A Gentle Rebuttal to Prof. Grundfest

The following was first published on 2/13 over at Securities Litigation Watch, my new blog.

If you want current postings and updates on the wide world of securities litigation, I encourage you to update your bookmarks and subscriptions.

* * * * *

Last week, in a widely-circulated and much discussed Wall Street Journal op-ed column entitled “The Class Action Market” (here, sub. req'd), former SEC Commissioner and current Stanford Law Professor Joseph Grundfest suggested that private securities class actions have lost their utility in policing the securities markets and compensating investors.

I respectfully disagree with Prof Grundfest.

And so, apparently do the Department of Justice and the Securities and Exchange Commission.

In a little noticed amicus brief filed last Friday by the DOJ and the SEC in the Tellabs, Inc. v. Makor Issues & Rights, Ltd. appeal before the U.S. Supreme Court, the federal regulators noted:

Meritorious private actions are an essential supplement to criminal prosecutions and civil enforcement actions brought, respectively, by DOJ and the SEC.

Prof. Grundfest also suggests that private securities litigation is "virtually useless as means of compensating investors for their losses."

Investors in AOL or Time Warner securities would also probably disagree with Prof. Grundfest.

The private securities class actions involving AOL Time Warner settled for $2.5 billion. Time Warner settled with the federal regulators for a small fraction of that amount - $150 million to the Department of Justice and $300 million to the United States Securities and Exchange Commission. While the combined $450 million in federal regulatory settlements is not chicken feed, it is only 18% of the amount recovered in the private class action.

And the AOL case represents two of the largest payments ever made by a corporate defendant to the federal government to settle securities fraud related allegations. In many private cases, there are no state or federal penalties or disgorgements to compensate investors. For example, in the Williams Securities Litigation:

1. The company had not restated their financial statements.
2. No governmental investigation had uncovered any fraud.
3. No employees of the corporate defendants had been fired
4. Defendants never acknowledged that any improper conduct had occurred.

Yet the private securities class litigation was able to recover a substantial sum for investors, settling in 2006 for $311 million.

Expect more chatter on Prof. Grundfest's proposal during the next few months.

Does a Serial Recidivist = Corporate Scienter?

The following was first published last week over at Securities Litigation Watch, my new blog.

If you want current postings and updates on the wide world of securities litigation, I encourage you to update your bookmarks and subscriptions.

* * * * *

If a company engages in two separate alleged securities frauds six years apart, with an

intervening bankruptcy reorganization but retains at least six officers or directors from the predecessor entities, is it possible that the prior allegations could be used to bolster the corporate scienter allegations in the new litigation?

Sounds a little complicated, so let's break it down.

Way back in February 2001, Globalstar, L.P., Globalstar Capital Corporation and Globalstar Telecommunications Limited (collectively "Old Globalstar") were accused of making false and misleading statements regarding Globalstar’s financial prospects and condition. That case culminated in one of those ultra-rare securities class action trials, and ultimately settled for $20 million.

After the complaints in the first case were filed, but before that case went to trial, all of the Old Globalstar entities filed for bankruptcy protection.

Fast forward to 2007.

The Globalstar entities have reorganized as Globalstar, Inc. (NASDAQ: GSAT), filed a registration statement for a new IPO, and, as of last week, been hit with a fresh group of securities class actions.

How then do allegations of serial recidivism help to establish the scienter of a defendant corporation?

There are at least three distinct tests for corporate scienter, including two versions of the "collective scienter" theory being applied by the courts today.

Under the collective scienter theory, the analysis is based on the collective knowledge of the corporation's employees.

Under the stronger version of the collective scienter theory, a plaintiff can establish that the corporation acted with fraudulent intent without any reference to a particular employee. See, e.g. In re Dynex Capital, Inc. Sec. Litig., 2006 WL 1517580 (S.D.N.Y. June 2, 2006).

Under the weaker version of the collective scienter theory, a plaintiff need only establish that a management-level employee of the corporation acted with the requisite fraudulent intent, even if that employee is not a defendant and did not make any alleged false statement. See, e.g. In re Sonus Networks, Inc. Sec. Litig., 2006 WL 1308165 (D. Mass. May 10, 2006); In re Marsh & McLennan Companies, Inc. Sec. Litig., 2006 WL 2057194 (S.D.N.Y. July 20, 2006).

At the far end of the spectrum, and seemingly losing support by the day, is the concept that the corporate scienter analysis could only be determined by looking:

to the state of mind of the individual corporate official or officials who make or issue the statement . . . rather than generally to the collective knowledge of all the corporation's officers and employees acquired in the course of their employment.

Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353 (5th Cir. 2004).

While the new Globalstar cases have just been filed, the overlap of six senior officers or directors between the old and new entities (none of whom are currently named as defendants in the new litigation) may provide an interesting test case for the limits of the collective scienter theory.

