Do private securities lawsuits play an important role in deterring fraud and compensating defrauded investors, or are they simply wasteful and ineffective? These were the questions that on October 23, 2008 Stanford Law School Professor Joseph Grundfest and Duke Law School Professor James Cox debated in New York at the Forum for Institutional Investors sponsored by the Bernstein Litowitz Berger & Grossman law firm.

 

The professors’ discussion, moderated by Bernstein Litowitz partner Sean Coffey, addressed some of the perennial questions concerning private securities litigation. I have summarized the professors’ comments below, followed by my own observations.

 

The Professors’ Debate

Professor Grundfest: Professor Grundfest addressed the issues first. He characterized private securities litigation as a process "for moving money around for the benefit of the people moving the money around." Professor Grundfest was particularly emphatic in arguing that private securities litigation is a poor deterrent of misconduct. He pointed to the many allegations of wrongdoing that have accompanied the current financial crisis as evidence that private securities litigation is not a deterrent to misconduct.

 

Professor Grundfest argued that because the vast preponderance of private securities litigation is settled with insurance proceeds or company money, there is no "individual responsibility," because the "wrongdoers" are not "hit in the pocketbook."

 

In order for the system to provide deterrence, Professor Grundfest suggested, the process should be changed so that rather than having as its objective simply to be to produce "the largest pot of money" from whatever source derived, the objective should be geared toward settlements funded directly out of individuals’ pockets, even if it results in a much smaller settlement.

 

Professor Grundfest described the current system as a "drug induced fantasy," as it essentially involves institutional lead plaintiffs suing companies in which institutional investors are the primary shareholders. Professor Grundfest asserted that this system produced nothing more than a very elaborate and costly pocket shifting, as a result of which it is mathematically impossible for a fully diversified investor to come out ahead. The only effective deterrent, Professor Grundfest argued, would be to require individual settlement contributions as a regular part of private securities litigation settlements.

 

Professor Cox: Professor Cox challenged the assertion that private securities litigation provides no deterrence, stating that it is not enough to look at litigation defendants alone to determine whether securities litigation has a deterrent effect. Rather, Professor Cox argued, the question is whether the threat of litigation raises the standard of conduct across the marketplace, among all companies. Professor Cox said that it is difficult to measure the benefit to the entire marketplace of increased disclosures and other conduct calculated to avoid litigation.

 

Professor Cox specifically observed that the performance of the U.S. markets in the current financial crisis demonstrates that these safeguards do work. He noted that while the markets around the world are all down, the U.S. markets are down less than other markets because the U.S. markets generally are viewed as more transparent and more trustworthy.

 

Professor Cox also noted that as it has evolved, our system of securities enforcement has come to require a public/private partnership. He cited research that looked at circumstances where both public enforcement and private litigation were involved, as well as circumstances where only one or the other initiative was involved. He said this research shows that the SEC has tended to pursue enforcement cases against securities violations involving smaller companies where fewer dollars are involved, while the private securities litigation bar has concentrated on the larger companies where more is at stake, where both the costs and the incentives for private action are greater. Professor Cox argued that this private/public partnership has contributed to a more comprehensive enforcement of the securities laws.

 

Professor Cox was dismissive of the portfolio theory against the effectiveness of private securities litigation. He noted first that Chamber of Commerce research had shown that the analysis that diversified institutional investors could not come out ahead, at a minimum, does not apply in the IPO and M&A context. He also pointed out that this portfolio theory is not raised as an objection to other types of commercial litigation, where one company sues another to recover damages. The same pocket shifting argument could be applied to all commercial litigation, but no one is suggesting that all commercial litigation be eliminated as unjustified under portfolio theory.

 

In the end, however, Professor Cox is not opposed to the idea of having individuals contribute toward class settlements, and he even suggested that the judiciary should have their consciousness raised about asking what the individual defendants have contributed towards settlement.

 

Sean Coffey: The panel moderator, Sean Coffey, commented that he believed that in order for private securities litigation to be most effective, individuals need to feel that they are "at risk." Coffey commented that he believed that the spectacle of the individuals being required to contribute to the WorldCom settlement did produce the kind of heightened awareness that could deter improper behavior.

 

But at the same time, Coffey noted, "because you don’t want to deter people from serving" on boards, the instances when individuals should be required to contribute should be "rare."

 

Professor Grundfest closed by commenting that individual responsibility is "the message that needs to go out" and he asked rhetorically, "why is it so rare?" He also asked "isn’t it was really works?" — adding that motivating behavior is a more important goal than moving money around.

 

Discussion

Anyone who has had a close look at the securities litigation process can only be appalled at the wasteful expense, most of which has little to do with the merits or anything else important that is at stake, but has more to do with the enrichment of the process participants. But as profligate as the process inefficiency is, this costliness is not unique to securities litigation. Our system of litigation may not have been designed to enrich the lawyers, but that certainly is one of its most apparent effects.

 

But while there undoubtedly are ways our securities litigation system could be improved, that does not mean that the system overall fails to achieve its intended goals. In particular, I believe that private securities litigation does have a deterrent effect.

 

My perception is that most corporate officials have a strong desire to avoid accusations of fraud, even if the accusation were to come only in the form of a private securities lawsuit. For most corporate officials, the idea of their name and picture appearing in the local newspaper accompanied by the word "fraud" is their worst nightmare. Most corporate officials work hard to prevent this from happening. Of course there are those individuals whose greed overcomes their fear, and about this group I have further comments below.

 

As for whether the system compensates investors or simply moves money around, all I can say is that there are a large number of sophisticated, well-informed and profit motivated institutional investors that continue to actively participate in securities litigation, some serving frequently as lead plaintiffs. These institutional investors believe that the litigation is in their financial interest, notwithstanding what modern portfolio theory might purport to suggest. In addition, many of these investor plaintiffs are often interested in using litigation to achieve governance changes or other nonmonetary objectives. They clearly believe that private securities litigation helps them to achieve those goals.

 

And as for the idea that individuals should be forced to contribute routinely out of their own assets towards civil litigation settlements, I think we need to take a giant step back and look at what we are talking about. Most securities cases settle in their early stages, often even before motions for summary judgment have been determined. Rarely at the time of settlement have there been any factual determinations of any kind, much less any findings of culpability.

 

Most securities lawsuits settle because of the costs and burdens of litigation and because of the catastrophic loss potential involved if the case were to go forward through trial. Given these virtually universal settlement dynamics, it would, in my view, be a miscarriage of justice if individuals were to be required routinely to contribute out of their own funds toward settlement. Indeed, in the absence of culpability findings, any mandate requiring individual contribution arguably would be confiscatory and could violate due process, at least when there otherwise would be indemnity and insurance available.

