The prepared testimony of the witnesses who appeared at today's hearing on the "Securities Litigation Attorney Accountability and Transparency Act" can be found here. The witnesses were Judge Vaughn Walker (N.D. Cal.), William Galvin (Secretary of the Commonwealth, Commonwealth of Massachusetts), Theodore Frank (American Enterprise Institute), and Professor James Cox (Duke University School of Law).
The legislation, entitled the "Securities Litigation Attorney Accountability and Transparency Act," would:
(1) allow a prevailing defendant to argue to the court that the plaintiff's attorney should pay the prevailing defendant's fees and expenses because the "position of the plaintiff was not substantially justified;"
(2) require disclosure to the court of any conflict of interest between a plaintiff and his attorney and permit the court to disqualify the attorney if necessary; and
(3) permit courts to approve lead counsel in securities class actions through "alternative means," including a competitive bidding process.
A hearing on the legislation will take place before the Subcommitte on Capital Markets, Insurance, and Government Sponsored Enterprises of the House Committee on Financial Services tomorrow morning. The witnesses list can be found here. Thanks to Point of Law for the link.
Last week's U.S. Supreme Court decision in the Kircher case, with its focus on the interaction between federal civil procedure law and SLUSA, has not exactly garnered a lot of media attention. That said, Point of Law provides this commentary and the New York Law Journal (June 22) has a short article (subscrip. req'd).
The U.S. Court of Appeals for the Tenth Circuit has issued an opinion in the Qwest securities litigation on the issue of selective waiver. See In re Qwest Communications Int'l Inc. Sec. Litig., 2006 WL 1668246 (10th Cir. June 19, 2006). In particular, the court considered whether the company could withhold documents from the plaintiffs on the grounds of attorney-client privilege or the work-product doctrine even though those documents had previously been produced to the SEC.
After an exhaustive survey of related decisions, revealing that circuit courts generally have rejected the concept of selective waiver, the court held that the record in the case did "not establish a need for a rule of selective waiver to assure cooperation with law enforcement, to further the purposes of the attorney-client privilege or work-product doctine, or to avoid unfairness to the disclosing party." In the court's view, Qwest was seeking "the substantial equivalent of an entirely new privilege, i.e., a government-investigation privilege," which the court was disinclined to create. (Note that the production of opinion work product was not an issue in the case.)
The Rocky Mountain News has an article on the decision.
Quote of note: "At least to the degree exhorted by amici, 'the culture of waiver' appears to be of relatively recent vintage. Whether the pressures facing corporations in federal investigations present a hardened, entrenched problem suitable for common-law intervention or merely a passing phenomenon that may soon be addressed in other venues is unclear."
The extent to which secondary actors (e.g., accountants, lawyers, or bankers) can be held primarily liable under Rules 10b-5(a) and (c) - covering deceptive devices, schemes, and acts - has been the subject of recent judicial contention. A column in the June 13 edition of the New York Law Journal (subscrip. req'd) attempts to reconcile the different positions taken by the Southern District of New York in the Parmalat case and the Eighth Circuit in the Charter Communications case. For posts from The 10b-5 Daily discussing the issue in more detail, see here and here.
Quote of note: "The two cases may be reconciled, not by use of the Eighth Circuit's guidelines, but rather by the fact-specific inquiry suggested in Parmalat. In Parmalat, the banks were alleged to have engaged in the worthless invoice transactions to cover up loans to Parmalat, thus making financial fraud the only possible purpose for the transactions. On the other hand, the transactions in Charter Communications were not as plainly fraudulent, despite the plaintiffs' characterization of them as "sham or wash transactions.'"
In the Kircher v. Putnam Funds case, the U.S. Supreme Court has held that a district court's decision to remand a case to state court pursuant to the Securities Litigation Uniform Standards Act of 1998 ("SLUSA") is not subject to appellate review. The 9-0 decision authored by Justice Souter (with a separate concurrence by Justice Scalia) resolves a circuit split between the Second Circuit (not appealable) and the Seventh Circuit (appealable) on the issue.
SLUSA generally prohibits the bringing of a securities class action based on state law in state court. The defendants are permitted to remove the case to federal district court for a determination on whether the case is precluded by the statute. If so, the district court must dismiss the case; if not, the district court must remand the case back to state court.
As a matter of federal procedural law, a remand based on a district court's decision that it does not have subject-matter jurisdiction over a case cannot be reviewed on appeal. In Kircher, however, the Seventh Circuit found that this general proposition is inapplicable to a case removed and remanded under SLUSA because the district court is making a substantive decision of no preclusion, as opposed to a procedural decision of no subject-matter jurisdiction.
