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Corporate securities litigation has never been big business in the Washington area. Until now. Plaintiffs’ lawyers rushed to Alexandria, Va., last week to file at least 15 stock fraud class actions against Vienna, Va.-based MicroStrategy on news that the company had to dramatically restate earnings for the past two years. While the cases are not the first stockholder suits to be filed in the Eastern District, local litigators and attorneys for emerging companies see the flurry as a signal of stormy weather ahead. Such suits, often resulting in seven-figure settlements, are commonplace in Silicon Valley, where the tech sector has matured, gone public, and suffered the slings and arrows of accusations from plaintiffs’ attorneys. While only six consolidated cases against companies have gone forward in the Eastern District since 1996, more than 180 such cases have gone to court in the Northern District of California, according to a securities litigation Web site run by Stanford University law Professor Joseph Grundfest, a former member of the Securities and Exchange Commission. “It’s almost become an unfortunate rite of passage for high-tech companies,” says Laurie Smilan, a securities litigator in the recently opened McLean office of Palo Alto’s Wilson Sonsini Goodrich & Rosati. Northern Virginia, Smilan says, “is like Silicon Valley 10 years ago.” Because there have been so few publicly traded companies in this area historically, securities litigators “are still in the early stages of recognizing the potential for increased class action litigation,” says William Donnelly, a partner in the D.C. office of Richmond’s McGuire, Woods, Battle & Boothe. It’s taken a shock like MicroStrategy’s losing 79 percent of its market value in three days wake up and smell the business. WHO’S READY? At least some of the top securities firms have seen the future. New York’s Skadden, Arps, Meagher, Slate & Flom, Wilson Sonsini, and Boston’s Hale and Dorr have all opened Northern Virginia offices in the last few months. But the work may not come easy to firms just because they have an outpost in Reston or because they coddled a company from the basement to the boardroom. “We look for the 800-pound gorilla who is a specialist in this sort of thing regardless of whether it’s a firm we’ve used before,” says the general counsel of a local high-tech company. “Because you’re dealing with SEC issues, [that firm] is either a very very large Washington or New York firm.” The firms that GCs have on the tips of their tongues include Wilmer, Cutler & Pickering and Wall Street players Skadden and Fried, Frank, Harris, Shriver & Jacobson. Most securities lawyers contacted for this article declined to comment on the record, fearing that it might diminish their prospects of getting a piece of the MicroStrategy litigation. But several litigators watching last week’s events point to Hale and Dorr as MicroStrategy’s likely choice. Boston partner Thomas Ward has been handling the company’s SEC work, and securities litigator James Quarles III is in the firm’s new Reston office. Neither returned phone calls, and MicroStrategy General Counsel Jonathan Klein could not be reached for comment. On the plaintiffs’ side, two D.C. firms are considered major players in the securities class action arena: 32-lawyer Cohen, Milstein, Hausfeld & Toll and 10-lawyer Finkelstein, Thompson & Loughran. Cohen, Milstein has been lead or liason counsel in many of the securities class actions filed in the Eastern District, including cases against Information Analysis Inc. and and LCI International Inc. The record in those cases, though, is mixed. The case against LCI was dismissed by the court, while Information Analysis resulted in an undisclosed settlement. Cohen, Milstein has a track record in other types of class actions, having worked on the Exxon Valdez case, a price-fixing case against vitamin manufacturers, and litigation accusing industrial companies of profiting from slave labor in Nazi Germany. Andrew Friedman, the Cohen partner who filed Harad v. MicroStrategy on March 21, says technology companies face pressure to engage in questionable tactics in order to keep their stock buoyant. “One of the overriding concerns is that they pay their employees greatly in stock, so there’s an overwhelming incentive to influence earnings or to delay bad announcements,” he says. “More companies going public,” he says, “more opportunity to defraud investors.” RISE AND FALL The dynamics of stockholder suits are remarkably similar from case to case. A company’s stock takes a dive, often related to news that promising predictions of revenues have failed to pan out. Plaintiffs attorneys representing stock holders as retirement funds their investments. While a number of cases are dismissed because plaintiffs fail to show fraud on the part of corporate officers, almost every case that makes it past the summary judgement stage results in settlement, sometimes with shares of the company included in the payout and attorney compensation. MicroStrategy found itself in the land of multiple class actions on March 20, when the company announced its restatement of earnings for the past two years. The business-to-business software firm’s revenue for 1999, originally reported as $205.3 million, were dropped to between $150 million and $155 million. Revenue for 1998 was downgraded from $106.4 million to between $95.9 million and $100.5 million. That same day, Schiffrin & Barroway, a Bala Cynwyd, Pa.-based firm, filed a class action against MicroStrategy in the Eastern District of Virginia. So far, 14 other law firms have followed, including New York’s Milberg, Weiss, Bershad, Hynes & Lerach and Boston’s Berman, DeValerio & Pease. The suits allege that MicroStrategy and its officers and directors violated federal securities law by issuing false and misleading statements about the company’s finances. Specifically, the suits allege that MicroStrategy recognized as revenue money not yet received from contractors. MicroStrategy has not commented on the allegations other than to say the restatements were made to conform with SEC accounting guidelines. The company’s outside auditor, PricewaterhouseCoopers, has withdrawn its certification of MicroStrategy’s filings. Pricewater-houseCoopers has been named as a defendant in at least one of the cases. MicroStrategy’s accounting practice is not uncommon among aggressive technology companies. But it’s a practice SEC Chairman Arthur Levitt called “accounting hocus pocus” in a 1998 speech. The SEC issued new accounting guidelines in December, and a March 10 Bear Stearns & Co. report says 32 companies have restated their earnings or adjusted their accounting practices since then. For the securities bar, that could mean that more cases are in the pipeline. In fact, one of the companies that joined MicroStrategy in restating profits, Milwaukee-based Cumulus Media Inc., was also hit with stock fraud suits last week stemming from a restatement of its earnings. As for the forecast predicting a torrent of stock fraud litigation in Northern Virginia, securities experts suggest it was inevitable. Grundfest, the Stanford University professor who tracks such cases, says, “Sunrise to sunset, it’s no more surprising than that.” Reporter Vanessa Blum contributed to this article.

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