On Feb. 29, U.S. District Judge Melinda Harmon held a hearing on the $7.2 billion Enron class-action settlement and a record $688 million attorneys' fee request, but she did not immediately issue a ruling.

During the 4 1/2 hour fairness hearing in Houston, Harmon heard arguments for and against final approval of the distribution plan and attorneys' fee award. The judge said she would issue her ruling as soon as possible, according to news reports.

The hearing is the latest chapter in investors' efforts to recover the more than $40 billion they lost after Enron, once the seventh-largest U.S. company, collapsed into bankruptcy in 2001. The bulk ($6.6 billion) of the $7.227 billion settlement would be funded by three of the energy company's former investment banks: Citigroup, Canadian Imperial Bank of Commerce, and JP Morgan Chase. Other settling defendants include former Enron auditor Arthur Andersen, Andersen's worldwide affiliate, Bank of America, Lehman Brothers, Enron's former outside directors, and the law firm of Kirkland & Ellis.

Patrick Coughlin, a partner with Coughlin Stoia Geller Rudman & Robbins who represents the class of investors, argued that the settlement is fair and reasonable given the complexity of the lawsuit and the firm's risk in taking on the case. While the fee award would be the largest ever in a securities case, Coughlin noted that the award would amount to 9.52 percent of the total settlement. “This is the largest class (action) settlement ever. There is no case comparable to this result,” he said.

Coughlin told the judge that his firm spent $100 million while researching and preparing the case against Enron's banks; the firm billed 247,000 hours, took more than 300 depositions from witnesses, submitted 5,700 filings, and reviewed 70 million documents. “The one thing we could not do was settle it for a nominal amount. We went all out,” Coughlin said, according to Bloomberg News. “We risked $100 million, and we could've gotten zero.”

The fee request was based on a retainer agreement that the San Diego-based law firm reached with the lead plaintiff, the University of California. The agreement provided for a sliding fee scale from 8 to 10 percent, with the fee percentage increasing based on the size of the recovery.

Ari Garbow, an attorney for Fiduciary Counselors, which oversees Enron's retirement and savings plans, said the fee request is “grossly out of sync with comparable cases,” according to the Houston Chronicle. He proposed that the award be cut to about $400 million, or 5.65 percent of the settlement. In the WorldCom class action, the $336.1 million fee award amounted to 5.5 percent of the overall $6.1 billion settlement.

Lawrence Schonbrun, a lawyer for an individual investor, said the fee request was “an affront to every working person in this country,” according to the Associated Press.

Coughlin Stoia bolstered its fee request with supporting declarations from Columbia University Law Professor John C. Coffee Jr., Harvard University Law Professor Lucian Bebchuk, a former federal judge, and several officials with the University of California.

In his declaration, Coffee said the Enron case was risky for Coughlin Stoia to bring because the investor plaintiffs were relying on a novel “scheme to defraud” theory that had been rejected by other federal courts (and was later rejected by U.S. Court of Appeals for the Fifth Circuit, which oversees appeals from the federal courts in Texas). The firm “was able to induce some of the largest, most sophisticated financial institutions in the world to settle for record amounts, based on a novel theory that other plaintiffs' counsel might have overlooked or been unable to articulate convincingly,” Coffee wrote. “Unlike other recent mega-fund cases--most notably WorldCom--[Coughlin Stoia] lacked the overwhelming legal leverage in this case that compelled the defendants in WorldCom to settle.”

Coffee noted that Coughlin Stoia helped Enron investors recover 8.3 percent of their market capitalization losses, 2.86 times the 2.9 percent recovery obtained by WorldCom investors. He pointed out that only 20.9 percent of the WorldCom settlement “was actually paid to shareholders”--the rest of the settlement went to note purchasers. “Viewed in this light, [the Enron settlement] recovered for shareholders almost six times as much as WorldCom--and in the face of higher risk,” he concluded. To review Coffee's declaration and other settlement documents, click here.

The Enron settlement is open to investors who bought company stock or related securities between Sept. 9, 1997, and Dec. 2, 2001. Under the distribution plan, holders of Enron's common shares would receive $6.79 per share, while holders of preferred stock would get $168.50 per share.

The investors are still pursuing claims against Merrill Lynch, Credit Suisse Group, and Barclays. On Jan. 22, the U.S. Supreme Court rejected the investors' request to review the Fifth Circuit ruling that barred them from bringing class-action claims against three banks. The high court's decision wasn't a surprise after the justices ruled in a separate case that Charter Communications shareholders could not sue two of the company's former vendors.

