Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

The $277.5 million jury verdict in the Apollo Group securities lawsuit caused a great sensation at the time it was returned in January 2008 (as discussed here). The verdict heartened plaintiffs’ attorneys and it served as a counterweight to the defense verdict in the virtually contemporaneous JDSU Uniphase securities lawsuit trial (which is discussed here).

But on August 4, 2008, Judge James Teilborg of the United States District Court for the District of Arizona entered an order (here) granting the defendants’ motion for judgment as a matter of law, based on his finding that the trial testimony did not support the jury’s finding of loss causation. Judge Teilborg’s order vacated the judgment and entered judgment in defendants’ favor.

The Apollo Group securities lawsuit involved alleged misrepresentations and omissions relating to a February 6, 2004 “Program Review” in which a Department of Education representative discussed the company’ potential violation of DoE rules. News of the allegations in the Program Review first became public on September 14, 2004, but the company’s share price did not react. Apollo’s share price fell significantly on September 21, 2004, when a securities analyst issued a report (the “Flynn reports”) expressing concern about the company’s possible exposure to future regulatory issues.

Judge Teilborg had held in connection with the parties’ pre-trial cross-motions for summary judgment that the issue whether the Flynn reports constituted “corrective disclosure” sufficient to support a finding of loss causation was a question for the jury

In its post-trial motion, Apollo argued that the evidence at trial was insufficient to support a finding that the Flynn reports represented “corrective disclosure,” because they did not contain any new fraud-revealing information. Judge Teilborg found that “the evidence at trial undercut all bases on which [the plaintiff] claimed the Flynn reports were corrective.”

Accordingly, the court concluded that although the plaintiff “demonstrated that Apollo misled the markets in various ways concerning the DoE program review,” the plaintiff “failed to prove that Apollo’s actions caused investors to suffer harm.” The court therefore concluded that “Apollo is entitled to judgment as a matter of law.”

Judge Teilborg then went on to consider conditionally Apollo’s motion for a new trial, as a precaution against the possibility that the appellate court could reverse the grant of judgment as a matter of law. He found that “none of the reasons cited by Apollo warrant a new trial in the case” and so the court conditionally denied Apollo’s motion for a new trial.

The possibility of significant post-trial developments in the Apollo case is something I expressly suggested at the time of the jury verdict, and, indeed the case still has a great deal farther to run procedurally, with additional opportunities for even further developments in the case.

In the interim, the post-trial disposition in the Apollo Group case alters the mix of securities lawsuit trial outcomes. According to data from the Securities Litigation Watch (here), six post-PSLRA cases (including Apollo Group) have gone to verdict, with three of the verdicts in favor of the plaintiffs and three in favor of defendants, although on November 26, 2007, the Ninth Circuit reversed and remanded the defense verdicts in the Thane International case (about which refer here). With the vacatur of the plaintiff’s verdict in the Apollo Group case, the securities lawsuit jury verdict scoreboard now stands evenly distributed, three each for plaintiffs and defendants – subject to further procedural developments.

As for the significance of this development, it may be hard to say definitively until all proceedings are complete, but the verdict’s vacatur can’t be encouraging for plaintiffs’ lawyers. This development together with the defense verdict in the JDS Uniphase trial would seem to argue pretty compellingly in favor of avoiding jury trials and seeking pretrial resolution

One practical significance of the vacatur of the Apollo jury verdict is that it removes any suggestion that the jury’s verdict represents a finding of fraud sufficient to trigger the fraud exclusion in the company’s D&O insurance policy. This undoubtedly represents significant relief to the company and the other defendants, in addition to the sense of vindication the company likely feels following the court's ruling.

The company’s August 5, 2008 press release about the Judge Teilborg’s ruling can be found here. A detailed summary of the Apollo Group securities case, including links to pleadings, can be found here.

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A June 5, 2008 proposal by the Financial Accounting Standards Board that could require public companies to disclosure more about their litigation risks is generating a storm of controversy. As discussed in Zusha Elinson’s June 24, 2008 Law.com article entitled "GC’s Bristle at Proposed Disclosure Rules" (here), under the proposed revision to FASB Statement No. 5 (which can be found here), "the threshold for reporting potential loss from a lawsuit would be lowered from ‘probable’ to anything but ‘remote.’" Companies would have to "estimate just how much legal threats might cost and the likely outcome" and "disclose more details about the underlying litigation and the reasoning behind their predictions."

 

As discussed at length in in the Point of Law blog (here), there are a number of concerns about these proposed changes. Among other things, they are concerned that the new rules could force companies to lay out their litigation strategies for opponents to see; potentially waive the attorney client privilege; and even lead to more securities fraud cases if litigation turns out worse than estimated.

 

It certainly doesn’t take much creativity to imagine circumstances in which a company that finds itself the unfortunate recipient of an unexpected runaway jury verdict subsequently gets hit with a follow on securities lawsuit filed by plaintiffs’ lawyers alleging on behalf of shareholders that the company failed to disclose its true exposure to the underlying litigation.

 

Similarly, it is easy to imagine companies eager to avoid this litigation threat finding themselves challenged to produce defensive disclosure that does not simultaneously compromise their litigation position or their settlement negotiation strategy.

 

An additional concern that might challenge companies faced with the new disclosure requirements would arise from questions surrounding available insurance coverage in connection with the litigation. Companies involved in serious litigation sometimes find themselves unable to establish what amount of its legal expense and even settlement or judgment amounts might be covered by insurance.

 

Since the ultimate financial impact on the company from litigation could well depend on as yet incomplete negotiations with their insurers, the estimate of the financial impact from the litigation could be particularly uncertain. Indeed, compelling disclosure under these circumstances might not only compromise their position in the underlying litigation but it could potentially compromise their position with respect to their insurers as well.

 

The comment period for the proposed revision closes on August 8.

 

Additional concerns regarding the proposed new rules are noted on Professor Larry Ribstein’s Ideoblog (here).

 

Special thanks to Walter Olson at the Point of Law blog (here) for providing links to the proposed revised rules.

 Trade Marks: There are innumerable examples in William J. Bernstein’s entertaining new book “A Splendid Exchange: How Trade Shaped the World” (here) demonstrating that the world was “flat” long before its more recent evocation. I found the following a particularly interesting example:

On September 5, 1833, the American clipper Tuscany appeared at the mouth of India’s Hooghly River, took on a river pilot, and headed upstream to Calcutta. The news of its arrival was swiftly relayed upriver, throwing that city, whose name is synonymous with sweltering heat, into a state of excitement. The Tuscany carried a new and priceless cargo: more than a hundred tons of crystal-clear New England ice.

