The New Case Surge Continues
This just in - new federal securities class actions continued to be filed at a strong pace.
Indeed, strong may be a bit of an understatement as the activity in January 2008 is nearly 50% over historical levels when extrapolated out to a yearly basis.
The numbers are a little fuzzy (see our earlier post here on why that is) but at least 24 new federal securities class actions were filed in January 2008. That translates to 288 new cases per year.
Compare that to the 9 new federal securities class actions filed in January 2007, and the results are even starker. New case filings are up more than 250% from the same period last year.
And lest you say that this new crop of cases solely relates to the burgeoning subprime crisis, the newly filed cases involving Panera Bread, Comcast and American Dental Partners, among others, have little, if anything to do with mortgages, subprime or otherwise.
As far as the fuzziness of the numbers, it has to do with whether new cases will be consolidated with earlier (or later) cases involving similar claims, but filed in different jurisdictions (Freddie Mac), or against different defendants (Countrywide) for example.
And while four of those 24 cases may be reasonably predicted to later be consolidated into other actions, but that would still leave 20 new cases in one month. That would still translate to 240 new federal securities class action cases on an annualized basis, a nearly 25% jump over historical averages.
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Monday, November 12, 2007 |
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Class Actions Above Historical Levels
As recently noted by Kevin LaCroix over at The D&O Diary, new case filings are not only up dramatically from the artificially low levels that we saw in 2005 and 2006, they are in fact ABOVE historical levels.
But the numbers are even more striking than first reported. During the period from August 1, 2007 through October 31, 2007, there were at least 65 new federal securities class actions filed, and possibly as many as 68.
That translates into between 260 and 272 new federal securities class action filings per year.
Compared to the historical averages that have been reported by Stanford/Cornerstone (193 per year from 1996-2006) or PwC (218 per year from 2002-2006) that represents an annualized increase over historical levels of between 19 and 41%.
I hesitated to use an equivocation phrase such as "at least" in my figures, especially given that my research team is focused on rooting out securities class actions wherever they may be in the four corners of the world, but there is a rational reason for giving a range instead of a hard number.
Two of the cases, Countrywide Financial Corp. (NYSE: CFC) and RAIT Financial Trust (NYSE: RAS), have companion "niche" cases that were brought on behalf of purchasers of only a specific type of securities. These types of cases are generally consolidated into the broader class action. Occasionally, but not always a lead plaintiff or class representative is appointed on behalf of the niche class. See generally In re Cendant Corp. Litig., 182 F.R.D. 144 (D.N.J. 1998) (appointing a separate lead plaintiff to represent PRIDES purchasers, but declining to appoint a separate lead plaintiff to represent options purchasers).
In the case of Countrywide, the niche case is on behalf of purchasers of Capital V Preferred Stock, and in the case of RAIT Financial, the niche case is on behalf of purchasers of Series A, B, and C Preferred Shares.
In any event, the return to historical levels of securities class action activity appears to have gone on for long enough to be a bona fide trend, and the death notice of the securities class action can safely be tucked away for now. If only we could do the same for buried notice...
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Thursday, October 25, 2007 |
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Updated List of Securities Class Action Trials
Due to overwhelming reader demand, we have produced a short presentation that details the 15 securities class action cases that have gone to trial since 1996.
The cases fall into three categories:
1.Securities Class Action Trials Based on Post-Reform Act Conduct Resulting in a Verdict at Trial (four)
2. Securities Class Action Trials Based on Post-PSLRA Conduct Resulting in a Settlement or Summary or Default Judgment During Trial (six)
3. Securities Class Action Trials Based on Pre-PSLRA Conduct Resulting in a Verdict at Trial (five)
We have not yet added the JDS Uniphase case to the presentation, but will do so when it fits into one of our three categories.
Readers are encouraged to send in any updates, additions, or corrections.
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Wednesday, October 24, 2007 |
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I Shall Call Him, "Mini PSLRA"
In our spare time we were perusing the recently released 2007 edition of the "Survey of State Class Action Law" from the American Bar Association's Litigation Section.
