In prior posts (most recently here), I have written about the increasing importance of opt-out settlements in the context of securities class action litigation. Along the way, numerous readers have inquired whether I am aware of a publicly available resource that is tracking the securities lawsuit opt-out settlements. I am not aware of any public resource, but because there clearly is an interest in having this information available, I have gone ahead and compiled all of the opt-out settlement information of which I am aware. My list of the opt-out settlements can be found here.

Readers should understand that the opt-out information I have compiled is necessarily limited to the settlements of which I am aware and is limited to publicly available information. The information is also limited to recent prominent securities lawsuit opt out settlements; there may well be earlier or other cases that had opt out settlements of which I am simply unaware. As a result, the information on the linked document is undoubtedly incomplete. I welcome any additional information that any readers would be willing to provide, and I will endeavor to keep the data updated as new or additional information becomes available.

My most recent comprehensive overview of the opt-out settlements generally can be found here. My recent post detailing the Qwest opt-out settlements can be found here. Readers should be further aware that virtually all of the opt-out settlements identified in the linked document have been described or at least mentioned in prior posts on this blog, and these prior discussions can be retrieved by using the search box in the upper left hand corner of the blog home page.

Options Backdating Settlement: On January 4, 2008, Nabors Industries announced (here) that it had entered a settlement agreement in connection with the consolidated options backdating-related shareholders derivative lawsuit that had been filed against the company and certain of its directors and officers in the Southern District of Texas. In connection with the settlement, Nabors Industries agreed to "certain corporate governance reforms, a new equity award policy, and a modified Compensation Committee Charter." The company and its insurer also agree to pay up to $2.85 million to plaintiffs’ counsel for the plaintiffs’ attorneys’ fees and expenses.

I have added the Nabors Industries settlement to my list of options backdating lawsuit dismissals, denials and settlements, which can be accessed here.
International Corporate Governance: Over at the Race to the Bottom blog, an excellent blog that I follow regularly, University of Denver Professor J. Robert Brown is running a series of blog posts (beginning here) taking a look at corporate goverance standards and issues in countries other than the United States, drawing on student research. So far, the blog series has featured posts on Norway and Board Diversity (here), and the first part of a two-part post on Corporate Governance and the United Kingdom (here). This series promises to be very informative and we look forward to following its progress.

In prior posts (most recently here), I noted that even during the two-year lull in securities lawsuits filings that prevailed between mid-2005 and mid-2007, filings against life sciences companies – and pharmaceutical companies in particular – continued more or less unabated. More recently I noted (here) that pharmaceutical companies in the Standard Industrial Classification Code category 2834 represented one of the two most frequently sued categories of companies among the 2007 securities lawsuits. Because of this heightened lawsuit frequency involving life sciences companies, it seems worthwhile to take a closer look at the 2007 life sciences securities lawsuits.

First a word about categorization. For purposes of this post, I am including under the heading "life sciences" any company in either SIC Code series 283 (Drugs) or SIC Code series 384 (Surgical, Medical and Dental Instruments and Supplies). Reasonable minds might differ about whether additional categories should be included, but I decided to go for simplicity here.

Companies within the SIC Code series 283 were particularly hard hit in 2007, especially companies in the 2834 SIC Code (Pharmaceutical Preparations), within which 14 companies were sued in 2007. In addition, two companies in SIC Code 2836 (Biological Products) and one company in SIC Code 2833 (Medicinal Chemical and Botanical Products) were also sued, bringing the total number of companies sued in 2007 from SIC Code Series 283 to 17. These 17 lawsuits compare to eight lawsuits in the SIC Code Series 283 among the 2006 securities lawsuits.

There were four companies sued in SIC Code series 384, including two within SIC Code 3841 (Surgical and Medical Instruments) and two within SIC Code 3845 (Electromedical and Electrotherapeutic Apparatus).

The 21 total lawsuits against companies in these two SIC Code series categories means that lawsuits against life sciences companies represent roughly 12% of the 172 securities lawsuits filed in 2007. (Refer to my prior post here for a description of the data I am using in my analysis). This compares to 34, or slightly less than 20%, of the 2007 securities lawsuits related to the subprime meltdown. As I have said before, the subprime lawsuits were an important factor but by no means the only important factor in the increase of securities lawsuit filings in 2007.

The 2007 securities lawsuits against life sciences companies involved a wide variety of allegations. By far the most common contention is the allegation of unexpected or undisclosed set-backs in the regulatory or clinical trial process, which was raised against nine of the 21 life sciences companies sued. The next most prevalent type of allegation was related to disclosures surrounding product safety (five companies).

Other allegations included slowing sales or missed projections (two companies), misrepresentations regarding product efficacy (one company), disclosure of a criminal investigation (one company), failure to disclose merger-related information (one company), misrepresentations or omissions regarding sales practices (one company), and misrepresentations regarding the status of regulatory approvals (one company).

Of the 21 life sciences companies sued in securities lawsuits in 2007, five are foreign-domiciled, including two from France, and one each from Germany, Switzerland and the U.K.

As I noted in my prior posts regarding pharmaceutical company lawsuits (here), while life sciences companies have proved to be popular targets for plaintiffs’ lawyers, they have not always proved to be easy targets. Many of the past securities lawsuits against pharmaceutical companies have been dismissed. The dismissal levels may have something to do with the prevalence of allegations regarding regulatory or clinical trial setbacks. While these setbacks may indeed rock the companies’ stock prices, these kinds of setbacks are an almost inevitable attribute of the regulatory and scientific environment in which these companies operate. These risks are often comprehensively disclosed, creating a particular challenge for plaintiffs’ attorneys.

While it is far too early to tell how the 2007 securities lawsuits against life sciences companies will fare, it will be interesting to monitor these cases to see how many go forward beyond the motion to dismiss stage.

The Return of the "Club Deal" Antitrust Case: According to news reports (here), plaintiffs’ lawyers have filed an antitrust lawsuits against the leading private equity firms and investment banks, alleging that the 13 defendants conspired to fix prices in connection with seven specific private equity "club deals" between 2004 and 2007. In fall 2006, a different set of plaintiffs lawyers had originally filed a complaint in the Southern District of New York raising substantially similar allegations, but they withdrew their complaint after the U.S. Supreme Court handed down its May 2007 opinion, specifying a heightened pleading standard for antitrust cases, in Bell Atlantic v. Twombley. The new plaintiffs’ counsel apparently feels they can meet the Twombley standard.

The new complaint, which can be found here, was filed in the District of Massachusetts, and alleges that the large buyout firms conspired to keep acquisition prices low by "clubbing together" rather than competing on large buyout deals. The private equity firm defendants include, for example, Bain Capital, Blackstone Group, KKR, and Thomas H. Lee Partners. The seven specific deals referenced in the complaint include Kinder Morgan, HCA and Freescale Semiconductor. The lawsuit also targets investment banks for the conflicted role they allegedly sometimes play as both advisers to the target companies and as lenders (or even co-investors) to or with the acquirers.

Special thanks to Ned Kirk of the Sedgwick Detert firm for a link to the news reports and for a copy of the Complaint.

