The SEC announced yesterday that it had named Walter G. Ricciardi and Peter H. Bresnan as Deputy Directors of the Division of Enforcement.  Prior to this promotion, Ricciardi was the District Administrator of the Commission's Boston District Office and Bresnan was an Associate Director in the Division of Enforcement.  Historically, the Enforcement Division has had just one Deputy but as Broc Romanek explains on his blog, "Enforcement now follows in the footsteps of Corp Fin in maintaining two deputy director positions, as the layers of management continue to grow along with the overall size of the SEC Staff."

Of course, we now must add the positions of District Administrator of the Commission's Boston District Office and Associate Director of Enforcement to our already lengthy list of high-profile job openings in the securities regulation world.

I've added it as an update to the Reeder Feedback on the ILR Report post here, but another comment from a reader now has me pondering. The premise of the IRL report seems to be that individual investors get the "short end of the stick" because, unlike institutions, they are unlikely to be sufficiently diversified  to get enough of the "'winning' transactions (i.e., from selling a security at what is alleged to be an artificially inflated price)" to offset their losses from "losing" transactions caused by securities fraud.  Conversely, institutional investors are typically diversified, and therefore do better than individuals in this regard.

But...as one reader points out, "'institutions', i.e. pension funds, mutual funds, are simply aggregations of individual investor interests." 

Isn't that right?  Doesn't this benefit of diversification to institutions that supposedly causes individuals to get the "short end of the stick" simply get distributed in the end to individuals anyway?

Yesterday's report from the Institute for Legal Reform that concluded that individual investors are getting the "short end of the stick in the securities class action system as compared to large institutional investors" (discussed here) prompted some interesting and immediate responses from SLW readers, which are cut and pasted below:

1.  The report recognizes that if A sells 100 shares to B at a price inflated by $1 per share, A gained $100 and B overpaid by $100. Now if one party is an institutional investor that trades a lot, it is on both sides of the trades fairly evenly, and its gains and losses tend to average out; it could be A in one case and B in another. /span>(More specifically, its average net gain or loss will tend to be a small fraction of its overall holdings.) If another party is a small investor that trades infrequently, it could be a big winner or a big loser, particularly if it has only one trade, either as party A or B. The report correctly points out that the institutional investor is thus somewhat hedged, while the individual could be a big winner or loser. This is not really the same thing as what the press release says when it states,

"The average American investor gets the short end of the stick in the securities class action system as compared to large institutional investors," said ILR President Lisa Rickard. "The stock holdings of individual investors are generally too few in number to offset losses in stock value that follow allegations of securities fraud."

Yes, individuals who are losers in one stock probably are net losers, but half of them are also net winners.

2.  The report carefully pointed out in its footnote 11 that it ignores where the funds for the settlement are coming from. That is a big issue! If the funds are coming from the company (i.e., if insurance is small or is recouped through higher premiums), then the results may be completely reversed! That is, a long-term investor, which is more likely to be an institution, will have bought before the class period and thus help pay the settlement (from its share of ownings in the company) but have bought too early to be in the class. If A sells to B and B is compensated from the settlement with outside money, A can win and B can break even or lose only a small amount. But if A, B, or another investor pays for part or all of the settlement, then the results for investors overall are worse. Basically, if you toss in "free" money for the settlement of course investors will generally do well. But if the investors, as shareholders, have to pay for part of the settlement, they will do worse. Add in the leakage to attorneys, and the claim in the press release that "most institutional investors don't simply break even from securities class action settlements; many benefit," is strained. (And besides, if half gained and half lost by chance, one could also say that "many benefit" from just a random redistribution of money, so that part of the claim in the press release is not particularly meaningful as it now stands.)

UPDATE:

3.  Another point is that "institutions", i.e. pension funds, mutual funds, are simply aggregation of individual investor interests.

