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Judge Scheindlin of the S.D.N.Y., who is presiding over the IPO allocation cases, continues to publish notable securities law decisions. This time the issue is lead plaintiff selection. Under the PSLRA, the lead plaintiff in a securities class action is presumptively the party with the largest financial interest in the relief sought by the class (i.e., the movant who alleges the most potential damages). In creating this provision, Congress sought to encourage the participation of institutional investors as lead plaintiffs. There is an ongoing debate over to what extent this legislative history, as opposed to the plain language of the “largest financial interest” presumption, should influence a court in its selection of a lead plaintiff.

In In re eSpeed, Inc. Sec. Litig., 2005 WL 1653933 (S.D.N.Y. July 13, 2005), the court addressed whether a group of individual investors (which included a family and one other individual) or a single insititutional investor should be named lead plaintiff. After surveying the relevant case law in the S.D.N.Y., the court found:

“[A] group of unrelated investors should not be considered as lead plaintiff when that group would displace the institutional investor preferred by the PSLRA. But where aggregation would not displace an institutional investor as presumptive lead plaintiff based on the amount of losses sustained, a small group of unrelated investors may serve as lead plaintiff, assuming they meet the other necessary requirements.”

Based on this standard, the relevant question was whether the family members (i.e., the related members of the individual investor group) had greater losses than the institutional investor. In making that evaluation, the court was forced to address another controversial issue: whether the “first-in, first-out” (FIFO) or “last-in, first-out” (LIFO) methods for estimating losses should be used. The court decided to apply the LIFO method, which matches the last purchases made during the class period with the first sales made during the class period, noting that “it takes into account gains that might have accrued to plaintiffs during the class period due to the inflation of the stock price.” Under the LIFO method, the family members had greater losses than the institutional investor. Accordingly, the court named the entire individual investor group as the presumptive lead plaintiff.

The New York Law Journal has an article (via law.com – free regist. req’d) on the decision. Another recent decision applying the LIFO method is Arenson v. Broadcom Corp., 2004 WL 3253646 (C.D. Cal. Dec. 6, 2004), where the court granted summary judgment against certain plaintiffs who could not establish damages under this method.

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Readers unfamiliar with securities class action litigation may wonder about The 10b-5 Daily’s focus on motions to dismiss and settlements. Simply put, that’s where the action is in this area of the law. If a securities class action is not dismissed, it is usually settled. Which is why, in part, Congress chose to heighten the pleading standards for securities litigation when it enacted the Private Securities Litigation Reform Act.

1. Who writes The 10b-5 Daily?

Lyle Roberts is the author of The 10b-5 Daily. The rest of the time, I am a partner with Cooley LLP in the firm’s Washington, D.C. office. My practice consists of defending public corporations and their officers in class actions, derivative actions, merger and acquisition litigation, and SEC enforcement actions. I also counsel clients with respect to securities regulatory issues.

I am a graduate of The Johns Hopkins University (B.A., M.A.) and the University of Chicago Law School (J.D.). Following law school, I clerked on the U.S. Court of Appeals for the Fourth Circuit for Judge Donald S. Russell. I have been widely published on securities law topics, with articles in The Wall Street Journal, The New York Law Journal, Legal Times, Insights, Compliance Week, Legal Backgrounder (The Washington Legal Foundation), and the University of Chicago Law Review, and quoted in various media reports. I am a frequent moderator/panelist for Practicing Law Institute (“PLI”) programs on securities litigation, including acting as the co-chairman for the anual Handling a Securities Case program.

2. How long has The 10b-5 Daily been in existence?

The first post was in May 2003 at a predecessor website. In August 2003, The 10b-5 Daily moved to its present location at http://www.the10b-5daily.com.

3. Why is it called The 10b-5 Daily?

Rule 10b-5 is a rule promulgated by the Securities and Exchange Commission (“SEC”) pursuant to Section 10(b) of the Securities Exchange Act of 1934. It prohibits, among other things, the making of misleading statements or omissions of material fact in connection with the purchase or sale of any security. It is the leading statutory basis for private securities fraud claims.