Need for Speed: If you not yet seen it, you have to read the Wired Magazine article entitled "The Pedal-to-the-Metal, Totally Illegal, Cross-Country Spring for Glory" (here), which tells the tale of Alex Roy, who is consumed by a passion to recreate Cannonball Run and set the speed record for driving between Manhattan and Santa Monica (a feat Roy accomplished in an astonishing 31 hours and 4 minutes). You have to read it to believe it.

Special thanks to new reader Michael Barker the link to the article.

On January 3, 2008, State Street Corporation announced (here) that for the fourth quarter of 2007, it will be establishing a reserve of $618 million, on a pre-tax basis, "to address legal exposure and other costs associated with the underperformance of … fixed-income strategies managed by… the company’s investment management arm." The net charge to the company, "after taking into account the tax effect of the reserve and associated lower incentive compensation cost" will be $279 million.

In its January 3 press release, the company did not identify the specific litigation to which the reserve will relate; rather, the company referenced only "customer concerns as to whether the execution of [the fixed-income strategies] was consistent with the customers’ investment intent." The press release goes on to state that the strategies "were adversely impacted by exposure to, and the lack of liquidity in, subprime mortgage markets."

A January 4, 2007 New York Times article entitled "State Street Corp. Is Sued Over Pension Losses" (here) states that State Street decided to create the reserve "after five clients sued it, claiming they had lost tens of millions of dollars in State Street funds they were told would be invested in risk-free debt like Treasuries." The Times article briefly identifies four of the claimants, but adds that "it was unclear who brought the fifth suit."

Because of the possibility that, as stated in the Times article, that State Street’s litigation and related reserve "highlight the legal challenges that lie ahead for financial firms," it would appear to be worthwhile to review here the five State Street lawsuits. The value of this exercise is underscored by the perception (which I share) voiced by one commentator quoted in the Times article that "there could be many, many more" lawsuits like those against State Street.

The first of the five lawsuits was brought on October 1, 2007 by Prudential Retirement Insurance and Annuity Company. (I previously posted about the Prudential lawsuit here.) A copy of the Prudential complaint can be found here. According to Prudential Financial’s October 1, 2007 filing on Form 8-K (here), the action "seeks, among other relief, restitution of certain losses attributable to certain investment funds" sold by State Street’s investment management arm, and alleges that State Street "failed to exercise prudent investment management." The specific legal basis of Prudential’s claim is that State Street and its investment arm violated the Employee Retirement Income Security Act of 1974 (ERISA).

The complaint alleges that the defendants "radically altered" the investment strategies of two bond funds, the Intermediate Bond Fund and the Government Credit Bond Fund. The complaint alleges that the funds "took undisclosed, highly leveraged positions in mortgage-related financial derivatives" and thereby "exposed" the funds to "an inappropriate level of risk" that during the summer of 2007 "produced catastrophic results." The complaint further alleges that as these events unfolded the defendants provided "untimely, incomplete and misleading information."

The Prudential complaint alleges that the defendants caused losses of "roughly $80 million" to assets held by about 165 retirement plans for which Prudential is responsible, affecting approximately 28,000 plan participants. The complaint seeks restitution and compensation for the investor losses (which Prudential has, according to an October 2, 2007 Wall Street Journal article, here, already reimbursed). The complaint also seeks recovery of fees and other amounts the defendants’ received, as well as recovery of the plaintiff’s attorneys’ fees.

Of the five lawsuits against State Street in connection with which the company established its litigation reserve, three others (in addition to the Prudential lawsuit) allege violations of ERISA. The first of these three other ERISA lawsuits was brought on October 17, 2007 by Unisystems and the trustee of the Unisystems Employees’ Profit Sharing Plan. A copy of the Unisystems amended complaint can be found here. (My prior post about the Unisystems complaint can be found here.)

The second of the three other ERISA lawsuits was brought on October 24, 2007 by the Composite Pension Trust of Nashua Corporation. A copy of the Nashua complaint can be found here.

The third of the three other ERISA lawsuits (and the fourth of the five total lawsuits brought against State Street) was brought on October 31, 2007 by the plan administrator and the trustee of the Employees’ Savings and Profit Sharing Plan of the Andover Companies. A copy of the amended Andover Complaint can be found here.

The fifth of the five lawsuits against State Street (which is also the lawsuit which the Times was unable to identify) was brought on November 5, 2007 in Harris County, Texas, District Court by Memorial Hermann Healthcare System. On December 3, 2007, the defendants removed the Memorial Hermann complaint to the Southern District of Texas. A copy of the removal petition, to which the initial state court complaint is attached, can be found here. Unlike the four other State Street lawsuits, the Memorial Hermann complaint does not allege a violation of ERISA. Instead, the complaint asserts against the State Street defendants a variety of state law claims, including breach of contract, fraud and negligent misrepresentation.

The Memorial Hermann complaint essentially alleges that the State Street defendants breached an "Agreement of Trust" to serve as trustee of nearly $91 million in the plaintiff’s assets. The assets allegedly were invested in the State Street Limited Duration Bond Fund, which the complaint alleges lost 37 percent of its value during three weeks in August 2007, and 42 percent of its value for the 2007 year. The losses allegedly were the result of "unjustified investments in mortgage securities without diversification and using derivatives, all contrary to the stated Investment Objectives and representations."

UPDATE: In a later post, I discuss (here) a sixth lawsuit that has been filed against State Street.

The State Street lawsuits are significant in and of themselves, but also for what they might foreshadow. As I noted above, these lawsuits may well represent the kinds of legal problems that other financial services companies may face, particularly as the mortgages backing many of these investment funds and investment securities continue to detiorate.

There are a number of other important implications from the State Street lawsuits. The first relates to the identity of the claimants – these are very large institutions suing other very large institutions. These lawsuits are not the kind of lawyer-driven stock drop lawsuits that have drawn so much ire from would be reformers. These are conservative business litigants using plaintiffs’ tools seeking to recoup significant losses. These sophisticated litigants may be unlikely to accept quick compromises, and, mindful of their own fiduciary obligations, may well be unwilling to accept any compromise that does not represent a very significant percentage of the losses.

The second important implication of the State Street lawsuits is the sheer magnitude of the dollars involved, as demonstrated by State Street’s pre-tax set aside of $618 million for cases that are only in their earliest stages. The State Street litigation reserve underscores the staggering exposures that these cases and others like it represent. The stakes in these cases are enormous.

The third implication derives directly from the enormity of the financial exposures involved; that is, these cases clearly have very serious repercussions for liability insurers, a consideration discussed in a January 4, 2008 Dow Jones newswire article entitled "Subprime Litigation May Dent D & O Insurers Like Chubb, AIG" (here). The article’s overall conclusion – that the subprime litigation wave may represent a significant concern for D & O insurers – is a valid point that I have in fact previously considered in a prior post (here). However, while I generally agree with the Dow Jones article’s overall thrust, I do disagree with some the article’s premises.

The most egregious of the article’s faulty premises is that the State Street lawsuits represent a D & O insurance exposure. The article disregards the fact that four of the five State Street lawsuits are brought under ERISA. The typical D & O policy contains an ERISA exclusion, primarily because exposures under ERISA are covered under a separate fiduciary liability policy, not a D & O policy.

