Both the Federal Rules of Civil Procedure and the PSLRA provide that plaintiffs' counsel in a securities class action may be awarded a "reasonable" fee as determined by the court. Courts generally agree that it is appropriate to cross-check a proposed percentage fee award using the lodestar method (take the reasonable hours expended times a reasonable hourly rate and adjust with a multiplier), but there is no uniformity as to what are the appropriate hours, rates, and multiplier to use.
Bloomberg has an article on the approval of the settlement in the Nortel securities litigation. There are two items of note. First, the overall settlement value apparently has declined by over $1 billion since the settlement was first announced. Second, the court reduced the proposed attorneys' fees from 8.5% (approximately $96 million) to 3% (approximately $34 million) of the settlement value.
A review of the opinion, which is not yet available online, reveals that the court's main concern was that the proposed attorneys' fees award resulted in a lodestar multiplier of 5.8 (i.e., "fees totaling 5.8 times the number of hours actually worked"). The court viewed this as excessive, citing a number of prominent cases (including Bristol-Myers Squibb and Worldcom) where other S.D.N.Y. judges approved attorneys' fee awards that had lodestar multipliers of 3.5 or less. Based on a 3% award, the lodestar multiplier in Nortel is approximately 2.05.
The Wall Street Journal has an editorial (subscrip. req'd) in today's edition discussing the Bloomberg/Schumer report. The authors express surprise at Senator Schumer's apparent support for tort reform, noting that he has not always voted that way in Congress. They also are skeptical whether, as suggested by Senator Schumer in his press conference, the problems associated with securities class actions can be resolved via SEC rulemaking.
Quote of note: "The true costs of [Sarbox's liability provisions] have yet to be tested for the simple reason that it will take a recession or a stock-market correction to trigger the next round of attempts to turn corporate miscalculations into income redistribution opportunities. So far, this ticking bomb inside Sarbox has received little notice compared to the very real costs of compliance with Section 404 on internal controls. But we can expect to hear more about it after the first wave of Sarbox lawsuits starts hitting the papers. Until that happens, the current consensus that Sarbox is tolerable and the SEC merely has to enforce it more sensibly will remain the conventional wisdom."
Bruce Carton, the former author of Securities Litigation Watch, has joined Garden City Group and started a new law blog. Readers of The 10b-5 Daily are likely to find Best in Class of interest. Carton also will be hosting a webcast next week on "Emerging Trends in Securities Class Actions."
Despite the recent downturn in securities class action filings, securities litigation reform is a hot topic. On the heels of the Committee on Capital Markets Regulation's interim report, Mayor Bloomberg and Senator Schumer have issued "Sustaining New York's and the US' Global Financial Services Leadership." The two reports cover much of the same ground, but there are differences in their securities litigation reform recommendations. After noting that "if economic conditions were to decline in the future, than a strong resurgence in [securities class actions] would likely follow," the Bloomberg/Schumer report recommends (pp. 102-104):
(1) Limit the liability of foreign companies with U.S. listings to damages that are proportional to their degree of exposure to the U.S. markets. (SEC)
(2) Impose a cap on auditors' liability. (SEC)
(3) Encourage arbitration as an alternative dispute resolution system for securities grievances. (SEC)
(4) Allow parties in federal securities actions to appeal interlocutory judgments (e.g., the denial of a motion to dismiss) immediately to the circuit courts. (Congress)
In the Jan. 18 edition of the New York Law Journal, Professor John Coffee presents a wish list (subscrip. req'd) of securities litigation reforms. The proposed reforms are:
(1) Congress should impose a cap on auditor liability. To make this reform more politically acceptable, Congress could overturn Central Bank and restore private aiding and abetting liability for securities fraud (at least for accounting firms).
(2) Governor Spitzer should ban, by executive order, "pay to play" practices where lawyers "compete to be selected as class counsel for the public pension funds serving as 'lead plaintiff' in securities class actions by making political contributions to state and municipal comptrollers, who in some jurisdictions, including New York, have exclusive control over the pension fund."
(3) Unlike almost every other state, there is no private right of action for securities fraud under New York law. Attorney General Cuomo should draft new legislation correcting this deficiency.
Quote of note: "Such a ceiling would not protect an audit firm from repetitive litigation resulting in repetitive large settlements - say, ten suits, each for $40 million on average. But a firm forced to settle those many actions at those levels probably does not deserve to survive. It is the prospect of a one-time billion-dollar loss that merits the adoption of a ceiling."