The U.S. Chamber Institute for Legal Reform has sponsored this interesting study on securities class action litigation that it released today at its 6th Annual Legal Reform Summit. It is a lengthy study that I plan to read and discuss in the future, but as summarized in this press release, the Institute for Legal Reform argues that

"The average American investor gets the short end of the stick in the securities class action system as compared to large institutional investors," said ILR President Lisa Rickard. "The stock holdings of individual investors are generally too few in number to offset losses in stock value that follow allegations of securities fraud."

The study was conducted for ILR by Navigant Consulting to determine if private securities class actions are serving the best interests of all investors. It revealed that most institutional investors don't simply break even from securities class action settlements; many benefit, accumulating the gains of stock prices inflated by alleged fraud and also receiving compensation for losses suffered as a result of disclosure of the alleged fraud."

I am researching the current state of securities class actions outside the U.S.  I plan to create a comprehensive list of the settlements, pending cases and, in some countries, the pending legislation related to securities class actions going on outside the U.S.  As I did with the Counting Up the Securities Class Action Trials series of posts, I will happily share this research with SLW readers.

So... I'd like to once again call upon the collective knowledge of the readers of this blog to make sure this list is complete.  Can anyone out there help?  Just a little bit?  If you have any information on non-U.S. securities class actions/settlements/legislation, please send it to me via email (see the "Contact Us" link for the address) or as a comment to this post.

Thanks,
Bruce

In my December 2003 post entitled, "Puncturing the Myths of Opting Out," one of the key points in support of the idea that opting out of securities class action settlements was generally ill-advised was the following:

"Indeed, the plaintiffs' law firm Bernstein Litowitz Berger & Grossman, co-lead counsel in the WorldCom case discussed above, offers the following eye-opening bit of research: to its knowledge, no individual action has ever settled prior to a pending class action or settled on more favorable terms."

This is now open to debate, however, because according to this Reuters article, the $78.9 million settlement reached by five NYC pension funds that opted out of the WorldCom securities class action is "about three times bigger than what they would they would have gotten as part of the wider class-action case."

"This settlement fully validates the decision of the funds' trustees to opt out of the class action to pursue an individual case," Michael Cardozo, the city's corporation counsel, said in a statement.

In addition, the article notes that the NYC pension funds expect to receive payment "within the next few weeks," which, barring some unexpected turn of events in the WorldCom securities class action claims administration, will be way before any money is received by the class.

Interestingly, in this updated version of the same Reuters article, there is a quote from Sean Coffee of Bernstein Litowitz taking issue with Cardozo's statement. Coffee states:

"I would be very skeptical of any claim that an individual plaintiff did better than a class member given the representations that had been made to the federal court about the individual plaintiff's damages, and the significant disparity in attorneys fees," he said.

The opt out plaintiffs reportedly paid attorneys fees of 15%, whereas the class paid just 5.5%.

A group called the Financial Services Roundtable has sponsored this report entitled "The Responsibility of the Securities and Exchange Commission For Efficiency, Competition and Capital Formation: Reforms for the First 1000 Days" (I may have missed it but I don't think they ever explain which "first 1000 days" they have in mind).  In any event, the report offers a series of SEC-enforcement related reforms, many of which are quite insightful.  I suggest checking them all out, but some of the highlights are:

• If a matter becomes a formal or informal investigation, the SEC staff should notify the parties whether they are targets or simply sources of information. If in the course of an investigation a party that was originally identified as a target is no longer considered a target, the party should be promptly notified.

• In connection with every Wells submission, the party making the submission should be advised of the specific facts that will be presented to the Commission by ENF.

• Parties should not be asked to waive attorney-client privilege unless they assert advice of counsel as a defense–and even then sparingly, perhaps in cases where fraud may be involved.
  
• The Commission should appoint an ombudsman with authority to investigate complaints by parties about violations by the staff of the procedures established by the Commission, or the Commission's Inspector General should be given the authority to investigate public complaints about staff violations of the Commission's rules for enforcement actions.

