In the securities fraud lawsuit arising out of the Comverse Technology options backdating scandal, a federal district judge, applying principles derived from the Supreme Court’s 2005 decision in the Dura case, has overturned a magistrate judge’s lead plaintiff ruling, resulting in the Lerach Coughlin firm’s removal lead counsel in the case. (The background on the case can be found here.) The district judge’s ruling is interesting and potentially significant because of its implications about the factual determinations a district court must make under the Private Securities Litigation Reform Act (PSLRA) at the earliest stages of the case.

Judge Nicholas Garaufis had referred the lead counsel motions to the Magistrate Judge Ramon Reyes. Reyes selected the Plumbers and Pipefitters National Pension Fund (“P & P”), represented by the Lerach Coughlin firm, as lead plaintiff. Plaintiffs The Menorah Insurance Co. Ltd. and Mivtachim Pension Funds Ltd. (together, the “Menorah Group”) represented by the Pomerantz Haudek Block Grossman & Gross law firm, objected to the Magistrate Judge’s ruling and appealed to the district court.

Reyes had found that P & P had purchased 534,471 shares that resulted in losses of approximately $2.9 million, exceeding the Menorah Group’s claimed loss of $343,242 on its 172,000 shares. Because Reyes determined that P & P had the greatest financial interest in the outcome of the case, he selected P & P as lead plaintiff.

The Menorah Group based its objection on the fact that most of P & P’s losses resulted from “in and out transactions,” in that both the purchase and the sale of the shares took place before the alleged misrepresentations were disclosed. The Menorah Group argued that if the “in and out” shares were excluded, P & P did not suffer a $2.9 million loss, but instead actually realized a $132,722 gain. Judge Garaufis agreed, vacated the Magistrate Judge’s ruling, and appointed the Menorah Group as lead plaintiff.

Judge Garaufis based his ruling on the Supreme Court’s holding in Dura. He reasoned that because Dura provided that plaintiffs in a fraud-on-the-market securities case can recover only if a specific loss was proximately caused by a defendant’s misrepresentations, the plaintiffs in the Comverse case could not recover any losses they had incurred before Comverse’s conduct was disclosed. Specifically, losses incurred prior to the curative disclosure cannot be considered in the recoverable losses calculation that courts engage in when selecting a lead plaintiff.

In making this determination, Judge Garaufis rejected the argument that loss causation was a factual issue that should not be considered at the pre-discovery stage. Judge Garaufis reasoned that “where (as here) it is clear from the face of the pleading that most of P & P’s losses were suffered before any alleged corrective disclosure, the Court would be abdicating its responsibility under the PSLRA if it were to ignore that issue.”

It may be true, as Judge Garaufis states, that his ruling is a logical extension of Dura’s requirements, but this consequence of the Dura decision was not immediately apparent when the Dura case first came down. After all, Dura involved a motion to dismiss; it did not involve a lead plaintiff motion.

Judge Garaufis’s ruling is also somewhat unexpected for its conclusion that courts must in effect reach some factual conclusions about a prospective lead plaintiff’s recoverable losses, and exclude losses that are not recoverable in calculating the plaintiff’s financial interest. In the Pomerantz Hudek law firm’s press release announcing its selection as lead counsel (here), Patrick Dahlstrom, one of the lawyers for the Menorah Group, is quoted as saying that the decision “reinforces the growing recognition that Courts must conduct such analysis of the facts…and eliminate those losses that are clearly not recoverable, in determining which movant has the largest financial interest.”

The determination of allowable losses is not the only pre-discovery factual determination that courts have decided they are required to make under the PSLRA. As The D & O Diary noted (here) in its discussion of the Tellabs case now pending before the U. S. Supreme Court, many courts have also decided they must weigh alternative inferences, in order to determine whether a plaintiff’s complaint meets the PSLRA’s heightened pleading standard. The evolving case law under the PSLRA seems to be moving toward a series of successive early stage factual determinations, all pre-discovery and based on the pleadings alone. Whether or not these determinations are required under the PSLRA, there is a certain cart-before-the-horse feel to these procedures. There is something uncomfortable (for me at least) about a court determining at the earliest stages of a case and without evidence that a plaintiff’s losses are not recoverable and must be excluded. (On the other hand, it is pretty hard for P & P to argue that they have the most significant financial interest in the outcome if on a net basis they didn’t even lose any money on their investment. )

A March 6, 2007 Law.com article entitled discussing the lead counsel decision in the Comverse Technology case can be found here.

More Bad News for the Lerach Coughlin Firm: The Lerach Coughlin firm’s removal from as lead counsel in the Comverse case is the firm’s second high profile removal as lead counsel in a matter of days. On February 27, 2007, Judge Barbara Lynn of Dallas granted the request of the lead plaintiff in the Halliburton securities lawsuit to replace the Lerach Coughlin firm with the Boies, Schiller firm. (The D & O Diary’s earlier post on the Halliburton lead plaintiff’s motion can be found here.) Judge Lynn also removed that Scott & Scott firm as co-lead counsel. The lead plaintiff had sought to remove the Lerach Coughlin firm because its relationship with the firm “deteriorated” after the criminal indictment of the Milberg Weiss law firm. (The Lerach Coughlin firm split off from the Milberg Weiss firm in 2004.) The Lerach Couglin law firm’s removal as lead counsel in the Halliburton case is discussed in greater detail on the Legal Pad blog, here.

But Not All the New is Bad: On the other hand, not all the news for the Lerach Coughlin firm these days is bad. For example, the firm is lead counsel in the securities lawsuit pending against First BanCorp and several of its directors and officers. On March 5, 2007, First BanCorp. announced (here) that it had settled the case for $74,250,000. The lead plaintiff in the case is the Plumbers & Pipefitters Local 51 Pension Fund (the Lerach Coughlin firm seems to be on good relationships with the organizations for plumbers and pipefitters). The Securities Litigation Watch blog has a detailed post about the First BanCorp. settlement here.

And the Lerach Coughlin firm also represented the University of California in its opt-out action against the Time Warner defendants. As The D & O Diary previously noted (here), on February 28, 2007, the University of California announced (here) that it had settled the opt-out action for $246 million. The University also announced that Lerach Coughlin firm’s fee was approximately $37 million.

As the WSJ.com Law Blog noted (here) about these developments, for the Lerach Coughlin firm, it has been “the best of times, the worst of times.”

One Final Note: As described above, the Menorah Group, selected to serve as lead counsel in the Comverse Technology case, includes the Menorah Insurance Company, Ltd. This may be one more example that Adam Savett of the Securities Litigation Watch blog can add to his list (here) of cases where private institutional investors (like, for example, insurance companies) have served as lead plaintiff in a securities class action lawsuit under the PSLRA.

