LITIGATION VALLEY

California is the most litigious state in the most lawsuit-crazy country in the world. More than 1.5 million civil suits are filed in California every year, and lawyers here earn upwards of $17 billion annually in legal fees. Those numbers could soar even higher if a controversial new state ballot initiative is adopted on Nov. 5. Proposition 211 would make it easier to file securities-fraud suits in California than in any other state–and top business leaders have risen up in alarm to fight it. “There’s no place in the world like California for new companies,” says Richard Hill, the chairman and CEO of Novellus Systems, a San Jose semiconductor-equipment manufacturer. “But this bill will bring that to a screeching halt.”

The “Attorney-Client Fee Arrangements, Securities Fraud, Lawsuits” initiative would make businesses and their professional associates, from boards of directors to accountants, liable for any statement or act that “directly or indirectly, willfully, knowingly or recklessly” results in a loss to any pension fund, retirement fund or even a personal savings account. Companies would be fair game for class-action lawsuits for both reporting and failing to predict bad news. Corporate officers would be personally assessed for punitive damages, and their firms could not indemnify them. The proposition would also prohibit any attempt to set new limits on attorneys’ fees.

Why would California voters favor an amendment that could slow the state’s booming technology industry? “This will hurt the companies with the most volatility, and that means companies that are growing fast,” warns Scott McNealy, CEO of Sun Microsystems. Supporters say the initiative would provide extra protection for elderly victims of securities frauds. But opponents say it would jeopardize many of the companies the elderly have invested in.

San Diego attorney William Lerach, who together with his firm has given nearly $5.3 million to the “Yes on 211” campaign, argues that the Private Securities Litigation Reform Act of 1995 made it more difficult for investors to sue and that investors need better protection from corporate abuse. “There’s an epidemic of fraud against senior citizens, retirement savings, 401(k)s and IRAs, and unless stronger remedies are given to victims of that kind of fraud, it will get worse,” he says. “It’s time to stamp it out.”

That may be true, but the primary beneficiaries of 211 will be securities lawyers like himself. They have made millions filing so-called class action “strike” suits against firms in such volatile industries as high technology. The suits usually allege that a company “knew or should have known” that “adverse” developments would send its stock plummeting without warning. “Fundamentally, Proposition 211 is a Trojan horse for strike suits,” charges Hill. Another chairman and CEO, Larry Ellison of Redwood Shores-based Oracle, brands the proposition “legal terrorism.”

Fears about the potential impact of 211 have already caused some companies to stop making predictions about their future. “We’re not going to make any statement that could lead to frivolous lawsuits,” said an Intel spokesman, after announcing that the company would no longer give such guidance to investors.

A quarter of the nation’s securities-fraud suits are brought against California-based firms. One target was Centigram Communications Corp. of San Jose, which was sued after its stock dropped from $14 to $11 in late 1994. Lerach accused company officials of dumping stock nine months earlier. Although a judge threw out all but one charge, Centigram decided, after nearly a year of fighting, to settle for $1.5 million, a typical corporate approach. “We did an economic analysis,” says president and CEO George Sollman. “I calculated that going into court and trying this would cost us between $750,000 and $1 million in legal fees, plus a lot of management time.” Instead, he agreed to pay $250,000 toward a settlement, with his insurance companies paying the rest.

The battle over Proposition 211 is already the most expensive ballot initiative in history. Nearly $46 million has been spent so far, the bulk coming from opponents, including the Big Six accounting firms and high-tech firms from Apple to Xilinx. The Yes on 211 side is being funded by Lerach’s firm and dozens of other law firms, from New York to California. The out-of-state interest resides in the fact that under the measure companies with even one California shareholder could be sued and tried in California.

No one is as worried as executives of the high-tech corridor in Silicon Valley. The computer whizzes have never been very active in politics, but now, in addition to sounding their alarm about 211, they are forming a lobbying group to head off future threats. Says Intel’s senior vice president, Leslie Vadasz: “We need to be more proactive and make sure our story is heard early in the debate.” Someone must be listening. Earlier this year, voters indicated a preference for Prop 211; more recent polls show that the lawyers are losing.