Lawyers Lurk Over Dotcom Stock Dive
By John Roemer
Stockholders have been remarkably tolerant of topsy-turvy markets
roiling their dot-com investments, but the news last week that a
corporate securities class action has been filed in a Chicago federal
court against Skokie, Ill.-based Peapod.com is an alert that the
e-commerce honeymoon is over. The lawsuit alleges that the online
grocery giant hid its fiscal woes, causing investors to lose money
when shares plunged 52 percent in a single disastrous day, March 16.
"It was predictable. Dotcoms have gone up and up, and you knew what
would happen when dotcoms went down," says George S. Dahlman, an
analyst at Piper Jaffray securities in Minneapolis who follows
e-commerce food retailers. "Any time you have a market segment start
to run into financial trouble with its stock prices, the trend is
toward shareholder suits."
The hardware and software industries that power the Net generally are
composed of mature companies that went public long ago and so have
become wearily accustomed to stock-drop suits. Since 1996 more than
180 such cases have been filed in federal court for the Northern
District of California, which covers Silicon Valley. The suits seldom
go to trial. Instead, plaintiffs lawyers who can make a strong case
that stock prices fell because of corporate behavior are able to force
defendant companies to the settlement table, where the suits are
dropped in exchange for sums typically in the millions of dollars.
Since lawyers do well in these deals, they're well-motivated to be on
the hunt for opportunity.
Despite the plague of litigation besetting tech, dotcoms have until
recently seemed relatively immune. Last fall, one of the first
stock-drop suits leveled at an online company targeted Net portal
2TheMart.com (recently acquired by GoToWorld.com). The suit alleged
that the company disseminated false and misleading information about
its financial position and prospects, and about future benefits to
shareholders. The suit, which is still only in its early stages,
claims that, as a result, the company's stock traded at artificially
inflated share prices.
Michael Goldberg, a Los Angeles class action lawyer who is part of the
team suing 2TheMart.com, predicts similar lawsuits will become more
commonplace as the tech stock market declines. "Of course it depends
on why each particular stock tanks," he says. "If it's simply business
cycles in action, plaintiffs have no case. But if we can show fraud
with particularity and specificity, shareholders will sue."
Disenchanted Peapod investors named in the suit filed last week claim
they were deceived by a November announcement in which the company
stated that its $15 million in cash and securities would carry it
through the third quarter -- even though company officials allegedly
knew they would need more capital than that.
Peapod's stock fell sharply when the company's CEO, William Malloy,
abruptly quit. Some said he was seriously stressed over efforts to
keep the company afloat, and was particularly distraught when VCs
backed out of a proposed $120 million cash infusion. Reports that
Peapod's cupboard was nearly bare followed, prompting Dutch grocer
Royal Ahold to invest $73 million. Ultimately, what should have been
perceived as a happy ending to the story of Peapod's financial woes
was tarnished by the shareholder action, which seeks to represent all
investors who bought Peapod stock between the November announcement
and March 16.
"It's almost comical, an ongoing joke, that if your stock drops 50
percent you get sued," says Dan Rabinowitz, Peapod's chief financial
officer. "The suit has no merit."
Peapod is now left struggling to regain its financial footing while
under siege. Three other similar shareholder suits are on file, and
Rabinowitz has heard there may be two more in the works. Peapod has
retained the respected law firm of Sidley & Austin for the defense.
The Facts of Life
When business-to-business software manufacturer MicroStrategy went
deeply south last month, multiple class actions resulted alleging that
officers and directors broke federal securities laws by falsely
reporting as revenue money the company had yet to receive.
Andrew Friedman, a partner at Cohen Milstein Hausfeld & Toll in
Washington, D.C., which filed one of the MicroStrategy suits, says
there may not be a dotcom class action epidemic "unless a lot of
companies cook the books, as we believe MicroStrategy did."
Friedman suggests companies get out in front if they have accounting
procedure changes or other red flags to wave. Don't wait for
regulators to bust you, he counsels.
"If you have bad news to tell, say so," he says. "You'll still be
liable, but if you make a pre-emptive strike by telling the story
yourself, courts may look more favorably on your defense lawyers."
Aram Rubinson, an e-commerce retail analyst at Payne Weber in New
York, contends that shareholder suits are a fact of the human
condition. "People always want their money back when they feel they've
been scammed," he says. "In a world where people believe in
entitlements, there's likely to be more of this."
