Insight

Recently, a number of studies have been published analyzing case filing trends for securities class actions as of mid-year 2010. Such studies include those conducted by Advisen (report here), Cornerstone Research/Stanford Law School (report here), and NERA (report here). While these studies use different sources and, in some cases, different methodologies to track and analyze data, they all point to a similar observation: that securities class action filings have been on a downward trend since late 2009 and that trend appears to be due in large part to the drying-up of credit crisis class action litigation.

It tends to makes sense. The overvaluation of mortgage-backed securities driven by an unregulated lending market created an unprecedented global recession with stock prices plummeting into the abyss. Naturally, one would expect this to result in a boom of securities fraud litigation, but would eventually burn itself out as the economy recovers and the number of defendants dwindles. Simply put, securities class actions tend to track the ebb and flow of world events, especially events such as a global recession. See e.g. the class action fall-out of the BP oil spill with lawsuits against BP, Transocean, and others.

In Morrison v. NAB the Supreme Court established the "transactional test," which turned on its head decades of lower court jurisprudence involving multi-national securities class action litigation. Rather than merely deciding narrowly on the facts in Morrison, the Court chose to adopt a black letter test that, at first glance, appears to bar all federal securities fraud suits in the US for securities traded on a foreign stock exchange. The implications for private plaintiffs as well as the SEC seemed far reaching as many securities class actions have historically involved an eclectic array of parties hailing from all corners of the globe.

However, in a timely display of democratic balance, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) on July 21, 2010. Title 9 of the Act is devoted to investor protections. It addresses, among other things, several key Morrison issues with respect to securities class actions. The event saw the realization of some expected changes with a few twists.

As discussed in our previous post, there are a number of legislative developments pending that could positively impact plaintiffs suing for securities fraud. Similarly, if some of these initiatives do make it into law they could limit or even reverse the decision in Morrison v. NAB.

Title 9 of the financial regulatory bill, otherwise known as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), proposes enhancements to investor protection and improvements to the regulation of securities. First, Section 929P(b) authorizes an action brought by the SEC based on a conduct and effects test (the same test used by lower courts prior to the Morrison case). This would give the SEC jurisdiction over foreign traded securities and defendants in certain circumstances. Second, Section 929Y of the Act directs the SEC to study whether the same test should be applied for private actions for securities fraud. The SEC will have 18 months from the statute's enactment to report their findings to Congress. If they make a recommendation in favor of such a test it is likely that Congress will amend the Securities Exchange Act of 1934 and revert back to the pre-Morrison jurisprudential landscape.

Investors and issuers alike should take note of the Supreme Court's opinion in Morrison v. National Australian Bank as it could have major implications for their ability to sue or be sued for securities fraud in the future. 

In a ground breaking decision decided yesterday the High Court in Morrison rejected years of federal jurisprudence on the extraterritorial application of US securities fraud legislation. In a scathing opinion by Justice Scalia, the Court criticized the Second Circuit's vaunted "conduct" and "effects" test for establishing subject matter jurisdiction over foreign investors trading foreign securities on foreign exchanges (the so called "foreign cubed" case). The Court found that the authority to hear a securities fraud case involving foreign investors and securities is a question of "merit" and not a question of subject matter jurisdiction. In other words, rather than diving into the particulars of the defendant's conduct or the nationality of the parties, the Court found that the question is whether Section 10(b) gives rise to a private cause of action for securities that are traded outside of the territory of the United States.

In opposition to the Second Circuit's test involving foreign securities traded on foreign exchanges, the Court promulgated the "transactional test" for determining the extraterritorial reach of US securities fraud laws. The Court held that "[T]hose purchase-and-sale transactions are the objects of the statue's solicitude...And it is in our view only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which Section 10(b) applies."

First the good news - there aren't a whole lot of options backdating cases left.

Now the bad news - we have to update the numbers again, with the settlement earlier this week of the options backdating litigation involving  Maxim Integrated Products, Inc. (NASDAQ: MXIM)  for $173 million.