Blogging will be light over the coming days as the 2005 ISS Annual Conference kicks off tomorrow morning and runs through Friday.  The speaker list this year is pretty impressive, and includes GE's Jeffrey Immelt and Disney's Robert Iger.  The conference will include a securities litigation-related panel on Thursday, October 20, that I will moderate on the topic of "The Fiduciary Duty to File Claims in Securities Class Action Settlements."  The speakers on this panel are:

• Randall Pulliam, Partner, Baron & Budd (you may recall his firm filed the "failure to file" lawsuits against mutual fund advisers back in January 2005).
• Peter Saparoff, Partner, Mintz Levin.
• Karen Barr, General Counsel, Investment Adviser Association.

See you there!

I've joked about the SEC's "Pre-Crime Unit" before and I'll probably continue to do so until someone educates me about what this group actually does.  I'm referring, of course, to the SEC's "Office of Risk Assessment," which was created back in 2003 and given the mission, as I understand it, of predicting the future. 

Since predicting the future is notoriously difficult, the SEC's chairmen have tended to use more flowery language when attempting to articulate the ORA's mission--"seeing around corners," "seeing over hills," and " seeing over the horizon" appear to be steady favorites.

Chairman Donaldson, for instance, stated in this March 2004 speech  that the mission of the ORA is "to see over the hills and around the corners of problems that may be looming in the distance," which was consistent with his earlier statement that ORA was designed to "head off major problems before they occur."

Although there has been at least some speculation as to whether new Chairman Cox was a believer in the ORA concept, Cox seemed to put that to rest through comments he made on Sunday during his visit to China.  Discussing the Refco case, Cox reportedly stated that

"There is always the possibility for broader effects from individual cases," Cox said. "That is why the SEC has a special unit for looking over the horizon and around the corner to discover whether or not such risks are materializing."

[Let me ask this question again:  Is a position in ORA a good gig or bad gig? Can anyone really fault you even if you completely and utterly fail to see over hills and horizons, stop problems before they occur or otherwise fail to foresee the future?

According to this Dow Jones article, the ORA was "stuck in 'a holding pattern' for a while," but, according to Peter Derby, the SEC's former managing director for operations, finally "kicked in to gear this spring."  "It's up and running, they're doing work," said Derby.

What kind of work? It's really not clear from the article.  However, the results of whatever work is being done are apparently being kept in a "big binder":

The risk assessment office works with others at the SEC to identify key risks to U.S. markets and investors. For now, Fishkin keeps results in a big binder. He plans to replace it with a computer program that will display risks and show whether they are increasing or decreasing, offering regulators a kind of market radar.

The article notes that another key weapon in the ORA's arsenal is "reading":

Reading is another weapon in the office's arsenal. Fishkin said staffers regularly plow through stacks of academic reports and stock research looking for 'red flags' in market incentives, behaviors, products or procedures.

In this post back in January I asked:

"Don't you hate it when your wife ignores your specific "entreaties" that she not share inside information about your publicly-traded company with her brother, and gets herself sued by the SEC?"

Well, in fairness to the women SLW readers out there I think I must now similarly ask:

Don't you hate it when you tell your husband during dinner conversation that the company by which you are employed intends to acquire another public company, and your husband--without your knowledge--then goes out and purchases stock in the public company to be acquired and gets himself sued by the SEC?

That is what is alleged in the SEC's settled insider trading case filed October 12 against Robert Petrosky.  Also of note in that case is that the settlement only requires Mr. Petrosky, who profited $41,381.85 through his trading, to pay a civil penalty of $20,690.91 (equal to one-half of his profits) in addition to disgorging his trading profits.  It is highly unusual for a defendant in a settled case to get off with anything less than a penalty equal to the amount of the illegal profits.  The SEC noted in its announcement of the settlement, however, that

In accepting Petrosky's settlement, the Commission took into account his significant cooperation in the staff's investigation, including the fact that he voluntarily came forward, reported his trades, and worked promptly with the staff to resolve the matter.

