Every year, the Stanford Law School Securities Class Action Clearinghouse, in conjunction with Cornerstone Research, releases its annual overview of securities class action lawsuit flings. As I noted in a post last week, this year’s version introduced a number of innovations and reflected a host in interesting observations. (The full 2010 Stanford/Cornerstone report can be found here.)

 

 

Because the securities class action litigation environment clearly is going through a significant transition, I thought it would be worthwhile to check in with the Stanford Law Professor Joseph Grundfest, who oversees the Stanford website. Professor Grundfest was gracious enough to agree to participate in an interview for this site. The interview, in the form of a Q&A, is reproduced below. My questions appear in italics, followed by Professor Grundfest’s responses.

 

 

Q. What do you think were the most important securities class action litigation trends during 2010?

 

 

            A: The dramatic increase in merger related federal class securities fraud litigation. These cases were traditionally filed only in state court, but the decline in traditional securities fraud litigation appears to have generated a demand in the securities fraud plaintiff bar to find new cases to fill the litigation pipeline. Also, plaintiffs may discover that it is easier to control this litigation if they can bring cognizable federal claims, even if those claims are quite weak.

 

 

Q. What do you think were the most important judicial trends concerning securities litigation in 2010?

 

 

            A: The implications of the Supreme Court’s Morrison decision continues to reverberate in the lower courts, and many observers are surprised by the vigor with which the lower courts are dismissing actions related to foreign market activity. Morrison is not being interpreted narrowly.

 

 

Q. What impact do you think that the Dodd Frank Act will have on securities litigation? Do you think the Dodd Frank whistleblower provisions will lead to significantly increased SEC enforcement activity? Are there other provisions of the Act that you think are particularly important from a litigation or enforcement activity standpoint?

 

 

            A: Dodd-Frank’s bounty provisions are the joker in the deck here. If the presence of the bounty causes a material increase in SEC enforcement actions, it is reasonable to expect an increase in parallel private actions. After all, that’s the way the market works now: if the SEC files a claim that plaintiffs haven’t yet pursued, it’s only a short matter of time before a very similar private complaint is on file in federal court. There’s no reason that the market won’t work that way in response to SEC actions instituted in response to whistleblower information.

 

 

Q. You are in regular contact with directors at some the leading companies in the country. What are directors most concerned about these days? Are there particular liability exposures that you think directors are worried about?

 

 

            A: Thoughtful, honest directors are most concerned with the implications of Dodd-Frank’s bounty provisions. In an ideal world, these directors would want all employees with information about potential violations to report those concerns to the appropriate authorities within the company, including the audit committee, so that prompt remedial activity (including potential self-reporting to the SEC) could take place as quickly as possible. Now, however, these directors find themselves in competition with the SEC which stands ready to offer significant financial rewards for the provision of information that might otherwise go to compliance authorities within the corporation. Honest directors, standing ready to remedy all violations brought to their attention, will now be frozen out of the information market because they simply can’t compete with the significant bounties available under Dodd Frank.

 

Q. You have been systematically observing securities class action litigation now for many years. What do you think are the most important securities class action trends and developments in recent years, and why?

 

 

            A: It’s a business. The business responds to the forces of supply and demand, and reacts to exogenous shocks in the form of financial crises and revelations of backdating. If you analyze the securities litigation process from a purely economic perspective, otherwise mysterious behavior becomes far more transparent.

 

 

Q. Several years ago you suggested that there had been a “permanent shift” to lower securities class action litigation activity levels. I wonder what you think of that suggestion now with the benefit of the passage of time and of the opportunity to review intervening events.

 

 

            A: To formally test this hypothesis, we still need several more years’ worth of data. With that caveat firmly in mind, I would like to suggest that this years’ data are consistent with that observation. The “core rate” of litigation, i.e., the number of companies named as defendants in traditional securities fraud actions, is well below the pre-Sarbanes Oxley level, once we net out the merger disclosure cases that inflate this year’s census. This observation suggests that fewer issuers are engaged in the sorts of conduct that would have stimulated litigation prior to Sarbanes Oxley. To be sure, plaintiff counsel can point to a variety of legal developments that arguably raise the bar for plaintiff recovery, but the cases likely precluded either reflect attempts to expand the scope of liability beyond the contours set by the Supreme Court, or involve weaker, more remote claims. The strong cases alleging clear frauds are, in my view, being prosecuted as strongly as ever.

 

 

Q. Are there pending cases or ongoing issues that you are watching that you think will be particularly important in the months ahead?

 

 

            A: There are three securities cases pending before the Supreme Court this term and any or all of them could lead to decisions that would have significant implications for the securities fraud litigation market. Also, the Supreme Court has a busy class action procedure docket, and decisions in those non-securities cases could have profound implications for the prosecution of class action securities fraud litigation.

 

 

Q. Do you have any predictions about 2011 securities litigation activity, as far as anticipated levels or trends?

 

 

            A: I would expect the core rate to remain constant, and from there I would expect a bump up as even more merger disclosure litigation finds its way to federal court and a bump down as Morrison reduces the incidence of claims targeting foreign trading activity. Farther down the road, I would not preclude an increase in litigation activity attributable to whistleblower “tag along” cases that will be filed shortly after the Commission announces litigation or settlements arising from Dodd Frank bounty hunter disclosures.

 

 

Q. If you were to be called upon to serve as a D&O insurance underwriter, what are the most important things you would want to consider when reviewing a particular company, and why?

 

 

            A: I would only insure issuers who promise not to file any claims :)

 

 

I would like to thank Professor Grundfest for his willingness to participate in this dialog. I know there are many D&O insurance underwriters who earnestly wish they could implement his proposed D&O insurance underwriting philosophy.

In a gigantic 398-page opinion dated January 19, 2011, Southern District of New York Judge Robert Sweet has denied the defendants’ motion to dismiss in the securities class action lawsuit filed in connection with the collapse of Bear Stearns. He did however grant defendants’ motions to dismiss the related shareholders’ derivative lawsuit and ERISA class action lawsuits. A copy of Judge Sweet’s January 19 opinion can be found here.

 

Background

 

As detailed here and here, investors first filed a securities class action lawsuit against Bear Stearns and certain of its directors and officers in March 2008 in the wake of the company’s collapse and sale to JP Morgan. As amended the plaintiffs’ complaint also names the company’s outside auditor, Deloitte & Touche, LLP, as a defendant.

 

 

In their massive consolidated amended complaint (here) , the securities class action plaintiffs allege that in a series of statements during the class period, the defendants made material misrepresentations or omissions with regard to the company’s exposure to subprime mortgages; with respect to the performance of and valuations in connectionwith one of its hedge funds; with respect to the company’s liquidity; with respect to the company’s risk management and valuation practices. The company is alleged to have inflated its reported financial results and financial condition, among other things due to use of inappropriate models to value the company’s subprime-mortgage related assets. Deloitte is alleged to have knowingly and recklessly offered materially misleading opinions about the company’s accuracy.

 

 

A separate shareholders’ derivative action was also filed, as was an ERISA class action lawsuit, which were consolidated with the securities class action lawsuit. The defendants in the various actions moved to dismiss.

 

 

The January 19 Opinion

 

In a detailed analysis dozens of pages in length, Judge Sweet rejected the defendants’ contention that the plaintiffs’ allegations of materially misleading statements were insufficient.

Judge Sweet also held that the plaintiffs adequately pled scienter. While he concluded that the individual defendants’ trading in their shares of company stock were not sufficient to establish motive and opportunity to violate the securities laws, he nevertheless found that plaintiffs allegations were sufficient to establish a strong inference of conscious misbehavior and recklessness. 

