Bankers can start worrying a little less about lawsuits from disgruntled investors.
The Securities Litigation Reform Act of 1995, which Congress passed late last year over President Clinton's veto, creates several safe harbors from class actions alleging securities fraud.
"Banks will benefit because there will be a less immediate rush to the courthouse whenever there is a drop in the stock price," said Karl A. Groskaufmanis, a lawyer in the Washington office of Fried, Frank, Harris, Shriver & Jacobson.
"It clearly will reduce the incentive and incidence of some of these lawsuits," agreed James F. Stapleton, a partner in the Stamford, Conn., office of Day, Berry & Howard. "In Connecticut, we had a whole rash of lawsuits against banks during the real estate crisis of the early 1990s. Most of those would have been dismissed under this law."
Congress passed the act to combat a spate of what bankers considered frivolous class actions. The suits clogged the courts and cost banks millions of dollars to defend.
The most important safe harbor applies to forecasts of revenues, earnings, and growth, Mr. Groskaufmanis said. Lawyers have charged that inaccurate predictions have misled investors into buying stock.
Banks can use the new law to avoid these suits if they take a few precautions, Mr. Groskaufmanis said. The bank must say the forecast is a best guess and it must explain how economic changes could affect the bottom line.
Mr. Groskaufmanis said boilerplate warnings about economic forecasts aren't good enough. The disclosure must be detailed and linked directly to individual predictions, he said.
The warnings also must specify how big the risk is. Simply stating that earnings would fall if a loan fails doesn't work. Bankers must specify how much earnings would fall, he said.
The act also protects bankers who talk to stock analysts about their institution's performance. But Mr. Groskaufmanis said this protection isn't perfect. He advised bank officials to refer to a written document containing all of the disclosures in order to remain safe.
He also said banks should update their disclosures. This way an outdated statement won't return to haunt the institution. Banks also should maintain strong relations with their institutional investors. The law makes the biggest investor the lead plaintiff in any suit.
Of course, the act does not offer complete protection. It does not cover forecasts connected with initial public offerings, tender offers, and comments in the financial statements.
It also requires auditors to act as the public's watchdog. Auditors must search for illegal activities and comment on whether the company is strong enough financially to survive.
At least some shareholders are sure to proceed with suits.
"There are experienced plaintiffs' attorneys and they are not going to fold up their tent and go home," Mr. Groskaufmanis said. "The risks are still there."
Still, bankers are clearly better off with the new protections. "People are still looking at this act and analyzing it and clearly there are some issues here that will only be decided by litigation," Mr. Stapleton said. "But the overall impact clearly will be to reduce the number of cases in the securities fraud field."