We saw it back in July, and now we're seeing it again:  squabbling between plaintiffs' law firms over what I have dubbed the "passive voice press release."   These recurring spats are between Law Firm A that files a securities class action and properly issues a press release/"notice to class members" under Section 21D(a)(3) of the Reform Act; and Law Firm B that follows the filing of such a lawsuit with its own press release that looks every bit like a "notice to class members" but with one slight twist--Law Firm B has not filed a lawsuit.  Rather, Law Firm B announces that a lawsuit seeking class action status has been filed [Passive Voice Alert!] in the United States District Court for the Southern District of New York on behalf of all persons who purchased the common stock of XYZ....

Non-English majors in the putative class who read such a press release might reasonably assume that if Law Firm B is going to the trouble of announcing that a lawsuit "has been filed," that just maybe Law Firm B was the firm that actually filed such a lawsuit, and that Law Firm B is a good place to start, therefore, if they want to join in as a plaintiff.  At least that seems to be the fear of the Law Firm A's of the world.

In today's spat, Law Firm A is Lerach Coughlin, which filed a securities class action lawsuit against Refco on October 11, and issued this statement yesterday that began as follows:

On October 11, 2005, the law firm of Lerach Coughlin Stoia Geller Rudman & Robbins LLP ("Lerach Coughlin") (http://www.lerachlaw.com/cases/refco/) filed a complaint on behalf of all those who purchased the common stock of Refco, Inc. ("Refco" or the "Company") (NYSE: RFX).  The complaint alleges a series of false and misleading statements associated with the company's accounting practices and follows a lengthy investigation by Lerach Coughlin. Since Lerach Coughlin filed a complaint, The Law of Firm of Schatz & Nobel has issued a press release claiming to offer "information" about joining the suit.  Be advised that this firm has not even filed a complaint.  Rather, the press release appears to be  an advertisement designed to solicit clients so that the firm can participate in this case.

Schatz & Nobel's passive voice press release that prompted this statement is available here.  Curiously, the press release contains this sentence at the end:

While Schatz & Nobel has not filed a lawsuit against the defendants, to view a copy of  the Complaint initiating the class action or for more information about the case, class action cases in general, and your rights, please contact Schatz & Nobel toll-free....

Does that mean that if you contact S&N to view a copy of the complaint "initiating the class action" that they will provide you with the Lerach Coughlin complaint?

For years, a threshold requirement for the SEC to obtain the equitable remedy of an officer and director bar against a defendant in one of its cases was an underlying fraud charge under Section 10(b).  As stated in Section 21(d)(2) of the Exchange Act, a court has the authority to

prohibit, conditionally or unconditionally, and permanently or for such period of time as it shall determine, any person who violated section 10(b) or the rules or regulations thereunder....

So historically, in a case like the recently settled enforcement action against David Michael, former director and chair of the audit committee of Del Global Technologies Corp., Inc., in which the SEC charged Michael only with violations of the books and records, internal controls, and lying-to-auditors provisions of Section 13 of the Exchange Act, no O&D bar would have been possible. 

The Sarbanes-Oxley Act of 2002 changed this, however.  Section 305 of SOX amends Section 21(d) by adding a new Section 21(d)(5):

5.  Equitable Relief

In any action or proceeding brought or instituted by the Commission under any provision of the securities laws, the Commission may seek, and any Federal court may grant, any equitable relief that may be appropriate or necessary for the benefit of investors.

The end result?  Despite the absence of any fraud charge against David Michael, the SEC's settlement provided for a final judgment that, among other things, permanently bars Michael, pursuant to Exchange Act Section 21(d)(5), from serving as an officer or director of a public company.

