For those who missed it over the Christmas holiday, the Wall Street Journal had a feature article (subscrip. req'd) last Friday on the battle over whether the settlements entered into by several banks as part of the Enron and WorldCom securities litigations are covered by the banks' errors and omissions insurance policies.
Quote of note: "But Swiss Reinsurance Co. and some other big insurance companies are balking. While many insurers have paid out at least a portion of such claims, the holdouts say banks shouldn't be allowed to benefit through insurance from the roles they allegedly played in the frauds, or to cover their fines and legal bills. Beyond the money, the dispute raises questions about how heavily companies can rely on broadly written insurance policies to cover unanticipated losses stemming from alleged wrongdoing."
The National Law Journal has a feature article (subscrip. req'd) in its most recent edition on the SEC's use of private counsel to investigate corporate malfeasance. The article includes a discussion of the conflicting "waiver of privilege" rulings that that have arisen out of the McKesson HBOC securities litigation. (The 10b-5 Daily has posted about some of those decisions.)
Quote of note: "In 2001, the SEC began offering favorable treatment to troubled companies that hire independent counsel to do internal corporate investigations and report back to the SEC. But with that has come a host of new legal challenges. Do companies that waive attorney-client privilege and turn over the results of internal investigations to the SEC also waive the privilege for third parties, such as plaintiffs' lawyers representing shareholders? And have the outside counsel become, in effect, agents of the government so that cooperating employees need to be given Miranda warnings?"
Professor Michael Perino, author of the leading treatise on the PSLRA, has published an empirical study of attorneys' fees in securities class actions. The paper is entitled "Markets and Monitors: The Impact of Competition and Experience on Attorneys' Fees in Securities Class Actions." Perino finds that the participation of a public pension fund as a lead plaintiff is correlated with lower attorneys’ fees requests and awards. By contrast, there is no statistically significant correlation associated with the participation of a union pension fund, the other type of institutional investor examined by the study. Court auctions of the lead counsel role result in significantly lower attorneys' fees. In addition, the participation of repeat players (either courts that are more experienced handling securities class actions or institutional objectors) are correlated with lower attorneys' fees.
Quote of note: "These findings suggest four basic policy responses. First, because the fee arrangements that public pension funds negotiate appear to be the product of at least some competitive bargaining, courts should look to those arrangements as guidelines for awarding fees in cases without institutional investors. Second, to obtain the benefits of judicial experience in fee awards, courts with comparatively little experience in handling securities class actions should look to the fees that more experienced courts award, a process that will be facilitated by making award decisions (which are predominantly unreported) more widely available. Third, policy should continue to encourage institutions, most particularly public pension funds, to serve as lead plaintiffs and to encourage institutions to monitor fee requests and object to those that are excessive. Finally, courts should continue to experiment with auctioning the role of lead counsel in those cases in which the available lead plaintiffs do not appear to have used competition or otherwise to have engaged in arm’s length bargaining to select class counsel."
The December 19 edition of the New York Law Journal has a special section (regist. req'd) on securities litigation and regulation. The special section includes articles on scheme liability, scienter and summary judgment, the demand requirement in derivative cases, and the use of asset protection devices in SEC enforcement cases.
The lead article on scheme liability under subsections (a) and (c) of Rule 10b-5 is of particular interest. The article discusses the district court split over whether secondary actors who did not prepare or substantially participate in preparing corporate financial misstatements can still be held liable for them as scheme participants. The issue currently is before the First and Ninth Circuits.
Quote of note: "Recently, plaintiffs have aggressively pursued scheme theories of liability against secondary actors under subsection (a) and/or (c) in cases involving major accounting scandals such as Homestore, Lernout & Hauspie, Parmalat, and Enron. In those cases, plaintiffs allege that secondary actor defendants - who did not make the misleading financial statements and disclosures - are liable under subsections (a) and/or (c) for knowingly or recklessly participating in "schemes" with insiders that allowed the companies to misstate their financial condition. A threshold question presented in these cases is whether a secondary actor who participates in a scheme to generate false financial results, but does not itself participate in generating the company's financial statements, can be held liable under Rule 10b-5."
The U.S. Court of Appeals for the First Circuit has issued an interesting opinion in a research analyst case. The decision - Brown v. Credit Suisse First Boston LLC, 2005 WL 3359728 (1st Cir. Dec. 12, 2005) - affirms the dismissal of securities fraud claims based on alleged false "buy" recommendations made by CSFB's analysts with respect to the stock of Agilent Technologies.
