Securities Fraud Cases Get Wired

A proposed virtual courthouse turns some lawyers into Luddites.

Published January 23, 1997 8:00PM (EST)

The nation's first electronic courthouse is under construction in California, much to the dismay of some corporate attorneys.

The cause for their consternation is a proposed court rule requiring that legal papers in securities fraud class actions be posted on the World Wide Web. A response to the 1995 Securities Reform law, which encouraged the dissemination of information about securities litigation through the Internet, the rule could presage the creation of an electronic legal system.

The Internet rule drafted by the San Francisco-based U.S. District Court for Northern California is expected to be approved by the court's judges next month. It coincides with the unveiling of the Stanford University Securities Class Action Clearinghouse, a Web site that will track litigation nationwide and serve as a repository for court documents.

The court's jurisdiction includes Silicon Valley, often the target of securities fraud lawsuits that have set off titanic political and legal battles among the corporate elite. Such litigation is often mystifying to the people in whose name cases are brought and who, in California at least, have been asked to vote on the scope of such suits at the ballot box.

Thanks to the Stanford site, citizens can review the merits of individual suits and settlements, find out how much money attorneys are making from the cases and receive e-mail alerts when new documents are filed.

But the prospect that corporate America's dirty laundry will be hung out for all to see has unnerved some lawyers.

Last month, the Bar Association of San Francisco initially voted to oppose the Internet posting requirement, known as Rule 23-3. Among their reasons: the rule would distort the legal process by exposing alleged corporate misconduct to worldwide publicity, allowing the trial of "private" cases in the press.

There's no doubt that Internet filing requirements undermine efforts to seal settlements and court records. In the electronic courthouse, anyone with a mouse has a key to the file room, and once a case is on the Net it can't be sealed.

The courts could profit as the site allows judges and their staffs to research cases for free. And if, as expected, the electronic courthouse becomes common, the courts and attorneys will save money, and a few trees, by slaking the legal system's thirst for paper.

The Stanford site could well become a powerful tool for the defense attorneys and high-tech firms that bear the brunt of securities fraud suits.

Say Netscape Communication Corp.'s next Web browser bombs and the subsequent slide in stock price triggers the inevitable class action on behalf of Netscape stockholders. The company's attorneys could plan their defense by surfing the Stanford site to see how their opponents litigated other cases, easily determining what arguments worked or failed.

It's no surprise then that Silicon Valley powerhouses like Netscape, Sun Microsystems Inc. and Apple Computer Inc. donated equipment and software for the Stanford site --much to the discomfort of plaintiffs' attorneys.

The high-tech industry helped finance the defeat last November of California's Proposition 211, the securities fraud initiative backed by Milberg Weiss Bershad Hynes & Lerach and other plaintiffs' firms. Furthermore, Stanford University law professor Joseph Grundfest, a former Securities and Exchange commissioner who opposed Prop 211, served on the committee that drafted Rule 23-3 and oversees the Stanford site.

Wealthy corporations and their hired guns, of course, can gain access to such information, Web site or not.

The real significance of the Internet rule and the Stanford site is the empowerment of all the faceless "class" members who may well be oblivious to the litigation carried out in their name.

Imagine if other class actions were subject to a similar rule. People plugged into a Web site like Stanford's would have a heads-up next time attorneys propose a settlement like one that gave consumers coupons for light bulbs while their attorneys received millions of dollars in legal fees from General Electric.

The likelihood that Rule 23-3 will one day be expanded to include other kinds of litigation was on the minds of San Francisco Bar Association board members who met last Wednesday to discuss the Internet rule.

The notion that one day every lawsuit might get posted is what concerns these lawyers, says former bar president Mark Schickman.

In the end, the San Francisco attorneys were unable to resist the technological tide.

After the federal judge who chaired the Internet rule committee showed up at the bar association board meeting Wednesday, the attorneys relented, withdrawing their opposition but not their concerns.

Judge Vaughn Walker told the lawyers that the Internet rule does provide a loophole for Luddites by exempting legal papers that aren't prepared on a computer.

If you want to get around the rule, he said, "Have someone type pleadings on an old-fashioned typewriter."

Quote of the day

Well, it worked for Cochran...

"I'm no poet, but obviously if you don't have time, you most certainly can't commit the crime."

-- Lawyer Robert C. Baker, winding up his defense in O.J Simpson's civil trial ("Simpson Lawyer Says Case is About Money, not Justice" in Thurday's New York Times).

By Todd Woody

Todd Woody is a regular contributor to Salon. He is a senior writer at The Recorder, a San Francisco legal daily, where a different version of this story first appeared.

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