The 10b-5 Daily

Despite the recent downturn in securities class action filings, securities litigation reform is a hot topic. On the heels of the Committee on Capital Markets Regulation’s interim report, Mayor Bloomberg and Senator Schumer have issued “Sustaining New York’s and the US’ Global Financial Services Leadership.” The two reports cover much of the same ground, but there are differences in their securities litigation reform recommendations. After noting that “if economic conditions were to decline in the future, than a strong resurgence in [securities class actions] would likely follow,” the Bloomberg/Schumer report recommends (pp. 102-104):

(1) Limit the liability of foreign companies with U.S. listings to damages that are proportional to their degree of exposure to the U.S. markets. (SEC)

(2) Impose a cap on auditors’ liability. (SEC)

(3) Encourage arbitration as an alternative dispute resolution system for securities grievances. (SEC)

(4) Allow parties in federal securities actions to appeal interlocutory judgments (e.g., the denial of a motion to dismiss) immediately to the circuit courts. (Congress)

Coverage of the report can be found in the Financial Times (subscrip. req’d), Wall Street Journal (subscrip. req’d), and the New York Times. D&O Diary has a comprehensive summary.

In the Jan. 18 edition of the New York Law Journal, Professor John Coffee presents a wish list (subscrip. req’d) of securities litigation reforms. The proposed reforms are:

(1) Congress should impose a cap on auditor liability. To make this reform more politically acceptable, Congress could overturn Central Bank and restore private aiding and abetting liability for securities fraud (at least for accounting firms).

(2) Governor Spitzer should ban, by executive order, “pay to play” practices where lawyers “compete to be selected as class counsel for the public pension funds serving as ‘lead plaintiff’ in securities class actions by making political contributions to state and municipal comptrollers, who in some jurisdictions, including New York, have exclusive control over the pension fund.”

(3) Unlike almost every other state, there is no private right of action for securities fraud under New York law. Attorney General Cuomo should draft new legislation correcting this deficiency.

Quote of note: “Such a ceiling would not protect an audit firm from repetitive litigation resulting in repetitive large settlements – say, ten suits, each for $40 million on average. But a firm forced to settle those many actions at those levels probably does not deserve to survive. It is the prospect of a one-time billion-dollar loss that merits the adoption of a ceiling.”

A few items from around the web:

(1) The Financial Times has an article on the U.S. Supreme Court’s new-found interest in business cases. Although the authors note that many of these cases result in narrow decisions, they cite the Dura decision on loss causation as having had a “big impact.”

(2) The Wall Street Journal Law Blog has a follow-up post on the lead plaintiff dispute in the Merck securities litigation. The lead plaintiffs have asked the court to permit Bernstein Litowitz to act as co-lead counsel.

(3) An op-ed in the Financial Times from earlier this month discusses the negative effects abroad of U.S. shareholder litigation. The author, who works for the British Association of Insurers, advocates the curbing of lawsuits and an increase in shareholder rights. Thanks to Werner Kranenburg for the link.

Just before the holidays, in its Dec. 18 issue, the New York Law Journal ran its annual special section on securities litigation and regulation. It includes articles on: (1) a recent scheme liability decision in the Enron case; and (2) the use of agency and respondeat superior theories by plaintiffs to reach non-speaking defendants.

Earlier this month, the New York Sun ran an interesting feature article on the Time Warner securities litigation. Although the securities class action settled for $2.5 billion last year, some institutional investors who decided to opt-out of the case appear to be doing even better than the class participants. The State of Alaska, for example, recently settled its related state court action against Time Warner for 83% of its estimated damages. Thanks to Point of Law for the link.

Quote of note: “While Alaska may be the most successful opt-out plaintiff thus far, others have also improved their lot by going it alone. A Dutch retirement fund, Stichting Pensioenfonds ABP, won a $20 million settlement from Time Warner earlier this year on what ABP said was $150 million in investment losses. ABP’s chief counsel told a Dutch newspaper, Het Financieele Dagblad, that the fund would have gotten only $1 million to $3 million if it had stayed in the class.”

Addition: Lies, Damn Lies, & Forward-Looking Statements has a post on this article that offers more details and links on the opt-out cases.