In addition, none of the five complaints name as a defendant any individuals; there are no director or officer defendants in any of these complaints (although there are John Doe defendants named without further identification in several of the complaints). The entity coverage under the typical D & O policy provide coverage only for securities claims against insured entities, and none of the five complaints raise securities law allegations.

So, contrary to the Dow Jones article’s presumption, the State Street complaints do not themselves appear to embody any particular D & O insurance threat, as in their current forms at least, they would not appear implicate the typical D & O insurance policy. To be sure, the complaints may represent serious threats to fiduciary liability insurers and perhaps even to investment management errors and omissions (E & O) insurers, and to that extent the implication would seem to be that the subprime litigation wave represents a much more extensive threat to the insurance industry beyond just D & O. All of which does indeed suggest that the subprime litigation wave is a potentially complex and serious threat to insurers generally. To that extent, at least, the Dow Jones article is correct when it states that State Street’s reserve "has increased concern that insurers offering policies covering such exposures could be hit with big claims from the credit crisis."

In any event, I do agree that the subprime litigation wave represents a threat to the D & O insurers, even if the State Street lawsuits themselves may not. My prior blog posts on the potential impact on D & O insurers from the subprime meltdown can be found here and here; even though I wrote these posts months age, the analysis still appears more or less valid.

It should also be noted that there have been a number of other subprime related lawsuits brought under ERISA, primarily by employees raising allegations relating to company stock held in the 401(k) plans. A list of these employee ERISA lawsuits may be found in my running tally of subprime-related litigation, here.

The January 6, 2007 New York Times has an article entitled "Testing Investors’ Faith in State Street" (here) that examines the market’s curious reaction to State Street’s announcement concerning its litigation reserve — its stock price went up, hitting a 52-week high, a response that Times columnist Gretchen Morgenson is at a loss to explain.

Now This: The American Dialect Society has chosen (here) "subprime" as the 2007 Word of the Year. Pondering this development, I was moved to reflect that the subprime meltdown has moved beyond a mere financial event; it has become a cultural, social, and even political phenomenon.

Like all important phenomena, the subprime meltdown has deep roots, which arguably go back to the early 80s when the market for mortgage securities was more or less invented at Salomon Brothers, as entertainingly retold in Michael Lewis’s classic, Liar’s Poker. Though the events described in Lewis’s book took place over twenty years ago, they resonate now with irony and sometimes even ominous portent, although much of the current resonance was perhaps unintended when the words were originally written.

The most portentous segments detail the creation in the mid-80s of the recently eventful mortgage security, the collateralized mortgage obligation (CMO), about which Lewis notes, in words that contemporary investors in Norway, Japan, Australia and the U.K might now rue, that "CMOs opened the ways for international investors who thought American homeowners were a good bet." Lewis also notes, in an observation that seems particularly ironic today, that that as a result of the innovation of CMOs, "investors now had a new, firm idea of what the price of a mortgage bond should be." Lewis goes on to describe how the Wall Street Bankers "found a seemingly limitless number of ways to slice and dice home mortgages."

Space constraints prevent doing full justice to Lewis’s account, so fraught with significance in light of today’s circumstances. Suffice it to say that given recent events, Liar’s Poker merits and rewards a re-reading. It is as entertaining as it ever was, but the description of the invention of the market for mortgage bonds seems to matter in ways that it did not previously.

Special thanks to loyal reader Matt Rossman, who pointed out Liar’s Poker’s newly relevant historical value some time ago – I only recently got around to following up on Matt’s suggestion to re-read the book.

Chinese Checkered: In an earlier post (here), I reviewed the recent checkered track record of Chinese companies listed on the U.S. securities exchanges, including in particular Chinese IPOs. A December 2007 Dewey & LeBoeuf article entitled “China’s Top Ten at the Corporate Governance Bottom” (here) sounds many of the same themes as my prior post.

The article notes that “the ten largest Chinese companies trading in the U.S. rate poorly when it comes to corporate governance.” The article cites research showing that the ten companies have “an average rating of 0.5 stars for corporate governance, with five being the highest rating and three being average.” Five of the companies received “0” ratings for corporate governance.

Among the reasons for the low ratings is a NYSE guideline allowing “foreign private issuers” to follow their home country governance rules. Because China does not require that a majority of directors to be independent, “Chinese companies listed on the NYSE are allowed to stack the board with inside directors.”

In addition, that article notes, “lack of strong outside oversight” can lead to problems “when it comes to transfer pricing, related-party transactions, intergroup guarantees, tax rates, and the valuation of contingent liabilties.” The control role of the Chinese government in these companies’ ownership and operation can “lead to considerable pressure,” because “these large companies are instruments of state policy.”

There may be a view that the exchanges’ allowances for Chinese companies are indispensable if the U.S. financial markets are to attract these and other overseas listings. And it may well be argued that the governance concerns, which reflect the biases of U.S. expectations, are merely components of the market information that should be taken in to account in the companies’ valuations.

At a minimum, these considerations certainly do argue in favor of a more cautious approach to Chinese companies, both for investors and D & O underwriters alike. As I noted in my prior post, a disproportionate number of Chinese companies have become involved in securities litigation in the U.S.. a fact that may not be unrelated to the governance concerns.

Changing Environment for Climate Change Disclosure: In prior posts (here and here), I have reviewed the changing circumstances surrounding environmental disclosures, particularly as relates to global climate change. A January 2008 McKenna, Long & Aldridge article entitled “The SEC is Getting Hot and Bothered Over Climate Change” (here) takes a detailed look at the current and proposed requirements that potentially could affect public companies’ disclosure obligations relating to global climate change.

The article’s conclusions are that “publicly traded companies can expect scrutiny of their SEC filings to increase” and that “companies that have yet to squarely confront the question should consider taking a closer look at future filings.”

Apollo Group Securities Lawsuit Trial Wrapping Up: In recent posts (most recently here), I discussed the JDS Uniphase securities lawsuit trial, which, on November 27, 2007, resulted in a jury verdict in the defendants’ favor. The JDSU trial was noteworthy because trials in securities cases are so rare. But as I also noted that there was, coincidentally, another securities trial, involving Apollo Group, going on at the same time.

Adam Savett reports on his Securities Litigation Watch blog (here) that the plaintiffs in the Apollo Group trial rested their case on December 12, 2007, and the court subsequently denied the defendants’ motion for directed verdict. Closing arguments in the case apparently are scheduled to take place on January 9, 2008. Savett predicts a jury verdict on January 10.

In any event, we won’t have long to wait to find out the outcome of yet another civil securities lawsuit trial. It is probably a worthy topic for another day to consider why this flurry of trial activity is taking place now and what it may mean. Certainly, if the Apollo Group trial results in another defense verdict, it would further discourage other plaintiffs from hazarding a jury, and perhaps further encourage settlement.

Readers my be interested to note that the Securities Litigation Watch blog is also maintaining (here) a list of all post-PSLRA securities class action lawsuits that have gone to trial.

Finally, readers interested in details of the trial may want to read this December 7, 2007 Arizona Republic article (here) describing the trial testimony of Apollo Group’s former CFO.

Busted Buyout Lawsuit Reaches the Finish Line: In an earlier post (here) I discussed the litigation arising out of Finish Line’s bid to walk away from its planned $1.5 billion acquisition of Genesco. In case you missed the news over the holidays, on December 27, 2007, the Tennessee court (here) rejected Finish Line’s contention that there had been a “materially adverse effect” sufficient to permit Finish Line to invoke the termination procedures in the agreement. The court ordered Finish Line to complete the transaction.