Photobucket - Video and Image Hosting A frequently repeated – but demonstrably false – statement about securities class action lawsuits is that, while public pension funds have served as lead plaintiffs in securities fraud lawsuits, private institutional investors, such as banks, mutual funds, and insurance companies, have not. However, as Adam Savett points out (here) on the Securities Litigation Watch blog, private institutional investors do indeed seek to serve as lead plaintiffs, and his blog post cites several specific instances where mutual funds, insurance companies and banks have done just that.

Savett’s observations are relevant to the discussions I have been having in response to the recent wave of institutional investor opt-out settlements. (See my most recent post on opt-out settlements here.) The usual line of analysis goes that because the recent opt-out settlements have involved public pension fund opt-outs, the threat of future opt-out exposure is limited to companies that have significant public pension fund investor ownership. But this assumption could prove to be very misleading.

As Savett’s blog post substantiates, private institutional investors will choose to take an active litigation role when they see it in their interests to do so, and there is no reason why they might not elect to opt-out of a class settlement, just as they might elect to see to serve as a lead plaintiff. However, unlike Savett, I am unable to support my assertion with concrete examples. Watch this space – if I learn of an example of a private institutional investor entering into a significant securities opt-out settlement, I will post it to this blog.

Readers who might think that the Amalgamated Bank’s recent opt-out settlement with Time Warner (refer here) is an example of a private institutional investor opt-out settlement may want to take a closer look at Amalgamated. According to its website (here), Amalgamated Bank was founded in 1923 by the Amalgamated Clothing Workers of America and serves working class consumers and trade unions. In addition to normal banking functions, the bank also administers union-related trust funds and multi-employee benefit plans. The bank is owned by UNITE HERE, a trade union of textile and hospitality trade workers. Readers can reach their own conclusions, but I am not prepared to describe Amalgamated Bank as a private institutional investor.

Readers who are aware of any private institutional investor opt-out securities settlements are encouraged to let me know.

UPDATE: Adam Savett points out that the Lerach Coughlin law firm’s web site’s list of the opt out plaintiffs the firm represents in the AOL Time Warner lawsuit (here) include a number of private institutional investors, including mutual funds and insurance companies. To my knowledge, none of these plaintiffs have yet settled with the defendants, but their involvement suggests it is only a matter of time before we start seeing private institutional investor opt out settlements.

SUPPLEMENTAL UPDATE: At least one of the institutional investors that has settled with Time Warner appears to be a private institutional investor. According to Time Warner’s 2006 10-K (here, refer to page 53), Time Warner has reached a settlement of the opt out action filed by DEKA Investment GmbH, which from its website (here) appears to be an investment fund company for institutional investors. The amount of DEKA’s settlement is not disclosed. Hat tip to Adam Savett for the link.

A Fraudster’s Take on Fraud: Readers who may have missed it over the weekend will definitely want to go back and read Herb Greenberg’s March 3, 2007 column in the Wall Street Journal entitled "My Lunch With 2 Fraudsters" (here, subscription required). The column reports on Greenberg’s lunch interview with Sam E. Antar of Crazy Eddie’s infamy and Barry Minkow of ZZZZ Best infamy. It comes as no surprise to me that Sam did most of the talking. Readers may recall my prior post (here) about Sam’s views on preventing fraud. Sam also maintains the White Collar Fraud blog (here). Sam has quite a lot to say, a small portion of which comes through in Greenberg’s column. Sam makes no bones about the fact that as the architect of the Crazy Eddie’s securities fraud, he is a criminal. Among other interesting observations, Sam told Greenberg:

As criminals, we built false walls of integrity around us. We walked old ladies across the street. We built wings to hospitals…We wanted you to trust us. Simply said …if you want to be an investor, you cannot accept information at face value. "Unexamined acceptance" is the greatest cause of investor losses.

Professor Larry Ribstein has an interesting commentary (here) on his Ideoblog about Sam’s remarks.

Welcome to the Drug and Device Law Blog: The D & O Diary would like to welcome, and to encourage readers to read, the Drug and Device Law Blog, which may be found here. This new blog is written by Jim Beck of the Dechert law firm and Mark Herrmann of the Jones Day law firm. (Full disclosure: Mark and I were at Michigan Law School together, and Mark’s wife is my dentist. Small world.) The blog take a very lawyerly approach to legal issues affecting the drug and medical devices industries, although it should be noted that many of the blog’s posts are of more general interest. A particularly noteworthy recent post (here) discussed the recent Supreme Court punitive damages case and explored its implications for punitive damages awards in future class action cases.

Mark is also the author of the Curmudgeon’s Guide to Practicing Law, a humorous and irreverant guide to surviving the practice of law (big firm style). According to the WSJ.com Law Blog (here), the Guide is "a well-written and clear guide on how to be an effective law-firm associate. It’s also funny."

 

Photobucket - Video and Image Hosting For years, Warren Buffett’s annual Letter to Berkshire Hathaway shareholders has been a trove of business insight and commercial wisdom, and this year’s letter (here), released on March 1, 2007, is no exception. While the general focus of the letter is a year-end review of the various Berkshire businesses, Buffett still managed to work in some memorable observations about some larger topics. I review below several of his comments, as well as one substantial omission from the letter to shareholders. (Full dislosure: I own Berkshire shares, although not nearly as many as I wish I did.)

Executive Compensation: After noting that he has been on 19 corporate boards and that he sets the compensation for the CEOs of “around 40 significant operating businesses,” he has nonetheless faced “ostracism” from the compensation committees of the boards on which he has served, perhaps because he takes a different view on executive compensation. His concern is that there is a pack mentality on executive compensation, driven by compensation consultants, which results in the following:

CEO perks at one company are quickly copied elsewhere. “All the other kids have one” may seem a thought too juvenile to use as a rationale in the boardroom. But consultants employ precisely this argument, phrased more elegantly of course, when they make recommendations to comp committees.

Buffett is not optimistic about changing these practices, either; he says that “irrational and excessive comp practices will not be materially changed by disclosure or by an independent comp committee.” Buffett asserts that true comp reform will take place only “if the largest institutional shareholders…demand a fresh look at the whole system.” Buffett is skeptical that the fresh look will never take place as long as compensation is engineered by comp consultants who are “deftly selecting ‘peer’ companies,” a practice that will only “perpetuate present excesses.”

Hedge Funds: Using the example of the wealthy, fictitious Gotrocks family, Buffett examines the way that an investment industry of “helpers” is diverting (rather than creating) wealth through imposition of outsized management fees and other costs. Buffett has particular contempt for the “2-and-20 crowd” that charges 2% of principal and 20% of profit, ensuring enormous fees to the “helper” but inferior returns to investors:

The inexorable math of this grotesque arrangement is certain to make the Gotrocks family poorer over time than it would have been had it never heard of these “hyper-helpers.” Even so, the 2-and-20 action spreads. Its effects bring to mind the old adage: When someone with experience proposes a deal to someone with money, too often the fellow with money ends up with the experience, and the fellow with experience ends up with the money.

