Transcript Changing Tides Thur 8.30 am

Changing Tides:
Supreme Court Decisions
and Securities Class
Action Lawsuits
Singin’ The PL Blues
MODERATOR:
• Denise Amantea, Esq., Partner, Woodruff Sawyer &
Company
PANELISTS:
• Stephen Choi, Ph.D., JD, Murray and Kathleen Bring
Professor of Law, New York University School of Law
• Patrick Coughlin, Esq., Partner, Coughlin Stoia Geller
Rudman & Robbins LLP
• Todd David, Esq., Partner, Alston & Bird LLP
• Jane E. Keller, Esq., Senior Vice President & Chief Claims
Officer, The Navigators Group, Inc.
• Cynthia Zollinger, President & Chief Executive Officer,
Cornerstone Research
Agenda
• Recent Supreme Court Decisions



Stoneridge
Dura Pharmaceuticals
Tellabs
• Impact of These Decisions
• Statistics
• Changing Tides
Stoneridge
(decided 1/2008)
• Charter – Provided digital cable converter (set top)
boxes to customers;
• Scientific-Atlanta and Motorola supplied the boxes;
• Charter to miss projected cash flow numbers by $1520 million;
• Charter overpaid by $20 a box - overpayment
returned by purchasing advertising;
• Wash to Motorola and Scientific-Atlanta;
• Motorola and Scientific-Atlanta allegedly
entered transactions and backdated contracts.
Stoneridge
• Supreme Court – Motorola’s and Scientific-Atlanta’s
allegedly deceptive acts, which were not disclosed to
the market, too remote to satisfy reliance;
• It was Charter, not Scientific-Atlanta or Motorola
that allegedly filed fraudulent financial statements;
• Nothing Scientific-Atlanta or Motorola did made it
necessary for Charter to record the transactions as it
reported its financial results to the public.
Stoneridge
• Impact: Rejected Plaintiff’s attempt to create
private right of action for aiding and abetting;
• Really strengthened or extended Central Bank
– in Central Bank there had been no allegation
of false or deceptive conduct by the Bank;
• Stoneridge – there were such allegations here –
participation in the transaction alone is not
enough to establish liability.
Dura Pharmaceuticals
(decided 4/2005)
• Alleged misrepresentations about readiness of a
new asthmatic spray device;
• Investors sue alleging stock was purchased at
inflated prices;
• Supreme Court – inflation allegation alone is
not enough. Investors have to tie economic loss
to the misrepresentations.
Dura Pharmaceuticals
• Impact: Arguably did not change the law
meaningfully. Basically followed law already
on the books in 2nd, 7th, and 11th Circuits, but
made it clear to district courts that failure to
allege loss causation adequately justified
dismissal;
• Commentators thought Supreme Court might
reconsider fraud-on-the-market doctrine
adopted in Basic v. Levinson.
Dura Pharmaceuticals
• Fifth Circuit – Oscar/Belo – At the class
certification stage investors have to prove loss
causation by a preponderance of the evidence
before fraud-on-the-market “reliance”
presumption kicks in.
Tellabs
(decided 6/2007)
• Manufacturer of specialized fiber optic equipment
– demand for core product misrepresented;
• 7th Circuit – facts “from which, if true, a
reasonable person could infer that the defendant
acted with the requisite intent.”
• Supreme Court – 7th Circuit standard not high
enough. Court rejects toughest standard in 9th
and 6th Circuits - Plaintiffs are entitled only
to most plausible of competing inferences.
Tellabs
• Supreme Court – “Only if a reasonable
person would deem the inference of scienter
cogent and at least as compelling as any
opposing inference one could draw from the
facts alleged.”
• Impact? Debatable.
Impact of Tellabs on Class Actions
How to Handle Competing Inferences?
