NERA Economic Consulting has released a study entitled "Recent Trends In Shareholder Class Action Litigation: Beyond the Mega-Settlements, is Stabilization Ahead?" The study reaches the following notable conclusions:
(1) The average settlement value hit a new high in 2005 (even excluding WorldCom and Enron) of $24.3 million. Nevertheless, NERA believes that "average settlements will not rise further over the next two or three years and, instead, could even fall" given that most of the cases associated with the stock market crash of 2000-2002 have been resolved.
(2) The study examines various factors that can raise settlement values - e.g., presence of accounting allegations (+20%), related official investigation (+25%), and lead plaintiff is an institutional investor (+33%).
(3) There were 209 filings in 2005. Although this is the lowest number since 1997, most of the difference is due to a sharp fall in filings in the 9th Circuit and "it is far too early to conclude there is a downward trend."
Over the weekend, the Wall Street Journal had an article (via wsj.com - subscrip. req'd) on the IPO allocation cases. The article discusses the potential impact of the proposed JPMorgan settlement on the overall recovery for investors.
Quote of note: "After J.P. Morgan Chase & Co. agreed in recent days to pay $425 million to settle its part of the civil charges, estimates of the potential amounts that investors could get back have jumped and could reach several billions of dollars, plaintiffs' lawyers say. That could make the case among the biggest brought against major Wall Street firms related to a series of scandals earlier this decade, including the collapse of companies such as Enron and WorldCom. Some plaintiffs' lawyers say they now expect a higher recovery for investors partly because the amount that J.P. Morgan -- the first of the banks to settle the case -- agreed to pay is surprisingly large, given that the IPOs the company led accounted for less than 10% of the total damages calculated by the plaintiffs."
Over $400 million was the right way to bet on this week's settlements.
Freddie Mac (NYSE: FRE) has announced the preliminary settlement of the securities class action and related derivative suits pending against the company in the S.D.N.Y. The cases relate to Freddie Mac's restatment of financial results for the years 2000 through 2002. The settlement is for $410 million and includes corporate governance reforms.
JPMorgan Chase & Co. (NYSE: JPM) has entered into a settlement of the claims against the company in the IPO allocation cases. The settlement is for $425 million. JPMorgan is the first underwriter defendant to settle.
(a) There is already plenty of speculation that JPMorgan's decision to settle early is the result of the fact that it was forced to pay a significant premium when it was the last major bank to settle in the WorldCom case.
(b) Based on the size of this settlement and the fact that there are still 54 underwriter defendants, it appears unlikely that the issuer defendants (who entered into a conditional settlement nearly three years ago) will have to make any payments.
The Dayton Business Journal has a column on directors and officers insurance that is either, depending on your point of view, alarming or alarmist. The author discusses some of the ways outside directors can maximize their protection.
There is a 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 under Rule 10b-5 as scheme participants. Last week, the U.S. Court of Appeals for the Eighth Circuit weighed in on the issue and flatly rejected this theory of liability.
In In re Charter Communications, Inc. Sec. Litig., 2006 WL 925354 (8th Cir. April 11, 2006), the court addressed allegations that the vendor defendants entered into sham transactions with Charter knowing that the company "intended to account for them improperly and that analysts would rely on the inflated revenues and operating cash flow in making stock recommendations." The plaintiffs argued (relying primarily on a district court decision in the Parmalat case) that the vendors violated Rule 10b-5(a) and (c) by participating in a fraudulent scheme or course of business.
The court found, however, that "any defendant who does not make or affirmatively cause to be made a fraudulent misstatement or omission, or who does not directly engage in manipulative securities trading practices, is at most guilty of aiding and abetting and cannot be held liable under Sec. 10(b) or any subpart of Rule 10b-5." Since the plaintiffs did not allege that the vendor defendants made or approved Charter's financial misrepresentations, the claims against them were properly dismissed.
Holding: Dismissal affirmed.
Quote of note: "To impose liability for securities fraud on one party to an arm's length business transaction in goods or services other than securities because that party knew or should have known that the other party would use the transaction to mislead investors in its stock would introduce potentially far-reaching duties and uncertainties for those engaged in day-to-day business dealings. Decisions of this magnitude should be made by Congress."
There will be no new posts on The 10b-5 Daily until next week (April 17).
The respondents' brief in the Kircher case before the U.S. Supreme Court is now available online. The docket reveals that an amicus brief in support of Kircher has been filed by four law professors. Putnam Funds, in turn, is supported by amicus briefs from the Washington Legal Foundation, the Securities Industry Association and the Bond Market Association, and the U.S. Chamber of Commerce. Oral argument is scheduled for April 24.
The U.S. Supreme Court's recent decision in Dabit and upcoming oral argument in Kircher has generated interest in the scope, meaning, and practical impact of the Securities Litigation Uniform Standards Act ("SLUSA")
The author of The 10b-5 Daily, Lyle Roberts (Wilson Sonsini) will be moderating a Practicing Law Institute telephone briefing on this topic on Wednesday, April 19 at 1 p.m. ET. The briefing will cover the history of SLUSA, this term's Supreme Court cases, and other current SLUSA issues. The panelists are Jay Kasner (Skadden Arps), who successfully argued the Dabit case on behalf of Merrill Lynch, and Robert Wallner (Milberg Weiss). CLE credit is available. Click here to register.
(2) Professor John Coffee has a forthcoming article entitled Reforming the Securities Class Action: An Essay on Deterrence and its Implementation. He argues that the deterrence function of securities class actions would be enhanced by requiring corporate insiders to more frequently contribute to settlements. To accomplish this goal, Professor Coffee proposes two primary reforms: (a) the SEC should require a company's independent directors "to assess the apportionment of liability among the corporation and its officers and explain in a public statement if they consider it to be fair to the corporation - and why;" and (2) "the court awarding attorneys fees in a securities class action should award substantially higher fees for the portion of the recovery obtained from insiders than on the portion obtained from the corporation." Thanks to Lies, Damn Lies, and Forward-Looking Statements for the link.