4. What does The 10b-5 Daily cover?

The 10b-5 Daily is devoted to tracking news and events relating to securities class actions brought on behalf of investors against companies, with an emphasis on judicial developments. These cases typically allege that the company, through its officers and/or directors, made false or misleading statements to the market that artificially inflated the company’s stock price. The class consists of investors who purchased the company’s stock during the class period at the artificially inflated price.

Although the author of The 10b-5 Daily represents the defendants in these cases, the weblog is designed to be a general resource and cooperative effort. Many of The 10b-5 Daily’s readers and contributors are attorneys who work in plaintiffs’ firms.

5. Why does The 10b-5 Daily mostly discuss motions to dismiss and settlements?

Simply put, that’s where the action is in this area of the law. If a securities class action is not dismissed, it is usually settled, in large part because of the enormous costs, and attendant risks, of bringing these cases to trial. Therefore, the motion to dismiss is often the key moment for a securities class action.

6. What is the Private Securities Litigation Reform Act?

The Private Securities Litigation Reform Act of 1995 (“PSLRA” – see the links in the right column of The 10b-5 Daily’s main page) was enacted by Congress to deter abusive lawsuits and encourage the voluntary disclosure of information by corporate issuers. To that end, Congress established heightened pleading requirements for securities fraud, an automatic stay of discovery in securities fraud cases pending the resolution of a motion to dismiss, a system for selecting a lead plaintiff in a case brought as a class action, and a safe harbor from liability for forward-looking statements. Many of the cases profiled in The 10b-5 Daily discuss the application of this legislation.

7. Do you need to be a lawyer to understand the posts on The 10b-5 Daily?

Let’s hope not. Most of the readers of The 10b-5 Daily are lawyers, but there are also a significant number of investors, corporate officers, insurance professionals, and others who visit regularly. The posts tend to assume a basic understanding of the law surrounding securities fraud. Much of that basic understanding, however, can be gleaned from this FAQ section and the materials linked in the right column of The 10b-5 Daily’s main page.

8. Does The 10b-5 Daily summarize every aspect of the material it discusses?

The 10b-5 Daily is designed to act as a filter for items related to securities class action litigation. Readers should not assume that the summaries of articles, cases, legislation, or settlements are complete (or even particularly thorough in what they do cover). The focus here is on what the author of The 10b-5 Daily finds interesting, which may be entirely different from what another person who reads the same material would find interesting. See the “Legal Disclaimer” section in the right column of The 10b-5 Daily’s main page for more on this topic.

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11. Why are readers of The 10b-5 Daily unable to post comments?

A public discussion area must be constantly monitored to remove spam comments. The author of The 10b-5 Daily would rather spend his limited free time posting. That said, readers are strongly encouraged to send in comments, links, or any other information of interest to The 10b-5 Daily via e-mail at “the10b5daily at hotmail dot com.” Many of the posts on The 10b-5 Daily are the result of reader-submitted materials.

12. Why do some posts on The 10b-5 Daily have a “disclosure” line?

The 10b-5 Daily discloses when its author has had direct involvement in the material being discussed (typically when he represents a party to the litigation or has been quoted in an article). The mere involvement of his law firm or any of its attorneys will normally not cause a disclosure line to be added to a post.

13. Can I use the material found on The 10b-5 Daily?

The 10b-5 Daily and the10b-5daily.com are trademarks belonging to Lyle Roberts. All original material appearing on The 10b-5 Daily is copyright 2003-2014 by Lyle Roberts. All rights reserved. Readers may quote, cite, or link to this copyrighted material, but credit must be given to the author, typically by referring to “The 10b-5 Daily” or “Lyle Roberts” and, if possible, including a link to the weblog or the post’s specific URL. The author of The 10b-5 Daily reserves the right to rescind this permission at any time and for any reason.