Trey Davis, a spokesman for the University of California, said the investor plaintiffs are considering their options and will present them to Judge Harmon, the Houston Chronicle reported. The Enron investors also have claims pending against former CEO Jeff Skilling, ex-Chief Accounting Officer Richard Causey, the Royal Bank of Canada, Royal Bank of Scotland, and Toronto-Dominion Bank. On Feb. 5, the university announced a $11.5 million settlement with Goldman Sachs over notes issued by Enron.

Friday, January 18, 2008

Trends in Securities Litigation—What You Need to Know for 2008
Submitted by: L. Reed Walton, Staff Writer

How will current lawsuits on the docket and new settlements affect investors in the coming year? Will the credit crisis and market turmoil yield a new wave of settlements? These trends are the subject of an upcoming RiskMetrics Group white paper, part of our What You Need to Know for 2008 educational program.

RiskMetrics Group will also host a webcast exploring securities litigation trends for the upcoming year. Adam Savett, Head of Securities Class Action Services for RiskMetrics Group, will host a panel of noted industry experts, including Stuart Grant, Managing Partner at Grant & Eisenhofer, Lyle Roberts, Partner at Dewey & LeBoeuf, and Kevin LaCroix, Director at OakBridge Insurance Services.

To register for the webcast, please visit here.

Click here to view the full What You Need to Know for 2008 Educational Series.

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Thursday, December 6, 2007

A Change in Federal Enforcement Tactics
Submitted by: Ted Allen, Publications

Five years after the passage of the Sarbanes-Oxley Act, the Securities and Exchange Commission has increased its civil enforcement efforts, but the agency is collecting less in penalties from companies, and federal prosecutors are bringing fewer criminal cases.

During the 2007 fiscal year that ended Sept. 30, the SEC brought 656 enforcement cases, a 14 percent increase from the 574 cases in 2006, according to Bloomberg News. The increase--the first in four years--stems in part from the 24 cases the agency brought over the alleged backdating of stock options.

“There are still more to come,” Linda Thomsen, the SEC’s enforcement director, said at a Nov. 10 law conference in New York, according to Bloomberg News. “My hope is we will get a lot more done” over the next year, she said.

Overall, more than 200 companies have disclosed internal or federal probes into past option grants. However, the SEC has concluded probes at more than 31 firms without recommending any enforcement action--which should be good news for companies and directors who are facing investor lawsuits. Peter Stone, a defense lawyer with Paul Hastings Janofsky & Walker, told The Recorder legal newspaper that “the existence of an ongoing formal SEC investigation is a significant factor in settlement discussions with plaintiffs.”

Among the recently cleared firms are: Electronic Arts, Interwoven, Linear Technology, Zoran, Computer Sciences, PMC Sierra, VeriSign, Sunrise Telecom, and Sunrise Senior Living, according to Bloomberg News.

During fiscal 2007, the SEC also filed 47 insider-trading cases over suspicious trading before the release of buyout news; those actions included cases against former employees at UBS, Morgan Stanley, and Bear Stearns, Thomsen said.

The number of SEC actions also was boosted by the 39 orders that the agency issued in September against accounting firms and individuals who allegedly audited public companies without registering with the Public Company Accounting Oversight Board.

At the same time, the agency is collecting less in fines and penalties from companies and corporate officers. During the 2007 fiscal year, the SEC collected $1.6 billion in penalties and illegal profits, down from more than $3 billion in each of the previous three years, Bloomberg News reported, citing an agency report released Nov. 15.

“The cases they're bringing these days are much smaller,” James Cox, a securities law professor at Duke University, told Bloomberg News. “The commission has adopted “a new ethos about penalties,” based on the concern that “savaging” companies with fines amounts to punishing their investors.

The SEC adopted a new corporate penalty policy in early 2006 after corporate advocates and Republican Commissioner Paul Atkins complained that the penalties were disproportionately high and ultimately were hurting shareholders. Earlier this year, Chairman Christopher Cox directed the agency’s enforcement division to obtain commission approval before negotiating corporate fines.

When asked by Bloomberg News about the decline in total fines, Chairman Cox noted that there wasn’t a major corporate fraud settlement this year. In 2006, the agency collected an $800 million penalty from American International Group and obtained a $400 million settlement from Fannie Mae.

The decrease in corporate penalties ultimately is a significant issue for investors, because much of this money is eventually distributed to investors through the SEC’s Fair Fund program, which was created by the Sarbanes-Oxley Act. The SEC has returned more than $3.2 billion to investors since 2002.

A continued decline in corporate penalties may undermine the arguments of class-action litigation critics, who contend that only the government should be permitted to recover damages for investors. Investor lawyers, including Fred T. Isquith of Wolf Haldenstein Adler Freeman & Herz and Jay Eisenhofer of Grant & Eisenhofer, have countered by pointing out that the SEC doesn’t have the resources to fully protect shareholders and that private lawsuits typically generate greater recoveries. (For more on these arguments, please see the March and April 2007 editions of the SCAS Alert.)

