With the sentencing of the last two defendants in the criminal investigation of the Milberg law firm and several of its former partners, it may be time to ask what the impact has been on the plaintiffs’ securities bar and what the future may be for securities litigation. There are also interesting questions about what the impact may be on securities litigation as a result of Barack Obama’s election to the White House and the augmentation of the Democrats’ control of Congress.
These questions were the focus of a November 5, 2008 panel at the PLUS International Conference in San Francisco. The panel, which was moderated by Edwards Angell Palmer & Dodge partner John McCarrick, included Boris Feldman of the Wilson Sonsini firm; Professor Joseph Grundfest of Stanford Law School; Keith Fleischman of the Grant & Eisenhofer firm; and Judge Vaughn Walker of the Northern District of California.
The session was preceded with a fascinating video created for the event entitled "The Rise and Fall of William Lerach," which detailed the career and criminal prosecution of former plaintiffs’ securities bar titan Bill Lerach. The video also included an interview of Lerach that had been taped before Lerach began his incarceration.
The video included a detailed history of the circumstances underlying the criminal investigation of the Milberg firm, including the fascinating story of how a lovers’ quarrel in Cleveland and the discovery of stolen paintings in a public storage warehouse led to Lerach’s indictment and eventually to the entry of guilty pleas by Lerach and others. (I detailed these events behind the criminal indictments, including pictures of the stolen paintings and how they related to the overall story, here).
The video contained some extraordinary footage, including a vintage video clip of Lerach in a 2003 speech about supposedly corrupt corporate officials, quoting the Bible (refer to text here) as saying, "What profit a man if he gain the whole world but lose his own soul?" – adding parenthetically on his own, "or his freedom." The video also quoted Lerach as saying several times in an apparent attempt to defend the kickback payments that led to his conviction that "it was an industry practice" and that his firm did it "because we had to" in order to "meet competition. "
Following the video, the panelists turned to the question of the current state of the plaintiff securities bar and what may lie ahead.
The discussion focused initially on the question whether the leading plaintiffs’ lawyers’ demise has opened the door for other plaintiffs’ firms. Boris Feldman observed that the level of talent in the plaintiffs’ has proven to be both deep and broad. He added, however, that in his view that the more significant development is that the power of the securities class action cases seems to have shifted from an individual lawyer, like a Lerach or a Mel Weiss, to institutional investors. Keith Fleishman agreed that institutional investors are in greater control of these cases.
Judge Walker expressed a contrary view, commenting that from his perspective the cases "largely have not changed." He said that the involvement of a sophisticated institutional investor that "rides herd" occurs "in relatively few cases." In the vast majority of cases, he said, "things have not changed." He said that in his view, plaintiffs’ lawyers are "still very much in the drivers’ seat."
He went on to note that the problems with the system are not confined to the conduct to which Lerach plead guilty, noting that Lerach had plenty of what Walker called "accessories." Among the "accessories" Walker identified are the judges who have not "ridden herd" to scrutinize settlements, fee awards and claim administration. He also identified the defense bar as among the "accessories," who present settlements without having obtained the facts but instead "locking arms" with the plaintiffs’ counsel at settlement hearings, as a result of which there is no "adversary presentation" of the kind on which courts depend.
Judge Walker expressed concern that there is little monitoring or participation in the strategic process, and "frankly not enough discipline" in the system "to weed out the cases" that should not be pursued.
Keith Fleischman disagreed with Judge Walker and said that in his experience, courts were very much engaged in the supervision of cases and their settlements, and required a process in which the developments were "highly scrutinized."
Professor Grundfest offered the view that perhaps both Judge Walker’s and Fleischman’s viewpoints were correct because the cases are "bifurcated" between the larger cases in which institutional investors are actively involved and the smaller cases where smaller plaintiffs’ firms and investors with smaller interests are involved. Grundfest observed that the vast majority of cases either are dismissed or settle for under $10 million, and the institutional investors are not involved in these smaller cases.
Boris Feldman observed that some of these smaller plaintiffs may include small Taft-Hartley funds whose involvement may represent a "version 2.0" of the activities that led to the problems of which Lerach was convicted. He raised the question about the small union locals that are repeatedly involved in securities cases in which they actively seek lead plaintiff status, which, Feldman suggests, raises questions about what is really in it for the local funds and whether there are favors of one kind or another that that motivates these small funds.
An interesting related question that came up in the panel discussion is whether or not the institutional investors’ involvement in securities litigation could lead to an increase in the number of securities cases that go to trial. Fleischman first raised this, suggesting that expectations on both sides of these cases have changed, which could lead to more cases going to trial.
Feldman came back to this topic later, suggesting that the dynamic has changed in cases in which politicians are involved, such as where the lead plaintiff is a large public pension fund. Feldman observed that the specialized lawyers who have handled these cases generally know what a case is worth, and generally know about where a case will settle. Politicians may have other motivations, and may well believe that a trial victory would be more valuable to them than a settlement.
Professor Grundfest also suggested that plaintiffs’ firms, managing a portfolio of cases almost in the same way a hedge fund manages its investments, may find it expedient to take cases to trial as one way to try to maximize returns across their entire portfolio. Grundfest agreed that we are probably going to see more trials.
The panel discussed a number of other topics, including the way in which plaintiffs’ plead damages in the class action complaint. Judge Walker observed that insufficient attention is paid to whether the theory of damages alleged makes sense. He noted that not enough attention is paid to demonstrating the way that the defendant company’s stock price moved with respect to the alleged misrepresentations.
The panelists also discussed the way in which e-discovery has changed these cases. Feldman observed that e-discovery has been a "goldmine" for the plaintiffs’ lawyers, and because of the expense involved, the "big loser" has been the insurance companies. Grundfest noted that he tells his students that "e-mail" stands for "evidence mail" because it "captures and creates smoking guns." Judge Walker noted that these documents can sometimes assume an importance all out of proportion to the case as well.
What the Election Means for the Plaintiffs’ Bar: The panel concluded with the panelists making predictions about what Tuesday’s election may signify for securities litigation. Grundfest opened the discussion by stating that as a result of the Democrats’ sweeping electoral victory, the headline is that "Christmas comes early" for the plaintiffs’ bar, and the only question is "what’s in the boxes and what’s under the tree." Grundfest suggested that the plaintiffs’ bar may succeed in having Congress legislatively reverse Stoneridge and Central Bank.
Grundfest also suggested that Congress might move toward revising the pleading standard in securities cases, moving from the currently more restrictive standard to one where the case could survive a motion to dismiss if there were the "mild aroma" of fraud. Grundfest also suggested that as the likely changes could "dramatically increase the exposure" for the insurers, because the potential securities litigation exposure is "likely to go up in the future."
Feldman agreed that, after a period in which conditions may have been relatively advantageous for defendants, we could have entered "a bad period from a claims perspective for insurance companies." Feldman suggested that Obama’s judicial appointees are likely to be more receptive to class actions, and to favor the "interests of the little man." He agreed that the plaintiffs’ priorities are likely to get through Congress and also that Central Bank is likely to be legislatively reversed. He also said that the current credit crisis will feed into this processes, as excesses unearthed as part of the credit crisis will become the "poster children" to justify the legislative changes.
Judge Walker concluded the discussion with an observation of the irony that we now find ourselves in a period of the greatest upheaval of our generation yet two of the most talented plaintiffs’ lawyers are "out of action."