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When one of the world’s leading ocean freight companies merged with a large competitor in 1995, all looked rosy for stockholders. But a year later, the floor dropped out when the company’s stock fell to half its earlier value, based on problems allegedly inherited from its former competitor. Stockholders, led by now-deceased New York lawyer Harvey Greenfield, sued for losses of more than $15 per share, as well as punitive damages, saying they would have sold their stock earlier if they had known about the internal complications. Company officials, they argued, committed fraud by concealing material information that would have rendered prior glowing predictions about the merger false and misleading. Greenfield and group won at the appellate level, but on Tuesday the California Supreme Court, meeting in San Francisco, appeared extremely reluctant to expose companies to common law liability for third-party stockholders’ decisions to hold on to their shares, rather than sell. If the high court were to agree with the stockholders, Justice Ming Chin said for an apparent majority, “We’d open the floodgates to litigation in California.” “Isn’t everyone going to say, ‘Oh yes, I’m damaged. I should have done something?’” In another case Tuesday, the high court addressed whether trial court judges have an affirmative duty to advise pro per defendants about their right not to testify in court. In the securities case — Greenfield v. Fritz Cos. Inc., S091297 — Orrick, Herrington & Sutcliffe partner William Alderman argued that stockholders’ suit against the now-defunct Fritz Cos. Inc. failed the test laid out by the high court itself in 1993′s Mirkin v. Wasserman, 5 Cal.4th 1082. That ruling held that conclusionary allegations that securities had been purchased in reliance upon misrepresentations wouldn’t suffice to withstand a general demurrer. “Were [shareholders] permitted to sue under California common law any time the value of their holdings declined, claiming that they would have sold at the higher price had the company disclosed different information,” Alderman wrote in court briefs, “the consequences for the nation’s securities markets would be staggering.” At one point Tuesday, Justice Carlos Moreno asked whether Alderman’s position was helped or hurt by the U.S. Supreme Court’s 1975 decision in Blue Chip Stamps v. Manor Drugs, 421 U.S. 723, which held that non-buyers and non-sellers do not have standing to sue under federal securities law. Alderman said the case obviously helped. But then Moreno noted a footnote in Blue Chip Stamps that allows state law remedies. Most of the justices’ tough questions, though, were aimed at Alderman’s opponent, Michael Braun, a partner in the Los Angeles office of New York’s Stull, Stull & Brody, who argued that Greenfield relied on Fritz Cos.’ financial well-being statements in deciding to hold onto his stock. “How did he rely on it?” Chief Justice Ronald George asked. “What do you have to say about the degree of pleading needed to prove reliance?” Justice Marvin Baxter noted that all stockholders could presumably say they relied on misleading reports in order to sue companies over stock losses. He also said that stockholders facing a downslide could cut their losses by selling and then seeking damages from their company or ride the market out until good times return. “Isn’t this a basic business decision most shareholders make when faced with this kind of situation?” Baxter asked. When Justice Chin raised the possibility of opening the floodgates of litigation, Braun noted stockholder-favoring laws in New York and New Jersey that haven’t caused problems. “We have to weigh the speculative fear of a floodgate,” he said, “with the fact that they have not” occurred back East. In court papers, Braun wrote that the First District Court of Appeal’s ruling was not a windfall for his client. “It merely represents the precious opportunity to be heard,” he wrote. “To hold otherwise is not only to deny plaintiff access to the judicial system, but to immunize corporations who flagrantly defraud their shareholders — a result that is inconsistent with law, logic and morality.” In People v. Barnum, S095872, the court’s second argument of the day, both sides took a verbal beating from the court in a case in which Sacramento’s Third District ruled that trial court judges need not advise pro per defendants about their right not to testify. Sacramento-based Deputy Public Defender David Adams argued that while the U.S. Supreme Court’s 1975 ruling in Faretta v. California, 422 U.S. 806, gives criminal defendants the right to waive counsel, trial court judges still have an obligation to make sure the defendants know they have the right not to testify. But Chief Justice Ronald George asked if that wouldn’t risk defendants claiming on appeal that they were coerced into not testifying. “Taking the stand,” he said, “could be letting the cat out of the bag and help the prosecution’s case.” Justice Joyce Kennard added that “45 out of 49 of our sister states that have addressed this issue have rejected the particular rule you wish us to adopt.” Sacramento-based Deputy Attorney General Clifford Zall got his own share of grief from Kennard and George, with the chief justice asking whether trial court judges could answer any of the defendants’ questions about their right to testify. “Any advisement of any sort is fraught with potential problems,” Zall said. But, George added, how could you fight a defense appeal if a defendant asks the judge about his rights and the judge says he can’t answer? “It’s difficult to draw that line for all circumstances,” Zall said. “But under this case, no constitutional right to advise is compelled.” The Supreme Court is expected to have decisions in both cases in 90 days.

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