This case is aboutÂ STRATEGY
PUBLICATION DATE: October 01, 1997
Proposition 211: Securities Litigation Referendum (A)Â Case Solution
In 1996, the major Silicon Valley organizations arranged a campaign to defeat a ballot initiative that would have made the federal law easier to evade, and securities fraud lawsuits simpler to elude. The amount of securities fraud lawsuits filed during the period 1988-1996 were truly enormous, numbering about 1300 and having resolutions worth $7.3 million on average. It was apparent that dropping stock values wasthe trigger for the high number of lawsuits filed. High technology businesses, which often have share prices that are volatile, were the main target of thelawsuits. Several law firms, led by Bill Lerach, specialized in these litigations, and some were considered to have stables of investors who would file a lawsuit as soon as a company’s share price dropped considerably.Â Although the defendant firms were assured that no fraud could be proved by these lawsuits to blacken their companys name, the defendants felt compelled to settle to avoid an expensive and drawn-out court fight. In 1995, bookkeeping, high technology, and other firms succeeded in having Congress enact national legislation restricting the circumstances under which such lawsuits would be successful. To reinforce their position under state law, the plaintiff’s bar qualified a referendum, proposition 211, for the November 1996 California ballot. If passed by the voters, not only would securities fraud litigations be easier to win but virtually all publicly traded firms in the USA could be subject to lawsuits.