Securities Litigation

Crunching The Numbers On Credit Crisis Securities Class Action Suits: It Pays To Play

2010-08-04T21:40:34Z

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.

]]> Trends in securities class action filings have gone through ups and downs. And, it is no surprise that the credit crisis class action bubble would rise and fall as the class action wheel turns. In his analysis of the Advisen mid-year report, Kevin M. LaCroix of the D&O Diary provided valuable insight into the cyclical nature of securities class action filings:

...as has always been the case in the past, the litigation cycle will eventually turn and filing activity levels will revert to the mean. There is an entrenched industry of highly entrepreneurial plaintiffs' securities class action lawyers who have every incentive to continue to file lawsuits. I suspect strongly that one factor in the current relative downturn in new securities class action filings is that the plaintiffs' lawyers are simply swamped trying to keep up with the massive wave of complex lawsuits they filed in the wake of the subprime meltdown and the credit crisis. Eventually the decks will clear and they will resume their normal activities, particularly if there are headline-grabbing events that provide litigation fodder.

Although the trends noted in recent studies on case filings are not surprising, do they show the whole picture? For institutional investors with eligible settlement claims one must conclude that statistics on case filings are just the tip of the iceberg. If there is a boom in case filings resulting from the credit crisis there is bound to be a boom in case settlements as a result of the credit crisis. The good news for investors is that settlement dollars that can be recovered from all of the credit crisis litigation that began in early 2007 have only begun to roll in.

Using data compiled from the Securities Class Action Services, LLC database, the following graphs show the number of securities class action cases that reached a final settlement from 2000 to 2009.

Number of Cases With Final Settlements 2000 - 2009 (includes federal, state, and international)

Federal Cases With Final Settlements 2000-2009

As the above demonstrate, case settlements spiked dramatically in 2009. And, settlements in the first half of 2010 have already come close to eclipsing the total number of settlements for the year 2006, 2007, and 2008. This makes sense as credit crisis litigation began in early 2007. It can take up to 2-4 years for a securities class action to reach a settlement with an additional 1-2 years for the claims filing and disbursement process to be completed. In fact, the very first of the credit crisis suits to settle (New Century Financial Corp.) did so only weeks ago. Thus, if we use January 1, 2008 as a benchmark for credit crisis securities class actions, we can expect investors to be making claims on settlement dollars related to the credit crisis well into 2014.

The NERA mid-year 2010 study found that the size of the typical securities class action settlement rose substantially in the first half of 2010 with the median settlement reaching nearly $12 million, "considerably higher than in any prior year since the passage of the PSLRA." Similarly, securities class action settlement dollars awaiting disbursement reached $23.7 billion at the end of July 2010. And, more than 400 securities class action suits filed after January 1, 2008 have not yet come to a settlement. Of course, many of those cases will settle and, therefore, will provide relief to institutional investors who are savvy enough to file on all of their eligible claims.

While it is true that securities class action filings are on a relative downward trend as plaintiff lawyers work through the credit crisis cases, there are some things that will never change. When it comes to filing claims on securities class actions, it pays to play.

Morrison Overturned? What Dodd Act Means For Securities Class Actions

2010-07-26T21:54:18Z

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.

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SEC and DOJ Extraterritorial Reach - As expected the Act codifies the SEC and DOJ's power to enforce federal antifraud securities legislation with respect to conduct abroad. Federal courts will have jurisdiction to hear such actions where (1) "conduct within the United States...constitutes significant steps in furtherance of the violation," or (2) conduct occurring outside of the United States...has foreseeable substantial effect within the United States. This is a formulation similar to the Second Circuit's vaunted "conduct and effects" test that was applied prior to the Morrison decision. Thus, the SEC will have the power to pursue certain market participants under US federal law even if their conduct occurred outside of the US.

Private Parties Extraterritorial Reach - Also as expected, the Act did not go so far as to codify extraterritorial application of federal securities fraud laws for private parties. Under Section 929Y of the Act, the SEC is charged with soliciting public comment and conducting a study on whether the federal antifraud laws should be extended to cover conduct outside the US. A report of the study with recommendations is to be submitted to Congress within 18 months after the date of enactment.