Stockholders Sue Peapod
digitalmass.com
Internet Finances Face New Scrutiny
suntimes.com
/=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-= advertisement =-=-=
Check out the Standard's all new Job Shop!
Come browse the hottest job opportunities in the Internet Economy.
Our new posting service brings together the top employers and the
top candidates in the Internet business space. Find your next gig
right here or post a job in front of the best web minds in the world.
Your next career move could be a mouse click away.
Visit JOB SHOP today. thestandard.com
=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=/
SAID IN CHAMBERS
~~~~~~~~~~~~~~~~
"Conduct remedies are particularly difficult to enforce against a
company bent on exploiting any loopholes." -Steven C. Salop, professor
of law and economics at Georgetown University, explaining why anything
less than a Microsoft breakup will likely fail.
"There has always been greater faith than merited in the ability of
antitrust laws to affect monopolization."
-George L. Priest, a Yale Law School professor, expressing skepticism
that any legal remedy will be effective.
nytimes.com
(Free registration required)
----------------------------------------------------------------------
BRIEFS
~~~~~~
ISPs OFF THE HOOK: The Supreme Court let stand a New York ruling that
Internet Service Providers cannot be held liable either legally or
financially when they serve as conduits for defamatory e-mail or
bulletin board messages. "The public would not be well-served by
compelling an [ISP] to examine and screen millions of e-mail
communications, on pain of liability for defamation," New York's
highest tribunal pronounced. The case is a loss for Alexander Lunney,
who was a 15-year-old Bronxville, N.Y., high school student when an
anonymous poster hijacked his name to send vulgar messages using a
Prodigy e-mail account. Lunney - who never even subscribed to Prodigy
- sued the ISP, but three New York state courts said no dice, and the
U.S. Supremes refused to get involved.
washingtonpost.com
E-ETHICS GETS FUNDING: Tech law professor Pamela Samuelson of the
University of California at Berkeley and her husband, software
engineer Robert Glushko, scored big when Glushko's Commerce One
business-to-business firm went public last year. So last week they put
up $2 million to endow a law, technology and public policy clinic at
Cal's law school, Boalt Hall. The clinic will file lawsuits, write
model legislation and submit amicus briefs "to vindicate the rights of
ordinary people when bad things happen to them in cyberspace," said
Samuelson, who won a MacArthur Foundation "genius" grant in 1997.
callaw.com
(Paid subscription required)
THE SHERIFF CAN'T GARNISH YOUR NAME: Even if you're bankrupt, your
domain name is not subject to garnishment, Virginia's supreme court
ruled. The landmark decision agreed with Network Solutions' contention
that ownership of domain names is a contract-for-services right
existing between the registrar and the name holder that makes the
registrar exempt from liability in bankruptcyproceedings. The case
involves an effort by Umbro International Inc., to wrest umbro.com and
37 other names from Network Solutions on the ground that they are
assets of a bankrupt company called Canada Inc. The court says it
reached its decision by applying "traditional legal principles to [a]
new avenue of commerce."
courts.state.va.us.
ADDITIONAL LINKS:
Suit Over Fakes Could Undermine E-Bay
thestandard.com
Judge: E-Mail Recipients May Remain Secret
law.com
Battling Breakup, Microsoft Will Ask for Government Records
nytimes.com
(Free registration required)
DoJ Wants Microsoft Broken in Two
thestandard.com
Jam Session with RIAA Exec Hilary Rosen
thestandard.com
MP3 Looks For Deal
nytimes.com
(Free registration required)
Hitsgalore.com Sues Bloomberg for Defamation
interactive.wsj.com
(Paid subscription required)
Young Lawyers' Stock Rises With the Internet
digitalmass.com
Xerox and Microsoft Create On-Line Copyright Safeguard Software
nytimes.com
(Free registration required)
Mexico E-Commerce Legislation Approved
mercurycenter.com
Elian Movie Site Stirs AP Backlash
thestandard.com
Yahoo Uses ICANN Process to Attack Similar Domain Names
icann.org.
Phone.com Sues Geoworks Over Wireless Patent
wired.com
27 Private Antitrust Suits Against Microsoft Are Consolidated
interactive.wsj.com
(Paid subscription required)
Maryland is Second State to Sign UCITA
thestandard.com
DoJ Scrutinizes Homestore.com's Real Estate Practices
newsbytes.com
Net Panel Ponders E-Commerce Tax Breaks
164.109.144.131
New Business Method Patent for Applying for a Patent
nytimes.com
(Free registration required)
Pets.com Sues 'Late Night' Over Foul-Mouthed Puppet
salon.com
FILE YOUR OPINION
~~~~~~~~~~~~~~~~~
This Week's Question: Can class action lawsuits help prevent dotcom
stock fraud?