Thus, of the 39 options backdating cases that were filed as securities class actions, 36 have now reached a resolution. Of the resolved cases, 8 of those cases have been dismissed and 28 have substantially or completely settled.

The twenty eight settlements total $2.32 billion, for an average of $79.7 million.  Removing the largest settlement (UnitedHealth Group) lowers the average back to $51.88 million.  And due to a reader comment, we have a new metric - the median settlement value is $16 million including the UnitedHealth case, or $14 million if that case is excluded.  Removing the outlier on the other end (the $2 million PainCare Holdings settlement) returns the median back to $16 million.

Co-lead counsel in the Maxim case are Bernstein Litowitz Berger & Grossmann and Chitwood Harley Harnes.

As always, our complete analysis can be accessed in this presentation.

Continuing their series of "trends" studies for non-US securities class actions, NERA Economic Consulting has released a study of securities litigation trends in the Australia market.

Covering the period from 1993 - 2009, the study has several notable findings, chief among them:

• New case filings have accelerated in recent years.
• The vast majority of Australian actions settle.
• Cases are concentrated in the financial industry

According to the authors (and borne out by our own SCAS data), securities class action filings in Australia set a new record in 2009, breaking the previous record set in 2008.  Moreover, the total number of new cases filed in 2007-2009  represents half of all securities class action cased ever filed in Australia.

As with US cases, a majority of Australian cases alleged either misleading or deceptive conduct, or failure by companies to promptly disclose information material to the value of their securities.

Also, more than half of all securities class actions were brought against companies in the "financial industry," though the report has a broad definition of that term, including both real estate and insurance companies for example.

The study also found that a super-majority of securities class action cases in Australia settle. Of the 12 class actions resolved by the end of 2009, 8, or 75%, were settled.  Apparently, this trend has become even more pronounced in recent years – every case filed after 2003 that has been resolved was settled.

The full report can be downloaded here.

In perusing our options backdating scorecard, we realized that we hadn't updated two cases.

1. The Vitesse Semiconductor Corp. (Pink Sheets: VTSS) litigation actually had two settlements, one with the corporate defendant and the directors and officers, and a separate settlement with KPMG, the auditors.  The revised total value of the two settlements is $20,774,322.

2. The UTStarcom, Inc. (Nasdaq: UTSI) case, which was initially dismissed by the District Court, was settled for $9.5 million back in 2009.

Thus, of the 39 options backdating cases that were filed as securities class actions, 35 have now reached a resolution. Of the resolved cases, 8 of those cases have been dismissed and 27 have settled.  There are now only 4 cases waiting for a substantial final resolution - just over 10% of the filed options backdating class actions.

The twenty seven settlements total $2.15 billion, for an average of $79.7 million.

As always, our complete analysis can be accessed in this presentation.

While it is far too late to suggest that we have reached an inflection point with regard to the options backdating litigation, we have certainly reached a reflection point, with the recently announced Juniper Networks, Inc. (NYSE: JNPR) settlement.  The $169 million class action settlement is the 6th nine-figure settlement of an options backdating securities class action.  Given that some early prognosticators suggested the total settlement value of all of these cases would not exceed $1 billion, it's time to crunch the numbers once more.

Of the 39 options backdating cases that have been filed as securities class actions, 34 have now reached a resolution. Of the resolved cases, 9 of those cases have been dismissed and 25 have settled.

The twenty five settlements total $2.13 billion, for an average of $85.1 million. But, removing the largest settlement (UnitedHealth Group) lowers the average back to $50.08 million. This continues the recent trend of the average settlement value of these cases rising, after a prolonged decline following the UnitedHealth settlement.

As we have previously noted, the options backdating cases have settled more quickly on average, than other cases. The twenty five cases have settled in an average of 717 days. While the numbers have been slowly creeping up as the remaining cases linger, the average time from filing to settlement is still below historical levels.

As always, our complete analysis can be accessed in this presentation.

According to news reports (Bloomberg, Reuters), a verdict was returned earlier today in the Vivendi trial.

Vivendi SA was found liable on all 57 counts, but former Chief Executive Jean-Marie Messier and former Chief Financial Officer Guillaume Hannezo were found not liable.