Category Archives: All The News That’s Fit To Blog

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.

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.”

There will be no new posts on The 10b-5 Daily until next week (April 9).

(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. 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.”

(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.