The court held that the plaintiffs needed to plead facts "sufficient to indicate that the speaker did not actually hold the opinion expressed." In examining the existence of this "subjective falsity," the analysis of the falsity of the statement and the defendants' fraudulent intent (i.e., scienter) cannot be separated. Accordingly, the PSLRA's heightened pleading standard for scienter should be applied and the plaintiffs must "plead provable facts strongly suggesting that the speaker did not believe [a] particular opinion to be true when uttered."
Turning to the complaint, the court found that "while the plaintiffs' allegations regarding the obvious conflicts of interest and general state of corruption within CSFB's analyst ranks may be enough to turn the stomach of an ethically sensitive observer, they are insufficient, on their own, to support a fraud pleading with respect to the subjective falsity of the eight 'buy' recommendations issued on Agilent stock." In particular, the court rejected a series of CSFB e-mails that suggested its analysts engaged in "sharp practice," but fell short of creating a strong inference that any particular "buy" rating did not reflect the personal belief of the analyst in question.
Holding: Dismissal affirmed.
Quote of note: "The plaintiffs' allegations, if true, show beyond hope of contradiction that the defendants operated without much concern for ethical standards. But the fact that an organization is ethically challenged does not impugn every action that it takes. In a securities fraud case, the plaintiffs still must carry the burden, imposed by the PSLRA, of pleading facts sufficient to show that the particular statements sued upon were false or misleading when made. This is as it should be: the securities laws - and section 10(b) in particular - were designed to provide a damages remedy for losses incurred as a result of false or misleading statements, not to punish defendants for bad behavior in a vacuum."
Two legal columns of interest:
(1) Forbes has a column on the lead plaintiff contest in the Refco securities class action.
(2) The New York Law Journal has a column (regist. req'd) discussing the effect of the SEC's new offering rules on the liability for misstatements in registration statements or prospectuses/oral communications soliciting a sale.
Under the PSLRA, the lead plaintiff in a securities class action is presumptively the party with the largest financial interest in the relief sought by the class (i.e., the movant who alleges the most potential damages). Although the statute expressly refers to the selection of a "person or group of persons" to fill the lead plaintiff role, some courts have expressed hostility to proposed lead plaintiff groups that are merely aggregations of unrelated investors.
In an unusual decision in In re Pfizer Inc. Sec. Litig., 2005 WL 2759850 (S.D.N.Y. Oct. 21, 2005), the court took this a step further. First, the court rejected the various proposed groups of investors, finding that they had been "artificially grouped by [their] attorneys." Second, the court declined to appoint the investor with the largest claimed losses because "inaccuracies in its damages calculations" called into question its reliability. Finally, the court selected as lead plaintiff an investor whose counsel had withdrawn its motion for appointment as lead plaintiff (at least conditionally) in favor of another movant.
Quote of note: "Several of the putative plaintiffs are aggregated into artificial 'groups.' Nothing before the Court indicates that this aggregation is anything other than an attempt to create the highest possible 'financial interest' figure under the PSLRA and I reject it."
As any law student quickly learns, a lot of interesting points can be found in the footnotes of judicial opinions. "Footnote 4" in the Molson Coors Brewing Company lead plaintiff decision, authored by Judge Kent Jordan (D. Del.), is already lighting up the blogosphere and citations are sure to follow.
In his decision - In re Molson Coors Brewing Co. Sec. Litig., 2005 WL 3271488 (D.Del. December 2, 2005) - Judge Jordan describes his task as deciding "which of the plaintiffs' law firms will win the money race." The judge's accompanying footnote states that he means "no disrespect" to the plaintiffs' firms competing to be named lead counsel, but that the "'pick me' urgency seems far more likely to come from the lawyers than the parties because, in the real world, people are not so eager to undertake work that someone else will do for them." He goes on to state that the proposed lead plaintiffs' natural inclination to let someone else "shoulder the burden of supervising the litigation" gets "overridden because securities lawyers are involved, lawyers who are vying for the chance to take the laboring oar in litigation and the monetary rewards that go with it." The judge concludes that PSLRA's lead plaintiff provisions may be ineffective because "lawyers are still very much in the driver's seat."
There is no lack of amici curiae who have filed briefs on behalf of Merrill Lynch in Merrill Lynch v. Dabit, the SLUSA case before the Supreme Court. The list includes (with hyperlink to the brief where available) the Department of Justice/SEC, the U.S. Chamber of Commerce, the Investment Company Institute, Lord Abbett & Co./Vance Management, the Washington Legal Foundation, the Securities Industry Association/Bond Market Association, and Pacific Life Insurance.
As of last year, about 70 Chinese companies were listed on U.S. stock exchanges. Accordingly, U.S. securities litigation is a topic of interest for these companies and their domestic regulators. Legal Week has an article on the pending visit to China of a prominent plaintiffs' securities lawyer.