What makes this such a compelling example of the "flattening" of the world is what happened after the overseas introduction of this highly desirable but locally unavailable product:

The first heavy, inefficient steam-driven mechanical refrigerators, produced by dozens of inventors under numerous patents, were used in fixed ice-making plants far from natural ice sources –in the Caribbean, south of the Mason-Dixon Line, in West Coast cities, and particularly in the Argentinean and Australian meatpacking plants. Tudor’s Calcutta trade, which grew steadily more profitable for nearly half a century following his initial delivery in 1833, came to an abrupt end a few years after the opening of the city’s first artificial ice plant in 1878.

The elimination of the Calcutta ice trade may well have devastated the New England ice producers at the time. But in the end, the overall benefits of innovation and increased trade opportunities far outweighed the consequences from the loss of the long-forgotten ice trading monopoly. Changing needs, transport costs, and technological innovation continue to alter existing trade patterns, producing winners and losers at every turn.

 

Because sudden change can devastate beneficiaries of existing arrangements, the need to protect the status quo can sometimes seem necessary and even urgent. Bernstein’s book shows not only that trading societies have faced these problems repeatedly throughout human history, but how societies that have accepted and faced these problems have prospered.

 

A good short review of Bernstein’s book can be found here.

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I have previously noted (most recently here) the increasing significance of opt-out actions as a part of securities lawsuit resolution. Columbia Law School Professor John Coffee, in a March 27, 2008 paper entitled “Accountability and Competition in Securities Class Actions: Why ‘Exit’ Works Better Than ‘Voice’” (here) examines the opt-out phenomenon and concludes that while the increased recoveries in opt-out actions compared to class recoveries will encourage competition among plaintiffs’ counsel, shareholder litigation could become even costlier to resolve.

Coffee also concludes, contrary to what others have “prematurely predicted,” that shareholder class action lawsuits “will not die or whither away, but that the current system of shareholder class action lawsuits may be abandoned in favor of a “two-tier system,” in which “the largest investors will opt-out and sue in state court individual actions, with the class action becoming the residual vehicle for smaller investors.” These possibilities have enormous implications for the future of securities litigation, which Coffee’s paper explores.

Coffee opens his paper comparing the changes wrought by the opt-out phenomenon with prior legislative efforts to reform class action litigation. Specifically, Coffee notes that unlike legislative efforts to give the class greater control, such as the lead plaintiff provision of the PSLRA, the increasingly utilized opt-out option may offer true oversight, actual competition, and even lead to better results for the plaintiff class.

In analyzing these developments, Coffee adopts terminology from the writings of economist Albert O. Hirschman. Hirschman describes two ways in which organizational behavior may be modified: (i) participants can be given greater “voice”; or (ii) participants can be given increased ability to “exit” the system. Coffee contrasts the legislative reforms, such as the lead plaintiff provision, designed to give class members greater “voice,” with the alternative of “exit” offered by the opt-out option. Coffee concludes that “ ‘exit’ works better than ‘voice,’” at least within realm of securities class actions.”

A critical component of Coffee’s analysis is that “when institutional investors exit the class and sue individually, they appear to do dramatically better – by an order of magnitude!” Coffee views this as an “optimistic development” because the opt-out outperformance can “kickstart active competition” among plaintiffs’ attorneys, by contrast to the PSLRA reforms which have had the perverse effect of reducing competition.

As Coffee notes, these developments have significant implications for the future of class litigation, as large institutional investors increasingly may conclude that their interests are better served by proceeding separately. Coffee specifically notes that the current wave of subprime-related cases are “particularly likely to produce a high rate of opt-outs,” because of the predominance of institutional investors among purchasers of the kinds of asset-backed securities that are at the heart of many of these lawsuits.

Coffee speculates that defendants (and indeed all class litigants) may seek to employ adaptive practices to offset these developments. Among other possibilities Coffee reviews are such practices as advancing the time of the opt-out decisions before the settlement is reached; structuring the settlement in a way to give class members “priority” over individual recoveries, such as given them a security interest in company assets to the extent of the settlement amount; including a “most favored nation” provision in class settlements so that class members are entitled to increase their recovery if opt-outs reach a higher settlement; or even reducing the settlement amount in respect of each opt-out.

In the final analysis, each of these potential adaptations has shortcomings. Over the long run, Coffee anticipates, “increased opting out will place class counsel under increased competitive pressure to improve the class settlement.” For that reason, Coffee concludes that “greater competition is coming.”

I very much agree with Professor Coffee that the emergence of significant opt-out settlements represents a watershed development in securities class action litigation, with the potential to have an enormous impact. However, I think it does still remain to be seen how widespread the opt-out phenomenon will prove to be.

The increased recovery percentages (so far) in the high profile opt out actions do provide obvious incentives for institutional investors to become more focused on their opt-out opportunities. But so far the significant opt-out activity has been limited to “mega” cases where the aggregate recoveries, for both the class and the opt-out litigants have run into the hundreds of millions and even the billions of dollars. It is entirely possible that rather than becoming a universal phenomenon affecting all, most, or even many securities class actions, significant opt-out activity will be limited only to a small handful of cases where the dollars involved reach this rarified range. Without more, it seems premature to project that shareholder litigation is about to enter a two-tier system where institutional litigants have abandoned class resolutions altogether.

That said, even if the phenomenon proves to be limited only to a small subset of securities cases, the opportunities and incentives involved could still affect the overall outcome of many securities cases. Just the threat of material opt-outs could affect the class action settlement dynamic. As Professor Coffee notes, some adaptive behavior is likely, as litigants seek to suppress or minimize the prospects for opt-outs. The likeliest adaptive behavior is that class settlements overall could be driven upward, as all class settlement participants seek to remove the incentive to opt out by improving the class settlement itself.

We are already in an era of increasing average claim severity. The emergence of the opt-out phenomenon can only amplify these trends. In any event, the developments related to opt-outs also present important implications for D&O insurers’ severity assumptions and for insurance purchasers’ assumptions about limits adequacy. The direct and indirect impacts from the emergence of significant opt out activity could make historical assumptions in this regard obsolete.

Very special thanks to Professor Coffee for his permission to cite and quote his paper, which, he emphasizes, is preliminary only.

Hat tip also to Werner Kranenburg of the With Vigour and Zeal blog (here) for the link to Professor Coffee’s paper.

