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Better Ammo for Angry Shareholders?


The Infomatec case seemed like the breakthrough that lawyer Klaus Rotter had been waiting for. In September, 2001, a judge awarded $55,000 in damages to a German butcher who had bought shares in Infomatec, a now-insolvent maker of software for interactive TV. The judge ruled that the company's top managers lied about their 1999 revenue. For the first time in Germany, company officers responsible for a false claim would be obliged to cough up compensation to shareholders.

Rotter's elation didn't last long. On Oct. 1, 2002, a higher court judge overturned the ruling, saying Germany's stock market law doesn't allow shareholders to collect damages even when they have been deceived. The case helps explain why Rotter, an intense 36-year-old Munich attorney, still drives an Opel minivan. There are no vast riches to be made if you're a lawyer for shareholder plaintiffs. "The companies want to lead shareholders around by the nose," says Rotter.

There could be a Porsche in Rotter's future, though. On Feb. 25, the German government announced it would push new proposals to make it easier for shareholders to wrench damages from company managers who lie and from corporations that play fast and loose with their books. If the measures become law, German investors will finally have some legal clout.

Among other things, lawmakers would create a mechanism akin to a class action in the U.S., allowing shareholders to pool their resources to take on a corporate foe. The new rules, which probably won't become law before 2005, would also hold managers accountable for all public statements, not just those made via the stock market's official news ticker, as is now the case.

Rotter isn't waiting for the government to act. His 10-lawyer firm is already pressing ahead on some 30 cases against corporations. A tireless rainmaker who issues a steady stream of press releases on the progress of his cases, Rotter is the most ambitious member of this tiny part of the German bar. His case roster reads like a catalogue of 1990s stock market excess. Many of the boom-and-bust stars of Frankfurt's now-defunct Neuer Markt are there, including EM.TV, whose two top former officials, brothers Thomas and Florian Haffa, are on trial in Munich.

However, under current law, angry shareholders must prove bad intent. Those who go to court also have to worry about a provision forcing them to pay the defendant's legal fees if they lose. The new law would reduce that risk. But even so, the main driver behind U.S. civil lawsuits would be missing: the contingency fee, in which the lawyer takes a percentage of the damages if he or she wins and gets nothing for a loss. Such a system would remain illegal in Germany, meaning Rotter's clients would still have to pay his $325-an-hour fee -- although the hours per client would be far lower if plaintiffs could band together. However you slice it, it currently makes little sense for German investors to sue unless they have lost a bundle.

Rotter has a few successes under his belt in U.S. courts, where he works with the New York firm Shalov Stone & Bonner. For example, they and other U.S. attorneys won $11 million for shareholders in a settlement with Los Angeles-based TV-production company Team Communications Group Inc., which was listed on both NASDAQ and the Neuer Markt. His latest transatlantic case: Royal Ahold. Within days after the Dutch grocer with heavy U.S. assets admitted it had overstated earnings by at least $500 million, sending its stock price into a swoon, Rotter and his American partners had filed suit against Ahold and its accountant, Deloitte & Touche.

But the big score in Germany is still elusive. Whether that will change is an open question. German corporations are lobbying against any upgrade of shareholder rights, especially the measure making managers personally liable for damages. For now, Klaus Rotter will have to keep filing his cases one investor at a time. By Jack Ewing in Frankfurt, with Katharine A. Schmidt in Stuttgart


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