Almost lost among a series of pro-business decisions from the U.S. Supreme Court, the 2007 Tellabs opinion has turned out to be “the shining star” for plaintiffs, Berman DeValerio partner Joseph J. Tabacco, Jr. told attorneys at a recent legal seminar.
Initially trumpeted as a victory for defendants, the ruling is “as close to a middle-of-the-road decision as the plaintiffs bar could have asked for,” Tabacco said during the American Law Institute-American Bar Association session.
Tabacco, managing partner of the firm’s San Francisco office, appeared with defense attorney Jonathan C. Dickey of Gibson, Dunn & Crutcher LLP. The July 25 session was part of a Postgraduate Course in Federal Securities Law.
In Tellabs, Inc. v. Makor, Justice Ruth Bader Ginsburg set a reasonable standard for reviewing motions to dismiss – a standard many plaintiffs firms had been meeting for years by investigating allegations prior to filing and providing detailed, fact-filled complaints. With Justice Ginsburg’s decision, courts can now read plaintiffs’ allegations holistically, Tabacco said.
“If the case passes the smell test, if you read about it in the newspaper, if you have a reputable plaintiff, such as a large institution, there’s a much greater likelihood that it won’t get dismissed,” he said.
Over the first few months of this year, some court watchers who saw a reduction in new filings predicted the demise of securities litigation. But mid-year statistics from NERA Economic Consulting and others indicate that 2008 filings are on track to be the highest since 2002. Many of the newer cases were spawned by the subprime implosion.
Dickey called it “good news” that average settlements and median settlements are more modest than in years past.
“Where is the good news there?” Tabacco quipped. “I missed that.”
“It’s good news for me,” said Dickey, who is the co-chair of his firm’s securities litigation practice.
According to NERA, settlements during the first half of 2008 averaged $32 million, up slightly from an average of $31 million in 2007. But the median settlement dropped to $6.2 million during the first six months of 2008, compared with $9.4 million last year, Dickey said.
With the exception of some cases tied to stock options backdating, Dickey noted that very few of the recent settlements include contributions made straight from the pockets of corporate directors and officers.
Settlements in the Enron and WorldCom cases raised fears among directors and officers that they would be held financially accountable for alleged violations at their companies, Dickey said. But those cases now seem to be the exception rather than the rule.
Tabacco agreed that such cases are rare. However, he said, some institutional investors are calling for greater personal accountability, especially in the most egregious examples of fraud. “The [settlement] checks that get written should not be simply written by the insurance companies, but should be written by individuals,” he said.
Tabacco and Dickey also spoke about the effects of this year’s Stoneridge decision, which found that so-called “secondary actors” cannot be held liable for fraud. Tabacco described the case as “an example where the Chamber of Commerce finally had their way äó_ and, in the face of an outrageous fraud, the Court was able to insulate and draw lines against those that should be held culpable versus those that shouldn’t.”
At issue in Stoneridge: whether a company called Scientific Atlanta could be held liable by investors in a fraud case against Charter Communications. Scientific allegedly had participated in a phony revenue scheme that helped Charter artificially inflate its financials.
While the Supreme Court found that Scientific did engage in a deceptive act, the justices said the company could not be held liable because investors had not relied upon Scientific’s statements or actions when making decisions about trading Charter securities.
Both attorneys expressed surprise that some district courts have applied the Stoneridge decision to dismiss claims against corporate insiders because their conduct was never publicly disclosed to investors. Dickey predicted this will become a point of debate as these cases move into the appellate courts.
The two were also in alignment on one key element of the subprime credit crunch: the slow pace of cases. Litigation will likely take years as attorneys argue about who is responsible for the enormous losses in market capitalization.
Plaintiffs will find these cases especially difficult to prove, as a result of the Supreme Court’s 2005 Dura Pharmaceuticals opinion, which requires claimants to demonstrate that an alleged fraud directly caused a stock price to drop. (See related article on damages calculations on p. 5.)
Dickey predicted that investors will face a “tough road” in proving that the enormous subprime market losses were directly attributable to specific defendant companies.
The decisions in Dura, Tellabs and Stoneridge are clear indications that the state of securities litigation and the political environment are entwined, Tabacco concluded. “If the plaintiffs don’t see it, they’re kidding themselves,” he said. “We see more and more meritorious cases that get parsed and sliced.”
*In August 2017, our firm name changed to Berman Tabacco. Case references and content published before that date may refer to the firm under our prior name, Berman DeValerio.