 

We do not bar defendants in other contexts from availing themselves of liability insurance. We do not bar, say, defendants in auto accident cases from availing themselves of auto liability insurance, though one might hypothesize that drivers would be more careful if liability insurance were unavailable. Similarly, doctors are permitted to insure against allegations of malpractice, though mandated uninsured liability might motivate greater caution (or, more probably, result in fewer doctors). Why should defendants in securities lawsuits be any less able to benefit from contractual indemnity or liability insurance provisions?

 

There are of course those individuals whose greed outweighs their fear, and for whom the threat of litigation is no deterrent. These kinds of people undeniably are out there, but these people are not going to be forestalled by any deterrence mechanisms, even the threat of direct personal liability. The most effective approach to these kinds of bad actors is prevention, not deterrence. Meaningful transparency requirements and effective systems of internal controls monitored by independent watchdogs– that is how to fight bad actors’ misconduct.

 

Finally, even if there are occasional circumstances where individuals’ behavior theoretically might dictate their individual contribution toward private securities litigation settlements, these occasions should be rare. In that respect, I agree with the Sean Coffey’s comments that if these kinds of impositions were to become routine, talented individuals correctly might conclude that it is not in their personal financial interest to serve on a corporate board.

 

Looking Ahead

Regardless who wins the upcoming Presidential election, that there will be significant postelection efforts to strengthen regulatory mechanisms to try to prevent future financial marketplace crises and misconduct. There is some danger in this environment, where scape-goating is in high gear, that the idea of mandating the imposition of financial burdens directly onto individual directors and officers might gain some traction. Indeed, the Wall Street Journal op-ed column discussed below underscores that risk.

 

If this initiative were premised on the idea of requiring individual contributions toward settlement even in the absence of findings of culpability, any initiatives along these lines would inappropriately and unfairly shift costs to individuals. Attention more appropriately should be focused on mechanisms designed to improve monitoring, oversight and disclosure, so that greater transparency will allow the marketplace to do more to police behavior and prevent misconduct.

 

It will in any event be interesting to watch what unfolds after the election. There is little doubt that there will be an enormous effort to overhaul the financial markets’ regulatory structure. The outcome of these efforts will substantially affect markets and market participants, and could even affect the liability exposures of corporate officers and directors.

 

Where Were the Directors?: If early indications are any gauge, the idea that board members should be held individually accountable is likely to be a featured part of the regulatory reform discussions that undoubtedly lie ahead. By way of illustration, in an October 25, 2008 Wall Street Journal op-ed column entitled "Where Were the Boards?" (here), Papa John’s founder and Chairman John Schnatter asked, with respect to the current financial crisis "Where were the boards of directors of the companies that helped create this mess?"

 

Schnatter noted that boards "have a clear-cut fiduciary responsibility to provide oversight," as a result of which he observed that "we should not ignore their roles in contributing to this financial meltdown."

 

Schnatter conludes that "politicians in Washington would be wise" to "adjust their focus upward" (where, as Schatter noted "true power lies") and "set greater accountability for boards, requiring stringent oversight by those who are empowered to set the ground rules for American companies." He does, however, allow that penalties should not be so "harsh" that "no sensible business person would become a director."

 

Regardless of the level of authority with which Schnatter may speak, the concept of "greater accountability" at the director level undoubtedly will be part of the regulatory reform dialog that will follow the upcoming election. The practical usefulness of any conversation along these lines will depend critically on the extent to which the concern about the willingness of sensible business people to serve as directors is appropriately respected.

 

To Encourage the Others: The very idea that a few individual directors should be punished periodically as deterrent against the misbehavior of all others reminds me of the unfortunate British admiral, John Byng, who was court-martialed and shot to death for "failing to do his utmost" during the Battle of Minorca at the outset of the Seven Years’ War.

 

Voltaire included this incident in his novel, Candide, in which the main character, Candide himself, witnesses Admiral Byng’s execution in Portsmouth. Candide is told "Dans ce pays-ci, il est bon de tuer de temps en temps un amiral pour encourager les autres." (In this country, it is wise to kill an admiral from time to time to encourage the others.)

  

On October 23, 2008, in a much-anticipated decision addressing what it called "the vexing question of the extraterritorial application of the securities laws," the Second Circuit in the National Australia Bank (NAB) case ruled (here) that U.S. courts lack subject matter jurisdiction over the claims of foreign claimants in that case who bought their NAB shares on a foreign exchange. Although the Second Circuit did not, as friends-of-the-court had urged, pronounce a bright line rule against jurisdiction in such "f-cubed" claims, it nevertheless provided guidelines that will be relevant to similar cases going forward.

 

Background

NAB is Australia’s largest bank. Its shares trade on securities exchanges in Australia, London, Tokyo and New Zealand. Its American Depositary Receipts trade on the New York Stock Exchange. NAB has a mortgage servicing subsidiary, HomeSide, based in Florida. In 2001, NAB disclosed that it was taking a significant write-down due to a recalculation of the amortized valuating of HomeSide’s mortgage servicing rights. Following this announcement, the price of NAB’s shares and ADRs declined, and investors filed a securities class action lawsuit in the Southern District of New York.

 

The claim was initially brought by four plaintiffs. One of the four purported to represent domestic purchasers of NAB’s securities. The three other plaintiffs bought their shares abroad and sought to represent a class of non-U.S. purchasers. Background regarding the case can be found here.

 

On October 25, 2006, the District Court granted defendants’ motion to dismiss the complaint. The District Court held that it lacked subject matter jurisdiction over the foreign claimants claim. The court dismissed the domestic plaintiff’s action for failure to state a claim because the domestic plaintiff failed to allege that he suffered damages. The three foreign plaintiffs appealed. The domestic plaintiff’s claim was not before the Second Circuit, and so the appellate court was exclusively concerned with the jurisdictional issue.

 

The Second Circuit’s Opinion

In its October 23 opinion, written by Judge Barrington Parker, the Second Circuit noted that the "difficulty of the case was heightened by its novelty" – that is, the involvement of so-called "foreign-cubed" claimants. The appellees and several amici had urged the Second Circuit to adopt a "bright-line rule" by holding that in "foreign-cubed" securities litigation that mere domestic conduct should not be enough for a U.S. court to exercise subject matter jurisdiction where the conduct had no effect in the U.S. Links to the briefs for the parties and the amici can be found here. My prior post detailing the issues surrounding "f-cubed claims" generally can be found here.

 

The Second Circuit duly acknowledged what it characterized as the "parade of horribles" the friends-of-the-court invoked in favor of a bright line test, including the possibility that exercising jurisdiction in those cases could bring U.S. securities laws in conflict with those of other jurisdictions.

 

However, the Second Circuit observed that declining jurisdiction over all "foreign cubed" cases "would conflict with the goal of preventing the export of fraud from America." In particular, the Court was concerned that the U.S. should not be seen as a "safe haven for cheaters." The court said that "we are leery of a rigid bright line rule because we cannot anticipate all the circumstances in which the ingenuity of those inclined to violate the securities laws should result on their being subject to American jurisdiction."