Dollar Weakness and U.S. Indebtedness: After reviewing the $2.2 billion profit Berkshire earned between 2002 and 2006 from its direct foreign-exchange position (i.e., Berkshire was long on foreign currencies), Buffett reviewed the reasons why Berkshire will continue to attempt to gain from foreign currency exposure, either from “the ownership of foreign equities or of U.S. stocks with major earnings abroad.” Buffett expects to gain as the dollar continues to weaken, which he expects because of the massive level of U.S. imports that are not reciprocated by export sales – as a result of which “the U.S. has necessarily transferred ownership of its assets or IOUs to the rest of the world.” The U.S. can do this because “we are an extraordinarily rich country that has behaved responsibly in the past.” But Buffett believes that this imbalance and outflow of assets and wealth has its consequences, some of which are potentially very dangerous:

our citizens will also be forced every year to ship a significant portion of their current production abroad merely to service the cost of our huge debtor position. It won’t be pleasant to work part of each day to pay for the over-consumption. of your ancestors. I believe that at some point in the future U.S. workers and voters will find this annual “tribute” so onerous that there will be a severe political backlash. How that will play out in markets is impossible to predict – but to expect a “soft landing” seems like wishful thinking.

Photobucket - Video and Image Hosting PetroChina and Darfur: Consistent with Buffett’s commitment going forward to foreign equities, Berkshire has a substantial investment in PetroChina, which is China’s biggest producer of oil. According to his letter to shareholders, as of December 31, 2006, Berkshire owned 2.3 billion shares of PetroChina Class H shares (representing 1.3% of the company and making Berkshire the company’s largest foreign shareholder), which have a cost basis of $488 million but a market value of $3.3 billion, or a current value of 670% of cost. (Buffett obviously has not lost his eye for a bargain.)

Interestingly, Buffett elected to say nothing in his letter to shareholders about Berkshire’s investment in PetroChina, which has come under fire recently (refer here) for its 40 percent investment in a Sudanese oil venture. (The allegation is that the venture supports the Sudanese government, which is responsible for genocide in the Darfur region. Based on these concerns, Harvard and Yale, among others, have divested their shares in PetroChina.) Perhaps to avoid the necessity for Buffett to address this topic in his shareholder’s letter, Berkshire released a statement (here) the week before the letter was published. Essentially, Berkshire’s response is that it is not PetroChina, but PetroChina’s controlling shareholder China National Petroleum Corporation (owned by the Chinese government) that has operations in Sudan. PetroChina itself does not, and the subsidiary can’t control the parent.

A February 23. 2007 Salon.com column entitled “Warren Buffett Plays Dumb in Darfur” (here) criticizes Berkshire’s response for ignoring the true relationship between PetroChina and CNPC – specifically, that the executive team for both companies consists of exactly the same individuals in the same functions with the same titles. The Salon.com article asserts that “to declare, as Berkshire does, that a subsidiary has no ability to control the policies of the parent, when the two entities are run by the exact same people, is an exercise in specious obfuscation.”

The D & O Diary is in no position to judge the merits of the PetroChina dispute. But it has been my observation that commentators have been more hostile toward Buffett since he started his very public bet against the dollar a few years ago. As his investment approach has moved beyond foreign currencies to foreign equities and other foreign assets, media commentators, who idealized him for so long as the “Oracle of Omaha,” are now likelier to demonize him. Buffett’s strategy to go long on foreign assets because of his bearish views on the U.S. dollar will likely make him increasingly unpopular. Perhaps Buffett himself is experiencing his own form of “backlash” of the kind he anticipated in his shareholder’s letter’s comments about the fallout from U.S indebtedness. Unlike Buffett himself, many are unable (or unwilling) to regard his decision to invest in foreign assets as the neutral pursuit of superior investment returns. I suspect that going forward Buffett will find himself dogged by similar questions like those surrounding Berkshire’s PetroChina investment.

Photobucket - Video and Image Hosting In recent posts (most recently here and here), I have commented on the worrying trend toward institutional investor opt-out cases and the massive settlements that have followed. In a February 28, 2007 press release (here), the University of California announced the latest of institutional investor opt-out settlement, a $246 settlement on the University’s behalf with Time Warner, of which the University’s counsel, the Lerach Coughlin law firm, will receive about $37 million.

The University stated in its press release that its settlement is "believed to be the largest publicly announced payment in an opt-out securities claim in history." The University estimated that the settlement represents "between 16 and 24 times the amount that it would have received through the class settlement." The University estimates that its investment loss on its Time Warner stock was about $555 million, so the school recovered about 44 cents on for each dollar of investment loss.

According to a March 1, 2007 New York Sun article (here), the University of California settlement was only one of five large institutional investors that recently reached opt-out settlements with Time Warner. The five settlements collectively totaled approximately $400 million. In addition the University of California, Time Warner also reached settlements with Amalgamated Bank, the California Public Employees Retirement System, and two pension funds for Los Angeles County.

The Sun article also notes that the payouts in the opt-out settlements "could rile some small investors because the institutions claim they are getting vastly better settlements than they would have if they remained in the class." The Sun article quotes Columbia Law School Professor John Coffee as saying that the discrepancy in per-share recovery between the class and the opt-outs is an "embarrassing distinction," but one that is not easily rectified, since any party has the right to opt-out. Coffee also said that the opt-outs could reduce the amounts companies are willing to pay out to the main pool of investors.

The five institutional investor opt-out settlements mentioned in the Sun article, together with the previously announced $105 million CalSTRS settlement with Time Warner, brings the total amount of just these six opt out settlements to $505 million, more than 20% of the $2.4 billion settlement for the entire class.

In a prior post (here), guest blogger Rick Bortnick and I discussed the problems created by the possibility of large opt out settlements following prior class settlements. But Professor Coffee’s remarks in the Sun article raise the possibility that it may become increasingly difficult to reach a class settlement at all, as settling defendants seek to reduce the amount they pay in class settlement in order to preserve assets to settle with opt outs, while class members seek to avoid any "discrepancy" in the value of class and opt out settlements, and as individual plaintiffs stream out of the class to see if they can improve their recovery by proceeding individually.

Notwithstanding these troublesome thoughts, we still don’t know whether or not the opt-out settlements will become a standard part of securities fraud litigation or will prove to be an exclusive attribute of the mega-cases growing out the wave of corporate scandals earlier in this decade. To take one example, the size of the recoveries for both for the University of California and its counsel was directly related to the massive size of the University’s investment loss. Would institutional investors, or for that matter, plaintiffs’ lawyers, be as interested in going it alone if the potential recovery is significantly less substantial?