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Tuesday, October 9, 2007

Justices to Consider the Liability of Bankers, Vendors
Submitted by: Ted Allen, Publications

The U.S. Supreme Court will hear arguments today in Stoneridge Investment Partners v. Scientific-Atlanta, a high-profile case that concerns the liability of bankers, vendors, and other third parties who help companies commit securities fraud.

The Stoneridge case stems from claims by shareholders of Charter Communications against Motorola and Scientific-Atlanta, which manufactured set-top boxes used by Charter’s cable television subscribers. The investors allege that the two vendors engaged in “wash” transactions in 2000 to help Charter meet its annual operating cash flow goals.

The closely watched case, which one industry group has called “the most important case in a generation,” has attracted 30 amicus briefs from investor advocates, state officials, and industry groups.

The Council of Institutional Investors, the North American Securities Administrators Association, the University of California, the New York State Teachers’ Retirement System, the Change to Win labor federation, and 30 state attorneys general have filed briefs in support of investors. The Bush administration disregarded the recommendation of the Securities and Exchange Commission and filed a brief in support of the Charter vendors.

While the Supreme Court previously barred suits against “aiders and abettors” in its 1994 Central Bank of Denver decision, the Charter investors argue that they should be able to bring “scheme liability” claims against vendors, bankers, and others who knowingly participate in transactions that help companies mislead shareholders, even if the third parties didn’t publicly mislead anyone. Billions of dollars may be at stake in the case, as the high court’s decision likely will have far-reaching implications and affect the ability of Enron investors to pursue a class lawsuit against the company’s former investment banks.

On Sept. 20, the Supreme Court announced that Chief Justice John Roberts would take part in the court’s deliberations in Stoneridge. Roberts, along with Justice Stephen Breyer, earlier recused himself from the high court’s decision on whether to hear the case. Both justices reported in their 2006 financial disclosure forms that they own shares in Cisco Systems, the parent of Scientific-Atlanta, Legal Times reported. The Supreme Court did not disclose the basis for the chief justice’s decision to rejoin the case.

Roberts’ participation in the case presumably will help the defendants. During the past year, the chief justice joined court majorities in several rulings that favored business interests.

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Monday, October 8, 2007

Has the Trend of Fewer Securities Lawsuits Ended?
Submitted by: Ted Allen, Publications

After two years of below-average filings of securities lawsuits, has that trend reversed?

Between Aug. 1 and Sept. 21, investors sued 37 companies, according to The D&O Diary, a weblog written by Kevin LaCroix, a lawyer with OakBridge Insurance Services. That rate of new lawsuits translates to an annual total of 296, which well exceeds historical averages. During the week of Sept. 17 to 21, eight companies were hit with first-time lawsuits, LaCroix noted.

Investors filed most of these new suits against subprime lenders and homebuilders, which saw their shares plunge after the collapse of the subprime mortgage market earlier this year. Investors also have targeted Moody’s and McGraw-Hill, the parent of Standard & Poor’s, accusing the rating firms of giving excessively high ratings to mortgage-backed securities. Investors also sued Bear Stearns, which operated two hedge funds that collapsed after investing in subprime mortgage securities.

In addition, lender Countrywide, homebuilder Beazer Homes, and Freemont General have been sued by their own employees over losses they suffered in their 401(k) accounts through their holding of company shares.

Overall, shareholders had filed 130 federal securities lawsuits as of late September, up from 100 during the same period in 2006, according to Securities Class Action Services data.

Meanwhile, defense law firms, which last year touted new practice groups to address stock option backdating, have been gearing up teams of professionals to address the fallout from the subprime mortgage market.

A Quiet First Half of 2007
This surge in new securities cases follows a rather quiet first six months of 2007, when investors brought lawsuits against 59 companies, according to a mid-year report released in July by Stanford Law School and Cornerstone Research. That total was 42 percent lower than the average filing rate from late 1996 through June 2005, and the first half of 2007 marked the fourth consecutive six-month period when new case filings have trailed that historical average, the report said. (For more on the Stanford-Cornerstone report, please see the August 2007 issue of the SCAS Alert.)

Another group of researchers, NERA Economic Consulting, recorded 76 federal cases as of June 30, and projected a total of 152 cases for the whole year. That total would be 12 percent more than the 136 cases in 2006, but it would still trail the more than 200 cases that were brought each year from 1997 to 2005, NERA noted in its mid-year report, which was released Sept. 13.

History suggests that the recent surge in lawsuits may be a temporary phenomenon, and future case filings may return to 2006 levels after investors file all their subprime-related lawsuits. For instance, the option backdating scandal spawned 22 federal securities lawsuits in 2006, but was the subject of just four lawsuits this year, the NERA report noted.

