Monday, September 24, 2007

Has the Two-Year Lull in Securities Lawsuit Filings Ended?

One of the most oft-noted observations (refer, for example, here) concerning directors' and officers' liability exposure is that since mid-2005 the number of securities class action filings has fallen well-below historical averages. When NERA Economic Consulting recently released its 2007 mid-year report on securities class actions (refer here for my prior post about the NERA report), the report noted that while lower class action filing levels persist, the filing rate during the first-half of 2007 did represent an increase over immediately prior six-month period. The NERA study was focused on filing during the period ending on June 30, 2007, but it is clear the filing levels since June 30 have continued the upward trend that NERA noted, particularly since August 1, 2007.

By my count, during the eight weeks between August 1 and September 21, 2007, 37 companies were sued for the first time in securities class action lawsuits. If this filing rate is extrapolated over a 52-week period, the resulting annualized rate would be 296 lawsuits, well above historical norms.

Perhaps the most active week during the recent 8-week period was the immediate past week of September 17 through September 21, when eight companies were sued for the first time in securities class action lawsuits:

Part of what is driving this litigation is the growing wave of subprime lending-related litigation, which I have more specifically identified in my running tally of subprime lawsuits, here. The lawsuits filed last week include as many as three subprime-related cases, depending on how broadly you define the category: Care Investment, NetBank, and Opteum. But it is significant that the subprime litigation wave is not all or even most of the story here; the lawsuits are arising in a diversity of sectors and involve a variety of allegations, most of them having nothing to do with subprime lending.

Clearly part of what is going on here is that volatility has returned to the financial marketplace. As I have argued elsewhere (refer here), the 2-year lull in securities lawsuit filings arguably was simply a side-effect of an unusually stable financial marketplace. But a disrupted credit arena and a more volatile securities environment has stressed a number of companies. And so, far from having arrived at a "permanent shift" in the level of securities filings, as Stanford Law Professor Joseph Grundfest suggested just a couple of months ago (here), we were rather simply enjoying a period of unusual calm, which now appears will be followed by more normal conditions, if they do not in fact turn out to be worse than that. To be sure, eight weeks may prove to have been far too short of a period from which to generalize. But at least based on the last eight weeks, it appears that we may be headed back to historical filing levels.

One very important observation about the heightened filing levels during the last eight weeks is what an important part of this activity has been played by former Lerach Coughlin law firm, known since Bill Lerach’s August 31 departure as Coughlin Stoia Geller Rudman & Robbins. Amidst the generally elevated filing levels, the Coughlin Stoia firm has been the first to file against quite a number of the companies sued during the last eight weeks, including most recently Jones Soda, Terragon, Care Investment, The Children’s Place, and W Holding. Given everything that has been going on at the firm during this same eight week time period, its activity levels are truly remarkable. Either they are not distracted or they are very committed to showing that they are not distracted. They also appear to be trying to communicate that Lerach’s departure is not going to slow them down. Or I suppose they could be just trying to make a buck the best way they know how.

CFO.com has an interesting September 21, 2007 article entitled "Signs of Life: Securities Suits Rise" (here) commenting on the recent NERA report and its conclusions about filing rates during the first half of 2007. The SOX First blog has a September 22, 2007 post on the same topic here.

Corporate Corruption and Follow-on Shareholder Litigation: Regular readers know that I have commented frequently (most recently here) on the risk of shareholder litigation following Foreign Corrupt Practices Act investigations. I also recently wrote (here) about the corrupt practices investigation at BAE Systems. In that connection, it is interesting to note that among the lawsuits that the Coughlin Stoia firm has recently filed is a shareholder derivative suits against the BAE board of directors and several of its present and former officers "seeking to recover losses BAE suffered in connection with the more that $2 billion in alleged bribes paid to Prince Bandar Bin Sultan and others." The law firm’s September 19, 2007 press release describing the lawsuit can be found here, and the complaint can be found here.

The defendants are accused of intentional, reckless and negligent breaches of their duties of care, control, compliance and candor. The defendants, which include Prince Bandar bin Sultan, three former officers of Riggs Bank, and PNC Financial Services (successor in interest to Riggs), are alleged to have engaged in illegal, improper and ultra vires conduct, including causing BAE to violate the laws of the United States and international business codes and conventions relating to corrupt business practices.

I have long identified the risk of follow-on shareholder litigation following FCPA investigations as a growing area of D & O risk. The involvement of a prominent plaintiffs’ firm like the Coughlin Stoia firm underscores the growing significance of this risk.

The new BAE lawsuit could well run afoul of the Internal Affairs Doctrine, about which I previously commented here. This doctrine holds generally that only one state should have the authority to regulate a corporation’s internal affairs, and many courts will refuse to allow actions to proceed against corporations from other jurisdictions if the shareholders have sufficient avenues to address management malfeasance under the laws of the corporation’s domicile. BAE will undoubtedly contend that shareholders have avenues available, particularly under the new U.K. Companies Bill (about which refer here).

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