 

 

In concluding that the plaintiffs had adequately alleged scienter, Judge Sweet noted, among other things, that

 

 

the Securities Complaint has alleged that the Bear Stearns Defendants willfully or recklessly disregarded warnings from the SEC regarding Bear Stearns’ risk and valuation models which allegedly were designed to give falsely optimistic accounts of the Company’s risk and finances during the Class Period. The Securities Complaint also alleges that the Bear Stearns Defendants improperly delaying taking the hedge fund collateral, thus intentionally or recklessly avoiding the revelation of losses and the consequent negative effect. These allegations are sufficient to create a strong inference of scienter.

 

 

Judge Sweet expressly rejected the defendants’ allegation that the plaintiffs’ allegations represented mere fraud-by-hindsight, noting that “the adverse consequences of Bear Stearns’ disclosures relating to its exposure to declines in the housing market, and the adverse impact of those circumstances on the Company’s business going forward, are alleged to have been entirely foreseeable to Defendants at all relevant times.”

 

 

In rejecting the fraud-by-hindsight contention, Judge Sweet also cited with approval from the February 2010 dismissal motion ruling in the Ambac subprime securities lawsuit, in which Judge Naomi Reice Buchwald had noted that the conduct alleged, if true “make the defendants an active participant in the collapse of their own business, and of the financial markets in general, rather than a mere passive victim.” Judge Sweet added that “the same logic applies here, where Defendants’ alleged misconduct was integral to the decline of Bear Stearns, and the financial markets with it.”

 

 

Judge Sweet also held that the plaintiffs had adequately alleged loss causation, stating that:

 

 

The Company’s failure to maintain effective internal controls, its substantially lax risk management standards, and its failure to report is 2006-2007 financial statements in accordance with GAAP not only were material. but also triggered foreseeable and grave consequences for the Company. The financial reporting that was presented in violation of GAAP conveyed the impression that the Company was more profitable, better capitalized, and would have better access to liquidity than was actually the case. The price of Bear Stearns’ securities during the Class Period was affected by those omissions and allegedly false statements and was inflated artificially as a result thereof. Thus, the precipitous declines in value of the securities purchased by the Class were a direct, foreseeable, and proximate result of the corrective disclosures of the truth with respect to Defendants’ allegedly false and misleading statements.

 

 

Judge Sweet also rejected Deloitte’s motion to dismiss, holding that the securities complaint adequately alleged the firm’s recklessness, “if not actual knowledge, based on its awareness of red flags and its duty to investigate.” Judge Sweet held that the plaintiffs had adequately alleged scienter as to Deloitte, observing that “the facts underlying the alleged accounting violations with respect to the valuation models and fair value measurements, the hedge funds and the inference from the events of the collapse establish the failure to consider the red flags and constitute adequate allegation of reckless disregard sufficient to establish scienter.”

 

 

While Judge Sweet entirely denied the securities class action defendants’ motion to dismiss, he granted the defendants’ motions to dismiss the consolidated shareholders’ derivative suit. The derivative suit was essentially a “double derivative” suit brought on behalf of shareholders of JP Morgan, alleging misconduct on the part of various Bear Stearns defendants. Judge Sweet agreed with the defendants’ contention that the plaintiff lacked standing to assert the double derivative allegations because the plaintiff no longer holds Bear Stearns shares and does not sufficiently allege harm to JP Morgan. Judge Sweet also found that the plaintiff had not adequately alleged demand futility. He also concluded that certain of the plaintiff’s claims were barred by the doctrines of res judicata and collateral estoppel.

 

 

Finally, Judge Sweet granted the motion to dismiss the ERISA class action complaint, holding that the plaintiffs’ allegations were not sufficient to overcome the applicable presumption of prudence and failed to establish improper conflicts of interest.

 

 

Discussion

 

In a recent post I noted that whatever may be the overall track record for plaintiffs in the securities lawsuits arising out of the subprime meltdown and credit crisis, the plaintiffs are showing a consistent record of success in this highest profile cases. The Bear Stearns case my be one of the highest profile cases of all, because, as Judge Sweet noted at the outset of his opinion, the Bear Stearns collapse “was an early and major event in the turmoil that has affected the financial markets and the national and world economies.”

 

 

Not only is the outcome of the dismissal motions in the Bear Stearns case entirely consistent with the prior outcomes in other high profile cases, but Judge Sweet’s rulings were made in reliance on the opinions in many of those other cases, including in particular AIG (refer here) and Fannie Mae (refer here).

 

 

One prior ruling on which Judge Sweet particularly relied is Judge Naomi Reice Buchwald’s dismissal motion denial in the Ambac Financial case, about which I previously commented here. I noted the significance at the time of Judge Buchwald’s holding that the general financial collapse is no defense to securities fraud if the defendants allegedly caused their own and the financial system’s collapse. I continue to believe this analysis may be influential in other pending cases, as it was here in the Bear Stearns case.

 

In any event, the Bear Stearns case joins the growing list of high-profile subprime meltdown and credit crisis cases in which the dismissal motions have been denied, including Citigroup (refer here), AIG (here), Countrywide (here), Fannie Mae (here), Washington Mutual (here), New Century Financial (here), Sallie Mae (here) and Bank of America (here).

 

It is entirely possible that JP Morgan anticipated the possibiltiy of this development at the time it acquired Bear Stearns; according to press reports at the time, in connection with the acquisition, JP Morgan set aside $6 billion to cover anticipated litigation costs (among other things). 

 

I have in any event added the Bear Stearns decision to my running tally of subprime and credit crisis-related lawsuit dismissal motion rulings, which can be accessed here. (Note that I have separately tallied Judge Sweet’s rulings on the securities class action, derivative and ERISA lawsuits.)

 

 

David Bario’s January 24, 2011 Am Law Litigation Daily article about the Bear Stearns opinion can be found here.

 

As a result of the First Circuit’s January 20, 2011 opinion, the plaintiffs in the Nomura Asset Acceptance Corporation mortgage-backed securities lawsuit have managed to revive a slender portion of their case, albeit on a rather precarious basis. The First Circuit otherwise affirmed the lower court’s dismissal of the remainder of their case.

 

The First Circuit’s opinion could be influential in other mortgage-backed securities suits, particularly on questions surrounding the standing of claimants to assert claims based on offerings in which they did not purchase securities.

 

The First Circuit’s January 20 opinion can be found here.

 

Background

As discussed here, purchasers of mortgage pass-through certificates filed this action in March 2008 against Nomura Asset Acceptance Corporation, certain of its directors and officers, the eight mortgage trusts that had issued the certificates, and the offering underwriters who had supported the 2005 and 2006 public offerings of the certificates.

 

On September 30, 2009, District of Massachusetts Judge Richard G.Stearns granted the defendants’ motions to dismiss, as discussed here. Judge Stearns held that the plaintiffs lacked standing to assert claims in connection with the six out of the eight offerings in which the named plaintiffs had not purchased certificates. Judge Stearns found that the plaintiffs had not adequately pled claims with respect to the two remaining offerings.

　

With respect to the plaintiffs’ allegations concerning the mortgage originators’ underwriting standards, Judge Stearns found that the offering documents contain a "fusillade of cautionary statements" that "abound with warnings about the potential perils." Judge Stearns noted that plaintiffs’ contention that they were not "on notice" of those perils "begs credulity."

 

The plaintiffs appealed.

 

The January 20 Opinion

In a January 20 opinion written by Judge Michael Boudin for a three judge panel, the First Circuit affirmed Judge Stearns’ dismissal except with respect to the plaintiffs’ allegations concerning the mortgage originators’ underwriting practices.

 

With respect to the standing issue, the plaintiffs had argued that the class action vehicle affords a proper basis for representative plaintiffs to assert claims for a broad class of claimants, and that the eight mortgage-backed offerings were sufficiently linked by the common shelf registrations statement on which the certificate issuer relied.

