It was so good I decided to post it.
zdnet.com
California's stock lawsuits can proceed
Ruling lets existing suits proceed in state courts, despite new federal law banning them.
By Paul Elias, ZDN
The California Supreme Court on Monday said a closely watched securities class action
against Diamond Multimedia Systems Inc. can proceed, despite a new federal law that
banned such suits.
The suit, in Santa Clara County Superior Court, and 80 others brought against mostly
high-tech companies can go ahead, the court ruled in its 5-2 decision, because it was
filed before the new law, passed in November, took effect. Similar class action suits filed
after November are barred from state court.
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The Diamond Multimedia suit, filed in 1996, alleges that executives knowingly lied about the
company's financial well-being and artificially inflated its stock to more than $40 per share in
December 1995.
By June 1996, Diamond (Nasdaq:DIMD) announced it was losing money and its stock
plummeted to $9 1/8 a share. The stock closed at 6 31/32 today.
Diamond Multimedia unsuccessfully argued that state court was no place for a class action
that included out-of-state investors. The company accused the plaintiffs, represented by Milberg,
Weiss, Bershad, Hynes & Lerach, of merely using the state court to avoid the tougher federal
court system.
Majority rules
But the majority opinion, written by Justice Marvin Baxter, held that California-based executives
who lie about their company's financial status can be sued in state court, regardless of where the
investors live or bought the stock.
California "has a clear and substantial interest in preventing fraudulent practices in this state
which may have an effect both in California and throughout the country," Baxter wrote.
Justice Janice Brown wrote a dissenting opinion, arguing that these so-called stock-drop suits
have never belonged in state court.
She agreed with the company that the suit was nothing more than a ploy to avoid the onerous
restrictions of the federal Private Securities Litigation Reform Act passed in 1995. That act was
designed to make it harder for the likes of Milberg, Weiss from frivolously suing publicly traded
companies when their stock drops. High-tech companies are particularly vulnerable to these suits
because of their volatile stock.
"Under California law, nothing comparable to the provisions of the Reform Act -- intended both
to make abusive securities litigation more difficult to mount and sustain, and to further the
declared congressional policy of a national securities market -- would apply to class action
securities fraud suits filed in our courts," Brown concluded.
The bright side
Despite the ruling, Diamond's lawyer, Steven Schatz, said the high-tech industry had won a
significant victory with the November passage of the federal law outlawing securities class
actions in state court.
Schatz said his client, while still on the hook in Santa Clara County Superior Court, should be
given credit for serving as the poster child for abusive lawsuits.
"Diamond certainly played a role in prompting Congress to action," Schatz said.
Always in season
One industry observer, however, wasn't as optimistic that the tech industry's war was over in state court.
Stanford Law Professor Joseph Grundfest, the former head of the Securities and Exchange
Commission who now tracks security litigation across the nation, said it remains to be seen i
f Milberg, Weiss and other plaintiffs lawyers will be completely and forever shut out of state court.
"Securities litigation is like a flu virus," Grundfest said. 'You come up with a vaccine
and the virus morphs into something else that beats the vaccine."
In fact, Grundfest said Monday's Supreme Court ruling could open the door for large,
institutional investors to start suing companies individually -- as opposed to joining
a class action -- in state court.
Three such investors, pension funds from Pennsylvania and Mississippi as well as the
Teamsters union -- filed "friend of the court" briefs with the Supreme Court in support
of Milberg, Weiss' position.
Other litigation
Meanwhile, Monday's ruling may not be Diamond's biggest litigation worry. The company
is currently fighting a piracy suit brought by the recording industry in Los Angeles federal
court in October.
The recording industry alleges that Diamond's palm-sized Rio player, which allows users to
download from the Internet and listen to music in a Walkman-like contraption, violates copyright laws.
A federal judge, however, denied the industry's request for a preliminary injunction and the
company filed a counterclaim last month accusing the industry of conspiracy to restrain trade.
Paul Elias is a freelance writer based in San Francisco. |