Moving on...

Many of you are already aware that I recently joined Institutional Shareholder Services as their Vice President, Product & Market Segment Manager for Securities Class Action Services.

As previously noted here, this means that I have revived Securities Litigation Watch, the blog started in 2003 by Bruce Carton, my predecessor at ISS.

As also previously noted, I am putting this blog (Lies, Damn Lies, & Forward Looking Statements) up for adoption.

Interested parties should e-mail me at liesdamnliesblog@gmail.com.

For the near term, postings here will merely be reposts of original content first posted over at Securities Litigation Watch.

Thanks again for your loyal readership, and I look forward to seeing and hearing from you over at Securities Litigation Watch.

"The Fab Fifty"

The American Lawyer magazine has published a "Young Litigators Fab Fifty" list of fifty lawyers ages 45 and under. The members are considered to be "Litigation's Rising Stars."

Of interest to readers - two partners at two different prominent plaintiff side firms made the list.

The first, Blair A. Nicholas, 36, of Bernstein Litowitz Berger & Grossmann, LLP makes the list here.

Mr. Nicholas earned his spot on the list for his work as one of the lead trial counsel in the Clarent Corporation Securities Litigation, one of those rare securities cases that actually went to trial, and for his work in the Williams Securities Litigation, which settled for $311 million - the largest securities fraud settlement ever in Oklahoma.


The second, name partner Darren J. Robbins, 40, of Lerach Coughlin Stoia Geller Rudman & Robbins LLP, makes the list here.

Mr. Robbins serves on the firm's executive committee and as head of the mergers and acquisitions practice at Lerach Coughlin. According to this short firm bio, Mr. Robbins "concentrates his practice in the structuring of corporate governance enhancements in connection with the resolution of shareholder class and derivative litigations."

Securities Class Actions - Next Stop Thailand?

According to an article in the Bangkok Post this morning (you have to love the international dateline!), the Thai Investors Association (TIA) is pressing the government of Thailand to pass a "new class-action law to help strengthen the rights of retail investors."

Wichai Poolworaluk, TIA's president, suggests that:

In overseas markets, class-action suits are used as a tool to protect investor rights. And under this law, authorities gain greater leeway to help protect the rights of retail investors.

The TIA also is seeking to amend the Public Companies Act "to help increase the rights of shareholders, particularly in voting rights to contest controversial items that could damage the interest of minority investors."

The TIA is a:

leading organization in protecting investors rights and promoting good corporate governance among listed companies in order to help provide on environment for sustainable growth of the Thai capital market.

A review of the different litigation options currently available to Thai investors under Thai law is available from The Thailand Law Forum, here. The Law Forum "is a non-profit web site that strives to provide the English-speaking public with a free, unbiased and up-to-date source of information about Thai law."

The "Qwest" Is Over for CalSTRS

Back in December, we looked at the results that one group of "opt-out" pension funds trumpeted in the AOL Time Warner securities litigation.

The opt-out trend continues, with apparent success by some investors.

According to a press release issued earlier this week, the California State Teachers' Retirement System (CalSTRS) was able to recover "approximately 30 times what it would have received had it participated in the federal class action as a class member," in reaching a $46.5 million settlement with Qwest Communications, Qwest's former auditors and underwriters, and and certain former Qwest executives.

CalSTRS, which is the second-largest public pension fund in the United States, was represented in the litigation by "Cotchett, Pitre, Simon & McCarthy" and Girard Gibbs LLP in the Qwest litigation.

The Cotchett firm's name is in quotes because an article (sub. req'd) in The Recorder from earlier this week indicated that name partner Bruce Simon was leaving the firm to start his own solo antitrust practice. A review of the firm's website reveals that the firm is now known as Cotchett, Pitre & McCarthy.

A copy of CalSTRS complaint, filed in December 2002 in the San Francisco County Superior Court, is available here, and the executed settlement agreement is available here.

The federal class actions were largely settled in 2005 for $400 million. Lead counsel in the class action is Lerach Coughlin Stoia Geller Rudman & Robbins LLP and the New England Healthcare Employees Pension Fund, Satpal Singh, Tejinder Singh, and Clifford Mosher are lead plaintiffs in the class action.

Of Tangential Interest (since postings are not daily at this point): A side by side review of the press release issued by CalSTRS after the filing of the complaint with the press release issued after the settlement reveals that the fund leapfrogged from the third largest public pension fund in 2002 to the second largest fund in 2006 as assets grew from $94 to $157.8 billion.

The fund that CalSTRS passed to move into second place is the New York State Common Retirement Fund (NYSCRF), which had assets of $140.45 billion as of March 2006. The NYSCRF is no stranger to securities litigation, having served as lead plaintiff in two of the largest securities class actions ever, WorldCom and Cendant.