 

Having rejected the bright line test, the Court went on to observe that "we are an American court, not the world’s court, and we cannot and should not expend our resources resolving cases that do not affect Americans or involve fraud emanating from America." The Second Circuit said that "in our view the ‘conduct text’ balances those competing concerns." Under the conduct test, subject matter jurisdiction exists "if activities in this country were more than merely preparatory to a fraud and culpable acts or omissions occurring here directly caused the losses abroad."

 

The Court then turned to applying the conduct test to the NAB case. The claimants urged that because miscalculation of HomeSide’s mortgage servicing rights had taken place in this country, U.S. courts could exercise jurisdiction. The Second Circuit nevertheless determined that U.S. courts lack jurisdiction, citing three factors: "the fraudulent statements at issue emanated from NAB’s headquarters in Australia; the complete lack of any effect on America or Americans; and the lengthy chain of causation between HomeSide’s actions and the statements that reached investors."

 

Discussion

Though the defendants in the NAB case prevailed, the case hardly means the end of f-cubed litigation. Arguably, in light of the Second Circuit’s refusal to adopt a bright line test, the jurisdictional standards remain largely unchanged, and litigants will continue to argue whether there is sufficient U.S. based conduct and U.S based effects to support the U.S. court’s exercise of jurisdiction.

 

Moreover, the Second Circuit made it clear that there will be circumstances in which it will be entirely appropriate for U.S. courts to exercise jurisdiction over the f-cubed claims. For that reason, and even though the Second Circuit held that the U.S. courts lacked jurisdiction of over the NAB case itself, foreign claimants likely will continue to try to assert claims against foreign-domiciled companies in U.S. courts.

 

That said, the claimants case against NAB did get tossed. The Second Circuit did caution against U.S. courts presuming to act as "the world’s court" and also cautioned against the exercise of jurisdiction over claims that do not affect Americans or involve fraud emanating from America. In other words, not all foreign claimants’ claims against foreign domiciled companies will go forward in U.S. courts.

 

Moreover, these issues are relevant not only at the motion to dismiss stage but also at the other procedural stages, including the lead plaintiff stage (refer here). As Adam Savett noted on the Securities Litigation Watch blog (here), courts have been increasingly willing to craft class certification to exclude foreign domiciled claimants at least in certain circumstances.

 

All of that said, the NAB decision will be grist for the mill in the onslaught of litigation involving foreign domiciled companies sued in connection with the current subprime and credit crisis litigation wave. The NAB decision necessarily implies a case-by-case determination and so litigants will continue to wrestle to determine whether these cases will go forward in U.S. courts. In the meantime, the cases will continue to be filed.

 

An October 23, 2008 Bloomberg article discussing the case can be found here.

 

Special thanks to George T. Conway, III of the Wachtell, Lipton law firm, who successfully represented NAB in the Second Circuit, for providing me with a copy of the opinion.

 

As I noted in a prior post (here), NERA Economic Consulting, in a May 15, 2008 paper (here), had asked the question whether options backdating-related securities class action lawsuits were settling for less than data from prior class action settlements would predict. In the May 15 paper, looking at the settlements to date, NERA found that the options backdating-related securities lawsuit settlements were well below predicted amounts.

 

NERA has now published an October 22, 2008 paper (here) that revisits its earlier analysis in light of intervening options backdating-related securities settlements.

 

With respect to the previously observed expectations gap, NERA had hypothesized in its earlier paper that either suits alleging backdating are generally viewed as weaker or the weakest cases had simply settled most quickly.

 

In its most recent paper, NERA revisits these hypotheses in light of three recent settlements – Brocade Communications, UnitedHealth Group and Monster Worldwide – finding that there may be support for the conclusion that the initial settlements may have been low because the weakest cases settled first. In these three more recent dispositions, the settlements were either at or well above predicted ranges. Indeed, NERA found that the UnitedHealth Group case was as much as five times greater than the predicted amount.

 

At the same time, NERA noted that four of the more recent settlements were more consistent with prior observations, in that the settlements were below predicted ranges.

 

In its earlier report, NERA had concluded that on average the options backdating cases were settling for about 38% of the predicted amount. With the addition of the intervening settlements the average settlement is up to about 74% of predicted amounts. However, this increase is largely driven by the inclusion of the UnitedHealth Group settlement. Without the UnitedHealth Group settlement, the average of the options backdating settlements drops to 43% of the predicted amounts.

 

Nevertheless, based on its analysis (and I am simplifying here), NERA still cannot reject the hypothesis that options backdating-related securities settlements are on average no different than settlements in non-backdating cases with similar level of investor losses and other similar traits.

 

NERA notes that of the overall options backdating-related securities lawsuits, 17 remain to be settled, which represents a larger group of cases than the 15 cases that have settled to date. It remains to be seen whether or not these remaining cases will or will not settle within expected ranges.

 

My table showing all options backdating related case dispositions, including settlements and dismissals both for all options backdating-related securities lawsuits and options backdating related derivative lawsuits, can be found here.

 

The calamity that began as a U.S.-based subprime mortgage meltdown has now grown into a global financial crisis that has resulted in bankruptcies and bailouts involving some of the world’s largest financial institutions. Along the way, these financial institutions’ investors have seen their investment interests damaged or destroyed, leaving many angry and aggrieved. If a new lawsuit is any indication, investors aggrieved by their lost investments in global financial institutions may be turning to the U.S. courts for redress.

 

As reflected in their press release (here), on October 22, 2008, plaintiffs’ attorneys filed a purported securities class action in the Southern District of New York on behalf of investors who purchased securities of the recently nationalized Belgium-based financial services company, Fortis N.V. , related entities, and certain of its directors and officers.

 

According to the press release, though the company portrayed itself as stable and largely immune to the turmoil that was sweeping financial markets, "the Company was practically insolvent at all relevant times and needed to sell assets at fire-sale prices and raise capital at extraordinarily high rates to remain viable."

 

The press release states that the company’s balance sheet was impaired by assets acquired in connection with the company’s October 2007 acquisition of ABN AMRO.

 

On September 29, 2008, the governments of Netherlands, Belgium and Luxembourg agreed to bailout the company, but only if it were to sell its troubled stake in ABN AMRO. A September 30, 2008 Wall Street Journal article about the action of the three governments, and the role of the ABN AMRO transaction, can be found here. Even though the deal was in the form of an emergency infusion of 11.2 billion Euros ($16.9 billion), it was "not enough to stem Fortis’ continued decline."

 

On October 4, 2008, the Dutch government took over the company’s operations for 16.8 billion Euros ($23 billion). As the plaintiffs’ lawyers’ press release puts it, "news that the famed financial giant was in ruins and required nationalization further punished Fortis’ already bruised stakeholders." An October 6, 2008 Wall Street Journal article describing the government takeover, including the sale of Fortis banking and insurance assets to BNP Paribas, can be found here.