All of these questions remain to be seen. In the meantime, it is hard to disagree with Professor Coffee’s statement in the Sun article that the flood of securities opt-out settlements is "probably the most distinctive new trend in class action litigation."

 

Photobucket - Video and Image Hosting In a series of recent editorials, the New York Sun has raised some interesting and troubling questions about a New York City’s pension fund’s involvement as lead plaintff in the Apple Computer options backdating securities litigation.

The first Sun editorial on the topic, entitled "New York Versus Apple "appeared on January 25, 2007 (here). The editorial noted the irony that the same day as the city’s Mayor, Michael Bloomberg, and its senior U.S. Senator, Charles Schumer, released a report (here) asserting among other things that meritless securities litigation was undercutting the competitiveness of the city’s financial markets, the New York City Employees’ Retirement System (NYCERS) was named as lead plaintiff in a class action lawsuit against Apple Computer and its executives and directors. The editorial observed that the city’s law firm in the lawsuit, Grant & Eisenhofer, includes on staff as Senior Counsel, Leslie Conason, whose firm website bio reports that prior to joining the law firm, she "was responsible for managing all securities lititgation for the City of New York, where she was in charge of securities litigation for the $100 billion in pension assets held by the workers and retirees of the City of New York."

The editorial also points out that a partner at the Grant & Eisenhofer law firm, Keith Fleischman, had made a $1,000 campaign contribution to the city’s Comptroller, William Thompson, Jr., in 2003, when Fleishman was at the Milberg Weiss firm. (As reported on the Comptroller’s website, here, among Thompson’s duties is the managment of the city’s pension funds.) The editorial concludes by saying that:

The notion of a shareholder suit against Apple strikes us, in any event, as a stretch. Whatever shenanigans went on with Steve Jobs’ stock options, the company’s stock price is up 600% over the past two years, far outpacing the overall gains by the stock market or NYCERS. Any reasonable shareholder should be happy as a clam. New York’s economy and streetscape have certainly benefited from the city’s Apple Stores in SoHo and at the plaza of the GM building. If there’s a bright spot, it’s that one of the Apple directors named as a defendant is Albert Gore, Jr. By the time the vice president is done being deposed by the class action lawyers hired by the NYCERS board, he may be ready to line up with Messrs. Schumer and Bloomberg the next time they call for legal reform.

 

In a letter to the editor printed in the February 27, 2007 issue of the Sun (here), Thompson defended himself and the city’s process for selecting counsel. His letter explains that after a selection process that included interviews and reference checks, the city executed agreements with nine plaintiffs’ firms in mid-2006. His letter also points out that each of the city’s pension systems’ Board of Trustees makes the final determination as to whether or not to proceed with this type of litigation. Thompson’s letter also defended the decision to pursue the Apple litigation, and the city’s role in shareholder litigation generally.

In the same February 27, 2007 issue in which Thompson’s letter to the editor appeared, the Sun ran a second editorial, this one entitled "Thompson’s Trial Lawyers" (here). The paper found that six of the nine firms in New York City’s "securities litigation pool," had made a total of $102,491 in donations to Mr. Thompson’s 2005 election campaign – an election in which Thompson "faced only token opposition" and in which he was "reelected with more than 90% of the vote." Among other firms, the Kirby, McInerney & Squire firm is reported to have given $39, 975, and the Wolf Popper firm is reported to have given $36,256. Wikipedia notes that Thompson is a leading candidate to become the Mayor of New York in 2009 and has amassed a compaign fund of over $2 million.

In addition, the editorial reports that the head of the pensions division in the city’s Law Department said that the Grant & Eisenhofer "brought the idea of NYCERS filing a lead plaintiff application to the Law Division." In other words, the editorial notes, the city didn’t discover it was injured and look for a lawyer, "a lawyer chased down a perfectly healthy client and brought the client the idea of a lawsuit, even though the Apple stock the city owned was up 600% in the past two years." The editorial concluded that:

It’s one thing… to take campaign money from trial lawyers. It’s another thing entirely to turn around and allow those lawyers to use the good name of the city pension fund to pursue litigation with no redeeming value other than racking up huge fees for those same trial lawyers. The price Mr. Thompson pays for the more than $100,000 in campaign contributions he has taken from the class-action aecurity lawyers who represent the city is inevitability that the newspapers — and, someday, perhaps, voters — are going to question his judgment in pursuing this sort of litigation.

The Sun added a third editorial on February 28, 2007, entitled "Absentee Trustees" (here) in which the paper took a closer look at Thompson’s assertion that a pension fund Board of Trustees had supervised the decision to pursue securities litigation on behalf of the fund. The paper found that at the October 24, 2006 Board "regular meeting" at which the city’s Law Department claims that the vote to pursue litigation took place, "the so-called meeting of the ‘board’ included not 11 trustees [the total number of trustees on the board], not 10 trustees, not nine trustees, not eight trustees, but exactly one. That’s right, just one actual trustee." The editorial points out that the board may want to reconsider its processes; "after all, the directors of Apple Computer are being sued by NYCERS for allegedly failing to provide proper oversight." The editorial concludes with the observation that "if things take an unfortunate turn for the New York City Employees’ Retirement System, it’s conceiveable that some enterprising class-action lawyer might look at them as a target. Apple stock appreciated 600% and it still got sued."

Way back in the optimistic era of securities litigation reform, back when Chris Cox was still just a Congressman from Orange County, when Congress enacted the Private Securities Litigation Reform Act of 1995, there was a notion that institutional investors needed to become more involved in order to eliminate abusive lawyer-driven securities litigation. So Congress promulgated a lead plaintiff process, in which the "most adequate platiniff" would be selected based on which plaintiff showed the "largest financial interest." Whatever Congress thought might result from this reform, it seems fairly likely that it did not envision institutional plaintiffs pursing lawsuits as a result of an unsupervised and campaign finance driven process, supplemented by a revolving door between the institutional investors and the plaintiffs’ firms. (As an aside, I also suspect that Congress did not envision institutional investor driven opt-out litigation either, about which I recently commented here.)

