Here Come the Lawyers (to the Rescue)

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Sometimes it seems that a week doesn’t go by without a shareholder suit against a software company. One that almost slipped by unnoticed involves Siebel and its claims of near universal customer satisfaction, a position that was first challenged in this column two years ago.

As one of those articles was cited in the suit, it’s worthwhile to revisit why these suits are important and why, despite attacks on trial lawyers from all sides of the political spectrum, we desperately need to let these suits play out in our legal system. To be sure, some of them are scams. But the value of the good ones vastly outweighs the risk posed by the few that should never the light of day.

My main argument for shareholder suits centers around the ecosystem effect of misinformation. Large software companies, and smaller market leaders, sell and support their products inside an interlocking web of relationships — competitors included — that vastly increases the importance of any one company’s market activities. Thus, while a company like Siebel may generate hundreds of millions of dollars in software licenses, the total value of the IT systems these licenses participate in are much greater: Meta Group estimates the current CRM market at $67 billion — up more than 600 percent from 2000.

Messing around with the truth in a $67 billion market is a dangerous affair. If customers buy defective software, investors back a company’s whose books are faulty, and partners make deals with a vendor that can’t deliver, the entire market is put at risk. Honest players are discredited by association, customers are turned off or turned cynical as a result of being lied to, investors run for safer and more credible investments, and a whole industry can start to wither on the vine.

This is what happened to the ASP market in the late 1990s, even without anything more scandalous or illegal than some iffy business models. A couple of high-fliers took the ASP market into scam territory, scared off customers and vendors alike, lost millions for their investors and only now, some five years later, is the concept of ASP coming back as viable, and safe for everyone involved.

If being flaky but legal can be bad, the result of actually lying and cheating can have devastating effects. A New York Times article about the WorldCom accounting scandal intimated that the vice president in charge of AT&T’s long-distance service was sacked because he couldn’t turn in the same level of profitability as his counterpart at WorldCom. Who knew that the WorldCom numbers were false? The company generated the numbers, the auditors approved them, and the SEC enforcers were AWOL. Everyone just assumed the numbers were good.

Here’s where the trial lawyers ride in to the rescue. By pulling the judicial branch of government, with its rules of evidence and procedure, into the mix, an important check and balance is added to the equation. The intimidation factor alone is worth a lot: knowing how easy it has been for auditors and regulators to turn a blind eye, the fact that a civil suit could force the truth to the fore and wreak punishment on wayward executives sharpens their minds like nothing else.

With many executives monomaniacally driven to make their quarterly numbers, or else, the threat of bad publicity, civil judgments, and even criminal indictments is generally enough, at a minimum, to keep the honest software executive honest. And by getting at the essential details not discussed in an SEC filing or balance sheet, the discovery process in a civil suit makes it even harder for wayward executives to scheme their way out of trouble. Those emails, messages, and archived files can tell an important story if given a chance. A story that everyone in the free market system in which we operate has a fundamental right to know.

To do otherwise would be to cloak our industry in a veil of silence that would undoubtedly cover up a wide range of misdeeds: look at what happens even with the threat of a lawsuit lurking around every quarterly report. So call these lawsuits part of the cost of doing business — honest business. It sure beats the alternative.