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Tuesday, Feb 27, 2024

Law—Attorneys exchange points on shareholder lawsuits

Ippolito, Budwig Are Now Partners at

McKenna & Cuneo

William Lerach responded with a series of short, punchy sentences when asked how a company might avoid a securities class-action lawsuit.

“By telling the truth,” the attorney told the group before him. “By doing what the law requires. By not exaggerating your future prospects. By not falsifying your financial reports. By not giving in to the temptation that exists to add one more day to the quarter, one more truck of goods to go out, to stop the clock from running.

“It’s really not difficult,” said Lerach, a Downtown-based partner in Milberg Weiss Bershad Hynes & Lerach LLP who specializes in shareholder suits. “The rules are pretty clear. And people can obey them if the will is there.”

Lerach was speaking to a gathering of the Corporate Directors Forum on Sept. 21 at the La Jolla Marriott Hotel. He counseled companies to be cautious in their public statements, and to let their stock price “take care of itself based on corporate results that are obtained legitimately and honestly reported, rather than relying upon hype, hyperbole and manipulation to push the stock price up.”

The evening put Lerach at a podium to debate an attorney who defends companies in shareholder suits: Michael D. Torpey, a San Francisco-based partner with Brobeck, Phleger & Harrison LLP and head of its securities litigation group.

Law-abiding and conscientious companies still “get sued by Mr. Lerach,” Torpey said, suggesting that adhering to the law and avoiding a lawsuit are two different things.

Yet Torpey’s advice had similarities to Lerach’s.

“To comply with the law you do what Bill said,” Torpey said. “To avoid getting sued you do all of those things and in addition you are careful in how you deal with analysts and be careful how you communicate so that you don’t surprise the Street. These lawsuits are driven by typically one-day stock price drops that are quite significant, and if you are careful to manage your communications, you reduce the risk of a one-day stock price drop.”

The two had a lively, respectful exchange that also included the following points:

– Congress in 1995 found “significant abuse” in private securities litigation, Torpey said, evidenced by the fact that 62 percent of all the high-tech, venture-backed companies that had come into existence had been sued, while 70 percent of companies in Silicon Valley had been sued. He argued the Private Securities Litigation Reform Act of 1995 had not brought balance to the area, and held out a dim view for achieving the sort of balance he’d like.

– Lerach said “judges with political agendas or certain sympathies have utilized the increased discretion given to them under the new law to throw cases out.” But his concern is being addressed by reversals in the appeals courts, he said.

– The two differed on whether the Securities and Exchange Commission and other federal agencies are adequately overseeing securities fraud. Torpey argued hundreds of SEC proceedings are resolved every year. Lerach called the SEC “outstripped in manpower and in budget.”

– Lerach painted a picture of corruption in public companies: “All too often corporate executives commit fraud, pocket millions of dollars of insider trading proceeds and then when sued, use the corporation’s money, not their money, to pay for the defense.” Corporate money also settles lawsuits and buys the insurance that protects the executives, he alleged. “And thus we have a system unfortunately where misconduct pays.”

– Torpey, Lerach and a panel member who questioned them discussed difficulties that emerging technology companies may have, given the small size of their boards and the kind of independence those boards have. Dana F. Kopper, senior vice president and chief operating officer of BoardWorks in Los Angeles, cited a recent study of Internet companies that said dot-com boards generally lack the independence of boards at companies listed on the Standard & Poor’s 500.

Torpey spoke of a lack of creative tension between less-independent boards and their executives.

“I think one of the problems with dot-com boards is they tend to be dominated by ven-ture capitalists who have funded the company and have a large ongoing investment in it, and a bunch of college roommates or buddies of the CEO. And it’s really sort of a lethal combination,” Lerach said.

Venture capitalists care only about getting the company public, he said. The CEO’s friends, he added, “would all be a lot better off if they were replaced by a bunch of 50-plus-year-old, gray-haired, wise men” who could “provide a little cautionary guidance” to young entrepreneurs.

Torpey gave up his opportunity to rebut, saying he agreed, and causing laughter in the room.

The evening was sponsored by Marsh Inc.

– – –

Letterhead Changes: Peter J. Ippolito and two attorneys from his construction practice at Downtown-based Hillyer & Irwin have left to join the Downtown office of McKenna & Cuneo, LLP. Ippolito and Mark G. Budwig are now partners at McKenna, while Steven S. Owen is of counsel. The change brings the number of attorneys in McKenna’s San Diego office to 23. McKenna & Cuneo is based in Washington, D.C. Kurt L. Kicklighter has joined San Diego-based Luce, Forward, Hamilton & Scripps LLP as a partner in its business practice group Downtown. He was previously with Higgs, Fletcher & Mack LLP.

Contact Graves at bgraves@sdbj.com.


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