　

In rejecting these assertions and concluding that the named plaintiffs lacked standing in the six offerings in which they themselves had not purchased securities, the First Circuit stated:

 

In our case, as in others involving mortgage-backed securities, the necessary identify of issues and alignment of incentives is not present so far as the claims involve sales of certificates in the six trusts. Each trust is backed by loans from a different mix of banks; no named plaintiff has a significant interest in establishing wrongdoing by the particular group of banks that financed a trsut from which the named plaintiffs made no purchases. Thus, the claims related to the six trusts from which the named plaintiffs never purchased securities were properly dismissed, as were the six trusts and defendants connected to nly those six trusts.

 

The First Circuit also noted that "the named plaintiffs have no stake in establishing liability as to misconduct involving the sales of those certificates."

 

The First Circuit then turned to the sufficiency of plaintiffs’ allegations of securities law violations. The First Circuit had little trouble affirming the district court’s dismissal with respect to the plaintiffs’ allegations concerning mortgage appraiser practices and concerning the offering documents statement of the rating agencies ratings.

 

However, the First Circuit reached a different conclusion with respect to the plaintiffs allegations that, contrary to representations in the offering documents, the originators of the mortgages underlying the certificates "routinely violated" lending guidelines and instead simply approved as many loans as possible.

 

The First Circuit acknowledged the district court’s conclusion that the offering documents contained warnings about the mortgage originators’ practices, but disagreed with the district court’s conclusion that these warnings precluded a possible finding of liability. (The First Circuit omitted to mention that the district court had found that the offering documents contain a "fusillade of cautionary statements" and that it "begs credulity" that the plaintiffs were not put on notice of these concerns.)

 

The First Circuit, by contrast to the district court found that "plaintiffs’ allegations of wholesale abandonment may not be proved, but – if accepted at this stage – it is enough to defeat dismissal." The First Circuit found that "the specific allegations" as to the mortgage originator’s practices "offer enough basis to warrant some initial discovery aimed at these precise allegations."

 

Having granted the plaintiffs a revival of at least one category of their claims, the First Circuit made it clear that the revived claims may have only a precarious lease on life. The First Circuit added with respect to these claims that the district court is "free to limit discovery stringently and to revisit the adequacy of the allegations thereafter and even before possible motions summary judgment."

　

Discussion

A recurring question in many of these mortgage-backed securities suits had been the question whether or not a named plaintiff that bought securities in one offering initiated pursuant to a shelf registration statement can assert claims based on other offering based on the same shelf registration, even if the named plaintiffs bought no securities in the other offerings.

 

In general, the district courts have been holding that the plaintiffs lack standing at least as to the offerings in which they did not purchase securities, but the question has continued to arise.

 

As the first Court of Appeals ruling on this question as part of the current wave of subprime-related litigation, the First Circuit’s conclusion on the standing issues is likely to be highly influential even outside of the First Circuit, and indeed could just about put an end to the issue.

 

The First Circuit’s reversal with respect to the plaintiffs’ allegations concerning the mortgage originators’ underwriting practices is interesting, if for no reason than the rather stark difference in perceptions of the plaintiffs’ allegations at the district court level and at the appellate court level. Whereas, the district court found that the suggestion that investors were not put on notice of the alleged practices "begs credulity," the appellate court, while providing relatively little explanation for its different conclusion, found that the allegations at least merited some discovery.

 

Perhaps the one way that the First Circuit’s differing conclusion may be understood is by reference to many other district court opinions in mortgage-backed securities cases in which the courts have concluded that allegations that the mortgage originators "systematically disregarded" stated underwriting guidelines are sufficient to state a claim. The First Circuit did not refer to these other court’s conclusion, but its holding shares a common thread with these other courts’ decisions.

 

And so the plaintiffs in this case have (just) managed to live for another day – at least as to two of the eight offerings, and at least one of the three categories of alleged misrepresentations. Whether this new lease on life in the end will be sufficient for the plaintiffs remains to be seen. The First Circuit issued an engraved invitation for the district court on remand to afford the plaintiffs only the most circumscribed discovery and also to revisit the adequacy of the plaintiffs’ claims – "even before summary judgment," whatever that may have been meant to suggest.

 

I have in any event modified my running tally of the subprime and credit crisis lawsuit dismissal motions to reflect the First Circuit’s limited reversal of the district court’s dismissal in this case. The dismissal motion register can be accessed here.

 

The First Circuit’s reversal, however limited, does at least serves as a reminder that it may be dangerous to jump to too many conclusions about how plaintiffs are faring in the subprime and credit crisis related cases. There are still many more cases to be heard, and, as this case shows, there is always the possibility that further proceedings may alter or even undo prior results.

 

It is probably worth noting that the First Circuit’s opinion in the Nomura case represents the forth appellate ruling so far as part of the litigation wave arising out of the subprime meltdown and credit crisis-related litigation wave. As discussed in my recent status update on the credit crisis litigation, appellate courts have affirmed the dismissals of at least three subprime securities suits: NovaStar Financial (here), Centerline (here) and Impac Mortgage (here). The Nomura case represents the first appellate decision that did not result in a complete affirmance of the lower court’s ruling of dismissal.

 

Special thanks to a loyal reader for providing me with a copy of the First Circuit’s opinion in the Nomura case.

 

Law Firm Memo Round-Up: From this week’s mailbag, here is a brief register of several law firm memos. First, a January 11, 2011 memo from the Vinson & Elkins law firm presents a brief update of the current state of play regarding ERISA stock drop cases. Second, the 2011 Edition of "Corporate Governance and Securities law: A Public Company Handbook" from the Curtis, Mallet-Prevost, Colt & Mosle law firm can be found here. Finally, the Shearman & Sterling law firm’s January 2011 memo entitled "FCPA Digest: Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act" can be found here.

 

As Israel is to Louisiana, Nigeria is to Alabama: And Yemen is to Vermont, at least according to an absolutely fascinating map published this past week in The Economist magazine that matches each U.S. state with a country whose GDP most closely resembles that particular state’s GDP. Ohio’s economy is comparable, for example to Belgium’s, while New York’s is equivalent to that of Australia, and Virginia’s is comparable to Poland. Even the District of Columbia is the equivalent of Kuwait.

 

The comparisons are interesting, but the larger message is that every single U.S. state has an economy as big as that of some countries, so collectively the United States economy is huge.

.

The map also affords interesting comparisons by population.. If you click on the blue "Population" box, the map displays the country whose population size is equivalent to each state – Oklahoma is comparable to Congo-Brazzaville, Virginia is equivalent to Burundi, Idaho is equivalent to Guinea-Bissau, Wyoming is equivalent to the Solomon Islands, Colorado is equivalent to Eritrea, and so on.Absolutely fascinating.

　

A Moviegoer’s Comment: This past Saturday night after a viewing of the film "The King’s Speech," the audience in the east side Cleveland movie theater where my wife and I were watching the film broke into applause. Now, I enjoyed the film and I appreciated the actors’ fine performances. But exactly to whom or to what was the audience showing its appreciation? Am I the only one that finds applauding for a movie a little odd?

 

Admittedly, it is unusual for me to have seen this movie, or any movie, in a theater. Our viewing of "The King’s Speech" marked the first time that my wife and I had gone to the movies, just the two of us, since we saw "The Madness of King George" about sixteen years ago. Without intending, we seem to have limited our range of moviegoing exclusively to films portraying British monarchs named George that have disabilities constraining their abilities to fulfill their kingly duties. This is, shall we say, a rather limited genre. .

 

I don’t know if there is such an Oscar, but if there were an award for best adaptation of classical music for dramatic effect, "The King’s Speech" would be a clear winner. The film’s use of the first portion of the Second Movement from Beethoven’s Seventh Symphony during the dramatic moment that Colin Firth as King George VI finally delivered his "speech" was brilliant. The movie ends with an excerpt from Beethoven’s Emperor Concerto, which is a nice touch, as well.

 

In appreciation for the movie’s use of music, here is video with an interesting graphic depiction of the Second Movement from Beethoven’s 7th.　