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Add E*Trade and SunTrust Bank to the growing list of companies that have been sued in purported class action lawsuits on behalf of auction rate securities investors against companies that sold them the instruments. The plaintiffs’ attorney’s April 2, 2008 press release regarding the E*Trade auction rate securities lawsuit can be found here, and the complaint can be found here. The plaintiffs’ attorneys’ April 2, 2008 press release regarding the SunTrust lawsuit can be found here and the SunTrust complaint can be found here. With the addition of these two new suits, there have now been a total of ten companies sued in these auction rate securities class action lawsuits.

The auction rate lawsuits are interesting. Clearly the plaintiffs’ lawyers think they are worth pursing. And if the intensity of the auction rate securities investors’ anger is an accurate gauge, then the plaintiffs’ lawyers filing of these lawsuits ultimately could be justified. As a result of prior posts on this blog (here and here) about auction rate securities, I have received numerous emails and inquiries from upset auction rate securities investors. Notwithstanding the investor anger, it is probably worth noting that so far as I can tell the leading plaintiffs’ securities firms are not (at least not yet) active in this space. Most of the auction rate securities class action lawsuits thus far have been filed by two plaintiffs’ firms (refer here and here).

The allegations in these auction rate securities class action lawsuits are largely identical. Essentially the plaintiffs contend that the defendants failed to disclose material facts about the instruments. In particular, the defendants are alleged to have failed to disclose that the auction rate securities were not cash alternatives, but rather that there were only liquid at the time of auction. More to the point, the complaints allege that the defendants failed to disclose that the auction rate securities would become illiquid as soon as the broker-dealers stopped maintaining the auction market.

In each of these class action lawsuits, the complaint names as defendants a specific financial institution and its broker-dealer affiliate. No individual defendants are named. While each complaint contains substantially identical generalized allegations of misrepresentations or omissions, the complaints contain virtually no allegations about specific statements the particular defendants companies are alleged to have made.

And even though the complaints purport to allege breaches of Section 10(b) of the ’34 Act, the complaints’ only basis for alleging scienter are generalized allegations of knowing falsity; there are no allegations of insider trading, and no particularized factual allegations supporting the general allegations of knowing falsity. The complaints similarly depend on the failure of the auction rate market itself as satisfying the loss causation requirement, rather than referring to any alleged curative disclosures or anything else in particular about the specific securities in which the class members invested.

The defendants undoubtedly will argue that these generalized allegations are insufficient to meet the threshold pleading requirements, in reliance in particular on Tellabs and Dura Pharmaceuticals. But while the defendants may seek to have the actions dismissed, the plaintiffs’ lawyers clearly intend to keep filing these actions.

The lawsuits potentially may also raise some interesting D & O liability insurance coverage issues. Because the complaints do not name any individuals as defendants, the sole potential coverage under the typical D & O policy that these claims might trigger is the so-called “entity coverage” found in most policies. In most public company D & O policies, the entity coverage is strictly limited to “securities claims.” While the auction rate securities lawsuits purport to raise claims under the securities laws, these allegations may or may not trigger the potentially applicable entity coverage, depending on how the term “securities claim” is defined in the applicable policy.

There are two general variants of the “securities claim” definition. One variant defines the term “securities claim” by reference to the securities laws themselves, including within the definition claims that assert breaches of federal or state securities laws or their equivalent. The other definitional variation defines “securities claim” by reference to the claimants and securities allegation with respect to which would be recognized as a securities claim. For example, this latter category might limit a “securities claim” to claims brought by holders of the company’s securities, or alternatively, might limit a securities claim to alleged breaches in connection with trading of the company’s own securities.

Clearly this definitional distinction could make a difference in connection with these recently filed auction rate securities lawsuits, as these claims might assert a “securities claim” and trigger the entity coverage in policies that use the former variants, but may or may not trigger the entity coverage in the policies that have the latter variant.

It is probably also worth noting that a number of the companies (for example, E*Trade) that have been sued in these auction rate securities class actions have also separately been sued in securities class action lawsuits by the companies’ own shareholders. These companies’ available insurance coverage may be under significant pressure already.

With the accumulation of these lawsuits, whose numbers are likely to continue to grow, it may well be time for these lawsuits to be broken out into their own separate statistical category, much as the IPO laddering cases were when the were filed in 2001. The auction rate securities lawsuits clearly represent a litigation category distinct from the more typical securities class action brought by public company shareholders.

But with the addition of the two latest lawsuits, the total number of subprime related lawsuits, as reflected on my running subprime lawsuit tally (which may be accessed here), now stands at 64, of which 26 have been filed in 2008. As noted above ten of these 64 lawsuits represent lawsuits brought by auction rate securities investors. Two of the 64 were brought by asset-backed securities investors against the investment banks who created the instruments. Two of the 64 were brought by mutual fund investors against the fund companies and fund managers. The remaining lawsuits were brought by public company shareholders.

Subprime Derivative Lawsuits: In addition to securities lawsuits, some shareholders have also filed subprime-related shareholders’ derivative lawsuits against company management alleging breach of fiduciary duty and other legal breaches. The latest of these subprime-related derivative lawsuits was filed on April 1, 2008 in the United States District Court for the District of Maryland against Municipal Mortgage & Equity (“Muni Mae”) , as nominal defendant, and certain of its directors and officers (complaint here). Muni Mae has previously been sued in a subprime-related securities lawsuit (refer here).

The derivative suit against Muni Mae joins other subprime-related derivative lawsuits that previously have been filed against, among others, Countrywide, American International Group, Regions Financial, and Bear Stearns. I have not been separately tracking the subprime-related derivative lawsuits, basically because I failed to anticipate that shareholders would file as many subprime-related derivative actions as they have. In response to readers’ inquiries, I will now endeavor to track the subprime-related derivative suits.

Unfortunately, because I am coming at this task belatedly, I may fail to account for derivative lawsuits that were filed previously and of which I am unaware. I would be grateful if readers would let me know of any pending subprime-related derivative lawsuits of which they are aware, so that I can add them to my tally and the list will be as complete as possible.

Subprime Litigation Overview: The field of subprime-related litigation has continued to grow and expand, to the point where it is difficult to get an organized sense of the range of issues and litigants involved. An April 1, 2008 memorandum from the Gibson Dunn law firm entitled “Subprime-Related Securities Litigation: Where Do We Go From Here?” (here) provides a top-level overview of current exposures facing companies involved in subprime-related businesses. The paper identifies early trends and key defenses, takes a brief look at likely D & O insurance issues, and describes the factors that are likely to affect the likely future direction of this litigation.