A few items from around the web:
(1) The Financial Times has an article on the U.S. Supreme Court's new-found interest in business cases. Although the authors note that many of these cases result in narrow decisions, they cite the Dura decision on loss causation as having had a "big impact."
(2) The Wall Street Journal Law Blog has a follow-up post on the lead plaintiff dispute in the Merck securities litigation. The lead plaintiffs have asked the court to permit Bernstein Litowitz to act as co-lead counsel.
(3) An op-ed in the Financial Times from earlier this month discusses the negative effects abroad of U.S. shareholder litigation. The author, who works for the British Association of Insurers, advocates the curbing of lawsuits and an increase in shareholder rights. Thanks to Werner Kranenburg for the link.
CMS Energy, a Michigan-based energy provider, has announced the preliminary settlement of the securities class action pending against the company in the E.D. of Michigan. The case, which was originally filed in May 2002, alleges that CMS Energy made various false and misleading statements by including the results of certain "round-trip" energy trades entered into by one of its Texas-based subsidiaries as part of its revenues and expenses. The proposed settlement is for $200 million, of which CMS Energy will pay $123.5 million and its insurers will pay $76.5 million.
After eleven years, the PSLRA's scienter pleading standard finally will be addressed by the U.S. Supreme Court. On Friday, the court granted certiorari in Tellabs, Inc. v. Makor Issues & Rights, Ltd. on appeal from the U.S. Court of Appeals for the Seventh Circuit. (The 10b-5 Daily's summary of the lower court decision can be found here.)
The question presented on appeal is whether, and to what extent, a court must consider or weigh competing inferences in determining whether a complaint has alleged sufficient facts to establish a strong inference of scienter. The Seventh Circuit held that the plaintiff was entitled to more than the most plausible of competing inferences. Instead, a court should "allow the complaint to survive if it alleges facts from which, if true, a reasonable person could infer that the defendant acted with the required intent." In their cert petition (via SCOTUSblog), defendants argued that this is the most lenient of the "four meaningfully different interpretations of the strong inference standard" that have been adopted by federal circuit courts and urged the Supreme Court to resolve the circuit split.
Links to the various cert petition briefs can be found on SCOTUSblog, which also notes that the Supreme Court has ordered expedited briefing in the case and may be planning to hear it during the March 2007 session. Thanks to Greg Harris for the tip.
Just before the holidays, in its Dec. 18 issue, the New York Law Journal ran its annual special section on securities litigation and regulation. It includes articles on: (1) a recent scheme liability decision in the Enron case; and (2) the use of agency and respondeat superior theories by plaintiffs to reach non-speaking defendants. (A post on last year's special section can be found here.)
The race to release annual data on securities class action filings has heated up to the point where the two major players both have decided not to wait for the final numbers to come in. This week saw the publication of "2006: A Year in Review" from Cornerstone Research/Stanford Law School Securities Class Action Clearinghouse and "Recent Trends in Shareholder Class Action Litigation: Filings Plummet, Settlements Soar" from NERA Economic Consulting. The reports use filing data through mid-December 2006.
The findings include:
(1) Filings plunged to a record low since the passage of the PSLRA in 1995. As usual, the reports differed in their calculation of the exact number of filings. Cornerstone found that there were 110 filings (as compared to a post-PSLRA average of 193), while NERA found there were 129 filings (as compared to a post-PSLRA average of 239).
(2) The average settlement, excluding settlements over $1 billion, was $34 million (up 37% over 2005). The increase is driven almost entirely by the growth in settlements over $100 million. (NERA)
(3) There has been a dramatic decrease in the total market capitalization losses associated with filings (44% decline in losses measured as of the last day of the class perod), which is a product of fewer filings and lower market capitalization losses per filing. (Cornerstone)
(4) A significant portion of cases are dismissed within the first two years. The Second and Ninth Circuits, which together receive the most cases, dismiss approximately 20% within this time period. The Fourth Circuit has the highest rate, dismissing 31% of cases within two years, while the Tenth Circuit has the lowest, at 5%. (NERA)
Why the decline in filings this past year? Possible reasons put forward by the reports include better corporate governance (Cornerstone and NERA), a strengthened federal enforcement environment (Cornerstone), a strong stock market combined with lower stock price volatility (Cornerstone), and distraction on the part of the plaintiffs' bar (NERA).