I have been struck over the past few weeks by the unusual number of vacant, high-profile positions in the securities enforcement/regulation world.  One of those was filled yesterday when the SEC announced that it has named Luis Mejia as its Chief Litigation Counsel supervising the Enforcement Division's nationwide litigation program.  Mejia joined the Commission in November 1999 as Assistant Chief Litigation Counsel, and he succeeds David L. Kornblau, who left the Commission in August.

But consider the list of other vacant or soon-to-be vacant positions:

• Public Company Accounting Oversight Board Chairman:  William J. McDonough announced on September 23 that he will resign his position November 30 or when his successor is in place, whichever is sooner.
• SEC Director of Division of Investment Management: Vacant
• SEC Director of Market Regulation: Vacant
• SEC Chief Accountant: Donald T. Nicolaisen announced on September 7 that he will leave the Commission this month to return to the private sector.
• SEC District Administrator, Fort Worth District Office: Harold F. Degenhardt announced in August that would leave the Commission in September to become a partner in the Dallas office of the law firm of Fulbright & Jaworski, LLP.
• SEC District Administrator, Philadelphia District Office: Ari Gabinet announced in September that he will leave the Commission at the end of October to head the securities regulation group at the Vanguard Group, Inc.
• DOJ Chief, Fraud Section, Criminal Division: Vacant (Apply here if you want the job!)
• DOJ Deputy Chief for Litigation, Fraud Section, Criminal Division (Apply here if you'd rather be the Chief's deputy!)

As discussed here, the SEC filed a petition for panel rehearing with the Eleventh Circuit on September 22 seeking to get a troubling footnote of dictum in the Smyth opinion deleted because it casts serious doubt on the validity of the SEC's standard injunction orders. 

The Eleventh Circuit's response?  Petition for rehearing denied. 

As Russ Ryan commented here, the result of this footnote not being deleted is that "the SEC is going to have to get more specific in any injunctions it seeks within that circuit, or it will have to file its cases elsewhere."

A legal publication called "Lawdragon" has this rather irreverent article entitled "Kill Bill Vol. 2" about the federal investigation of Milberg Weiss and Bill Lerach.  This appears to be the maiden issue of "Law Dragon"--I've only heard of it because I was quoted in the article and they mailed me a copy:

"I think that the Lazar case involves isolated allegations involving conduct that probably isn't very prevalent anymore," says Bruce Carton, vice president of Securities Class Action Services, a division of Institutional Shareholder Services, which advises institutional investors. "Representation of individual plaintiffs is not really the way that these plaintiffs' firms make money in securities litigation these days."

(I am graciously choosing to forgive the Lawdragon for calling me Bruce Carlton in a highlighted quote).

The "why-didn't-I-think-of-it-first" title of the article is a play on the idea that the current federal investigation of Lerach is "Volume 2" while "Kill Bill, Volume 1, came in 1995, when Congress passed what was dubbed the 'Get Lerach Act,' aimed at stopping the prolific filing of suits by Milberg Weiss and its star attorney)".  But as the header of the article blares,

He's annoying, obnoxious and greedy, with fewer friends than a Saturday night truck stop. After fending off an armored assault by the U.S. Congress, he's once again in the crosshairs. They may take down Lerach. They may not. But one thing is certain: The forces of Bill will survive.

The commentary below by Wayne Schneider, General Counsel for the New York State Teachers' Retirement System, is the first of what I hope will be many "guest posts" here at SLW.  Mr. Schneider writes about the impact that institutional investors are having on securities class action litigation, particularly in the area of attorneys' fees. 

If you have an interesting securities litigation-related article, memo or opinion, please consider sending it to me for possible publication as a "guest post" on this web site.

Thanks,
Bruce Carton

Getting More for Investors
by Wayne Schneider, General Counsel, New York State Teachers' Retirement System*

When considering the impact of the 1996 Reform Act on federal securities class actions, the actual and potential future impact that responsible institutional investors are having on the fees awarded to class counsel in federal securities class actions cannot be stressed enough. The plaintiffs' class action bar will routinely argue that class counsel fee awards in federal securities have been, and still are, in the 30% range. Yet, responsible institutional investors serving as lead plaintiffs under the Reform Act are demonstrating that competent class counsel can be reasonably compensated for their efforts in federal securities class actions by fees which are substantially below the 30% level and, indeed, substantially below 20%.

Everyone is undoubtedly familiar with the fee award in the Cendant litigation which settled in 2000. The settlement was over $3 billion. The fee award, however, was only $55 million because of the retainer agreement class counsel had entered into with the New York City Pension Funds, the New York State Common Retirement Fund and the California Public Employees' Retirement System serving as lead plaintiffs.

Can there be any doubt as to the magnitude of the benefit which these institutional investors conferred on the class by driving a hard bargain on class counsel fees? Let's do the math. Suppose the fee award had been 30% in line with what the plaintiffs' class action bar claims is the "standard" for class counsel fees in federal securities class actions. Had the fee award been 30%, Cendant investors would realized over $845 million less from that settlement than they actually did as a result of the fee deal that was, in fact, negotiated. Even if the fee award had "only" been 20%, that award would have meant over $545 million less in the pockets of Cendant investors. The dollar value of the savings on counsel fees undoubtedly realized in the Cendant case by itself dwarfs the settlement amounts in all but a handful of federal securities class actions!

Fortunately, the Cendant case is not an isolated instance but instead only one of the most remarkable examples of the way in which responsible institutional investors may be reshaping forever the perception of what should constitute a reasonable fee for plaintiffs' class counsel when a federal securities class action finally settles. Other examples of favorable fee arrangements reached by responsible institutional investors serving as lead plaintiffs include the following:

* Class counsel agreed to seek a fee award not to exceed 17% of the 2004 settlement having a value of $102 million in the Symbol Technologies Inc. case. The lead plaintiffs are the Louisiana Municipal Police Employees' Retirement System, the Louisiana Sheriff's Pension & Relief Fund and the City of Miami General Employees' & Sanitation Employees' Retirement Trust. * Class counsel agreed to seek a fee of 10.5% in the Homestore.com, Inc. case which was settled in 2003 for $13 million in cash and 20 million shares of Homestore.com common stock, for a total reported value of $93 million. California Teachers' Retirement System was the lead plaintiff in that case. * Class counsel agreed to seek a fee of 17% in the Gemstar-TVGuide International, Inc. case which settled in 2004 for $67.5 million. The lead plaintiffs in that case are the Teachers' Retirement System of Louisiana and the General Retirement System of the City of Detroit. (As it happened, the court awarded a fee equal to approximately 13.6% of the settlement.) Other claims were settled more recently for $25 million and class counsel is seeking a fee not to exceed 20% of the settlement. * Class counsel agreed to seek a fee of 14% in the Providian Financial Corp. case which settled in 2004 for $65 million. The lead plaintiff was the Retirement Systems of Alabama. * Class counsel agreed to seek a fee of 15% in the Enterasys Networks, Inc. case which settled in 2004 for $50 million in cash and stock. The Los Angeles County Employees Retirement Association was lead plaintiff in that case. * Class counsel agreed to seek a fee of 10.5% in the Critical Path, Inc. case which settled in 2002 settled for $17 million plus 850,000 warrants. The Florida State Board of Administration was lead plaintiff in that case. * More recently, class counsel has agreed to seek a fee of 18% in the OM Group, Inc. case which settled for $92.4 million. The Policemen & Firemen Retirement System of the City of Detroit is the lead plaintiff in that case.

And then we have this year's "blockbuster" settlements:

* In the Bristol-Myers Squibb Securities case which settled for $300 million, the fee originally agreed to by class counsel was 15% but that fee was reduced in subsequent negotiations to 7.5%. (The court eventually awarded a fee equal to approximately 4% of the settlement.) The lead plaintiffs were the Teachers' Retirement System of Louisiana, the Louisiana State Employees' Retirement System, General Retirement System of the City of Detroit, and Fresno County Employees' Retirement Association. * In the Dynegy case which settled for $473 million, class counsel agreed to seek a fee not to exceed 9% of the settlement. The Regents of the University of California are the lead plaintiff in that case. * e Worldcom, Inc. cases agreed to accept a fee of only 5.5% of the $3.55 billion in settlements achieved in 2005. The New York State Common Retirement Fund is the lead plaintiff in that case.

There has been some recognition of the efforts of responsible institutional investors in reducing fee requests. For example, the court in the Motorola case remarked in 2003 that lead plaintiff New Jersey State Treasurer had entered into retainer agreements providing for fees which are "significantly below" the level of fees often theretofore awarded by courts. In the academic community, Professor Lisa L. Casey wrote in her 2003 article entitled "Reforming Securities Class Actions from the Bench: Judging Fiduciaries and Fiduciary Judging" in the Brigham Young University Law Review:

"Experience demonstrates that institutions applying for the role of lead plaintiff can and do negotiate fee agreements with putative lead counsel before selecting attorneys for the class. In the Waste Management megalitigation, for example, lead plaintiff Connecticut Retirement Plans and Trust funds negotiated a contingent fee agreement with lead counsel....The pact included a provision capping attorneys' fees if the case settled after resolution of motions to dismiss but before a decision on motions for summary judgment. The court approved the contract fees as reasonable and awarded counsel 7.93% of the case recovered for the class in the megasettlement, or $36.225 million of the $457 million recovery fund. Acting as lead plaintiff in the megalawsuit arising from the Enron debacle, the University of California Board of Regents also negotiated a contingent fee contract with lead counsel Milberg Weiss calling for a fee below 10% of any recovery--again, substantially lower than the 25% benchmark previously utilized by many courts."

Even members of the plaintiffs class action bar will, in unguarded moments, acknowledge the impact responsible institutional investors can have in substantially lowering fee requests in federal securities class actions. For example, in a 2004 newsletter, one plaintiffs' class action firm stated the following:

"...public fund plaintiffs have sharply reduced the percentage of the settlement pool that goes to the lawyers who represent [investors] in securities class actions. In cases where individuals act as lead plaintiffs, contingent fees have historically ranged up to 33%. But institutional investors have the sophistication and the commitment to the class they represent to negotiate significantly lower fees.

"Institutions look for ways to ensure that attorney fees are reasonable and reflect the results obtained, as well as the time and effort expended. Their fee agreements often include anti-windfall provisions and other incentives that tie the lawyers' share to the size of the recovery and the length of the proceedings.

"The New York State Common Retirement System last year issued a Request for Proposals in which all responding securities litigation counsel agreed to a fee scale that set fees of 8% to 14% for settlements under $100 million. Larger settlements are governed by a multi-tier system that lowers the percentage even more. Other funds have come up with similar formulas to keep legal fees reasonable, providing a valuable service not only to their plan members but also to the wider pool of shareholders entitled to part of the settlement."

There is no reason to believe that responsible, properly informed institutional investors serving as lead plaintiffs cannot secure lower fees in federal securities class actions for the benefit of the investor class they are representing. Counsel for public sector funds, for example, can attest to a highly competitive environment in which plaintiffs class action firms are vigorously competing with each other to represent public sector funds. Counsel for public sector funds are routinely bombarded with all manner of promotional material from plaintiffs class action firms and invited to lavish conferences and other activities designed to promote the firms' capabilities in the prosecution of federal securities class actions. Representatives of plaintiffs class action firms regularly attend meetings of organizations in which public sector funds participate and importune representatives of public sector plans in an effort to drum business.

Unfortunately, outside the circles of plaintiffs class action firms and public sector funds, the efforts of responsible lead plaintiffs in driving down fees have attracted little attention. The lack of discussion in the media of the level of fees have been negotiated leaves a considerable opening for class action firms to continue to recruit lead plaintiffs who have no knowledge of what kind of fees can be obtained through obtaining bids from competing law firms and hard negotiation. Organizations like ISS can perform a genuine service for investors by examining and publicizing the efforts of those lead plaintiffs who truly benefit investors by obtaining substantially reduced fee requests.

*The views expressed in this commentary represent only the views of the author and do not necessarily represent the views of the institution by which he is employed.

On August 10, 2005, the 11th Circuit published this opinion in SEC v. Smyth which contains a surprising footnote containing dictum that seems to undercut the validity of the SEC's injunctive order.  As Russ Ryan of King & Spalding explained in this guest post over at TheCorporateCounsel.net,

"In a startling footnote 14 at the very end of the opinion, the court dropped a bombshell that questions the enforceability of just about every injunction the SEC has obtained in recent memory. The court essentially said an injunction can't be just a broad prohibition against future violations of a statute or rule, because all that does is tell the defendant to "obey the law" without specifying what particular acts are prohibited.

Although the footnote is dictum in a technical sense, the case could have far-reaching consequences for the SEC's enforcement program. The injunctions in Smyth were no different than any other SEC injunction, at least as far as settled cases go. That is, they simply tracked the language of the relevant statutes and rules, and told the defendants and their cohorts not to violate them again.

At a minimum, district courts within the 11th Circuit presumably won't be signing off on future settlements with similarly worded injunctions. So unless the 11th Circuit somehow retracts it criticism of such language, the SEC is going to have to get more specific in any injunctions it seeks within that circuit, or it will have to file its cases elsewhere. And, of course, if other federal courts are persuaded to follow Smyth's logic, they won't sign off on the usual form of SEC injunctive language either, and will probably dismiss any SEC contempt proceedings that are based on injunctions already out there."

BNA now reports that on Sept. 22, the SEC filed a brief with the Eleventh Circuit asking the court to "delete the extensive dictum in footnote 14, which concludes that the consent injunctions entered in this case are unenforceable because they 'track the provisions of the statute or regulation the violation of which is enjoined,' and are therefore invalid 'obey-the-law' injunctions inconsistent with Fed. R. Civ. P. 65(d)." The SEC reportedly argued that the footnote poses a threat to the injunctive relief typically ordered by the SEC, and that it "may be unable to seek further review of the panel's statement from the entire Court or the Supreme Court because the injunctions were entered by consent, and because the statement is dictum."

There are some interesting points and figures raised in this August 2005 GAO Report (released Oct. 3) to Congress concerning the SEC's collection efforts.   Among them:

• As of April 2005, the SEC has designated over $4.8 billion in civil monetary penalties and disgorgement to be returned to investors under the Fair Funds provision of SOX.  Of the 75 cases making up this amount, the SEC has collected money in 73.
• Although the SEC has collected $4+ billion to be returned to investors, only $60 million has actually been distributed to date. [QUESTION--Where is the other $4.74 billion right now?]
• SEC civil monetary penalties in 2003 and 2004 were an amazing 12 and 14 times greater than 2002, respectively:
  • 2002: $85,000,000
  • 2003: $1,030,602,290
  • 2004: $1,206,475,410

According to this article, at least two Congressmen have called for congressional hearings to be held on the issue of the lag in returning funds to investors.

It is non-securities litigation related, but I think this Ninth Circuit opinion (see page 29) helps show where bloggers stand in that court.  According to Judge Kozinski's dissent,

"[T]he judge has offered nothing at all to justify his actions - not a case, not a statute, not a bankruptcy treatise, not a law review article, not a student note, not even a blawg."

Not even a blog?!  That judge couldn't even find himself a blog post to support his actions?! Geez, that's pathetic.

I'm actually relieved Judge Kozinski didn't continue after "not even a blawg," because he was already so far down the Authority Pecking Order that I'm pretty sure the next item was going to be something like "not a syllabus from a community college pre-law class" or "not a note from his mother."