Weak
Tougher
Reasonable
3rd & 7th
Circuits
Equally Plausible
“at least as compelling”
2nd, 5th, 8th, 10th
& 11th Circuits
Preponderance
1st, 4th,
6th & 9th
Circuits
Tellabs
27% of Lawsuits in our sample from the 9th Circuit
* From Choi & Pritchard (2009)
Data Sample
• 2003 to mid-2007 (right before Tellabs)
• Dismissal decisions both pre- and post-Tellabs
• Rule 10b-5 Class Actions
Statistical Tests
Tests
1. Probability of
dismissal
2. How long to get
dismissal
3. Incidence of lowvalue settlements
-
Controls
Other Claims
Case Strength
Firm Size
High Tech Firms
FDA-related claims
Confidential Witnesses
Motive Variables
Lead plaintiff
Lead Counsel
1. Probability of Scienter-Based Dismissal
Ninth Circuit v. All Other Circuits
+28.9%
-19.2%
Pre-Tellabs
Post-Tellabs
2. No. of Dismissal Decisions until Dismissal
Ninth Circuit v. All Other Circuits
+1.8
+0.3
Pre-Tellabs
Post-Tellabs
3. Low Value Settlements
+55.4%
“Reasonable” All
Circuits v. Others
-15.6%
+0.03%
-19.4%
Pre-Tellabs
Post-Tellabs
Ninth v. All
Circuit Others
Key Take-Away Points
• Filings up in 2008… but likely lower in 2009
• Credit crisis-related issues — a recurring theme
• Disclosure losses above average in 2008
• Most cases settle for less than $20 million,
• But mega-cases comprise majority of
settlement dollars
Filings Up in 2008
But Likely Down in 2009
CAF IndexTM – Number of Class Action Filings
1997 – 2009 YTD
2009 Estimated Filings
Ponzi Filings
Options Backdating Filings
Auction Rate Securities Filings
242
All Other Credit Crisis Filings
228
224
209
All Other Filings
224
216
20
192
182
181
176
179
175
9
39
81
119
15
128
24
114
15
46
95
68
1998
1999
© 2009 by Cornerstone Research
www.cornerstone.com
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Credit Crisis-Related Cases
Have Been Prevalent
TM
CAF Index
127
– Semiannual Number of Class Action Filings
1997 – 2009 YTD
2009 H2 Estimated Filings
Ponzi Filings
Options Backdating Filings
Auction Rate Securities Filings
All Other Credit Crisis Filings
All Other Filings
112 112
126
117
115
115
111
111
109
105 104
105
109
107
17
107
95
92
87
30
83
79
5
77
39
83
42
73
72
15
69
64
9
5
55
9
64
73
55
15
38
46
55
50
8
40
30
38
1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009
H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2
© 2009 by Cornerstone Research
www.cornerstone.com
DDL Increased Significantly in 2007 H2
But Declined in 2009 H1
Disclosure Dollar Loss: 6 Month Periods
1997 H1 – 2009 H1
$165
Dollars in Billions
Options Backdating Filings
Credit Crisis Filings
All Other Filings
$135
$129
$120
$116
$37
1997 H1 – 2008 H2
6-Month Average ($69)
$62
$97
$55
$87
$83
$78
$36
$76
$61
$57
$57
$48
$48
$44
$36
$33
$37
$35
$78
$31
$29
$74
$20
$61
$21
$26
$11
$33
$27
$16
1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009
H1
H2
H1
H2
H1
H2
H1
H2
H1
H2
H1
H2
H1 H2
H1
H2
H1
H2 H1
H2
H1
H2
H1 H2
H1
© 2009 by Cornerstone Research
www.cornerstone.com
Market Capitalization Declines
Have Been Above Average
Maximum Dollar Loss: 6 Month Periods
1997 H1 – 2009 H1
$1,126
Dollars
in Billions
$987
Options Backdating Filings
Credit Crisis Filings
All Other Filings
$926
$505
$497
$434
1997 H1 – 2008 H2
6-Month Average ($356)
$418
$518
$332
$429
$292
$266
$351
$335
$307
$241
$195
$173
$246
$218
$169
$137
$98
$146
$235
$116
$171
$125
$233
$88
$52
$114
$91
$154
$235
$189
$177
$102
1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009
H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1
© 2009 by Cornerstone Research
www.cornerstone.com
In 2008 32% of Financial Firms in
S&P 500 Were Sued
TM
S&P 500 Securities Litigation Heat Maps
Percent of Companies Subject to New Filings*
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Basic Materials
2.4%
0.0%
0.0%
0.0%
0.0%
3.4%
0.0%
0.0%
0.0%
0.0%
Communications
8.3%
17.4%
22.7%
4.8%
2.3%
4.8%
2.3%
6.5%
4.8%
2.4%
Consumer Cyclical
5.5%
4.1%
5.3%
5.5%
2.7%
9.5%
2.8%
5.9%
2.9%
0.0%
Consumer Non-Cyclical
4.5%
5.6%
9.7%
7.4%
8.4%
9.6%
7.1%
9.3%
7.4%
0.0%
Energy
0.0%
3.3%
19.2%
0.0%
4.0%
0.0%
0.0%
0.0%
0.0%
2.4%
Financial
4.2%
1.4%
18.3%
6.3%
13.6%
5.0%
0.0%
9.4%
32.6%
7.7%
Industrial
2.9%
0.0%
6.1%
4.5%
4.5%
4.6%
1.6%
1.6%
3.2%
1.5%
Technology
11.4%
14.8%
5.3%
3.6%
3.6%
5.4%
9.3%
0.0%
6.0%
0.0%
Utilities
5.9%
5.9%
34.3%
2.9%
6.1%
3.0%
0.0%
3.2%
3.3%
0.0%
All S&P 500 Companies
5.0%
5.6%
12.0%
4.8%
6.0%
6.0%
3.2%
5.2%
9.2%
1.8%
Legend
0%
0% – 5%
© 2009 by Cornerstone Research
www.cornerstone.com
* The chart is based
on the composition of the S&P 500 as of the first trading day of each year.