The Sun identifed the ironic propinquity of the Bloomberg/Schumer report’s release and NYCERS’ selection as lead plaintiff in the Apple litigation. An irony the Sun missed is that the Paulson Committee Interim Report (here), which preceded the Bloomberg/Schumer report by only a few weeks and raised similar concerns about the adverse competitive effects of meritless securities litigation, specifically decried "pay to play" practices between institutional investors and the plaintiffs’ bar. The Paulson Committee Report asserted that:

When political contributions are made by lawyers to individuals in charge of a state or municipal pension fund, the attorneys should not be permitted to represent the fund as a lead plaintiff in a securities class action. Following the lead of the municipal bonds industry, the securities litigation regulations should be comprehensive and should cover any direct contributions as well as indirect contributions (made through "consultant" or other similar arrangements) … At a minimum, the SEC, as an amicus, should ask courts to require disclosure of all political contributions or fee-sharing arrangements between class counsel and a lead plaintiff (or controlling individuals within the lead plaintiff organization). This disclosure should occur prior to the court’s appointment of either counsel or plaintiff and should be followed by a similar disclosure at the fee award hearing. (Emphasis added)

 

The D & O Diary has a suggestion for Mayor Bloomberg. If he really thinks abusive securities lawsuits are undermining the competitiveness of his city’s financial markets, he should toss the report that he and Senator Schumer paid McKinsey to write and read the Paulson Committee’s Interim Report’s comments about "pay to play" practices. And then he should take a very hard look at practices in his city’s Law Department. The good news for Mayor Bloomberg is that he doesn’t even need to await the SEC action the Paulson Committee’s Interim Report advocated; he can institute his own securites litigation reform without any fuss or bother or press conferences or grandstanding speeches or anthing like that. For reasons the D & O Diary has elaborated upon at length elsewhere (most recently here), this reform is unlikely to affect the relative competitiveness of the city’s financial markets in the global marketplace, but it certainly would clean up some pretty unattractive looking circumstances and practices.

How to Find out Who is "Paying to Play": Readers who are interested to know more about plaintiffs’ lawyers campaign contributions (or those of anybody else, for that matter) will definitely want to spend some time on the website (here) of the Center for Responsive Politics, where campaign contributions are searchable by donor name. (Click on the "Who Gives" tab and select "Donor Lookup" from the dropdown menu.) For example, a search on the name William Lerach identifes 150 separate donations totaling $1,283,430 (including several donations to Hillary Clinton ) A search on the name Mel Weiss shows that Weiss made 120 donations totaling $699,102. Among other candidates, Weiss made a number of donations to Senator Schumer. Hmmm, that’s kind of interesting… maybe after the law firm’s indictment, Schumer felt he could…yep, that’s probably it.

Isn’t It Ironic, Don’t You Think?: The Sun obviously has an eye for irony and an interest in securities fraud litigation. The Sun’s outlook must be in its DNA, because its founding investors, according to Wikipedia (here), included none other than Conrad Black, who has been working for years on his own wing in the securities fraud litigation house of blues. You don’t suppose that has anything to do with the paper’s obvious and manifest hostility to securites lawsuits? Nahhh…

The D & O Diary wishes to acknowledge with grateful thanks the two alert readers who prefer anonimity and who provided links to the Sun editorials and to the Center for Responsive Politics website.

 

 

 

 

 

Photobucket - Video and Image Hosting In an earlier post (here), The D & O Diary commented on the research published by Lucian Bebchuk of Harvard Law School and two colleagues, in which they examined over 19,000 options grant awards between 1996 and 2005, finding a disproportionately higher number of grants on the date during the month with the lowest share price. In an article in the March/April 2007 issue of Harvard Magazine entitled "’Insider Luck’: How Stock-Option Grants Were Gamed – And What to Do About It" (here), Bebchuk elaborates and comments upon his research.

A portion of the magazine article summarizes Bebchuk’s previously released study, in which the researchers found that 12% of all CEO options grants were "lucky grants," defined as grants awarded on days on which the stock price was at its monthly low. (The research findings are summarized in my prior post, linked above.) The magazine article adds the further research finding that "opportunistic timing has not been limited to executive’ grants; rather it has been present to a significant degree in outside directors’ grants as well." The research showed that about 9% of the grants to outside directors were "’lucky’ events taking place on dates with stock prices at monthly lows." Bebchuk reports that the opportunistic timing was spread over about 460 companies, and that "in companies in which opportunistic timing of options awards took place, luck tended to lift the boats of both executives and outside directors."

Bebchuk emphasizes that the research showed that "most companies have not engaged in such timing in awarding options," but that certain factors were associated with a higher likelihood of lucky grants. The option grants were more likely to be "lucky" when the potential payoffs were relatively high, and opportunistic timing was "correlated with increased influence of the CEO on the company’s internal pay-setting and decision-making process."

Bebchuk goes on to note that the "fact that many outside directors were themselves recipients of lucky grants reinforces the view that opportunistic stock-options awards were produced by governance failures, not business decisions made rationally and in good faith to serve shareholder interests." Bebchuk concludes by commenting that "even though significant backdating may belong to the past, its underlying causes are problems with which the corporate governance system must continue to wrestle."

Bebchuk’s research and commentary are interesting. But I have begun to be a little suspicious of research studies showing that backdating took place at a very large number of companies, far greater than the number that have announced backdating problems so far. We are now nearly a year beyond the first wave of media attention surrounding the backdating issue. How many more companies can there be out there yet to divulge options grant manipulations? If Bebchuk’s numeric research conclusions are not ultimately borne out, are his other conclusions and comments adequately supported? To be sure, there may yet be many companies about to reveal options timing problems, and Bebchuk’s research could be validated by forthcoming disclosure events. At this point, I have become a little skeptical that there are as many companies yet to reveal options timing problems as Bebchuk’s research would suggest.

Losing AIM?: In prior posts (most recently here), I have suggested that global financial markets are evolving, and that factors that may have made London’s Alternative Investment Market (AIM) more attractive than U.S securities markets in the last few years may be changing on their own. A February 22, 2007 article in the U.K.-based LegalWeek.com entitled "Losing AIM – Three Years of Market Boom Has Come to an End" (here) confirms that "the twin shadows of market indigestion and long-simmering concerns regarding the quality of companies floating has finally called a halt to the AIM express."

The article notes that the recent headlines regarding Torex Retail (see my prior post, here) "have taken their toll, though regulatory concerns have been brewing for months." Although the article optimistic about the prospects for renewed future prosperity on the AIM, it does acknowledge that right now, the market is going through a "necessary correction." As one commentator quoted in the article says, "we are paying the price for the number of deals done in 2005 for companies of questionable quality."

Contrary to the arguments of would-be reformers, the AIM experience is not bearing out the need for U.S securities markets to loosen their regulatory standards in order to compete in the global marketplace. To the contrary, the AIM experience increasingly is substantiating the need for markets to maintain their regulatory discipline in order to preserve investor confidence. Moreover, it appears that some of the differences in the global financial marketplace that have been driving competition in recent years are turning out to be transient, and are evolving. As The D & O Diary has frequently noted (most recently here), we should be very cautious about relying on transient phenomena as a basis for compromising the U.S. securities markets’ regulatory integrity.

Hat tip to Werner Kranenburg of the With Vigor and Zeal blog for the link to the LegalWeek.com article.

Practice, Practice, Practice? How you really get to Carnegie Hall — refer here.