SEC and DOJ Aiding and Abetting - As expected, the Act significantly expands the reach of the SEC's enforcement power against aiders and abettors of securities fraud and related claims. The Private Securities Litigation Reform Act of 1995 (PSLRA) gave the SEC the right to bring claims for aiding and abetting violations of the Secuities Exchange Act of 1934. But, the PSLRA required that the SEC show that the defendant(s) knew of the misconduct, which has been interpreted by several courts to mean actual knowledge. The new standard of proof under the Dodd Act requires only that the SEC establish a "reckless" state of mind. The Act also expanded the remedies available to the SEC when suing aiders and abettors. The Act gives the SEC the right to bring suit and seek civil penalties against aiders and abettors under the Securities Act of 1933 and the Investment Company Act of 1940. The Investment Advisors Act of 1940 was also amended to provide for civil penalties against aiders and abettors.

Private Parties Aiding and Abetting - In an unexpected twist, the Act does not extend the right to sue aiders and abettors to private parties. This step, which was championed by Senator Arlen Spector and Representative Maxine Waters, would have overturned the Supreme Court's Stonebridge decision barring suit against aiders and abettors in securities fraud cases. However, similar to extraterritorial reach for private parties, the Act does provide for a Government Accountability Office (GAO) study on the propriety of aiding and abetting liability as a remedy for private litigants. The GAO has a year from enactment to report its findings to Congress.

What does the Dodd Act mean for the future of securities class actions? It has been noted in other commentary that the limitation on US securities fraud laws to domestic exchanges could mean as much as a 10% reduction in cases filed in the US annually coupled with a reduction in the size of many US class actions. In addition, collective action remedies in foreign countries continue to be complicated, and, in some cases, non-existent.

However, the above scenario could very likely be only a short-term result. There is a distinct possibility that, given the global recession and increased concern for consumer protection, the plaintiffs' bar will more vigorously and successfully pursue a uniform collective action regulation in the EU and similar remedies in other countries. This is not to mention that the Dodd Act dealt a significant blow to the Morrison decision. The SEC's power to pursue market fraud worldwide on behalf of aggrieved US investors is now undisputed. Also, pursuit of civil penalties against aiders and abettors under a much lighter burden of proof will mean potentially larger and more far reaching SEC enforcement actions on behalf of aggrieved investors.

Along with more authority given to the SEC, the Dodd Act has also given the SEC more funding. It has preliminarily authorized SEC funding that would effectively double its budget through 2015 and also gave it discretion to tap into a new $100 million reserve fund. The combination of funding and remedial ammunition could mean an invigorated SEC and a statistically significant spike in future SEC disgorgement actions. According to SEC Chairwoman Mary Schapiro, the SEC is revamping and stepping up its focus on enforcement. This seems to be the case as evidenced by the recent $550 million SEC settlement with Goldman Sachs. It is, therefore, quite possible that aggrieved US investors with claims against foreign defendants may have been left in the dark by Morrison but will nonetheless have a shoulder to cry on at the SEC.

Whether private parties will again be able to sue under federal law in US courts for conduct in connection with foreign traded securities, or whether they will be able to one day target aiders and abettors is still very much in doubt. The regulatory and legislative process for deciding this issue will take years. Meanwhile, the Supreme Court's decisions in Morrison and Stonebridge still stand. However, while the ultimate outcome is still very difficult to ascertain, the SEC may have revealed its hand somewhat in its Morrison amicus brief, which endorsed a rule of extraterritorial application that provides a private right of action in cases where the US conduct is both "significant" and "material." Will this or some other standard for extraterritorial application come to fruition? Only time will tell.

Post-Morrison Legislative Developments

2010-07-12T18:12:36Z

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.

]]> In addition to the above, the Act proposes a private right of action for aiding and abetting liability in securities fraud cases. Such a provision would effectively repeal the Supreme Court’s 2008 Stoneridge decision that limited lawsuits against those who aid or abet securities fraud. During conference committee negotiations over the Act, House members sought to insert the amendment. However, Senate negotiators did not agree and instead proposed a study rather than an outright amendment. Thus, Section 929Z of the Act calls for a US Government Accountability Office study on whether investors should be able to bring lawsuits against banks, audit firms, vendors, and other “secondary actors” who help companies defraud their investors.¹

The Act has passed the US House and is awaiting final Senate approval. While it does codify the extraterritorial reach of the SEC’s enforcement powers, it authorizes only studies by the SEC into the extraterritorial scope of private actions and aiding and abetting liability in securities fraud cases. This could mean years before the Morrison decision will have to contend with a legislative rebuttal. However, the Act does seem to be on a fast track to approval by Congress, which will open the door for vigorous lobbying by the plaintiffs bar for the formal adoption of these proposed amendments. And, the SEC may have revealed its hand somewhat in its Morrison amicus brief, which endorsed a rule of extraterritorial application that provides a right of action in cases where the US conduct is both "significant" and "material." If the changes are ultimately adopted they could mean both a reversion back to the pre-Morrison era of large multi-national class action litigation as well as a ballooning in the size and scope of class action settlements and/or judgments.