 

The plainitffs’ lawyers’ press release adds:

 

On October 14, 2008, Fortis traded on the Brussels exchange at the lowest levels that it had ever seen since it was formed 18 years ago, after selling most of its operations to three governments and BNP Paribas SA. Fortis, which resumed trading after a six-day suspension, declined 78 percent to 1.22 euro, valuing the Company at 2.86 billion euros ($3.91 billion).

 

The complaint in this case, which can be found here, apparently purports to be filed on behalf of  ALL investors who bought Fortis shares between January 28, 2008 and October 6, 2008, and not just U.S. domiciled investors or those who bought their shares on exchanges in the U.S. (where Fortis shares trade over the counter). The complaint specifically alleges that Fortis shares trade on the Brussels, Euronext and Luxembourg stock exchanges, as well as in the U.S.

 

To the extent the class action purports to be filed on behalf of foreign-domiciled investors who bought their shares in Belgium-domiciled Fortis on foreign exchanges, the case appears to present a classic instance of the so-called "f-cubed" problem (the reference is to the three foreign connections – foreign corporate domicile, foreign investor domicile, and foreign exchange location).

 

This case does not present the extreme situation represented in the lawsuit filed against EADS (and about which I wrote here) in which the foreign company’s shares did not trade in the U.S. at all, but it nevertheless does present all the jurisdictional problems associated with subjecting foreign domiciled companies to potential liability under U.S. securities laws. As I noted here in connection with the recent ruling in the AstraZeneca case, courts increasingly are showing reluctance to project U.S securities liability in connection with f-cubed claims.

 

There is of course a well-established pattern of foreign domiciled companies becoming involved in U.S. securities litigation. Indeed, just in connection with the current subprime and credit crisis-related litigation wave, there have been U.S. securities lawsuits that have been filed against, Société Générale, Swiss Re, Deutsche Bank, and UBS, among many others.

 

What sets this most recent lawsuit against Fortis apart from these prior cases, at least in my mind, is that it relates so directly to the dramatic actions of foreign governments to try to salvage the company. These circumstances involve a magnitude, a depth of clearly foreign involvement and interests, and a combination of purely global financial circumstances that could be far beyond the purview of a U.S based court. To be sure, there may well have been misrepresentations made in connection with these events (the complaint certainly makes numerous allegations to that effect), and there may well of course have been misrepresentations of a kind for which the U.S. laws are designed to provide provide relief, which of course will have to be determined at a later date.

 

The case also involves such a vivid example of the momentous events that have moved across the global financial stage in recent weeks. The litigants will of course present their arguments about whether and to what extent a U.S. court is the appropriate forum here. Those of us not directly involved in the case may ask whether U.S. courts appropriately should perform roving inquests on the bailouts and bankruptcies that emerge around the globe as a result of the current financial crisis.

 

In any event, the Fortis lawsuit may represent another example of the new wave of credit crisis-related litigation, where the connection to the subprime meltdown is indirect, and the events that triggered the lawsuit are related to the catastrophic events in the financial market place that began to unfold in September 2008. My most recent prior post on this new litigation wave can be found here. On the other hand, it may also be argued that the problems Fortis faced are simply the result of the subprime mortgage exposure and subprime-related investments of the company it acquired, much the same as, for example, Wachovia was exposed to the subprime-related problems from Golden West, which Wachovia acquired.

 

Here Be Dragons: The ill-fated ABN AMRO transaction is a veritable treasure trove of excesses, extremes and subsequent moral lessons. Undoubtedly a book will be written some day about how the investor consortium led by Royal Bank of Scotland, and including Fortis, outbid (to the consortium’s eternal regret) the prior ABN AMRO bid of Barclays. Until the book comes out, readers may want to refer to the highly abridged version of events on Wikipedia, here.

 

Were there not so many other current events, the financial pages undoubtedly would be full of what-went-wrong retrospectives on the ABN AMRO deal. It is one more of those amazing things about the current circumstances that, despite the size of the ABN AMRO calamity, it is effectively just background noise in the larger cataclysm.

 

In the latest of the decisions in which subprime and credit crisis-related securities lawsuits have failed to withstand preliminary judicial scrutiny, on October 6, 2008, Central District of California Judge Andrew Guilford granted (here) defendants’ motion to dismiss the plaintiffs’ second amended complaint in the IMPAC Mortgage Holdings case, with leave to amend.

 

As reflected here, the plaintiffs initially filed their purported class action complaint on August 17, 2007. The initial complaint was subsequently amended twice, and the October 6, 2008 ruling related to the plaintiffs’ second amended complaint. The second amended complaint essentially alleged that contrary to the company’s public statements, the company’s Alt-A loans were actually being sold to less creditworthy borrowers, so that the Alt-A loan portfolio was as risky as a portfolio of subprime mortgages. The plaintiffs further alleged that at the same time, the company misrepresented its true financial condition by its failure to write down the value of its loan portfolio.

 

In his October 6 opinion, Judge Guilford states that "plaintiff packs the Complaint with 30 pages of supposed misstatements or culpable acts, but none of them shows fraudulent intent or deliberate or conscious recklessness." The statements of the former employees on whom the plaintiffs sought to rely are, Judge Guilford found, "completely benign," or "so vague as to be meaningless."

 

Judge Guilford concluded that the plaintiffs’ allegations "do not provide any specifics, and they do not show fraudulent intent or conscious recklessness." The PLSRA, the court noted, "was intended to guard against exactly these sorts of vague, conclusory allegations." Judge Guilford therefore granted the defendants’ motion to dismiss, allowing the plaintiffs’ 21 days to file an amended complaint.

 

The plaintiffs in the IMPAC Mortgage case not only face a tight timeframe but also face an uphill battle to satisfy the shortcomings Judge Guilford identified. The complaint Judge Guilford rejected had already been amended twice, so it unlikely the plaintiffs held anything back or have a reservoir or additional powerful allegations to draw upon. The short work Judge Guildford made of their multifarious allegations could hardly be encouraging. In addition, Judge Guilford did not even reach the issues of whether the complaint adequately pled misrepresentation or appropriately relied on the group pleading doctrine, holding that his ruling on the scienter issue relieved him of the necessity to reach those other issues.

 

Judge Guilford’s approach in the IMPAC Mortgage case has appeared in a number of the preliminary rulings in the current wave of subprime and credit crisis-related cases. Even though we are still only in the very earliest stages of most of these cases, there have already been a number of cases where courts have been similarly skeptical of plaintiffs’ allegations. Some recent examples include the First Home Builders of Florida ruling (discussed here) or the NovaStar Financial ruling (here).