The Supreme Court disagreed. Based on SLUSA's text, the Court found that "removal and jurisdiction to deal with removed cases is limited to those precluded" by the statute. Under these circumstances, "a motion to remand claiming the action is not precluded must be seen as posing a jurisdictional issue." The district court's exercise of its "adjudicatory power" is "jurisdictional, as is the conclusion reached and the order implementing it." Accordingly, the remand decision is not subject to appellate review.
Interestingly, the Supreme Court also addressed the Seventh Circuit's assumption that SLUSA gives federal courts exclusive jurisdiction to decide the preclusion issue, so that "a remand order based on a finding that the action is not precluded would arguably be immune from review." The Court found that nothing in SLUSA creates this exclusive jurisdiction and on remand the state court would be "perfectly free to reject the remanding court's reasoning" and make its own determination as to preclusion. Moreover, any error in that decision could "be considered on review by this Court." The issue was of particular importance in the instant case, because the Court had recently held that holder claims, arguably like those brought by Kircher, are precluded under SLUSA.
Holding: Judgment vacated and case remanded with instructions to dismiss the appeal for lack of jurisdiction.
Williams Companies, Inc. (NYSE:WMB), a Tulsa-based provider of natural gas, has announced the preliminary settlement of the securities class action pending against the company in the N.D. of Oklahoma. The case was originally filed in 2002 and alleges that Williams engaged in financial fraud related to its energy trading operation and a former telecommunications subsidiary.
The settlement is for $290 million. The company expects to pay between $145 million and $220 million, with the rest of the funds coming from its insurers. According to a press release from the lead plaintiff, the settlement comes on the eve of trial and after a discovery effort that included "more than 180 depositions and reviews of more than 18 million pages of documents."
Lies, Damn Lies, & Forward-Looking Statements has a number of posts sorting out all of the details on the settlement, including noting that Williams' outside auditors, Ernst & Young, have apparently also settled for $21 million.
The role of Rule 10b5-1 stock trading plans in assessing the adequacy of a plaintiff's scienter (i.e., fraudulent intent) allegations is becoming a more frequent issue in securities class actions as the use of these plans increases. A recent decision in the N.D. of Texas - relying on the Netflix opinion discussed in this post - will certainly encourage that trend.
In Fener v. Belo Corp., 425 F.Supp.2d 788 (N.D. Tex. 2006), the court held that at the pleading stage it is the burden of the plaintiff to place any allegedly suspicious stock trading in context. Accordingly, the plaintiffs needed to address "in their complaint whether [the defendant officer] sold his stock pursuant to a Rule 10b-5(1) trading plan formulated before the alleged fraudulent scheme and why, if he did, this does not undercut a strong inference of scienter." (A contradictory decision is discussed here.)
Holding: Motion to dismiss granted with leave to amend.
Securities Litigation Watch has an interesting guest post from Wayne Schneider, General Counsel for the New York State Teachers' Retirement System, on plaintiff attorneys' fees in securities class actions. Mr. Schneider discusses the success that some public pension funds have had in negotiating contingency fee rates that are considerably lower that the historical rates for these cases.
Quote of note: "Public sector funds are showing in quite dramatic fashion that the 30% plus fees celebrated by legal academics hired to support fee requests are not necessary to provide reasonable compensation for class counsel in federal securities class actions."
The impact of the Milberg Weiss criminal indictment on the business of securities class actions continues to be the subject of media interest. In the last few days, articles on this topic have appeared in Forbes and the Los Angeles Times (free regist. req'd). The general consensus? Other firms would step into any gap.
Quote of note (Forbes): "'If they were to disappear tomorrow, I doubt very little would change,' says Joseph Grundfest, a professor at Stanford University Law School and former Securities and Exchange commissioner. 'The same companies would be sued, the same causes of action would be pursued.'"
Two interesting articles:
(1) In a legal system that permits contingency fee arrangements, it is axiomatic that big settlements lead to big attorney fee awards. The New York Sun has an article on the attorney fee arrangment in the Enron securities class action, which could lead to a record $1 billion payout for the lead counsel in the case.
(2) The 10b-5 Daily has frequently discussed the potential impact of Rule 10b5-1 stock trading plans on securities class actions (for example, in this post). The Los Angeles Times has an article (free regist. req'd) on a forthcoming Stanford University study finding that corporate insiders with stock trading plans "initiated 10.4% of their stock sales before a negative earnings report that would send share prices lower" as compared to "5.2% of the time in advance of positive earnings news." The author of the study speculates that executives may be manipulating the timing of the release of corporate news that could effect their stock sales. The article also notes that relatively few companies disclose the existence or terms of their executives' trading plans.