　

https://youtube.com/watch?v=4uOxOgm5jQ4

As a result of a spike in second half filings, the number of new securities class action lawsuits increased slightly in 2010 compared to the year before, although the 2010 filing levels remained below historical averages, according to the annual study released jointly by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse. This year’s version of the study, entitled "Securities Class Action Filings: 2010 Year in Review," introduces some innovations that provide some interesting perspectives on securities class action lawsuit filings.

 

The study can be found here, and the joint January 20, 2011 press release about the study can be found here.

 

According to the study, there were 176 securities class action lawsuit filings in 2010, up 4.8% from 2009, but 9.7% below the 1997-2009 average number of filings (195). The increased number of filings in 2010 was largely due to the increased filing activity in the second half of the year, when 104 new securities suits were filed (compared to only 72 in the first half).

 

A significant factor in the increased number of 2010 filings was the number of lawsuits related to merger and acquisition transactions. According to the report, there were 40 filings with allegations related to M&A transactions, which represents a 471 percen increase from the seven M&A-related filings in 2009.

 

This increase in M&A-related litigation cannot be explained simply as reflection of increased M&A activity, since M&A activity increased only 20 percent in 2010. The increase, the report suggests "may be largely a result of changes in plaintiff law firm behavior rather than changes in underlying market forces." The press release quotes Stanford Law Professor Joseph Grundfest as saying that "plaintiffs lawyers are scrambling for new business as traditional fraud cases seem to be on the decline," adding that "there is little reason to believe that this trend will reverse or slow down."

 

The report also notes a number of trends that have previously been noted elsewhere, including the decreasing number of credit crisis-related lawsuits during the year, and the spate of lawsuits involving for-profit education companies and also involving Chinese companies.

 

With regard to the surge in lawsuits involving Chinese companies, the press release quotes Professor Grundfest as saying that this litigation is arising as "some Chinese issuers struggle to conform to Western market norms, adding that at the same time others might engage in outright fraud." The report itself adds the observation that most of the Chinese companies sued in 2010 were only recently listed on major U.S. exchanges; eight out of the 12 Chinese companies sued were listed during 2009 or 2010, while the remaining three issuers were listed toward the end of 2006, 2007 and 2008. On average these companies were sued within 1.4 years of their listing dates.

 

The report includes a status update for the credit crisis related filings. The report confirms an observation I had previously noted, which is that the credit crisis cases seem to be reaching the settlement stage more slowly than compared to securities cases generally. The report states that credit crisis filings "have significantly lower settlement rates compared to non-credit-crisis filings," largely as a result of the cases pending in the Second Circuit. The report shows a 9.8 percent settlement rate for credit-crisis filings compared to 24.1 percent for non-credit crisis filings. However, the dismissal rates for credit crisis-related filings "do not appear to be different from non-credit-crisis-filings."

 

A new feature added to this year’s report is an analysis of the litigation exposure following initial public offerings. The report analyzed the likelihood that a company would be sued in the eleven year period after its IPO, and compared that likelihood to the possibility that a company in the S&P 500 would be sued during that same eleven year period.

 

The report found that the exposure to securities class actions is the highest during the first few years after an IPO, although the exposure diminishes over time as the companies mature. The analysis showed that there is more than a 10 percent chance that firms would be hit with a securities suit within three years of an IPO, with the highest risk in the second year after an IPO, when they faced a 4.1 percent chance of being sued.

 

Interestingly enough, at least with respect to IPO companies that survived for eleven years, the possibility of those companies being sued during that eleven year period is actually lower than for the S&P 500 companies during that period. The S&P companies had a 49.9 percent chance of a suit during that period, compared to only 28.7 percent for the IPO companies. The report speculates that this lower risk over the longer period may be explained by the fact that the IPO companies tend to be much smaller than S&P 500 companies, and therefore represent less attractive targets for the plaintiffs’ lawyers.

 

One particularly interesting aspect of the report’s IPO review is its analysis of the survivability of IPO companies. The report shows that only 39.4% of IPO companies survived for the full eleven year study period (compared to 65.1% of S&O 500 companies).Indeed, more than 35 percent of companies failed to survive four years after their IPO (compared to less than 15% of the S&P 500 that failed to survive the first four years of the study period).

 

The report’s industry analysis shows that as filings against financial companies declined due to the diminution of the credit crisis litigation wave, filings against companies in the health care sector spiked.

 

The report also notes that as the number of M&A related cases has increased, the phenomenon noted in recent years of belated filings (in which the filing date came well after the stock price decline that precipitated the suit) has largely abated.

 

Overall, the report contains a number of interesting observations and findings, and the report warrants reading at length and in full.

 

Two final notes: First, the lawsuit count reflected in the Cornerstone report may differ from other published figures, as the Cornerstone report counts multiple filings against the same defendants as a single filing (compared to other commentators that may count separate complaints separately until they have formally been consolidated).

 

Second, while securities class action lawsuit filings may have been down in 2010 compared to historical averages, the overall level of corporate and securities litigation during the year was actually up – indeed, at "record" levels" – at least according to Advisen’s recently issue report about 2010 litigation activity, about which refer here.

 

My own analysis of the 2010 securities class action lawsuit filings can be found here.

 

Though securities class action lawsuit filings were below historical averages, overall corporate and securities litigation reached "record" levels during 2010, according to a report from the insurance information firm, Advisen. The report, which was released on January 19, 2011 and is entitled "2010 a Record Year for Securities Litigation," can be found here.　

 

 Preliminary Notes

In considering the Advisen report, it is critically important to recognize that the report uses its own unique vocabulary to describe certain of the litigation categories.

 

The litigation analyzed in the Advisen report includes not only securities class action litigation, but a broad collection of other types of suits as well, including regulatory and enforcement actions, individual actions, derivative actions, collective actions filed outside the U.S. and allegations of breach of fiduciary duty. All of these various kinds of lawsuits, whether or not involving alleged violations of the securities, are referred to in the aggregate in the Advisen report as "securities suits."

 

One subset of the overall collection of "securities suits" is a category denominated as "securities fraud" lawsuits, which includes a combination of both regulatory and enforcement actions, on the one hand, and private securities lawsuits brought as individual actions, on the other hand. However, the category of "securities fraud" lawsuits does NOT include private securities class action lawsuits, which are in their own separate category ("SCAS").

 

Due to these unfamiliar usages and the confusing similarity of category names, considerable care is required in reading the report.

 

The Report’s Analysis

According to the latest Advisen report, there were a total of 1196 corporate and securities lawsuits field in 2010, which is slightly above the 1171 corporate and securities lawsuits filed in 2009, and represents a "record."

 

According to the report, there were 193 securities class action lawsuits filed in 2010, down from 233 in 2009 (Advisen’s securities class action lawsuit counts may differ from those of other published sources because the Advisen count, unlike those of other sources, include state court securities class action lawsuits as well as federal court lawsuits). The 193 securities class action lawsuits is 2010 is well below the 2004-2009 average of 227. The Advisen report attributes the relative decline to "a sharp drop in credit crisis suits."

 

The proportion of all securities class action lawsuits as a percentage of all corporate and securities lawsuits has been, according to the report, "steadily trending downward." Thus, prior to 2006, securities class action lawsuits represented as much as one third of all corporate and securities lawsuits. However, in 2010, securities class action lawsuits represented only 16 percent of all corporate securities lawsuits, and only 14 percent during the fourth quarter of the year.

 

Two growing categories of corporate and securities litigation are breach of fiduciary duty lawsuits and shareholders derivative lawsuits.

 

Breach of fiduciary duty lawsuits have grown rapidly as a category of all corporate and securities litigation. As recently as 2004, fiduciary duty suits represent only 8 percent of all corporate and securities lawsuits, whereas they represented about a third of all corporate and securities suits in 2010, and 40 percent in the fourth quarter of 2010. Many of the breach of fiduciary duty cases filed in 2010 are related to merger and acquisition transactions.