 

While there have of course been decisions going the other way, these skeptical courts have made it clear that they expect to see more than mere allegations that a mortgage loan portfolio underperformed prior expectations or that the lender’s financial condition has deteriorated. If the early returns are any indication, plaintiffs in many of the subprime and credit crisis-related cases may face similar skepticism in order on their preliminary motions.

 

In any event, I have added the IMPAC Mortgage decision to my table of subprime and credit crisis case dispositions, which can be accessed here.

 

One feature of the current financial turmoil is that the government has taken or will take control of or ownership positions in a number of business organizations. The phenomenon of government ownership of a private enterprise potentially could present any number of conflicts and challenges. Among other problems that may arise is the question of exactly what the government’s role should be with respect to ongoing or future litigation.

 

This particular litigation dilemma is explored in an October 18, 2008 Wall Street Journal article entitled "Fannie Suit Vexes Regulator, May Pay Shareholders" (here). The article states that the securities lawsuit filed in connection with Fannie Mae’s September 2008 collapse puts the government regulatory agency now acting as Fannie Mae’s conservator "in an awkward position." Background regarding the lawsuit, filed on September 8, 2008, can be found here. My prior post about the lawsuit can be found here.

 

The Journal article notes that Freddie Mac settled a prior securities lawsuit for $410 million (about which refer here). Implicitly using the amount of this prior settlement as a point of reference for the possible magnitude of any future settlements of the Fannie Mae lawsuit, the Journal article observes that the "government’s control of Fannie puts taxpayers potentially on the hook for hundreds of millions of dollars of damages stemming from the lawsuit."

 

The Journal article also notes that one of the key elements of the new case will be the government regulator’s 340-page May 2006 report that was highly critical of Fannie Mae. The article notes that "a vigorous defense on Fannie’s part would require rebutting the agency’s own report. An acknowledgement of the report’s veracity could mean admitting wrongdoing and an even bigger payout."

 

The Journal article may well be correct that the government regulator’s role as Fannie Mae’s conservator potentially puts the regulator in an awkward litigation position. But in making this point, the article overlooks a number of important considerations about the lawsuit.

 

First and foremost, the recent lawsuit, unlike the prior Fannie Mae lawsuit, does not in fact name Fannie Mae itself as a defendant. The only defendants named are several present or former directors or officers of the company. Because the company itself is not a defendant, it will find it less awkward to stand by its report than the Journal article suggests.

 

Second, while the May 2006 report may be relevant, it is unlikely to be the centerpiece of the plaintiffs’ case, simply because the report was published nearly a year and a half before the start of the class period alleged in the plaintiffs’ complaint. The complaint purports to assert claims on behalf of persons who bought Fannie Mae shares between November 16, 2007 and September 5, 2008, and the alleged misrepresentations and omissions on which the complaint is based allegedly occurred during that period. The prior report is unlikely to play a role anywhere near as crucial as the Journal article suggests.

 

UPDATE: An observant reader has pointed out the possibiltiy that the Journal article is not referring to the newly filed Fannie Mae lawsuit, but rather is referring to a 2004 lawsuit involving Fannie Mae, in which Fannie Mae is in fact a defendant. Background regarding this prior lawsuit can be found here. On close reading, it appears possible that the Journal article was referring to this earlier lawsuit. To the extent the article was referring to the 2004 lawsuit not the most recenlty filed one, my two prior comments may be inapplicable. However, the following comment remains valid, regardless of which lawsuit the article was referring to. As an aside —  with a publication like the Journal, we really shouldn’t have to wonder  which lawsuit an article is referring to.

 

Third, it remains to be seen what role if any the company or its governmental conservator will play in any eventual settlement. Fannie Mae likely has tens, if not hundreds, of millions of dollars of D&O insurance that at least potentially could respond to this lawsuit. (In making these observations, I emphasize that I have no firsthand knowledge of Fannie’s D&O insurance program.) To the extent the insurance does respond to this claim and to the extent that policy terms and conditions do not otherwise bar coverage, the insurance program, rather than the government itself, would likely fund potential settlements. The Journal article fails to address or even acknowledge this possibility, which potentially could be a critical settlement factor.

 

Notwithstanding these observations, there are legitimate concerns about the possible role of the government regulator in the pending litigation. The essential point of the Journal article – that the government has its own interests– is unquestionable true. Moreover, this concern about diverging governmental interests is true not only with respect to the conduct of litigation alone, but applies broadly to the general conduct of business in the various enterprises in which the government has taken a controlling or an ownership interest.

 

Government Ownership in Private Enterprise: In connection with the various entities and organizations that the government has nationalized in whole or in part in recent weeks, Treasury Secretary Henry Paulson has stated that the government’s role will be passive and apolitical. But, as James Grant, the author of Grant’s Interest Rate Observer, noted in an October 18, 2008 Wall Street Journal essay (here), "the record of the Depression-era Reconstruction Finance Corp. suggests that the government is a shareholder that can throw its weight around. Besides, would Mr. Paulson’s apolitical intentions bind his successor?"

 

Anyone doubting the complicating nature of the government as an owner in private enterprise should consider what has occurred at AIG since the government’s bailout and 79.9% ownership stake was first announced. The incredible scrutiny that AIG has faced regarding severance compensation and marketing expenses clearly demonstrates that the arrival of government control is by no means a friendly embrace.

 

Moreover, AIG’s recent agreement with New York AG Andrew Cuomo, as a result of which, among other things, AIG has "canceled 160 conferences and events" underscores the austere, constrained existence AIG must now sustain under the supervision of its government appointed caretaker/liquidator.

 

I am not defending AIG’s severance compensation payments. However, the problem with the more generalized austerity requirements is that they may be contrary to taxpayers’ larger interests. AIG’s ability to service its interest obligations (which now reportedly amount to $1 billion per month), sell off business units in an orderly way, and repay its debt obligation to the U.S. government is unlikely to be advanced by the prohibition on conferences and events. Politicians’ insistence that the company forbear from ordinary marketing activities will impede the company’s ability to conduct business and potentially could hinder the company’s ability to fulfill its bailout obligation. Unfortunately, grandstanding politicians appear to be a compulsory accessory of governmental ownership.

 

Other companies faced with the prospect of government ownership in exchange for a government bailout might consider the offer at least a mixed blessing, if not an actual poisoned chalice.

 

D&O Insurance: There Will Be Blood: Though the Journal article discussed above may have overlooked the significant potential litigation role of directors’ and officers’ liability insurance, others have not been so remiss. For example, the October 18, 2008 New York Times article entitled "Financial Crisis Provides Fertile Ground for Boom in Lawsuits" (here), expressly cites the availability of insurance as one reason why plaintiffs’ lawyers may be interested in pursuing litigation related to the current credit crisis.