5% – 15% 15% – 25%
25%+
Federal Judicial Circuits Percentage of
Suits Filed by Circuit: 1999 – Sept 2009
*
Includes IPO allocation cases.
Circuit
Percentage
of Suits
1
4.7%
2
34.4% *
3
7.3%
4
3.8%
5
6.2%
6
4.1%
7
4.4%
8
3.6%
9
20.4%
10
3.0%
11
7.7%
DC
0.5%
Section 11 Claims in 23% of Filings
25%
Percentage of Total Filings with Section 11 Claims
2002 – 2008
23.0%
20%
19.0%
15%
12.0%
11.0%
10%
9.0%
9.0%
7.0%
5%
0%
2002
© 2009 by Cornerstone Research
www.cornerstone.com
2003
2004
2005
2006
2007
2008
Total Settlement Dollars
2004 H1 – 2009 H1
$13.6
WorldCom
Enron
Tyco
Dollars in Billions
$8.6
$5.2
$4.7
$3.0
$2.3
$2.1
$1.4
$1.9
$0.8
$0.5
1H 2004 2H 2004 1H 2005 2H 2005 1H 2006 2H 2006 1H 2007 2H 2007 1H 2008 2H 2008 1H 2009
N = 39
N = 71
N = 53
N = 66
N = 37
N = 55
N = 56
N = 54
N = 48
N = 50
Note: Settlement dollars adjusted for inflation; 2009 dollar equivalent figures shown. Half-year designation based on settlement hearing date.
© 2009 by Cornerstone Research
www.cornerstone.com
N = 56
Settlement Summary Statistics
Settlements
2009 H1
Through 2008
Minimum
$0.4 million
$0.1 million
Median
$6.9 million
$7.4 million
Average
$34.1 million
$55.5 million
$925.5 million
$7.7 billion
$1.9 billion
$57.1 billion
Maximum
Total Amount
Note: Settlement dollars adjusted for inflation; 2009 dollar equivalent figures shown.
© 2009 by Cornerstone Research
www.cornerstone.com
Almost 80% of Cases Settle
for Less Than $20 Million
Distribution of Settlement Amounts
Dollars in Millions
93.9%
97.4%
Under
$100
Under
$300
100.0%
89.4%
78.8%
61.5%
40.2%
Under
$5
Under
$10
© 2009 by Cornerstone Research
www.cornerstone.com
Under
$20
Under
$50
All
Settlements
Mega-Settlements Comprise a Significant
Portion of Total Settlement Dollars
Settlements in Excess of $100 Million (“Mega-Settlements”)
Dollars in Millions
95%
% of Settlements in Excess of $100 Million
% of all Settlement Dollars Associated
with Settlements in Excess of $100
Million
79%
66%
57%
53%
50%
42%
41%
15%
4%
2001
4%
2002
© 2009 by Cornerstone Research
www.cornerstone.com
6%
2003
6%
2004
8%
6%
2005
2006
2007
6%
2008
Dispositions by Year Suit Filed –
Excluding IPO Allocation Cases
100%
90%
Open
Withdrawal
Dismissal
80%
Settlement
Percentage of Cases
70%
60%
50%
40%
30%
20%
10%
0%
1999
2000
2001
2002
2003
2004
Year of Filing
2005
2006
2007
2008
9/2009
Percentage of Cases Dismissed or Withdrawn:
Time from Filing of Suit to Resolution –
The First Five Years and Beyond
100%
90%
80%
70%
60%
50%
40%
39%
30%
20%
23%
22%
10%
9%
4%
3%
Year 5
Beyond
0%
Year 1
Year 2
Year 3
Year 4
NOTE: Based on 507 dismissed or withdrawn cases filed from 1999 – September 2009.
Changing Tides
• Are there identifiable claim trends emerging
subsequent to these rulings?
• Are there changes in program structures?
• Have underwriters altered their risk selection
appetite?
• Are there specific policy terms & conditions that
have been modified as a result of these cases.
• Has pricing been affected?
Many thanks to …
• Denise Amantea
• Stephen Choi
• Pat Coughlin
• Todd David
• Jane Keller
• Cynthia Zollinger