WASHINGTON _ Xoma Corp. had a small litigious victory onWednesday that could buoy up other biotechnology companies whocomplain of drowning in a sea of securities litigation. The Berkeley,Calif.-based company succeeded in a motion to conclusively dismiss asecurities class action lawsuit at the circuit court level.The suit, originally filed in June 1992, alleged that Xoma'smanagement had overstated the likelihood of regulatory success for thecompany's lead product for sepsis, E5, and had failed to refutestatements by stock analysts predicting FDA approval for E5. The drugwas rejected by the FDA in the spring of 1992 and the company's stockdropped $4.75 per share (25 percent) on the news.The class action suit was dismissed twice by the U.S. District Court forthe Northern District of California but was amended and refiled eachtime by the plaintiff. As in most securities cases, the plaintiffs areshareholders represented by attorneys who get anywhere from 25 to 40percent of the total cash settlement of a case.According to Xoma vice president, general counsel and secretary ChrisMargolin, the plaintiffs' third amendment to the suit was greeted by thecourt with "the three magic words" _ dismissed with prejudice. Inorder to pursue the suit further, the plaintiffs must now file an appeal inone of the country's 12 circuit courts.Most companies faced with securities litigation settle rather than incurthe astronomical cost of defending themselves. But getting a suitdismissed before it proceeds to the stage of disclosure, which involvescompany officers giving lengthy depositions and plaintiffs' lawyerscombing through corporate files, is the most economical way to fendoff securities suits.Legal fees for fighting off a suit with a "motion to dismiss" can costhundreds of thousands of dollars but fees for a full-fledged defense caneasily gobble up millions. Settling a suit can be expensive too, as Xomalearned when it settled its first securities class action lawsuit in mid-1992 by paying $3 million in cash and $3 million worth of warrants tothe plaintiffs. In that case, the motion to dismiss was unsuccessful.Although the plaintiffs' counsel began negotiations demanding a $15 to$20 million settlement, they accepted far less.Lawyers Receive Most Of The ProceedsMargolin said that the irony of securities litigation is that the plaintiffs'attorneys generally take home the most money. In the 1992 settlement,he said lawyers collected $2 million of the cash, leaving only $1million and warrants to the shareholders they represented. If theXoma's stock price hovers near its current level of around $3 per sharefor the next 10 months, the warrants will be worthless.Margolin said that the class action suit recently dismissed was"remarkably thin" and said that such cases are "one of sorest subjectsamong biotechnology companies." Laurence Silverman, partner withCahill Gordon & Reindel in New York and lead counsel for Xoma inboth of its securities suits, said the courts are more willing to scrutinizethese types of lawsuits for merit than they were just five years ago."We're seeing a trend in more sophisticated jurisdictions, such as SanFrancisco, New York and Boston, for the courts to take a much closerlook at the motion-to-dismiss stage," Silverman told BioWorld. "Thesecourts have seen the proliferation of securities litigation and have cometo recognize the burden that these suits represent, particularly onemerging companies."Silverman, who currently represents about half a dozen biotechnologycompanies, said that the continual settling of securities lawsuits issetting a worrisome precedent. "It's important to stand up to some ofthese suits and fight them out," he said. "The unending settlements justfeed the plaintiffs' bars' [attorneys'] hunger for more." n

-- Lisa Piercey Washington Editor

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