 

The article states that "even companies that have suffered huge losses may still be worth pursuing because of their liability insurance." The article also quotes Stanford Law Professor Joseph Grundfest as saying that "You can’t get blood from a stone. But you sure can get money from the insurance company that covered the stone."

 

Most of the focus on Rule 10b5-1 plans lately has been on possible abuses (refer, for example here). Indeed, one of the reasons the court cited in the dismissal motion denial in the Countrywide derivative lawsuit pending in California was concern about Angelo Mozillo’s possible manipulation of his 10b5-1 plan (refer here). 

 

However, an October 16, 2008 Eighth Circuit opinion in Elam v. Neidorff (here) confirms that corporate officials’ proper use of Rule 10b5-1 plans can still afford a substantial securities lawsuit defense.

 

As discussed more fully here, on July 28, 2006, plaintiffs had initiated a securities class action lawsuit against Centene Corporation and certain of its directors and officers. On June 29, 2007, Judge Catherine D. Perry of the Eastern District of Missouri granted the defendants’ motion to dismiss, on the grounds that "plaintiffs have not met the heavy pleading standard required" by the PSLRA. Judge Perry’s opinion can be found here. The plaintiffs appealed.

 

The Eighth Circuit, in an opinion written by Judge Bobby E. Shepherd, affirmed the district court’s ruling on two grounds. First, the Court held that "the district court properly found that plaintiffs have not adequately pled that defendants’ … statements were false when made." Second, the Eight Circuit held that "the district court properly found that plaintiffs have not met the PSLRA’s standard for pleading scienter."

 

In ruling that the plaintiffs had not adequately pled scienter, the Eighth Circuit considered among other things, the fact that the individual defendants’ stock sales on which the plaintiffs sought to rely had been made pursuant to a Rule 10b5-1 trading plan.

 

The Court’s opinion stated (citations and internal quotations omitted):

 

Neidorff and Witty each sold a portion of their personal holdings of Centene stock in April 2006 pursuant to Rule 10b5-1 trading plans, in place since December 2005. The sales constituted 5.3 percent of Neidorff’s unrestricted holdings and 2.4 percent of Witty’s unrestricted holdings. Stock sales pursuant to Rule 10b5-1 trading plans can raise an inference that the sales were prescheduled and not suspicious. This is particularly true where, as here, the stock sales at issue represent only a small portion of each seller’s overall holdings. Accordingly, no inference of scienter arises from Neidorff’s and Witty’s April 2006 stock sales.

 

The Eighth Circuit’s opinion is a reminder that, notwithstanding the concerns that recently have been raised about possible Rule 10b5-1 plan abuses, proper trading plans can afford substantial protection and can permit company officials to trade in their shares in company stock without fear that the trades might later serve as the basis of liability under the federal securities laws.

 

As examples of trading plans that successfully averted any scienter inference, the Centene officials’ plans merit a closer look.

 

The Eighth Circuit stated that the individual defendants’ trading plans "lay out in advance the dates at which the trade will be made in advance and give control of the trades to a broker." The District Court’s dismissal opinion stated further that the plaints "provided for automatic sales on certain dates if the stock price was above $25." The only sales made under the plans, which were instituted in December 2005, were two in February and April 2006. "There were no later sales, not because defendants halted the program, but because the stock price never reached the $25 mark."

 

The critical aspects of the plan appear to have been, first, that the officials entered the plan in advance; second, that the plan specified the trading dates, but subject further to a specified trading price: three, that the trading on those dates, if the price criterion was met, was automatic; and fourth, that a broker controlled the trades. It does not seem to have mattered that the officials did not trade regularly under their plans, because of the minimum share price requirement.

 

It is probably important to note that the plan lacked many of the attributes that recently have drawn negative attention to these kinds of plans. That is, the Centene officials’ plans were not changed, nor were the plans stopped and started; and the individuals were not running multiple plans.

 

Amidst the negative publicity that recently has surrounded Rule 10b5-1 plans, the Eighth Circuit’s opinion is a useful reminder that Rule 10b5-1 plans can and should be a part of a coordinated securities litigation loss prevention program. A comprehensive (although now slightly dated)overview of securities litigation loss prevention in general can be found here.

 

The 10b-5 Daily blog has a post relating to the Eighth Circuit’s opinion here, as does the Securities Docket, here.

 

Not Exactly Lou Gehrig’s Farewell Speech, But Still Entertaining: If you have not yet seen the October 17, 2008 farewell letter from Andrew Lahde of Lahde Capital Management, you will want to refer here. Lahde, one of whose funds returned 870 percent last year by betting against subprime mortgages, decided to close down his funds and return money to investors after concluding that the danger of losing money from a bank collapse was too high.

 

Lahde claims that he wrote his farewell letter "not to gloat" — but darned if his letter nevertheless doesn’t sound an awful lot like gloating (except for the part where he is advocating the legalization of marijuana). The letter is worth reading in full for its entertainment value, but among the highlights is the following single-finger salute to his now-former competitors and counterparties:

 

The low hanging fruit, i.e., idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

 

Lahde also suggests the institution of a forum (perhaps to be funded by George Soros) to "create a new system of government that truly represents the common man’s interest, while at the same time creating rewards great enough to attract the best and the brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. The forum could be similar to the one used to create the operating system, Linux."

 

Wikigovernment. Cool.

 

Special thanks to Peter Schwartz of the Wired Mosaic blog (here) for bringing Lahde’s letter to my attention.

 

When the various broker dealers and investment banks recently announced their agreements with government regulators to buy back auction rate securities, the announcements raised questions about the continuing need for the pending auction rate securities litigation. But, at least based on a recently filed lawsuit, it now appears that the settlements may have opened the door for a whole new round of securities litigation related to the settlements themselves.

 

On October 3, 2008, plaintiffs’ lawyers initiated a securities class action lawsuit in New York (New York County) Supreme Court on behalf of investors who purchased bonds and preferred securities in various offerings conducted pursuant to Merrill Lynch’s March 31, 2006 shelf registration. A copy of the complaint can be found here. The complaint, which asserts claims under Sections 11, 12 and 15 of the ’33 Act, names as defendants Merrill Lynch and related entities; certain current and former Merrill Lynch directors and officers; the underwriters that conducted the various offerings; and Merrill Lynch’s auditor.

 

The complaint alleges that the offering documents "misstated Merrill’s financial condition and failed to disclose that the Company bore massive exposure to losses from investments tied to subprime and other mortgages, and was responsible for significant liability arising from its participation in the market for auction rate securities (ARS). Further Merrill improperly valued mortgage-backed assets on its books, and failed to account for its contingent obligations in the ARS market."

 

The complaint alleges that as a result of later disclosures about the company’s "true financial condition," the value of the securities sold in the referenced offerings declined materially. The complaint specifically refers to, regarding the company’s true financial condition, Merrill Lynch’s August 7, 2008 announcement (here) that "it would repurchase $12 billion in ARS from investors due to the failure of the ARS market."