In 2001, investors filed more than 300 IPO-laddering cases, causing the total case filings to soar to 520, according to NERA. That surge in IPO-laddering cases was short-lived; during the next three years, total cases ranged from 251 to 280 per year, which were only slightly higher than the 237 to 270 cases filed annually in 1998 to 2000.

Unless the subprime mortgage crisis leads to a widespread collapse of corporate credit markets and a broader recession, it appears that the recent flurry of subprime-related lawsuits will result in just a temporary increase in litigation activity.

“Certainly, the collapse of the 1990s stock market bubble led to an active period of class action litigation filings and settlements--a similar drop in market values in the future might lead to a resurgence in filings, even in a post-[Sarbanes-Oxley Act] world,” the NERA report noted.

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Tuesday, July 10, 2007

U.S. Supreme Court Tightens Pleading Standards
Submitted by: Ted Allen, Director of Publications

In a partial victory for companies, the U.S. Supreme Court tightened the pleading standards for shareholders who file securities class-action lawsuits over corporate fraud.

While the high court ruled for the defendants in Tellabs v. Makor Issues & Rights, most legal observers concluded that the justices took a balanced approach because they did not erect a higher barrier to investor plaintiffs, as industry groups and the Securities and Exchange Commission had asked the court to do.

"This ruling will make the lives of plaintiffs’ lawyers incrementally more difficult, but not impossible. Clearly, this was not a ringing victory for the defense side," James D. Cox, a securities law professor at Duke University, told the SCAS Alert. "All the plaintiffs' lawyers I have talked to are breathing a sigh of relief."

The Supreme Court, in an 8-1 decision on June 21, directed the U.S. Court of Appeals for the Seventh Circuit to reconsider a ruling that allowed shareholders to sue Tellabs, an Illinois-based telecommunications equipment maker. Investors allege that the chief executive misled investors and analysts in 2001 about the prospects for the firm's best-selling product.

The Supreme Court was asked to decide what type of inferences a federal court may consider in determining whether an investor's allegations can meet the requirement of the Private Securities Litigation Reform Act of 1995 (PSLRA) to plead facts "giving rise to a strong inference that the defendant acted" with fraudulent intent.

This case is significant because investor plaintiffs must meet the law’s pleading standards to survive a defendant's motion to dismiss. If investors overcome this hurdle, they can gather pre-trial testimony from executives and force companies to turn over documents. In such cases, companies often will agree to a significant settlement to avoid additional litigation costs and the risk of trial.

Writing for the majority, Justice Ruth Bader Ginsburg noted that private securities litigation is an "indispensable tool" to help defrauded investors and is "crucial to the integrity of domestic capital markets." She also observed that the intent of the PSLRA was "to curb frivolous, lawyer-driven litigation, while preserving investors’ ability to recover on meritorious claims."

Ginsburg said plaintiffs can avoid having their claims dismissed by presenting facts that support an inference of fraudulent intent that is "cogent and at least as compelling as any opposing inference that one could draw from the facts alleged." In other words, an investor must show facts that support an inference of wrongful intent that is at least as likely as inferences that would show that corporate officers did not intend to defraud shareholders.

The case attracted a flurry of supporting briefs on both sides. The Tellab shareholders were supported by the Council of Institutional Investors, the University of California, the New York State Retirement Fund, the labor-affiliated Amalgamated Bank, the National Conference on Public Employee Retirement Systems, and state officials from Ohio and 23 states and territories.

Various industry groups backed Tellabs, including the Securities Industry and Financial Markets Association, the Washington Legal Foundation, the American Institute of Certified Public Accountants, and TechNet, which represents technology executives.

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Tuesday, May 8, 2007

Historic Shell Settlement Sparks Praise and Criticism
Submitted by: Ted Allen, Director of Publications

A group of 50 European institutional investors have reached a $352.6 million settlement with Royal Dutch Shell over the petroleum company's statements about its oil and gas reserves.

The accord is the first large securities class settlement by investors in a European legal proceeding. The settlement, if approved by the Amsterdam Court of Appeals, would resolve claims by non-U.S. investors who purchased the company's shares on European exchanges between April 8, 1999, and March 18, 2004.

"This is truly an unprecedented settlement of a large-scale European shareholder dispute," Jay Eisenhofer, a partner with Grant & Eisenhofer, a U.S. law firm that represents the European investors, said in an April 11 press release.

However, the settlement has been criticized by a lawyer who represents Shell investors in the U.S. class-action litigation, who says the company is attempting to do an "end run" around the U.S. courts and settle for less with European investors, who can't bring a securities class lawsuit in their home countries. "When all you can do is settle, you can't obtain maximum value," said Stanley Bernstein, a partner in the firm of Bernstein Liebhard & Lifshitz, which is lead counsel in the U.S. case.

