A couple of interesting items from around the web.
(1) Will the government's role in the credit crisis limit the scope of private litigation? The Blog of the Legal Times has a post on the long-running securities class action against Fannie Mae pending in D.C. federal court. The defendants have asked to court to order mediation, arguing that the plaintiffs have refused "to acknowledge 'the drastically changed landscape' following Fannie’s government takeover."
(2) The 10b-5 Daily was an avid follower of South Korea's attempts to implement a securities class action system (see here, here, here, and here). As noted when the legislation passed in late 2003, however, the bill imposed significant phase-in and standing requirements that threatened to limit its use. But even a blind squirrel finds a nut once in a while. Securities Docket reports that the first South Korean securities class action is about to go forward.
The New York Law Journal has had two recent columns on securities litigation topics.
(1) In "Revisiting the Limitations Period For Securities Fraud" (June 10 edition), the authors discuss the Supreme Court's decision to hear the Merck case.
Quote of note: "Doing away with inquiry notice entirely would solve much, if not all, of the existing confusion. However, the Supreme Court's view of the competing policy issues is likely to inform its decisions regarding whether to keep inquiry notice and, if so, in what form, and whether to impose upon investors an actual duty to investigate and if so, what consequences follow a failure to do so. Reading the tea leaves, the Court is likely to reaffirm that the limitations period commences only after actual or imputed discovery of the facts, and may well formulate broad guidance for inquiry notice that provides an incentive to investigate fraud at an early stage, and imposes a duty to investigate, failing which imputed knowledge would bar claims."
(2) In "Pay-to-Play Reform: What, How and Why?" (May 21 edition), the author examines alleged abuses in the retention of plaintiffs' counsel in securities class actions. Among other items, he notes the recent judicial criticism of "portfolio monitoring."
Quote of note: "Ultimately, the dividing line here probably should be between institutional investors that have an active in-house counsel and those that do not. In the latter case, the law firm effectively controls the client, and thus the problems that the PSLRA sought to end with its lead plaintiff reform resurface again. But when there is a competent house counsel who makes the litigation decisions, the provision of monitoring services should not be viewed as questionable or disqualifying."
A few interesting items:
(1) What is Judge Sonia Sotomayor's record in securities class actions? Two notable Second Circuit decisions in which she has participated are Dabit (later unanimously overturned by the Supreme Court) and In re IPO Securities Litigation.
(2) Am Law Litigation Daily reports that the Amsterdam Court of Appeals has approved the proposed Royal Dutch Shell settlement with non-U.S. investors.
(3) The American Lawyer has an article on the lead plaintiff/lead counsel decision in a securities class action brought against Merrill Lynch. The court was highly critical of the "portfolio monitoring" services provided by the lead counsel candidates.
Texas billionaire Sam Wyly has suffered another setback in his long-running battle to obtain documents related to the Computer Associates securities class action. (The 10b-5 Daily has posted about the litigation over the years - see here, here, and here.) In a decision issued last week, the New York Court of Appeals found that Wyly, as an "absent" class member in the Computer Associates case, does not enjoy a presumptive right of access to the files held by plaintiffs' counsel upon the termination of representation. Moreover, in his federal court challenge of the Computer Associates settlement, Wyly had failed to demonstrate a "legitimate need" for these files and it was appropriate for the state court to defer to the federal court's determination on this issue.
The New York Law Journal has an article on the decision. In the article, Wyly's counsel notes that his client's federal court challenge of the Computer Associates settlement is currently on appeal and Wyly "will pursue the relevant documents there." Stay tuned.
The big news from late last week was the jury verdict for the plaintiffs in the Household International securities class action. Originally filed in 2002, the complaint alleged that Household engaged in a "massive predatory lending scheme" that led to a $600 million financial restatement. The jury found that the defendants acted at least recklessly as to 16 different statements made to the market, causing Household's stock price to be artificially inflated. The trial will now move on to the damages phase.
As just the seventh securities class action based on conduct that took place after Dec. 1995 (i.e., after the passage of the PSLRA) to go to a trial verdict, the Household case is getting a lot of attention. Here are some links:
Press: Chicago Tribune (May 8, 2009); Chicago Daily Herald (May 8, 2009)
Blogs: The D&O Diary; AmLaw Litigation Daily; Securities Litigation Watch (including a helpful analysis of the jury verdict form).
A few interesting stories from the past week.
(1) From the "Where Are They Now" file, the parties in the Dura Pharmaceuticals securities class action have reached a $14 million settlement. The case included a 2005 U.S. Supreme Court decision on the pleading of loss causation. SecuritiesLaw360 has an article (subscrip. req'd) on the settlement.
(2) At the time of the Milberg Weiss indictment, there was some discussion about whether companies that had previously settled in cases brought by the law firm would bring actions to recover those funds. That has not really happened . . . until now. The American Lawyer has a report on a suit brought by Lakes Entertainment alleging that its 2000 settlement was the product of an improper damages estimate.
(3) One possible indicator of whether securities class actions filings will increase is whether plaintiffs firms are hiring more lawyers. According to an article in The Recorder, that appears to be happening, with an increase in lawyers switching from defense firms.
RiskMetrics has released the SCAS 50, which "lists the top 50 plaintiffs' law firms ranked by the total dollar amount of final securities class action settlements occurring in 2008 in which the law firm served as lead or co-lead counsel."
Last year's leaders:
Total settlements - Coughlin Stoia Geller Rudman & Robbins - 29
Total settlement value - Bernstein Litowitz Berger & Grossmann - $711,950,000
Average settlement value - Grant & Eisenhofer - $108,950,000
The Second Circuit's recent decision affirming the dismissal of a securities class action against JP Morgan Chase is getting some press attention. The New York Law Journal had two columns this week discussing the case.
In "Circuit Gives Guidance to Litigators on Securities Fraud Claims" (Feb. 23 - subscrip. req'd) and "Clarifying Pleading Requirement for Scienter, Materiality Under PSLRA" (Feb. 25 - subscrip. req'd), the authors focus on the court's application of SEC Staff Accounting Bulletin 99 as "persuasive authority" on the issue of materiality. Both columns conclude that the decision is helpful for defendants who can demonstrate that their alleged misstatements are quantitatively immaterial.
A few items of interest from around the web.
(1) Securities Docket has a guest column on group litigation in the United Kingdom and how it contrasts to the U.S. system.
(2) The D&O Diary has an analysis of 2008 securities class actions against life sciences companies.
(3) The New York Law Journal has a column (subscrip. req'd) on the Second Circuit's recent decision holding that an investment advisor does not have standing to bring a securities case in a representative capacity on behalf of its clients. The decision is W.R. Huff Asset Management Co. LLC v. Deloitte & Touche LLP, 549 F.3d 100 (2d Cir. 2008) and the author notes that its reasoning is applicable to the selection of lead plaintiffs in securities class actions.
The constant percentage method of calculating damages in a securities class action assumes that the fraud caused the stock to be valued at "x" percent more than it was really worth throughout the class period (with "x" percent equaling the percentage decline in the stock price after the fraud was revealed), even if the stock price varied widely during that time.
The New York Law Journal has an interesting column (Jan. 21 - subscrip. req'd) on whether the constant percentage method remains a valid method of calculating damages. The authors argue that the method has been called into question because of the requirement in Dura (the Supreme Court decision on loss causation) that the revelation of the "relevant truth" be the cause of any loss. Only one court, however, has specifically rejected the use of the constant percentage method.
Quote of note: "In excluding the damages and loss causation report of plaintiffs' expert, the [In re Williams Securities Litigation - N.D. Ok.] court found that the constant percentage method was in direct conflict with Dura Pharmaceuticals Inc. v. Broudo, the controlling Supreme Court precedent on loss causation. Securities litigators and their experts should pay heed to Williams. To the extent that this well-reasoned decision starts a trend in the case law, use of the constant percentage method in securities fraud cases may become a thing of the past."
Securities Docket will be hosting a "2008 Year in Review - Securities Litigation and Enforcement" webcast on Tuesday, January 6 at 2 p.m. ET. All of the details on the free program, which will include a number of prominent bloggers, can be found here.
SCAS Alert (RiskMetrics) has an article on what the coming year may bring for securities litigators. The main speculation is whether the Democratic majorities in Congress will seek to overturn the Supreme Court's decisions in Central Bank (no aiding and abetting liability) and Stoneridge (limiting scope of "secondary actor" liability).
Quote of note: "Likewise, James Cox, a securities law professor at Duke University, told the SCAS Alert that he expects that Congress would address securities litigation reform after grappling with 'the 800-pound gorilla in the room--the issue of regulatory reform.' He said he had heard that prominent plaintiffs' firms and Senate offices have been working on draft legislation to address Stoneridge."
(1) Fee requests have been in the news. Last week it was the court's decision to sharply reduce the requested fees and expenses in the Coca-Cola securities class action. This week it is the billing of temp attorneys at high hourly rates in the Xerox securities class action.
Quote of note (Forbes): "Stephen Vasil, a Yale Law School graduate, and Andrew Gilman, a New York University law grad, were hired through a temp agency to work on the Xerox case. Vasil says they often performed glorified secretarial work, including reviewing electronic documents to identify their author and destination. Vasil was paid $35 an hour, Gilman, $40. Yet the law firms in the case are asking for roughly $500 an hour for their services."
(2) Securities Docket has a guest column by Professor Adam Pritchard on his proposal that corporations opt-out of the current securities class action system by limiting potential investor damages to the disgorgement of the defendants' gains.
Quote of note: "Perhaps the best way of understanding the proposal is as a means of ex ante rebutting the presumption of reliance. The Basic Court took pains to stress that the presumption could be rebutted by “[a]ny showing that severs the link between the alleged misrepresentation and … his decision to trade at a fair market price, will be sufficient to rebut the presumption of reliance.” My proposal severs that link. By waiving the FOTM presumption of reliance in the articles of incorporation, shareholders will be putting future purchasers of the company’s stock on notice that they cannot rely on that presumption to collect out-of-pocket damages. If courts are to be faithful to Basic, they have to faithful not only to its presumption, but also the means that it provided for rebutting that presumption."
The Coca-Cola securities class action continues to make news. After the "sale of stolen company documents" controversy, the case was settled earlier this year for $137.5 million.
The Fulton County Daily Report has an article on the court's decision to reduce the fee award from 26% to 21% of the common fund - about a $7 million difference - and reject $4 million in claimed expenses. Among other things, the court complained about the percentage of work done by high-billing attorneys, declined to reimburse on-line research costs, and criticized the per-day travel costs.
Quote of note (decision): "This Court is not troubled by the apparent fact that [the plaintiffs'] attorneys seek high comfort on their journeys, but neither should the class finance such a lifestyle. This Court finds that a client could reasonably expect to pay $300 per night for his attorney's food and lodging on domestic trips, and that is the level at which this Court will reimburse [the firm] for its travel."
A couple of items from around the web:
(1) The New York Law Journal has a column (Nov. 5 edition - subscrip. req'd) on loss causation and class certification. The authors argue that although the Oscar (5th Circuit) and Salomon (2nd Circuit) decisions appear to create a split over how burdensome it is for plaintiffs to demonstrate the existence of loss causation at the class certification stage of a case, the practical difference will not be significant. In both courts the parties "will be forced to address loss causation in detail."
(2) The D&O Diary has been attending conferences on the future of securities litigation and reporting back on the results. The blog has detailed notes from the recent PLUS International Conference and Forum for Institutional Investors. Short version: happy days may be here again for the plaintiffs' bar.
Securities Docket has an interview with Professor Adam Pritchard (U. Mich. Law) on his proposal that corporations opt-out of the current securities class action system by limiting potential investor damages to the disgorgement of the defendants' gains. The post also includes links to Pritchard's expanded Cato Supreme Court Review article on the subject and his model shareholder proposal.
Quote of note: "My guess is that no company will buy on to it unless it gets past the SEC first, in response to a no-action letter attempting to exclude the proposal as inconsistent with federal law. I’ll concede that the chances of ultimate success are probably less than 50%, but I don’t see a big downside from trying."
As a general matter, claims under the Securities Act of 1933 ("'33 Act") may be brought in federal or state court. Some federal courts, however, have held that the Securities Litigation Uniform Standards Act of 1998 ("SLUSA") creates a removal exception for '33 Act securities class actions involving "covered securities" (i.e., securities sold on a national exchange) that are brought in state court. But, you might ask, what about '33 Act securities class actions that do not involve covered securities?
Ask and you shall receive an answer. In New Jersey Carpenters Vacation Fund v. Harborview Mortgage Loan Trust, 2008 WL 4369840 (S.D.N.Y. Sept. 24, 2008), the court considered whether the removal provision of the Class Action Fairness Act of 2005 ("CAFA") applied to a '33 Act securities class action involving large, mortgage-related bond offerings. The plaintiffs alleged that there were misrepresentations in the offering documents. The court concluded that (a) CAFA applies to all securities class actions except those specifically excluded by the statute; and (b) the exceptions in CAFA for class actions relating to covered securities, corporate governance, and security-related rights and duties were intended to ensure that CAFA did not encroach upon SLUSA and were inapplicable in the instant case. Accordingly, the court held that "[s]ince CAFA's main provision trumps [the '33 Act's jurisdiction provision], and no exception applies, remand of the case must be denied."
Holding: Plaintiff's motion to remand denied. (Note that the Ninth Circuit reached the opposite conclusion in Luther v. Countrywide Home Loans Servicing LP, 533 F.3d 1031 (9th Cir. 2008) earlier this year.)
One of the most convoluted securities class actions ever may finally have come to an end (barring a successful appeal). The court has declined to certify the class in the case pending against Halliburton in the N.D. of Texas since 2002. According to a Law360 article (subscrip. req'd), the basis for the court's decision was the failure of the plaintiffs to establish loss causation.
Over the years, the Halliburton case has seen four amended complaints, two changes in lead counsel, the recusal of the original judge, and the judicial rejection of a proposed settlement. That's a long way to go to get to a denial of class certification.
(1) The National Law Journal (Sept. 22 edition) has an interesting column on the issue of securities class action damages. Professor Adam Pritchard (U. Mich.) argues that the fundamental flaw in the system is the failure to measure damages by the defendant's gain, rather than the plaintiff's loss.
Quote of note: "Measuring damages by the defendant's gain would accomplish two things. First, it would scale back the stakes in securities class actions. . . . Second, measuring damages by the defendant's benefit would focus deterrence on the executives who actually lied."
(2) The New York Law Journal (Sept. 22 edition) has an article discussing whether the government's role in the credit crisis will limit the scope of private litigation.
Quote of note: "AIG, for instance, was already facing a number of shareholder suits before the government stepped in. The government's acquisition of an 80 percent interest in the insurer through its $85 billion loan then squeezed shareholders further. How a government-controlled AIG will deal with securities class actions remains uncertain."
A few items of interest from around the web:
(1) Bruce Carton, a longtime securities law blogger, has launched Securities Docket a "global securities litigation and enforcement report." The site provides one-stop shopping for the latest news, blog posts, filings, etc.
(2) The New York Law Journal has a column (subscrip. req'd) on recent Ninth Circuit loss causation decisions. In particular, the authors discuss the Apollo Group, Corinthian Colleges, and Gilead decisions and conclude that they have not made it more difficult to successfully plead loss causation.
(3) The WSJ Law Blog has coverage of a recent decision in the Oracle securities class action. The court found that the defendants engaged in discovery abuses, including failing to preserve audio recordings of an author's interviews with Oracle's CEO (even though the recordings were in the possession of the author).
A couple of columns on securities litigation topics:
(1) The New York Law Journal (Aug. 25 edition) has a column on the Eleventh Circuit's recent decision regarding proportionate liability and control person claims.
Quote of note: "The LaPerriere decision provides the basis for an even further shift in favor of control person defendants. Under LaPerriere, control person defendants inevitably will avoid joint and several liability for the entirety of plaintiffs' damages and may even be held responsible for a lesser amount of damages than that attributed by the fact finder to the persons they control."
(2) Legal Times (Aug. 27 edition) has a column on the litigation surrounding auction rate securities. The authors conclude that the pending securities class actions may be rendered moot by regulatory settlements designed to fully compensate injured investors.
Quote of note: "The most interesting legal aspect of these settlements and buyback programs may be their debilitating impact on the numerous class actions and other private suits filed since the market seized up. Most problematic for any private suit, including putative class actions, is the inability to prove damages -- a central element of any private action. If all auction dealers ultimately agree to implement their own buyback programs for customers, then all those potential plaintiffs will have no remaining damages."
When and how plaintiffs must disclose the identities of their confidential witnesses as part of the discovery process continues to be fought over in the courts. In In re Marsh & McLennan Companies, Inc. Sec. Litig., 2008 WL 2941215 (S.D.N.Y. July 30, 2008), the plaintiffs argued that the identities of their confidential witnesses were protected by the work product doctrine and there was also a need to avoid any risk of retaliation by Marsh against its former employees.