 

Merrill Lynch previously was the target of what I will call a "conventional" auction rate securities lawsuit. Background regarding this prior lawsuit can be found here and regarding the prior auction rate securities lawsuits generally can be found here.

 

This new Merrill Lynch lawsuit complaint differs from the prior conventional auction rate securities lawsuit in a variety of ways. The most important distinction is who is represented in the plaintiff class. The prior auction rate securities lawsuits were brought on behalf of auction rate securities investors – that is, the people who bought the actual auction rate securities. The plaintiffs in the Merrill Lynch lawsuit are not persons who bought auction rate securities, but who bought Merrill Lynch’s own securities in the referenced offerings.

 

The misrepresentations alleged are different as well. In the conventional auction rate securities lawsuits, the allegation is that the risks of the auction rate securities were insufficiently disclosed. In this new lawsuit, the allegation is not about the risks of auction rate securities themselves, but rather that Merrill Lynch did not disclose its own susceptibility to contingent liability in connection with its issuance or sale of the auction rate securities.

 

One other peculiarity of the prior auction rate securities lawsuits is that those suits generally did not name any individual defendants. The new Merrill Lynch complaint names a couple of dozen individual defendants, as well as several dozen offering underwriters.

 

Given the number and identities of the various defendants, this lawsuit will keep a lot of lawyers employed for a long time. Among the preliminary issues on which the lawyers will be engaged is the court’s subject matter jurisdiction. The plaintiffs elected to file their lawsuit in state court pursuant to the concurrent jurisdiction provisions in Section 22 of the ’33 Act. The defendants undoubtedly will seek to remove the lawsuit to federal court, and the plaintiffs in turn will seek to have the case remanded to state court.

 

As I noted in a prior post (here), the Ninth Circuit recently upheld the decision of the district court in the Luther v. Countrywide case to remand a ’33 Act case back to state court, where it originally had been filed before being removed to federal court. However, as the 10b-5 Daily blog recently noted (here), a judge in the Southern District of New York refused to remand New Jersey Carpenters Vacation Fund v. Harborview Mortgage Loan Trust, which had been removed to federal court. Among other things the court in the Harborview case held that the provisions of the Class Action Fairness Act trumped the jurisdictional provisions of the ’33 Act.

 

In view of the fact that the new Merrill Lynch case likely will be remanded to the Southern District of New York (the same court in which the Harborview case is pending), it will be interesting to see whether the plaintiffs are able to have the case remanded back to the New York state court where they initially filed the new Merrill Lynch complaint.

 

As I have previously noted, along with the question whether or not a ’33 Act case properly can be removed to federal court is the more practical question of why the plaintiffs want to proceed in state court in the first place. Some day someone will explain to me why the plaintiffs’ bar suddenly has developed this fascination with pursuing ’33 Act claims in state court. Is it, as I have supposed, an effort to circumvent the procedural requirements of the PSLRA?

 

In any event, I have added the new Merrill Lynch complaint to my running tally of subprime and credit crisis-related securities lawsuits, which can be accessed here. With the addition of the new lawsuit, the current tally now stands at 125, of which 85 have been filed in 2008. Of these, 21, including the new Merrill Lynch lawsuit, are auction rate securities lawsuits.

 

Motion to Dismiss Granted in Subprime Securities Lawsuit: On September 29, 2008, Judge John Steele of the Middle District of Florida granted the defendants’ motion to dismiss, without prejudice, in one of the more unusual subprime related securities lawsuits. A copy of the opinion can be found here.

 

As detailed here, the plaintiffs allege that the defendants (First Home Builders of Florida and two residential real estate brokerage firms, as well as successor entities), in violation of the federal securities laws, had fraudulently induced plaintiffs to purchase real estate investment properties by promising that defendants would procure lease-to-own tenants for the investors’ properties; that the tenants rental payments would cover all of the investors’ out-of-pocket costs; and that investors would receive a guaranteed 14% return on the investment in the first year.

 

Judge Steele granted the defendants’ motion to dismiss, ruling that as a result of the plaintiffs’ failure "to allege who made what misrepresentations," the plaintiffs’ fraud allegations failed to meet the pleading requirements of Rule 9(b). Judge Steele declined to rule on the plaintiffs’ group pleading theory. He allowed plaintiffs 30 days to file an amended complaint.

 

I have added the First Home Builders of Florida dismissal to my table of subprime and credit crisis-related lawsuit case dispositions, which can be accessed here.

 

Special thanks to Adam Savett of the Securities Litigation Watch blog (here) both for the Merrill Lynch complaint and for the opinion in the First Home Builders of Florida case.

 

Note from Ohio: I want to know how the Saturday Night Live scriptwriters managed to get the whole  "Joe the Plumber" schtick inserted into tonight’s actual Presidential debate. But the one thing I do know is that after tonight’s debate, my fellow Ohioan, Joe the Plumber, is moving to Canada, where he will be left in peace because their national election is already finished.

 

In what is as far as I am aware the first class action settlement in the current wave of subprime-related securities lawsuits, on October 14, 2008, WSB Financial Group announced (here) that it had entered into a settlement agreement of the class action lawsuit pending against the company and certain of its directors and officers.

 

 

As detailed in greater length here, on October 30, 2007, plaintiffs’ lawyers’ had initiated a securities class action lawsuit in the Western District of Washington. A copy of the plaintiffs’ consolidated complaint can be found here.

 

 

WSB Financial Group is the parent company of Westsound Bank. The lawsuit alleged that the offering documents associated with the company’s December 21, 2006 IPO contained material misrepresentations or omissions. Among other things, the complaint alleges that the offering documents stated that the company “focused on originating and maintaining a high-quality loan portfolio and had rigid underwriting policiesdesigned to ensure the credit quality of the Company’s portfolio. In reality, however, WSB Financial originated hundreds of high-risk loans in violation of the Company’s stated policies for a total amount of at least $90 million.”

 

 

In its October 14 press release, the company stated that the parties had agreed to a settlement of $4.85 million. The press release also states that the company’s D&O insurance policy would contribute $4.45 million toward the settlement and had previously contributed approximately $350,000 toward the cost of the settlement. The proposed settlement is subject to court approval.

 

 

As a relatively small settlement of one of the smaller, lower profile cases in the current litigation wave, this settlement is likely to have relatively little direct influence on other pending cases. The significance of this settlement may simply be that it has happened at all. With so many of the subprime and credit crisis-related cases only in their earliest stages, the likelihood of settlements emerging seemed like a distant prospect. It may yet be a considerable time before the higher profile cases move toward the settlement stage, even assuming they survive preliminary motions. This settlement suggests that at least some cases will move more quickly toward resolution.