The investors sued after Shell reduced its oil and gas reserve estimates by more than 33 percent in early 2004, which prompted the company’s shares to fall. The reserve reductions led to the ouster of chairman Phil Watts and two other top executives. Shareholders contend in their lawsuits that Shell inflated its reserves from 1997 to 2003 and overstated more than $100 billion in future cash flows.

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Monday, May 7, 2007

Institutional Shareholder Services to Hold May 9 Webcast on Securities Litigation Trends
Submitted by: Sarah Cohn, Director of Communications

ISS will hold a special Governance Forum webcast, Accountability Goes Global: International Investors and U.S. Securities Class Actions, on Wednesday, May 9 at 9:30 a.m. Eastern Daylight Time.

Recent media reports have noted that the class action concept, while often foreign to non-U.S. investors, is increasingly taking hold worldwide, as investors seize the power that collective action offers to similarly situated litigation groups. During ISS’ forum, panelists Mark Willis, a Partner at Cohen, Milstein, Hausfeld, Toll, P.L.L.C.; and Elli Kioupi, General Counsel at Avalon Holdings, will discuss why international investors are becoming more active in U.S. class action cases. Adam Savett, ISS Vice President of Securities Class Action Services, will moderate the panel and also share some of the key findings from his forthcoming paper, Accountability Goes Global: International Investors and U.S. Securities Class Actions.

To attend the online forum, please register here.

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Wednesday, April 4, 2007

Securities Litigation Watch Update: Q1 Review: New Cases Up, Settlements Even
Submitted by: Adam Savett, Vice President and Product and Market Segment Manager, Securities Class Action Services

A quick review of the SCAS database reveals that 30 new federal securities class actions were filed in the first quarter of 2007. On a pro-rata basis, this would translate to 120 new federal securities class actions for the year. This would represent a slight increase from 2006 securities class action filings, but would still remain below historical levels in the post-PSLRA world.

Additionally, 41 federal securities class action settlements received final approval during the first quarter of 2007. On a pro-rata basis, this would translate to 164 federal securities class action settlements for the year. This would put 2007 within the margin of error for settlements during the last few years.

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Tuesday, March 27, 2007

Supreme Court to Address Scheme Liability
Submitted by: Adam Savett, Vice President, Securities Class Action Services

Yesterday, the Supreme Court granted certiorari to consider whether secondary actors can be held liable to shareholders under a "scheme" liability theory. Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 549 U.S. ___ (U.S. 06-43 Mar. 26, 2007).

The Supreme Court's decision comes hard on the heels of the Fifth Circuit's decision in the Enron litigation last week, which highlighted the growing Circuit split on the issue. The Fifth and Eighth Circuit Courts of Appeal have rejected scheme liability, and the Ninth Circuit has indicated that liability may be found under the theory.

The Eighth Circuit had ruled that a party cannot be liable under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c) for engaging in "schemes" to defraud. The Eighth Circuit held that liability under Section 10(b) is limited to those who (1) "make or affirmatively cause to be made a fraudulent misstatement or omission," or (2) "directly engage in manipulative securities trading practices." Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 443 F. 3d 987 (8th Cir. 2006).

The Eighth Circuit affirmed dismissal of securities fraud claims asserted by shareholders of Charter Communications (NASDAQ: CHTR) against two of Charter's vendors, Scientific-Atlanta, Inc. and Motorola, Inc. (NYSE: MOT). Charter’s shareholders alleged that the two vendors had entered into sham transactions while knowing that Charter intended to account for the transactions improperly. Neither Scientific-Atlanta nor Motorola made or affirmatively caused to be made any allegedly misleading statements directly to Charter's shareholders about those transactions. Charter's shareholders had alleged that the two vendors could be liable for participating with Charter in a "scheme" to defraud Charter's shareholders. The vendors allegedly deceived Charter's shareholders because the "sham" transactions artificially inflated Charter's cash flow by about $17 million in one quarter, which thereby inflated revenue forecasts and Charter's stock price.

In rejecting scheme liability, the Eighth Circuit relied on the Supreme Court’s earlier decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 191 (1994). In Central Bank, the Court held that there was no aiding and abetting liability for claims brought under Section 10(b) and Rule 10b-5. The Court in Central Bank did not foreclose all liability for secondary actors, noting that the absence of aiding and abetting liability "does not mean that secondary actors in the securities markets are always free from liability."