We fully intended to read all 569 fascinating pages, but right there on Page 26 was the following little gem:
Arizona has adopted legislation mirroring the federal Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 et seq. Arizona’s statute, found at A.R.S. §§ 44-2081 to 44-2087, applies to all private actions arising under Arizona securities law. For any private action brought as a plaintiff class action under Arizona or federal rules of civil procedure, the plaintiff is required to comply with specific requirements which mirror those in 15 U.S.C. § 78u-4(a)(2). For instance, each plaintiff seeking to serve as a class representative must file with the complaint a sworn certification and must publish notice to members of the purported class. See A.R.S. § 44-2081(B), (D). The court then appoints a “lead plaintiff” in accordance with procedures which mirror those in 15 U.S.C. § 78u-4(a)(3). See A.R.S. § 44-2081(E), (F).
Not believing our eyes, we ran to the Arizona Revised Statutes and looked it up. Turns out the statute was passed just after the PSLRA went into effect and has been on the books since April 1996. Of course, our good friends SLUSA and CAFA have made this particular statute not much more than an interesting anecdote.
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Tuesday, May 8, 2007 |
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Accountability Goes Global: Part Deux
The companion paper to our upcoming webcast is now available for public consumption here.
Some key findings:
- The first instance we were able to find of an international institutional investor seeking to serve as a lead plaintiff was in 1999, in the Network Associates litigation.
- Every year since then has seen at least one international institutional investor seeking to serve as a lead plaintiff in a class action.
- International institutional investors sought to serve as lead plaintiffs 182 times in 98 different cases during that period.
- The cases where these investors were involved were not limited to those involving non-US companies - Prominent examples included Delphi, Coca Cola, General Motors, and Dell.
- The international institutional investors that filed lead plaintiff motions were from 17 different countries. Germany, Canada, and Israel were the countries with the largest number of movants.
- The lead plaintiff movants were represented by 23 different law firms. The law firm that represented international institutional investors most often – Milberg Weiss, followed by Schiffrin Barroway Topaz & Kessler, Bernstein Litowitz, Berger & Grossman, and Grant & Eisenhofer.
We hope to update this research on an annual basis, so stay tuned...
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Tuesday, April 3, 2007 |
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Q1 Review: New Cases Up, Settlements Even
A quick review of the SCAS database reveals that 30 new federal securities class actions were filed in the first quarter of 2007. On a pro-rata basis, this would translate to 120 new federal securities class actions for the year. This would represent a slight increase from 2006 securities class action filings, but would still remain below historical levels in the post-PSLRA world.
Additionally, 41 federal securities class action settlements received final approval during the first quarter of 2007. On a pro-rata basis, this would translate to 164 federal securities class action settlements for the year. This would put 2007 within the margin of error for settlements during the last few years.
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Friday, March 9, 2007 |
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Another Case Added to Options Backdating List
Our options backdating securities class action list has been updated to add HCC Insurance Holdings, Inc. (NYSE: HCC). The number of companies on the list now stands at 27.
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Friday, November 17, 2006 |
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More on Prof. Coffee and the Paulson Committee
In an article in the November 16, 2006, New York Law Journal, Prof. John Coffee writes that notwithstanding what he labels some "dubious reporting" by the New York Times, he has not recommended to the Paulson Committee that "any private cause of action under Rule 10b-5 could and should be eliminated by SEC rule-making." He writes that his proposal (which is set forth in detail in this October 2006 law review article) actually is far more modest:
But the boldest and most fundamental of the reforms that I would recommend asks the SEC to 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. This would not eliminate a private cause of action under Rule 10b-5, but it would force the plaintiff's bar to sue and settle with corporate officers and agents--i.e., auditors, underwriters, and law firms--instead of treating the corporate entity as the deep pocket that paid everything. Such litigation is entirely feasible, as shown by the fact that in the Enron and WorldCom cases, which are the two largest settlements in securities class action history, the bankrupt corporate entity was not sued, yet record recoveries were obtained.
He also notes that § 36 could be used to "recast securities litigation" in another way, by providing auditors with a partial exemption in the form of a ceiling against catastrophic liability.