However, as noted in the December 28, 2007 CFO.com article (here) discussing the ruling, there is still a second action pending in New York, that could affect whether or not the transaction ultimately is completed. UBS, which had committed to finance the transaction, contends that the merger will result in an insolvent entity. The Tennessee court has said that if that is the case, the court would “halt the agreement.”

Finally, the WSJ.com Law Blog notes (here) that though the court has issued its ruling in the Genesco case, there are still plenty of other busted deals to fuel additional litigation for the foreseeable future in the New Year.

PLUS D & O Symposium: The 2008 Professional Liability Underwriting Society (PLUS) D & O Symposium will take place on February 6 and 7, 2008 in New York. I will be co-chairing the Symposium again this year, with my good friend Chris Duca of Navigators Pro. We are very proud of this year’s agenda, which includes former SEC Chairman William Donaldson as the keynote speaker and features a stellar lineup of panelists, including SEC Enforcement Division Director Linda Chatman Thomsen. The entire schedule is available at the PLUS website, here.

Readers will be interested to know that the early registration discount is available only until January 11, 2008, so you will want to be sure to register before the end of this week.

As the latest of the year-end 2007 securities lawsuit reports (including my own, here), Cornerstone Research has released (here) its 2007 report on securities class action filings. Cornerstone’s January 3, 2008 press release describing the report can be found here. The numbers in the Cornerstone report differ from those in the previously released year-end report of NERA Economic Consulting (here), but the numbers are directionally consistent. The Cornerstone report does make some additional observations about the 2007 securities lawsuit filings, and also adds some interesting analysis.

The Cornerstone report notes the following findings:

1. Cornerstone reports that there were 166 securities class action lawsuit filings in 2007, which represents a 43% increase over the 116 filings in 2006. The 2007 yearly total is, however, 14 percent below the average for the ten-year period ending in December 2006.
2. Stock market volatility is important in explaining the number of filings. The increase in filings in the second half of 2007 coincided with an increase in volatility in the U.S. stock market from the historically low levels that prevailed in 2006 and the first half of 2007.
3. Securities lawsuit filings as a percentage of the total number of publicly traded companies increased in 2007. 2.19% of publicly traded companies were sued in securities lawsuits in 207, compared to only 1.57% in 2006, and by contrast to the 2.27% ten-year average from 1997-2006.
4. For cases filed in 2007, the drop in market capitalization both from the beginning to the end of the class period and from the class period high to the end of the class period increased, largely driven by several large case filings in the fourth quarter of 2007.
5. Of the 2,646 cases in Cornerstone’s database, 81 percent have been resolved. Of the resolved cases, 41 percent were dismissed and 59 percent settled. For the cases filed from 1996 to 2001, almost all of which have been resolved, the median time to resolution is 33 months. The median time to dismissal is 25 months, and the median time to settlement is 36 months. Cases with larger shareholder losses are likely to take longer to resolve.
6. The Finance sector had the largest amount of litigation activity, with 47 Finance cases in 2007, driven by the subprime crisis.
7. The top three Circuits in terms of the number of 2007 filings were the Second Circuit, with 58 filings; the Ninth Circuit, with 39 filings; and the Eleventh Circuit, with 18 filings.
8. Cornerstone counted 32 cases attributable to the subprime crisis (by contrast to my own count of 34 cases, here). The report notes that the subprime filings reflect a shift in emphasis from allegations related to traditional income statement line items to allegations related to balance sheet components.

In attempting to discern the significance of the 2007 filing levels, the Cornerstone report revisits the analytic framework Cornerstone first postulated in its mid-year 2007 report (here). The mid-year report raised two alternative theories for the lull in litigation activity from mid-2005 to mid-2007, the "less fraud" hypothesis and the "lower volatility" hypothesis. The "less fraud" theory, associated with Stanford Law Professor Joseph Grundfest, involved the theory that as a result of corporate reforms, there is less fraud and hence less litigation. (Professor Grundfest went further and speculated that perhaps, as a result of the reforms, there had been a "permanent shift" to a lower litigation level.) The "lower volatility" theory noted that the period of lower litigation activity coincided with historically low stock market volatility, and speculated that litigation activity might return to historical norms if volatility returned.

The year-end Cornerstone report expressly attributes the increased litigation activity in the second-half of 2007 to the heightened level of stock market volatility during that period. Nevertheless, the report also states that "the ‘less fraud’ theory suggests a significant and permanent shift in the class action landscape" that is "not inconsistent with the recent increase in filing." The report finds this possibility because of the significant amount of 2007 litigation activity that was directly associated with the subprime crisis, which the Cornerstone report describes as "a likely ‘one time’ event," that "may not be indicative of future filing activity."

To support this analysis, the report suggests that there is an identifiable "core litigation rate," which is a statistical construct based on historical filings from which "one time events" like "backdating, subprime cases [and] IPO Allocation filings are excluded." Using this construct, the report finds that "litigation activity remains well below historical norms." Professor Grundfest describes this "core litigation rate" as "the litigation rate observed net of one-time systemic shocks."

I cannot disagree with the report’s overall conclusion that more data is needed before the "less fraud" hypothesis can be conclusively rejected. Indeed, only time will tell. But for a number of reasons, I disagree with the Cornerstone Report’s analysis of the 2007 filings, and in particular with the report’s conclusions about the significance of the 2007 filing activity.

First, the Cornerstone report treats the 2007 subprime litigation activity as if it consists of a single, uniform phenomenon, limited in scope and duration. But my own view is that even though the subprime meltdown is still relatively recent, the litigation activity has already evolved into a highly diverse set of circumstances, lawsuits and litigants. As I detail at greater length here, the subprime litigation wave already involves a wide variety of kinds of companies and allegations. Moreover, it is likely to continue to evolve in the months ahead. To isolate the subprime cases as if they represent a narrow or contained phenomenon minimizes the potential of the ongoing subprime litigation wave to drive litigation activity for months and perhaps years to come, and disregards the very real possibility that the wave will expand to encompass a far wider variety of litigants and allegations.

Second, even if the subprime litigation wave can fairly be characterized as a "one-time" event, that is hardly sufficient to marginalize its continuing significance. The fact is the world of D & O liability has experienced a steady progression of "one time events" in recent years — the bursting of the Internet bubble, the telecom crash, the IPO Allocation cases, the corporate scandals, the options backdating cases, and now the subprime crisis. Indeed, the joke among D & O insurance industry professionals at the recent PLUS International Conference was that subprime is "just a one time event" – the joke being that in the D & O industry, there is a one time event every year, and that results are driven by the constant recurrence of supposed "one time events." When one time events become the norm, they are not extraneous, they are the very essence of the risk exposure.

The reality is that the claims experience in the D & O arena is characterized by a succession of one time events. Indeed, no D & O insurance manager who wished to retain his credibility with senior insurance company management would attempt to try to marginalize the subprime litigation wave by describing it as a one time event, simply because there have been too many supposed one time events in recent years for the phrase to retain any meaning. D & O claims are and for years have been driven by these kinds of events. There perhaps may be a statistical construct by which to postulate a "core litigation rate," but the construct would be disregarded by insurance professionals as lacking credibility and unlikely to provide adequate predictive power to describe likely future events. The practical reality is that it must be assumed that there will always be one time events – not as unusual occurrences, but in the ordinary course.