 

 

Nevertheless, anyone who thinks that the current litigation morass might quickly be cleaned up may need to curb their enthusiasm. An October 13, 2008 Law.com article entitled “New Wave of Class Actions Filed in Wake of Subprime Collapse” (here) quotes a plaintiffs’ securities class action attorney as saying that he anticipates that subprime litigation “will keep us busy for seven or eight years.”

 

 

In any event, I have added the WSB settlement to my table of subprime and credit-crisis related case dispositions, which can be accessed here.

 

 

A Different Approach: In our country, the most important issue in any crisis is figuring out who to blame. Refined distinctions are not a necessary part of this blame assignment process, and blame can be assigned indiscriminately. (If you doubt this assertion, please refer to the public statements of any U.S. politician during the current financial turmoil.) Our transatlantic cousins apparently take a different approach, which I must say has much to recommend it.

 

 

According to an October 14, 2008 Law.com article (here), the nationalized British lender Northern Rock has announced that it will not bring legal action against its former directors and officers, after having concluded that "there are insufficient grounds to proceed with a negligence action against the ex-directors." The article also reports that "the bank’s auditors are off the hook."

 

When, as has been the case recently, there is a single predominant story, there also is a danger that other important developments may be overlooked. The subprime and credit crisis meltdown and related litigation has been so preoccupying that almost nothing else has broken through the noise.

 

However, a recent casual observation made me go back and take a closer look at latest securities class action lawsuit filings. I was surprised to observe that, at least by one measure, a majority of recent filings are unrelated to the credit crisis.

 

What initially caught my eye was the recent flurry of litigation filing activity involving life sciences companies. Just since September 23, 2008, four life sciences companies have been sued in securities class action lawsuits:

 

1. Spectranetics: On September 23, 2008, plaintiffs’ lawyers initiated a securities class action lawsuit in the District of Colorado against Spectranetics, a medical device manufacturer, and certain of its directors and officers. As reflected more fully here, shareholders filed the suit after the company’s stock price declined following publicity relating to the company’s alleged involvement in customs’ law violations.

 

2. Medicis Pharmaceuticals: On October 3, 2008, plaintiffs’ lawyers filed a securities class action lawsuit in the District of Arizona against Medicis Pharmaceuticals, a specialty pharmaceutical company, and certain of its directors and officers. As described here, the lawsuit followed the company’s announcement that it would be restating its annual and quarterly financial statements for the period 2003 through 2007, due to the company’s sales return reserve calculation.

 

3. Biovail: On October 8, 2008, plaintiffs’ lawyers announced that they had filed a securities class action lawsuit against Biovail, a specialty pharmaceutical company, and certain of its directors and officers, following disclosures of issues involving one of the company’s developmental stage drugs. The plaintiffs’ lawyers’ October 8 press release can be found here.

 

4. Elan Corp.:  On October 14, 2008, plaintiffs’ lawyers initiated a securities class action lawsuit in the Southern District of New York against Irish biopharmaceutical company Elan Corp. and certain of its directors and officers alleging that the company failed to disclose unfavorable results in Phase II clinical trials of a compount the company is developing to be used to treat patients suffering from Alzheimer’s disease. A copy of the plaintiffs’ lawyers’ October 14 press release can be found here.

 

 

Obviously, none of these lawsuits has anything directly to do with the turmoil in the financial markets that has been dominating the headlines. Nor are these cases the only securities lawsuits filed in recent weeks that are unrelated to the financial meltdown.

 

A review of the securities lawsuit filings during September 2008 reveals that a majority – 14 out of 24 – of the September filings were not directly related to the credit crisis. Moreover, the case filings spread across a wide variety of kinds of companies, including children’s apparel (Carter’s, about which refer here), gas exploration and development companies (Quest, refer here) and computer graphics, (NVDIA, refer here).

 

There was a flurry of activity in September involving companies in the wireless industry. The September filings included lawsuits against wireless broadband companies NextWave Wireless (refer here) and Novatel Wireless (refer here), and a wireless network management software company, Harris Stratex (refer here).

 

But whether or not there is any significance to this flurry of lawsuits involving companies in the wireless industry, or to the flurry of lawsuits noted above involving life sciences companies, the most noteworthy point is that these lawsuits are not related to the credit crisis, and that many of the other recent filings similarly are unrelated to the credit crisis.

 

There is no doubt that the most significant factor in the overall increase in securities litigation activity in recent months has been the subprime and credit crisis related litigation. But merely because this litigation has been the most important factor does not mean that it is the only factor. There has been a significant amount of securities litigation activity unrelated to the subprime meltdown and the credit crisis. Focusing exclusively on the credit crisis-related litigation could result in overlooking the other important securities lawsuit filing developments.

 

Although the plaintiffs’ lawyers have been quick to pursue claims from the credit crisis, they have not done so to the exclusion of all other activities. Indeed, the plaintiffs’ bar continues to pursue other kinds of claims, and so merely because a company has not been directly affected by the credit crisis does not by itself mean that the company is free from securities litigation exposure in the current environment.

 

A Note About Lawsuit Counts: There are two cases that complicate how the September 2008 filings are categorized. As I have previously noted (here and here), the lawsuit filings involving The Reserve Group and Constellation Energy do not directly arise out of the subprime meltdown or credit crisis. However, as explained more fully in my prior posts, these cases arguably represent a "second derivative" of the credit crisis.

 

At the same time, it should be noted that the Stanford Law School Securities Class Action Clearinghouse, employing a strict definition, did not categorize these two cases as subprime related. I have noted on this blog in the past the difficulties involved with "counting" these lawsuits as the subprime litigation wave has evolved. But, in any event, the statement above that the majority of September securities lawsuit filings were not related to the credit crisis, uses the Stanford website’s categorization, which I suspect also reflects a more common understanding.

 

A Final Note: The essential thrust of this blog post depends on the assumption that the distinction between cases that are and are not credit crisis-related is readily apparent. However, as the credit crisis becomes more generalized and if there is a significant downturn in the larger economy, there may be an eventual convergence of the two categories, as all companies become subject to the general downturn.

 

If the entire economy is suffering the effects of the unavailability of credit, the litigation that follows may no longer be susceptible to the categorization I have been trying to maintain. The possibility of this development is one more reason to maintain a broader perspective across all of the ongoing litigation activity.

 

Déjà vu All Over Again: Biovail, a Canadian corporation, is no stranger to U.S.-style securities class action litigation. As reflected here, the company was the target of a 2003 securities class action lawsuit that ultimately settled for $138 million. The settlement was just finalized on August 8, 2008, exactly three months before the filing of the most recent securities lawsuit against the company. (UPDATE: As a result of the reader comment, I relaize the prior sentence should say that the new lawsuit was exactly TWO months to the day from the finalization of the prior dismissal. I stand corrected!)

Similarly, Elan, a company domiciled in Ireland, has been the target of two previous securities class action lawsuits, refer here and here.