A dozen years after Central Bank, the federal courts are increasingly divided on whether "scheme" claims against secondary actors are different from claims for aiding and abetting against those same actors. Although the Eighth Circuit ruled that "scheme" liability cannot be squared with Central Bank's prohibition on aiding and abetting liability, the Ninth Circuit has ruled that it can under limited circumstances. Last year, the Ninth Circuit held that secondary actors can be liable for participating in a scheme to deceive investors if they engaged in conduct that had the “principal purpose and effect of [creating] a false appearance of revenues” even if they did not make misleading statements. Simpson v. AOL Time Warner, Inc., 452 F.3d 1040, 1048 (9th Cir. 2006). And last week, the Fifth Circuit expressly rejected the Ninth Circuit’s standard and joined the Eighth Circuit in rejecting “scheme” liability for secondary actors. Regents of The University of California v. Credit Suisse First Boston (USA), Inc., et al., No. 06-20856 (5th Cir. Mar. 19, 2007).

The actual question presented for review:

Whether this Court's decision in Central Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994), forecloses claims for deceptive conduct under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5(a) and (c), 17 C.F.R. 240.l0b-5(a) and (c), where Respondents engaged in transactions with a public corporation with no legitimate business or economic purpose except to inflate artificially the public corporation's financial statements, but where Respondents themselves made no public statements concerning those transactions.

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Wednesday, March 7, 2007

Guest Commentary: A SEC Monopoly Will Not Work
Submitted by: Fred T. Isquith, Wolf Haldenstein Adler Freeman & Herz

"Of all the forms of tyranny, the least attractive and the most vulgar is the tyranny of wealth," Theodore Roosevelt famously said.

The decline in the number of securities class-action lawsuits filed in the federal courts is well documented. Similarly well documented is that investor losses in these cases, measured by the fall in the stock prices, have also declined since the boom market of the late 1990s.

A number of theories have been suggested by legal and economic observers for the decline in litigation activity. Some have suggested that the law should be changed so investors could no longer seek recovery of losses, even where fraud has occurred. Instead, these columnists suggest that the Securities and Exchange Commission alone be permitted to determine when, if at all, to challenge corporate misconduct. Wall Street would like nothing better.

Rising stock prices of the bull market can conceal many sins. When increasing price of securities is coupled with the U.S. Supreme Court's decision in Dura Pharmaceuticals, requiring plaintiffs to describe in their pleading the economic theory of loss, and the uniquely restrictive pleading requirement of the 1995 amendments to the securities laws (passed over the veto of President Bill Clinton, and being interpreted restrictively by a business friendly judiciary), one would expect to find fewer cases and lessened amounts recovered than immediately following the collapse of the "tech bubble years." Lawyers representing investors, impaired in their ability to collect for investor overpayments of securities caused by corporate malfeasance, would naturally seek other outlets for their time and talents.

Other hypotheses, including that there is "less fraud," seem highly problematic. According to this hypothesis, the government has supposedly been more aggressive in pursuing criminal and civil enforcement. Therefore, management has seen the light; natural human greed has been suppressed, and mankind has been improved. From this nearly theological statement of faith, there also arises the revealed command that the entire area of enforcement be left to the SEC, an agency nearly in thrall to Wall Street and corporate America. Neither of the hypotheses nor the perceived benefits of reserving to the SEC a monopoly of investor protection has real world justification.

Corporate malfeasance is based upon human nature: the acquisitive instinct and the desire for social status that accompanies riches regardless of how earned. Corporate greed exhibits the incentives of the free market without moral restraint. As water finds it own level and leaks out, so does money. No matter what reforms are then passed, the presence of large sums of money find a way of inducing some managers, directors, and Wall Street to take more than is properly theirs to take. Sooner or later, these managers and directors begin to think that corporate assets are their own, regardless of their lack of entrepreneurial risk in developing the business, and that the shareholders (and employees) are just in their way.

The lack of control by shareholders over the management of public corporations has been widely documented. Hiding troubling developments in a business and creating false pictures of success are natural. Self-congratulation is far preferable to embarrassing truth. Whether it is engaging in self enrichment through Wall Street manipulations, or the backdating of stock options, or otherwise enhancing already enormous compensation and benefit packages, or concealing their own embarrassment in making poor decisions that impact the business negatively, management will not be self-restrained. The money to be made is too big.

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Tuesday, March 6, 2007

The SCAS 50 for 2006
Submitted by: Adam Savett, Vice President of Securities Class Action Services

For the fourth year, my company (ISS' Securities Class Action Services) has issued its "SCAS 50" report. Based on data from the SCAS database, the SCAS 50 lists the top 50 plaintiffs' law firms ranked by the total dollar amount of final securities class action settlements occurring in 2006 in which the law firm served as lead or co-lead counsel.

The full report is available here.

