INSIDE TAXES COMMENTARY -- Oct. 15, 1996

Prop. 211: real motivation is lawyer profits

Proponents of Proposition 211 on the November 5 ballot have tried to entice support from retirees and elderly investors, even dredging up Charles Keating's savings and loan fraud in an effort to frighten voters.

This is a smoke screen to confuse voters by covering up the principal motive behind the initiative: Securities lawyers stand to rake in millions of dollars in fees from filing class-action suits. This measure stacks the deck so that companies may be forced to settle lawsuits rather than risk going before juries.

Finally reined in at the federal level by Congress on a strong bipartisan vote, these attorneys can no longer use the federal courts. Instead, they want to broaden their ability to file securities lawsuits in California state courts. According to Stanford Law School Professor Joseph Grundfest, a former U.S. Securities and Exchange Commission member, this proposition would provide more grounds for state lawsuits than had existed under federal law, without evidence that this expansion is warranted.

Here are some compelling arguments against 211:

• In outlawing these kinds of suits, Congress ensured continued access to the courts for investors who are hurt by fraud. Under existing state and federal laws, a securities lawsuit against Keating and his Lincoln Savings and Loan bankruptcy could still be filed, and the federal case against Keating would remain virtually unchanged under the federal reforms.
• The state's largest retirement system, the California Public Employees' Retirement System, refused to support the initiative once most of its directors were aware of the measure's potential harm to the system's own investments.
• Proposition 211 is bad news for taxpayers. Encouraging predatory lawsuits would be a drain on California's economy.

Taxpayers would have to pay new court costs of about $100 million over the next 10 years, according to an economic analysis by Law and Economics Consulting Group. This analysis says costs of operating businesses in California would increase by $1.5 billion over 10 years, and state revenues would be reduced by as much as $5.1 billion as companies seek more hospitable surroundings, taking 150,000 jobs with them.

And the company that gets caught up in this legal morass will have less to report in earnings for shareholders and less to invest in research and development of new products. The high-tech and biopharmaceutical industries are frequent prey for these lawyers, and could be sued in California if only one share of stock is held by a California resident.

• Proposition 211 would ensure that attorneys get vast amounts of fees, and it would prevent the Legislature from adopting fee limits, and not just in securities lawsuits.

Proposition 211 is a serious threat to the California economy.