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

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).

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.

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.

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?”