The court held that confidential witness information enjoys limited, if any, work-product protection. Even assuming that the information was privileged, the Marsh defendants would have been forced to exhaust their depositions to ascertain the identities and, accordingly, had established a substantial justification for disclosure. Moreover, the threat of retaliation identified by the plaintiffs was more properly the basis for a protective order and required specific factual support.
Holding: Ordered disclosure of confidential witness information, including identities and any documents provided to the plaintiffs. The court also authorized limited discovery as to certain investigations pending against the proposed class representatives.
The New York Law Journal has a column (Aug. 13 - subscrip. req'd) on the "Extraterritorial Application of U.S. Securities Laws." The authors focus on the recent Astrazeneca decision in the S.D.N.Y., where the court dismissed the action as to foreign purchasers on foreign exchanges based on a lack of subject matter jurisdiction.
Quote of note: "Determining U.S. subject matter jurisdiction over complex transnational securities fraud cases will always need to be governed by flexible and fact- specific analyses. However, for purposes of greater judicial uniformity as well as a greater degree of certainty in the international business community about the parameters of U.S. jurisdiction, the district courts should have better guidance than deciding cases 'on very fine distinctions' with the ultimate decision based upon a court's 'impression' of whether subject matter jurisdiction exists."
As it turns out, the defense is on a winning streak in securities class action trials. Although the jury verdicts in the recent JDS Uniphase (for defendants) and Apollo Group (for plaintiffs) trials were split, the Apollo Group defendants achieved a post-trial victory yesterday when the court ruled that the plaintiffs had failed to prove loss causation.
The Apollo Group case was based on the company's failure to disclose the existence of a government report finding that its wholly-owned subsidiary, the University of Phoenix, had violated Department of Education regulations. In its decision overturning the jury verdict, the court found that the two analyst reports relied upon by the plaintiffs as "corrective disclosures" that led to a stock price decline "did not provide any new, fraud-revealing analysis." The analyst reports merely repeated information about the government report already known to the market or provided information about the University of Phoenix that was factually wrong (and therefore could not have been corrective).
The plaintiffs plan to appeal the decision, which could lead to an interesting 9th Circuit opinion on loss causation. The WSJ Law Blog and Reuters have additional coverage.
The U.S. Chamber Institute for Legal Reform has issued a paper entitled Securities Class Action Litigation: The Problem, Its Impact, and the Path To Reform. The paper expands upon some of the concerns and recommendations raised by recent capital market studies and offers a series of proposed reforms. The proposed reforms include: more disclosure surrounding possible conflicts of interest between plaintiffs and their counsel, permitting cost-shifting for certain discovery, providing equal access to interlocutory appeals, and having Congress clarify the pleading standards for scienter and loss causation.
The author of The 10b-5 Daily, Lyle Roberts (Dewey & LeBoeuf), is participating in a Washington Legal Foundation webcast on the SEC and securities class actions. The webcast will take place on Tuesday, July 29 at 10 a.m. ET. Click here (PDF) for the details.
Addition: An archive of the webcast can be found here.
Two columns from the New York Law Journal on securities litigation.
(1) In 'Oscar': Misinterpretation of Fraud-on-the-Market Theory (July 17 edition - subscrip. req'd), the author discusses a Fifth Circuit decision on class certification. Notably, the court held that loss causation must be established at the class certification stage of a case by a preponderance of all admissible evidence before the plaintiffs can receive the benefit of the fraud-on-the-market presumption. The author argues that the decision, handed down last year, creates an impermissibly high barrier to class certification that other circuit courts have declined to adopt.
(2) In Whither 'Stoneridge v. Scientific-Atlanta'? Early Results (July 8 edition - subscrip. req'd), the author surveys lower court decisions that have applied the U.S. Supreme Court's holding on scheme liability. The author argues that the Pugh (7th Cir.) and DVI (E.D.Pa.) decisions suggest courts are inclined to interpret Stoneridge "broadly and dismiss claims against any third parties, regardless of their affiliation with an issuer, who are not alleged to have participated in preparing or disseminating false financial statements or other public statements."
While a proposed class representative does not have to possess "expert knowledge" of the case, there are some limits on how clueless it can be. In the Monster Worldwide, Inc. securities class action before the S.D.N.Y., the court has rejected a proposed class representative (a pension fund) that put forward a witness (the co-chairman of the fund) who "did not know the name of the stock at issue in this case, did not know the name of either individual defendant, did not know whether [the pension fund] ever owned Monster stock, did not know if an amended complaint had been filed, did not know whether he had ever seen any complaint in the action, did not know that [a defendant] had moved to dismiss the complaint, and did not know that [the pension fund] had moved for pre-discovery summary judgment." Following this testimony, the pension fund put forward a second witness who "admitted that he had mostly learned about the substance of the litigation only in the week before his deposition."
The court rejected the pension fund as a class representative, but approved the appointment of the other lead plaintiff to that role. Despite its concerns that the counsel for the pension fund "may not have fulfilled their professional responsibilities in proposing [the pension fund] as a class representative," the court nevertheless appointed the firm as class counsel. The New York Law Journal has an article on the decision.
Quote of note (opinion): "The Court will not be a party to this sham. The foregoing events establish beyond a doubt that [the pension fund] has no interest in, genuine knowledge of, and/or meaningful involvement in this case and is simply the willing pawn of counsel."
The recruitment of foreign institutional investors to act as lead plaintiffs in U.S. securities class actions is a well-established practice. An interesting look into how these clients are obtained can be found in a breach of contract action recently filed by a plaintiffs' firm against the lawyers it hired as "independent contractors" to develop international clients.
The agreement between the parties, which is an exhibit to the answer and counterclaim, stated that the lawyers would receive monthly compensation and 10% of any fees the plaintiffs' firm earned in cases where a client obtained by the lawyers acted as lead plaintiff (with a deduction for the monthly compensation). The action arose when the lawyers decided to terminate the agreement after a few months and become associated with a different plaintiffs' firm.
A few items of interest from around the web.
(1) Professor Michael Perino's paper finding that investors may have been damaged in cases where Milberg Weiss improperly compensated the lead plaintiff has some critics. Ideoblog has a comment and response with the author (here and here).
(2) Forbes has an article on "collusive settlements" in securities litigation.
(3) Bruce Carton, the founder of Securities Litigation Watch, is back with a new blog on securities litigation and enforcement. Readers of The 10b-5 Daily will want to add Unusual Activity to their favorites list.
The Wall Street Journal had an article in yesterday's edition on the JDS Uniphase securities class action trial. The article discusses how the inability to reach a settlement forced the company to risk bankruptcy by taking its chances with a jury.
Quote of note: "Marty Kaplan, JDS's chairman, says the nine-member JDS board had its 'hawks,' who wanted to push to trial, and others who preferred to settle. But he says the plaintiffs' demands far exceeded even the largest settlement the board considered, meaning there was no 'serious debate' about whether to go to trial."
(1) The New York Law Journal has an article on the assistance being provided by Refco's ex-CEO, Phillip R. Bennett, to the investors suing the company for securities fraud. The unusual cooperation came to light when plaintiffs' counsel submitted a letter to the court in conjunction with Bennett's criminal sentencing.
Quote of note: [Plaintiffs' counsel] said he would not mind a reduction, however slight, in Bennett's sentence because of his cooperation with shareholders' lawyers. 'It would be a helpful future precedent,' he said."
(2) Of course, cooperating with plaintiffs' counsel can go too far, as illustrated by the Milberg Weiss indictment. Point of Law has a post on the presentation of a new paper by Professor Michael Perino (author of the leading PSLRA treatise) finding that investors may have been damaged in cases where Milberg Weiss improperly compensated the lead plaintiff.
Quote of note: "These findings cast doubt on Milberg Weiss’ claim that paying kickbacks was a completely victimless crime. They are consistent with the hypothesis that Milberg Weiss asked for and got a greater share of the settlements in these cases than it otherwise would—a real economic harm to the class members who therefore would have had a lower net recovery."
A few items of interest from around the web:
(1) The New York Law Journal (May 19 edition) has an article on the global reach of securities class actions. In particular, the article discusses (a) the developing standards for subject matter jurisdiction over claims by foreign investors in U.S. courts, and (b) the evolution of the class action device for securities claims in foreign jurisdictions.
(2) Securities Litigation Watch has a post on the Top 10 Corporate and Securities Articles of 2007, complete with links. The list includes a number of securities litigation related articles.
(3) NERA has issued a report on the settlement of options backdating class actions. The report concludes: "in the cases that have settled to date, the amounts paid to plaintiffs have been substantially lower than in comparable non-backdating class actions."
House Republican leaders John Boehner (R-OH) and Lamar Smith (R-TX) have asked the House Judiciary Committee to hold a hearing on the payment of kickbacks to lead plaintiffs in securities class actions. The press release and letter to the Chairman of the House Judiciary Committee can be found here. The WSJ Law Blog has a post on the topic and the ABA Journal has an article with related news links.
Establishing loss causation for the purpose of class certification or summary judgment is becoming a significant hurdle for plaintiffs. On the heels of the Flowserve and Omnicom decisions comes another defense victory.
In Fener v. Belo Corp., 2008 WL 876967 (N.D. Tex. April 2, 2008), the corrective disclosure made by the company attributed a decline in newspaper circulation to three separate sources. Only one of the sources, however, was related to the alleged fraudulent conduct. Based on Fifth Circuit precedent, the court held that it was the plaintiffs' burden to prove that it was more probable than not that this portion of the disclosure, and not the other unrelated negative statements, caused a significant amount of the stock price decline. The plaintiffs' expert failed to present empirical evidence sufficient to meet this burden. (The 10b-5 Daily previously posted about the initial motion to dismiss decision in the case.)
Holding: Class certification denied.
Quote of note: "[The] event study tends to establish that the market reacted to the bundle of August 5 news pieces with an August 6 stock price drop of 5.47%. Crucially, however, the study fails to target the corrective disclosure at issue."
Under the fraud-on-the-market theory, reliance by investors on an alleged misrepresentation is presumed if the company's shares were traded on an efficient market. Investors are not entitled to the presumption, however, if they are unable to show that the misrepresentation actually affected the market price of the stock. Class certification continues to be an intense battleground on the application of the fraud-on-the-market theory, as evidenced by two recent decisions.
(1) In In re Fannie Mae Sec. Litig., 247 F.R.D. 32 (D.D.C. 2008), the court considered whether it was appropriate to apply the fraud-on-the-market presumption to investors who purchased Fannie Mae stock after the company's Dec. 2004 announcement that it would engage in a large financial restatement. The plaintiffs argued that additional information about the alleged fraud was released over the next ten months and the class period should extend to Sep. 2005. The court disagreed and held that the Dec. 2004 announcement "severed the link between the alleged misrepresentations and the stock price" and later investors could not "claim a reasonable reliance on Fannie Mae's financial statements." Accordingly, the court found that the class period ended in Dec. 2004.
(2) In In re Credit Suisse First Boston Corp. (Lantronix Inc.) Analyst Sec. Litig., 2008 WL 512779 (S.D.N.Y. Feb. 26, 2008), the court considered whether a series of allegedly false analyst statements about Lantronix affected the market price of the company's stock. The court declined to decide whether the fraud-on-the-market presumption could ever apply to research analyst statements, noting that the issue is currently before the Second Circuit in the In re Salomon Analyst Metromedia Litig. case (see this post for more background). Nevertheless, the court decertified the class based on the plaintiffs' failure to adequately demonstrate that the analyst statements had: (a) increased Lantronix's stock price when issued; (b) had an effect throughout the class period; or (c) negatively impacted Lantronix's stock price when their falsity was revealed to the market.
The March 17, 2008 edition of the National Law Journal has a pair of columns on the impact of the Supreme Court's recent securities litigation decisions.
(1) In Stoneridge Alters Legal Landscape (subscrip. req'd), the authors recap the decision and argue that the Court's rejection of "scheme liability" has "profoundly changed" the potential securities fraud exposure of third parties.
Quote of note: "The holding in Stoneridge indicates that all or most of that $7 billion [in Enron-related settlements] probably did not have to be paid, because the banks, even if they acted with full knowledge that they were engaged in a scheme with Enron, had no liability to the investing public under the anti-fraud provisions of the federal securities laws. Note that while the settling banks in Enron paid approximately $7 billion, there remained a number of banks that declined to settle, and that would have faced massive exposure had Stoneridge been decided differently."
(2) In Courts Interpret Tellabs (subscrip. req'd), the authors examine the post-decision case law and conclude that courts are taking a "more stringent" approach to scienter pleading.
Quote of note: "Of 102 reported decisions reviewed applying Tellabs, 64 reflect dismissals (albeit some with leave to amend). On its face, this (unscientific) survey reflects a dismissal rate higher than historical norms."
A few items from around the web.
(1) RiskMetrics has released its annual SCAS 50 report of the top 50 plaintiffs' law firms ranked by the total dollar amount of final securities class action settlements occurring in 2007 in which the law firm served as lead or co-lead counsel.
(2) The Federalist Society has posted an online debate on the Stoneridge decision on scheme liability. Participants include Professor Stephen Bainbridge, Professor Jay Brown, and AEI's Ted Frank.
(3) Amanda Rose, an incoming Vanderbilt law professor, has issued an interesting working paper on securities class actions. Rose argues that the overdeterrence threat of securities class actions could be mitigated if "policymakers adopt an oversight approach to securities litigation reform by, for example, granting the SEC the ability to screen which Rule 10b-5 class actions may be filed, and against whom."
Big news in the long-running Coca-Cola securities class action. As previously posted in The 10b-5 Daily, the defendants have sought the denial of class certification based on alleged misconduct by lead counsel for the plaintiffs. In a report issued this week, the special master considering the issue agreed with the defendants. The report found that lead counsel engaged in improper conduct when it paid a former Coca-Cola employee to provide the plaintiffs with stolen company documents. The special master's recommendation that lead counsel be barred from serving as class counsel is subject to approval by the district court judge. Legal Pad has an extensive post on the decision, including a link to the report.
Quote of note (Special Master's Report and Recommendation): "Ordinarily, in the absence of any reason to suspect class counsel of inappropriate conduct, courts must assume that class counsel will properly and candidly discharge these duties. Here, however, the Court is faced with a very unusual situation in which Class Counsel engaged in extremely troubling conduct by paying for documents stolen from Coke, and then exacerbated the conclusions to be drawn from that initial conduct by refusing to accept responsibility for that conduct and by continuing, to this day, to defend that conduct through the use of arguments that appear to be pretextual. The administration of justice would be prejudiced should the court turn a blind eye to these circumstances."
Will the "Securities Litigation Attorney Accountability and Transparency Act" finally gain some traction? It's doubtful. Initially introduced in 2006 after the Milberg Weiss indictment, the legislation would permit fee shifting for successful defendants at the discretion of the court, require the disclosure of conflicts of interest between a plaintiff and his attorney, and allow courts to approve lead counsel through a competitive bidding process. SecuritiesLaw360 reports (subscrip. req'd) that the bill was reintroduced last week with support from House Minority Leader John Boehner (R-Ohio).
(1) Lyle Roberts (the author of The 10b-5 Daily) and Jonathan Miller have a column in the Feb. 8, 2008 edition of the New York Law Journal on the collective scienter theory. The column (subscrip. req'd) discusses the Dynex Capital and Tellabs II decisions.
(2) Securities Litigation Watch is keeping a close tab on securities class action filings. January 2008 was a big month, with at least 20 new filings (and not all of them subprime related).
(3) Professor Stephen Bainbridge posts his remarks on "Stoneridge and Capital Markets Policy" from an ABA panel presentation today.
The Apollo Group securities class action trial ended with a plaintiffs' verdict. A couple of news articles - from Portfolio.com and The Legal Intelligencer (Jan. 31, 2008 edition - subscrip. req'd) - offer some more background on what happened.
Quote of note (Portfolio.com): "While this might sound like the perfect case for the defense to rush to settle, that did not happen. At one point, there was a confidential mediation, but it went nowhere, says [plaintiffs' counsel]. 'They made it abundantly clear to us that they had every intention of trying this case to verdict,' he says. 'We had no intention of caving, we would never cave, and we made it abundantly clear we try cases to verdict.'"
The author of The 10b-5 Daily, Lyle Roberts (Dewey & LeBoeuf), is participating in a Practicing Law Institute audio webcast on the U.S. Supreme Court's recent Stoneridge decision. The webcast will take place on Thursday, January 31 at 1 p.m. ET and CLE credit is available. Click here to register.
As it turns out, trials remain a risky business for both plaintiffs and defendants. Any thoughts that the JDS Uniphase defense verdict would lead to more securities class action trials will have to be tempered by yesterday's result in the Apollo Group trial. Bloomberg reports that the jury returned a plaintiff verdict that could lead to a payout of up to $277.5 million in damages.
Interestingly, the company has a web page on the litigation that includes a case summary, key documents, and a timeline of events. Comprehensive coverage of the trial and the jury verdict can be found at Securities Litigation Watch and The D&O Diary.