Morrison v. National Australia Bank - The Dawn of a New Age?

2010-06-25T21:54:34Z

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."

]]> As of today there are at least 1,028 securities class action cases that have been filed but have not yet reached a court approved settlement. Clearly, the lower courts in the days, weeks, and months to come will have their work cut out for them in applying the Court's transactional test to their pending cases. However, the lower courts may not have much deciphering to do. While the High Court's opinions have at times in other contexts been cryptic, it is hard to construe the Court's opinion in Morrison to be anything less than a clear precedent that drastically reins in the extraterritorial reach of US securities fraud laws. For example, the Court's rejection of the Second Circuit's jurisdictional analysis tends to indicate that gone are the days of considering the nationality of the plaintiff or even the nationality of the issuer. A plain reading of the opinion seems to indicate that the threshold question is whether the security in question is traded on a US stock exchange. If it is not, then the transactional rule would seem to bar suit.

It should be noted, however, that the lower courts could have trouble in determining the meaning of the second prong of the transaction test, the "domestic transactions in other securities" language. One reading of this language could be simply that the Court is referring to American Depository Receipts (ADRs). This reading would seem to make sense as it parallels the Court's dicta restricting Section 10(b) to US stock exchanges and limiting it to the territory of the US. But, the rule does not expressly mention ADRs. Therefore, a much more liberal reading of the opinion could construe the rule to, for example, provide a cause of action for the purchase of securities on a foreign exchange through the internet by a US citizen who is having coffee at the local java shop.

Even given the more liberal interpretation discussed above, it is not hard to imagine that application of the plain language of the Court's opinion to the world of US securities class actions will have far reaching implications. Below are just a few questions that come to mind.

If the transactional rule in fact bars all standing to sue for fraud in connection with securities traded on foreign exchanges, it could have a notable impact not just on foreign investors, but also on any domestic investors who trade on foreign exchanges. Hypothetically speaking, such investors would be barred from suit in the US in connection with those foreign traded securities and would have to seek redress in a foreign country under that country's laws. Most of these countries will not have a class action framework like that in the US, if one exists at all.
The number and size of class actions in the US may shrink if a plaintiff's foreign securities are barred from suit. For example, of the 530+ suits that settled in 2009 approximately 50 of them were against defendants domiciled in a country outside the US (9.4%). If we retroactively apply the transactional rule it is reasonable to assume that at least around 10% of the cases that were settled last year would either not have been brought in the US at all or would have been much smaller in size and scope. This is not to mention the extraction of foreign securities claims from settlements that were primarily dominated by securities traded on domestic exchanges.
Development of class action/mass action litigation as a remedy in foreign countries may be expedited as the plantiff's bar seeks alternative forums for redress in a post global recession landscape.
Foreign issuers may start declining registration on US stock exchanges in order to avoid costly US securities class actions.
The opinion does not carve out an exception for the extraterritorial reach of SEC and DOJ actions. Thus, it could be construed to place the same limitations on these agencies as it does on private claimants.
US claims administrators may start requesting verification from investors of the exchange on which their securities are traded.

The above are just some of the changes that one might anticipate as a result of the decision in Morrison. But, it should be noted that the Court's ruling was based on the absence of language in Section 10(b) that would extend its reach to foreign investors and stock exchanges. Therefore, a congressional amendment to the SEA of 1934 would render the Court's opinion moot. With the financial reform bill winding its way through Congress, proposals like Section 7216 of H.R. 4173 (extending extraterritorial reach of the SEC and DOJ) would start to rein in the Court's transactional rule. And, other legislation, such as that providing for aiding and abetting liability in securities fraud suits, as well as language adopting the Second Circuit's conduct and effects test, could also extend the reach of the statutory fraud remedy.

