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Google: countdown to lawsuit?
When popular Web search engine finally goes public, how quickly will the lawsuits follow?
August 18, 2004: 4:40 PM EDT
By Krysten Crawford, CNN/Money staff writer

NEW YORK (CNN/Money) - It is not so much a matter of if, but when: the long-awaited and twice-bungled initial public offering of Google will inevitably lead to investor lawsuits.

Legal experts said as much on Wednesday, the day the Securities and Exchange Commission declared the initial public offering of Google effective. The shares will begin trading on Thursday.

By themselves, the widely publicized missteps made by the company as it prepared for its highly-unusual public offering are unlikely to touch off a rush to the nearest courthouse.

Instead, the quirky Web search service is likely to fall victim to what most public companies -- newly launched or no -- face if their stock price falls: claims by investors' representatives that the drop was caused by the failure of insiders to disclose key company information.

"If (Google's) stock tanks I think you will have plaintiffs' lawyers who will try very hard to think of some way....to get money back," said Bruce Carton, the executive director of Securities Class Action Services, a subsidiary of Institutional Shareholder Services that tracks shareholder lawsuits.

Trial lawyers often file lawsuits on behalf of investors when a stock price falls, especially following bad company news. According to Stanford University's Securities Class Action Clearinghouse, 150 shareholder class actions, including so-called "stock drop" lawsuits, have been filed in federal court so far this year.

Charges typically zero in on company information that lawyers say was critical -- or, in legal parlance, "material" -- to a company's well-being, but which executives failed to disclose to the public.

In Google's case, the hunt to recover money could focus on two blunders made by the company as it prepared to go public. One involved failing to register shares earmarked for some employees and consultants. The other centered on a Playboy interview company founders Sergey Brin and Larry Page gave in late April, just days before Google formally notified regulators and the public of its IPO plans.

Of the two mishaps, the Playboy interview is better fodder for plaintiffs lawyers, according to legal experts. Securities laws mandate that companies in the process of going public enter a "quiet period" during which they are not supposed to arouse public interest or in any way influence prospective investors beyond what's contained in the formal IPO registration documents.

A violation of that restriction is known as "gun jumping."

'Gun jumping' comes back to haunt another

One company that recently violated those rules and is now the subject of several class actions is Salesforce.com (CRM: up $0.98 to $11.95, Research, Estimates). The CEO of Salesforce.com, which develops customer relations software, was the subject of a wide-ranging interview that appeared in the New York Times less than a week before the company planned to go public in mid-May.

Because of that interview, Salesforce.com's market debut was delayed more than a month, to June 23. The company did not retract any of the bullish comments its CEO made in the article nor did it warn investors until July 21 that 2005 earnings would miss Wall Street forecasts. That warning, which sent company shares down 30 percent in a single day, triggered at least 3 shareholder lawsuits.

Google's situation is somewhat different. Unlike Salesforce.com, Google was forced by federal regulators to verify the accuracy of the Playboy interview, which appears in the magazine's September issue, and to include the text in an amended regulatory filing.

In that filing, the company said that it did not think the interview violated securities laws. But if a court ruled otherwise, Google could be required to repurchase all of the IPO shares.

By doing that, Google has given all prospective investors access to the same information. The company has also gone to great lengths to warn that it's a risky bet, with some 22 pages of the prospectus outlining risk factors to investors.

"If (Google officials) have been accurate and complete, avoiding material misrepresentations and material omissions, then plaintiffs lawyers would have a hard time" arguing that IPO investors were defrauded, said Henry Hu, a securities law professor at the University of Texas School of Law. "But that's not to say that plaintiffs lawyers aren't going to try."

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They may not even need a court victory to get Google to pay up. Companies will often pay millions of dollars, without admitting or denying wrongdoing, to end cases before a court has a chance to decide whether they did anything wrong.

In little more than a year, companies have agreed to shell out more than $6 billion to settle shareholder-related settlements, according to Securities Class Action Services.

With that kind of money at stake, it doesn't take much to trigger a lawsuit.  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.