A Canadian Backdating Lawsuit: Though the backdating scandal now seems like ancient history, it seems that the lawsuits are still continuing to come in, although the most recent instance involves a Canadian company sued in a Canadian court.

According to news reports (here), a shareholder of Savanna Energy Services Corp. has filed an action in Alberta’s Court of Queen’s Bench against eleven current or former directors and officers of the company, alleging that the defendants manipulated the company’s stock options in order to profit personally. The lawsuit seeks damages equal to the defendants’ ill-gotten gains and a ban on issuing options to the company’s executives. The plaintiffs’ complaint relies on an affidavit from Eric Lie, the University of Iowa professor whose research initially triggered the options backdating scandal. Lie’s affidavit reports “a high statistical probability” that individuals at Savanna backdated options between 2004 and 2007.

Because Savanna is a Canadian company whose shares trade only on the Toronto Stock Exchange and because it has been sued in Canadian court under Canadian law, I have not tried to shoehorn the case into my running tally of options backdating lawsuits (which may be accessed here). The Savanna lawsuit may represent its own unique category of one.

Delaware Corporate Law Update: Francis Pileggi has posted on his Delaware Corporate and Commerical Litigation Blog (here) an interesting series of posts (here, here and here) reporting on the proceedings at Tulane University's Corporate Law Institute, which took place this past week. The posts include a number of interesting commentaries from members of the Delaware judiciary. Francis's post (here) about Delaware law regarding the sale of companies is particularly noteworthy and interesting, particularly Vice Chancellor Strine's remarks about the duties of boards of companies in the process of the sale of a company.

Death by Blogging?: Readers who may not appreciate how stressful it can be to maintain a blog may want to review the April 6, 2008 New York Times article entitled “In Web World of 24/7 Stress, Writers Blog Till They Drop” (here), which surveys the toll that blogging is taking on some authors.

While no one here at The D & O Diary seems to be in any immediate danger, maintaining the blog is unquestionably stressful. The authors described in the Times article are (or rather, were) at least getting paid for their troubles, whereas The D & O Diary lacks even that consolation. Our blogging efforts defy Samuel Johnson’s sage words that “No man but a blockhead ever wrote except for money” -- words that we frequently contemplate to our distress. Yet on we blog, as if by compulsion. A blog is indeed a harsh mistress.

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As courts have wrestled with the issue whether certain foreign shareholders can act as lead plaintiffs, or indeed can even be included in the plaintiff shareholder class, they have faced an ever-broader array of questions and challenges. The kinds of issues that foreign shareholder litigants present are illustrated in the February 13, 2008 lead plaintiff selection order (here) of Judge Saundra Brown Armstrong of the United States District Court for the Northern District of California in the BigBand Networks securities class action lawsuit. Refer here for background regarding the case.

BigBand, which is based on California, went public on March 14, 2007 (refer here). Its shares trade on Nasdaq. On September 27, 2007, the company announced (here) a revised revenue estimate for the third quarter of 2007. The company’s share price declined and several shareholders filed securities class action lawsuits against the company and certain of its officers and directors as well as the IPO offering underwriters and others.

The two leading contenders for the lead plaintiff role were Gwyn Jones, “a British citizen who resides in the Republic of Cyprus,” and Sphera Fund, an Israeli-based institutional hedge fund investor. The two would-be lead plaintiffs agreed that Jones has the largest financial interest in the case, having sustained losses of $438,617, whereas Sphera sustained losses of $374,889. Sphera nevertheless asserted three grounds on upon which it sought to rebut the presumption that Jones, with the largest financial interest in the  case, was the most adequate plaintiff.

Sphera first argued that in enacting the Private Securities Litigation Reform Act, Congress sought to encourage institutional investors to serve as the lead plaintiff in securities class action lawsuits. Judge Armstrong found however that “a plaintiff’s mere status as an institutional investor does not provide any presumption that the institutional plaintiff is a more adequate plaintiff than an individual investor with a larger financial interest.” Judge Armstrong went on to note that Congress could have created a per se presumption in favor of institutional plaintiffs but did not do so.

Sphera next sought to overcome the presumption that Jones was the most adequate plaintiff by arguing that Jones was subject to a “unique defense.” Sphera argued that the judgment of the U.S. court in a class action securities lawsuit might not be given preclusive effect in Cyprus and that fact was sufficient to overcome the presumption. In making this argument, Sphera drew upon prior holdings in the Vivendi and GlaxoSmithKline cases that the most adequate plaintiff presumption can be rebutted where the presumptive lead plaintiff’s country may not give res judicata effect to a U.S. court’s class action judgment. (Refer here for my prior discussion of the GlaxoSmithKline case, in which the court rejected the lead plaintiff petition of a German investor with the most significant financial interest out of concern that a German court might not enforce the U.S. court’s judgment in the case.)

Sphera’s attempt to challenge Jones broke down on its attempt to substantiate its characterizations of Cypriot law. Judge Armstrong held that “the arguments and evidence presented …are a totally inadequate basis for this Court to form any opinion as to whether Cypriot courts would give binding effects to this Court’s judgments.” Judge Armstrong observed regarding Sphera’s attempt to establish the relevant Cypriot law that

Sphera Fund does not even so much as provide an authenticated version of the Cypriot Civil Procedure Rules, but instead provides only a link to a webpage that is primarily in Greek and appears to contain translations of various Cypriot laws….Moreover, the versions of the rules on this website appear to use idiomatic phraseology that is literally Greek to this Court….The Court therefore has no basis on which to render an informed opinion on this question.

Judge Armstrong went on to note that “on the evidence before this Court,” Sphera’s concern about the enforceability of the U.S. court’s judgment in Cypriot courts “applies equally to Sphera Fund, an Israeli entity as to Jones.” Sphera “provided no specific argument that an Israeli court would give preclusive effect to a securities class action judgment such as may be rendered in this case.” Although relegated to a footnote, a further observation of the court seems particularly relevant to the entire analysis; that is, the court notes that the country of Jones’ citizenship (U.K.) rather than the country of his residence (Cyprus) may be the more relevant consideration, and prior courts have found that U.S. judgments may be preclusive in U.K. courts.

Finally, Sphera’s third argument against the presumption that Jones is the most adequate plaintiff is that Jones is in any event unqualified to serve as lead plaintiff. Sphera’s arguments in this regard are, the court notes, “simply ad hominem attacks on Jones,” which the court dismisses as “sophomoric.”