In any event, interest by many parties in expansion of the class action overseas will undoubtedly be sparked by the decision in Morrison. As such, it is more important than ever that investors become knowledgeable about the legal landscape for securities fraud in foreign countries. Therefore, be on the look out for a forthcoming white paper from SCAS canvasing the current securities class action landscape in Europe and in other areas of the world.

*For more colorful insight into Morrison as well as coverage on other securities related actions pending before the High Court see Keven LaCroix's D&O Diary blog entry here: http://www.dandodiary.com/2010/06/articles/securities-litigation/more-thoughts-about-morrison-v-national-australia-bank/

*The Supreme Court's decision in Morrison v. National Australia Bank can be obtained here: http://www.supremecourt.gov/opinions/09pdf/08-1191.pdf.

Didn't We Just Update That?

2010-05-07T04:01:52Z

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.

NERA Releases Australian Securities Class Action Trends Study

2010-05-06T20:18:25Z

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.

Options Backdating Update

2010-05-03T21:12:44Z

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.

The SCAS 50 for 2009

2010-04-15T04:27:09Z

Today we released our seventh annual "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 2009 in which the law firm served as lead or co-lead counsel.

As always, we look at the data in three main ways for each firm - total settlement dollars, total number of settlements, and average value per settlement. I have listed the top five firms in each category below.

The full report is available here.

2009's Top 5 - Total settlement value:

1. Coughlin Stoia Geller Rudman & Robbins (n/k/a Robbins Geller Rudman & Dowd LLP)
2. Milberg
3. Bernstein Liebhard
4. Barroway Topaz Kessler Meltzer & Check
5. Barrack, Rodos & Bacine

2009's Top 5 - Average settlement value:

1. Bernstein Liebhard
2. Wolf Haldenstein Adler Freeman & Herz
3. Berman DeValerio
4. Berger & Montague
5. Stull Stull & Brody

2009's Top 5 - Number of settlements:

1. Coughlin Stoia Geller Rudman & Robbins
2. Barroway Topaz Kessler Meltzer & Check
3. Bernstein Litowitz Berger & Grossmann
4. Milberg
5. Kaplan Fox & Kilsheimer

A few observations.

1. In contrast to last year, we have three different firms that garnered more than $1 billion in total settlements.

2. The settlements are a little more spread out this year than last year, with 4 firms missing the cut for Top 5 in total settlements by just one settlement.

3. We continue to see more and more "non-traditional" securities litigation firms making the list, with four firms that bring some serious mass-tort or personal injury street cred in that group, including both Motley Rice and the other half of the former Ness Motley firm, Richardson Patrick Westbrook & Brickman making the list.

4. Each year we seem to have at least one firm that has changed names from the prior year, just in the Top 5 tables. This year we again have two, Robbins Geller Rudman & Dowd and Berman DeValerio.

More Options Backdating Settlements

2010-02-18T05:43:41Z

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.

Vivendi Verdict In

2010-01-29T19:17:15Z

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.

]]> Damages have not been finalized yet, but news reports suggest a range up to $11 billion depending on how many investors are ultimately included.

Vivendi has already issued a statement, noting that it intends to "pursue all available paths of action to overturn the verdict."

Among the complaints that Vivendi lists with the verdict:

* the Court's decision to include French shareholders in the class
* rulings on jurisdiction (remember this is an F-cubed case)
* the plaintiffs' method of proving and calculating damages

Stay tuned for more details and an update to our presentation on all 23 securities class action cases that have gone to trial since 1996.

Those cases fall into three categories:

1.Securities Class Action Trials Based on Post-Reform Act Conduct Resulting in a Verdict at Trial (nine)

2. Securities Class Action Trials Based on Post-PSLRA Conduct Resulting in a Settlement or Summary or Default Judgment During Trial (seven)

3. Securities Class Action Trials Based on Pre-PSLRA Conduct Resulting in a Verdict at Trial (seven)

The presentation is available here, and will be updated shortly to reflect the Vivendi verdict.

NERA Releases 2009 Canadian Securities Class Action Trends Study

2010-01-27T17:21:55Z

Today NERA Economic Consulting released the 2009 update to their study, Trends in Canadian Securities Class Actions.

According to the report, securities class action filings in Canada in 2009 continued to stay above historical average filings. The report notes that eight securities class actions were filed in 2009, compared with ten filings in 2008. As with recent reports discussing trends in US securities class action case filings, the "drop" from one year to the next is not the whole story, as 2009 is the second most active year ever for Canadian securities class action case filings.