 

Similarly, derivative lawsuits filings increased to 129 in 2010, up from 93 in 2009. In 2011, the derivative lawsuits represented 11 percent of all corporate and securities lawsuit filings.

 

Financial firms remained the most frequently sued companies in 2010, although filings against financial firms were down relative to prior years. Overall, 30 percent of the corporate and securities lawsuits in 2010 were filed against financial firms, compared to 40 percent in 2008 and 2009. The remaining 2010 lawsuits were more widely dispersed than in recent years.

 

The report notes that the average settlement value of all corporate and securities lawsuits in 2010 was $37 million, compared to $29 million. In considering this information it is critically important to consider that this figure aggregates regulatory and enforcement settlements with private lawsuit settlements. In that regard it is important to note that the report states that average securities class action settlement in 2010 was $32 million, the average breach of fiduciary duty settlement was $17 million, and the average derivative settlement was $11 million. In each case the private lawsuit settlements averages are substantially influenced by outlier settlements.

 

The Advisen report also notes that securities litigation has been "on the rise" in recent years outside of the U.S. The report notes that there were 36 "securities suits" in courts outside the U.S., which is ‘in line" with 2006-2008 totals.

　

Discussion

The data point to which most discussions default in trying to gauge the level of corporate and securities litigation activity is the level of securities class action lawsuit filings. Indeed, a number of commentators (including this blog) release annual studies of securities class action lawsuit filing levels, which typically trigger discussions about whether or not lawsuits are up or down.

 

The Advisen study makes it clear that if the discussion is focused solely on securities class action litigation activity, then there may be a misleading impression about the level of overall corporate and securities litigation.

 

The fact is that securities class action litigation is an increasingly smaller part of all corporate and securities litigation. So even though the number of securities class action lawsuits filed in 2010 was down relative to recent annual averages, the overall level of corporate and securities litigation was up in 2010 – in fact, according to the Advisen report, it was at "record" levels.

 

There are probably a few caveats that need to be supplied with these overall observations about filing levels. First, some readers may object to the conflation of regulatory and enforcement actions with private civil lawsuits. One obvious concern is that the conclusion that corporate and securities litigation overall is reaching "record" levels may simply be a reflection of the fact that regulatory authorities have ramped up their enforcement activities – indeed, there is no doubt that that is at least part of what is going on.

 

Along those lines, I think it is fair observation that the Advisen analysis would be improved if the regulatory and enforcement actions were separated out from the overall analysis. In that regard, it is particularly unfortunate that the "securities fraud" category is both confusingly named and also incorporates both regulatory actions and securities lawsuits not brought as securities class action lawsuits, eliminating any chance that a reader might try to filter out the regulatory and enforcement activity from the private litigation activity.

 

Another concern is that even if securities class action lawsuit filing levels are down relative to historical norms and as a percentage of all corporate and securities lawsuits, securities class action lawsuits remain the most significant source of severity risk – at least in terms of private civil litigation, as distinct from regulatory and enforcement actions.

 

However, from the perspective of the likelihood of litigation, and in particular from the perspective of the claims experience of D&O insurance carriers most active in the primary layer, the increasing incidence of other types of corporate and securities litigation is a very significant development. An analysis focused solely on securities class action litigation would miss the significance of the increase claim frequency coming from these other kinds of claims, and the resulting claim exposure for companies and for the D&O insurers.

 

My own analysis of the 2010 securities class action lawsuit filings can be found here.　 

 

2010  Securities Litigation Overview Webinar: On Friday January 21, 2011, at 11:00 am EST, I will be participating in a free webinar on the topic "Year End 2010 Securities Litigation Overview," sponsored by Advisen, to discuss 2010 securities litigation trends and developments.. Other panelists participating in the webinar include David Bradford of Advisen, Kevin Mattesich of the Kaufman Dolowich law firm and Gerald Silk of the Bernstein Litowitz firm. Further information about the webinar, including registration instructions, can be found here. 

 

 

　

As detailed in the accompanying blog post, all signs are that the FDIC will be filing increasing numbers of civil actions against former officials of banks that have been closed as part of the current round of bank failures. With this possibility in mind, it seems like it is time for The D&O Diary to initiate yet another of its litigation tracking lists.

 

A list reflecting the civil lawsuits that the FDIC has filed in its capacity as receiver against former officials of failed banks can be found here.

 

 

 

I will be updating this list periodically as I become of aware of additional civil lawsuits that the FDIC has filed. This list is a community resource for readers of this blog, and I hope that readers will help maintain the value of this resource for the community by advising me of any new lawsuits that have been filed and of any omission from the list. As I update the list, I will indicate at the top of this blog post the last date on which the list was most recently updated.

 

More banks have failed in Georgia than any other state as part of the current bank failure wave, but the FDIC had not yet filed a civil action against the former officials of a failed Georgia bank – that is, until now. On January 14, 2011, in what is the third FDIC lawsuit overall against former officials of a failed bank as part of the current round of bank failures, the FDIC filed a lawsuit against eight former officials of the failed Integrity Bank of Alpharetta, Georgia. The FDIC’s complaint can be found here.

 

UPDATE: As discussed further below, in addition to the Integrity Bank case, the FDIC also filed a separate lawsuit on January 14, 2011 in the Central District of California against former directors and officers of the failed 1st Centennial Bank of Redlands, California.

 

Including one bank closed already in 2011, there have been 52 bank failures in Georgia since January 1, 2008. Integrity Bank was one of the first in Georgia to fail when it was closed on August 28, 2008.  

 

 

In some ways, it may come as no surprise that the FDIC filed its first failed bank lawsuit in Georgia against officials from Integrity Bank. As noted here, the FDIC had successfully intervened in a derivative lawsuit brought by the trustee of the bank’s bankrupt holding company. In moving to intervene in the trustee’s lawsuit, the FDIC had said that it intended to file its own lawsuit against former Integrity bank officials.

 

 

In addition, two former Integrity officials have already drawn criminal charges involving activities at the bank, as discussed here. One of the two indicted Integrity officials, Douglas Ballard, is also named as a defendant in the FDIC’s civil lawsuit. As noted here, in July 2010, the two individuals entered criminal guilty pleas in the case.

 

 

As noted in Scott Trubey’s January 18, 2011 Atlanta Journal-Constitution article about the FDIC’s civil suit (here), among the former Integrity Bank officials names as defendants in the FDIC’s lawsuit is Georgia State Senator Jack S. Murphy,   who was only recently named as Chairman of the Georgia Senate Banking Committee. Another defendant, Clinton M. Day, a former bank chairman, previously was a state senator and was at one time the Republican Candidate for lieutenant governor, and also once served on the Senate Banking Committee

 

 

The FDIC, which filed the lawsuit in its capacity as Integrity Bank’s receiver, seeks to recover “over $70 million in losses” that the FDIC alleges the bank suffered on 21 commercial and residential acquisition, development and construction loans between February 4, 2005 and May 2, 2007.

 

 

The 56-page complaint, which names as defendants eight former directors of the company who also served on the bank’s director loan committee, alleges one count of negligence and gross negligence, and one count of breach of fiduciary duties.

 

 

The complaint alleges that the 21 loans at issue were “concentrated in a small number of preferred individual borrowers,” in violation both of the bank’s own lending policies and applicable statutory lending limits. The loans are alleged to have been made without appropriate documentation and with inadequate collateral. The complaint alleges that state and federal regulators “repeatedly warned” the bank about its heavily concentrated loan portfolio and lax oversight and control of its lending function.

 

 

The complaint concludes that “the years of excess risk taking and lack of oversight by the Defendants that fueled Integrity’s astronomical growth ultimately led to its failure on August 29, 2008.” The complaint also quotes the bank’s founder as admitting that “Our overwhelming success up to [mid-2006] became intoxicating and we shifted some of our focus from asset quality to earnings and growth which was a mistake …[t]his shift in our focus also created gaps in the enforcement of Bank policies and procedures. In other words, we became lax on having our checker checking the checker.”