Two items of interest:
(1) Texas billionaire Sam Wyly's litigation over the settlement in the Computer Associates securities class action has hit a slight bump. The court decision giving Wyly access to the work product of the lead counsel in the Computer Associates case has been on appeal in New York state court. The New York Law Journal reports that the appellate court has overruled the earlier decision, finding that an absent class member does not have the same right to lawyers' files as a client in a traditional attorney-client relationship. Wyly's attorney states that Wyly plans to appeal the decision and, in any event, will be able to obtain the material as part of his ongoing legal malpractice suit against the plaintiffs' firms.
(2) Was the JDS Uniphase case a harbinger of success for defendants in securities class action trials? We should know soon. According to Securities Litigation Watch, a verdict in the Apollo Group trial could be reached today.
The New York Law Journal (subscrip. req'd) has two interesting columns this week discussing developments in the pleading of securities fraud.
(1) Lower Court's Handling of Tellabs' "Inference of Scienter" (Dec. 11) discusses how courts have addressed the PSLRA's scienter pleading standard in the aftermath of the Supreme Court's Tellabs decision earlier this year. After summarizing the relevant decisions, the authors conclude that Tellabs has made it more difficult to survive a motion to dismiss based on a "post-Tellabs trend that corporate investigations, revisions, and restatements do not necessarily support a sufficiently compelling inference of scienter."
Quote of note: "The early returns suggest a significant change in how lower courts are addressing scienter issues in 12(b)(6) motions in Section 10(b) private civil cases. As one court aptly stated, the analysis required by Tellabs 'is akin to holding a minitrial on the merits of the case based only on the complaint.'"
(2) Group Pleading Suffers Another Blow (Dec. 13) addresses the varying court decisions on whether the "group pleading doctrine," which permits the attribution of alleged misstatements in group-published documents to corporate officers without specific factual allegations about their respective involvement in the misstatements, has survived the passage of the PSLRA. As the authors note, some courts (especially the S.D.N.Y.) have drawn a distinction between group pleading for purposes of attributing misstatements (permitted) and group pleading for purposes of establishing the existence of a strong inference of scienter (not permitted). Other courts, most notably the Third Circuit in its recent decision in Winer Family Trust v. Queen, 503 F.3d 319 (3rd Cir. 2007), have rejected the distinction as "illogical" given that it requires a heightened pleading of scienter for an act that the defendant is only presumed to have committed.
Quote of note: "The issue may yet reach the Supreme Court. At present, there is only a latent conflict among the circuits, as no circuit court has expressly held that group pleading is still permissible despite the PSLRA. Nonetheless, many district courts, particularly in the Second Circuit, have continued to apply the doctrine. It is difficult to predict where the Second Circuit would come out on this issue, given its silence to date. However, if it were to adopt the prevailing view of its district courts, that would create a clear conflict between circuit court holdings, which could send the issue to the Supreme Court."
Whether the plaintiffs in a securities class action should be required to disclose the identities of their confidential witnesses as part of the discovery process is an issue that continues to be the subject of litigation. The 10b-5 Daily had a post last year about an E.D. of Pa. decision in which the court held that the defendants were entitled to the names of all individuals known by the plaintiff to have relevant knowledge, but the plaintiff was not required to specifically identify the confidential witnesses relied upon in the complaint. The court did note, however, that it would consider revisiting its decision if the defendants were presented with an overwhelming list of names.
How many names would be "overwhelming"? A court in the N.D. of Cal. has an answer: 77. In In re Harmonic, Inc. Sec. Litig., 245 F.R.D. 424 (N.D. Cal. 2007), the court found the only effect of allowing the plaintiffs to withhold the names of the five confidential witnesses relied upon in the complaint would be "to force the Defendants to expend resources on taking the depositions of 77 people [i.e., the witnesses identified in the plaintiffs' initial disclosures] in order to obtain the information." The court also rejected the plaintiffs' argument that the names of their confidential witnesses were protected work product, noting that the information would "inevitably come to light."
Holding: Motion to compel answers to interrogatories concerning confidential witnesses granted.
Texas billionaire Sam Wyly has been in litigation over the settlement in the Computer Associates securities class action for years, alleging that plaintiffs' counsel improperly settled the case for a low amount just prior to the company's public disclosures of accounting fraud. The 10b-5 Daily has previously posted about Wyly's efforts to obtain documents related to the case (see here, here, and here). Having finally obtained the documents earlier this year, Wyly has brought a fraud action in New York state court against the relevant plaintiff law firms. Newsday has an article on the suit.
Quote of note: "The heart of Wyly's claim is the distinct difference between two sets of shareholder lawsuits filed against CA -- one in 1998 following a sharp drop in CA's share price, and another in 2002 following revelations of federal probes of CA's accounting. . . . The suit takes exception with the law firms' claims that allegations in the two suits were largely similar and therefore could be combined for the purposes of a settlement. The suit claims that if allegations in the latter suit had been properly researched and argued, the settlement would have been much larger. Instead, Wyly's suit argues, the 2002 suit never even reached the discovery phase."
Addition: An alert reader notes that Wyly has not actually been given the documents he was seeking from plaintiffs' counsel. According to the relevant court docket, production has been stayed pending an appeal of the court's decision.
The trial of the year - if you are a securities litigator - has come to an end. Reuters and the Associated Press report that the jury in the JDS Uniphase trial has returned a unanimous verdict in favor of the defendants. (Thanks to Securities Litigation Watch for the links.)
Quote of note (Associated Press): "Christopher Dewees, JDS Uniphase's chief legal officer, said the company participated in multiple settlement talks since the lawsuit was filed in 2002, but the parties remained 'very far apart.' 'The company is obviously extremely pleased that the jury recognized that this case is without merit,' he said in an interview. 'But it is obviously chagrined to have spent the time, effort and money over the past 6 years to achieve this verdict.'"
The New Jersey Law Journal has an article discussing the status of the various Vioxx-related securities litigations pending against Merck & Co. The company entered into a $4.8 billion product liability settlement last week, which may make the plaintiffs' cases easier to win. The securities class action, however, was dismissed earlier this year on statute of limitations grounds. The dismissal is being appealed to the Third Circuit. (The 10b-5 Daily has previously posted about the lead plaintiff dispute in the case.)
Plenty of cases get snatched from the hands of juries by settlements on the courthouse steps. The JDS Uniphase trial, however, is still going strong. More updates can be found on Crash.net (click here, here, and here) and a San Jose Mercury News blog.
Quote of Note (San Jose Mercury News): "As of now, it looks like closing arguments will start sometime on Monday (maybe) and continue through at least Tuesday."
Addition: Meanwhile, Securities Litigation Watch reports that another securities class action trial has gotten underway in the D. of Arizona. The corporate defendant in the case, which started in 2004, is Apollo Group.
A few interrelated items of note:
(1) The New York Law Journal has a column (Nov. 15 edition - subscrip. req'd) on possible securities litigation reform. Professor John Coffee argues that "we have too little securities litigation in the contexts where it would be useful and too much securities litigation in the contexts where it is useless." He suggests a compromise reform that would "restore 'aiding and abetting' liability by overturning Central Bank, while also placing a percentage ceiling on the non-trading corporation's liability in a secondary market case."
(2) Professor Coffee states in his column that the number of securities class actions has dropped and "no real upturn is in sight." Others are not so sure. The D&O Diary had a post two weeks ago noting that a significant upturn in filings appeared to be underway. That trend is continuing, fueled largely by filings from a single plaintiffs' law firm. Coughlin Stoia has filed ten new securities class actions so far this month (click here for a press release search).
(3) Lots of suits leads to lots of settlements. RiskMetrics has released the Securities Class Action Services (SCAS) 50 Power Rankings report, which ranks the top 50 plaintiffs' law firms based on various settlement statistics. Coughlin Stoia heads the list for cumulative dollar value of securities class action settlements from 2003 to 2006.
While media reports on the JDS Uniphase securities class action trial have tapered off since the opening statements, there is one place to get updated reports - Crash.net, a motorsport website. It turns out that Kevin Kalkhoven, the former CEO of JDS Uniphase and a defendant in the case, is one of the owners of the Champ Car World Series. Accordingly, Crash.net is following the trial closely, with a focus on Kalkhoven (click here, here, here, here, and here for the last two weeks of coverage).
Quote of note: "The trial is scheduled for nineteen days, which means if all goes according to plan, the evidentiary portion of the trial will end on Friday 16 November. Then, the thanksgiving week will be a 'break' for all lawyers and jurors, before reconvening the following week for closing arguments and jury deliberations."
After the large settlement comes the large fee request. The Tyco settlement, at $3 billion with an additional $225 million to be paid by PricewaterhouseCoopers (the company's auditor), has been hailed as the largest payout ever by a single corporate defendant in a securities fraud lawsuit. The Wall Street Journal has a report on the attorneys' fees requested by the lead counsel for the plaintiffs - $460 million, or 14.5% of the settlement. Three institutional investors who are members of the class have objected to the size of the request. WSJ Law Blog has a rundown of the numbers.
Quote of note: "In similar cases, known as mega securities settlements, fees have averaged closer to 10%. 'This is something of an outlier in terms of the percentage of the fee request,' says Adam Savett, a director of the Securities Class Action Services Group, a unit of RiskMetrics Group. He added, 'Plus, the sheer size of the fee check that the judge will picture in his mind might pose a burden.'"
There was talk about an increase in the number of securities class action trials back in 2005, but the trend never went anywhere. Not surprisingly, therefore, the start of the trial in the JDS Uniphase case has generated a fair amount of media attention. The case has an interesting history, including the lead plaintiff taking out a newspaper advertisement urging JDS Uniphase employees to disclose what they know about the alleged fraud.
Coverage of the opening statements in the trial can be found in Reuters (plaintiffs), the San Jose Mercury News (plaintiffs), and, from a few hours ago, the Associated Press (defendants).
Addition: RiskMetrics Group has put together a handy summary of post-PSLRA securities class action trials (via WSJ Law Blog).
There has been an interesting development in the long-running Coca-Cola securities class action. According to media reports, the defense has sought denial of class certification based on alleged misconduct by lead counsel for the plaintiffs (Coughlin Stoia and Chitwood Harley) relating to payments to witnesses. Coca-Cola asserts that these are the "same sort of tactics" that the former lead attorney on the case has admitted to as part of a recent criminal plea agreement. Coverage can be found in the Wall Street Journal, the Fulton County Daily Report, and Reuters.
A few items of interest:
(1) The D & O Diary has a post examining recent securities class action decisions involving foreign investors. One type of litigation that is receiving a lot of attention is "foreign cubed" cases (defined as an action brought in the U.S. against a foreign issuer, on behalf of a class that includes not only investors who purchased the securities in question on a U.S. securities exchange, but also foreign investors who purchased the securities on a foreign securities exchange).
(2) Securities Litigation Watch has a post on a recent Ninth Circuit case setting out the standard for determining when an investor is on inquiry notice of his securities fraud claim for purposes of the running of the statute of limitations. The case is Betz v. Trainer Wortham & Co., Inc., 2007 WL 2874369 (9th Cir. Oct. 4, 2007).
(3) Two new papers on determining securities fraud damages have been published: Inflation and Damages in a Post-Dura World (David Tabak - NERA) and The Loss Causation Requirement for Rule 10b-5 Causes-of-Action: The Implication of Dura Pharmaceuticals v. Broudo (Allen Ferrell - Harvard; Atanu Saha - Alix Partners).
On the eve of oral argument in the Stoneridge (a.k.a. Charter Communications) case on scheme liability, the media coverage continues.
(1) The Wall Street Journal had two items in its weekend edition, including a "Hot Topic" breakout of the case and an editorial (subscrip. req'd) urging the court to reject the position advocated by the investor plaintiffs.
(2) More editorials can be found in the Washington Times, the Financial Times, and the USA Today.
(3) CNBC has a point/counterpoint with two prominent securities litigators from its "Power Lunch" program.
A number of media outlets have chosen to run articles on the Stoneridge (a.k.a. Charter Communications) case today in anticipation of next week's argument. Articles can be found in the Washington Post, Wall Street Journal , Reuters, and MarketWatch.
Quote of note (Washington Post): "Joseph A. Grundfest, a Stanford University law professor who supports businesses in the case, said the SEC and the Justice Department already have the power to sue third parties for their involvement in a fraud scheme. He noted that Congress repeatedly has rejected attempts to expand the rights of investors to sue. 'There's a question of real principle here: Which decisions should be made by the courts, and which should be made by Congress?' Grundfest said."
For those readers who would like to get a preview of the Stoneridge (a.k.a. Charter Communications) argument in the U.S. Supreme Court next week, there are two notable events being held this Friday.
(1) The American Enterprise Institute is hosting a panel discussion (including Harvey Pitt, the former SEC Chairman) on the case in Washington, D.C. Details can be found here.
(2) The Center for Business Law & Regulation at Case Western Reserve University has a half-day conference on the case taking place on campus in Cleveland, Ohio. There also will be a live webcast. Details can be found here.
The New York Law Journal (Sept. 28) has two columns on securities litigation topics. A subscription is required to view the columns online.
(1) In "DOJ Backs 'Scheme Liability' in Third-Party Class Actions" the authors provide a preview of the upcoming Stoneridge (a.k.a. Charter Communications) case in the U.S. Supreme Court. The column summarizes the history of the case and discusses the arguments presented in the DOJ's amicus brief.
Quote of note: "The U.S. Department of Justice's endorsement of scheme liability for third parties may result in a pyrrhic victory for the plaintiff class action bar given the stark impact that its proposed reliance test would have upon many scheme liability claims. Scheme liability, according the solicitor general's view, would only apply to defendants whose misconduct was directly relied upon by the allegedly defrauded investor and not to other, potential deep-pocket defendants who allegedly participated in a broader scheme to defraud."
(2) In "'Oscar': Nearing the End of Fraud-On-Market Theory?" the author argues that the Dura decision on loss causation has led courts to question the continuing efficacy of the fraud-on-the-market theory. The author discusses the Fifth Circuit's denial of class certification in Oscar Private Equity (a short summary and link to the decision can be found here) and concludes that it may be a harbinger of things to come.
Quote of note: "[T]he Fifth Circuit seems to have accepted the Supreme Court's challenge, and has significantly chipped away at the validity of the fraud-on-the-market theory by barring use of the presumption at the class action certification stage. In so doing, it has invoked the logic of Justice White's Basic dissent. Based on Oscar and other appellate decisions, it seems as though the repudiation of the fraud-on-the-market theory will continue and Justice White's opinion will sometime soon become the law of the land."
The Wall Street Journal reports that the SEC will hold a roundtable early next year on the topic of shareholder litigation. The roundtable is being held in response to a letter (along with discussion questions) from six prominent law professors petitioning the agency to examine the topic. It also comes in the wake of a series of reports, including from The Committee on Capital Markets Regulation and Bloomberg/Schumer, that have discussed the potential negative impact of shareholder litigation on the U.S. financial markets.
Quote of note (WSJ): "The SEC roundtable, as it appears so far, will address the law professors' concerns, including who bears the cost of paying for attorneys fees in securities lawsuits, the role insurance plays in indemnifying companies or individuals, the percentage of investors who file claims and collect portions of settlements, and how the economics of a settlement change when the defendant is a third party."
The problems in the subprime mortgage market have led to extensive litigation. The Washington Post had an article this week on the topic. Meanwhile, The D&O Diary has been keeping a running tab on subprime-related securities class actions.
Quote of note (Washington Post): "A consortium of investors is going after the collapsed Bear Stearns hedge funds. Home buyers, shareholders and investment banks have filed suits against more than a dozen mortgage lenders. A working group at the Securities and Exchange Commission is examining accounting and disclosure issues, as well as stock sales earlier this year by executives at companies that since have been ensnared by the subprime mess."
The American Lawyer (September 2007) has a feature article (including a sidebar and a timeline) on the twists and turns in the securities litigation surrounding Biovail Corporation. Biovail is Canada's largest publicly traded drugmaker and has been both defending itself in a securities class action and prosecuting a case against short-sellers of the company's stock. The company's use of information gathered in the securities class action (which was subject to a protective order) in its other case has gotten the company and its counsel into trouble with the court.
Quote of note: "By the end of 2003, Biovail stock was trading below $25. The drop could be explained, at least in part, by Biovail's poor performance. In October 2003 the company issued an announcement of disappointing third quarter results, which sent the stock downward. But [the Chairman of Biovail] suspected that there was something else going on. As Biovail's share price continued to languish through 2004, he came to believe that short-sellers were waging a campaign of disinformation to make sure the share price never recovered."
Two articles from last week:
(1) The American Lawyer has a feature article on Milberg Weiss's indictment and the concurrent decline in securities class action filings.