Six new cases were filed in 2009 involving allegations of misrepresentations and/or omissions by issuers, including claims brought under the new continuous disclosure provisions. This is a new high both in absolute terms and in percentage terms (75%).

The report also notes a steep drop in the overall value of settlements achieved in 2009, with six cases settling 2009 for approximately $51 million versus eight cases totaling $890 million in settlements in 2008. According to the report, the average settlement for 2009 was $8.5 million and the median settlement was $9 million.

Of interest - the majority of cases filed in 2009 were brought in relation to securities issued by companies in the minerals and financial sectors. The report notes that this is both reflective of the composition of the Canadian economy and consistent with filing trends in prior years.

The trend of "belatedly filed" cases that has been discussed with respect to US cases also appears to have permeated north of the border, with 2 of the 8 cases (25% for you non-math majors) filed in 2009 having been filed nearly two years after the end of the proposed class period.

The full report can be downloaded here.

The Downside to Opting Out

2010-01-22T16:41:39Z

Much ink is spilled (particularly by self-laudatory securities litigators) on the potential upside of the process of opting out of securities class actions and filing individual or group actions over the same alleged misstatements or omissions.

Someone in the plaintiffs bar (perhaps with a PR background) even created a new term to describe these cases - direct actions.

It seems that virtually all of what has been written on the issue has focused on the allegedly larger recoveries that opt-out plaintiffs have received in their own cases as compared to what they would have received if they had remained in the class action and filed a claim for their pro-rata share of the settlement fund.

Well most upsides also have a downside, and a recent state court trial of an opt-out case provides a nice case study for us.

Back in 2004, Aspen Technology, Inc. (OTC: AZPN) and several of Aspen's officers and directors were hit with a securities class action alleging that from October 1999 through October 2004, the defendants had failed to disclose and misrepresented that:

(i) the Company had improperly and prematurely recognized revenue for certain software license and service agreement transactions entered into with certain alliance partners and other customers during fiscal years 2000-2002 and possibly other periods;

(ii) the Company lacked adequate internal controls and was therefore unable to ascertain its true financial condition; and

(iii) as a result, the values of the Company's revenues, earnings, assets and/or liabilities for fiscal years 2000-2002 and possibly other periods were materially overstated and might have to be restated.

During the class period, Aspen had acquired ICARUS Corporation, a company that produced computer software used by the process manufacturing industries to estimate plant capital costs and evaluate project economics, for about $25 million. The payment was a combination of cash, a promissory note, and Aspen stock with a market value of $12.4 million.

In November 2005 the defendants settled the class action litigation for $5.6 million.

Certain class members representing 1.4 million shares of common stock (or less than 1% of the shares purchased during the class period) opted out of the class action settlement.

Three separate actions were filed on behalf of the holders of approximately 1.1 million of the opt-out shares. One of the actions settled, another is still pending, and a third (you guessed it - on behalf of the former owners of ICARUS) went to trial before the Business Litigation Session of the Massachusetts Superior Court for Suffolk County in November 2009.

The ICARUS complaint alleged claims against Aspen and certain former officers alleging securities and common law fraud, breach of contract, statutory treble damages, deceptive practices and/or rescissory damages liability. The damages sought by the plaintiffs (which included trebled claims) were estimated to be $30 million.

Earlier this month, Justice Judith Fabricant ruled that "no fraud occurred...defendants are entitled to judgment on all counts of the complaint." A copy of Justice Fabricant's decision can be found here. According to a blurb on Skadden's website (defense counsel for Aspen) - the news is even worse for the former owners of ICARUS, noting that Justice Fabricant ruled that "the defendants recover of the plaintiffs its costs of action, as provided by law."

Those that stayed in the Aspen class action? The settlement fund was disbursed in March 2008.

As an aside, it is worth noting that the phrase "direct action" has another wider usage:

Politically motivated activity undertaken by individuals, groups, or governments to achieve political goals outside of normal social/political channels. Direct action can include nonviolent and violent activities which target persons, groups, or property deemed offensive to the direct action participant.

So, the next time you see an angry group of shareholders, just remember, they are probably only on their way to the courthouse...

Latest Edition of SCAS Top 100 Released

2010-01-15T18:01:20Z

One of the many reports that we publish here at SLW World Headquarters is a quarterly review of the largest securities class action settlements since the passage of the PSLRA, known as the "SCAS Top 100."

