If the pundits are to be believed, 5 November will see Bill and Hillary Clinton comfortably reinstalled in the White House for a second term. Less predictable is the fate of Silicon Valley if the Californian electorate accept a controversial piece of proposed legislation that could turn the state into the class action capital of the US.
When Californians cast their vote for Clinton or Dole on Tuesday, they will also be asked to support or reject Proposition 211, a legislative amendment that would enable investors to file for damages - in cases of company fraud or misrepresentation - in Californian courts, against quoted companies with at least one California shareholder. Inevitably this includes every technology company in Silicon Valley.
John Young, chief executive emeritus of Hewlett Packard, summed up the concerns of the hi-tech community in Silicon Valley. "Proposition 211 would be nothing less than a disaster for high-technology companies, the very companies that are leading California out of recession and are creating high-paying jobs."
The origins of 211 lie in the 1995 Securities Litigation Reform Act. This clamped down on the ambulance-chasing practices of East Coast lawyers, who fired off class action suits against companies, often on spurious or frivolous grounds. Almost any financial forecast that turned out to be over-optimistic could be categorised as deliberate misrepresentation by somebody.
Technology firms with their notoriously volatile stock prices have been particularly vulnerable to such actions in the past and many of them had lobbied to have these litigious distractions made far harder. Such class actions seldom came to court as the procedure surrounding them was so convoluted and time-consuming that most companies simply settled out of court.
But the price was high for the companies on the receiving end and highly lucrative for the lawyers handling the claims. It has been estimated by some economics analysts that the total cost to US businesses from class actions had topped the $1.5 billion a year mark by the time Congress was persuaded to act.
The Securities Litigation Reform Act basically made it far harder to file ?frivolous? class actions. It is now necessary to have proof of corporate wrongdoing before getting to court, not just to be miffed when your favourite stock takes a dip in the market.
This tightening of the law nearly didn?t happen. Law firms across the US fought against it, lobbying hard in Washington. Bill Lerach, a San Diego lawyer with a reputation as the ?king of the class action?, and one of the largest party fund contributors in the US, actually persuaded President Clinton to veto the federal bill.
It?s not difficult to see why the lawyers were so keen to prevent any clamp-down. According to the San Diego Union Tribune, Lerach, by his own estimate, has taken part in 400 strike suits, resulting in $5 billion in settlements. Forbes Magazine estimated that his firm, Milberg Weiss Bershad Hynes and Lerach, is involved in 20 per cent of all securties class actions.
But when Congress overrode Clinton?s veto, attention turned to California, where the ballot initiative allows citizens to break the political gridlock and vote new laws directly on to the statute book. This was the means by which law firms, dismayed at the prospect of class action revenue drying up, decided they could by-pass the new federal laws.
So began a propoganda war between the pro-211 camp - basically a consortium of law firms specialising in the securities business - and the anti-211 camp - essentially every business with a presence in California, the overwhelming majority of the media and just about everyone on the political landscape at both state and national level.
Proposition 211 became an issue in both the Clinton and Dole campaigns, with both men coming out against it. "It just goes too far," said Clinton. "It has national implications. It think it is a mistake. I don?t think it is good for the economy. Proposition 211 would be highly disruptive to investment in new companies throughout the country." Dole was equally robust in his opposition, highlighting the "tragic abuse" of the class action process by a small group of lawyers. "Now those same lawyers are attempting to create a haven in California for frivolous lawsuits that do not create a single job, product or dollar of economic growth," he said.
The price of fighting the proposed legislation is high. Lerach?s own firm has backed the pro-211 campaign to the tune of an estimated $3.9 million. The total pro-211 fighting fund is believed to be close to $9 million and that has to matched by the anti-campaign.
But the prospect of losing the vote horrifies both business and political figures in California. Dan Lungren, the California Attorney General, predicted that Silicon Valley would be evacuated by businesses if 211 becomes law. "It is a job killer that will send California?s best high-tech and bio-tech companies to other states," he said.
This is no idle predication. The American Electronics Association (AEA) claims its research shows that 47 per cent of hi-tech companies would think about pulling out of California if 211 becomes law. Mitch Kertzman, chief executive officer of Sybase, said such a move would be a very hard decision to take, but it would be the logical outcome of a 211-based law.
Jerry Newman, chairman of the International Forum for Corporate Directors, warned that 211 would inhibit the ability of Californian firms to recruit talented management. "This initiaitve would restrict companies from indemnifying their corporate directors and company officers, placing enormous financial risk and financial stress on those individuals." This view is supported by the AEA. Chairman George Sollman commented: "Proposition 211 will create a leadership void for California?s hi-tech industry that will particularly hurt small and medium sized firms. It amounts to a leadership and brain drain that this industry can ill afford." Both sides have been playing to the gallery when it comes to convincing the electorate of the rightness of their cause. The pro-211 lobby has dressed up 211 as a sort of pension protection plan - 'The Retirement Savings and Consumer Protection Act?. Their TV commercials play on images of US OAPs whose life savings have been taken away from them because their pension schemes invested in hi-tech companies.
This argument in particular drives hi-tech bosses into a rage. Oracle chief executive Larry Ellison, who has personally lobbied Clinton on the issue, stormed: "Proposition 211 is legal terrorism. The idea that some lawyers on the East Coast are going to protect pensions by doing this is just evil." But the pensions tack is a clever move on the part of the lawyers. Poor investment is a highly emotive issue in California following the unprecedented declaration of bankruptcy by Orange County. This followed a dubious investment strategy with public funds by some of the country?s treasury officials.
The anti-211 lobby has been playing the bio-technology card. Many Californian bio-tech firms are doing essential research work into diseases like Alzheimers and Aids. The money to fight class action suits is money that could have gone into finding a cure for such illnesses.
It looks set to be a close call when the polls close on Tuesday. A survey in the Los Angeles Times two weeks before polling day found that only 52 per cent of those polled said they would vote against 211.
That?s a narrow enough margin to have some companies taking defensive action already. Intel last month announced that the threat of ?frivolous lawsuits? stemming from 211 meant that it could no longer risk issuing forward-looking statements to investors. It also cancelled a planned analysts briefing. Many Silicon Valley companies, including Intel rival AMD, have taken the same course in the past two weeks.
For his part, Lerach, who has become the bogeyman for the IT industry, is apparently unconcerned. "The hi-tech industry needs someone to demonise and I?m it," he told a San Franciso newspaper. The IT industry will be watching the poll results on Tuesday in the hope that this particular demon has been exorcised.
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