Finally, as I have documented elsewhere (here and here), subprime litigation is only one of a number of important factors driving the recently increased litigation activity. Even without the subprime cases, the uptick in litigation activity is significant.

To be sure, only time will tell whether the increased litigation activity in the second-half of 2007 is indicative of future activity levels. But as I previously stated (here), I think there is already a sufficient basis upon which to declare that the two-year lull in securities lawsuit filings is over, and to state that there does not appear to have been a "permanent shift" to lower securities lawsuit filing levels.

The first of the 2007 year-end securities class action reports has already appeared (refer here), with others soon to follow. As I have noted elsewhere (most recently here), the most important securities trend during 2007 was the return of lawsuit filing activity to historical levels, after a two-year lull. But there were numerous other important securities lawsuit trends in 2007, as discussed below.

First, a word about data. My observations about the 2007 securities lawsuits are based on my own tally of the 172 securities lawsuits, which I derived from publicly available data plus information from readers. My tally differs from the numbers that appeared in NERA Economic Consulting’s 2007 year-end report (here). NERA counted 198 securities lawsuits through mid-December, and projected 207 lawsuits by year-end. The projected number was not borne out, but NERA’s actual year-end number around 200 is materially higher than my own count of 172. NERA undoubtedly has superior data; readers should be aware that I have used my own data for purposes of this post.

The year-end tally of 172 new securities class action lawsuits includes 103 new securities lawsuits that were first filed in the second-half of 2007. This half-year total is virtually identical to the six-month average of 101 that Cornerstone Research noted in its mid-year 2007 securities litigation report (here) for the period from the second half of 1996 through the first half of 2005. In addition, the year-end total of 172 lawsuits represents an increase of 56 cases over the 2006 year-end total of 116, an increase of 48 per cent.

The companies named in securities lawsuits in 2007 represent 80 different Standard Industrial Classification (SIC) Code categories. In a year in which subprime lawsuits were such a significant factor (refer here for my analysis of the 2007 subprime lawsuits), it is hardly surprising that one of the SIC Code categories with the highest number of new lawsuits is SIC Code 6798 (Real Estate Investment Trusts), which had 14 new lawsuits. But SIC Code 2834 (Pharmaceutical Preparations) also had 14 new lawsuits, which is entirely consistent with my frequent observation that while subprime lawsuits are an important part of the 2007 securities lawsuit trends, the subprime lawsuits represent only one of several important trends.

Other SIC Code categories that had significant activity unrelated to the subprime mess include SIC Code category 3674 (Semiconductors), which had seven lawsuits; SIC Code category 3663 (Radio and Telephone Equipment), which had six lawsuits; SIC Code category 7372 (Prepackaged Software), which had five lawsuits; and SIC Code category 4899 (Communications Services) which also had five lawsuits.
26 of the 172 securities lawsuits that were filed in 2007 involved companies domiciled outside the United States. These 26 companies are based in 12 different countries, including China (seven companies); Switzerland (three companies); Bermuda, Canada, France, Hong Kong, Israel and the U.K (each of which had two companies each); and Germany, South Korea, Sweden and Taiwan (each of which had one company each). My detailed analsysis of the securities lawsuits involving Chinese companies can be found here.

Many of the 2007 securities lawsuits involved allegations of misrepresentations in connection with the defendant company’s IPO within twelve months of the lawsuit. 29 of the 172 new lawsuits involved IPO allegations. Interestingly, 20 of the 29 lawsuits against IPO companies were filed in the second-half of 2007, which suggests that an increase in the number of cases involving IPO companies was an important part of the increased level of securities litigation activity in the second-half of 2007. In addition, nine of the 29 IPO company lawsuits involved foreign-domiciled companies, so the level of IPO-related activity and the level of foreign-domiciled company activity appears to be correlated to a certain extent.

The 2007 securities lawsuits were filed in 52 different federal district courts. By far the largest numbers of lawsuits were filed in the Southern District of New York, where a whopping 52 of the 172 lawsuits (or about 30%) were filed. The court with the next highest total, the Central District of California, had only 18. Indeed, if the lawsuits filed in the Central, Southern and Northern Districts of California are combined, the total of 32 cases is still far short of the S.D.N.Y. total.

The high number of filings in the S.D.N.Y. is in part attributable to the number of financial services companies that have been sued in Manhattan as a result of the subprime mess. But another important factor in the number of S.D.N.Y. lawsuits is the significant number of lawsuits against foreign domiciled companies. 21 of the 26 foreign-domiciled companies sued in securities lawsuits in 2007 were sued in the S.D.N.Y.

Other courts that had a significant number of securities lawsuits in 2007 include the Southern District of Florida (10); Eastern District of Pennsylvania (6); Northern District of Texas (5); and the Western District of Washington (5).

I have noted elsewhere (here) the significance of the number of 2007 securities lawsuits. Another important attribute of the 2007 securities lawsuits is their diversity. More specifically, the increase in 2007 securities litigation activity clearly was driven by a number of factors, not just the litigation activity surrounding the subprime meltdown. Indeed, even if the 34 subprime-related lawsuits (listed here) were withdrawn from the 2007 total, the resulting 138 lawsuits would still represent a material increase over the 116 lawsuits that were filed in 2006. The fact that there were significant numbers of cases aggregated in categories completely isolated from subprime-related issues demonstrates that the story of the renewed securities litigation activity involves far more than just the subprime meltdown.

Finally, one of the other many factors contributing to the renewed level of securities lawsuit activity in 2007 is the outbreak of lawsuits arising from busted buyouts, which I discuss at greater lenghth here.

In its 2007 year-end study of securities class action trends (here), NERA Economic Consulting noted that the "sharp increase" in 2007 securities lawsuit filings was "driven in part by litigation related to subprime lending," an observation I have also noted elsewhere. Given the importance of the subprime lawsuit filings to the overall 2007 securities lawsuit picture, it is worth taking a closer look at the 2007 subprime-related securities lawsuits.

As a preliminary matter, it should be noted that I have counted 34 subprime-related securities lawsuits during 2007 (as detailed here), whereas in its year-end report NERA stated that there were 38 subprime-related lawsuits. The difference may be merely definitional, as it became harder to classify cases as the year progressed. NERA may also have superior information, a not unlikely possibility given that my data are derived solely from publicly available sources. In any event, readers should be aware that the analysis in this post is limited to the 34 lawsuits in my tally.

The 34 companies sued in the subprime-related lawsuits represent 15 different Standard Industrial Classification (SIC) Codes. The largest concentration of cases is in the 6798 SEC Code (Real Estate Investment Trusts), which accounted for 11 of the34 cases. Fully 30 of the 34 companies sued fall within the 6000 SIC Code Series (Finance, Insurance and Real Estate).