While there is something more than slightly comical about Sphera’s attempt to present arguments based on Cypriot law in reliance on a partially translated webpage, the spectacle of a court making significant procedural determinations that potentially could affect the interests of absent class members based this kind of process is disheartening. Sphera's attempt to introduce Cypriot law may have been particularly clumsy, but this kind of spectacle is the almost inevitable absurd extreme to which the courts have been led based on the process of U.S. courts making assessments of foreign laws and of the likelihood that foreign courts would honor U.S. courts’ judgments in class action lawsuits.

Even with respect to jurisdictions such as the U.K. where the law is relatively accessible, the U.S. courts are nevertheless making assumptions that may or may not be valid about what a court in another jurisdiction might do in applying its own laws. And for countries where English translations of relevant legal provisions are unavailable, the entire exercise can simply break down. The inevitably scattershot results are underscored in the BigBand case when the court emphasized that it could not determine one way or another whether the judgment would be enforced in Cyprus or Israel but it was nevertheless proceeding ahead. It is hardly reassuring that the Court more or less acknowledged that it was making its decision in express recognition that it did not know what the relevant law is.

Moreover, with the increasing globalization of investor activity, the prospects for more instances of this kind of exercise, both at the lead plaintiff and at the class certification stage, seems likely. U.S. courts will be increasingly plagued by requirements to discern and make assessments upon the laws of a bewildering array of countries, and make decisions about the substantive rights of aggrieved absent potential class members based on assessments about what a foreign court might do under its law.  

Nor is the inaccessibility of some jurisdictions’ laws the only practical issue involved. For example, in the class certification context, and as Adam Savett pointed out on his Securities Litigation Watch blog, the practical alternative for foreign investors precluded from the shareholder class is for those precluded investors to file individual actions, which is precisely what foreign investors precluded from the Vivendi class have done, as Savett documents here.

The complications arising from foreign shareholder litigants’ involvement in U.S. securities actions defy easy solutions, but it seems increasingly apparent that these issues will continue to arise as foreign investors demonstrate their interest in accessing U.S. courts to seek available remedies under U.S. securities laws. While there are no easy solutions, the current ad hoc case by case method, informed only by U.S. courts’ rough and ready assessments of what the laws of other jurisdictions provide and how those jurisdictions’ courts might apply those laws to a U.S. class action judgment, seems poorly calculated to serve the best interests of absent, aggrieved class members.  

Speakers’ Corner: On March 6, 2008, I will be speaking at the Mealey’s Subprime-Backed Securities Litigation Conference in New York. I am honored to be included with a very illustrious group of speakers, who will be addressing the critical issues in a very comprehensive way. The program is being chaired by David Grais of Grais & Ellsworth. The entire program agenda and other conference information can be found here.

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On February 7, 2007, New Century Financial Corp. became the first company to be named in subprime-related securities lawsuit. On January 31, 2008, just short of one year later, Judge Dean Pregerson of the United States District Court for the Central District of California, granted the defendants’ motions to dismiss, but without prejudice and with leave to amend. For background on the lawsuit, refer here. For a copy of the January 31 opinion, refer here.

The plaintiff shareholders had initiated the complaint following the company’s February 7, 2007 announcement (here) that it would be restating its financial statements for the quarters ended March 31, June 30 and September 30, 2006, because of the company’s need to readjust the company’s allowance for “the potential repurchase of loans resulting from early-payment defaults by the underlying borrowers.” The company said that the reserve did not allow for the discounted price the company sustained upon its disposition of repurchased loans. The company’s press release also said that

the company’s methodology for estimating the volume of repurchase claims to be included in the repurchase reserve calculations did not properly consider, in each of the three quarters of 2006, the growing volume of repurchase claims outstanding.

On April 2, 2007, the company announced (here) that it had filed for relief under Chapter 11 of the U.S Bankruptcy Code. The company’s shares ultimately declined more than 97% percent.

On September 14, 2007, the lead plaintiff in the subprime-related securities lawsuit pending against New Century, the New York State Teachers’ Retirement System, filed a consolidated class action complaint. The consolidated complaint names as defendants the company and certain of its directors and officers; the company’s auditor, KPMG, and investment banks that underwrote the company’s June 2005 and August 2006 preferred stock offerings. The consolidated complaint raises allegations against all defendants under Section 11 of the ’33 Act, and against the company and its directors and officers under Section 10 of the ’34 Act.

In assessing the plaintiffs’ allegations, Judge Pregerson said that the complaint “lacks clarity in articulating the grounds for its claims.” The complaint “does not clearly identify the allegedly false statements or which of the factual allegations support and inference that particular statements are false or misleading.” The court attributed these shortcomings to the “lack of organization and somewhat unclear presentation of the allegations.” As a result, Judge Pregerson said, he “has difficulty determining whether plaintiffs have stated a claim.”

Judge Pregerson granted the motions to dismiss but allowed the plaintiffs leave to amend their complaint, by which the plaintiffs may attempt to “resolve deficiencies in the complaint by simple reorganization, revision and clarification of the currently long and at times meandering set of allegations.” The court instructed the plaintiffs that for each of the supposedly false or misleading statements, “the Complaint should identify some facts suggesting that the statement is false or misleading.” The court also directed the plaintiffs to attach to their amended complaint a chart specifying each allegedly false or misleading statement, the supporting factual allegations and the plaintiffs’ conclusion.

Like the prior dismissal of the subprime-related securities lawsuits involving IndyMac (about which refer here), the dismissal in the New Century case is without prejudice. Judge Pregerson’s opinion in the New Century case does not reach the merits, but nevertheless shows great impatience with the plaintiffs’ scattershot pleading approach. (“The Court,” Judge Pregerson observed in a footnote, “should not have to comb through the complaint to identify reasonable inferences from factual allegations to the legal conclusions.”) The plaintiffs have until February 25, 2008 to file an amended complaint. The court has scheduled argument on the updated motions to dismiss on April 21, 2008.

And so the motion to dismiss on the first-filed subprime securities lawsuit might be ready to be decided some 15 months (or more) after the complaint was initially filed. Obviously, at this rate it will take many years before the many subprime related cases have finally ground their way through the system, and before the full impact of the still evolving subprime crisis can be fully assessed.

But it is interesting to reflect, upon review of the events leading up to the New Century lawsuit, and as the subprime meltdown continues to unfold, that as early as the first quarter of 2006, New Century was already experiencing unanticipated loan repurchase requirements resulting from early-payment defaults on subprime loans. The subprime meltdown may seem like a sudden crisis, but has actually already been years in the making and will be even longer in the unfolding. Clearly, the wheels of finance, like the wheels of the law, grind exceeding slow but exceeding fine.