 

Photobucket - Video and Image Hosting The would-be reformers who propose restructuring the U.S securities regulation regime cite the loss of U.S. IPO market share to overseas markets, particularly London’s Alternative Investment Market (AIM), as justification for regulatory reform. But as The D & O Diary has previously noted (most recently here and here), these overseas markets, especially the AIM, face precisely the opposite pressure – that it, to validate their regulatory integrity in order to maintain investor confidence.

Along those lines, on February 20, 2007, the London Stock Exchange (LSE) announced a variety of new rules for AIM companies, providing further disclosure obligations and clarifying guidance regarding the rules for "Nominated Advisors" (or Nomads, as they are more popularly known). In its press release (here) announcing the rules changes, the LSE said that the "changes are intended to ensure the AIM maintains the right regulatory balance as the market continues to grow and thrive internationally." The AIM Director of Markets is quoted as saying that "as the market grows and becomes increasingly international, the Exchange will take incremental steps to build on the quality and integrity of the market."

The LSE’s summary of the rules changes, as well as a summary of the process leading up to the changes, can be found here. The amended Rules for AIM Companies can be found here.

The key changes in the new Rules for Companies include new requirements for disclosure of critical information on each AIM Company’s website; enhanced disclosure requirements for pre-admission announcements; and guidance regarding reverse takeovers. The changes also include revisions to the AIM disciplinary guidelines, including the provision for the LSE to be able to issue warnings for AIM rules violatins, and an increase in the maximum disciplinary fine (from 25,000 pounds to 50,000 pounds). A good summary of the new rules by the Pillsbury Winthrop Shaw Pittman law firm can be found here.

The AIM summary of the changes (here) notes that a number of commentators on the proposed rules during the notice-and-comment period had suggested that that the LSE "should mandate particular corporate governance requirements for AIM companies." The LSE declined to implement uniform corporate governance standards, observing that "given the wide range of companies that admit to AIM, the Exchange believes that the corporate governance measures to be adopted remain a matter for the nomad to provide advice about, on a company-by-company basis, both on admission and also on an ongoing basis as the company develops."

Even though the LSE declined to require uniform governance measures, the LSE’s increased emphasis on disclosure, and tightened requirements for Nomads, as well as the increased disciplinary provisions, bespeak an appreciation for the need to encourage regulatory integrity to maintain investor confidence. As The D & O Diary has noted in the past, companies attracted to the AIM out of a perception of a lighter regulatory touch there will find that they still face regulatory scrutiny. Moreover, the changes suggest that the comparative landscape among the various global exchanges is evolving. For that reason, the U.S. should hesitate to alter its regulatory structure to address what may be transient differences in the global financial marketplace.

Special thanks to Werner Kranenburg of the With Vigor and Zeal blog and to alert reader Doug Edinburgh for links regarding the AIM rules changes.

Photobucket - Video and Image Hosting A Baker’s Dozen of Canadian Securities Regulators: In the meantime, Canada is wrestling with a different issue – whether to unite its current system of 13 provincial securities regulators into a single, national regulator. According to news reports (here), a panel convened last year concluded that a single regulator could "consistently enforce investor rights across Canada." Canada is the "only major developed country without unified securities regulation, " as a result of which bad actors who have been fined or barred from activity can simply move from province to province.

The push for a single unified regulator has recently gained momentum because of several high profile insider trading cases, and the movement got a further boost when Alberta’s finance minister came out in favor of a unified regulatory approach (here). But the boost proved shortlived, as the head of the Alberta securities commission publicly opposed both the single regulator proposal and the finance minister (here). The Ontario government has been pushing for a single regulator, but other provinces, notably Quebec, have been pushing back.

Photobucket - Video and Image Hosting Epic Poet: Homer — first the Illiad and the Odyssey, then the Simpson. Read Homer’s most eternal statements, here. (Better not to have any food in your mouth when you read these.)

 

My recent posts on securities fraud opt-out litigation settlements (here and here) provoked a number of interesting responses, including one comment that was so detailed that I thought it would make an interesting guest blog post. The commentator accepted my invitation to be a D & O Diary guest blogger. I am pleased to present the latest D & O Diary guest post, below.

Our guest blogger today is Richard Bortnick of the Philadelphia law firm, Cozen O’Conner. Here is Rick’s guest post, in the indented text below — the comments following the indented text are mine:

The potential implications of the recent high dollar opt-out settlements, as discussed in your postings here and here, should not be taken lightly. To the contrary, while certainly not a trend, they could portend the dawning of a new era in shareholder litigation and lead to a dangerous future of far greater exposure for corporate defendants and, in some cases, their D&O insurers (if not by the individual defendants themselves). In short, these latest developments suggest that a class action settlement may not be the end of the day for the defense side, both with respect to defense costs and indemnity expense. As Yogi Berra once said, “it ain’t over till it’s over,” and it may not be over until the last large opt-out plaintiff has settled or presented its case to a jury.

In the past, a good percentage of shareholders who opted-out of a class action settlement did so for either moral or personal reasons partially or wholly unrelated to money. As such, opt-outs generally were not a concern to the defense side, and all interested persons were able to cap and account for the costs of shareholder litigation. Of course, this is not to suggest that the issue of opt-outs was ignored in the settlement documentation. Rather, virtually every class action settlement agreement contains (and has forever contained) a provision pursuant to which the settling defendants could “blow up” the settlement if shareholders owning a certain percentage of shares elected not to participate in the settlement. A typical “blow provision” contains opt-out percentages ranging from 2%-5% or more. While the enumerated percentage may have been triggered in a few stray cases, neither the company nor its D&O insurer felt the threat of future exposure justified their invoking their rights under the “blow provision.” The settlement, for all intents and purposes, put a cap on the amount of money a company and its D&O insurer knew they would spend for a claim and allowed them to reserve and ultimately pay a liquidated amount.

In light of recent developments, however, this may no longer be the case. Indeed, the number and, more importantly, the potential severity of opt-out claims and settlements may have a profound impact on whether and how companies, their D&O insurers and other categories of defendants (i.e., accountants, attorneys, underwriters, etc.) respond to a situation where the “blow provision” is implicated.

Let’s assume that shareholders who own 3% of a public company defendant’s stock elects to opt-out and go it alone in private litigation (or in combination with a sufficient number of other shareholders so as to constitute a “mass action,” but not a “class action”). What are a company and its D&O insurer to do? How about a non-settling accounting or law firm? At present, there is no simple solution, no “magic bullet” to avoid additional, and potentially severe, exposure both for defense and indemnity.

