Thursday, September 14, 2006

Comment on the ”Milberg Effect”

On September 12, 2006, the Wall Street Journal carried an editorial entitled “The Milberg Effect,” (here, subscription required) commenting on the possible impact of the Milberg Weiss indictment on the decline in the number of securities lawsuits in 2006. (To see the Cornerstone Consulting data about the decline, refer here.) The Journal editorial incorporated a bit of dodgy math projecting the likely year-end 2006 number of securities lawsuits and attributing the entire projected annual decline to the Milberg firm’s reduced filing activities. The editorial itself has been the subject of some criticism in the blogosphere. Both the Securities Litigation Watch (here) and the 10b-5 Daily (here) criticized the editorial for failing to account for the fact that multiple law firms usually target each company that is sued, so that the Milberg firm’s reduced activity alone could not be the sole cause of the reduced number of securities lawsuits in 2006.

The D & O Diary does not dispute these honorable fellow bloggers’ commentaries on the Journal editorial. Indeed, when the Milberg firm this week announced (here) what is its first new lawsuit since the firm was indicted in May 2006, the company it sued (IMAX) had in fact already been sued by multiple other law firms. (Refer here for a law firms that previously sued the company).

There are undoubtedly multiple reasons behind the decline in the number of lawsuits. (It is possible that improved corporate behavior is one of the important causes, although The D & Diary has its doubts, as discussed in a prior post, here.) But even conceding the criticisms of the Journal editorial, the D & O Diary believes that the Milberg indictment nevertheless has had an important impact on the decline in number of securities lawsuits.

As The D & O Diary noted previously noted (here), the most important fact to take into account in assessing the possible reasons for the decline is the fact that the decline began in September 2005. The significance of the date is that that is the same month that the grand jury that ultimately indicted the Milberg firm and two of its partners returned its first indictment. That first indictment was filed against Seymour Lazar, who was later named in the Milberg indictment as one of the paid plaintiffs that the Milberg firm allegedly maintained in order to be able to quickly file lawsuits when companies announced bad news. The D & O Diary poses the question (previously discussed at greater length in its prior post, here) whether or not it is a coincidence that the number of lawsuits began to decline immediately after the Lazar indictment. Could the Lazar indictment have communicated to the entire plaintiffs’ bar that the grand jury investigation was serious and that the practice of paying people to act as paid plaintiffs had to be abandoned immediately? Is the significance of the Milberg indictment not limited to its effect on the law firm itself, but does it perhaps reach to the activities of the entire plaintiffs’ bar? The D & O Diary wonders whether the reason that the number of lawsuits has declined since September 2005 is because the lawsuits that depended on the availability of paid plaintiffs are no longer being filed.

For an interesting study (with pictures) of one of the alleged paid plaintiffs named in the Milberg indictment, see this prior D & O Diary post (here) –scroll down the page to view the entry regarding the paid plaintiffs.

Options Backdating Litigation Update: The D & O Diary’s running tally of options backdating lawsuits (which may be found here) has been updated to incorporate the shareholders' derivative lawsuits that have been filed naming Affymetrix (here), Bed Bath & Beyond (here), Cable Vision Systems (here) and Par Pharmaceuticals (here) as nominal defendants. The addition of these lawsuits brings the number of companies named in options timing related derivative suits to 75. The number of companies named in securities fraud lawsuits stands at 16.

Special thanks to Bill Ballowe for the link to the Bed Bath and Beyond lawsuit.


Blogger Fayrenbalinst said...

To paraphrase an ex-president, it's the paid plaintiffs, stupid, not Milberg!

7:58 AM  
Blogger Andy said...

While some may criticize me as a dreamer, from personal experience, the "paid plaintiff" seems to be the exception, not the norm of the plaintiff's securities bar.

"The D & O Diary wonders whether the reason that the number of lawsuits has declined since September 2005 is because the lawsuits that depended on the availability of paid plaintiffs are no longer being filed."

My first thought is a corollary of the argument posted by the Sec. Litig. Watch blog: that there are multiple filers for many cases. So even if some firms no longer have a plaintiff client (because of the Milberg effect), that shouldn't substantially affect the number of cases in the U.S. The fraud still happened, there are just a lower number of firms filing lawsuits. Instead of 4 plaintiffs fighting for lead, you have 2.

Second, it seems to me that the primary cause is an underlying trend (as suggested by the C. Research report). Perhaps the combination of a natural down-cycle combined with corporate governance improvements as well as relative market stability is what has primarily caused the decrease in filings.

Finally, perhaps refuting my second point to an extent, I feel that the Milberg indictment certainly had SOME effect. My theory (not based in fact) is that Milberg was one of two ridiculously large volume filers. There is no doubt that there must have been many marginal cases in that bunch. With Milberg filing less claims (particularly if as an initial-filer), other, more selective firms may be passing on marginal case to focus on the strongest ones. While it would seem logical that the other volume filer (Lerach) would pick up the slack, perhaps other firms including Lerach are at capacity with their current case load (particularly in light of the recent explosion of options derivative suits filed by many of these firms).

My 2 cents.

12:31 PM  

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