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April 20, 2000
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M&W: The Corporate Ambulance Chaser
I am a corporate lawyer and also long CRA. Just thought I would share some general thoughts on the world of class actions.
Many class actions are full of merit and should be brought to protect innocent shareholders. Many are bunk. Which category does the CRA suit fall into?
M&W, and firms of their ilk, are at times the equivalent of slip and fall tort lawyers -- Corporate ambulance chasers. They'll create litigation where none should rightfully exist. Quite often, at times when there have been general or sector market declines, they will have one or more of their young associates look for press releases regarding corporate transactions, such as secondary offerings or the granting of stock options to executives. They will look for a public company that has any kind of new that can be deemed negative. They will then review the SEC filings and scour any other public information available, looking for a peg to hang their hat on, no matter how weak. They attempt to create a legal theory that will support some kind of breach of fiduciary duty by management of that company and then hit the phones, calling stockholders to serve as potential representatives of the class in a legal suit. They need to find only one pissed off holder and they have themselves a suit. Its commonly called a "strike suit."
Sometimes, the bottom line game plan of the M&Ws of the world is to create public perception pressure on the public company simply to drive a settlement for cash. Ultimately, the lawyers strive for settlement, usually in the form of the payment by the public company of M&W's legal fees and some other amounts. Of course the M&Ws will through in some by-law amendment or other device that purports to put another check and balance on the public company's management. Meanwhile, the public company knows it will be cheaper and quicker for it to settle through the payment of a few hundred thousand dollars, rather than fight a lengthy legal battle.
Thus the impetus for the M&Ws to bring any class action suit that comes their way or which they can manufacture.
Obviously, in the case of Celera, anyone who bought in the secondary at the $200+ level is bound to be disappointed with the result. So it couldn't have been too hard to find a shareholder willing to serve as the representative of the class.
As for the merit of the suite, on the one hand, I do not believe that the "CRA Story" has ever been one which told a tale of a private company hoping or needing to integrate its research and results with those of the government funded Human Genome Project in order to be successful.
Public companies are constantly in discussion with other players about potential partnerships and alliances. Most never come to be. If AT&T where in the process of doing a public offering of stock and at the same time were engaged in discussion with MCI about buying some of MCI's in-the-ground fiber capacity to extend the reach of AT&T's network, it is highly likely that AT&T wouldn't mention the discussions in the prospectus. There is a chance the deal would happen, and a chance it wouldn't.
However, one the other hand, I ask Fools why CRA would do a press release on the failure of its discussions with HGP? Why not treat it as a non event if it is in fact not a material event. Usually a press release is made for material events in a corporation's existence. The making of the press release itself almost creates a presumption that the failure of the talks was material. If the failure of the negotiations was material enough to disclose, then the potential or need or high desire for it to happen may have been material. That could be the heart of the M&W lawsuit.
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