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Wednesday, February 21, 2007

Options Backdating Securities Class Actions: The List - Update
Submitted by: Adam Savett, Vice President, Securities Class Action Services

The first order of business - our options backdating securities class action list has been updated to add Amkor Technology (NASDAQ: AMKR), Apollo Group (NASDAQ: APOL), Hansen Natural Corporation (NASDAQ: HANS), Quest Software (NASDAQ: QSFT) and Sunrise Senior Living (NYSE: SRZ). The number of companies on the list now stands at 25.

We will continue to update and maintain this list to track all newly filed securities class actions that have options backdating related allegations. The list will also include any previously filed cases that have recently added options backdating allegations.

Another excellent resource is The D&O Diary's list of options backdating related derivative lawsuits, here.

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Friday, February 9, 2007

More Korean Firms Could Face Securities Lawsuits
Submitted by: Ted Allen, Director of Publications

More South Korean companies are bracing for the possibility of securities class-action lawsuits now that a legal grace period has expired.

South Korea adopted securities class-action legislation in 2004 that was modeled in part on U.S. laws. However, the Korean legislation contained various hurdles that have deterred class claims. The law exempted firms with less than 2 trillion won ($2 billion) in assets from lawsuits over conduct before Jan. 1, 2007. "Now that the grace period has ended, all [listed] companies should prepare for a possible class action," attorney Chung Dong-yoon warned in a recent article in The Korea Herald.

Based on U.S. litigation trends, the attorney estimates that Korea’s 1,600 listed firms could face about 30 securities class-action suits each year. So far, no successful class suits have been filed.

The Korean law still contains other requirements that discourage lawsuits. To file a class suit, an investor must assemble a group of 50 shareholders who collectively hold at least .01 percent of a firm’s outstanding shares.

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Thursday, January 4, 2007

Appeals Court Rejects Class Certification in IPO Litigation
Submitted by: Ted Allen, Director of Publications

On Dec. 5, a U.S. appeals court ruled that a judge improperly granted class-action status to investors' claims against Wall Street banks over their underwriting of initial public offerings by technology firms in the late 1990s.

The investors, who previously reached a tentative $1 billion settlement with 310 Internet companies, contend that the banks manipulated IPOs to maximize their fees. The shareholders alleged that the banks created an artificial demand for the shares of these technology firms by requiring IPO clients to buy more stock later at higher prices.

A three-judge panel of the U.S. Court of Appeals for the Second Circuit ruled that the investors' claims weren't similar enough to be tried together in the same class. A federal judge certified the class based on six "focus cases."

The ruling is a significant victory for Morgan Stanley, Credit Suisse Group, and 10 other Wall Street firms, because many of the individual investors in the rejected class won't bother to pursue their claims separately or have the leverage to force the banks to agree to a generous settlement.

"Someone with a loss of $5 per share on a couple of hundred shares isn't going to waste the time and effort it takes to sue all these folks," Lawrence Hamermesh, a law professor at Widener University, told Bloomberg News. "When you combine all those losses together into $10 billion, then people have enough of a stake to keep going."

Melvyn I. Weiss, the lead lawyer for investors, said he would appeal the ruling. "It's not over," Weiss said, adding that the ruling applies only to the six focus cases and that other cases could meet the standards for class certification, The New York Times reported.

"The judges really are leaving some people who have been injured without any remedy," Weiss told Bloomberg News.

According to The New York Times and The Wall Street Journal, the appellate ruling may also jeopardize the $1 billion settlement with the IPO issuers and a separate $425 million tentative accord that investors reached with JP Morgan Chase in April. Neither settlement has received final court approval.

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Tuesday, December 26, 2006

Judge Dismisses Enron Investors' Claims Against Alliance
Submitted by: Ted Allen, Director of Publications

A federal judge has dismissed claims by Enron investors against Alliance Capital Management that arose from the service of Alliance executive Frank Savage on the energy company's board.

The investors argued that Alliance should be held liable because Savage signed a registration statement for a $1 billion Enron bond offering that incorporated the company's false financial statements for 1998 to 2000. Alliance, a New York-based money manager, is now known as AllianceBernstein.

U.S. District Judge Melinda Harmon in Houston rejected that argument after concluding that there was "no evidence that Alliance had any authority to influence, supervise, or determine Savage's actions at Enron," The Wall Street Journal reported. She also said there was no evidence that Savage knew or should have known that he had signed a false registration statement.

Jim Hamilton, an analyst at Wolters Kluwer Law & Business, noted the significance of the ruling in a posting on his Web log. Had the judge held Alliance liable based on Savage's service on Enron's board, "the effect would be to chill the willingness of qualified individuals to serve on boards of public companies as independent directors," Hamilton wrote.