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Wednesday, November 15, 2006 |
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Breaking Down the Royal Ahold Attorneys' Fee Award
Judge Blake in the USDC for the District of Maryland has issued this opinion awarding attorneys' fees in the massive $1.1 billion Royal Ahold settlement. Some quick but notable points:
1. Class counsel (Entwistle and Cappucci) was permitted under its retainer agreement with lead plaintiff COPERA to seek up to 20% of the settlement amount, but instead sought just 15% ($163.3 million, or a multiplier of 3.21 times the lodestar of $50.8 million).
2. The Court awarded Class Counsel 12% ($130.6 million), lopping off nearly $33 million from the requested amount. The Court stated:
I agree with plaintiffs that the range of comparable settlements should include some below $1 billion as well as those few that substantially exceed $1 billion.9 Strictly on a percentage comparison approach, a 12% fee award appears to me a reasonable percentage of the class recovery.Application of the Barber factors, some of which already have been addressed, also supports an award of this magnitude. On the one hand, settlement was achieved well before trial, presumably aided by significant concessions about the fraud at U.S. Food Service and the existence of “side letters” related to the joint venture consolidation. While some of the legal issues were familiar, others were more difficult and, at least as to subject-matter jurisdiction, novel in this Circuit. While the case was not “undesirable,” lead counsel was required to and did devote exceptional resources to the prosecution, facing some risk of non-recovery as the fee was entirely contingent under the retainer agreement with COPERA, and Royal Ahold’s financial position was unclear. The global aspect of the case raised additional practical and legal complexities, as did the parallel criminal proceedings in another district. The settlement obtained is among the largest cash settlements ever in a securities class action case and represents an estimated 40% recovery of possible provable damages. The notice process appears to have been very successful not only in reaching but also in eliciting claims from a substantial percentage of those eligible for recovery.
The court concluded by noting (listen up Lies, Damn Lies and WSJ Law Blog!) that
Finally, plaintiffs’ counsel were vigorous and extremely competent in their litigation against equally well-qualified defense firms.
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Friday, November 10, 2006 |
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More on the Fastow Deposition: No Ninjas
As discussed in advance here, Alexei Barrionuevo of the New York Times has this excellent article about the deposition of Andrew Fastow in the Enron case, which ended November 2 after eight and a half days of apparent drama, drudgery and even some comedy. According to the article, Fastow did not produce any smoking guns, but exhibited an impressive consistency over the nine days of his questioning.
The article also recounts an interesting event on the first day of the deposition:
Tensions were high that first morning, according to several people who witnessed the deposition. About 30 lawyers packed into the main conference room, sitting on either side of Mr. Fastow. Almost 40 more watched on video feeds in two overflow rooms.
Suddenly, four shadowy figures with ropes appeared, hanging outside the windows of the main room, which had the blinds drawn. A marshal scrambled to the windows. One lawyer for a major bank said the figures resembled ninjas. It turned out they were window washers.
“A lot of uncomfortable smiles broke out,” Mr. Heaton said....
Finally, the article suggests that my pre-deposition estimate that the Fastow depo would end up being a $3.2 million event was too high:
The deposition drew lawyers representing 10 major banks and top Enron executives who have not been charged with crimes. It was also streamed live over the Internet so law firms in New York, London and elsewhere could listen in.
With the typical lawyer in the case billing about $450 an hour, the legal fees just to follow the testimony could cost at least $2.1 million, and the overall price tag of the litigation is expected to reach hundreds of millions of dollars.
Doing the math on the NYT estimate, the article is assuming 7 hours days for each of the 70 lawyers, at $450/hour, for 9.5 days. I assumed 10 hour days, which is the key difference between the estimates. Not that it really matters but the article notes that the depo went from 9 am-6 pm most days, with only occasional breaks. That's 9 hours right there, and when you add in the travel time ... I'm thinking that my 10 hour/day estimate is probably closer to what was billed in this case.
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Tuesday, October 31, 2006 |
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Plaintiffs' Bar Shoots Back
After a flurry of recent coverage in the NY Times and elsewhere of the Paulson Committee and the prospect that it may soon recommend, among other things, that the SEC "dis-imply" a private cause of action under Rule 10b-5 against corporations, the plaintiffs' bar is finally shooting back. In this article in Business Insurance, several prominent members of the plaintiffs' securities class action bar were not shy about voicing their concern and outrage over this prospect:
"Securities lawsuits have fallen off sharply in the last few years and yet they want to further cripple them," said Bill Lerach, a prominent class-action lawyer from San Diego, Calif., law firm Lerach Coughlin Stoia Geller Rudman & Robbins L.L.P. "Why? Because it's the one effective weapon that shareholders have."