Another way to look at the companies is by industry, rather than by SIC Code. As might be expected, there are more companies is in the banking/mortgage lending business than any other industry; this group accounted for 12 of the companies sued. Other industry groups with multiple companies represented included residential home builders (5), REITs (5), Bond Insurers (3) and Credit Rating Agencies (2). Other industries represented with one company each include mortgage investment companies, mutual funds, and savings and loans. (The list of companies also includes Freddie Mac, which as a government sponsored entity is hard to classify.)

The subprime-related lawsuits were filed in 15 different federal district courts, with the largest number filed in the Southern District of New York (11). Other courts with multiple filings include the Central District of California (6), Eastern District of Pennsylvania (3) and the Northern District of California (2).

The list of companies sued includes two that are domiciled overseas: UBS (Switzerland) and Security Capital Assurance (Bermuda). One of the subprime-cases – the one involving Security Capital Assurance – involves IPO-related allegations.

The 34 subprime-related lawsuits were filed between February and December 2007, with at least one lawsuit filed in each month during that period. There were two in February, four in March, two in July, eight in August, four in September, two in October, five in November, and four in December.

In other words, the subprime-related lawsuits, while concentrated in the Finance, Insurance and Real Estate SIC Codes, represent a number of different industries. The lawsuits have been filed in a number of different courts, but with a concentration in New York and Los Angeles. The lawsuit filings were spread (albeit somewhat unevenly) throughout the year. These observations seem relevant to any analysis of what the cases might represent within the larger context of securities filing trends.

Mortgage Investigations Face Challenges: A December 27, 2007 Washington Post article entitled "Mortgage Probes Face Big Hurdles" (here) notes that as problems have emerged following the subprime mortgage meltdown, "government subpoenas are flying, investor lawsuits are mounting, and in the nastiest cases, businesses are pointing the finger of blame at one another. "

But despite the almost irrepressible urge to find scapegoats, investigators could face significant hurdles due to the "tangled system" of regulatory authority and oversight. In addition, another consideration that could stymie investigators, and that could be a factor in the many investor lawsuits, is that "many of the assets that tumbled were explicitly marketed as involving borrowers with trouble credit histories, alerting investors that they were high-risk bets."

White Collar Fraud is Not Just Wrong, It’s Insane!: Regular readers may recall my prior post (here) about former Crazy Eddie CFO (and convicted felon) Sam E. Antar, who is now making a name for himself warning others about how to spot fraud. A lengthy December 25, 2007 Fortune Magazine article entitled "Takes One to Know One" (here) takes a closer look at Antar. and his current campaign to combat fraud.

The detailed article reviews the Crazy Eddie fraud in depth and explains how Antar has become a roving lecturer on accounting fraud. The article summarizes Antar’s strategy for finding fraud as "sustained and disciplined paranoia." He also says that the only safeguards against accounting fraud that work are "stringent disclosure rules for companies and better fraud training for auditors."

Interested readers may want to check out Antar’s blog, White Collar Fraud (here), for further commentary from Antar, who signs his blog posts as follows: "Respectfully, Sam E. Antar (former Crazy Eddie CFO and convicted felon)."

With the year-end fast approaching, it is time to take a look back and review the top D & O stories of 2007. It was an eventful year, with some important developments that will have implications for the year ahead, and perhaps for years to come. Here are the top stories, with the year’s most important story leading the way.

1. Subprime Meltdown Launches Litigation Wave: When I first started tracking subprime-related litigation in April (here), I already knew that the subprime meltdown was going to be an important story. By July (here), I knew that the subprime story was "this year’s model"–that is, the hot litigation trend being driven by the business scandal most prominent at the time. By August, I wrote (here) that the developing story had become "All Subprime, All the Time." But even at that point, I don’t think I really appreciated what the subprime story would become. I certainly didn’t envision that it would lead to a surge of lawsuits against some of the giants of the financial services world, such as Merrill Lynch (refer here), Citigroup (refer here), Washington Mutual (refer here), and UBS (refer here).

As of year end, my current tally (refer here) of subprime-related lawsuits stands 34; the recently released NERA year-end securities litigation survey (here) put the number at 38. The litigation includes lawsuits against accountants (here), real estate brokers (here), and many others. The securities lawsuits have come not just against the lenders and the investment banks, but home builders, bond insurers, credit rating agencies, mutual funds, and a host of others. Even more ominously, there is an unmistakable sense of foreboding that the worst may lie ahead (refer here). But whatever may actually lie ahead, there is no doubt that the litigation resulting from the subprime meltdown is the 2007 D & O story of the year.

2. Two-Year Lull in Securities Filings Comes to an End: In mid-year 2007 studies, NERA (here) and Cornerstone (here) both observed that securities filings had been well below historical averages since mid-2005. Stanford Law Professor Joseph Grundfest questioned (here) whether or not there might have been a "permanent shift" to a lower level of securities lawsuit filings.

But as I detailed more thoroughly here, and as further documented in NERA’s recent 2007 year end survey (here), the two-year lull came to an end in the second half of 2007. Indeed, the 81 securities lawsuits filed during the period between August 1, 2007 and November 30, 2007 represents the highest level of lawsuit filings in a four-month period since June-October 2004, and the 25 new securities lawsuits filed in November 2005 represents the highest monthly total since January 2005.

Perhaps even more noteworthy is the fact that the new lawsuit activity is not being driven exclusively by the subprime litigation wave; while the subprime lawsuits collectively represent one important factor, the lawsuits are actually hitting a wide variety of companies for a wide variety of reasons, many having nothing to do with the subprime meltdown. The likelihood of continued financial marketplace volatility suggest that litigation levels may remain elevated for some time to come.

3. Supreme Court Issues Tellabs Decision: The Supreme Court does not take many securities cases; for that reason, and because the Tellabs case had the potential to significantly affect the threshold resolution of many securities cases, the Supreme Court’s opinion in the Tellabs case was much anticipated. When the Tellabs opinion finally came out in June 2007, it was a victory for defendants, although perhaps not as extensive a defense victory as it could have been, as detailed further here and here.

The Tellabs opinion reversed the Seventh Circuit’s ruling and held, interpreting the securities lawsuit pleading standards described in the Private Securities Litigation Reform Act, that for an inference that a defendant acted with scienter to be "strong," the inference "must be cogent and at least as compelling as any opposing inference of nonfraudulent intent." The majority opinion expressly rejected the position urged by concurring Justices Scalia and Alito that "the test should be whether the inference of scienter (if any) is more plausible than the inference of innocence."

While the Tellabs court’s more balanced approach seemed less likely to have a dramatic impact on dismissal motions as would the position urged by the concurring justices, the early returns suggest that the Tellabs case has made it more difficult for securities cases to survive a motion to dismiss (as discussed on this post on the 10b5-Daily blog, here). The Tellabs case has, in fact, proven to be an important factor in many of the motions to dismiss in the options backdating cases (about which refer here). The Tellabs decision and the Supreme Court’s 2005 opinion in the Dura Pharmaceuticals case are now important tools for defendants to try to use at the motion to dismiss stage in securities class action litigation.

4. Top Plaintiffs’ Lawyers Face Criminal Woes: Even a short time ago, who would have thought that the two leading securities plaintiffs’ attorneys would face criminal prosecution? Yet on October 29, 2007, Bill Lerach entered a guilty plea (refer here), and on September 20, 2007, Mel Weiss was indicted on criminal charges (here). (For more about Lerach’s criminal charges, refer here; for Weiss’s, refer here).

