Just over a year ago, investors were pushing each other out of the way to place “buy” orders for soaring tech stocks. Today, the crowds are forming instead at lawyers’ offices.
From Amazon.com to Priceline, Oracle to PlanetRx.com, a host of once high-flying technology companies has been hit by lawsuits from angry investors.
In fact, scores of lawsuits have been filed in the past month, most based on the same allegation: that company executives — Amazon’s Jeff Bezos, Oracle’s Larry Ellison and Priceline’s Jay Walker are named personally in various actions — gave false and misleading statements that led investors to pony up their savings to buy stock.
Many are saying that the chief executive officers in question were among the most exuberant about the industry’s rosy outlook — and the most incorrect about what was going to happen.
But do the suits have merit? Or are they just an act of frustration on behalf of investors eager to cast blame for losing sizeable chunks of their investments when the bubble burst? And does the barrage of lawsuits itself pose a public relations trap?
There is nothing new about investors suing a publicly traded company. What is new is the sheer volume of legal actions facing the likes of Amazon, which has had suits filed by a number of law firms against it in the past three weeks.
“When the money is flowing, no one worries about protecting their rights,” James Haggerty, the president of New York-based PR Consulting Group, which specializes in legal issues, told the E-Commerce Times. “But when things start to slow down and heat up, everyone starts looking for answers and ultimately you have disgruntled investors.”
One reason for the recent spate of claims is simply low stock prices. Some law firms prepare class action suits ahead of time and file them when a stock falls to a certain level. Judges are increasingly looking askance at these “automatic” suits, Haggerty said.
Don’t Pass Go
While 80 percent of all lawsuits are settled out of court, one or more of the current suits is likely to run its course as a test case on how exactly the Internet boom happened — and who was to blame for the bubble bursting.
“Some of these dot-coms were promoted in a way that was very fast and loose,” Haggerty said. “Some of these suits might have a lot of legitimacy. But we won’t know for a year or more.”
Legal experts say that it is difficult to generalize about investor lawsuits, though the majority do not make it to court. However, despite a 1995 U.S. law that limits how much investors can recover from corporations they sue, settlements and awards can be considerable.
According to National Economic Research Associates, the average settlement for class action suits brought by investors in 1999 was US$12.9 million. But some have been much larger, including a $3.2 billion settlement paid out by Cendant Corp.
One spark for these lawsuits, according to Michael Lange, a partner at Boston-based law firm Berman DeValerio & Pease, is that the fortunes of dot-com CEOs are so closely tied to those of their companies.
“Top executives have an extra incentive to pump up their company’s stock price,” Lange said. “Many of them receive a sizeable percentage of their compensation in the form of equity, including stock options, which become worthless if the share price falls. Their careers are often on the line if they fail to make their numbers.”
If nothing else, Lange noted, the perception is strong that these executives have a motive to over-hype their own stocks, which may be one of the reasons why so many suits are now being aimed at dot-coms.
On the other hand, the mantle of responsibility may help explain why Amazon CEO Jeff Bezos was recently heard telling individual investors to stay away from stocks like his company’s, due to volatility.
Warning: Pitfalls Ahead
Regardless of their disposition in court, shareholder suits are fraught with other dangers, especially if mishandled by inexperienced Internet companies.
Haggerty said he was recently involved in a case in which a dot-com issued a press release bragging about a “victory” in court. That victory? A routine continuance.
“The press saw it, the investors saw it and eventually the judge saw it and was not happy,” Haggerty said. “These companies have always existed in full promotion mode. But we tell them a lawsuit is not like anything else and they have to take it a little easy.”