***
"I think it's outrageous," class-action attorney Stanley Grossman, senior partner at Pomerantz Haudek Block Grossman & Gross L.L.P. in New York, said of the proposals.
"We keep reading every day about more and more fraud," he said. "What the SEC is saying is 'we can't handle it all. We need companies to do the internal investigation.' Well, if they're so overwhelmed, how are they going to pick up all of these cases of the plaintiffs' bar?"
***
Another prominent class-action attorney, Sean Coffey, who helped win a $6.15-billion settlement for investors in WorldCom Inc., said the proposed curbs on shareholder litigation suggest that corporate America has already forgotten the string of business scandals that took place in recent years.
"The body isn't cold yet, and they are already acting like there were no corporate scandals," said Mr. Coffey, of the law firm Bernstein, Litowitz, Berger & Grossman. "It's mind-boggling."
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Monday, October 16, 2006 |
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"Paulson Committee" May Soon Recommend Dramatic Limits on Securities Class Actions
Since early September 2006, a committee composed of "independent ... U.S. business, financial, investor and corporate governance, legal, accounting and academic leaders" has fairly quietly been conducting a study into how to improve the competitiveness of the U.S. public capital markets. Next month this committee (The Committee on Capital Markets Regulation, also referred as the "Paulson Committee" because it will present its recommendations to US Treasury Secretary Henry Paulson), will issue an interim report with recommendations on several topics. Most notably for this blog, these topics include "Liability issues affecting public companies and gatekeepers (such as auditors and directors) with a focus on securities class action litigation...."
An article in today's BNA Securities Law Daily states that John Coffee, a professor at Columbia University School of Law, said at a recent ALI-ABA conference that he is an adviser to the panel and has suggested several reforms designed to mitigate the threat of securities litigation. According to the article, Coffee believes that in the "near future," the Paulson Committee can be expected to make recommendations "to impose limits on securities class actions" and that the "SEC could take some action to change the role of [the] securities class action" in the next 6 months.
Among the possible changes that could result, Coffee said, were the eye-opening ideas that:
1. The SEC could "dis-imply" a private cause of action under Rule 10b-5 against corporations, leaving enforcement of that rule to the government, not private plaintiffs. The SEC might also "dis-imply" such a private cause of action with respect to the corporation only when the SEC has sued the corporation. Coffee states in the article that "That idea does have some support."
or
2. "Stock drop" cases could be moved out of the courts and into the arbitration arena.
The Paulson Committee's recommendations are due out by the end of November 2006. If either of these ideas are among them, look for a barrage of deafeningly loud disapproval from the plaintiffs' bar and consumer groups.... Stay tuned.
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Thursday, October 12, 2006 |
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The 36 Million Dollar Man
Kudos to Curtis Kennedy, the Denver attorney who successfully challenged the attorneys' fee award in the Qwest Communications securities litigation, and did so at a reasonable cost to the class. As discussed in this article, the court in the Qwest case recently approved the $400 million settlement of shareholder claims against Qwest, but reduced attorney fees by $36 million--from $96 million to $60 million. Kennedy, representing the Association of U S West Retirees, fought the $96 million in attorney fees requested by lead counsel in the case, law firm Lerach Coughlin, calling the fees "excessive and tantamount to winning the lottery."
According to another article in today's Rocky Mountain News, while Kennedy could attempt to obtain a percentage of the $36 million he helped save the class, he is not doing so. Rather, he is seeking only $40,500, which according to the article is "the 90 hours Kennedy spent on the case times his hourly rate of $300 times 1.5." Kennedy states in the article that he declined to seek a percentage of the $36 million because "I just think that would be hypocritical after asking the judge to apply moderation" to the $96 million request by Lerach Coughlin.
