Like cats and dogs, lawyers and accountants have been scrapping for as long as anyone can remember, but now Congress has been drawn into the fray - in the name of investor protection.
On one side is the accounting profession and lots of medium-size, high-tech companies. They complain that a predatory group of law firms has been filing frivolous class action lawsuits looking for a quick out-of-court settlement and an easy payday.On the other side are law firms and consumer advocates who charge that such lawsuits are the only remedy investors have when they've been deceived by dishonest corporate managers or incompetent auditors.
Both sides portray themselves as the victims of fraud and accuse each other of greed at the expense of a company's shareholders.
"I have never encountered an issue where there is such disagreement over the basic facts," Sen. Christopher Dodd, D-Conn., chairman of the Senate securities subcommittee which is looking into the issue.
Historically, the courts have viewed the accounting profession as a "public watchdog" protecting investors by keeping Corporate America honest. But the profession claims it is unfairly targeted in a growing number of lawsuits.
Dodd's panel is looking into accountants' claims that:
- an "explosion" of lawsuits is tying up many companies' resources when they could be devoted to more productive activities such as research and development;
- some companies are facing difficulty finding capable people willing to sit on their boards of directors, often targeted in securities fraud lawsuits;
- companies are increasingly reluctant to release information about matters such as earnings prospects or product development beyond what is required by law;
- accounting firms are rejecting some types of companies as customers because their industry is prone to class action lawsuits.
Computer industry executives lined up last month to tell Dodd's panel corporate horror stories about lawsuits filed against them within hours after the company's stock suddenly rose or fell.
F. Thomas Dunlap Jr., general counsel of Santa Clara, Calif.-based Intel Corp., said the microprocessor maker was sued in seven separate securities fraud lawsuits between 1991 and 1993 - usually after short-term stock drops - even though Intel's overall stock price and earnings per share rose over that period.
"It didn't cost the plaintiffs anything, but it cost Intel a lot of lost management time and over $500,000 in legal fees," said Dunlap, adding that the money could have paid the salaries of 10 production workers or five engineers for a year.
Many witnesses urged changing the rules for securities fraud law suits that encourage both the guilty and the innocent to settle.
"They let the good guys cut their losses and the bad guys get off the hook," said Ralph Whitworth, president of the United Sharholders Association, a Washington-based investors advocacy group. Even when investors do win big settlements - as owners of the company - they're paid with their own money, he said.