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Falling Stock Prices?

By Stephen R. Smith and Natalie Cortez

Open any major newspaper over the last few months and you will find a surprising number of articles detailing the significant drop in a public company's stock price in mere hours or days after the disclosure that the company has been civilly sued, be it a class action, securities fraud case, or harassment suit. The decline in a company's stock price following the disclosure of a pending lawsuit is not by any means new. Yet, the speed and extent of the decline in a company's stock appears to have greatly accelerated in recent years. As a result, public companies are now faced with a growing number of lawsuits geared principally at obtaining a speedy settlement by leveraging the lawsuit's potential impact on a company's stock value.

The common strategy centers on drafting complaints in an inflammatory way to create a threat of substantial negative publicity aimed at driving stock prices down. These complaints are often sent to the company in draft form with a request to mediate the dispute and a unilateral promise to keep the allegations confidential for a short period of time in an attempt to force a speedy settlement. Under a more aggressive variation of this approach, the complaint is filed under seal with the filing providing a significant privilege against defamation to plaintiff's counsel. Companies are then left with the Hobesian choice of proceeding with litigation and fighting the allegations contained in the draft complaint or settling with a plaintiff before the lawsuit has even been filed. This article briefly examines the costs and benefits of each approach.

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