(2) The Wall Street Journal Law Blog reports that Milberg Weiss and Lerach Coughlin have been sued in a class action based on the kickback allegations in the Milberg Weiss indictment. The suit is being brought on behalf of former class members in several lawsuits in which Milberg Weiss acted as lead counsel. A copy of the complaint can be found here. Legal Pad has more on the allegations in the case.
Quote of note (The American Lawyer): "Nor is there a new Milberg on the horizon. After several years, and several key court rulings, the PSLRA's goal of forcing plaintiffs to allege highly specific allegations appears to be working, according to both plaintiffs and defense lawyers. That makes a firm model based on filing lots of actions harder to maintain, since plaintiffs cases are more prone to dismissal. A handful of major players in the practice-Bernstein Litowitz and Grant & Eisenhofer, for example-file the major cases that Milberg did at its peak, but don't bring the bevy of smaller cases that Milberg also did."
In an op-ed in yesterday's edition of the Financial Times, the director of the Committee on Capital Markets Regulation (a.k.a. the "Paulson Committee") addresses a securities litigation reform that the SEC appears eager to avoid endorsing. Christopher Cox, the Chairman of the SEC, has told Congress that the SEC is not considering allowing companies to "mandate" arbitration for shareholder claims. The op-ed points out that the proposed reform actually puts the mandating power in the hands of the shareholders - who would vote on a charter amendment requiring arbitration and could always decide to reverse their decision later - not the company.
Quote of note: "The reform that the committee urges strengthens shareholder rights by broadening choice beyond the route of class action litigation. The SEC should not feel constrained to block or endorse alternatives to class actions. Indeed, after full and fair public discussion, the SEC should leave resolution of disputes between shareholders and their companies where it belongs, in the hands of shareholders and the courts."
The Wall Street Journal has an online debate (subscrip. req'd) between two securities litigators on the merits of scheme liability, a topic that will be addressed by the U.S. Supreme Court next term in the Stoneridge (a.k.a. Charter Communications) case. For those who like their debates slightly heated and reasonably entertaining, this will not disappoint. The WSJ Law Blog also has a related post where they invite comments on the topic.
Quote of note:
"Well, Sean, there you go again. You pick a troubling fact pattern -- a Wall Street bank's alleged involvement in a phony sale of assets to prop up corporate cash flow -- to argue for the rewriting of the securities laws.". . . .
"Thanks Bob for your concession that Bank A's conduct in my hypothetical was 'troubling.' That had to hurt. The question that investors would like to have you (and the Chamber of Commerce) answer is: do you think Bank A should get a pass for what it did in the (not so) hypothetical? Or is Bank A an 'innocent' third party that should be beyond the reach of defrauded investors?"
Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse have released an interim report on federal securities class action filings in 2007. The findings include:
(1) There were 59 filings in the first half of 2007. This represents a slight uptick from the previous six-month period, but is significantly below the post-PSLRA average semi-annual filing rate of 101 (mid-year periods July 1996 through June 2005).
(2) The report suggests two hypotheses for the continued low filing rate: (i) increased government enforcement activity leading to lower incidence of fraud; and/or (ii) a strong stock market with low volatility.
(3) The communication and finance sectors had the most filings.
The New York Law Journal (July 9, 2007 edition) has a special section (subscrip. req'd) on securities litigation and regulation, including articles on merger & acquisition cases related to private equity deals, the recent Billing antitrust decision in the U.S. Supreme Court, and the "changing face" of securities class actions. Two prominent New York securities litigators also have a publicly available "point-counterpoint" on recent judicial developments.
(1) A column on Law.com provides an overview of the recent U.S. Supreme Court cases related to securities litigation.
Quote of note: "While Dura and Tellabs are significant in their own right, their impact may pale in comparison to the Supreme Court's resolution, to be made in 2008, of Stoneridge Investment Partners LLC v. Scientific-Atlanta, Inc., which squarely puts the theory of "scheme liability" to the test."
(2) Professor Hannah L. Buxbaum has posted a forthcoming article on the jurisdictional issues raised by "foreign cubed" cases (defined as an action brought against a foreign issuer, on behalf of a class that includes not only investors who purchased the securities in question on a U.S. securities exchange, but also foreign investors who purchased the securities on a foreign securities exchange). The article - entitled "Multinational Class Actions Under Federal Securities Law: Toward a "Fraud on the Global Market" Theory?" - can be downloaded here.
Quote of note: "Multinational class actions invoke particularly strongly the concerns courts and commentators share regarding the over-expansive application of U.S. regulatory law in the global arena. (And, as I have argued, they are likely in the near future to attract the unfavorable notice of foreign governments as well.) Moreover, these claims illustrate particularly clearly the weaknesses of traditional jurisdictional rules."
The author of The 10b-5 Daily, Lyle Roberts (LeBoeuf Lamb), will be co-moderating a Practicing Law Institute audio webcast on the U.S. Supreme Court's recent Tellabs decision. The webcast will take place on Wednesday, July 11 at 1 p.m. ET. Bruce Vanyo (Katten Muchin) is the other co-moderator and the panelists are Jerome Congress (Milberg Weiss) and David Graham (Sidley Austin), who represented the parties in the case. CLE credit is available. Click here to register.
The Tellabs decision has been the subject of considerable media and blog commentary.
Legal Times: High Court Raises the Bar for Investors Alleging Securities Fraud
WSJ Law Blog: Tellabs - Securities Lawyers React
WSJ Law Blog: Supremes Deliver Another Blow to Plaintiffs Securities Bar
WSJ Law Blog: Scalia and Stevens Battle Over Statutory Interpretation
Washington Post: Pro-Business Decision Hews To Pattern of Roberts Court
Washington Post: Strict Standard Set On Investor Suits
NYT: Investors' Suits Face Higher Bar, Justices Rule
Bloomberg: Top U.S. Court Tightens Limits on Shareholder Suits
CNN Money.com/Legal Pad With Roger Parloff Blog: Supreme Court Deals Blow to Securities Class Actions, 8-1
SEC Actions Blog: The Supreme Court Strikes a Balance Regarding Requirements In Securities Damage Actions
The D&O Diary: Supreme Court Issues Tellabs Opinion
CFO.com: Shareholder Lawsuit Ruling a Boon?
SCOTUSBlog: A Lingering Thought on Tellabs
Securities Law Prof Blog: Tellabs v. Makor Issues & Rights
Sixth Circuit Blog: Tellabs Defines "Strong Inference" for Pleading Securities Fraud Under the PSLRA -- It Could Have Been Much Worse!
With all of the talk about the U.S. Supreme Court's most recent securities litigation issues (scienter and scheme liability), it is important to remember that the full impact of the court's last big decision - the Dura opinion on loss causation issued in 2005 - is still playing out in the lower courts. This year has seen a number of interesting decisions.
(1) In In re Motorola Sec. Litig., 2007 WL 487738 (N.D. Ill. Feb. 8, 2007), the court undertook a comprehensive examination of loss causation in the context of a summary judgment motion. Notably, the court rejected defendants' argument that under Dura "a securities fraud plaintiff bears the burden, even as a nonmoving party on summary judgment, of proving that its loss was caused by the claimed fraud, and not by the 'tangle of other factors' affecting share price." Instead, the court found that it is the defendant's burden to show that the decline in share price did not result from the disclosure of information related to the claimed fraud. (The parties settled the case shortly after this decision.)
(2) In Ray v. Citigroup Global Markets, Inc., 2007 WL 1080426 (7th Cir. April 12, 2007), the court addressed an appeal from a grant of summary judgment in a collective action against an investment advisor. The court identified three possible ways "a plaintiff might go about proving loss causation." First, a plaintiff could demonstrate the "materialization of a risk" - i.e., that it was the facts about which the defendant lied that caused the plaintiff's injury. Second, a plaintiff could rely on the "fraud-on-the-market scenario" discussed in Dura and show both that the misrepresentations artificially inflated the price of the stock and that the value of the stock declined once the market learned of the deception. Finally, a plaintiff could show that its broker falsely assured the plaintiff that a particular investment was "risk-free." The court found that the plaintiffs in the instant case had failed to introduce evidence sufficient to go ahead with their suit under any of these approaches.
(3) In Oscar Private Equity Investments v. Allegiance Telecom, Inc., 2007 WL 1430225 (5th Cir. May 16, 2007), the court vacated a class certification order "for wont of any showing that the market reacted to the corrective disclosure." The court held that the plaintiffs had failed to provide sufficient empirical evidence of loss causation and, therefore, could not take advantage of the "fraud-on-the-market" presumption of reliance.
Quote of note (Oscar Private Equity): "The plaintiffs' expert does detail event studies supporting a finding that [the company's] stock reacted to the entire bundle of negative information contained in the 4Q01 announcement, but this reaction suggests only market efficiency, not loss causation, for there is no evidence linking the culpable disclosure to the stock-price movement. When multiple negative items are announced contemporaneously, mere proximity between the announcement and the stock loss is insufficient to establish loss causation."
A few items of interest:
(1) With Vigour and Zeal has a post, including a link to a related article in Legal Week, on the filing of derivative actions in U.S. courts against non-U.S. companies.
(2) WSJ Law Blog has coverage of a humorous D. of Minn. decision denying the motion to dismiss in the UnitedHealth securities class action. As noted in the comments to the post, however, the defendants presumably were not amused by the court's heavy reliance on a pleading standard repudiated by the U.S. Supreme Court two weeks ago.
(3) And just in case you cannot get enough of the Stoneridge case, Best In Class has a post on some chatter that appears to have arrived a bit late.
Addition: Regarding the D. of Minn. decision, an alert reader points out that the court subsequently issued an amended opinion reflecting the change in the law (but reaching the same result).
According to an article in the Washington Post this weekend (which has been picked up by a number of other media outlets), the suspense is over. The SEC reportedly has asked the Solicitor General to file an amicus brief in support of the investor plaintiffs in the Stoneridge (a.k.a. Charter Communications) case on scheme liability that will be heard by the U.S. Supreme Court next term.
Two notes:
(1) Although some reports have suggested that the amicus brief will be filed in support of Enron's investors (and the original Washington Post article is not very clear on this point), that appears unlikely unless, as advocated by the attorneys for Enron's investors, the Supreme Court decides to hear the Enron and Stoneridge appeals together.
(2) Presuming the amicus brief is filed, it will be interesting to see if the SEC/Solicitor General deviates in any way from the earlier position on scheme liability taken by the SEC in a 9th Circuit case.
Just when you thought it was safe to read about something else on this blog, here are a few more pieces on the Stoneridge (a.k.a. Charter Communications) case pending before the U.S. Supreme Court.
(1) The Harvard Law School Corporate Governance Blog has a post with further speculation (see here) about whether Justice Alito could be the deciding vote. The post also discusses how the granting of cert in the related Enron's banks case might alter the outcome.
Quote of note: "[I]f the Court grants review in Credit Suisse [the Enron's banks case], it could well mean that Chief Justice Roberts and Justice Alito are inclined to take a narrow view of primary liability, and that The Chief Justice will be in a position to assign the opinion to a wavering Justice Alito. If Credit Suisse is granted, look for the case to be a 5-4 decision, with liability under Section 10(b) not extended to vendors and investment bankers, even where they know the transaction is a sham and will be used to effect a financial fraud."
(2) The Los Angeles Times ran an editorial on Wednesday urging the SEC to support the investor plaintiffs in the Stoneridge and Enron's banks cases.
Quote of note: "So far, the SEC has remained silent. But with its mandate to 'maintain fair, orderly and efficient markets and facilitate capital formation,' the SEC is uniquely suited to speak out when legal interpretations undermine confidence in the stock market's fairness."
(3) Meanwhile, the Washington Examiner has an op-ed urging the SEC to take the opposite position.
Quote of note: "The SEC’s support, expressed through a U.S. government friend-of-the-court brief in Stoneridge, would well tip the balance in the Supreme Court. For the sake of our capital markets and American shareholders, let’s hope the commission does the right thing. The SEC’s mission of 'investor protection' cannot be achieved by further empowering plaintiffs’ lawyers."
The battle to win the hearts and minds of the American people (or at least the SEC) on the issue of scheme liability, which is currently before the U.S. Supreme Court in the Stoneridge (a.k.a. Charter Communications) case, shows no signs of slowing down. This week has seen three publications of note:
(1) In its Tuesday edition, the Wall Street Journal had a feature article (subscrip. req'd) on the pressure being put on the SEC to side with the plaintiff investors.
Quote of note: "[A plaintiffs attorney] won the support of aspiring Democratic presidential candidate and former plaintiffs lawyer John Edwards, who said: 'I urge the SEC to fulfill its historic mission of protecting investors. Silence, or even worse, siding with fraud participants, would be a betrayal of that mission.'"
(2) The Wall Street Journal also has an op-ed (subscrip. req'd) in today's edition urging the SEC to support the defendant corporations.
Quote of note: "Unfortunately, we cannot be certain why the Supreme Court has taken the case, or if it will do the right thing. While Chief Justice John Roberts and Justice Stephen Breyer have spoken of the need for judicial modesty, both have recused themselves from the case. All the more reason for Treasury and the SEC to stand firm and ask the solicitor general to urge the Supreme Court to keep liability circumscribed."
(3) Finally, the Legal Times has an op-ed, written by attorneys who represent investors in a scheme liability case against Enron's banks, urging the Supreme Court to adopt a broad interpretation of the relevant statutes.
Quote of note: "At bottom, Section 10(b) and Rule 10b-5 have long proscribed any scheme or artifice to defraud, as well as any conduct that operates as a fraud on investors. Enron's banks worked hand-in-hand with Enron to design and implement sham transactions with the sole purpose of hiding debt and generating fake revenue. If that's not participating in a scheme to defraud, what else can we call it?"
Bloomberg has a feature article discussing the recent criticisms of the SEC's investor protection efforts. Of particular note for readers of this blog, the article states that Chris Cox, Chairman of the SEC, has denied that the SEC is considering a proposal or rule to allow corporations to mandate arbitration of shareholder claims. (Just last month, the Wall Street Journal reported that the SEC was exploring this proposal.)
The American Lawyer has an article on the possible emergence of U.S.-style securities class actions in Europe. The article notes, based on numbers from the recent issued PwC 2006 Securities Litigation Study, that the number of filings against European companies in U.S. courts has actually fallen over the past few years. On the other hand, more European countries are adopting some form of group litigation.
(1) The New York Sun has an op-ed discussing whether the SEC should allow public companies to arbitrate securities claims. (See this post for earlier coverage of the reform proposal.)
Quote of note: "I'd wager that you wouldn't see much of a share discount at all for companies that decided they'd rather arbitrate suits; you might even see a premium. Allowing an arbitration option would surely be a good market test of the efficacy of securities lawsuits."
(2) The D&O Diary has an interesting post on outside director liability exposure. In particular, the post analyzes a recent settlement in which former outside directors of Just for Feet paid a total of $41.5 million to settle a bankruptcy trustee’s state court breach of fiduciary duty claim. The settlement came after the company's D&O insurance was virtually exhausted in the settlement of a related securities class action.
Quote of note: "The Just for Feet settlement may provide the best example yet of the need for a separate Side A program dedicated solely to the outside directors’ protection -- or better yet, for a separate Individual Director Liability (IDL) policy solely for the benefit of one individual or a group of outside directors. The existence of separate limits that cannot be depleted in resolution of others’ claims is the best protection against the possibility that individuals might be left to face their own liability exposure without insurance protection."
The Washington Post had an interesting article over the weekend on attempts by the plaintiffs' bar to convince the SEC to support their position in the Charter Communications case. The case will be heard by the U.S. Supreme Court next term and addresses the issue of scheme liability.
There is good reason for the plaintiffs' bar to think that the SEC may be sympathetic. In 2004, the SEC filed an amicus brief in a 9th Circuit case urging the court to adopt a broad test for determining when a person's conduct as part of a scheme to defraud constitutes a primary violation that can create securities fraud liability (see this post).
Quote of note: "The approach that state and federal regulators advance in friend-of-the-court briefs may be particularly influential, and both sides are courting the regulators. SEC officials have not yet tipped their hand. But plaintiffs' lawyers and former agency officials expressed concern about a court brief in another securities dispute the agency submitted this year."
At least one of the litigation reform proposals by the Committee on Capital Markets Regulation (aka the Paulson Committee) appears to be getting some traction. A front page story (subscrip. req'd) in today's Wall Street Journal states that the SEC is exploring whether it should allow public companies to contract with their investors to provide for alternative dispute resolutions for securities claims.
Quote of note: "[A]ny move toward arbitration could realign the balance of power between shareholders and corporate managements at a time when that balance has tipped increasingly toward shareholders. It could also limit shareholders' ability to recover money damages or other compensation from corporations. The idea of giving companies the option of arbitrating shareholder disputes is likely to spark fierce opposition from both investor-rights groups and trial lawyers. As a result, there's a good chance that it could fall flat."
While The 10b-5 Daily was on break last week, there were interesting developments in two of the biggest ongoing securities litigations.
(1) On Friday, the U.S. Court of Appeals declined to reconsider its class certification decision in the IPO allocation cases. The Associated Press has an article and the ruling can be found here (via WSJ).
