Fighting Prop. 211 Becomes Crusade for High-Tech Execs

One day recently, at an hour when they would normally be setting out from their plush Northern California homes en route to the industrial parks where they engage in the business of changing the world through high technology, a group of Silicon Valley executives found themselves on a cramped shuttle bus.

Destination: Sacramento. Mood: Sour.

Inside the bus, a deep frown creased the boyish face of Tom Proulx, the multimillionaire co-founder of Intuit Co., which produces the popular computer program Quicken. Age 34, financially set for life by any rational measure of wealth, Proulx was being provoked into a rage by the thought of his adversary in the capital hearing to which he was headed: a 50-year-old San Diego lawyer named William Lerach.

“Bill Lerach is so ugly you can imagine what kind of kid he was,” he snapped to his colleagues. “He probably got beat up all the time. Now he’s going to get all those ‘jerks’ back.”

To most California voters, ballot initiative 211 is still an obscure proposal having something to do with state courts and lawsuits by stock investors.

But it looks very different to members of the business community and the securities bar, who were massing on that recent day for a Sacramento hearing to court support from the California Public Employees Retirement System, the giant $100-billion state employees pension fund.

To Proulx and his fellow executives, and to Lerach, the measure’s progenitor, Proposition 211 is a moral crusade worthy of multimillion-dollar war chests on both sides: It’s a battle over basic principles of business practice. And it’s more.

It’s personal.

The invective slung up and down the state by the campaigners for and against the initiative has even outweighed the dollars banked to promote and defeat it on TV.

“We have to show Bill Lerach that the tremendous sleeping giant that is business, particularly this community, has been awakened,” said Betsy Graves Mahan, a campaign director for Taxpayers Against Frivolous Lawsuits, an anti-211 organization started by Proulx. “We have to win more than just this battle. We have to win the war. We have to keep Lerach from coming back election after election to pick on us.”

For his part, Lerach paints himself as the protector of the little person, the small investor, against the depredations of corporate officers and directors.

“I am sick and tired of powerful people eroding the rights of ordinary people,” he said recently in his San Diego office. “Some of these people who come into my office have been cheated out of their life savings. They look like concentration camp survivors.”

The ballot initiative at the center of the campaign aims to make it easier for shareholders to sue public companies in California courts over unexpected changes in their stock prices--easier, in fact, than it would be to sue in other states or the federal courts.

Opponents say that could make California a magnet for what corporate executives consider costly nuisance suits, and might make California-based companies prime targets for the cases as well.

In perhaps its most calculatedly provocative provision, the measure forbids companies to use corporate funds to pay for officers’ legal costs. (The companies are allowed to take out insurance, which typically covers about half the expense.)

Silicon Valley bankers and executives, who sit on multiple corporate boards, view the provision as a knife pointed at their throats, with Lerach’s fingers gripping the handle.

“Proposition 211 says that either you knew your stock was going to go down and therefore you are a crook, or that you didn’t know and therefore you’re incompetent,” said Lawrence Ellison, chief executive of Redwood City-based Oracle Corp. “And it says whether you’re a crook or incompetent, we’re going to take your house away. I’d rather walk through Sherwood Forest in the 16th century than live in a society that allows this to happen.”

Ellison’s words are echoed in virtually every executive office and boardroom in Silicon Valley. He and other executives have threatened to step down from the companies they serve if 211 passes (the pro-initiative side calls that an empty threat).

Silicon Valley professionals forecast an end to the high-tech boom on Wall Street if the measure succeeds. They also predict a spate of public companies returning to private ownership in the hunt for shelter from the lawsuits Proposition 211 might engender.

They have turned their sights on Lerach, painting him as a tool of “East Coast lawyers” and as someone whose principal motivation isn’t protecting the shareholder, but feathering his nest with out-of-court settlements.

Lerach argues that without the protection of strong securities laws, victims of boardroom swindlers will be left without recourse.

Fearful of what they see as a mortal threat to their way of raising capital and a menace to their personal fortunes, the notoriously competitive Silicon Valley entrepreneurs have come together in a way they never have before.

As a sign of their determination, they have placed the campaign under the supervision of John Doerr, a leading high-tech venture capitalist and a man of storied energy and influence in the industry. (Doerr could not tell a recent interviewer whether he was registered as a Republican or Independent.)

Moreover, the industry’s leaders, known for their frugality--at least when it comes to public philanthropy--are expected to spend about $20 million of their personal and corporate resources to defeat the initiative. Other big contributors are East Coast accounting firms and the brokerage industry.

On the other side, the Lerach forces have gathered a war chest of more than $11 million.

Proposition 211, as it happens, is the latest volley in an enduring war between Bill Lerach and the high-tech execs.

The conflict has deep roots. Over the years, Lerach has perfected a legal weapon for holding corporate officers responsible for slides in their stock prices that take small investors by surprise. These so-called “derivative” lawsuits generally charge executives and directors with fraud for having made overly optimistic statements about their companies’ prospects or for inadequately telegraphing bad news.

