See you in court - For Starters

Telecommunications, June, 2002 by Ted McKenna

Smelling blood in the water, law firms are on the hunt for plaintiffs to join class-action suits filed on behalf of disgruntled telecom investors.

Enron and Global Crossing may be receiving most of the attention for their accounting practices, but are no means the only high-tech companies facing investor lawsuits. The list includes JDS Uniphase and FLAG Telecom, who are alleged to have misrepresented in various ways the state of their respective businesses, raising false expectations with investors.

Within the space of a couple weeks in April, for example, at least six law firms announced the filing of class actions against JDS Uniphase, whose stock was once more than $150 a share and has recently been trading for between $4 and $5.

No matter the company, the suits make generally similar claims. For instance, a suit filed by Washington, D.C.-based Cohen Milstein Hausfeld & Toll alleged that between July 27, 1999, and July 26, 2001, JDS Uniphase "falsely represented the demand for the company's products, misrepresented the success of acquisitions, and misrepresented its financial position by failing to timely account for changes in goodwill values in order to inflate the value of the company's securities."

A spokesperson for JDS Uniphase declined to comment on the suits, as did the bankrupt FLAG Telecom, another company that saw a steep dropoff in stock prices--from $40 at one point to virtually nothing today--and is also being sued for alleged misrepresentation.

The recent crash in telecom stock prices left more than a few unhappy investors ripe for the picking by firms that specialize in shareholder lawsuits. For example, the giant of class actions, New York-based Milberg Weiss, which is handling two of the suits filed against JDS Uniphase and FLAG Telecom, also had actions recently pending on Alcatel, Nortel Networks, Lucent Technologies, Global Crossing and Enron, among many others.

Attempting to respond to complaints that many class-action suits are frivolous, Congress in 1995 passed the Private Securities Litigation Reform Act, which gave "safe harbor" protections to companies making forward-looking statements about their financial prospects. But telecom attorney Alfred Mamlet of Washington, D.C.-based Steptoe & Johnson says plaintiffs' counsel in securities class-action suits can usually find some statement made by the companies that isn't covered by the disclaimers tacked onto the end of press releases or stated at the beginning of earnings conferences.

As for the latest flood of class-action suits, it's nothing unique to telecom. "Filing suits against companies that have had a relatively rapid fall in stock prices is a time-honored tradition," Mamlet says. "So today it's telecom companies. Tomorrow it might be biotech or pharmaceutical companies."