In June 2017 when the U.S. Supreme Court entered its opinion in California Public Employees Retirement System v. ANZ Securities, in which the Court affirmed the Second Circuit and held that Securities Act of 1933’s three-year statute of repose is not subject to equitable tolling, one question that was asked was whether the Court’s ruling would encourage more securities suit class members to file protective actions before the statutory period expired in order to preserve their right to opt-out of the class action.
Recent developments in a securities class action involving VEREIT, a real estate investment trust and successor-in-interest to the troubled American Realty Capital Properties, in which VEREIT has entered three opt-out settlements with large institutional investors totaling a whopping $217.5 million, suggest that the concerns raised following the ANZ Securities decision may be coming to pass. These developments may also portend a very complicated future for U.S. securities class action litigation, at least in the most serious cases. Alison Frankel’s October 29, 2018 post on her On the Case blog about the VEREIT opt-out settlements can be found here.
As discussed here, in October 2014, plaintiff shareholders initiated a series of class action lawsuits in the Southern District of New York against American Realty Capital Properties and certain of its directors and officers. (In July 2015, American Realty Capital Properties changed its name to VEREIT.) The plaintiffs alleged that the company made a series of financial misrepresentations that ultimately led to the departure of a number of its executives and to the company’s former CFO’s conviction for accounting fraud. The third amended complaint in the securities class action lawsuit can be found here. The Robbins Geller law firm is lead counsel for lead plaintiff TIAA-CREF and for the class.
The Three Opt-Out Settlements
Apparently, a number of VEREIT’s large institutional investors have chosen to opt-out of the class action lawsuit and to file their own separate actions. Over the course of the last several months, the company has announced that it had entered settlements with various of its largest institutional investors that had filed separate lawsuits against the company and its executives in connection with the accounting misrepresentation.
First, on June 7, 2018, VEREIT issued a press release announcing that it had entered a $90 million settlement with mutual fund giant Vanguard in connection with the individual action Vanguard had filed against the company and its executives in the District of Arizona. (District of Arizona Judge Roslyn Silver had previously denied VEREIT’s motion to transfer the case to the Southern District of New York.)
In its press release announcing the settlement, the company noted that Vanguard’s holdings accounted for approximately 13 percent of VEREIT’s outstanding shares of common stock held at the end of the class period. The press release also notes that the fact that the Vanguard action was proceeding in a jurisdiction other than the one in which the class action is pending created the risk that VEREIT could face “successive trials on similar factual and legal issues that could have subjected VEREIT to increased legal risk.” Vanguard was represented in the Arizona action by the Boies Schiller Flexner law firm.
Second, on October 2, 2018, VEREIT announced that it had reached an agreement to pay $85 million to settle with eight class action opt out entities serving as plaintiffs in a series of separate lawsuits pending in the Southern District of New York. In its press release announcing the settlement, the company noted that with this latest opt out settlement the company had now settled claims brought in association with approximately 24 percent of VEREIT’s outstanding shares of common stock and swaps referencing common stock held at the end of the period covered by the various shareholder actions. The eight opt-out institutional investors were represented in their separate actions by the Bernstein Litowitz law firm.
Third, on October 26, 2018, VEREIT announced that it had entered a $42.5 million settlement with four class action opt out entities that were plaintiffs in a series of separate actions pending in the Southern District of New York. In its press release announcing the settlement, the company said that this latest settlement together with the prior settlements totaled $217.5 million and represented a total of approximately 31 percent of the VEREIT’s outstanding shares of common stock and swaps referencing the common stock held as of the end of the period covered by the pending shareholder actions. The four institutional investors in this latest action were represented by the Lowenstein Sandler law firm.
Commentary on the Opt-Out Settlements
In her blog post to which I linked above, Alison Frankel asked of these settlements, “Is this the future for defendants accused of securities fraud: facing a multitude of far-flung suits by well-counseled, well-capitalized investment funds?”
Frankel noted that when the ANZ Securities case was pending before the U.S. Supreme Court, plaintiffs’ lawyers had argued that if the Court were to determine that the filing of a securities class action lawsuit does not toll the statute of repose, the courts would be flooded with duplicative lawsuit filings by investors who in the past would have been content to await the settlement of the class action lawsuits. Indeed, in her dissent in the ANZ Securities case, Justice Ginsburg noted that class members will have “strong cause to file a protective claim,” which could “substantially burden the courts.” In his majority opinion, Justice Kennedy called this concerns “overstated.”
To be sure, the institutional investors that filed their separate actions in connection with the American Realty Capital Properties accounting scandal initiated their actions before the U.S. Supreme Court issued its opinion in the ANZ Securities case. However, as Frankel noted in her blog post, the investors had filed their actions in response to the Second Circuit’s ruling that ultimately was affirmed by the U.S. Supreme Court.