 

 

Though a total of 325 banks have failed since January 1, 2008 (through Friday January 14, 2011), the Integrity Bank lawsuit is only the FDIC’s third lawsuit against former officials of failed banks filed as part of the current wave of bank failures. There undoubtedly are more lawsuits to come, as the FDIC’s website indicates (here) that through December 2010 the FDIC has authorized lawsuits against a total of 109 former bank officials. The website clearly shows that lawsuits against additional officials are being authorized each month.  

 

 

With the likelihood of many more lawsuits to come, I have started a list of the FDIC’s lawsuits, which can be accessed on accompanying blog post, here.

 

 

Special thanks to alert loyal readers who alerted me to this new lawsuit.

 

 

UPDATE: FDIC Also FIles Suit Against 1st Centennial Bank: After I first published this blog post, I learned that that in addition to the Integrity Bank lawsuit, the FDIC also filed a lawsuit on January 14, 2011 against 12 former directors and officers of the failed 1st Centennial Bank of Redlands, California. A copy of the FDIC’s 1st Centennial complaint can be found here.

 

 

1st Centennial failed on January 23, 2009, so the FDIC’s lawsuit arrived about two years after the bank first failed.

 

 

The complaint alleges that after a period of rapid growth, and at a time when it was apparent that the Southern California real estate market was already in decilne, the bank increased its exposure to the riskiest loans, in excess of regulatory limits. The complaint alleges that by concentrating the bank’s activities in these riskiest loans, the bank suffered capital and liquidity problems. The complaint specifically alleges that the defendants 16 specific loans that caused the bank at least $26.8 million in losses. The complaint alleges that the bank’s failure caused the FDIC insurance fund losses of about $163 million.

 

 

I have added the 1st Centennial bank complaint to my list of bank lawsuits, which as a result of this latest suit now shows that the FDIC has launched a total of four lawsuits so far as part of the current wave of bank failures.

 

On January 14, 2011, in a ruling that could have implications for other failed bank investors’ securities class action lawsuits, Northern District of Georgia Judge Charles A. Pannell, Jr. granted defendants’ motions to dismiss the securities suit that had been brought by investors in the failed Haven Trust Bank of Duluth, Georgia. A copy of Judge Pannell’s order can be found here.

 

This case may be familiar to readers as I recently wrote about the FDIC’s failed bid to intervene in this case. As discussed here, Judge Pannell denied the FDIC’s motion to intervene.

 

Banking regulators closed Haven Truston December 12, 2008. As detailed here, on December 31, 2009, investors who purchased shares in the bank’s holding company filed suit in the Northern District of Georgia alleging that the company’s former officials had misled investors in connection with the share offering, in violation of federal and state securities laws.

 

In his January 14 order, Judge Pannell granted the defendants’ motion to dismiss, finding that the plaintiffs had not adequately alleged violations of either the state or federal securities laws. With respect to the plaintiffs’ federal securities laws allegations, Judge Pannell held that the plaintiffs had not adequately alleged scienter or loss causation.

 

In holding that the scienter allegations were insufficient, Judge Pannell said that "the amended complaint’s reliance on the defendants’ positions as directors and officers, their attendance at meetings, and access to internal documents and reports is insufficient to allege a strong inference of scienter." He also found that the defendants’ alleged motivation to maintain a dividend stream was also insufficient to allege scienter.

 

Finally, with respect to the plaintiffs’ allegations that there had been "excessively risky" loans to one of the defendant’s children "may be relevant to a shareholder derivative claim for corporate mismanagement" but were not relevant to determining scienter.

 

With respect to loss causation, the plaintiff’s allege that the FDIC announcement that it was taking over the bank caused the loss in value of the plaintiffs’ stock. Judge Pannell said that "this allegation does not establish that the defendants’ alleged misrepresentations and omissions caused the plaintiffs’ loss, but instead establishes that the loss was caused by the FDIC’s decision to close the Bank due to the effect of the subprime mortgage and financial crises on the Bank’s loan portfolio."

 

After quoting with approval from a Second Circuit decision holding that "when the plaintiff’s loss coincides with a marketwide phenomenon.. . the prospect that the plaintiff’s loss was caused by fraud decreases," Judge Pannell concluded by stating that "in this case, the plaintiffs have not offered any facts distinguishing between losses caused by the defendants’ alleged misrepresentations and the intervening events that wreaked havoc with the banking industry as a whole."

 

Discussion

Judge Pannell’s decision is interesting in an of itself, as it shows at a minimum in that investors in the many pending failed bank-related shareholder lawsuits will face difficult hurdles in surviving the initial pleading hurdles.

 

To be sure, it hardly comes as news that plaintiffs will be challenged in satisfying the scienter requirements under the federal securities laws, which is equally true in the failed bank investor suits as it is in securities class action cases in general.

 

On the other hand, Judge Pannell’s rulings with respect to loss causation may be particularly noteworthy, and may be particularly encouraging to defendants in the other failed bank-related securities cases. The plaintiffs in those other cases, like the plaintiffs in the Haven Trust case, may also face significant challenges showing that their alleged investment losses were caused by the alleged misrepresentations rather than the "intervening events that wreaked havoc with the banking industry as a whole."

 

Most defendants will be able to argue, as did the defendants in the Haven Trust case, that the plaintiffs’ investment lost value when the FDIC took over the now failed bank. Defendants in those cases will undoubtedly attempt to argue that since the investors’ loss "coincided with marketwide phenomena" the plaintiffs’ burden of pleading loss causation increases.

 

Many of the failed bank cases are just getting started and it may be some time before many of these cases have worked their way to the motion to dismiss stage. But Judge Pannell’s ruling in the Haven Trust case suggests that many of these cases could face uphill battle.

 

The defendants in these cases may still face separate claims brought by the FDIC as receiver, as may yet be the case for the defendants in the Haven Trust case (after all, the FDIC did seek to intervene in the securities case, in part based on the FDIC’s stated intent to assert its own claims against the defendants). But even if there are separate FDIC claims, at least the defendants are not facing a multi-front war.

　

Special thanks to a loyal reader for providing a copy of the dismissal motion ruling in the Haven Trust case.

　

More About Georgia Banks: At the same time as the lawsuit involving banks that failed some time ago are working their way through the system, other trouble banks in Georgia are continuing to fail. Just this past Friday night, regulators closed yet another bank in Georgia. Though this is the first bank to fail in Georgia in 2011, the bank is the 52nd bank to fail in Georgia since January 1, 2008, the highest number of any state.

 

Highly reliable rumors also suggest that the FDIC is getting ready to initiate civil litigation, in its capacity as receiver of failed banks, against directors and officers of one or more failed Georgia banks, possibly as early as this week. Stay tuned.

　

More About China: Regular readers may recall prior posts (refer for example here), where I have written about increasing amounts of securities class action litigation involving Chinese-domiciled companies. Questions concerning Chinese companies listed in the U.S. are continuing to emerge, particularly with respect to Chinese companies that establish their U.S. listing by way of merger with a dormant publicly traded shell.

 

On January 13, 2011, Bloomberg Businessweek published another article raising questions about Chinese companies financial reporting. The article, entitled "Worthless Stock from China" (here), raises questions about a number of Chinese companies and their reporting practices. The article makes for interesting (albeit disturbing) reading.

　

　

In a January 12, 2010 opinion (here) in a subprime-related securities suit involving Goldman Sachs-issued mortgage pass-through certificates, Southern District of New York Judge Harold Baer, Jr. granted the rating agency defendants’ motion to dismiss on the grounds that they are not "underwriters" under Section 11, but denied the Goldman Sachs defendants’ motion to dismiss, at least as to the securities offerings in which the plaintiffs had actually purchased shares.

