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June 30, 2001

The Ambulance Chasers

By Colleen Marie O'Connor

The bust of the dotcom bubble has helped to create a boom in another industry: shareholder class-action lawsuits. Companies listed on the tech-heavy Nasdaq have had more lawsuits filed against them than on all the other exchanges combined.

A new study by PricewaterhouseCoopers LLP (PWC) showed that shareholder lawsuits alleging financial fraud continued to rise in 2000.

Not surprisingly, the 2000 Securities Litigation Study reported high-tech companies were the most popular target of lawsuits.

More Claims

Claims filed last year against Nasdaq listed companies rose seven percent to 131, from 122 in 1999.

This compares to 67 claims filed against companies listed on the New York Stock Exchange last year, and three filed against the American Stock Exchange listings.

The study found that over the past two years, approximately two-thirds of all cases were filed against companies listed on the Nasdaq.

All told, PWC said 201 cases were filed last year, down slightly from 207 in 1999. The software sector alone saw 26 such companies sued in 2000.

Computer services and telecommunications fields accounted for some 40 percent of all complaints.

Lawsuits against pharmaceutical companies dropped slightly, accounting for just four percent of total suits last year compared with seven percent in 1999.

A review of 255 settlements since 1995 showed that some $6.6 billion was paid to plaintiffs and almost 50 percent of all cases that settled resulted in a payment of about $5 million.

However, the average amount of the settlement rose dramatically over the last two years.

The average settlement for cases settled in 1999 was $14.3 million, and in 2000 that number climbed to $15.4 million.

The authors of the study attributed the increase in shareholder class-action lawsuits to several factors, including increased SEC scrutiny on accounting and financial disclosure issues; attention on revenue recognition policies in the software and technology sector; and an increase in the number of high-profile companies restating their earnings. A restatement typically triggers a lawsuit.

False Information

"Looking ahead to 2001, the seemingly high percentage of companies delaying the filing of their annual reports, coupled with the market downturn in late 2000, will likely lead to more shareholder class-action suits in the coming months," said Kerry Francis, dispute analysis and investigations partner for PricewaterhouseCoopers.

"Particularly in the technology sector, there may be an increase in shareholder suits alleging a company artificially inflated share prices by issuing false and misleading information about the company's growth based on new economy metrics," Francis added.

Colleen Marie O'Connor is an associate editor at The IPO Reporter, published by Venture Economics, a Thomson Financial Company.