Quote of note (ruling): "The Petitioners, having sought a broad class, are essentially complaining that we failed to narrow their class definition to an extent that might have satisfied Rule 23 requirements. Whatever authority we might have had to undertake that task, we did not think it appropriate to provide legal advice to experienced class-action litigators."
(2) Meanwhile, the plaintiffs in the Enron securities class action are attempting to appeal the denial of class certification by the U.S. Court of Appeals for the Fifth Circuit related to their claims against Enron's banks. A cert petition (via WSJ) was filed with the U.S. Supreme Court on Thursday. Among other things, the petition argues that the case is a "suitable companion" to the Charter Communications case the Court will hear next term. The media coverage includes articles by the Associated Press and Houston Chronicle.
Quote of note (cert petition): "This case is especially significant because it involves the alleged misconduct of banks – major actors in our nation’s financial markets and the banks that Central Bank identified as secondary actors who nonetheless 'may be potentially liable as primary violators under Rule 10b-5 in any complex securities fraud [where] there are likely to be multiple violators.'"
(1) The Wall Street Journal had another op-ed (subscrip. req'd) this week, by Peter Wallison of the American Enterprise Institute, advocating the abolishment of private securities class actions. (For coverage of a similar WSJ op-ed from last month, see this post.)
Quote of note: "Yet the odd mystique of this costly compensation system lives on. Despite all the reports indicting securities class actions, only Mayor Bloomberg and Senator Schumer called for more than a mere study: 'The SEC,' they said 'should make use of its broad rulemaking and exemptive powers to deter the most problematic securities-related suits.' It's doubtbful that the SEC will pick up this baton, but even if it did history shows that courts cannot discipline themselves to distinguish effectively between the well-founded usits and the 'problematic' ones. The only solution is restoring what Congress originally intended - enforcement of Rule 10b-5 only by the SEC."
(2) The D&O Diary has an interesting post on a federal district court decision holding that the settlement of a Section 11 claim (i.e., for misrepresentations in a prospectus or registration statement) was not covered by the company's director and officer liability insurance. In CNL Hotel & Resorts, Inc. v. Houston Casualty Co., 2007 WL 788361 (M.D. Fla March 14, 2007), the court found that the settlement represented a disgorgement by the company of "wrongfully appropriated" money, which did not constitute a “loss” under the relevant policy provision and, therefore, was not insurable under applicable New York law.
Quote of note (The D&O Diary): "In light of the developing case law trend, and now a federal court’s affirmation of the trend, it is going to be indispensable for D & O insurers to clarify within the language of their policy the coverage that policyholders can expect for amounts paid in resolution of Section 11 claims. In that regard, it is critical to note that Judge Presnell specifically stated that 'Section 11 claims are not per se uninsurable.'"
Addition: Thanks to Ted Frank for public links to Wallison's op-ed and a longer article by Wallison on the same topic.
The SEC's decision to file an amicus brief in support of the defendants in the Tellabs case before the U.S. Supreme Court has increased the case's exposure.
The Los Angeles Times had an article in yesterday's edition questioning whether Chairman Cox "is pushing for restrictions on investors' ability to sue." The SEC's brief has given critics a excuse to break out the "fox guarding the henhouse" analogies (again) based on Chairman Cox's sponsorship of the PSLRA when he served in Congress.
Meanwhile, the New York Law Journal has a lengthy preview (subscrip. req'd) of the Tellabs argument. The authors conclude: "At a minimum, it seems likely that the Court will agree with the majority of circuits that innocent inferences must at least to some extent by taken into consideration as part of the context necessary to judging whether a plaintiff's allegations give rise not merely to some inference of scienter but to a 'strong' inference."
Forget about reforming securities class actions, let's just get rid of them. Or so suggests Professor Joseph Grundfest in a provocative Wall Street Journal op-ed (subscrip. req'd) in yesterday's edition. Professor Grundfest is a former SEC commissioner, so his decision to kick securities class actions when they are down (based on number of filings) cannot be dismissed lightly.
The op-ed puts forward a simple, but debatable, theory: "fewer companies are being sued for fraud because there is less fraud." The reason for the decline in corporate fraud is the rigorous post-Enron enforcement activity of the SEC and DOJ, which provides a much greater "deterrent effect" than private securities litigation. Moreover, Sarbanes-Oxley has given the SEC the ability to compensate investors without the high attorneys' fees associated with securities class actions. (A topic the author of The 10b-5 Daily has covered elsewhere.) Accordingly, investors would be better off if they "simply allowed the SEC to control the process."
Quote of note: "As long as the government's enforcement activities remain sufficiently vigorous, the private class-action securities fraud lawsuit can be viewed as an expensive, wasteful and unnecessary sideshow that generates little deterrence and offers questionable levels of compensation. The question then is not why these lawsuits have been shrinking so rapidly in recent months, but when and whether they should exist at all."
A few items from around the web.
(1) The Financial Times had an article yesterday on the status of "scheme liability" in the U.S. courts. The article notes that the issue is currently before the Fifth Circuit in the Enron case and that the U.S. Supreme Court is considering whether to hear an appeal from the Ninth Circuit's decision in the Homestore case.
(2) Lies, Damn Lies, & Forward-Looking Statements (back from hiatus) has a post on the settlement of the opt-out case brought by the California State Teachers' Retirement System (CalSTRS) against Qwest Communications. CalSTRS claims to have recovered "approximately 30 times what it would have received had it participated in the federal class action as a class member." (The 10b-5 Daily's post on the class action settlement can be found here.)
(3) Best in Class has a post on "passive voice" press releases from plaintiffs' firms seeking clients.
(4) The Wall Street Journal had a column (subscrip. req'd) in Friday's edition discussing the effect of options backdating disclosures on a company's stock price (quick answer: generally not much of an effect). Of course, no significant stock price drop usually means no securities class action.
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)
Coverage of the report can be found in the Financial Times (subscrip. req'd), Wall Street Journal (subscrip. req'd), and the New York Times. D&O Diary has a comprehensive summary.
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.
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.)
Earlier this month, the New York Sun ran an interesting feature article on the Time Warner securities litigation. Although the securities class action settled for $2.5 billion last year, some institutional investors who decided to opt-out of the case appear to be doing even better than the class participants. The State of Alaska, for example, recently settled its related state court action against Time Warner for 83% of its estimated damages. Thanks to Point of Law for the link.
Quote of note: "While Alaska may be the most successful opt-out plaintiff thus far, others have also improved their lot by going it alone. A Dutch retirement fund, Stichting Pensioenfonds ABP, won a $20 million settlement from Time Warner earlier this year on what ABP said was $150 million in investment losses. ABP's chief counsel told a Dutch newspaper, Het Financieele Dagblad, that the fund would have gotten only $1 million to $3 million if it had stayed in the class."
Addition: Lies, Damn Lies, & Forward-Looking Statements has a post on this article that offers more details and links on the opt-out cases.
The Committee on Capital Markets Regulation has issued its interim report. While there is no call for an abolition of private securities litigation (as had been suggested in the media), the report does contain a number of findings and recommendations regarding securities class actions that are likely to be controversial.
The basic premise of the "Civil Enforcement" section (pp. 74-84) is that the "public value of the securities class action litigation is questionable." The Committee cites three reasons for this conclusion. First, "virtually all of the costs" of securities class actions fall on the corporation and its insurers, which means they are ultimately borne by the shareholders. Second, securities class actions do a poor job of compensating investors (average settlement of "between two percent and three percent of the investors’ economic losses") and there are high transactions costs (attorney fees, business disruption, etc.). Finally, any recovery is "largely paid by diversified shareholders to diversified shareholders and thus represents a pocket-shifting wealth transfer that compensates no one in any meaningful sense." (More on the issue of diversified shareholders and securities litigation can be found here.)
In keeping with this assessment, the Committee recommends that the SEC: (1) resolve certain judicial conflicts over Rule 10b-5 liability; (2) limit the amount of damages recoverable in private litigation when it has already provided investor compensation; and (3) encourage courts (perhaps with the assistance of new legislation) to stop pay-to-play practices in which plaintiffs’ firms make political contributions in exchange for lead counsel positions. In particular:
Materiality - The SEC should clarify whether a misstatement can be material if its disclosure does not have an "effect on the market," thereby resolving a circuit split between the 9th Circuit (yes) and the 3rd Circuit (no).
Scienter – The SEC should clarify whether the fraudulent intent (i.e., scienter) element of a securities fraud claim can be demonstrated by "recklessness." At least, that is what the Committee appears to be suggesting. The discussion of the current state of the law in this section is simply wrong, with the report stating that there is a split between the Second Circuit’s more strenuous "strong inference of fraudulent intent" standard and the Ninth Circuit’s more lenient "deliberate recklessness" standard. The Committee confuses the Second Circuit’s description of the relevant pleading standard for fraudulent intent (which is mandated by the PSLRA and applicable in every circuit) with the court’s substantive standard for fraudulent intent. In fact, every federal circuit court (including the Second Circuit) has found that recklessness is sufficient to establish fraudulent intent. It is the Ninth Circuit’s "deliberate recklessness" standard, i.e., recklessness so severe that it "strongly suggests actual intent," that is generally believed to be the most strenuous version of this standard in the country. (For more on this issue, the author of The 10b-5 Daily has co-written an article that discusses the differences between the pleading and substantive standards for scienter applied by the various circuits.)
Efficient Market – The SEC should clarify what constitutes an efficient market for purposes of applying the fraud-on-the market theory. The Committee discusses the recent PolyMedica decision in the First Circuit. (The 10b-5 Daily’s summary of the decision and the subsequent history in the case can be found here).
Overlap between SEC and Private Lawsuits – The SEC should "prohibit double recoveries against defendants by requiring that private damages awards be offset by any Fair Funds collections [by the SEC] applied for victim compensation." Interestingly, the Committee suggests that the SEC has the authority to do this pursuant to Section 36 of the Securities Exchange Act, which states that the SEC can "unconditionally exempt any person, security, or transaction from any provision [of the Act]." Although the recommended reform seems like a stretch of the SEC's authority pursuant to Section 36, the Committee does not offer any further discussion of this point. (The author of The 10b-5 Daily provided his take on the overlap issue in a National Law Journal op-ed published last year.)
Prohibit Pay-To-Play – Either through legislation or SEC advocacy in the courts, lawyers that make political contributions to individuals in charge of a state of municipal pension fund "should not be permitted to represent the fund as a lead plaintiff in a securities class action." The Committee notes that the Municipal Securities Rulemaking Board has adopted a rule that prevents pay-to-play in municipal underwriting that could serve as a model for successful reform in this area.
Other recommendations in the interim report would impact securities class actions. They include recommendations that Congress should explore protecting auditing firms from catastrophic loss (p. 88), that the SEC should (a) clarify that an outside director's good-faith reliance on an audited financial statement or auditor report is conclusive evidence of good faith, and (b) reverse its position that indemnification of outside directors for Section 11 damages is against public policy (p. 91), and that public companies should be permitted to contract with their investors to provide for alternative dispute resolutions for securities litigations (p. 109).
The Halliburton securities litigation is back in the news, two years after the S.D. of Tex. rejected a proposed settlement of the case. Forbes has an article on a motion by the Archdiocese of Milwaukee Supporting Fund, which is acting as lead plaintiff in the case, to replace Lerach Coughlin and Scott + Scott as lead counsel.
There has been plenty of news related to the Paulson Committee and its potential securities litigation recommendations over the past two weeks.
(1) John Thain, the head of the New York Stock Exchange, called class action suits "a tax on all companies and ultimately consumers" and expressed support for the Paulson Committee's potential tort reform recommendations. Thanks to Werner Kranenburg for the link to the Financial Times article (via MSN).
(2) Professor John Coffee used his New York Law Journal column (Nov. 16 - subscrip. req'd) to clarify that he did not recommend to the Paulson Committee (as had been reported) that the SEC dis-imply a private right of action under Rule 10b-5. Instead, his more modest proposal is that the SEC "adopt an exemptive rule under § 36 of the Securities Exchange Act of 1934 that would shield a non-trading public corporation from liability for monetary damages under Rule 10b-5." In other words, plaintiffs would have to look to corporate officers and agents (e.g., auditors and underwriters) for their securities fraud recovery. Securities Litigation Watch has a post.
(3) Finally, Treasury Secretary Paulson gave a speech on Monday arguing that excessive regulation and burdensome litigation were prompting companies to choose to list their stock on foreign exchanges rather that U.S. exchanges. According to the New York Times report, Paulson "did not speak about some proposals expected to be made by the two business groups to limit shareholder lawsuits," but did suggest that he was sympathetic to limiting auditor liability.
Will stock buyback programs provide the next basis for securities litigation? They are certainly the topic of the day. CFO Magazine has a feature article discussing whether insiders should be permitted to sell shares while a stock buyback program is in effect. Meanwhile, the New York Times has a column (subscrip. req'd) speculating that some stock buyback programs may be used to increase executive bonus payouts that are contingent on an increase in earnings per share. Thanks to Mike Gumport for the link to the CFO Magazine article.
Quote of note (CFO Magazine): "This June, Audit Integrity, a Los Angeles–based accounting and governance analysis firm, sent a note to clients identifying 16 companies with market capitalizations of at least $100 million that it considers at high risk for fraudulent behavior, including USANA, because the companies have high levels of both stock buybacks and insider selling. Meanwhile, [a prominent plaintiffs' attorney] is putting the finishing touches on a lawsuit he plans to file against 'one of the most high-profile companies in the United States,' along with its CEO, over issues relating to its buyback programs."
The plaintiffs' bar must have been amazed when they opened the Wall Street Journal last week to find Senator Charles Schumer (D - N.Y.) suggesting that something needs to be done about frivolous securities class actions. In an op-ed (subscrip. req'd) written with Mayor Michael Bloomberg, Senator Schumer discusses ways to help New York's financial services industry. Notably, the authors state that the litigation environment for corporations must be improved. Reuters has an article on all of this recent interest in securities litigation reform.
Quote of note (WSJ op-ed): "The total value of securities class-action lawsuits in the U.S. has skyrocketed in recent years, to $9.6 billion in 2005 from $150 million in 1997. The U.K. and other nations have laws that far more effectively discourage frivolous suits. It may be time to revisit the best way to reduce frivolous lawsuits without eliminating meritorious ones."
There has been much more on the Committee on Capital Markets Regulation (a.k.a. the Paulson Committee) and its potential litigation recommendations in the Wall Street Journal this week.
(1) An op-ed (subscrip. req'd) in Monday's edition, written by two Committee members, discussed the Committee's concerns and goals.
Quote of note: "In addition to regulation and accounting standards, the liability system can also affect the competitiveness of U.S. markets. Firms are sometimes confronted with circumstances in litigation, including securities class-action suits, where even a small probability of loss, given the size of claims, could result in bankruptcy. Consequently, companies often must agree to large settlements that result in reduced value for shareholders rather than pursuing a successful outcome on the merits of its case."
(2) An article (subscrip. req'd) in Wednesday's edition discussed the desire of accounting firms to limit the potential liability for their audit work and the Committee's possible recommendations on this issue.
Quote of note: "Recognizing, though, that auditor liability overhaul might be a tough sell on Capitol Hill, the committee may suggest that the U.S. Securities and Exchange Commission come up with a solution, Mr. Scott said. 'The SEC could modify their own rules regarding liability,' he added. One idea under study: Allowing accounting firms to negotiate liability caps with clients, a practice now barred to preserve auditors' independence."
Is it the end of private securities litigation? Not yet, but one could hardly tell given some of the fierce reactions to the possibility that The Committee on Capital Markets Regulation, a private group of business leaders and academic experts, may recommend that the SEC limit the ability of private plaintiffs to bring actions pursuant to Rule 10b-5.
The New York Times had a feature article on the "Paulson Committee" (as it is colloquially known because U.S. Treasury Secretary Henry Paulson provided a favorable quote for its initial press release) this past weekend. Although the main focus of the Paulson Committee appears to be examining the effects of the Sarbanes-Oxley Act, an initial recommendation to the Committee from Professor John Coffee that the SEC consider dis-implying a private right of action under Rule 10b-5 (in some or all cases) is garnering the most attention.
Reaction can be found in a New York Times column and posts in Point of Law, Ideoblog, and Securities Litigation Watch. The 10b-5 Daily offered its views on the problem of SEC/private litigation overlap last year.
Two items from around the web:
(1) The Wall Street Journal has an article (subscrip. req'd) today on efforts by Bernstein Litowitz to remove Milberg Weiss as co-lead counsel and re-open the lead plaintiff/lead counsel selection process in the Merck securities litigation. Merck's motion to dismiss the case is currently pending before the court.
(2) Following up on an earlier post in The 10b-5 Daily concerning the British Petroleum derivative suit filed in Alaska state court, the Financial Times has a column (via a reprint in South Africa's Business Day) on the case, the spread of U.S.-style shareholder litigation, and the potential corporate governance effects on foreign companies.