 

Although Judge Baer’s closely follows other decisions in similar cases, it also diverges from other recent decisions in certain respects, including a recent decision in a separate case in the same courthouse involving other Goldman Sachs-issued mortgage pass through certificates.

 

Background

Goldman Sachs and related entities sold over $2.6 billion in mortgage pass-through certificates in three offerings from three issuing trusts between February 2, 2006 and March 28, 2006. The credit rating agencies assigned AAA ratings or their equivalent to the certificates. The named plaintiff in the case purchased securities in only one of the three trusts.

 

The plaintiffs filed their initial securities class action complaint February 6, 2009. The plaintiffs alleged that the originators of the mortgages underlying the certificates had "systematically disregarded" their own underwriting standards in originating the mortgages, contrary to the representations about the originators’ underwriting practices in the offering documents.

 

The defendants moved to dismiss.

 

The January 12 Opinion

The plaintiffs had named the credit rating agency as defendants and sought to hold them liable on the theory that, as a result of the involvement in structuring the securities, the credit rating agencies had acted as "underwriters" within the meaning of Section 11 of the Securities Act of 1933.

 

In rejecting this theory, Judge Baer observed that:

 

While the Rating Agency Defendants may have played a significant role in the ability of other defendants to market the securities at issue, and if we were writing on a clean slate, their liability might be presumed, the fact is we are not writing on a clean slate and, for the moment at least, the law insulates them from exposure under section 11 and they must be dismissed.

 

Judge Baer similarly had little trouble granting the defendants’ motions to dismiss the plaintiffs’ claims as to the two of the three securities offerings in which the plaintiffs had not purchased any securities. Referring to many other cases in which plaintiffs were held to lack standing under similar securities, Judge Baer said "I concur with these well reasoned and common-sense opinions that Plaintiff needs to show an injury connected with the offerings it challenges as misleading, and therefore Plaintiff’s claims with regard to Certificates they did not purchase …are dismissed for lack of standing."

 

However, Judge Baer rejected the Goldman defendants’ bid to have the plaintiffs’ remaining claims dismissed.

 

First, Judge Baer rejected the defendants’ bid to have the claims dismissed on statute of limitations ground. Specifically, he rejected that defendants’ contention that the plaintiffs had been put on ""inquiry notice" of possible misrepresentations more than a year before the plaintiffs filed their suit.

 

Judge Baer found that neither the December 2007 ratings downgrade of the securities nor generalized press coverage about problems with loan originators’ underwriting practices were sufficient to put the plaintiffs on inquiry notice, because this information did not "directly relate" to the misrepresentations that the plaintiffs alleged in this lawsuit.

 

Second, Judge Baer rejected the defendants’ argument that the plaintiffs had not suffered any cognizable loss, noting that "here, plaintiff alleges that it purchased the Certificates at par value of $99.99 and later sold the Certificates, before it filed this action, at a par value of $16.15. Section 11 does not require Plaintiff to allege more."

 

Finally, Judge Baer rejected the defendants’ argument that the plaintiffs had not alleged any action misrepresentation, noting that the plaintiffs had alleged that the mortgage originators "systematically disregarded" their supposed underwriting standards, and therefore the offering documents "did not put investors on notice as to the underwriting practices that the loan originators were using, and therefore obscured the actual level of risk faced by investors who purchased the Certificates."

 

Discussion

Several aspects of Judge Baer’s opinion closely track other rulings in similar cases. For example, his ruling that the rating agencies are not "underwriters" within the meaning of Section 11 follows a growing line of decisions reaching the same conclusion, including Judge Kaplan’s ruling in the Lehman Brothers case (about which refer here).

 

Similarly, his ruling that the plaintiff lacked standing to assert claims based on offerings in which it had not purchased shares is consistent with rulings in many other subprime-related cases, in which the plaintiffs in those cases were similarly found to lack standing to assert claims based on shares they had not purchased (about which, refer for example, here).

 

In addition, his ruling that the plaintiffs had alleged actionable misrepresentations based on the mortgage originators’ alleged "systematic disregard" of their underwriting practices is consistent with rulings in other mortgage-backed securities lawsuits in which plaintiffs were found to have adequately asserted claims of misrepresentation based on similar allegations that the mortgage originators had "systematically disregarded" the stated underwriting standards (about which refer here).

 

However, Judge Baer’s decision arguably diverges from other recent rulings, including even one recent ruling in a case involving similar Goldman-Sachs issued mortgage pass-through certificates.

 

Thus, an October 14, 2010 ruling in a case involving Goldman Sachs mortgage pass through certificates issued in 2007 (in offerings subsequent to the offerings at issue in the case before Judge Baer), by Southern District of New York Judge Miriam Cedarbaum held that the plaintiffs in that case had failed to allege "cognizable injury" under Section 11, by contrast to Judge Baer’s ruling that the plaintiffs in this case had adequately alleged cognizable injury.

 

The difference in the two rulings may be understood by an important difference between the two plaintiffs’ circumstances. In Judge Baer’s case, the named plaintiffs had actually sold the securities at issue at a steep loss. By contrast, Judge Cedarbaum found in that the plaintiffs in the case before her could only assert that they would lose money in a hypothetical sale of their securities. She found that it was not sufficient for the plaintiffs’ to allege injury based on an alleged hypothetical price on the secondary market at the time of the suit, without alleging that a secondary market actually exists. She found that the plaintiffs had failed to allege any facts regarding the actual market price.

 

There is a certain ironic tension between the two lawsuits, as the sale alleged in the lawsuit before Judge Baer showed what Judge Cederbaum had said the plaintiffs’ allegations in her case lacked – clearly, the sale in the case before Judge Baer showed there was some form of a functioning market for securities of this type, and that securities in that market were trading at a steep discount.

 

Judge Baer’s statute of limitations ruling also diverges somewhat from Judge Paul Crotty’s ruling just a few days ago in the subprime-related securities suit involving Barclays (about which refer here). In the Barclays case, Judge Crotty granted the defendants’ motion to dismiss on statute of limitations grounds based on his conclusion, contrary to Judge Baer’s ruling in this case, that the plaintiffs had been put on inquiry notice.

 

The difference in outcome between the two rulings may be understood by the specific event that Judge Crotty found to have put the plaintiffs in that case on inquiry notice, which was a Trading Update that Barclays itself had issued and that he found to have contained revelations about the very circumstances on which the plaintiffs were basing their allegations in that case. By contrast, in the case before Judge Baer, the communications on which the defendants sought to rely to show that the plaintiffs were on inquiry notice were not issued by Goldman Sachs and did not, according to Judge Baer, "relate directly" to the alleged misrepresentations.

 

While Judge Baer’s various rulings in this case substantially narrowed the plaintiffs’ claims, the plaintiffs’ ’33 Act allegations against the Goldman defendants survived, at least as to the securities in which the plaintiffs had invested, which stands in significant contrast to the claims of the plaintiffs in the other Goldman-related case before Judge Cedarbaum and to the claims of the plaintiffs in the Barclays case.

 

I have in any event added Judge Baer’s ruling to my running tally of subprime-related securities lawsuit dismissal motions rulings, which can be accessed here.

 

Alison Frankel’s January 14, 2011 Am Law Litigation Daily article about Judge Baer’s ruling can be found here.

 

Interview with Bill Lerach: If you have not yet seen Nathan Koppel’s January 14, 2011 interview of Bill Lerach on the WSJ.com Law Blog, you will definitely want to take a few minutes to read the item, which can be found here. Lerach has a number of interesting observations about his time in prison and in a half way house, as well as about his present circumstances.

 

My review of the recent biography of Lerach can be found here. Lerach also recently wrote a guest post on this blog, which can be found here.

 

A Contrary California Opinion on the Triggers of Excess Coverage: In an number of recent rulings, including a California case involving Qualcomm, several courts have held that the payment obligations of excess D&O insurers are not triggered if the underlying insurance is not exhausted by payment of loss, even if the policyholder funded the gap out of its own resources.

