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

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.

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.”

There will be no new posts on The 10b-5 Daily until after Labor Day (Sept. 4).

(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.

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 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.

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.

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.'”