The fraud-on-the-market theory states that reliance by investors on an alleged misrepresentation is presumed if the company's shares were traded on an efficient market. But what is an efficient market? The PolyMedica securities litigation has offered a thorough examination of this issue.
In considering class certification, the district court originally held (contrary to most other courts) that an efficient market is simply one in which "market professionals generally consider most publicly announced material statements about companies, thereby affecting stock market prices." On appeal, the U.S. Court of Appeals for the First Circuit rejected this definition in a decision - In re PolyMedica Corp. Sec. Litig., 432 F.3d 1 (1st Cir. 2005) - issued late last year. The appellate court held that an efficient market "is one is which the market price of the stock fully reflects all publicly available information." In other words, the market price must respond "so quickly to new information that ordinary investors cannot make trading profits on the basis of such information."
On remand - In re PolyMedica Corp. Sec. Litig., 2006 WL 2776669 (D. Mass. Sept. 28, 2006) - the district court focused on the expert evidence concerning whether there was a "cause-and-effect relationship, over time, between unexpected corporate events or financial releases and an immediate response in [PolyMedica's] stock price." The plaintiffs' expert provided an analysis demonstrating that PolyMedica's stock price moved in response to significant news events on certain days within the portion of the proposed class period in question, but the district court found that this analysis was insufficient to establish either causation or that the news was reflected "fully" and "quickly" in the stock price. Moreover, the district court found defendants' expert evidence that (1) short selling in PolyMedica stock was difficult and (2) the price of PolyMedica stock exhibited positive serial correlation (the direction in which the stock moved on a given day was a statistically significant predictor of how it would move the next day) was sufficient to suggest that the First Circuit's standard for market efficiency had not been met.
Holding: Class certification as to a portion of the proposed class period denied.
Quote of note: "Nothing in [plaintiffs'] analysis tends to show that all reactions to any news event were regularly complete within any given time frame, let alone 'quickly.' . . . It may be true, as [plaintiffs' expert] suggests, that one 'can observe a lot just by watchin,' but Yogi Berra is hardly a competent expert in market efficiency."
The Association of U.S. West Retirees failed to reduce the attorneys' fees in the shareholder litigation over the U.S. West/Qwest merger, but its challenge to the attorneys' fees request in Qwest's $400 million securities class action settlement has been more successful. In a colorful analogy, the Association stated in its court filing that "lead counsel are the mere jackals to the government's lions, feasting after both the United States Securities Exchange Commission and the United States Justice Department made the kill." The district judge evidently agreed. The Rocky Mountain News reports that in approving the settlement the court reduced the proposed attorneys' fees by $36 million (from $96 million to $60 million). Thanks to Securities Litigation Watch for the link.
For more on U.S. securities plaintiff firms representing foreign investors, here are two articles from The Times and the Evening Standard discussing the City of London's apparently unwitting (initially) role in bringing a derivative lawsuit against British Petroleum's officers and directors in Alaska state court.
Quote of note (The Times): "It is rare for British pension funds to take legal action against the companies in which they invest, but American lawyers are increasingly identifying London as a potential new market for aggrieved investors. Some UK-based companies have expressed concern to The Times that these lawyers are trying to export their no-win, no-fee system to Britain."
Securities plaintiff firms are putting a lot of effort into attracting foreign institutional investor clients. Lies, Damn Lies, & Forward-Looking Statements has a post on the latest "cooperation agreement" between a U.S. firm and a German firm. (The relevant press release can be found here.)
In an unusual case, two plaintiff firms have been the subject of a suit alleging that they engaged in legal malpractice in their handling of a securities class action. The securities class action was brought against Bennett Funding Group ("BFG") and settled in 1998 for a total of $139 million. Although no objections were raised to the settlement, members of the class later brought a malpractice class action against the plaintiff firms alleging that BFG's auditor, Arthur Andersen, should have been named as a defendant.
The district court dismissed the malpractice claims. This week, in Achtman v. Kirby McInerney & Squire, LLP, 2006 WL 2720643 (2d Cir. Sept. 25, 2006), the US. Court of Appeals for the Second Circuit affirmed the dismissal, finding that the plaintiff firms' decision not to sue Arthur Andersen was reasonable as a matter of law. The New York Law Journal (subscrip. req'd) has an article on the decision.
Quote of note: "[Counsel for the plaintiff firms] said yesterday he appreciated the irony of two class action firms being sued in a class action. 'They're usually accused of suing every deep pocket in sight,' he said. 'Here they're exercising restraint and they get sued for it.'"
The Wall Street Journal had a curious editorial, entitled "The Milberg Effect," in yesterday's edition. The authors argue: (a) plaintiffs are projected to bring 57 fewer securities class actions in 2006 than in 2005 (based on a recent Cornerstone statistical report); (b) Milberg Weiss is projected to file 56 fewer securities class actions in 2006 than in 2005; and, therefore, (c) it is the Milberg Weiss criminal indictment, rather than "Sarbanes-Oxley or better corporate governance standards," that has led to the overall 2006 decline in filings. The conclusion of the editorial is that these numbers should "provide all the evidence Congress needs to conclude that the only real way to rein in America's runaway legal system is with tort reform that allows redress of genuine wrongs but limits the ability of lawyers to game the system."
Whatever the merits of additional tort reform, somebody should have checked with a securities litigation practitioner before deciding that this argument made sense. The Cornerstone report is referring to the number of companies that have been sued, not to the overall number of securities class action suits that have been brought. It is common for multiple securities class action suits (filed by different law firms on behalf of different investors) to be brought against a single company. These suits are later consolidated and counted, for purposes of statistical analysis, as a single filing or case. There may be a "Milberg Effect" on the number of securities class actions brought this year, especially if that firm's willingness to act as a first-filer means that in its absence some cases are never pursued, but it seems safe to conclude that it is nothing like the one-for-one ratio suggested by the WSJ editorial.
Addition: Securities Litigation Watch takes a whirl at breaking down the numbers (also see the comments section for a discussion about the potential first-filer impact).
The New York Times has an article on the proliferation of shareholder suits related to options backdating. The article discusses the difficulty in bringing a securities class action, as opposed to a derivative suit.
Quote of note: "The class-action suits that allowed lawyers to champion shareholder rights while earning millions in fees from the collapse of companies like Enron and WorldCom have not materialized, even though more than 80 companies are under investigation in the backdating of stock options. Even when it is clear that options grant dates were manipulated, it is less clear how to calculate damage to specific shareholders. And in many cases, the statute of limitations has expired."
(1) Scheme liability continues to be the topic of the moment, with a New York Law Journal column (posted July 20 - subscrip. req'd) declaring Parmalat to be the best S.D.N.Y. securities litigation decision of the past year. The column, by Professor John Coffee, also discusses the recent Ninth Circuit opinion on the scope of scheme liability (a summary of that decision can be found here).
Quote of note: "[T]he new "scheme to defraud" case law could significantly extend the private reach of Rule 10b-5 against persons who only a year ago appeared immune as mere aiders and abettors. One can agree or disagree about the desirability of this result, but the Parmalat decision is carried off with style and authority."
(2) The National Law Journal has an article (posted July 20 - subscrip. req'd) on the recent Congressional hearing for a proposed securities litigation reform bill. The article focuses on the issue of whether it is appropriate to auction off the role of lead counsel in securities class actions.
Quote of note: "Judge Walker testified recently before the House of Representatives subcommittee on capital markets that not only should Bill H.R. 5491 allow judges the option of competitive bidding as a means of selecting lead counsel, but also that competition among law firms should be more intense. 'If anything, this provision should be made even stronger by providing that the court shall not permit a securities class action to proceed unless and until the lead plaintiff has demonstrated that the lead plaintiff has evaluated competing proposals for representation of the class,' Judge Walker said in prepared testimony. "
A quick catch-up on interesting items from the past few days.
(1) On Friday, the New York Times had an article on securities plaintiff firms. The article discusses the stock option backdating cases and speculates about which firm is ready to "assume Milberg's mantle."
(2) Point of Law has some follow-up on the congressional hearing for H.R. 5491, a securities litigation reform bill. A discussion of the legislation can be found here. A reader also points out that in addition to the testimony at the hearing, the AFL-CIO and the Consumer Federation of America apparently submitted statements opposing the bill.
(3) Lies, Damn Lies, & Forward-Looking Statements has a long post (which is full of relevant links) on the efforts being made by securities plaintiff firms to attract foreign institutional investors as clients.
Two columns on securities litigation that bookended the holiday:
(1) An op-ed in the June 26 edition of the Washington Post by Professor Richard Booth (U. of Maryland Law School) posits that diversified investing is the solution to the problem of securities fraud. Professor Booth concludes that all securities class actions should be replaced by derivative actions on behalf of the company.
Quote of note: "The cost of litigation operates as a tax on the returns of diversified investors that subsidizes undiversified investors. Even if undiversified investors have a legitimate gripe, the fact is that about two-thirds of all stock is held by diversified institutional investors, and much of the remainder is held by diversified nonprofit institutions. There is no justification for protecting undiversified investors at the expense of other investors when diversification is free for the taking."
(2) The July 5 edition of the New York Law Journal contains an article (subscrip. req'd) on two recent decisions from the S.D.N.Y. The decisions address when the Securities Litigation Uniform Standards Act of 1998 (SLUSA) does, or does not, pre-empt state class actions alleging misconduct in the securities industry.
Quote of note: "In sum, through differing outcomes, Felton and Paru appear to reinforce an emerging principle: if, at its core, the state securities class action depends on an allegation of misrepresentation or omission, SLUSA will preempt it, whatever legal theory the plaintiff may invoke; if it does not, SLUSA preemption will not lie."
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).
As a consequence of the Milberg Weiss indictment, several Congressmen have introduced a bill (H.R. 5491) that would amend the Private Securities Litigation Reform Act.
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 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.'"
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.'"
On a personal note, Lyle Roberts (the author of The 10b-5 Daily) has joined the Washington, D.C. office of LeBoeuf, Lamb, Greene & MacRae, LLP. The firm's press release can be found here.
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.
A column (via law.com) in the May 18 edition of the New York Law Journal discusses the post-Dura case law on loss causation and what it means for corporate disclosures. The author, Professor John Coffee, speculates that companies may be tempted "to write press releases in a code that discloses consequences, but not causes" so as to avoid creating a direct connection between the revealing of a misrepresentation and a stock price decline. Note that some of the judicial decisions discussed in the column previously have been summmarized on The 10b-5 Daily, including the D.E. & J. Limited Partnership and Cornerstone Propane cases.
Quote of note: "In any event, one prediction seems particularly likely: the old-fashioned corrective press release may gradually give way to a series of more nuanced communications, often made through third parties, that hint at a problem and intend that the market recognize the problem slowly and incrementally."
Options backdating is the new new thing in corporate scandals, with speculation that there may be a need for a federal taskforce to oversee all of the various U.S. Attorney offices that have issued subpoenas to companies on this issue. To date, shareholder litigation over these alleged practices appears to be limited to derivative suits (see, for example, this announcement from earlier this week). In a Forbes column posted this morning, however, former SEC Chairman Harvey Pitt notes that any improper conduct may "require a [financial] restatement, with class action litigation in the offing."
Addition: D&O Diary points out that a few securities class actions related to options backdating have already been filed. See this post.
Regular readers know that it has been the practice of The 10b-5 Daily not to post about the legal troubles of Milberg Weiss - a subject matter that is arguably outside of the scope of this blog. A number of excellent legal blogs cover white collar crime issues and have extensively posted about the recent criminal indictment of the firm (see, e.g., the WSJ Law Blog and White Collar Crime Prof Blog).
That said, the indictment of one of the leading securities class action plaintiff firms in the country will inevitably have ripple effects on this area of the law. Especially given that Milberg Weiss is, according to ISS's Securities Class Action Services (SCAS), lead or co-lead counsel in 95 active shareholder suits. Accordingly, The 10b-5 Daily will post relevant articles discussing the effect of the indictment on pending or previous securities class actions.
A recent roundup includes articles from The American Lawyer and The Recorder (via law.com) discussing Milberg Weiss' ability to continue as lead counsel in current cases and an article from Reuters suggesting that it is unlikely that companies who have settled with Milberg Weiss in cases cited in the indictment will bring legal actions to recover the funds.
The Dura decision by the Supreme Court left little doubt that in-and-out traders (i.e., investors who both bought and sold their shares during the class period) will have difficulty establishing the existence of loss causation. At least one court has confirmed this reading of the case in the context of class certification proceedings. In In re Cornerstone Propane Partners, L.P. Sec. Litig., 2006 WL 1180267 (N.D. Cal. May 3, 2006), the court found that "plaintiffs who sold their stock before July 21, 2001, when the first corrective disclosure occurred, did not suffer any loss causally related to the defendants' alleged misrepresentations." Accordingly, the court excluded these plaintiffs from the definition of the class.
It is important to note that other courts, even pre-Dura, have come to a similar conclusion in the context of evaluating potential lead plaintiffs (see, for example, this post). Moreover, while the decision is interesting, removing in-and-out traders from the class is unlikely to have much of a practical effect on a securities class action other than reducing, by some amount, the potential damages.
Addition: There is a press release from defense counsel in the Cornerstone case noting that the decision "appears to be the first of its kind."
Addition: A reader points out that a post-Dura class certification decision issued earlier this year in the Eastern District of Virginia reaches the opposite result. See In re BearingPoint, Inc. Sec. Litig., 232 F.R.D. 534 (E.D.Va. 2006) ("In sum, because in-and-out traders may conceivably prove loss causation, they are appropriately counted as members of the proposed class.") Thanks to Andrew Brown for the cite.
(1) Securities Litigation Watch has posted the SCAS 50, which "lists the top 50 plaintiffs' law firms ranked by the total dollar amount of final securities class action settlements occurring in 2005 in which the law firm served as lead or co-lead counsel." At the top of the list, by a considerable margin, are Bernstein Litowitz Berger & Grossmann and Barrack, Rodos & Bacine.
(2) Lies, Damn Lies, & Forward-Looking Statements has a post on the emerging practice of law firms and their clients "putting out press releases in advance of the deadline for filing a lead plaintiff motion, often indicating their intention to file a lead plaintiff motion."
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.
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.
(1) The New York Law Journal has a column (via law.com - subscrip. req'd) in this week's issue on the Supreme Court's decision in the Dabit case.
(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.
There has been a considerable amount of media and blog coverage of the Dabit decision. Here is a partial roundup:
Media - Articles can be found in Bloomberg, the Financial Times, the New York Times, and the Washington Post.
Blog - Commentary, with some emphasis on the federalism implications of the decision, can be found on Concurring Opinions, Conglomerate, Ideoblog (here, here, and here), PointofLaw.com, and ProfessorBainbridge.com.
The possibility that a number of companies have been backdating stock option grants to increase their value was the subject of a Wall Street Journal feature article (subscrip. req'd) this past weekend. The article notes that the practice "while not illegal in itself, could result in false disclosure." As a result, a company may be "vulnerable to an allegation of securities fraud." For some blogosphere commentary, see these posts from ProfessorBainbridge.com and Truth on the Market.
A recent district court decision discusses whether a lead plaintiff should be required to disclose its confidential sources as part of the discovery process. The court in In re CIGNA Corp. Sec. Litig., 2006 WL 263631 (E.D.Pa. Jan. 31, 2006) held that the defendants were entitled to the names of all individuals known by the plaintiff to have relevant knowledge, but the plaintiff was not required to specifically identify the confidential sources relied upon in the complaint. The court did note, however, that it would consider revisiting its decision if the defendants were presented with an overwhelming list of names.
Quote of note: "Of course, the recent identification of 'Deep Throat,' whose provision of information to the Washington Post led to the infamous Watergate scandal, also reminds us of the value of the free flow of information in a democratic society without fear of disclosure or retribution. However, as the D.C. Circuit's decision in the case of Judith Miller shows, the ability to avoid disclosing a confidential informant is not absolute; in most instances there is indeed a balancing test. How should the optimal balance be determined in this case?"
The U.S. Chamber Institute for Legal Reform has released a paper entitled Securities Class Action Litigation: How is the System Working Ten Years After Enactment of the Private Securities Litigation Reform Act? The paper surveys various statutory, judicial, and policy issues that have arisen in this area of the law.
The Association of U.S. West Retirees is continuing its campaign against the attorneys' fees being paid out in various settlements related to Qwest's securities litigation (U.S. West and Qwest merged in 2000). Although the organization failed to reduce the attorneys' fees in the shareholder litigation over the U.S. West/Qwest merger, it is back again, with some new colorful analogies, to challenge the attorneys' fees request in Qwest's recent $400 million securities class action settlement. The Rocky Mountain News has an article.
Quote of note: "'It is all too obvious that lead counsel are the mere jackals to the government's lions, feasting after both the United States Securities Exchange Commission and the United States Justice Department made the kill,' [counsel for the Association of U.S. West Retirees] wrote. But 'unlike the jackal, they seek the lion's share' of the settlement."