 

However, as discussed in a January 14, 2011 memorandum from the Wiley Rein law firm (here), the California Court of Appeal, declining to follow the Qualcomm decision , held that an excess insurer’s coverage obligation was triggered even though the underlying insurers had settled for less than their policy limits.　The outcome of the case turns in large part on the nature of the settlement of the underlying claim and rather arcane distinctions between "horizontal exhaustion" and "vertical exhaustion." The Wiley Rein memo does an admirable job explaining relevant circumstances and the sense of the court’s analysis.

 

A Few Words of Support for Those Struggling With New Year’s Resolutions: The January 15, 2011 Wall Street Journal had a somewhat snarky front-page article about how health clubs are jammed up with "pudgy" newcomers trying to keep up with their New Year’s resolutions, making life unpleasant for the regulars.

 

I have observed this same phenomenon in many gyms and health clubs in many different parts of the country over the years, including also the club to which I currently belong. There is no doubt that for the first few weeks of January every year, health clubs are notably more crowded and notably less pleasant, and problems do arise when newcomers violate unwritten rules of protocol.

 

However, I think the Wall Street Journal article is both unfair to the newcomers and omits the one critical piece of information that every newcomer needs to know.

 

The unfairness comes from the fact that the newcomers just want to get into shape and it is not their fault that out of simple unfamiliarity they don’t know the unwritten rules. The whole reason they are there is that they want to do something about the fact that they haven’t been spending enough time in the gym. If they have paid their fees, they are every bit as much entitled to the precious gym space as the regulars are. I have always found that a bit of patience and a friendly word of encouragement takes care of most situations arising from newcomers’ unfamiliarity with the expectations of other users.

 

The one critical piece of information the newcomers need to know is that the New Year’s crush only lasts a few days. By Martin Luther King Day, most of the hubbub has died down, and by February 1, everything is back to normal. The sad part is that the reason everything is back to normal is that almost all of the newcomers have become discouraged and deterred from coming back..

 

If I had one word of advice for the newcomers, it would be to postpone their New Year’s fitness resolve until February 1. Then the newcomers will find the gym a much more relaxed and less crowded place, and the newcomers might not be as discouraged and might even have a better shot of sticking with their resolution.

 

If you are one of the many who decided this New Year’s to try to get back into shape, please just stick with it for a few more days – within a week or two, the gym will not be nearly as crowded, and you will find it much more pleasant to complete your work out. The first two weeks of the year is the worst possible period to be trying to start a new fitness regime. For the remaining 50 weeks of the year, it will not be as challenging to fulfill your resolution. So hang in there.

 

Year End 2010 Securities Litigation Overview: On Friday January 21, 2011, at 11:00 am EST, I will be participating in a free webinar on the topic "Year End 2010 Securities Litigation Overview," sponsored by the insurance information firm, Advisen. Other panelists participating in the webinar include David Bradford of Advisen, Kevin Mattesich of the Kaufman Dolowich law firm, as well as an insurance company underwriter and a member of the plaintiffs’ bar. Further information about the webinar, including registration instructions, can be found here.
 

　

One of the great things about having this blog is that it has brought me into contact with a wide variety of interesting people, among them other bloggers, journalists, academics and writers. Among the interesting people I have come to know is Susan Beck, who is not only a Senior Writer for The American Lawyer, but also, it turns out, a neighbor of mine here in Northeast Ohio.

 

Over coffee with Susan recently, I decided it would be interesting to interview her for this blog. The fruits of my interview are reproduced below, with my questions in italics.

 

By way of further background, Susan has worked at the American Lawyer since 1987. She writes feature articles for the magazine (her most recent feature was about the Bratz doll dispute between Mattel and MGA Entertainment). She also writes items for and edits the Am Law Litigation Daily, and she write the weekly Summary Judgment opinion column for the Litigation Daily.

 

Here is my interview with Susan:

Q. I know that you went into legal journalism after several years of law practice. How did you get into legal journalism and why?

 

A. I was feeling dissatisfied and at first thought that I should change firms. But after a few interviews I realized that changing firms wouldn’t make things much better. I knew someone who had left his law firm job for the American Lawyer and talked to him. The job sounded exciting, especially the relative freedom it offered. .I got hired even though I had absolutely no journalism experience. I doubt I’d even get an interview today.

　

Q. The legal profession and the legal industry have changed quite a bit during the time you have been covering it as a journalist. From your perspective, how has the legal practice and legal industry changed and what do you think of the changes?

 

A.: To be honest, I’m still amazed at how little the legal profession has changed in the last 30 years. Law firms are still pretty much run the same way they were in the early 1980s, and so are law schools. The biggest change is that there are many more women in the profession, although they still are underrepresented at the top.

 

Q. I am a big fan of your Summary Judgment column, which you write with a little bit of an attitude. How did the column come about, and are you as cranky as you seem in that column? How do you decide what to write about in the column?

 

A.: Cranky! Me? Okay, I do have my cranky side, but I like to think of myself as generally a pretty easygoing, pleasant person. But I do have strong opinions, which can sound cranky in print.

The column came about from my work on the Litigation Daily. We all write with a bit of attitude in those items, but I wanted to go further and expound on subjects I care about. I get a lot of my ideas on my morning run. I tend to mull over things while I’m running (some might call it obsessing), and often an idea for a column will pop into my head. By the time I’m finished with my run, I’ll often have the column half written in my head.

I have to give a lot of credit to Alison Frankel, who edits the columns. She helps me identify topics, and does a wonderful job sharpening the pieces. She deserves all the credit for making the Litigation Daily such a great read.
 

　

Q. I am always impressed how you and your Am Law Litigation Daily colleagues find a number of interesting things to write about every day. How do you come up with your stories, and what sort of criteria do you use in choosing your stories?

 

A.: I wish it were more of a science, but we just keep our eyes open throughout the day for interesting litigation news. Some starts with other websites, some items are sent to us directly by lawyers, and some things come from checking court dockets. Our criteria, for the most part, are that is should be business litigation news that’s relevant to litigators at big firms.

 

Q. The legal journalism arena has changed quite a bit during your years of involvement. What do you think of the changes and where do you think it is heading?

 

A.: My job has certainly changed a lot. Just a few years ago I mostly wrote in-depth feature articles for The American Lawyer magazine, spending several months working on each article. I still write feature articles, but I spend about half my time on breaking news and commentary that goes right up on the web. Some days I crank out three stories a day, which is pretty grueling. I’m not sure where this is all headed, but obviously the trend is toward more immediate information.

 

Q.: Is there a story or a case you have always wanted to write about but you have never had the chance?

 

A.: I’ve been frustrated that I haven’t been able to find a good legal stories arising from the recent financial crisis that would work for our audience of big firm lawyers. I’ve been looking for a story that hasn’t already been covered by the mainstream press, and I’m not getting anywhere. (Any suggestions are welcome.) 

Q.: If you could interview one member of the legal profession, who would it be and why?   

A.: Marty Lipton on truth serum. He probably knows all the best secrets.  

 

Q.: When you write your book, what is it going to be about?   

A. How the Cleveland Indians, with an improbable, but lovable collection of unknown players, win the World Series.   

 

Q.: I know you moved back to Cleveland not too long ago after living in San Francisco and New York for many years. How is it being back in Cleveland after living in those other cities?  

A.: I love it. There are a lot of great things about New York and San Francisco, but I feel a level of comfort in Cleveland that I missed in those other cities. It’s a lovely place to live. The cost of living is so much better, the people are so nice and friendly, and I even prefer the weather. Those SF summers were way too cold and foggy, and I like snowy winters. On the down side, all our pro sports teams really suck right now. 

 I was surprised by Susan’s answer about the book she would write . I had not suspected her of being a writer of fantasy fiction.