Hat tip to the Class Action Defense Blog (here) for the link to the January 31, 2008 opinion in the New Century case.

Loaded for Bear: The February 15, 2008 Wall Street Journal had an interesting article entitled “Bear Probe May Center on Investor Call” (here) discussing how federal prosecutors’ investigating the collapse of two Bear Stearns hedge funds managed by Ralph Cioffi are examining Cioffi’s statements in an April 25, 2007 conference call with hedge fund investors. Readers interested in this investigation will want to refer back to the December 17, 2007 Business Week article entitled “The Bear Flu: How it Spread” (here) for further background on the circumstances under investigation.

According to the Business Week article, in the April 25 call, Cioffi made statements about a Bear Stearns branded CDO mechanism that Cioffi also managed called “Klio funding.” This mechanism sold commercial paper and other short term debt to money market funds to allow the CDO to buy other higher yielding, longer-term securities. The money market funds were willing to invest because Citigroup agreed to refund their initial stake plays interest (in a so-called “liquidity put”). Citigroup, in turn, drew fees and also was able to sell the Klios mortgage-backed securities of its own.

According to Business Week, the Klio structure spread rapidly as other hedge funds, CDO managers and bankers “followed Cioffi’s lead.” Between 2004 and 2007, Wall Street raised $100 billion through these types of CDOs, “essentially creating a whole new way for industry to finance risky subprime loans.” The article goes on to detail how the Klios offered the Bear Stearns hedge funds a “ready, in-house trading partner,” and that in many months “the Cioffi-managed Klios traded only with the Cioffi-managed Bear funds.” The daisy chain ended in disaster when the subprime loans underlying these investments began to deteriorate. Much of the subprime-related writedowns amongst the investment banks are related to the liquidity puts they provided.

The Journal article reports that in the April 25 call, one participant wondered whether the packaged mortgage securities in the Bear hedge funds were tied to subprime assets. Cioffi reportedly responded that he didn’t have time to teach “CDO 101” or answer basic questions about the securities. It is probably worth observing that the April 25 call came several weeks after New Century had (as noted above) filed for bankruptcy as a result of deteriorating subprime mortgages that were already a problem more than a year before that. The questioner’s inquiry in the April 25 call about subprime was not, as Cioffi’s belittling response suggests, the result of naïveté, but rather well-grounded concern.

Cioffi’s response, although lacking the vulgarity, calls to mind Jeffrey Skilling’s now infamous conference call statement in the fateful final months of Enron. In response to an analyst’s comment that Enron was the only company that releases its earnings statement without a balance sheet, Skilling said “Well, thank you very much, we appreciate that … asshole.” (Refer here for the details about Skilling and the infamous call.)

The comparison may or may not be fair. But every scandal needs a villain, and fair or not, it appears at least based on the news coverage concerning the collapse of the two Bear Stearns hedge funds, that the casting is now complete. It appears that during the current Act of the subprime drama that the role of villain is to be played by Ralph Cioffi, and as with those called to play the villains in prior dramas, his arrogance will be one of the things held against him.

The Backdating Disposition List, Updated: Regular readers know that I have been maintaining a list (accessed here) reflecting all backdating lawsuit dismissals, denials and settlements. I have recently updated the list to add three additional dismissals in options backdating-related derivative lawsuits, two of which are late additions of dismissals I missed last fall. The three dismissals are as follows:

Openwave: On February 12, 2008, the United States District Court for the Northern District of California granted (here) the defendants’ motion to dismiss the plaintiffs’ options backdating related derivative suit, with leave to amend. The court had previously dismissed the plaintiffs’ initial complaint, with leave to amend.The February 12 decision related to the plaintiffs’ amended complaint. The court will allow the plaintiffs another opportunity to amend.

Westwood One: According to the company’s November 1, 2007 filing in Form 10-Q (here), on August 3, 2007, the N.Y. Supreme Court granted the defendants’ motion to dismiss the plaintiffs’ options backdating-related shareholders’ derivative suit. On September 20, 2007, the plaintiffs’ appealed the court’s dismissal and moved for “renewal” under relevant statutes. The appeal remains pending.

Clorox: According to the company’s November 1, 2007 filing on Form 10-Q (here), on October 27, 2007, the plaintiffs voluntarily dismissed their options backdating-related derivative lawsuit in response to the recommendation of the company’s Board’s Audit Committee’s recommendation to the Board that the Board reject the plaintiffs’ suit demand, on the grounds that the suit was not in the best interests of the company.

Special thanks to Adam Savett of the Securities Litigation Watch blog for the information regarding the Westwood One and Clorox dismissals.

Headline of the Week: Still unexplained: why would anyone want TWO dead dogs?: From the February 16, 2007 Financial Times: “Ground-Dog Day as Woman Pays $50,000 to Clone Dead Pitbull” (here).

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A developing breakdown in an obscure corner of the credit-market involving debt instruments called “auction rate securities” could represent the latest threat to emerge from the credit crisis. According to news reports (here and here), the absence of buyers for these securities has caused several recent auctions to fail, forced isuers to abandon their offerings or pay exorbitant rates, and stuck many holders with instruments they did not intend to keep. The declining values for these securities confronts many holders with the prospect of significant balance sheet write-offs, and presents another source of possible litigation arising from the evolving crisis. These circumstances also present more evidence to support my view (expressed most recently here) that the fallout from the credit crisis will ultimately extend far beyond just the financial sector.

 

Auction rate securities are long-term bonds or preferred stock on which the interest rates are reset periodically, usually every seven, 28 or 35 days. The interest rate resets make the instruments more like short-term securities. Holders can also sell the instruments on the reset dates – assuming there are enough buyers.

 

According to a February 13, 2008 article in the Wall Street Journal entitled “Credit Woes Hit Funding for Loans to Students” (here) the market for these securities has “gone into the deep freeze.” Roughly half of the $20 billion in these securities put up for auction on February 12 “failed to generate enough demand to sell.” Problems have been mounting for weeks. According to one commentator in a February 13, 2008 Bloomberg article entitled “Auction-Bond Failures Roil Munis, Pushing Rates Up” (here), “it’s the beginning of the end of the auction rate market.” UPDATE: The lead article on the front page of the February 14, 2008 Wall Street Journal (here) says that this "once-obscure type of bond is now sending shock waves through a broad swatch of the U.S. economy. The February 14 Wall Street Journal also has a separate article entitled "Train Pulls Out of New Corner of Debt Market" (here)

 

According to the Bloomberg article, “investor demand for the securities has declined on waning confidence in the credit insurers backing the debt.”  Whereas in the past, the broker-dealers selling the securities might have intervened to support the market, these dealers are now wrestling with balance sheet issues of their own and can’t take the risk of getting stuck with the securities. These conditions are hitting issuers, such as student lenders, who depend on these instruments to raise funds to loan to students, and municipalities, who are finding the lending costs skyrocketing. The conditions are also hitting investors that purchased the securities in the past and now fund themselves unable to sell, or with interest rate reset mechanisms that are malfunctioning.

