So Sue Me! Shareholder Litigation Hits An All-Time High

Also, FASB looking at pro-forma accounting, and black ink at


If you need further proof of just how ugly it’s gotten in the equities world, consider this: so far this year, corporations have been slapped with a record 263 shareholder lawsuits. Even in the US — where suing is practically the national pasttime — that’s a whole lot of lawsuits. In fact, according to PricewaterhouseCoopers, it’s almost a third more lawsuits than shareholders filed in all of 2000. And we’ve still got over four months to go.

Securities firms have been on the other end of much of this shareholder venting. A staggering 143 of the cases allege misconduct by investment houses and brokerages when taking companies public. Indeed, many of the suits mirror investigations by the SEC, which has been looking into allegations that some underwriters and brokers took kickbacks in exchange for shares of hot initial public offerings.

PwC says the previous record for shareholder torts was 260, set in 1998. Of course, it’s far from shocking that stockholder suits are on the rise, considering share prices are on the fall. ”There’s nothing like losing money to inspire people to sue,” securities-law expert Alan Bromberg, at Southern Methodist University, tells the Los Angeles Times. Investors, for example, are expected to file more than 6,700 arbitration cases against brokerage houses this year, breaking the previous record of 6,058. The earlier record was set in 1994 — you guessed it, the year after a substantial market fall-off.

There’s a new wrinkle to some of this year’s suits, too. Jay Ritter, a University of Florida finance professor, tells The that some shareholders have sued over the alleged practice of ”laddering.” With laddering, investors are required to accept shares at higher prices in the aftermarket as a condition for receiving shares in earlier allotments. ”That type of practice has occurred with penny stock underwriters,” Ritter notes, but generally hasn’t been ”a focus of allegations against prestigious underwriters until recently.”

James Spellman, spokesman for the Securities Industry Association, says that ”when the Internet bubble burst it caused a lot of people to look for a scapegoat.” Apparently, so. Of the largest 100 tech IPOs since 1998, 31 of the issuers have been hit with shareholder lawsuits. For his part, Spellman defends IPO share allotments, saying their numbers are small compared to the large number of IPOs done in the late 1990s.

Of course, all this suing has some observers wondering about the legislation Congress passed (most recently in 1998) trying to limit frivolous investor suits. But experts say the media attention given to government investigations — along with the billions lost in the market downturn — have led many shareholders to dismiss worries that their suits would be, well… dismissed.

This might be a slight miscalculation. Yesterday, in a victory for Morgan Stanley Dean Witter and analyst Mary Meeker, a federal judge dismissed shareholder complaints as ”an entangled mass of verbiage” filled with ”market gossip.” The lawsuits, filed in Manhattan August 1, had accused Meeker of offering biased research and slanted investment advice about eBay and to win banking business for Morgan Stanley. Stay tuned.

FASB May Target Pro-Forma Accounting

The Financial Accounting Standards Board (FASB) is apparently entering the fray over pro-forma earnings. Officials at FASB say they are considering proposing steps to standardize the practice.

Representatives at the standards-setting organization say their focus would be on establishing definitions for certain financial measures and ratios that now aren’t permitted to be cited in official company reports. The FASB work would offer guidance on how companies should calculate and display certain financial measures, the board notes.

One area to be studied would be a range of intangible assets that companies cannot currently recognize under GAAP.

Don’t expect total clarity on how best to communicate to the public on a pro-forma basis, however. Says FASB chairman Ed Jenkins, ”We have no authority or responsibility for press releases or information that’s provided to analysts other than through the presentation of full financial statements.”

Read the Full Proposal From FASB.

Future Pensioners Are Worried

As the stock market continues to disappoint, more employees are shifting part of their 401(k) or IRA funds to less volatile investments, according to Principal Financial’s Well- Being Index.

The company’s survey shows 28 percent of respondents have reduced their stock-market exposure in the latest quarter, up from 14 percent in the prior three months


Principal senior vice president Daniel Houston says that ”after three more months of a flat market, the survey shows that investor patience is beginning to wear thin.” Houston suggests that more employee education about long-term saving strategies is warranted.

Black Ink now at

Staple’s Inc.’s latest earnings report says the company’s online operation turned its first profit ever during the quarter ending Aug. 4. The profits come six months ahead of management’s most recent projection, and 18 months ahead of the company’s original forecast. earned $9.6 million pretax, compared to a $29.1 million loss during the same period the year before. Segment sales rose to $233.8 million from $95.7 million.

Staples explains, though, that the $296,000 quarterly profit the company recorded in its ecommerce business, equal to 3 cents a share, is net income attributed to stock — and not to the parent’s shares.

Staples management originally wanted to take the dot-com public, but dropped the plan in March after the high-tech market hit the tank. When managers at Staples decided to buy back shares in at $7 each — more than twice what some insiders had paid for their stakes, mind you — some other shareholders objected. Eventually, Staples agreed that directors would forfeit any profits. The company also recently settled shareholder litigation by saying it would do a better job of explaining how it values shares.

From the Briefcase

What’s In a Name: Venator Group Inc. wants shareholders to approve a name-chanmge to Foot Locker Inc., after the sport-shoe chain the company owns. This won’t be the fist name change for Venator. Formerly called Woolworth’s, the company has been divesting itself of nonathletic businesses, including clothing stores.

Fewer Desks: Steelcase Inc. is eliminating 900 to 1,100 more jobs because of a steep decline in the office furniture business. The cuts include 300 to 400 salaried employees and 600 to 700 hourly workers, and come on top of a February decision to cut 1,200 workers and close two factories.

Seeking Top Billing: Stagebill LLC acquired Los Angeles-based Performing Arts Magazine and New York’s Avenue Magazine, perhaps taking aim at the Broadway dominance of rival Playbill. The private deals weren’t valued, although The called the Performing Arts purchase ”less than $10 million.” Stagebill is led by former Daily Variety publisher Gerry Byrne, with financing coming from former studio head Frank Biondi and his WaterView Advisors, New York Daily News owner Mort Zuckerman, and others.

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