Shareholder Lawsuit's Bear's Rebuttal
by Bill Barker

I think Louis and I are in basic agreement about the big picture here, which is that securities class action suits, when properly and honestly employed, are a good thing in helping to deter fraud. Where I part company with my fellow Fool is with his assertion that the current reforms being debated before Congress are "hasty," and that it is too early to tell whether the 1995 Reform Act is working properly to keep frivolous litigation under control. Three years after passage of the Reform Act, just as many suits are being filed as ever, and while there are still many unanswered questions, plenty is known about the effects or lack thereof of the 1995 Reform Act, and it's high time for improvements.

Louis's concern is with fraud. That's appropriate, but class action suits alleging fraud currently are filed and ultimately settled on the basis of stock price volatility, the availability of assets, and last and very much least, the merits of the case. Unless at least $20 million in damages can be claimed to be at stake, it is not economically viable for these entrepreneurial lawyers to even file a case, regardless of how obvious a fraud may be. But where a stock price's volatility (only when combined with the necessary volume, of course) provides a sufficient amount of "damages," you'd better believe that a whole slew of lawyers will be filing complaints as quickly as possible regardless of how silly (or downright dishonest) the theories of "fraud" are.

My purpose isn't to put a "Kick Me" sign on the backs of these lawyers. (Why bother, when they seem to have already requested that it be tattooed onto their faces? -- sorry, sorry.) Ultimately, I couldn't care less how much money the lawyers pocket. The problem here is that frivolous suits put a muzzle on management at the very time when shareholders most need to get at the information necessary to assess their investment.

To take a local example, the President of Rainforest Cafe <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %> appeared here in Fooldom for an auditorium event on June 4. But despite the marvelous opportunity provided by all this effort and technology, investors who attended weren't actually able to get answers to many of their most pressing questions -- and the reason for that has nothing to do with fraud and everything to do with management having to keep quiet in the face of spurious litigation. That's not just a problem after a sell-off. Every company's management is operating continually under the presumption that if anything suddenly goes wrong with the stock price, everything management has said can and will be used against it -- personally. In the face of that reality, and until further reforms are put into effect, the right to remain silent is the right that's going to continue to be too often exercised -- and that doesn't help any of us.

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