According to Gerald Silk of the Bernstein, Litowitz, Berger & Grossman firm, options backdating is a "make-or-break issue." Silk is not talking about the interests of aggrieved shareholders –he means that options backdating is a really big deal for the plaintiffs’ bar. His comments appear in a July 24, 2006 article entitled "Plaintiffs’ Lawyers Jockey for Position," in which law.com explores the struggle amongst plaintiffs’ lawyers for control of the growing wave of options backdating litigation. Among other things, the article examines the struggle between lawyers representing institutional and individual investors. The article also show why plaintiffs’ lawyers are preferring shareholders’ derivative lawsuit to securities fraud class actions in attempting to capitalize on the options backdating scandal; the article attributes the following to Silk:
derivative actions are more common in these backdating cases because, in order to have a securities class action under Rule 10-b(5), the stock has to fall and an investor has to demonstrate harm. This has not always been the case when it comes to the backdating scandal.
The article also shows that while derivative actions may represent a more limited opportunity for plaintiffs’ lawyers (from a fee standpoint), derivative actions have certain procedural advantages, such as the absence of a statutory preference for institutional shareholders and the absence of a statutory waiting period or discovery stay, all of which apply or may pertain in a federal securities action. As a result, plaintiffs’ lawyers representing individuals in derivative lawsuits are "rushing to court."
The article’s comments about the absence of significant share price declines for many of the companies involved in the options backdating investigation is consistent with The D & O Diary’s view that the options backdating scandal may not prove to be a "severity event" for the D & O insurance industry. On the other hand, it clearly is already a significant frequency event, and the frequency will continue to rise as the investigations continue to expand. For up-to-date frequency data for the options backdating litigation, visit this post of The D & O Diary, "Counting the Options Backdating Lawsuits."
Following our Right Honorable Friend, Bill Lerach: "These days Bill Lerach is either at the top of his profession — or on his way to jail." That is the lead in the July 23, 2006 Los Angeles Times article reporting on what life is like these days for Lerach, in the wake of the Milberg Weiss law firm indictment. The Los Angeles Times article reflects various pundits’ speculation that Lerach’s firm or Lerach himself may yet be dragged into the criminal proceedings. In what I suppose is intended to pass as news, the article concludes that "legal observers are divided about whether prosecutors are still gunning for Lerach." While much of the article replays Lerach’s background with Milberg Weiss and his recent success in the Enron case, one comment reported in the article is particularly colorful; the article reports the following commentary from Walter Olson, a senior fellow at the Manhattan Institute for Policy Research:
Lerach is "far from the only lawyer who has concluded that being noisy and unpleasant is good tactics for getting what you want," Olson said. He stands out because "he’s personalized it in a way that others haven’t done, turning litigation into a contest of peacocks in the barnyard."
Nugget Author Moves On: Chris Jones, heretofore a partner in the Boca Raton office of the Milberg Weiss firm and also the author of the PSLRA Nugget, announced today in a post on his blog that he is leaving the Milberg Weiss firm to join two other prior Milberg Weiss departees at the new law firm of Saxena and White. According to a post on the WSJ.com law blog, the Milberg firm will now be closing the Boca Raton office and is now down to two offices from four.
Today’s PSLRA Nugget post says that future posts will "decrease a little in frequency" as Jones adjusts to his new firm. The D & O Diary hopes the PSLRA Nugget is soon back up to speed. The D & O Diary is a subscriber to and regular reader of the Nugget and looks forward to continuing to read the Nugget’s interesting and entertaining posts.
A WSJ.com law blog post with futher discussion of the implications for the Milberg Weiss firm can be found here.
Outside Director Liability: The liability of outside directors was a hot topic earlier last year when the Enron and WorldCom settlements were first announced. As a result of the options backdating scandal, outside director liability is a hot topic again. Any public company director has to be concerned with the news that three outside directors at Mercury Interactive have been served with "Wells Notices" in connection with the options backdating investigation at Mercury. (Mercury’s press release disclosing the Wells Notices can be found here.) In an earlier development, outside directors of Hollinger were served with Wells Notices in connection with the SEC’s investigation of Conrad Black. Outside director liability is clearly going to remain a hot topic. The author of The D & O Diary’s views about the risks and practical D & O insurance implications surrounding the issue of outside director liability can be found in this July 24, 2006 article entitled "Outside Director Liability: Increased Risks and Practical Considerations."
Proportionate Liability: The 10b-5Daily blog has an interesting July 24, 2006 post discussing a July 5, 2006 holding in the Enron Derivative and ERISA litigation in which the PSLRA’s proportionate liability language is examined. The court, concerned about the "havoc" that the bare statutory language could create at trial, establishes threshold requirements for proportionate liability. Becase so few securities cases go to trial, this issue has not previously been examined by a court.