L.A. companies seek to close loophole.

It's a battle that many local technology and biomedical firms hoped they would never have to wage: Trying to close a loophole in a 1995 federal law limiting shareholder class action lawsuits.

Hearings begin in Congress this week on three bills designed to plug the loophole in the 1995 Private Securities Litigation Reform Act.

The law put restrictions on so-called "strike suits" filed by shareholders against a company when its stock price drops 10 percent or more. The suits typically allege that company executives issued false or misleading statements about product offerings or future performance.

Shareholders' attorneys have been skirting the federal law by instead filing such suits in state courts.

The problem has become especially acute in California, where a disproportionate number of companies with volatile stocks are located. Technology companies are frequent targets of the strike suits and have been particularly outspoken on the issue.

"These are huge cases, each one of which can destroy a company. It has had a chilling effect on what companies disclose to investors because they don't know if they'll be sued," said Mark Gitenstein, legal counsel to the Uniform Standards Coalition, a Washington D.C.-based group of companies pushing for more reforms.

So far, three Los Angeles-area companies have signed a letter addressed to key members of Congress pushing for closure of the loophole: Creative Computer Applications Inc. and Tekelec Corp., both based in Calabasas; and Chatsworth-based IRIS Inc., formerly International Remote Imaging Systems.

Other Los Angeles-area companies are relying on the American Electronics Association, the Software Publishers Association and the Uniform Standards Coalition to press their case.

Opponents of the bills, which would require all class-action shareholder lawsuits involving companies traded on national markets to be filed in federal court, say reform is premature.

"It's not clear yet whether there is any means for defrauded investors to recover any of their money under the 1995 law" because their cases have not yet been heard, said Merne Horan, executive director of the National Association of Securities and Commercial Law Attorneys.

Both proponents and opponents expect Congress to pass legislation early next year that would close the loophole; the question is whether President Clinton would sign the bill and, if not, whether supporters have the votes to once again override a veto.

Since the federal law was passed in 1995, there has been little change in the rate of total strike suit filings nationwide; the figures, however, showed a pronounced shift from federal to state courts in 1996.

In 1995, the year before the law took effect, 162 shareholder class action suits were filed nationwide. Because so few cases were filed in state courts, those filings were not tracked in 1995. In 1996, 150 cases were filed, including 39 filed exclusively in state courts, according to Stanford Law School professors Joseph Grundfest and Michael Perino.

This year, the two professors project 194 cases will be filed in state and federal courts. But through June 30, only 16 cases had been filed exclusively in state courts, which would project out to about 32 cases for the full year. That's a much smaller percentage of the total cases than in 1996.

More than half of the 95 post-reform shareholder class-action lawsuits filed in state courts through June 30 of this year have been filed in California.

In Los Angeles County alone, 12 shareholder class-action lawsuits have been filed in state court since the reform act passed in December 1995; that's one-eighth the national total. Among the L.A.-area targets: Quarterdeck Corp., Citadel Holding Corp., Cinergi Pictures Entertainment Inc. and Manhattan Bagel Inc.

"This has had a chilling effect on our clients," said Mark Hiraide, a partner in the Torrance law firm of Petillon & Hansen.