The impact of the criminal issues involving the two leading securities plaintiffs’ lawyers is perhaps incalculable, but it does not seem a mere coincidence that shortly after Lerach left his former law firm (now reconstituted as Coughlin, Stoia,Geller, Rudman & Robbins) the firm seemingly went into high gear, filing numerous new securities class action lawsuits. The Milberg Weiss firm, meanwhile, which also faces its own criminal charges, has essentially filed no new lawsuits since 2005.

While there are many opportunistic lawyers hoping to capitalize on the changes at the leading plaintiffs’ firms, it remains to be seen whether any of these firms can duplicate the role that the erstwhile leading firms have played in the past.

5. Largest Derivative Settlement Ever in UnitedHealth Option Backdating Case: The 2006 D & O story of the year undoubtedly was the options backdating scandal. The story has faded from the headlines in 2007 as the subprime scandal has emerged, but the numerous backdating lawsuits (refer here for a complete tally) are now working their way through the system. Although many of the options backdating lawsuits have been dismissed or have settled for relatively nominal amounts (refer here for a complete list of options backdating case dispositions), there have been some exceptions. The most exceptional outcome is the record settlement in the UnitedHealth Group options backdating derivative lawsuit, which apparently represents the largest derivative settlement ever.

As detailed here, in the settlement, former UnitedHealth CEO William McGuire and several other former UnitedHealth directors and officers agreed to a combination of surrender or relinquishment of stock others and other interests; repayment of certain compensation; and the repricing of other stock option awards, all of which collectively represents a value to the company in excess of $900 million. The value of McGuire’s contribution alone reportedly was valued at more that $600 million.

The sheer magnitude of these values makes this settlement noteworthy. The more interesting question is the extent to which this settlement will affect the resolution of the options backdating cases that remain pending, as well as future shareholders’ derivative lawsuit resolutions.

6. Stoneridge Case Argued: The Tellabs decision was not the only important D & O story out of the Supreme Court this year. On October 9, 2007, the Supreme Court head argument in the Stoneridge v. Scientific Atlanta case. At the time, the case was described as the "business case of the year." How important it will ultimately be remains to be seen, but it could have a very significant impact, as detailed at greater length here.

The case will determine the extent to which a third-party that did not actually make a misrepresentation or misleading statement can be held liable under for securities fraud under Section 10 of the ’34 Act and Rule 10b-5 thereunder. The seemingly likeliest outcome is a narrow holding that does not expand the scope of Section 10(b) liability. The Court’s opinion will be released some time before the end of the current Supreme Court term in June 2008. Until the outcome is known, the possibility (however remote) that the Court might overturn the Eighth Circuit and find an expansive basis for "scheme liability" makes this an important case to watch.

7. Global Warming Disclosure Issues Heat Up: Because global warming is one of the predominant social, political and economic issues of our age, it is almost inevitable that it would be come an important D & O issue as well. As I discuss at length here, the Supreme Court’s April 2007 decision in the Massachusetts v. EPA case provided a new context within which global warming has emerged as a concern for corporate officials. Existing disclosure requirements and activists’ proxy ballot initiatives ensure that this issue will remain as a significant corporate challenge.

Several developments that emerged as the year progressed underscore that global climate change is likely to remain a hot button issue for the foreseeable future, as detailed further here. The first occurred on September 14, 2007, when the New York Attorney General subpoened (refer here) five energy companies demanding that they disclose the financial risks of their greenhouse gas emissions to shareholders. The second is the petition submitted to the SEC by 22 different groups seeking to have the SEC require companies to assess and fully disclose their financial risks from greenhouse gas emissions and global climate change.

The activists’ focus on disclosure issues has serious implications because issues surrounding are at the heart of most D & O claims. Because this issue is likely to grow in importance in coming years, companies may face even greater disclosure pressures and a corresponding increase in liability exposures.

8. Busted Buyouts Beget Litigation: The bursting of the private equity buyout bubble has not only left a raft of busted buyouts in its wake, but has also led to a host of new securities lawsuits. Disappointed target companies that have not become the target of securities class action lawsuits included Radian (about which refer here), Harman Industries (refer here), United Rentals (refer here), and Genesco (refer here). Disappointed target companies that have also lawsuits against their erstwhile acquirers include United Rental’s unsuccessful lawsuits against Cerberus Management Company (refer here) and Genesco’s lawsuit against Finish Line (refer here).

There are a host of other deals that are dead or on life support, as detailed on the M & A Law Prof blog (here). There may be one or more of the companies on this list that may yet find themselves with a securities lawsuit to complement their woes. In any event, the busted deal securities lawsuits collectively represent just one more factor driving the increase in securities lawsuits in 2007.

9. Qwest Opt-Out Settlements Exceed Amount of Class Action Settlement: There have always been opt-outs from securities class action settlements, but during 2007, a number of separate and very substantial opt-out settlements raised potentially important implications for future class action settlements, as well as for D & O insurers’ severity assumptions and policyholders’ views of limits adequacy.

The case with the highest dollar value of publicly reported opt-out settlements is the AOL Time Warner securities litigation, where the nine publicly disclosed opt-out settlements total $795 million, as detailed here. But perhaps even more significant is the Qwest securities litigation, where the $411 million aggregate value of the collective opt-out settlements exceeded the $400 million class action settlements, as further detailed here. When the value of the opt outs settlements tops the value of the class settlement, you know you’ve got a problem.

The emergence of the opt-out settlements presents a host of potentially complicating problems for current and future securities class action litigants, particularly if significant opt-out settlements become a regular part of securities litigation. These developments could increase litigation expense and aggregate settlement expense in civil securities litigation, and even further complicate efforts to resolve class action lawsuits.

10. Section 11 Settlement Held Not Covered "Loss": Although there had been a prior case holding that a Section 11 settlement is not a covered "loss" under a D & O policy, the prior decision was an intermediate state appellate court decision from Indiana, and was viewed as an anomaly in some quarters. So there was quite a reaction when, on March 14, 2007, Judge Gregory Presnell of the United Stated District Court for the Central District of Florida held (refer here) that the $35 million settlement to which CNL Hotels & Resorts agreed to resolve Section 11 claims does not constitute covered "loss" under a D & O policy and was not insurable as a matter of law.

While at one level, Judge Presnell’s decision was merely an extension of existing case law, it did pose a challenge for the D & O insurance industry to address Section 11 settlement issues in the policy itself. Judge Presnell did specifically note that Section 11 settlements are not "per se" uninsurable. Since the CNL Hotels & Resorts opinion came down, the industry has been scrambling to come up with a policy-based solution, to address policyholder expectations of coverage for Section 11 settlements. The industry is still struggling toward equilibrium on this issue, which remains potentially very important for insured companies and their directors and officers.

Top Top Ten Lists: What could top a top ten list but a list of top top ten lists– Time Magazine has compled fifty top ten lists for 2007 here.

Options Backdating Developments: On December 21, 2007, McAfee announced (here) that it had reached a tentative settlement in the pending federal and state derivative lawsuits related to its options practices. The company said that it “has accrued $13.8 million” that amounts “related to expected payments pursuant to the tentative settlement.” The company’s press release does not specify to what specific costs this accrual would be applied.