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Tuesday, October 10, 2006 |
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"Esquire Bank" Now Serving Plaintiffs' Lawyers
I must admit I didn't see this one coming. Courtesy of the WSJ Law Blog we've just learned about Esquire Bank, "the first bank in the country to specialize in serving trial lawyers." Esquire Bank opened its doors in Brooklyn, New York last week.
I know there is a joke in here somewhere but I'm pretty much speechless. I guess all I can muster at this point is "Watch out for that lender liability!"
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Wednesday, October 4, 2006 |
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The $3.2 Million(?) Deposition
The eagerly awaited deposition of former Enron CFO Andrew Fastow in the massive Enron securities class action that is still going pending against numerous large investment banks (many other defendants have settled) may occur soon. According to this article in the NY Times, plaintiffs' counsel in the case has asked the Court to schedule the deposition soon, before Fastow is assigned to a prison. Fastow is currently in solitary confinement in a Houston detention center, awaiting assignment.
The article notes that the deposition of the now-cooperating Fastow will be critical to the case, and "will take an estimated 10 days, plus more than two weeks of preparation, said one lawyer involved in the case. Some 80 lawyers will probably to want to attend."
Whoa--80 lawyers? By my quick math, 80 lawyers billing 10 hours per day for 10 days, at a rate of $400/hour* adds up to a $3,200,000 deposition. And that just for the event itself, not including any of the preparation that these 80 lawyers will need to do.
Hopefully this deposition will prove more fruitful than the discovery to date in the case. The article notes that so far in the case, millions of pages of documents and hundreds of other depositions have amounted to very little information for the plaintiffs:
Despite truckloads of documents from Enron and the banks, and millions of dollars spent on the case so far, civil lawyers had struggled to learn much of anything from the banks’ own employees. Plaintiffs’ lawyers took 175 depositions from bank officials over the last 18 months, most of them running 15 hours long. Yet nearly all of those officials either exercised their Fifth Amendment right to not testify or said they did not recall anything relevant, according to two lawyers involved in the case.
* I'm three years removed from private practice so I'm guessing on the $400/hour average billing rate of the presumably high-level lawyers who will be present. I guess I'm excluding people like 4-digit man Ben Civiletti. Anyone care to refine my estimate?
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Wednesday, September 13, 2006 |
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The Milberg Effect? Not So Much
The WSJ had a Review and Outlook piece yesterday entitled "The Milberg Effect," which argues that the projected drop-off in securities class action cases in 2006 suggested by a recent study is due to a reduction in the number of cases filed by the law firm Milberg Weiss. According to the WSJ piece,
According to Cornerstone, a research firm that tracks litigation, law firms filed 179 class actions last year. The first six months of this year saw only 61, a rate that would result in about 123 class actions for the year -- or a decrease from 2005 of 56 suits. Meanwhile, according to publicly available press releases, Milberg Weiss filed 91 of last year's suits. Yet in the first six months of this year, having come under prosecutorial scrutiny and lost many lawyers, the firm has filed only 17. At this rate, Milberg would tally about 34 suits for the year -- or 57 fewer than 2005.
These numbers are more than a coincidence, and should put to rest the assumption that Sarbanes-Oxley or better corporate governance standards are producing fewer causes of legal action. Securities lawyers have long understood that most class actions have little or no substance but are manufactured by the plaintiffs bar to pad their own pocketbooks.
This is simply wrong. Contrary to the conclusion in the piece above, the projected overall drop-off of 56 class actions in 2006 and the projected Milberg drop-off of 57 class actions filings is a coincidence. The flaw in the WSJ's analysis is that it rests on the false assumption that each of the companies that are the subject of a securities class action are sued by only one law firm. That is not the case.
To develop this point a bit, the Cornerstone study projects that at the current rate, 123 companies will be the subject of a securities class action lawsuit this year--56 fewer than in 2005. It is critical to note here, however, that virtually all (let's conservatively go with 90%) of these 123 cases will involve multiple complaints filed by multiple law firms. Indeed, many companies will be sued by a dozen or more different law firms. Using this conservative 90% figure, if Milberg does file 57 fewer complaints in 2006, this drop-off will only impact the total number of companies that are the subject of a securities class action in the 10% of Milberg's filings where it is the only law firm to file a complaint. So we're looking at a possible reduction of 5 or 6 cases (5.7 to be exact), not 57 cases.
