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How safe a harbor?

When a publicly held company issues a disappointing earnings report, the market’s reaction typically is swift and harsh. But an increasing number of shareholders these days take matters a step further to show their displeasure: They go to court.
That’s what happened recently when Bausch & Lomb Inc. released its 1994 results. Within days, executives and the company itself were hit with a class-action complaint.
Newark-based IEC Electronics Corp. was on the receiving end of a similar suit last spring.
Shareholder suits usually allege that management misrepresented the company’s financial outlook, and that investors lost money acting on the statements. But many observers argue that almost any prediction or forward-looking statement by management that proves off the mark is likely to trigger litigation.
An impressive array of business representatives, academics and government officials this week stepped forward to urge restoring common sense to this area of liability. At hearings in Washington, D.C., and San Francisco, they asked the Securities and Exchange Commission to do more to protect public companies from costly, time-consuming–and very often meritless–legal battles brought on the basis of faulty forecasts.
The SEC already provides a “safe harbor” for forward-looking statements unless they are made without reasonable basis or issued in bad faith. But this rule covers only information contained in filings with the commission; statements made to analysts or in interviews with reporters, for example, are not afforded this protection.
That’s a gaping hole in the protective cover around companies–and one that plaintiffs’ attorneys charge through with disturbing regularity. Estimates of the total value of settlements–corporations often settle to avoid protracted litigation–range from $650 million to $1.5 billion a year, a fourfold increase since 1988.
Even with settlements commonplace, one study found, the average investor suit consumes more than 1,000 hours of management time and runs up nearly $700,000 in attorney’s fees. This is time and money that could have gone toward boosting sales and profits.
The National Association of Manufacturers wants the SEC to protect all statements except those containing a “material” misstatement or omission. Another proposal calls for disallowing private suits, leaving enforcement in regulators’ hands.
Sarah Teslik, executive director of the Council of Institutional Investors, wants the safe harbor to be absolutely safe–attach “investor beware” warnings to forward-looking statements and then protect even those management assertions that are misleading.
The chances that companies will gain such protection from shareholder suits seems extremely unlikely. Indeed, perhaps there is a better way to go.
What if a broadened safe harbor were coupled with a requirement that in these cases the loser pays the winner’s legal costs? With that prospect, disgruntled shareholders might take a different view of the paper losses they suffer when a company’s performance falls short of expectations.


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