Moreover, such a situation could have implications on the proposed class action settlement, as the company and its D&O insurer (as well as, where applicable, settling accountants, attorneys, etc.) may invoke the settlement agreement’s “blow provision,” and elect simply to “roll the dice” and try the class action, although that may be the least attractive option to someone who likes certainty and hates surprises. Of course, a decision to blow up a settlement could have wide-ranging business (and marketing) implications, particularly for a D&O insurer which develops a reputation of being a company which blows up settlements and leaves its insureds exposed to personal liability by way of a jury trial or otherwise. And, in any event, from where will the money to defend and ultimately settle the opt-out case come? The company? The D&O insurer which had not exhausted its policy’s limit as part of the class action settlement? The company’s outside accountants, attorneys, and whoever else had a hand in the transaction that gave rise to the lawsuit? Or, perhaps, the D&O’s themselves. In the few mega-opt-out cases to date, the plaintiffs pursued recovery from virtually everyone person and entity with any potential for exposure. And, we assume that most of these categories of defendants paid something toward the settlement.

One alternative might be to negotiate in the class action settlement a provision which allows the defendants to reduce the settlement amount they are to pay ( i.e., a “clawback”), should the number of opt-outs exceed an agreed number. As a second alternative or as an adjunct, the class action settlement could be on an “opt in” basis, whereby class members must take affirmative steps to become part of a class and a class action settlement. Or thirdly, the D&O insurer could decide to exhaust (if it hasn’t done so already) and leave the opt-outs behind, to fight with the Company and the D&O’s (although, this is not a realistic approach from a cash-flow standpoint). Quite simply, none of these choices is attractive, and none address the underlying problem: what do we do with the opt-outs?

The implications for plaintiffs’ counsel could be equally as profound. In a class action settlement situation, class counsel must apply to the court for an award of attorneys’ fees, and the quantum awarded is within the full discretion of the presiding judge. Depending on the size of the settlement and, oftentimes, the amount of work performed by plaintiffs’ counsel, courts have been known to award attorneys’ fees of anywhere between 7% and 30% (or more) of the gross settlement figure. Regardless of the quantum, however, the ultimate decision on attorneys’ fees was not one the lawyers or their clients were empowered to make. The final decision belonged to the court. In stark contrast, in the case of a “mass action” or individual opt-out action, the opt-out plaintiffs and their counsel are free to negotiate any fee arrangement they choose, without court involvement or intervention, capped only by governing ethical rules and the parties’ respective views. To the point, unlike in a class action setting, court approval of their private fee arrangement is unnecessary.

Assuming the recent spate of opt-outs is not an anomaly, the evolution of this process ultimately could lead to a regime whereby (1) smaller or less well-known plaintiffs’ counsel prosecute the class action aspect of a securities fraud litigation and then apply to the court for a fee award if/when a settlement is reached, while (2) the bigger, more well known plaintiffs’ firms transform a good portion of their practice to representing large, typically institutional, opt-out clients, thereafter negotiate a huge settlement with the defendants (and their D&O insurer?), and then collect whatever amount they have pre-negotiated with the client(s). Equally inviting to prospective opt-out counsel, they oftentimes would be relieved from having to devote the time, resources and money typically necessary to prosecute a securities fraud claim, as all of the work, including paper discovery and depositions, already will have been completed by the class action counsel in the context of the class action litigation. In other words, work much less and recover much more. Now that’s capitalism!

In short, a new opt-out regime may be upon us, and companies and their D&O insurers alike, as well as class counsel and their class members, should be sensitive to the possibility that the number of litigated opt-out cases could escalate and cause heretofor non-existence problems for all of them, absent a reasonable and realistic solution. It may be that nothing can be done, short of legislated changes to Rule 23 of the Federal Rules of Civil Procedure governing class actions, and complimentary judicial activism. But people need to begin talking about the problem now, before the
whole team of horses has left the barn.

Reading Rick’s comments made me wonder how likely it is that defendants or their insurers would ever elect to exercise the “blow provision” or if they did, what would cause them to do it? Would it be opt outs of a certain number? Or of a certain size? Clearly, there would have to be some development that convinced them that they were not getting the benefit from the class settlement for which they thought they had bargained, and that they would be better off without the class settlement. That still seems only a theoretical possibility, even with the magnitude of the recent opt out settlements.

I also wonder how much the opt-out phenomenon is a D & O insurance problem. Most of the recent prominent opt out settlements have come in association with mega class action settlements, where the class settlement (plus defense expense) far exceeded the amount of the D & O insurance. Perhaps one exception is the recent Qwest opt-out settlement, where insurers for Joseph Naccio reportedly (here) contributed $1.5 milllion on his behalf in settlement of the individual investor opt-out claim against him. But even with that exception, I wonder whether D & O insurers have been called upon to make significant contributions to the recent wave of opt out settlements, since the policies for the companies involved were long ago depleted in connection with the class settlement and defense expense.

And along those lines, I think it is important to note that the settling defendants in the recent CalSTRS opt-out settlements in the Qwest and AOL Time Warner cases involved numerous non-D & O defendants, including investment banks and auditors. We don’t know how much each of these defendants contributed. But in view of these defendants’ contributions toward settlement, the companies’ contribution might well have been relatively slight, particularly if CalSTRS remains a shareholder of the companies.

These considerations make me wonder how big of a problem opt outs may be (or become) for D & O insurers. Based on the publicly available details of the recent prominent opt outs settlements, I don’t think there is enough data to know for sure. But the threat of opt out cases dragging on after the class case has been settled unquestionably has important implications for D & O insurers’ severity assumptions. It also has important implications for D & O policyholders’ limits selection. (My prior post, here, has further thoughts about opt outs and severity assumptions and limits selection.)

I also wonder whether the apparent proliferation of opt out settlements may be an artifact of the massive corporate frauds from earlier in this decade, and whether opt out settlements will largely fade out as those cases finally work their way through the system. On the other hand, a more depressing possibility is that the plaintiffs’ bar has developed a lasting addiction to opt out cases and that institutional investor opt outs will go on even after the last of the mega cases is finally resolved. Although I appreciate the sentiment of Rick’s suggestion that revisions to Rule 23 may be needed, I wonder what specific revisions could eliminate the opt out curse. You can’t make anyone join a class of which they do not want to be a part.

A final thought: all those would-be reformers who want to do away with class litigation need to take a good hard look at the alternative to resolving everything in one lawsuit. The alternative is not pretty.

In any event, special thanks to Rick for his excellent guest blog post. The D & O Diary is always interested in responsible readers’ guest post submissions on appropriate topics. Authors interested in submitting a guest post should feel free to contact me any time.

Photobucket - Video and Image Hosting “I never said half the things I really said”: Rick’s reference to baseball great Yogi Berra made me reflect that although Berra was a fifteen time All-Star and league MVP three times, and appeared in fourteen World Series (including ten championships), he is now mostly remembered for his Yogiisms, a list of which may be found here.

We here at The D & O Diary find these words good rules to live by: “You can observe a lot by watching” and “If you can’t imitate him, don’t copy him.” Alas, it is true, as Berra observed, that “a nickel ain’t worth a dime anymore.”