The Association of U.S. West Retirees is continuing its campaign against the attorneys' fees being paid out in various settlements related to Qwest's securities litigation (U.S. West and Qwest merged in 2000). Although the organization failed to reduce the attorneys' fees in the shareholder litigation over the U.S. West/Qwest merger, it is back again, with some new colorful analogies, to challenge the attorneys' fees request in Qwest's recent $400 million securities class action settlement. The Rocky Mountain News has an article.
Quote of note: "'It is all too obvious that lead counsel are the mere jackals to the government's lions, feasting after both the United States Securities Exchange Commission and the United States Justice Department made the kill,' [counsel for the Association of U.S. West Retirees] wrote. But 'unlike the jackal, they seek the lion's share' of the settlement."
Following up on his Wall Street Journal editorial from a few weeks ago, Professor Moin Yahya (University of Alberta) is debating Professor Larry Ribstein (University of Illinois) on whether short selling plaintiffs are engaged in illegal conduct. PointofLaw.com has all the action.
Dr. David Tabak of NERA Economic Consulting has written a working paper on the relationship between risk disclosures and damages in securities class actions. CFO.com has an article discussing the paper.
Quote of note (CFO.com): "Given the increasing potential for shareholder lawsuits, Tabak believes that top managers should give greater weight to the option of revealing the possibility of bad news before it becomes a certainty. The realization of such perils as an adverse interest-rate movement, a product failure, or an impending government probe 'could easily lead to a large decline in a company's stock price' — a greater decline, he asserts, than what would have occurred earlier if the company had merely disclosed the probability that an event would take place."
Business Week has an article on the increasing number of institutional investors who are opting out of securities class actions and filing their own suits. The article discusses the Time Warner and WorldCom litigations.
The Wall Street Journal has an op-ed (subscrip. req'd) today discussing the effectiveness of the PSLRA. The author is Kenneth Lehn, a professor and former chief economist for the SEC.
The op-ed argues that the PSLRA has not discouraged the bringing of securities class actions. To the contrary, the percentage of listed companies subject to suit has increased and settlement values are up. The author summarizes the results of a number of recent studies.
After this rigorous opening, however, the op-ed suggests three modest PSLRA reforms that do not really go to the identified problem. First, defendants should be allowed to appeal denials of motions to dismiss. Second, damages should not be calculated using aggregate models. Finally, investors who are fully compensated for their losses by SEC distributions pursuant to the Fair Funds program should not be allowed to collect additional damages in private litigation.
Even assuming that these proposed reforms were worthwhile, it is hard to see how they would have any significant effect on the number of filings. What is missing, one might suggest, is a proposed reform addressing the economic incentives driving plaintiffs' attorneys to bring securities class actions.
In case you missed it, which would be easy to do since it appeared in the Saturday edition of the Wall Street Journal, Professor Moin Yahya had an op-ed (subscrip. req'd) decrying the relationship between short sellers and the securities litigation plaintiffs' bar. The op-ed discusses a few cases in which short sellers appear to have profited by sponsoring securities fraud suits against companies (including the Terayon case, discussed in this post from 2004).
Quote of note: "Plaintiffs should be deemed insiders until they announce their intention to sue or commence the lawsuit. Furthermore, any hedge funds that deal with plaintiffs or their lawyers should disclose their dealings prior to any short-selling. The SEC has had no compunction in the past targeting fraudulent practices, and the short-selling plaintiffs should not be treated any differently."
Professor Elliott Weiss, a well-known securities law expert, is the author of a law review article ("Let the Money Do the Monitoring: How Institutional Investors Can Reduce Agency Costs in Securities Class Actions") that was the basis for the PSLRA's lead plaintiff provisions. In an interesting career change, Professor Weiss has joined a prominent securities class action plaintiffs' firm. Securities Litigation Watch has an interview.
(1) The Boston Business Journal has an article on securities class action litigation trends. The article suggests that the recent rise in financial restatements may lead to a boom in filings.
(2) The Chicago Tribune provides a lengthy profile of Daniel Fischel, a law professor and leading expert witness in securities cases. Fischel will be testifying on behalf of Enron's former CEO at his criminal trial.
The National Law Journal has an article on the widening exposure of law firms in securities class actions. Although the Supreme Court's prohibition on aiding and abetting liability in private securities fraud actions has generally shielded law firms, in some cases courts have found that the law firms acted as primary violators. Plaintiffs have added fuel to that fire by arguing that even if a law firm did not make (or substantially participate in) a misrepresentation to the market, it can be held liable as a primary participant in a fraudulent scheme. (For more on scheme liability, see this post.)
This week's Economist has an article (subscrip. req'd.) on the failure of many investors, including institutional investors, to file claims in securities fraud settlements. The article notes that institutional investors may be "violating their fiduciary responsibilities when they do not try to get their money" and could be the subject of "class-action suits to come." An easy prediction - especially since those suits have already been around for a year.
Quote of note: "A study by James Cox, a colleague of Mr McGovern's at Duke, of 118 securities class-action suits between 1995 and 2002, published in the Stanford Law Review last month, concludes that 72% of institutions never claim their full share of the proceeds. Mr Cox offers several explanations: institutions' distaste for a form of litigation that, as they see it, benefits mainly lawyers; low expected gains; and the cost and hassle of claiming."
In-House Counsel has an overview of the recent trends in court decisions on director and officer liability insurance coverage. In particular, the article addresses the increasing number of cases in which alleged misrepresentations in the insurance application (usually involving financial information that a company is forced to later restate) have led insurers to rescind their policies.
Quote of note: "The remedy of rescission is a response to corporate fraud. The very reason corporations seek outside directors is to attempt to pre-empt any such fraud. Proliferation of the rescission remedy as to innocent directors and officers will discourage qualified outside directors from accepting such positions, thereby increasing the very conduct the rescission remedy seeks to discourage."
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?"
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."
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.
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.
MarketWatch reports that the Oracle derivative settlement has received court approval. Under the original terms of the settlement, the CEO of Oracle agreed to pay $100 million to charity on behalf of the company, while the company was to pay $22.5 million in legal fees to plaintiffs' counsel. The proposed settlement came under criticism, with the court expressing concern over the fact that Oracle, the presumed beneficiary of the settlement, would be paying the legal fees. The approved settlement provides that the CEO of Oracle will make both payments.
Fortune has an article on Supreme Court nominee Judge Samuel Alito's record in business cases. The article briefly discusses a securities class action decision that was favorable for the defendant company.
Quote of note: "In a shareholder class action suit brought against Burlington Coat Factory after its stock price plummeted, Alito’s opinion came down on the side of the company, but in a nuanced way. 'It suggests that he’s not particularly hostile to securities plaintiffs and many judges are,' says David Hoffman, who teaches corporate law at Temple University."
As a general matter, claims under the '33 Act may be brought in federal or state court and cannot be removed. There is a continuing split, however, over whether the Securities Litigation Uniform Standards Act of 1998 ("SLUSA") created a removal exception for '33 Act securities class actions (e.g., misstatements in a prospectus) brought in state court. The Second Circuit says that it did, but other courts have disagreed. In the latest decision on the issue, Lowinger v. Johnston, 2005 WL 2592229 (W.D.N.C. Oct. 13, 2005), the court found that removal pursuant to SLUSA was proper.
The October 21 edition of the New York Law Journal has a roundup (regist. req'd) of recent decisions on the applicability of the SLUSA discovery stay provisions to parallel state court derivative actions. The authors find that the trend in the case law is against imposing a discovery stay in this situation, but it is worth noting that there has been some recent contrary authority that is not discussed in the article.
Quote of note: "Thus, of the eight cases analyzed, [six] denied a stay of discovery in the derivative action, frequently with the proviso that the discovery would not be shared with the federal securities action. One stayed discovery based upon the derivative action counsel's stated intent to share the fruits of that discovery with the federal securities action. Only one stayed discovery despite the absence of evidence of collusion and where the derivative complaint was filed a year before the federal securities complaint."
The U.S. Chamber Institute for Legal Reform released a study and related article this week on securities class action litigation. The lead author on both papers is Anjan V. Thakor, a professor at the Olin School of Business at Washington University in Saint Louis.
(1) "The Economic Reality of Securites Class Action Litigation," a study done in conjunction with Navigant Consulting, finds that large institutional investors generally break even from their investments in stocks impacted by fraud allegations because the losses resulting from ill-timed purchases of inflated shares of one company are, over time, largely offset by financial gains generated from well-timed sales of inflated shares of a different company. As a result, institutional investors are often overcompensated as the result of securities fraud litigation. Less diversified investors (i.e., individual investors) are at greater risk of losing money as the result of securities fraud because they lack the natural "hedge" of institutional investors.
(2) "The Unintended Consequences of Securities Litigation" examines the financial impact of securities litigation on defendant companies and their stock holders. The article finds that the mere filing of a securities class action lawsuit on average results in a 3.5% drop in the defendant company's equity value. Moreover, the economic losses to a defendant company caused by securities fraud litigation are likely to far exceed the gains to the plaintiffs (especially for smaller companies).
The study and article can be found here. Securities Litigation Watch has a number of posts discussing the study (which uses settlement data from SCAS).
In this interview with the Toronto Globe and Mail, the CEO of Deloitte Touche wonders whether investors are asking too much of company auditors.
Quote of note: "He said investors expect a level of detail that audits are not designed for, and expect a certification to assure the company's financial health when it simply is meant to attest to the accuracy of the financial statements, based on information provided by the company. Auditors are now being held responsible for failing to detect outright fraud perpetrated by several company insiders who go to great lengths to hide their illicit activity, he said."
The author of The 10b-5 Daily has an op-ed in The National Law Journal this week on the overlap between the SEC's Fair Funds program and private securities litigation.
The PSLRA states that securities class action plaintiffs, within 20 days of filing a complaint, shall publish a notice advising the proposed class of the suit. After the publication of this notice, it is not uncommon for other plaintiffs' firms (who have not filed complaints) to publish similar notices in the hopes of attracting a client who can be put forward as a lead plaintiff candidate. Not surprisingly, as discussed in this post on Securities Litigation Watch, the initial plaintiffs' firms do not care for this practice. (Click here for more on the battle of the press releases from last June.)
France has been considering the implementation of a class action system. Those plans are coming under criticism, however, as at least one French attorney (who recently filed a suit against Vivendi on behalf of shareholders) looks to the Internet to recruit clients. The Associated Press has an article.
Section 304 of the Sarbanes-Oxley Act of 2002 provides that a company's CEO and CFO must disgorge certain bonuses, equity-based compensation, and trading profits if the company is required "to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws." Although Congress did not create an express private right of action in the statute, recent securities class actions and derivative suits often include a tag-along Section 304 claim.
The Legal Intelligencer reports (via law.com - free regist. req'd) that a federal judge finally has had the opportunity to address whether private litigants, as opposed to the SEC, can bring a Section 304 claim. In a derivative suit brought against Stonepath Group in the E.D. of Pa., Judge Dalzell has ruled that Congress did not intend to create an implied private right of action. The court found that another Sarbanes-Oxley provision expressly creates a private right of action, leading to the conclusion that Section 304's silence should be interpreted as restricting enforcement of the statute to the SEC. The case is Neer v. Pelino - a Westlaw cite will be added to this post when available.
Addition: Neer v. Pelino, 389 F.Supp.2d 648 (E.D.Pa. 2005).
The Recorder has an article (via law.com - free regist. req'd) by Michael Tu on the increase in securities class action trials.
Quote of note: "The varying results from these trial verdicts gives both plaintiffs and defendants reason to believe that they can, under the right circumstances, take their cases to trial and win. Given that increasingly aggressive settlement postures now being taken by plaintiffs are decreasing the defendants' relative risks of going to trial in many cases, defendants are less likely to settle when they believe they have a defensible case."
The Wall Street Journal reports (subscrip. req'd) that the state court judge presiding over the Oracle derivative case has temporarily declined to approve the proposed settlement. The CEO of Oracle agreed to pay $100 million to charity on behalf of the company, while the company will make a payment of $22.5 million in legal fees to plaintiffs' counsel. The terms of the settlement have come under criticism.
According to the article, the judge "seemed favorably disposed to the general outlines of the deal, but said he wanted more testimony about why Oracle shareholders should bear the cost of . . . legal fees." The next scheduled hearing is on November 15.
The Supreme Court has granted cert in the Dabit case (2d. Cir.) and will address the scope of the Securities Litigation Uniform Standards Act of 1998 ("SLUSA").
SLUSA preempts certain class actions based upon state law that allege a misrepresentation in connection with the purchase or sale of nationally traded securities. The issue before the Supreme Court is the application of the "in connection with" requirement. In particular, the court will resolve the circuit split between the Second and Seventh Circuits over whether SLUSA preemption applies to claims brought solely on behalf of persons who were induced to hold (but not purchase or sell) securities.
The 10b-5 Daily has posted frequently on this issue, including posts on the underlying Second Circuit opinion in the Dabit case finding that SLUSA only applies to purchaser/seller claims and the Seventh Circuit's opinion in the Putnam Funds II case reaching the opposite conclusion. For a cite to an article discussing the circuit split and its ramifications, see this post.
The Rocky Mountain News has another article on the attorneys' fees challenge in the $50 million settlement of the shareholder class action related to the merger of Qwest Communications and U.S. West. Having suggested that the settlement stunk "like a three-day-old unrefrigerated dead fish" (see this post), it is perhaps not surprising that the Association of U.S. West Retirees is pursing an appeal of the denial of its fees challenge.
Mondaq's has published a law firm summary of the new securities class action legislation set to go into effect in the Canadian province of Ontario. (The 10b-5 Daily has recently posted about the legislation.)
Quote of note: "[T]he Ontario regime contains two measures to reduce the potential for strike suits (although it remains to be seen how successful these measures will be). First, a plaintiff is required to obtain leave of the court before bringing a lawsuit, and the court will grant leave only if it is satisfied that the suit is being brought in good faith and has a reasonable prospect of success at trial. Second, the court must approve any proposed settlement of a lawsuit (this is also true of an SEC Rule 10b-5 lawsuit that is brought as a class action)."
The New York Times and San Jose Mercury News have opinion columns today questioning the propriety of the Oracle derivative settlement announced earlier this week. The CEO of Oracle agreed to pay $100 million to charity on behalf of Oracle, with an additional payment of $22.5 million in legal fees to plaintiffs' counsel.
Quote of note (Times): "John C. Coffee Jr., a professor of securities law at Columbia University, is not persuaded justice was served. He suggested that it 'would be fairer if the plaintiffs' attorneys would take their fee in the form of a charitable contribution that Mr. Ellison would make in their name to charities of his choice.' Perhaps, he mused, Mr. Ellison would choose a charity that promotes tort reform."
Quote of note II (Mercury News): "There's certainly a long history of Silicon Valley tycoons giving less than full respect to the rights of shareholders. Whether this justifies such an unusual settlement is debatable. Either way, it's going to be a tough call for Judge Schwartz."
The derivative litigation surrounding alleged insider trading by Larry Ellison, the CEO of Oracle, has taken a surprising turn. (The 10b-5 Daily has previously discussed the contradictory judicial decisions over this trading in a post entitled "Is A Billion Dollars In Stock Sales Significant?") The New York Times reports that Mr. Ellison will pay $100 million to charity to resolve one of the two derivative cases pending in California state court. The attorneys for the derivative plaintiff will receive a separate payment of $22.5 million.
Quote of note: "'I've never heard of anything, structured from the beginning as a settlement this large, going to a charity,' said Michael A. Perino, a law professor at St. John's University School of Law. Typically, Mr. Perino said, a derivative action results in a payment to the company."
Securities class actions brought in U.S. courts by foreign investors? Lots of them. Securities class actions brought in U.S. courts against foreign companies? Commonplace. But how about a securities class action brought in a U.S. court against a foreign state? Now we're talking.
In Aguayo v. Republic of Italy, 05 CV 7717 (S.D.N.Y.), filed last week, the plaintiff has brought a suit against Italy and the underwriters of its debt securities issued in this country. The complaint alleges that the relevant registration statements "understated Italy's debt, so that Italy could report that it complied with the European Union requirement that debt be limited to 3% of gross domestic product."
Thanks to Pietro Adami for sending in the complaint, which can be found here.
As previously discussed in The 10b-5 Daily, the state of Ohio has pursued a strategy of supplementing pending securities class actions with its own individual suits. That strategy appears to have paid off, at least in the WorldCom case. Columbus Business First reports that Ohio, on behalf of its pension funds, has agreed to a $94 million settlement with individuals and banks it alleged participated in the WorldCom securities fraud.
Quote of note: "The litigation was initiated by former Ohio Attorney General Betty Montgomery, who split with several states involved in a federal class-action lawsuit against WorldCom and its executives in September 2002. At the time, Montgomery said she made the move because Ohio was unable to gain lead plaintiff status in the federal case."