 

The February 13 Journal article reports that the size of the auction rate securities market is “$325 billion to $360 billion,” and the Bloomberg article reports that about a third of the 449 companies responding to a May 2007 survey reported that their companies permitted investment in auction rate securities.

 

The turmoil in the market for auction rate securities is already taking a toll on some companies. As I previously noted (here), Bristol-Myers Squibb recently took an impairment charge of $275 million in connection with its investment in auction rate securities. Lawson Software also recently took a charge to adjust for the fair market value on auction rate securities. The February 14 Journal reports that 3M and US Air have also made auction rate securities related accounting adjustments. 

 

As I noted in my prior post discussing the Bristol-Myers write-down, these balance sheet issues potentially affect companies in many different sectors. As I have long said (refer here), before all is said and done, the subprime meltdown is going to be about a lot more than just the financial sector.

 

Indeed, according to a February 6, 2008 CFO.com article entitled “Subprime Woes Just Beginning” (here) Samuel DiPizza, the CEO of PricewaterhouseCoopers, says that the next wave from the subprime mortgage crisis “will flow past lenders and homebuilders and strike nonfinancial U.S. companies with forced writedowns.” DiPiazza specifically referenced the fact that “these securities sit in cash equivalent accounts of industrials; they sit in investment portfolios of pensions. We are having to deal with thousands of companies, not just a handful of big banks.” In a Reuters account of his comments (here), DiPiazza added that a "first wave" of write-downs was likely in the current audit cycle this quarter.

 

Nor does the disruption of the auction rate securities market raise only accounting and valuation issues. There have already been at least two lawsuits brought by auction rate securities investors against investment managers based on soured auction rate securities investments.

 

The first, as reported in the Wall Street Journal (here), was the Texas state court lawsuit (complaint here) brought by Metro PCS against Merrill Lynch. The lawsuit alleges that Merrill invested $133.9 million of the company’s cash in 10 auction-rate securities without appropriate authorization or disclosure and that Merrill later misrepresented the riskiness of the assets and their suitability under the company’s investment guidelines. I previously discussed the Metro PCS lawsuit here.

 

The second lawsuit, first reported Bloomberg (here), involves a FINRA arbitration complaint brought against Lehman Brothers Holdings by Brian and Basil Maher, who claim that Lehman’s investment of $286 million of the brothers’ funds in auction rate securities was inconsistent with the brothers’ stated investment objectives. UPDATE: The February 14, 2008 Wall Street Journal has a front-page article entitled "Debt Crisis Hits a Dynasty" (here) that details how the Mahers earned their fortune and  what happened after they invested a portion with Lehman. The article also describes the Mahers' arbitration complaint in greater detail.

 

Both of these lawsuits relate to an earlier freeze-up in the market for auction rate securities, in August and September 2007. The more recent market seizure is much more widespread, affects many different levels of securities, and many more investors, including corporate investors. As the PricewaterhouseCoopers CEO’s remarks underscore, many of the companies and investment funds holding these investments face complicated evaluation and accounting issues. Many companies may find themselves compelled (perhaps at their auditor’s insistence) to take asset write-downs or impairment charges. Shareholders and fund investors who may feel they were not fully informed about the balance sheet assets and valuation risks may, like the plaintiffs in the lawsuits cited above, seek legal redress.

 

But in any event, as I have long said, before all is said and done, the subprime litigation wave is going to have spread far beyond just the financial sector.

 

An excellent  February 13, 2008 CFO.com article entitled "Is Your 'Cash" in Danger" (here) discusses the current state of the auction rate securities market in greater detail (the market is "coming to a screeching halt") and discusses the valuation and accounting implications for companies that hold these securities on the balance sheets. My prior post regarding asset valuation issues in the context of the current credit crisis can be found here.

 

Opt-Out Lookout: As I have tracked the rising significance of securities class action opt-out settlements (most recently here), I have tried to discern whether or not the rash of recent opt-out cases was a temporary phenomenon or more enduring. And while it does not definitively answer the question, the recent analysis on the Securities Litigation Watch blog (here) regarding the opt-outs from the Tyco class action settlement provides some very interesting additional data.

 

According to the SLW, 288 class members excluded themselves from the class settlement (which was finally approved on December 19, 2007). While not all the opt-outs have filed individual actions (yet), so far 88 institutional investors and high net worth individuals have joined in a total of five separate opt-out complaints. The opt-outs include several high profile mutual fund families and investment fund groups, as the SLW details at length.

 

The presence of such a significant number of opt-outs certainly suggests that opting out may prove to be a more enduring phenomenon. On the other hand, the fact that the specific class settlement involved is the Tyco securities case means that we will have to await another day to assess whether the opt-out phenomenon is merely an attribute of the corporate scandals or will become a standard fixture of all securities class action settlements.

 

A Rare Spectacle -- Securities Litigation Trials: Another interesting recent phenomenon was the surprising recent coincidence of two securities class action trials, in the JDS Uniphase case and the Apollo Group case. In the latest issue of InSights (here), I take a more detailed look at these two trials and analyze their possible significance.  

 

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On January 16, 2008, a civil jury in the Apollo Group securities lawsuit in the United States District Court for the District of Arizona entered a verdict in favor of the plaintiff class on all counts, awarding damages of $5.55 per share, an amount that according to Bloomberg (here) could reach as much as $277.5 million. The Bloomberg report also states that Apollo is responsible for 60 percent of the plaintiffs' losses, former Apollo CEO Tony Nelson is responsible for 30 percent, and former CFO Kenda Gonzales is responsible for 10 percent. The company's statement about the verdict can be found here. The plaintiff's counsel's statement about the verdict can be found here.

Background

Apollo Group is the parent of the University of Phoenix (UOP), the largest for-profit provider of higher education in the United States. According to the plaintiff's amended complaint (here), in 2003, two former UOP employees filed a False Claims Act action against UOP alleging that UOP received U.S. Department of Education funding in violation of laws specifying the way company educational recruiters may be compensated. Background regarding the False Claims Act case can be found here.