The implication from the separate actions and settlements in connection with the American Realty Capital Partners accounting scandal is, according to Frankel, that “when big funds believe there’s real money at stake in a securities case … they’re going to protect their interests by filing and litigating their own suits.” As these circumstances demonstrate, “judges are going to force individual funds to litigate their claims alongside the class – and force companies to mount parallel defenses in the class and opt-out litigation.” Indeed, in its press release announcing the Vanguard settlement, VEREIT expressly said that one the reasons for the settlement was its desire to avoid increased risks and expense that the separate action represented.
For all of the evils regularly ascribed to U.S.-style class action litigation, the one thing that has to be said for it is that it is efficient. It facilitates the resolution of all similar claims in a single proceeding. In that respect, while corporate commentators regularly bewail abusive class action litigation, the fact is that the efficiency of class action litigation is very much in the interests of the defendants companies, at least by comparison to the detriments that would be involved in litigating all of the individual cases piecemeal.
While of course class members have always had the option of opting-out, and in fact there have been a number of very high profile proceedings over the years in which there have been significant class action opt-outs, the threat of opt-outs provided a sort of disciplining mechanism putting pressure on the counsel for the class to secure a settlement attractive enough to deter prospective opt-outs from opting-out.
The U.S. Supreme Court’s ruling in the ANZ Securities case removes the ability for prospective opt-outs to sit back and await the settlement of the class action. As Justice Ginsburg said in the ANZ Securities dissent, plaintiffs have an incentive to file a protective opt-out action. Indeed, in her dissent, Justice Ginsburg said further that it may actually be “incumbent on class counsel, guided by district courts, to notify class members about the consequences of failing to file a timely protective claim.”
Not that the plaintiffs’ lawyers who were not chosen as lead class counsel need a whole lot of encouragement to pursue individual actions (at least where their client has sufficient putative damages to claim). A separate individual lawsuit gives a plaintiffs’ lawyer who has been cut out of the class case an opportunity to still get in on the action. Even better from the plaintiffs’ lawyers’ perspective, unlike class action settlements, individual settlements don’t require court approval and don’t entail the protracted processes that a class settlement requires – in other words, payday comes a lot sooner. To be sure, the plaintiffs’ counsel filing an individual action has to be prepared to bear the burdens and expenses involved in actually litigating the case. But if you look at the plaintiffs’ lawyers involved in the separate actions in the American Realty Capital Properties situation, you will see skilled firms quite capable of litigating a case even against excellent defense counsel.
From the defendants’ perspective, the proliferation of litigation resulting from multiple opt-outs is a disaster. A company facing multiple parallel lawsuit not only runs the legal risks that VEREIT identified in announcing its settlement of Vanguard’s separate Arizona action, but it also faces the entirely undesirable prospect of seeing its legal expenses multiply exponentially.
The phenomenon of separate opt-out settlements prior to the settlement of the class action also creates some very weird dynamics for the attempts to settle the class action. The separate opt-out settlements clearly set a kind of a floor for the class settlement. Yet on the other hand, if the class settles first, the opt-out plaintiffs are going to demand a premium in order to justify their having brought a separate action. Frankel quotes a plaintiff’s lawyer as saying that “if this is the future of securities litigation, it’s a very messy future on many levels.”
There is a further concern here, one that goes to the heart of the matter. As Justice Ginsburg noted in her dissent in the ANZ Securities case, this dynamic encouraging the splintering up of what would otherwise be an efficient class action procedure not only “disserves the investing public,” but the “harshest consequences” will fall on the least sophisticated investors, who will be most likely not to file a protective claim. A small retail investor can’t go out and retain the Boies Schiller law firm, as Vanguard did here. The Vanguards of the world can look after their interests and hire a first-rate law firm to battle on their behalf. As Frankel puts it, “it’s the small investors, who can’t justify going their own way, who will be hurt.”
It probably should be noted that these concerns are only going to apply to a small proportion of the securities lawsuits that are filed. It is no accident that all of this is happening in connection with a case the involved a major accounting scandal, one in which key figures went to jail. A case with those kinds of characteristics is clearly a serious matter, and is one that likely would command significant settlement dollars. However, most of the many cases being filed these days don’t involve these kinds of characteristics. For example, very few cases these days involve allegations of accounting fraud. Instead, the far more typical case today involves allegations that the defendant company experienced some kind of business reverse (the so-called event driven litigation).
In other words, this phenomenon of institutional investors pursuing multiple separate lawsuits is likeliest to occur only the largest and most serious cases. The problems Frankel identified in her article are not going to be universal, but in fact are likely to occur only in connection with some cases. That doesn’t mean the problems won’t be serious when they do occur, it just means that it won’t affect every case.
At a time when companies and their D&O insurers are already facing escalating securities class action frequency and increasing severity from securities class action litigation, merger objection litigation, and shareholder derivative litigation, this latest related-litigation dynamic is a very unwelcome development.