The 10b-5 Daily

Options backdating is the new new thing in corporate scandals, with speculation that there may be a need for a federal taskforce to oversee all of the various U.S. Attorney offices that have issued subpoenas to companies on this issue. To date, shareholder litigation over these alleged practices appears to be limited to derivative suits. In a Forbes column posted this morning, however, former SEC Chairman Harvey Pitt notes that any improper conduct may “require a [financial] restatement, with class action litigation in the offing.”

Addition: D&O Diary points out that a few securities class actions related to options backdating have already been filed. See this post.

Regular readers know that it has been the practice of The 10b-5 Daily not to post about the legal troubles of Milberg Weiss – a subject matter that is arguably outside of the scope of this blog. A number of excellent legal blogs cover white collar crime issues and have extensively posted about the recent criminal indictment of the firm (see, e.g., the WSJ Law Blog and White Collar Crime Prof Blog).

That said, the indictment of one of the leading securities class action plaintiff firms in the country will inevitably have ripple effects on this area of the law. Especially given that Milberg Weiss is, according to ISS’s Securities Class Action Services (SCAS), lead or co-lead counsel in 95 active shareholder suits. Accordingly, The 10b-5 Daily will post relevant articles discussing the effect of the indictment on pending or previous securities class actions.

A recent roundup includes articles from The American Lawyer and The Recorder (via law.com) discussing Milberg Weiss’ ability to continue as lead counsel in current cases and an article from Reuters suggesting that it is unlikely that companies who have settled with Milberg Weiss in cases cited in the indictment will bring legal actions to recover the funds.

The Dura decision by the Supreme Court left little doubt that in-and-out traders (i.e., investors who both bought and sold their shares during the class period) will have difficulty establishing the existence of loss causation. At least one court has confirmed this reading of the case in the context of class certification proceedings. In In re Cornerstone Propane Partners, L.P. Sec. Litig., 2006 WL 1180267 (N.D. Cal. May 3, 2006), the court found that “plaintiffs who sold their stock before July 21, 2001, when the first corrective disclosure occurred, did not suffer any loss causally related to the defendants’ alleged misrepresentations.” Accordingly, the court excluded these plaintiffs from the definition of the class.

It is important to note that other courts, even pre-Dura, have come to a similar conclusion in the context of evaluating potential lead plaintiffs. Moreover, while the decision is interesting, removing in-and-out traders from the class is unlikely to have much of a practical effect on a securities class action other than reducing, by some amount, the potential damages.

Addition: There is a press release from defense counsel in the Cornerstone case noting that the decision “appears to be the first of its kind.”

Addition: A reader points out that a post-Dura class certification decision issued earlier this year in the Eastern District of Virginia reaches the opposite result. See In re BearingPoint, Inc. Sec. Litig., 232 F.R.D. 534 (E.D.Va. 2006) (“In sum, because in-and-out traders may conceivably prove loss causation, they are appropriately counted as members of the proposed class.”) Thanks to Andrew Brown for the cite.

(1) Securities Litigation Watch has posted the SCAS 50, which “lists the top 50 plaintiffs’ law firms ranked by the total dollar amount of final securities class action settlements occurring in 2005 in which the law firm served as lead or co-lead counsel.” At the top of the list, by a considerable margin, are Bernstein Litowitz Berger & Grossmann and Barrack, Rodos & Bacine.

(2) Lies, Damn Lies, & Forward-Looking Statements has a post on the emerging practice of law firms and their clients “putting out press releases in advance of the deadline for filing a lead plaintiff motion, often indicating their intention to file a lead plaintiff motion.”