In a separate development, on December 5, 2007, the United States District Court for the Western District of Washington, applying Delaware law, denied the defendants’ motion to dismiss the plaintiffs’ complaint in the derivative lawsuit shareholders have filed against the Getty Images, as nominal defendant, and certain of its directors and officers. A copy of the court’s opinion can be found here. The court found that the plaintiffs’ allegations were sufficient, at least at the pleading stage, to excuse the demand requirement. The Race to the Bottom blog has a detailed discussion of the decision, here.

I have added these case developments in the McAfee and Getty Images cases to my table of options backdating settlements, dismissals and denials. The table can be accessed here.

Cerberus Wins Right to Walk Out on United Rentals: In an earlier post (here) in which I surveyed litigation arising from busted buyouts, I discussed the lawsuit that United Rentals had filed against Cerberus Capital Management, in which United Rentals sought to compel Cerberus to complete the acquisition of United Rentals, from which Cerberus was trying to walk away. The busted United Rentals transaction was somewhat different than other failed deals, in that Cerberus was not claiming that changed circumstances allowed it to renege on the deal; rather Cerberus claimed that the deal documents themselves allowed Cerberus to terminate the contract upon tender of a $100 million termination fee.

In a December 21, 2007 ruling (here), Delaware Chancellor William B. Chandler III, after a two-day trial, issued a 68-page ruling in favor of Cerberus, ruling that Cerberus could abandon the purchase by paying the $100 million breakup fee.

The outcome of the United Rentals lawsuit, while noteworthy, may have only slight influence on the other lawsuits arising from busted deals, because, unlike the erstwhile suitors in those other cases, Cerberus was not relying on the supposed occurrence of “material adverse effect” from a changed circumstance. Rather, the outcome turned on a specific provision of the United Rental agreement that Chancellor Chandler held to reflect an understanding that Cerberus could call of the deal simply by paying the fee.

The M & A Law Prof Blog has a short, interesting post on the decision here. Professor Larry Ribstein also has an interesting discussion of the decision on his Ideoblog, here. The WSJ.com Law Blog comments here on Chancellor Chandler’s language of and use of classical allusions in the decision.

More About Option ARMs: On November 5, 2007, I wrote here about Option ARM mortgages and asked the question whether they represent the next litigation front in the subprime meltdown, referring specifically to the securities lawsuit shareholders had filed against Washington Mutual. The Wall Street Journal asked many of the same questions in a December 22, 2007 article entitled “Option ARM: Next Weakling” (here), noting that Options ARMs “could be the next wave of trouble for the mortgage industry.” The article cires a Merrill Lynch report stating that Option ARMs are “ticking time bombs” that will start “ticking louder next year.”

Option ARMs give borrowers a choice about how much to pay each month. If borrowers choose to pay only the minimum, the principal amount of their loans can rise – a result known as “negative amortization.” Negative amortization would be an unwelcome development at any time, but it is a particular problem when home prices are falling, as they are now. Many option ARMs carried initial teaser rates that are scheduled to reset in the months ahead. According to sources cited in the Journal article, nearly $156 billion in Options ARMs are scheduled to reset between 2008 and the first quarter of 2012. Perhaps worst of all, most Option ARMs carry stiff prepayment penalties, making the loans into a financing form of an existentialist play.
According to the Journal article, both the Colorado and the Illinois attorneys general have subpoenaed mortgage companies as part of larger investigations into Option ARM sales practices.

The option ARMs are not subprime loans; many of the borrowers on these had good credit. But the prospect of potentially significant interest rate increases could raise, perhaps significantly, the level of the payments required to avoid negative amortization. The prospects for further defaults and foreclosures seems high. Merrill Lynch estimates that losses on Option ARMs could top $100 billion. Those losses would be on top of the estimated losses from subprime mortgages of as much as $400 billion.

On December 21, 2007, NERA Economic Consulting released (here) its 2007 Year-End Update analyzing recent trends in shareholder class actions. The NERA reports notes, as I have discussed in prior reports (most recently here), that securities lawsuit filing activity levels returned to historical levels in the second half of 2007. In addition, the NERA report also notes that in 2007 both average and median class action settlements were at all-time highs.

The NERA report’s key findings are as follows:
  1. “Despite some well-publicized speculation that filings had moved to a permanently lower level,” securities lawsuit filings “increased in 2007 after a marked decline that began in the second half of 205 and continued through 2006.”

  2. The report states that there were 198 securities lawsuits filed through December 15, 2007, and extrapolates a total of 207 lawsuits through year end, which the report notes would be slightly above the 2005 level but still below the 1998-2004 average annual filing level of 234.

  3. The growth in filings was “driven at least in part by litigation related to subprime lending.” The NERA report states that there were 38 subprime related securities filings during 2007.

  4. The average settlement in 207 was $33.2 million, a jump from $22.7 million in 2006, and well above the 2002-2007 average of $24.4 million. (The averages do not include the nine settlements over $1 billion).

  5. In 2007, the annual median settlement also reached an all-time high of $9.6 million, up from $7 million in 2006 and well above the 2002-2007 median of $6.8 million.

  6. The most important factor affecting settlements amount is “investor losses”; the median investor loss for cases settled in 2007 was $310 million. The median investor loss in cases filed in 2007 is $355 million, which the Report states is “a signal that the settlements associated with these new filings might remain high.”

The NERA report’s conclusions about filing levels are directionally consistent with my prior observations on this blog. I do think it is important to note, as I have detailed elsewhere, that while the subprime-related lawsuits are collectively a significant factor in the increase of filings in the second half of 2007, they are only one among many important factors. More to the point, securities filing activity in the second half of 2007 would still be up significantly over the preceding two years even if there were no subprime cases.

In addition, the NERA report’s lawsuit count is quite a bit higher than my own. My count, which consists of data taken from publicly available sources supplemented by tips I get from readers, show only 171 securities class action lawsuits through December 20, 2007. NERA counts 198 through December 15, 2007 and extrapolates 207 through year-end. I doubt that after today we are going to see too many new lawsuits by year end, so the extrapolated number might be high. It is hard to assess NERA’s count of 198 lawsuits though mid-December, without knowing what cases account for the difference between their tally and mine. I am willing to assume that they just have better data than I do, but I sure would be interesting in knowing what cases I supposedly missed.

Finally, I note that NERA’s count of 38 subprime-related class actions differs from my own count of 34 (refer here for my tally). Part of this difference might be definitional, as it is has become more difficult to sharply describe what is and is not subprime-related. If generalized credit issues cause a company’s problems, is the ensuing lawsuit subprime-related or not? I will say this, I have openly listed the lawsuits I have included on my count here. If NERA or anybody else wants to tell me which cases I have omitted, I will add them to my list with alacrity.

In any event, the NERA report closes with a couple of important points with which I completely agree. First, the report notes that “as the crisis in the credit markets continues to deepen and the market for subprime mortgages continues to suffer accordingly, more litigation is likely to follow.” The second is that given the investor losses on the 2007 lawsuits, “the settlements associated with these new filings might remain high.”

So here’s what the weather gauge says: clouds gathering, storms ahead.

CFO.com has a December 21, 2007 article on the NERA report, here. (Full disclosure, I was intereviewed in connection with the CFO.com article.)