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

Over the weekend, the Washington Post editorial page came out in favor of the Class Action Fairness Act.

There was a comprehensive article on the topic of D&O insurance a few weeks ago in The Journal News (which covers Westchester, Rockland, and Putnam counties in N.Y.). The author finds that both insurers and companies are struggling in the current environment. While insurers have been forced to pay out huge claims over the past few years due to corporate fraud and understandably want to limit their risk, the rise in premiums hits companies just as they are trying to weather the weak economy. Annual premiums of $1 million or more have become commonplace, with large cap companies often paying much more.

Quote of note (1): “Companies in industries that have gained dubious publicity for corporate fraud, such as securities, health care, technology and telecommunications, are getting hit the hardest, says Pam Sedmak, a partner in Sedmak & Co., and executive search firm in Cleveland. Sedmak says executives that her firm recruits for clients now routinely ask for details on the coverage the company’s insurance will offer them if they’re named as defendants in a lawsuit or investigation by the U.S. Securities and Exchange Commission or other agency. ‘They’re putting their personal wealth at stake, not to mention their freedom,’ she says of those who dare serve as a top executive or director of a public company.”

Quote of note (2): “Besides the lawsuits that have already been filed, the uncertainty about how much liability directors and officers will have in future claims is also driving premiums up, says attorney Lance Kimmel, an author of the Foley & Lardner study. That’s because it remains to be seen how courts rule on claims brought against officers and directors who are alleged to have violated the Sarbanes-Oxley law, which Congress passed last year to police corporate conduct.”

Quote of note (3): A insurance broker states that “she has seen companies go from policies that provided $10 million in coverage with a $100,000 deductible to policies that provide $5 million in coverage and carry a $200,000 deductible. Even with the inferior coverage, the new policy costs more, she says.”

An important piece of the securities class action puzzle is directors and officers liability insurance (“D&O insurance”). Due in large part to the surge in shareholder claims severity over the past few years, the premiums paid by companies have skyrocketed. According to a 2002 survey by Tillinghast-Towers Perrin:

1) Companies paid nearly 30% more for D&O insurance in 2002 (a similar increase occurred in 2001);

2) Although claim frequency and severity for most type of claims has stabilized, the average indemnity paid for shareholder claims has increased to $23.35 million, compared with $17.8 million in 2001, and $9.62 million in 2000; and

3) There was a decrease in the D&O average policy limits for the first time in 8 years (which may be a result of the dramatic rise in costs).

Reuters reports that the Class Action Fairness Act of 2003 has been approved by the U.S. House of Representatives by a vote of 253-170.

Quote of note: “Rep. James Sensenbrenner, a Wisconsin Republican and chairman of the House Judiciary Committee, said forcing cases into federal court would stop lawyers forum-shopping for sympathetic state courts such as in Madison County, Illinois, where a judge recently granted a $10.1 billion verdict in a suit against cigarette maker Philip Morris. ‘The class action judicial system itself has become a joke, and no one is laughing except the trial lawyers, all the way to the bank,’ Sensenbrenner said.”

The U.S. House of Representatives will hold a vote today on the Class Action Fairness Act of 2003. As noted previously in The 10b-5 Daily, the legislation applies some of the reform concepts in the PSLRA and SLUSA to all class actions. Notably, the House bill (a) requires most class action suits with more that $2 million at issue to be heard in federal court (unless the substantial majority of the plaintiffs are from the same state as the principal defendants), (b) allows parties to appeal class certification rulings, and (c) attempts to limit “coupon” settlements. The House is expected to pass the bill.

The New York Times, in a lengthy article on the bill, states that the class certification appeal provision “could cause delays in pending federal-court cases that seek to recover money lost through the corporate scandals at Enron and other large companies.” The newspaper evidently is not familiar with how securities class actions are usually resolved (i.e., before the class certification stage of the case). The Washington Post is also covering the story.

Quote of note (NY Times): “‘Just about every industry group is on the bandwagon on this because every industry is affected,’ said Lawrence Fineran, the vice president for regulatory and competition policy at the National Association of Manufacturers. For the business community, the bill is the most significant lawsuit-related legislation since Congress overrode President Bill Clinton’s 1995 veto of a bill to limit private lawsuits for securities fraud. ‘It’s the biggest thing in years,’ Mr. Fineran said.”

Addition: The House bill specifically excludes securities class actions from its jurisdiction provisions, presumably to avoid any conflict with SLUSA.

Addition: The final House bill changed its jurisdiction provision to match the jurisdiction provision in the Senate bill. As a result, it now provides for class action suits to be heard in federal court when fewer than one-third of the plaintiffs are from the same state and when the plaintiffs’ claims total at least $5 million.

A Reuters article provides additional information on the post-split structure.

Quote of note: “Weiss cautioned that details of the breakup plan were still being discussed and that timing was unknown. But if the plan plays out, he said, ‘the present Milberg Weiss will continue as an entity. Another firm will be formed by Mr. Lerach.'”

Addition: A story in The Recorder confirms that Milberg Weiss is likely to split into East Coast and West Coast operations, with the firm’s San Diego and San Francisco offices forming a separate entity. The article also speculates on the reasons behind the split.

Milberg Weiss Bershad Hynes & Lerach, widely recognized as the leading plaintiffs’ securities class action firm, is breaking up. The Houston Chronicle reports today that the 200-lawyer firm will dissolve over the next few months, with the lawyers regrouping into smaller firms. Milberg Weiss has seven offices located throughout the country. The split, however, will not be “simply geographical.”

Quote of note: “Lerach said he hopes that the resulting smaller firms will be ‘friendly’ competitors.”

The securities class action news today is all about Tyco International, Ltd.

First, Reuters reports that the shareholder plaintiffs in the class action against Tyco in the D. of N.H. are alleging that “the conglomerate falsified financial reports and inflated pre-tax profits by more than $6 billion between December 1999 and June 2002.” That is considerably more than the $2 billion in accounting-related problems that Tyco has disclosed. Interestingly, it is being reported as a new allegation that appears in the plaintiffs’ opposition to Tyco’s motion to dismiss (contrary to the normal assumption that the motion to dismiss briefing is based only on the factual allegations in the complaint).

Second, the Associated Press reports that Merrill Lynch & Co. and a former analyst are being sued by Tyco’s shareholders in a separate class action alleging that the analyst “wrote and publicly issued research reports on Tyco claiming to be independent, when in fact he regularly sent drafts of his reports to Tyco’s investor relations department for review.”

A subcomittee of the House Financial Services Committee is holding a hearing today on the Securities Fraud Deterrence and Investor Restitution Act. Stephen Cutler, the SEC’s Division of Enforcement Director, is among those scheduled to testify.

The Atlanta Journal-Constitution has an article in today’s edition reporting that an amended complaint has been filed in a securities class action against the Coca-Cola Company. The suit was originally brought in October 2000 in the N.D. of Ga. and alleges that Coca-Cola forced several of its major bottlers to buy excess beverage concentrate to boost the company’s revenues. The court dismissed part of the case last year.