Our most recent edition (through Q4 2009) of the SCAS Top 100 was published yesterday, and can be accessed here.

A few interesting observations.

1. More of the Top 100 cases settled in the last 4 years (53) than in the prior ten years.

2. Over the last 4 years, the price of admission to this list has doubled. On the December 31, 2005 version, the 100th largest settlement was the $39 million Washington Group International settlement from 2005. In this version, the 100th largest settlement was the $79.75 million Philip Services Corp. settlement from 2007.

3. The percentage of cases from the Top 100 where an institutional investor is the lead plaintiff continues to creep up. We now have 85% of the cases in the Top 100 with an institutional investor as a lead plaintiff. That compares to 56% 4 years ago.

4. Looking at the firms that serve as claims administrators in these cases, the Top 3 firms have switched places and had the number of settlements on the list move around, but the same three firms make up the Top 3.

A few notes for readers that have not seen a prior version of this report.

1. When a case has multiple settlements, the year listed in the report is for the most recent settlement.

2. The names of the law firms serving as co-lead counsel are left as they were when the case settled.

As always, readers are encouraged to send in any questions or corrections.

Updates to the Events Calendar

2010-01-14T17:30:08Z

Once again, here is the latest round of updates to our securities litigation conferences, webcasts, and other events list.

For the full list, please go here.

As always, readers are encouraged to send information on securities litigation related events to us via the "Contact Us" link on the upper left hand side of this blog.

Year End Securities Litigation Review

January 22, 2010
Webinar

Highlights:

* Analysis of newly filed cases and settlements in 2009
* Assessing the larger implications for underwriters, brokers and risk managers.

No brochure is available, but for more details, visit the webinar registration page.

Contests for Corporate Control 2010: Current Offensive & Defensive Strategies in M & A Transactions

February 4, 2010
PLI New York Center - New York, New York

Highlights:

* Director Fiduciary Duties in M&A Transactions
* Director's personal liability in M&A transactions
* Communicating with shareholders in M&A transactions
* Corporate Governance and Its Effect on the Board of Directors in M&A Transactions

No brochure is available, but for more details, visit the conference registration page.

International Jurisdiction Issues Arising from the Madoff Scandal

February 24, 2010
Teleconference

Highlights:

* Status of the cases filed to date against the feeder funds
* Enforcement issues involving investors and feeder funds abroad
* Clawback related issues and new standards for filing claims

No brochure is available, but for more details, visit the teleconference registration page.

Professional Liability Insurance

March 24-25, 2010
The Carlton Hotel - New York, New York

Highlights:

* Evaluating the Impact of the Credit Crisis on the E&O Market
* The State of the Professional Liability Marketplace
* Madoff scandal impact on the E&O landscape now and in the future

The conference brochure is available here, or for more details, visit the conference webpage.

The other securities class action trial

2010-01-07T17:19:09Z

While some ink has been spilled recently over the Vivendi trial that is wrapping up in New York, little mention was made of another recent (and rare) securities class action trial, until now.

The case, pending against Capital Research and Management Company and American Funds Distributors, Inc., alleged that the advisory and 12b-1 (or distribution) fees which defendants received from the mutual funds they advised, and their investors, were excessive.

In an exhaustive opinion, after a bench trial this past summer, Judge Gary Feess found that "Plaintiffs have failed to sustain their burden of proving that CRMC charged fees that were 'so disproportionately large that [they bore] no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining'" - the so-called Gartenberg standard.

The American Lawyer has a story, here.

Milbank, Tweed, Hadley & McCloy represents the defendants while Milberg and Weiss & Lurie are lead counsel for the plaintiffs.

Our presentation detailing all 22 securities class action cases that have gone to trial since 1996, is available here.

Those cases fall into three categories:

1.Securities Class Action Trials Based on Post-Reform Act Conduct Resulting in a Verdict at Trial (eight)

2. Securities Class Action Trials Based on Post-PSLRA Conduct Resulting in a Settlement or Summary or Default Judgment During Trial (seven)

3. Securities Class Action Trials Based on Pre-PSLRA Conduct Resulting in a Verdict at Trial (seven)

Note that we have not yet added the Vivendi case to the presentation, but will do so when it fits into one of our three categories.

As always, readers are encouraged to send in any updates, additions, or corrections.