Avoiding securities class actions arising from Y2K
issues
Brian W. Smith
Mayer, Brown & Platt, Washington, DC, USA
Andrew J. Morris
Mayer, Brown & Platt, Washington, DC, USA
Background: securities class
actions
Securities strike suits and the year 2000
problem
For decades, securities class actions have
presented public companies with huge
potential exposure, both in damages awards
and in litigation costs. Now, the Y2K problem
raises the prospect of a fresh new wave of
these claims. Senator Robert Bennett
(R-Utah), chair of the Senate's Y2K subcom-
mittee, has specifically pointed out the po-
tentially devastating combination of
securities class actions and the Y2K problem.
Senator Bennett expressed special concern
about the use of ``strike suits'' in the year 2000
context. It is clear that companies that fail to
plan and carry out their Y2K programs
properly, and to tend to the securities litiga-
tion dimension of the Y2K problem, could
face securities class action claims.
Potential exposure
As all public companies already know, they
must take the prospect of securities class
actions seriously. The securities laws ±
intended to provide shareholders protection
against fraudulent manipulation of share
value by companies and their senior officials
± can force public companies to cover in-
vestor losses on millions of shares of stock.
In fact, the effort to protect shareholders
through securities litigation has created very
powerful claims. The perception that these
claims may be too easy to file has spread
widely, and securities class actions have
been the subject of much public debate over
the last ten years. Many observers believe
that it is too easy to file lawsuits alleging
securities fraud by public companies and
their officers and directors. To state a
securities fraud claim, a plaintiff need only
identify a public company's stock that has
dropped in price; identify the arguable
explanations for the drop; then scrutinize the
company's securities filings for some failure
to predict the explanation, or to predict it
with complete accuracy. This often is enough
to file a securities class action that will cause
a rational public company to pay a large
settlement.
Congress, the chairman of the SEC, and
courts including the Supreme Court, have
noted repeatedly that securities class actions
can be fairly easy to file and keep alive. As
the Supreme Court put it, these cases ``pre-
sent a danger of vexatiousness different in
degree from litigation in general''[1].
Because of these concerns, Congress sev-
eral years ago passed the Private Securities
Litigation Reform Act of 1995. This Act
attempted to tighten some of the require-
ments for bringing securities class actions.
Whether it has succeeded in tightening the
requirements in practice is heavily debated.
Typical securities claims
Virtually all securities claims allege that a
stock has dropped in value since a share-
holder bought it; that the issuing company
(and its officers and directors) knew specific
information that indicated that the drop in
price was possible; and that instead of
disclosing this information, the company
made misleading statements that kept the
price of the stock artificially high.
The two primary types of federal securities
claims are Section 11 claims, brought under
the Securities Act, and Section 10(b) claims,
brought under the Securities Exchange Act
and SEC Rule 10b-5:
1 Section 11 of the Securities Act relates to
initial or secondary public offerings. It
provides a claim for damages suffered by
purchasers of a security sold in a public
offering pursuant to a registration state-
ment that contains a material untrue
The current issue and full text archive of this journal is available
at
http://www.emerald-library.com
[ 178 ]
Information Management &
Computer Security
7/4 [
1999
] 178±185
MCB University Press [
ISSN
0968-5227
]
Keywords
Litigation, Liability, IT,
Public companies,
Securities markets, Shareholders,
USA
Abstract
The threat of securities class
actions haunts every public com-
pany. The threat probably is worst
for information technology compa-
nies. Similarly, Y2K claims may
threaten every company, and
probably are greatest for those
most dependent on information
technology. It follows that the
combination of these risks ± of
securities class actions resulting
from any of the countless types of
possible Y2K claims ± presents
public companies with a formid-
able problem. This article provides
an overview of the implications of
Y2K for securities class actions,
and identifies some practical
steps for minimizing the risks from
Y2K-related securities claims.
This article was originally
published in
Journal of
Internet Law
. Permission to
republish is gratefully
acknowledged.