Maryland may be less affected than much of the nation by a bill that limits fraud lawsuits filed by shareholders, because federal courts in the state have aggressively used existing law to protect companies from unwarranted or frivolous suits.
The House of Representatives Wednesday passed sweeping restrictions on securities fraud lawsuits by a vote of 325-99, giving the curbs on shareholder suits much broader bipartisan support than other changes in the legal system proposed in the Republican majority's "Contract With America."
The bill would set stricter standards of proof for securities fraud lawsuits, provide broad immunity for executives who fail to realize that false or misleading disclosures will affect the value of their company's stock, and force stockholders who lose cases to pay the other side's legal fees. It now goes to the Senate, where Sen. Barbara A. Mikulski is co-sponsoring a similar measure.
The House vote came after a fierce lobbying battle between plaintiffs' trial lawyers and the accounting industry. The latter supports the bill in part because it would greatly reduce accountants' liability for securities fraud committed jointly by accountants and their clients.
High-tech companies have also campaigned for making it harder to sue for fraud, claiming they are hit with fraud suits when they run into problems inventing and marketing new products, even though the public knows that investing in start-up companies is risky.
Several studies, hotly disputed by plaintiffs' lawyers, contend stockholders recover an average of only about 5 to 8 percent of their losses when the lawsuits are settled.
The studies also contend that cases get settled for small amounts whether the companies really committed fraud or not.
"We haven't been able to find any merit-related variable that affects the settlements," said Frederick Dunbar, an economist at National Economic Research Associates in White Plains, N.Y. "There are other reasons that matter more."
But plaintiffs' lawyers -- and law professors who support them -- say America has the most trusted securities markets in the world because companies are forced to tell the people who own them the truth. The Securities and Exchange Commission is too understaffed to enforce securities law by itself, they say, so shareholders need access to courts to protect themselves.
The bill "would . . . threaten basic protections for investors and our capital markets," 67 securities law professors said in a petition to the House Commerce Committee.
Maryland has seen its share of shareholder suits, and defendants and their attorneys claim that the state has not been spared the abuses that reform advocates warn about.
The defendants include a number of the state's biggest past and present corporate names, including Merry-Go-Round Enterprises Inc; Jiffy-Lube International Inc.; USF&G; Corp.; MNC Financial Inc., then the parent company of Maryland National Bank; Baltimore Bancorp, the former parent company of the Bank of Baltimore; and the old Marriott Corp.
But Maryland's experience is a sign that the current law does enough to protect companies from unwarranted suits, said Charles Piven, a Baltimore attorney who has brought at least nine stock fraud suits on behalf of clients.
He said judges already have the power to demand more proof earlier in a fraud suit than in other cases, he said, and they have the power to make a stockholder who files an unwarranted case pay the company's legal bills. In Maryland securities cases, he said, judges have been using those powers more and more aggressively.
"Maryland has been one of the toughest places to bring these cases," he said. "The Fourth Circuit [which hears appeals from federal courts in Maryland] is a very tough circuit."
Indeed, the cases against USF&G;, Merry-Go-Round, General Physics Corp. of Columbia, Marriott and the second of two cases against Baltimore Bancorp were all either dismissed or withdrawn after the company threatened to ask the court for sanctions against the other side.
A lawyer who has defended four Maryland companies or their directors against stockholder lawsuits agreed that federal courts Maryland have cracked down on unwarranted suits. But Stewart Webb, a lawyer with the Venable law firm in Baltimore, said he favors writing the new restrictions into law anyway. "They [judges] could always swing back the other way," he said.