In an unusual move, the judge ordered Lerach Coughlin Stoia Geller Rudman & Robbins, the lead counsel for the investors, to pay part of Alliance's legal fees and expenses. In her Nov. 30 ruling, the judge said investors' lawyers should have realized that their claims had no merit before Alliance had to ask the court to dismiss those claims, Bloomberg News reported. The fees will be limited to those incurred by Alliance during the summary judgment phase of the litigation, attorney Lyle Roberts noted in his 10b-5 Daily Web log.

Harmon's order was noteworthy because defendants in U.S. securities lawsuits typically pay their own legal fees even when they persuade a court to dismiss a case. Investors, who generally have contingency fee arrangements with their attorneys, generally have their legal fees paid through a percentage of the settlements that they obtain.

William Lerach said his firm would pay the fees if it does not prevail on appeal or fails to persuade the judge to change her mind, the Journal reported. Savage, along with other former Enron directors, previously reached a settlement with investors, without admitting wrongdoing.

Lerach Coughlin so far has obtained $7.1 billion in settlements on behalf of the University of California and other investors who lost money during Enron's collapse into bankruptcy in 2001. Investors have reached accords with Citigroup, JP Morgan Chase, and three other investment banks and are still pursuing claims against Merrill Lynch, Credit Suisse, Toronto-Dominion Bank, Royal Bank of Scotland Group, Royal Bank of Canada, Goldman Sachs Group, and the law firm of Vinson & Elkins, according to Bloomberg News. Judge Harmon previously dismissed investors' claims against Deutsche Bank and Barclays.

A trial is scheduled for April, but a federal appeals court is reviewing a challenge by Merrill Lynch and other defendants to Judge Harmon's class certification order, Bloomberg News reported.

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Monday, December 4, 2006

Europeans Take a More Active Role in U.S. Cases
Submitted by: Ted Allen, Director of Publications

More European investors are realizing that it makes sense to participate in U.S. securities class-action cases by serving as lead plaintiffs, or by filing claims for their share of billions of dollars in settlements.

"There has been a sea change in interest among European investors filing claims and claiming money that is rightfully theirs," Mark S. Willis, a partner with Cohen, Milstein, Hausfeld & Toll, a law firm that represents investors, said during a SCAS Web cast in September. "And there's also been an interesting change in the attitude toward institutional investors here in Europe about taking an activist role in U.S. class actions."

One prominent example of a U.S. case where European institutional investors are serving as lead plaintiffs is the Parmalat Finanziara class action. The lead plaintiffs include Hermes Focus Asset Management Europe, Cattolica Partecipazioni, Societe Moderne des Terrassements Parisiens, and Capital & Finance Asset Management. (A Hermes affiliate is a part owner of ISS.)

Earlier this year, a group of 26 Dutch pension funds led by Stichting Pensioenfonds filed a securities lawsuit against Royal Dutch Shell. The lawsuit, which is pending in federal court in New Jersey, was filed separately from the consolidated class action that was brought earlier by two Pennsylvania pension funds and other investors. A Canadian institution, the Ontario Teachers' Pension Plan Board, served as a lead plaintiff in the Nortel Networks litigation that resulted in a $2.47 billion settlement in February.

European and other international investors also have joined in derivative lawsuits that seek corporate governance changes. In October 2005, U.K. and Dutch pension funds were part of an international coalition of institutions that sued News Corp. in Delaware court over the company's decision to extend its "poison pill" defense without seeking shareholder approval. After surviving a motion to dismiss, the investors reached a settlement with the media company in April.

In addition, AP7, a Swedish pension fund, is serving as a lead plaintiff in a derivative lawsuit by Viacom investors that seeks to recover compensation paid to top executives, according to Keith Johnson, a Wisconsin-based lawyer who advises foreign pension funds.

International investors have also joined together to lobby for U.S. governance changes, such as majority voting in board elections. In October, pension funds from the Netherlands, Sweden, the United Kingdom, Canada, and Australia urged U.S. regulators to allow shareholders to put proxy access proposals on corporate ballots in 2007.

As Johnson noted, many European investors traditionally have been reluctant to sue companies, because they come from cultures that rely far less on litigation than in the United States. "I don't see a mad rush to doing this, but I do see a slow trend, which will gradually increase in the next few years," he told the SCAS Alert.

Johnson said European investors have become more interested in litigation as several European nations have taken limited steps to enhance the rights of shareholders to sue. Last year, Germany passed legislation to allow investors or companies to seek model case proceedings to resolve common factual or legal questions in shareholder lawsuits. In November, a new British law took effect that allows shareholders to sue directors who "don't promote the success of the company." However, American legal rules remain far more favorable to investors, so European institutions will continue to bring securities claims in U.S. courts when possible.

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Submitted by: Ted Allen, Director of Publications" »

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Thursday, October 19, 2006

Buried Notice Will Not Die
Submitted by: Bruce Carton, Vice President of Securities Class Action Services

Let's put it this way. My company, ISS'