On Friday, the Wall Street Journal had a front-page story (subscrip. req'd) on the increase in foreign investors acting as lead plaintiffs in U.S. securities class actions. (A related trend is the rise in suits filed against foreign companies listed on U.S. exchanges.)
Quote of note: "The tort bar's newfound interest in overseas clients -- in particular, those involved in securities litigation -- is driven by a broader phenomenon: the globalization of business and investing. In U.S. securities cases, judges are required to tap shareholders with the largest losses as the lead plaintiffs. Increasingly, these shareholders are based overseas, from pension funds to hedge funds and private-equity players."
Quote of note II: "One [foreign investor bringing a suit in the U.S.] is retired tire-company executive Markus Blechner. Last year, when DaimlerChrysler AG paid $300 million to settle allegations it mislead U.S. investors, the Swiss national received nothing because he had purchased his shares in the auto maker on a Swiss exchange. . . . 'I thought, 'That's not fair. Don't I deserve to get paid, too?' recalls Mr. Blechner. He and two Austrian investment funds are now suing the auto maker in U.S. federal court in Delaware. 'Why not? It doesn't cost me anything,' Mr. Blechner says."
As noted in The 10b-5 Daily late last year, the Canadian province of Ontario is set to implement new securities class action legislation. The most significant change is the creation of a broader private right of action for shareholders who purchased their shares in the secondary market. The Toronto Globe and Mail had an article in yesterday's edition discussing the legislation and the need for Canadian companies to implement new disclosure policies in response to the increased litigation risk.
Quote of note: "Until now, investors who bought shares on the secondary market were able to sue only by alleging outright fraud as opposed to mere negligence. They also had to prove they relied on the misrepresentation when they bought or sold shares, an argument challenging to prove in court. By contrast, the new legislation makes no such stipulation, automatically assuming the plaintiff relied on the information. It is mainly for these reasons that a coalition of companies, including Alcan Inc., had opposed the bill, which was in the works for years. Those objectors pointed to the United States where, by contrast, plaintiffs must demonstrate that a defendant knowingly made a misleading or false statement."
Corporate Counsel has a short article (via law.com - free regist. req'd) on the incentives some institutional investors are offering their counsel to obtain direct recoveries from individual defendants.
Quote of note: "Christopher Waddell, general counsel of the California State Teachers' Retirement System, said that he uses both bounty and sliding-scale fees in order to 'incentivize' his outside counsel to go after personal assets. CalSTRS, the nation's third-largest public pension fund, has promised its lawyers a 2.5 percent bounty, plus an undisclosed fee, in a pending suit against the former directors of WorldCom."
The Associated Press has a column deploring the tax deductibility of securities class action settlements.
Quote of note: "For some companies, federal and state tax deductions will amount to as much as 40 cents on every dollar they pay to settle investors' claims. And given all the major settlements announced this year from the likes of Time Warner Inc., Citigroup Inc., JPMorgan Chase & Co. and many others, that quickly adds up."
The New York Law Journal has an overview (via law.com - free regist. req'd) of recent Delaware court decisions addressing the rights of corporate directors and officers to indemnification and the advancement of attorneys' fees and litigation expenses.
The Globe and Mail reports that investors are planning to bring a securities class action against the Canadian Imperial Bank of Commerce ("CIBC"). The proposed basis for the suit is noteworthy: the bank allegedly misled its investors over the cost of its settlement of the claims brought against it in the Enron securities class action. While CIBC had set aside a $300 million reserve for the settlement, it eventually settled two weeks ago for $2.4 billion.
Quote of note: "The precise size of the class action against CIBC has not been determined, but it will likely seek damages equivalent to the amount of the Enron settlement, which has helped to erase approximately $3.3-billion (Canadian) of CIBC's market value in the past two weeks, the source said."
The National Law Journal has a feature story on the recent increase in securities class action trials. The article suggests two possible reasons for the change: (1) an increase in the size of settlements, thus increasing the willingness of defendants to risk a trial; and (2) greater sophistication in how attorneys prepare for trial (e.g., using mock trials to hone their arguments).
Quote of note: "Ron Miller, an economist at NERA Economic Consulting in New York, suspects that the cases with bigger market losses are more likely to go to trial because of the cost-benefit analysis. Trials are expensive, and a small case is not worth anyone spending all that time or money in court. 'My suspicion is that there have been so few of these trials that a few people have gotten the same idea at the same time; it is time to test the waters,' he said."
The New York Times reports that Representative Chris Cox, the President's nominee to head the SEC, had a confirmation hearing today before the Senate Banking, Housing and Urban Affairs Committee. He is expected to be confirmed, but did face questions about his role in sponsoring the PSLRA.
Quote of note: "Mr. Cox said many advocates for and against him were wrongly assuming that he would be lax in protecting shareholders because of his work on the 1995 securities law. 'I view that legislation today as I did then - and as Senator Stevens described in his introduction of me - it's a vital part of the regime to protect shareholders,' Mr. Cox said."
Two interesting articles on securities fraud issues:
(1) This month's issue of the Wall Street Lawyer (Vol. 9, No. 2 - July 2005) has an article on two circuit splits concerning the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"). In "Showdown Over SLUSA," the authors (Greg Harris and Christian Word) discuss the splits between the Second Circuit and Seventh Circuit over: (a) whether SLUSA preempts "holder" cases in which the plaintiff class consists entirely of investors who neither bought nor sold securities during the alleged class period; and (b) whether a district court's decision to remand an action removed to federal court under SLUSA is appealable. The authors speculate that this double-split "raises the prospect of Supreme Court intervention and the high court's first decision addressing SLUSA." (The 10b-5 Daily's discussion of the splits can be found here and here.)
(2) This month's issue of the Securities Reform Act Litigation Reporter (Vol. 19, No. 4 - July 2005) has an article providing an overview of the securities class actions that have gone to trial since the enactment of the PSLRA. In "Ten Years After the Reform Act: Trends in Securities Class Action Trials," the author (Michael Tu) finds that a total of seven cases have been brought to a trial verdict during this period, with only four cases involving claims based on post-Reform Act conduct. The Securities Litigation Watch has been following this issue closely and has both a handy list of the cases and a link to the article.
The 10b-5 Daily has previously posted about a petition filed in New York state court against the plaintiffs' law firms that settled the Computer Associates securities class action. Texas billionaire Sam Wyly is seeking the discovery collected in the case and argues that the firms have breached their fiduciary duty to him by not granting access to the materials because, as a CA shareholder, he was effectively a client of the firms until he declined to participate in the settlement.
The plaintiffs' law firms removed the case to federal court, arguing that the petition raised numerous federal questions, including "whether under the PSLRA lead counsel represents the class as a whole or individual class members." In Wyly v. Milberg Weiss Bershad & Schulman, 2005 WL 1606034 (S.D.N.Y. July 8, 2005), the court disagreed, finding that none of the cited reasons were sufficient to find federal jurisdiction, and remanded the case back to state court. The court declined, however, to award Wyly any attorneys' fees for fighting the removal, noting "the dubious nature of petitioner's cause of action and the surrounding circumstances."
Why has the Supreme Court declined to hear cases that would clarify the PSLRA? Business Week has a "news analysis" on the Supreme Court's reluctance to take cases in "vital areas such as antitrust, environmental, intellectual-property, securities, and tax law." In particular, the article cites the varied application of the PSLRA's heightened pleading standards as a "prime example of the legal confusion that the Supreme Court has allowed to fester."
The article does not state how many cert petitions involving interpretations of the PSLRA the Supreme Court has rejected. That said, anecdotal evidence abounds. A recent example is the Supreme Court's decision not to hear the Baxter case, an appeal from a Seventh Circuit decision that created a circuit split over the PSLRA's safe harbor for forward-looking statements.
The Wall Street Journal had a feature article (subscrip. req'd) last week on the SEC's efforts, pursuant to Section 308 of Sarbanes-Oxley (the "Fair Funds" provision), to pay out some of the large civil penalties it has collected to investors. The article focuses on the logistical challenges of the WorldCom case, where tracking down all of the injured investors and sorting out their claims is expected to take close to two years.
Quote of note: "Regulators are looking for cheaper and faster ways to get money back to investors. While the Fair Funds program was set up to be separate from private class-action lawsuits, the SEC is moving to work more closely with trial lawyers and has hitched several of its Fair Fund efforts to related class-action settlements that cover a similar set of investors. SEC funds have been combined with class-action settlements in about a half-dozen cases, including the agency's $150 million settlement with Bristol-Myers Squibb Co. and its $25 million settlement with Lucent Technologies Inc."
The June issue of The Review of Securities & Commodities Regulation (Vol. 38, No. 11) contains an excellent overview of the law surrounding the use of confidential sources. The article, entitled "Anonymous Sources in Securities Class Action Complaints," is authored by John Henn, Brandon White, and Matthew Baltay and provides a circuit-by-circuit analysis.
No sooner does France announce that it may permit class actions than the first securities class action appears. Reuters reports that a French lawyer has launched a class action against Vivendi Universal on behalf of small shareholders. The company already faces a similar suit in the U.S.
Quote of note: "'Until now, no one has had the courage to do this' in France, Canoy told Reuters. 'But why can the Americans do certain things and not the French?'"
Some miscellaneous items that have been piling up in The 10b-5 Daily's mailbox and around the web:
1) There is an interesting commentary, entitled "The Incoherent Jurisprudence of the PLSRA Discovery Stay," in the May 18, 2005 issue of the Andrews Securities Litigation and Regulation Reporter (Westlaw cite: 11 No. 1 ANSLRR 2). The author (Jesse Weiss) examines the applicability of the stay where: (a) defendants have produced documents to government agencies; (b) plaintiffs have brought state law claims in addition to federal securities fraud claims; or (c) there are parallel proceedings in state or federal court.
(2) Securities Litigation Watch tries to track down the elusive answer to the following question: exactly how many securities class actions have gone to trial since the passage of the PSLRA? (As The 10b-5 Daily recently noted, everyone has a different number.)
3) The Christian Science Monitor has a feature article on the relative value of the recent Enron settlements.
It was a busy week for news articles related to securities class actions. Here is a quick roundup:
(1) There were three noteworthy articles related to the Enron settlements. Forbes had a column on the potential attorneys' fees. The Associated Press discussed the pressure on the other bank defendants to settle. Finally, CNN/Money offered an overview of the settlement landscape.
(2) The New Jersey Law Journal published a "practice paper" (via law.com - free regist. req'd) on the Third Circuit's Chubb decision. (The 10b-5 Daily's summary of the decision can be found here.)
(3) The June 2005 SCAS Alert contains an interesting survey of foreign legislative efforts to permit U.S.-style securities class actions.
As previously noted in The 10b-5 Daily, securities class actions rarely go to trial - making trial verdicts big news. Thane International, Inc., a California-based direct marketing company, has announced a trial victory in a securities class action brought in the S.D. of Cal. and based on the company's 2002 acquisition of Reliant Interactive Media Corp. in a stock swap. Reliant shareholders alleged that Thane had promised it would list the combined company on the Nasdaq National Market, but failed to do so. According to the press release, only six securities class actions have made it all the way to a trial verdict since 1996 (note that different sources have different numbers, but everyone appears to agree that the total is less than ten).
Thanks to Dave Tabak for the link.
The nomination of Congressman Chris Cox as SEC chairman has come under criticism, with many opponents citing his sponsorship of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). Professor Stephen Bainbridge of UCLA Law School has an interesting post on whether the PSLRA has actually "weakened investor protections" and provides links to a number of empirical studies to the contrary.
The Supreme Court's recent loss causation decision in the Dura case has been the subject of considerable commentary. The author of The 10b-5 Daily, along with one of his colleagues, has written an article on the topic - "Lower Courts Will Determine Impact of Supreme Court's Securities Fraud Ruling" - for the Washington Legal Foundation. A link to the article can be found here.
Professor John Coffee has a column (via law.com - free regist. req'd) in today's New York Law Journal examining the Supreme Court's recent loss causation decision. Among other issues, the column discusses the court's failure to reject the idea that an investor can claim an economic loss even if the price of his shares increased. (Regular readers will note that Professor Coffee's analysis of the pleading standard discussion in the Dura opinion differs from The 10b-5 Daily's analysis.)
Quote of note: "In the real world, however, there is a major difference: price declines are real phenomena that demonstrate that the market considered information to be material; in contrast, a price that does not change may be the result of either offsetting developments or, more likely, the fact that the allegedly material misrepresentation simply never was deemed material by the market. Indeed, to permit recovery in this case hypothesized by the Court is to permit recovery based on a double speculation -- first, as to the original uncorroborated price inflation and, second, as to what would have been the later price increase in the absence of discovery of the original inflation. Even the 9th Circuit has never gone this far."
The New York Law Journal has a column (via law.com - free regist. req'd) on the hazards of cooperating with government investigations. Among the possible consequences is that securities plaintiffs may be able to lift the PSLRA's mandatory discovery stay. The 10b-5 Daily has covered the district court spit on this issue extensively, most recently in a post from last September entitled "The 'Government Investigation' Exception."
Quote of note: "Recently, some courts have been moved by the argument that sustaining the mandatory stay would unduly prejudice or unfairly disadvantage plaintiffs otherwise unable to gain access to documents already produced to government agencies conducting investigations that mirror plaintiffs' claims. Reasoning that securities plaintiffs would be unfairly kept out of the judicial loop without access to the documents already held by those agencies while parallel investigations and prosecutions proceeded, these courts have determined that plaintiffs are entitled to have these same documents."
Business Week (May 16, 2005 edition) has a feature article profiling the plaintiffs' counsel who handled the WorldCom securities class action. The article is entitled "The Kings of Class Actions."
Confidential sources have become a hot topic in securities class actions. The Third Circuit and Ninth Circuit (see here and here) have issued recent decisions discussing the use of statements from confidential sources to help meet the PSLRA's heightened pleading standards. The New York Law Journal has an informative article (via law.com - free regist. req'd) that summarizes these decisions and talks generally about the development of the case law in this area.
Quote of note: "[A] majority of courts addressing this issue have permitted the use of confidential sources, at least under certain circumstances. However, a review of recent decisions suggests that the courts are now closely scrutinizing the use of confidential sources in securities fraud cases and are becoming more vigilant in probing whether there is in fact such a source, whether that source would have been in a position to acquire first-hand knowledge of the matters attributed to it, and whether the information attributed to the source is corroborated by other, independent particularized facts pled in the complaint."
The use of securities class actions is gaining favor in other legal systems. In an interesting article entitled "The Rise of Shareholder Class Actions in Australia" (via mondaq.com - free regist. req'd), an Australian attorney discusses the legal, regulatory, and environmental changes that have led to a spate of recent cases against Australian companies. He also compares the U.S. and Australian systems.
Quote of note: "There is an ever popular view among regulators and academics that shareholder class actions should be encouraged in order to supplement the often slow-moving cogs of government enforcement with much speedier private actions. Private enforcement is frequently more intimidating to corporations, particularly in the case of shareholder class actions which can aggregate the claims of thousands or even millions of shareholder and thereby significant increase a corporation’s legal exposure in comparison with the relatively meagre statutory fines that attach to corporate misfeasance."
More on the Dura decision:
(1) The Legal Times has an article (via law.com - free regist. req'd) discussing the reaction of the parties to the decision.
(2) Forbes has a column stating that the decision was a "no-brainer" and providing some academic commentary.
(3) The Wall Street Journal has an editorial (subscrip. req'd) citing the decision as another reason why criminal sentencing in the Enron "barge" case should not be based on the alleged inflation of the company's stock price.
The Associated Press reports that in France a government-appointed panel has begun preparing the new class action law. One early debate is over whether France should adopt an "opt-out" or "opt-in" system for potential class members.
Quote of note: "Eventually, experts say, the moves afoot in Britain, Sweden and France could lead to a European Union-wide class-action law - since governments generally prefer their neighbors' industries to be exposed to the same kinds of risk as their own. 'It's not for tomorrow, but if it gets off the ground in France, and since we already have it in Sweden, then maybe we'll see something at a European level,' said Peter Burbidge, a law professor at Britain's Westminster University. 'The French would want others to have it if they have it.'"
The use of confidential witnesses to support securities fraud allegations can be controversial, especially when the defense wants to test the accuracy of the statements attributed to these individuals. The Recorder has an article (via law. com - free regist. req'd) discussing two recent cases in the N.D. of Cal. where the handling of confidential witnesses has led to contempt and sanction motions.
Quote of note: "The plaintiff view is, 'My god, if we were to tell who they were, they'd sleep with the fishes.'"
Interesting item in Newsday about a petition filed in New York state court against the plaintiffs' law firms that settled the Computer Associates securities class action. Texas billionaire Sam Wyly reportedly is seeking the discovery collected in the case and argues "that the documents 'rightfully belong to him' because, as a CA shareholder, he was effectively a client of the firms until he declined to participate in the class-action settlement."
Addition: Forbes has more on the story.