E-mail your opinions to johnr@thestandard.com and we'll print a
selection of the responses in next week's newsletter. Keep them short
and include your name and affiliation if any.
Last Week's Question: Does the recording industry have a valid gripe,
or should Napster be free to facilitate digital downloads?
"I really believe the government should stay out of this one. Who is
to say someone is wrong when it comes to downloading off the Net? I
don't know how this can be regulated without infringing on our
personal rights."
-Betty St. John
Manitou Beach, Mich.
"Napster should be free. The Web is one of the greatest breakthroughs
in artists being able to express themselves and people being exposed
to all kinds of art and music. Through disintermediation, art will no
longer be held hostage to money. These folks are just mourning their
loss of control and the money that came from it."
-Nancy Kramer
Laurel, Md.
"On the one hand, you don't need Napster to find MP3s online. You can
find them through Yahoo and other search engines. On the other hand,
college students will pirate software. It happened in the days of 40M
hard drives and it will happen now, just at faster speeds than
LocalTalk. On a third hand, I'm an author and e-publisher, and I pay
my people and I like to get paid, so anything that facilitates me not
getting paid takes food out of the mouths of the people who count on
me. On the fourth hand, Napster also facilitated the exchange of MP3s
that the copyright holders want exchanged. Frankly, Napster may have
some problems because they maintain a centralized database and
therefore should be able to exercise some amount of control over that
database. The real person who is breaking the law is not Napster, but
the person making his illegal MP3s available. The only thing that
might work is to make several very painful and public examples of some
particularly egregious college student pirates and hope to instill the
fear of God (or the RIAA) in the rest of them. I recall a group of
students getting busted by the administration and Adobe during my
junior year in college (at Carnegie Mellon). After that, it was a
great deal more difficult to find pirated copies of anything. Either
the recording artists are going to have to sue their fans and make
some examples, or they are going to have to suck it up and figure out
how to make money in other ways." -Mary E Tyler Clarksville, Tenn.
"This is a digital Kinko's case. Just like Kinko's, Napster has made
Available a "copier" that facilitates infringement. Unlike Kinko's,
however, Napster doesn't control the copier. Rather, it is controlled
by the hard drives of the infringer. Furthermore, the argument that
Napster is a contributory infringer just because its code was used to
facilitate piracy doesn't wash - every VHS and cassette player
manufacturer would be a contributory infringer under this view."
-Brad D'Amico
Austin, Texas
STAFF
~~~~~
Written by John Roemer. Send newstips and press releases to
johnr@thestandard.com.
Edited by Lori Patel (lorip@thestandard.com).
GET THE MAGAZINE
~~~~~~~~~~~~~~~~
4 RISK-FREE issues at this URL:
thestandard.com
GET MORE NEWSLETTERS
~~~~~~~~~~~~~~~~~~~~
The Industry Standard newsletters cover the media, stock market,
e-commerce, music, law and more. Enter your e-mail address at the
following URL and select the newsletters you wish to receive:
standardservices.com
To UNSUBSCRIBE to any newsletters, log in at the following URL and
select the newsletters you wish to cancel:
standardservices.com
GET MORE NEWS
~~~~~~~~~~~~~
Go to thestandard.com for more coverage on the Internet
Economy. For technology news, go to our parent company's site at
idg.net.
ADVERTISING INFORMATION
~~~~~~~~~~~~~~~~~~~~~~~
For more information on advertising in The Industry Standard
Newsletters, contact:
West Coast
Connie Elliott (mailto:celliott@thestandard.com)
East Coast
Norma Wesolowski (mailto:normaw@thestandard.com)
FEEDBACK AND PROBLEMS
~~~~~~~~~~~~~~~~~~~~~
Send letters to the editor at letters@thestandard.com.
Please contact us with any problems that arise.
Send e-mail to: TheIndustryStandard@bellevue.com.
You can also contact us via phone or mail:
The Industry Standard, Customer Service
(402) 293-0386 (phone)
(402) 293-0794 (fax)
The Industry Standard, Production
315 Pacific Ave.
San Francisco, CA 94111
(415) 733-5400 (main)
(415) 733-5401 (fax)
Copyright 2000 The Industry Standard |