A philosophical defense of Berra and his penchant for unintentionally funny comments can be found here. Baseball purists may prefer Berra’s career player stats, here.

Photobucket - Video and Image Hosting As the Wall Street Journal noted in its February 16, 2007 article entitled “Probes of Backdating Move to Faster Track” (here, subscription required), the various options backdating investigations may be moving more rapidly now. Within the last weeks, there have been guilty pleas entered in connection with the Take-Two (here) and Monster Worldwide (here) investigations, and the Journal article also suggested that criminal charges may be forthcoming in the Broadcom investigation.

The reason that the pace of activity seems to be picking up may be due to a looming deadline. According to a February 20, 2007 San Jose Mercury article entitled “Clock Ticking on Prosecuting Backdating Options” (here), investigators are “bumping up against a legal deadline” – the five year statute of limitations for securities fraud. According to the article, the window may be closing because stock options misdating largely ended in 2002 because of Sarbanes-Oxley options reporting requirements. The article suggests that the looming deadline may force prosecutors to allege lesser related charges, such as conspiracy or lying to prosecutors, because they are not yet ready to press criminal securities charges. Prosecutors may also seek waivers from potential defendants, but defendants may have little incentive to agree to a waiver. Prosecutors may also seek to allege that until recent disclosures and restatements, the options timing practices were concealed, and therefore the running of the statute should be tolled – but obviously prosecutors would rather avoid taking the chance that a court might not agree that the statute was tolled.

In determining whether or not to bring charges, prosecutors are, according to the Journal article linked above, looking for “plus factors” that can increase prosecutors’ “promise of success” – these factors include “written indications of deliberate backdating; falsified documents; efforts to hide manipulation from auditors or investigators; or indications that top executives gave themselves backdated options.” (These factors are similar to those I cited in my earlier post, Is Backdating Criminal?, here.)

Prosecutors undoubtedly will be, among other things, reviewing company email traffic pertaining to options grants, as the Wall Street Journal’s February 20, 2007 article entitled “Emails Reveal Backdating Scheme” (here, subscription required) suggests. Certainly, email references (such as those the Journal reports to have appeared in emails at Mercury Interactive) to “magic backdating ink” are not helpful for individuals hoping to avoid investigators’ attention.

The Ultimate Solution to Investment Fraud: According to news reports (here), a Chinese businessman has been sentenced to death for a fraudulent $385 million investment scheme. Wang Zhendong promised investors returns of 60 percent on investments in an ant-breeding scheme. (Ants apparently are used in traditional Chinese medicinal remedies; refer here for background) The scheme drew over 10,000 investors between 2002 and 2005. The investment arrangement was really a pyramid scheme, and most investors lost their entire investment. The Intermediate People’s Court in Yingkou sentenced Wang to death.

Regular readers know that I have previously questioned (most recently here) the case for regulatory reform. Among the grounds the reformers routinely cite as the basis for regulatory reform is the U.S.’s loss of global IPO marketshare. A February 20, 2007 Wall Street Journal article entitled "Do Tough Rules Deter Foreign IPO Listing in the U.S.?" (here, subscription required) reports the findings of a recent study by Thomson Financial which found "little evidence of foreign companies shying away from U.S. exchanges since the adoption of Sarbanes-Oxley." Thomson Financial apparently studies new stock issues in the past 20 years and concluded that "in terms of dollars raised, foreign IPO activity in the U.S. looks very healthy indeed."

The study found that foreign IPOs (excluding investment funds and closed end funds) accounted for 16% of 2006 IPOs in U.S. exchanges, the highest proportion in the 20-year period studied. In addition, the $10.6 billion raised in foreign company offerings represents 26% of 2006 IPO volume, the highest level since 1994. According to the study’s author, "the statistics show that things look rather healthy" and that even after Sarbanes-Oxley, "there doesn’t seem to be any really significant deterioration of the IPO market."

The competitive challenge for the U.S. markets is not that they can’t attract foreign companies’ listings, it is that financial activity in general is increasingly global, and that global growth has more to do with what is happening overseas than with the state of regulation in the U.S. markets. As the February 20, 2007 Bloomberg.com article entitled "IPOs Shun U.S. Exchanges While Wall Street Collects Record Fees" (here) points out, activity on overseas markets may be booming, but "it is not that America’s economy and markets are shrinking – it is that the other ones are growing." The article also notes that "for companies based in Europe, the Middle East and Asia, the choice of where to raise capital often comes down to geography and time zones."

The increasing competitiveness of the global financial marketplace is due to a host of causes, most having nothing to do with the level of regulatory scrutiny in the U.S. As I have noted in prior posts, we should be wary of allowing the effects of larger global financial forces to serve as a pretext for reducing the level of regulation in our markets. The evidence above does not support the hypothesis that foreign companies are unwilling to list their shares here, and the increased financial activity overseas has no relation to the level of regulatory rigor in this country.

There is, however, one area, where the U.S. securities markets clearly are at a competitive disadvantage – cost. As the Bloomberg article notes, "for all the talk about keeping U.S. markets competitive and safeguarding jobs, the reality is that investment banks have helped price the U.S. out of the global IPO market." U.S firms charge more to underwrite shares than do firms elsewhere; according to Bloomberg, U.S. investment banks charged fees averaging 4.4 percent of the value of stock sales in 2006, by comparison than 2.3 percent in Europe.

Whether or not the higher underwriting costs for listing in the U.S. really are deterring foreign business, cutting costs would be a particularly easy way to remove at least one impediment to doing business here, and it is a step that doesn’t require any governmental authority’s cooperation to accomplish. At a time when U.S. financial firms are booking record profits, this seem like a reasonable first step toward removing impediments to the competitiveness of the U.S markets.

In my commentary on reform proposals, I have also frequently noted (refer here) that other countries’ reforms are narrowing differences between the U.S. and other countries. An article in the February 17, 2007 issue of the Economist magazine entitled "If You Can’t Beat Them, Join Them" (here, subscription required) comments that while European business interests may not welcome American style class action lawsuits, "welcome or not, class action lawsuits are on the way." Britain, Netherlands, Germany and Spain all already permit some form of collective action, and Italy and France are considering their own versions. (France recently tabled its version until after the May elections.) To be sure, these European versions lack many of the attributes of American class action litigation, including contingent fees, jury verdicts on damages, and the possibility of punitive damages awards. The Economist declares that these new forms of collective action deserve a "caution welcome" because they permit efficient resolution of widespread claims, and because they provide injured European investors a way to seek remedies without having to resort to U.S. courts.

Reasonable minds can disagree over whether the differences or similarities between the U.S and the European models of collective civil actions are most important now. But as global investors become more accustomed to seeking judicial remedies for management misconduct, the similarities will matter more than the differences.