The Milberg Effect? Not so much.
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MD&A Risk Factors (Nelson Rocks Preserve-style)
Courtesy of Overlawyered.com, I found this inspiring Disclaimer on the Nelson Rocks Preserve website. Nelson Rocks Preserve is an outdoor recreation area located in West Virginia that is apparently tired of people suing them when they fall off cliffs, get bit by snakes, etc. They are responding with a disclaimer that reminds would-be users of the preserve of important things like "a whole rock formation might collapse on you and squash you like a bug" or
...climbing is extremely dangerous. If you don't like it, stay at home. You really shouldn't be doing it anyway. We do not provide supervision or instruction. We are not responsible for, and do not inspect or maintain, climbing anchors (including bolts, pitons, slings, trees, etc.) As far as we know, any of them can and will fail and send you plunging to your death. There are countless tons of loose rock ready to be dislodged and fall on you or someone else. There are any number of extremely and unusually dangerous conditions existing on and around the rocks, and elsewhere on the property. We may or may not know about any specific hazard, but even if we do, don't expect us to try to warn you. You're on your own.
Inspired by Nelson Rocks, I have come up with a securities disclosure version of their disclaimer, designed to meet all of the MD&A "Risk Factors" needs of your favorite public company. It looks like this:
ITEM 1A: RISK FACTORS
Risks Related to our Business and Ownership of our Securities
Our business is unpredictable and unsafe. The stock market, including the market for our securities, is dangerous. Many books have been written about these dangers, and there's no way we can list them all here. Read the books.
The path to success for our business is littered with land mines. Seriously—anything could happen. Our competitors try their best every day to crush us, and they could succeed. We could get rich and complacent following our IPO and fail to innovate. Our customers could abandon us. Key members of our management team could quit to sail their yachts around the world for a decade. We could grow so fast that our business spirals out of control. Any or all of these could occur and our business would go down the toilet, along with your investment.
Real dangers are present even if none of the above occurs. New technologies may be developed that will render ours obsolete. A patent troll could come along who claims to own the intellectual property rights to our technology, costing us tens of millions of dollars in defense costs (best case) or destroying our entire business (worst case). Third parties such as malicious hackers could emerge to undercut our business. Even the government could torpedo us by passing new laws that hurt our business. The bottom line is that our business and the stock market are unsafe, period. Live with it or stay away.
Totally unforeseen things can happen. There could be a SARS epidemic. There could be a terrorist attack. There could be a natural disaster, such as a hurricane. A herd of elephants could escape from the zoo and trample our headquarters, squashing our business and your investment like a bug. Don't think it can't happen.
Even if none of these things happen, the stock market could go down for no reason whatsoever. That is to say, you may make a wise investment, we may work our tails off, our business may thrive, and you may still lose all of your money. It happens all the time.
If you engage in particularly dangerous trading such as uncovered options or naked short selling, you may lose everything you own. This is true whether you are experienced or not, trained or not, educated or not, or intelligent or not. It's a fact, such trading is extremely dangerous. If you don't like that, don’t do it. You really shouldn't be doing it anyway. We do not provide supervision or instruction. We are not responsible for the financial ruin that may result. As far as we know, any of these types of trades can and will fail and send you plunging to your financial death. You're on your own.
Financial bail-out services are not provided by our company. If you lose your shirt investing in our company after reading all this, don’t come running to us (or your class action lawyers). We assume no responsibility.
By investing in our business, you are agreeing that we owe you no duty of care other than not being crooks. We promise you nothing else. This is no joke. We won't even try to warn you about any dangerous or hazardous conditions not required of us by the SEC, whether we know about it or not. If we do decide to warn you about something, that doesn't mean we will try to warn you about anything else. We and our employees or agents may do things that are unwise and dangerous. In fact, we probably will. Sorry, we're not responsible. We may make bad decisions or give out mistaken guidance. Don't listen to us. In short, INVEST IN OUR COMPANY AT YOUR OWN RISK. And have fun!
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Tuesday, September 12, 2006 |
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Pop Quiz
Quick--
What is the difference between the following allegations: