After a flurry of recent coverage in the NY Times and elsewhere of the Paulson Committee and the prospect that it may soon recommend, among other things, that the SEC "dis-imply" a private cause of action under Rule 10b-5 against corporations, the plaintiffs' bar is finally shooting back. In this article in Business Insurance, several prominent members of the plaintiffs' securities class action bar were not shy about voicing their concern and outrage over this prospect:

"Securities lawsuits have fallen off sharply in the last few years and yet they want to further cripple them," said Bill Lerach, a prominent class-action lawyer from San Diego, Calif., law firm Lerach Coughlin Stoia Geller Rudman & Robbins L.L.P. "Why? Because it's the one effective weapon that shareholders have."

***

"I think it's outrageous," class-action attorney Stanley Grossman, senior partner at Pomerantz Haudek Block Grossman & Gross L.L.P. in New York, said of the proposals.

"We keep reading every day about more and more fraud," he said. "What the SEC is saying is 'we can't handle it all. We need companies to do the internal investigation.' Well, if they're so overwhelmed, how are they going to pick up all of these cases of the plaintiffs' bar?"

***

Another prominent class-action attorney, Sean Coffey, who helped win a $6.15-billion settlement for investors in WorldCom Inc., said the proposed curbs on shareholder litigation suggest that corporate America has already forgotten the string of business scandals that took place in recent years.

"The body isn't cold yet, and they are already acting like there were no corporate scandals," said Mr. Coffey, of the law firm Bernstein, Litowitz, Berger & Grossman. "It's mind-boggling."

This article from the Financial Times notes that according to Barney Frank, the congressman "widely expected take over the chair of the House financial services committee if the Democrats retake the chamber," the creation of a global securities regulator should be considered.

Observing the growing need for cooperation between the US and foreign regulators such as the UK's Financial Services Authority, the article states:

"Doesn't that sound like fun," Mr Frank said of such co-operation. "Joint action is theoretically [good] but what does that mean? In American baseball, if the runner and the ball arrive at the base at the same time, the tie goes to the fielder. Who breaks a tie if there is a disagreement over policy between the SEC and FSA?"

OK, so there is at least the prospect of a global securities regulator down the road, which is interesting. But is it as interesting as Frank's proclamation that in American baseball, the "tie goes to the fielder?"

Anyone who has played or coached baseball has heard the expression the "tie goes to the runner" many times. So what is this new rule that Mr. Frank is making up? Indeed, a Google search shows that there are only 5 (!) reported mentions of the phrase "tie goes to the fielder" in the history of the Internet, or whatever it is that Google scours. That compares to 12,200 mentions of the phrase "tie goes to the runner"

And yet... I think Mr. Frank may actually be right. According to baseball rule 7.08(e),

7.08 Any runner is out when-

(e) He fails to reach the next base before a fielder tags him or the base, after he has been forced to advance by reason of the batter becoming a runner.

Assuming there can be such a thing as a "tie" between the runner reaching the base and the ball reaching the fielder, it would seem to follow in such a case that the runner has failed to reach the base before the fielder tagged the base, and is therefore out.

So, Barney Frank, you appear to be correct. SLW salutes your willingness to buck popular wisdom, coin a new phrase, and tie it all back to securities litigation.

Any reader thoughts on this important issue?

Posting will screech to a halt for the rest of this week as SLW heads across the pond for the 2006 ISS Corporate Governance Conference in London. Stuart Grant of the US law firm Grant & Eisenhofer and Hilton Mervis of the pan-European law firm SJ Berwin will join me for a panel on the role of European institutions in US securities class action litigation.

Let me leave you by emptying my "To Blog" folder with these quick hits:

1. How's That Safety Net?

The first checks to defrauded WorldCom investors should be going out shortly in the SEC's $750 million settlement with the company. The first wave of checks will total approximately $150 million, and will provide claimants with a recovery of 2% of their Eligible Loss Amount. Another wave of cash will go out later, and will apparently provide investors with an additional 3% of their Eligible Loss Amount.

The SEC says in its press release that this "shows that even when things go terribly wrong, there is a safety net for injured investors." By my math, this "safety net" would return $5,000 to an investor who had an Eligible Loss of $100,000 in this case.

2. Statute of Limitations Expires in AOL Case

Did you read the Alec Klein's "Stealing Time: Steve Case, Jerry Levin, and the Collapse of AOL Time Warner" yet, which I recommended way back when? If you did you'll be surprised to learn that, according to this article in the Washington Post, the 5 year statute of limitations in the case has now passed, and prosecutors were unable to make a case against any AOL execs other than two mid-level persons.

The article states that

Despite a lengthy investigation by the U.S. attorney's office for the Eastern District of Virginia, lawyers involved in the case now say the government will not be able to bring criminal charges against top AOL executives over transactions in which the Dulles Internet service provider and its business partners allegedly sought to artificially boost each other's revenue numbers as the dot-com bubble was bursting in 2000 and 2001.

3. Not Appearing in the SEC Litigation Releases

A Minnesota federal court let the SEC have it last week, ruling that the SEC must actually review documents requested to be released under FOIA before asserting that it cannot release the documents without harming ongoing law enforcement efforts. As discussed in this Dow Jones article, the Court wrote that it

adamantly disapproves of the manner in which the SEC has conducted itself as it relates to Gavin's requests. The SEC has shirked its responsibility by brazenly refusing to conduct a document-by-document review-despite a direct order from the Court.

The SEC told the Court that a review of the requested documents would have cost over $2 million. The Court ruled that the group requesting the documents would be required to pay any such costs.

Nathan Carlile of the Legal Times has this lengthy and occasionally quite funny profile of David Lat, who writes the Above the Law blog we previously discussed here.

Reflecting upon Lat's highly unusual journey that has led to him to a career as a legal blogger, the article concludes by comforting us that

if this doesn't last – and if, eventually, Lat's story becomes just the familiar cautionary tale about a federal prosecutor who poses as a woman to post gossip on the Internet only to be exposed by a New Yorker writer and sign a lucrative blogging deal – he says things will still be OK.

Our options backdating securities class action list has been updated to add Michaels Stores, Inc.  The number of companies on the list now stands at 20.

Let's put it this way. My company, ISS' Securities Class Action Services, has an entire business that focuses on researching and identifying new securities class actions. We have a team of people whose JOB is to research this stuff every day, 24X7. However, until today we did not have any record of a case filed October 2, 2006 against Forward Industries, which was the subject of a "notice" published to the class announcing the filing of the complaint. How is this possible?

Because the notice used was what many refer to as "buried notice," buried in the back pages of the Investors Business Daily. As I wrote almost two years ago,

Yes, the PSLRA does allow for notice by "widely circulated national business-oriented publication" or "wire service." As I have argued in the links above, however, (1) the industry standard in the year 2005 is to place such notices on a national business wire, and (2) there is no legitimate reason to deviate from this standard by providing "stealth" (but apparently legally adequate) notice through some random hard copy business publication such as IBD.

Two years later, this is even more true. Everyone who is interested in learning about securities class action filings monitors the wire services for announcements about such filings. No institutions or anyone else that I know of scans all of the "widely circulated national business-oriented publications" looking for random hardcopy announcements, nor should they be required to do so.

Since early September 2006, a committee composed of "independent ... U.S. business, financial, investor and corporate governance, legal, accounting and academic leaders" has fairly quietly been conducting a study into how to improve the competitiveness of the U.S. public capital markets. Next month this committee (The Committee on Capital Markets Regulation, also referred as the "Paulson Committee" because it will present its recommendations to US Treasury Secretary Henry Paulson), will issue an interim report with recommendations on several topics. Most notably for this blog, these topics include "Liability issues affecting public companies and gatekeepers (such as auditors and directors) with a focus on securities class action litigation...."

An article in today's BNA Securities Law Daily states that John Coffee, a professor at Columbia University School of Law, said at a recent ALI-ABA conference that he is an adviser to the panel and has suggested several reforms designed to mitigate the threat of securities litigation. According to the article, Coffee believes that in the "near future," the Paulson Committee can be expected to make recommendations "to impose limits on securities class actions" and that the "SEC could take some action to change the role of [the] securities class action" in the next 6 months.

Among the possible changes that could result, Coffee said, were the eye-opening ideas that:

1. The SEC could "dis-imply" a private cause of action under Rule 10b-5 against corporations, leaving enforcement of that rule to the government, not private plaintiffs. The SEC might also "dis-imply" such a private cause of action with respect to the corporation only when the SEC has sued the corporation. Coffee states in the article that "That idea does have some support."

or

2. "Stock drop" cases could be moved out of the courts and into the arbitration arena.

The Paulson Committee's recommendations are due out by the end of November 2006. If either of these ideas are among them, look for a barrage of deafeningly loud disapproval from the plaintiffs' bar and consumer groups.... Stay tuned.

Kudos to Curtis Kennedy, the Denver attorney who successfully challenged the attorneys' fee award in the Qwest Communications securities litigation, and did so at a reasonable cost to the class. As discussed in this article, the court in the Qwest case recently approved the $400 million settlement of shareholder claims against Qwest, but reduced attorney fees by $36 million--from $96 million to $60 million. Kennedy, representing the Association of U S West Retirees, fought the $96 million in attorney fees requested by lead counsel in the case, law firm Lerach Coughlin, calling the fees "excessive and tantamount to winning the lottery."

According to another article in today's Rocky Mountain News, while Kennedy could attempt to obtain a percentage of the $36 million he helped save the class, he is not doing so. Rather, he is seeking only $40,500, which according to the article is "the 90 hours Kennedy spent on the case times his hourly rate of $300 times 1.5." Kennedy states in the article that he declined to seek a percentage of the $36 million because "I just think that would be hypocritical after asking the judge to apply moderation" to the $96 million request by Lerach Coughlin.

I must admit I didn't see this one coming.  Courtesy of the WSJ Law Blog we've just learned about Esquire Bank, "the first bank in the country to specialize in serving trial lawyers."  Esquire Bank opened its doors in Brooklyn, New York last week. 

I know there is a joke in here somewhere but I'm pretty much speechless.  I guess all I can muster at this point is "Watch out for that lender liability!"

Our options backdating securities class action list has been updated to add Marvell Technology Group, Ltd. and Meade Instruments, Inc..  The number of companies on the list now stands at 19.

The eagerly awaited deposition of former Enron CFO Andrew Fastow in the massive Enron securities class action that is still going pending against numerous large investment banks (many other defendants have settled)  may occur soon.  According to this article in the NY Times, plaintiffs' counsel in the case has asked the Court to schedule the deposition soon, before Fastow is assigned to a prison.  Fastow is currently in solitary confinement in a Houston detention center, awaiting assignment.

The article notes that the deposition of the now-cooperating Fastow will be critical to the case, and "will take an estimated 10 days, plus more than two weeks of preparation, said one lawyer involved in the case. Some 80 lawyers will probably to want to attend."

Whoa--80 lawyers?  By my quick math, 80 lawyers billing 10 hours per day for 10 days, at a rate of $400/hour* adds up to a $3,200,000 deposition.  And that just for the event itself, not including any of the preparation that these 80 lawyers will need to do.

Hopefully this deposition will prove more fruitful than the discovery to date in the case.  The article notes that so far in the case, millions of pages of documents and hundreds of other depositions have amounted to very little information for the plaintiffs:

Despite truckloads of documents from Enron and the banks, and millions of dollars spent on the case so far, civil lawyers had struggled to learn much of anything from the banks' own employees. Plaintiffs' lawyers took 175 depositions from bank officials over the last 18 months, most of them running 15 hours long. Yet nearly all of those officials either exercised their Fifth Amendment right to not testify or said they did not recall anything relevant, according to two lawyers involved in the case.

* I'm three years removed from private practice so I'm guessing on the $400/hour average billing rate of the presumably high-level lawyers who will be present.  I guess I'm excluding people like 4-digit man Ben Civiletti.  Anyone care to refine my estimate?