Tech Companies Magnets for Securities Litigation?

PointofLaw.com has a pair of insightful posts from yesterday on why technology companies seem to be particular targets for securities litigation.

First POL points to Larry Ribstein's Ideoblog which cites an article in the Wall Street Journal (that itself draws on a Price Waterhouse Coopers' annual report on securities litigation).

The article contends that, “technology companies almost by definition are more susceptible to lawsuits challenging their books” and Ribstein feels, "[t]hat’s because many suits are based on accounting problems, specifically including revenue recognition issues, to which tech companies are most prone."

POL picks up the ball again here and offers the following elaboration on Ribstein's comments:

...there are probably some good economic reasons for tech companies to be more susceptible to accounting fraud lawsuits, reasons that would account for some (though probably not all) of the observed difference.

1) Tech companies are much more likely than average to have outsized valuations tied to perceptions of revenue growth;

2) Tech companies are somewhat more likely than average to have executive compensation heavily tied to stock options;

3) Tech companies are more likely than average to be acquisition targets (or acquirers) in stock deals where short-term fluctuations in the stock price have long-term effects on the company's prospects;

4) There was also a stretch of time in the boom years where tech company executives were more likely to be fly-by-night and/or inexperienced. (See, for example, Lori Gottlieb's Inside the Cult of Kibu.)

If these perceptions are true, there would be a greater incentive for tech company executives to fiddle with the books, both in terms of expected benefit from the fraud and, in at least some cases, decreased costs of exposure (compared to the opportunity cost of being a failed tech company executive), which one would expect to increase the real fraud worthy of suit.

We have certainly worked on our share of "widget" related securites cases over the years. Perhaps the preceeding explains exactly why that is.

-- MDT