The Department of Education initiated an investigation of the issues raised in the False Claims Act action, and on February 5, 2004, a Department of Education employee issued a "Program Review Report" that accused UOP of violating the Department of Education rules with respect to education employees' compensation. The plaintiff in the securities case alleges that the violations in the report could have resulted in the limitation or termination of Department of Education funding to UOP.

On September 7, 2004, Apollo agreed to pay the Department of Education $9.8 million to settle the program review. The settlement agreement (a copy of which can be found here) specified that Apollo's entry into the agreement did not constitute an admission of wrongdoing or liability. News of the allegations in the Department of Education report first became public on September 14, 2004. The price of Apollo's stock fell significantly on September 21, 2004, when a securities analyst issued a report expressing concern about the company's possible exposure to future regulatory issues.

The Lawsuit

The lead plaintiff in the case is the Policemen's Annuity and Benefit Fund of Chicago, on behalf of a class of persons who purchased Apollo stock between February 27, 2004 and September 14, 2004. The case was pending before Judge James A. Teilborg.

In a September 11. 2007 order (here), Judge Teilborg denied the parties cross-motions for summary judgment. The defendants had sought summary judgment arguing that they had no duty to disclose an interim regulatory report (which they believed to be both unauthorized and false). The court found that while the defendants "may not have an affirmative duty to disclose the interim regulatory findings they do have 'a duty to disclose material facts that are necessary to make disclosed statements...not misleading.'" Judge Teilborg found that there was a jury issue as to whether any of the defendants' statements between the February delivery of the report and the September disclosure were misleading. Judge Teilborg also found that there were jury issues on the question whether the interim report was material and whether the defendants' acted with scienter in withholding information about the report.

In a particularly interesting holding, Judge Teilborg also found that there was a jury issue on the question of loss causation. The defendants argued that that there was no jury issue because the company's stock price did not react to the September 14 disclosure of the settlement. But the plaintiffs argued that the corrective disclosure was actually a cumulative process that included the analyst's September 21 report. Judge Teilborg said he could not conclude as a matter of law that the analyst report was not part of the corrective disclosure. The judge said it was a jury question whether or not the corrective information was fully absorbed into the marketplace before the analyst's report issued. (This mattered because there was no significant stock price drop until the report came out.)

Trial commenced on November 14, 2007. During the trial the plaintiff called both Nelson and Gonzalez to the stand to testify as hostile witnesses for the plaintiff. (Calling adverse parties as hostile witnesses is an unusual move, but it has the advantage of allowing the examining attorney to use leading questions and other techniques of cross-examination, which would otherwise not be allowed on direct examination.) According to news reports (here), Gonzalez testified that the company withheld the report from investors to avoid news coverage about the allegations. The news reports quote Gonzalez as having said that "when we received the program review report, we felt very strongly we did not want it basically tried in the press." The news reports also state that Nelson testified that the company's lawyers advised the company against disclosing the report, and that he thought disclosing it would have caused the company's stock price to drop.

The jury began deliberation on January 10, 2008 and returned a verdict on January 16. The jury found for the plaintiff on all counts. In its statement on the verdict (here), the company said that the case was premised on the company's "supposed failure to disclose unsubstantiated allegations from a preliminary government report." The company's counsel is quoted in the statement as saying that the "law does not require the disclosure of preliminary or unproven damages." The statement also says that "the ultimate disclosure of the report's contents caused no statistically significant movement in Apollo's stock price."

Discussion

According to the Securities Litigation Watch blog (here), 19 securities lawsuits have gone to trial since 1996. Of these, six cases (including the Apollo Group case) involving post-PSLRA conduct have reached a jury verdict, with three verdicts going in favor of the plaintiffs and three going in favor of the defendants. The Ninth Circuit recently reversed one of the three defense verdicts, as noted further below. Among the six verdicts is also the November 27, 2007 defense verdict in the JDS Uniphase trial (about which refer here).

It is important to keep in mind that this case is not over - indeed, it may have a long way yet to go. The defendants undoubtedly will pursue an appeal to the Ninth Circuit if their post-trial motions are unsuccessful. On appeal, both parties will look with interest (and in the defendants' case, concern) on the Ninth Circuit's November 26, 2007 opinion in the Thane International case (here), in which the Ninth Circuit reversed and remanded a trial verdict that had been entered on behalf of the defendants in that case. (Refer here for my prior discussion of the Thane International case). While the ultimate outcome of any appeal in the Apollo Group case remains to be seen, there may well be significant issues on appeal, particularly with respect to the defendants' obligation to disclose the report; scienter; and loss causation. (Of course, the parties always have the opportunity of entering into a post-trial settlement, as well...)

It is worth asking why all of a sudden securities cases are going to trial. It is not clear why the Apollo Group case did not, like most of these cases, settle. The parties may simply have been unable to reach a mutually acceptable compromise. The Apollo Group case does seem like an odd case for the plaintiff to have pushed to trial since there were no insider trading allegations or other suggestions that the individual defendants personally benefited - although the jury verdict obviously validates the decision (to the extent there was an active decision) to try the case, and the absence of individual benefit clearly did not influence the ultimate outcome.

There is at least potentially an interesting insurance coverage question, which is whether the jury verdict represents an adjudication of fraud sufficient to trigger the fraud exclusion that typically is found in directors and officers liability insurance policies. I have not been able to obtain a copy of the questionnaire the jury used to see what specific factual findings the jury made, but to the extent the jury found knowing misrepresentations, the verdict could preclude coverage, although the possibility of an appeal could also affect this issue. (The possibility of a jury verdict triggering the fraud exclusion is one reason why so few securities cases go to trial.) It should also be noted that the amount of damages could exceed any amounts of insurance that are available. (I want to emphasize in making these insurance observations that I have no knowledge of any kind about the particulars of Apollo Group's insurance, and so I am merely speculating not expressing any insurance opinions.)

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As the latest of the year-end 2007 securities lawsuit reports (including my own, here), Cornerstone Research has released (here) its 2007 report on securities class action filings. Cornerstone's January 3, 2008 press release describing the report can be found here. The numbers in the Cornerstone report differ from those in the previously released year-end report of NERA Economic Consulting (here), but the numbers are directionally consistent. The Cornerstone report does make some additional observations about the 2007 securities lawsuit filings, and also adds some interesting analysis.

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