Lerach placed Silicon Valley firms high on his target list for two main reasons. High-tech executives are inclined to public flights of optimistic fancy, and their stocks are especially volatile.

The term “Lerached” has long been part of the Silicon Valley vernacular, like “software” or “bug”: “Your company has been Lerached.” An often repeated saying in the high-tech crowd is that there are two kind of companies: those that have been sued by Bill Lerach and those that will be.

In fact, several leading high-tech firms have been sued multiple times. The defendants are often inclined to settle fast, under terms that generally include substantial fees for Lerach’s law firm, Milberg Weiss Bershad Hynes & Lerach.

“Business comes to a standstill,” said George Sollman, president of Centigram Communications, a San Jose communications company sued by Lerach in 1995. Centigram settled the case for $1.5 million in December after spending about $750,000 to litigate it.

“It was just not worth it,” Sollman said. “Not only do you spend a lot of time hunting down documents, but even our customers were asked to come up with documents.”

Last year, the battle moved into the political arena. While a bill to limit Lerach-style suits threaded its way through Congress, Intuit’s Proulx spearheaded an initiative drive to close off the state courts to securities fraud cases.

That drive faltered, however, and the initiative was defeated by voters March 26.

“People didn’t take it seriously enough,” said Michael Moritz, managing partner of Sequoia Capital, a Menlo Park venture capital firm. That might have been, in part, because the high-tech community felt it was sufficiently protected by the new federal law, enacted in December over President Clinton’s veto.

But many also blame Proulx. Although he had helped found Intuit, he was not known or respected in the region as an operating executive. He was unable to raise enough money in time to mount an effective media campaign on behalf of his measure, against which Lerach and his allies threw millions of dollars.

“We went in for a tennis match dressed in our good whites, and these guys came for a football match wearing shoulder pads and helmets,” said John Adler, chief executive of Milpitas-based Adaptec Corp., which was sued in 1990 by Lerach’s firm. “They ran a dirty campaign, and we weren’t prepared for it.” (In fact, the failed campaign was run by Ken Khachigian, one of the state’s most practiced political operatives.)

In one of the most dramatic anti-initiative ads of the campaign, an image of Charles Keating, the savings-and-loan magnate serving time for fraud, morphed into one of Alan Shugart, the chief executive of Scotts Valley-based Seagate Technology, while a voice intoned that Shugart supported the initiative.

Shugart, whose company had been sued three times by Lerach’s firm and settled one of the cases for millions of dollars, sued the campaign for defamation. (Pretrial proceedings are still going on.)

“When you see one of your competitors getting sued by someone who’s evil like Lerach, it’s kind of like seeing your mother-in-law go over a cliff in your brand new Cadillac,” Shugart says today. “You don’t know whether to laugh or cry.”

But Lerach has ardent supporters. For the recent CALPERS hearing, they almost filled the 300-seat CALPERS auditorium in Sacramento.

“Bill Lerach looks after the people who need looking after--the little guy,” said Sam Epstein, an 84-year-old North Hollywood resident who recovered most of the $65,000 he lost in Keating’s Lincoln Savings & Loan scam after Lerach sued Keating on behalf of the victims. “If you’re wondering, do I think he makes too much money, hell, no. I think he deserves every penny he gets.”

A succession of elderly pensioners served as Lerach’s shock troops at the hearing, exhorting the board to take a stand in support of 211. Modestly attired and plain-spoken, they were in sharp contrast to the slick, young executives in expensive business suits hoping for CALPERS to oppose the measure.

“There are good people on both sides of this issue,” said CALPERS Vice President Charles Valdes. “This is not going to be a win-win situation.”

Weeks later, CALPERS decided to remain neutral, after what Valdes called the most intense lobbying campaign he had seen in his 13 years on the CALPERS board. The decision was a defeat for the Silicon Valley side, which had hoped to push CALPERS from a neutral stance.

“Politics suck,” said Proulx. “I know better than anyone that it’s an ugly business. In the Silicon Valley, decisions are based on merit. In politics, the quality of an idea doesn’t matter. It’s all about money and friends. It’s about power. It’s anathema to the way Silicon Valley operates.

“But we can’t stick our heads in the sand any more,” he added. “It’s a bad game, but you have to play.”

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Key Provisions of Initiative

Proposition 211 would set new standards for securities fraud cases in California courts. Key provisions of the November ballot initiative are as follows:

* State courts would be permitted to consider a doctrine known as the “fraud on the market,” which allows shareholders to sue without citing specific examples of fraudulent information on which they may have relied in buying a stock.

* The cost of defending company executives and directors charged with securities fraud cannot be picked up by the company. However, the company may purchase insurance to cover monetary damages. (Insurance generally covers about half the expense.)

* Lawyers and accountants who attest to the veracity of a company’s financial statement can be held liable for the full amount of damages.

* There would be no cap on attorneys fees, although a judge would retain authority to regulate those payments.

* In cases of egregious fraud, punitive damages could be levied with the money going into the state’s general fund.