Wednesday, October 24, 2007

A Securities Lawsuit Goes to Trial

According to news reports (here , here and here), a jury trial in the securities class action lawsuit filed against JDS Uniphase commenced on Monday in federal court in Oakland. As documented in an October 2007 presentation from Risk Metrics Group (here), trials in securities cases are such a rarity that it is a historical record-keeping challenge to compile a list of the few securities cases that actually have been tried.

The lead plaintiff in the JDS Uniphase case is the Connecticut Retirement Plans and Trust Fund, and the defendants include the company itself and four of its former officers. The lawsuit relates back to the company’s astonishing $50.6 billion net loss the company report in fiscal 2001. The complaint alleges that the company knew that the boom was over and that the four individual defendants, also aware of that fact, sold more than $350 million in JDS Uniphase stock between July 31 and August 31, 2000, and that other insiders sold $503 million in stock.

The trial, which began on October 22, 2007, is scheduled to last 19 trial days, and the judge reportedly expects the jury to being deliberating before Thanksgiving.

As for why this case is going to trial, the AP news report quotes the Connecticut Treasurer’s general counsel as saying that the company "didn’t take the mandatory pretrial settlement talks seriously."

I have always thought that if there more securities cases went to trial, fewer would get filed. Earlier in my career, I had the pleasure, while acting as an insurer’s claims attorney, of directing a securities case through a jury trial, and I suspect that until the moment the jury foreman read the defense verdict, the plaintiffs’ attorneys did not believe we actually wanted to take the case to verdict.

But as much pleasure as it gives me to recount that anecdote, there are some fairly practical reasons why so few of these cases go to trial. The first is that the theoretical damages are often potentially ruinous, exceeding not only the amount of available insurance but the ability of any defendant to pay. Indeed, this "magnitude of damages" consideration is one of the many intriguing things about why the JDS Uniphase case, of all cases, is actually going to trial – the potential damages in the case have to be astronomical. By contrast, in the trial in which I was involved, the maximum potential damages were manageable, a circumstance that will rarely be the case.

Another reason so few cases go to trial is the fraud exclusion in the typical D & O policy, which precludes coverage in the event of an "adjudication" of fraud. Defendants, aware of this provision, are unwilling to risk going to trial and having a jury finding wipe out their insurance. In the case in which I was involved, the insurer waived all potential coverage defenses (known and unknown), but perhaps few carriers would be willing to agree to that.

I have always thought that another important reason so few of these cases go to trial is that the plaintiffs’ lawyers really don’t want to try them. Much easier to make allegations and collect the fee award out of a settlement than to go through the hard work of making the allegations stand up in court. Indeed, given the enormous burden and expense required to try a securities case, it arguably makes no economic sense for a plaintiffs’ lawyer to take all of that on and to risk losing it all at trial. That is perhaps the most intriguing thing about the JDS Uniphase trial – the institutional investor lead plaintiff is clearly calling the shots, and is clearly willing to run the risk of a trial.

If the JDS Uniphase trial actually gets all the way to a verdict (at this point still an uncertain proposition), and if the defendants prevail, it may be a while before you see another plaintiff willing to push their case to a jury, even tough talking institutional investors who may have a political agenda. Indeed, a contrary dynamic could be established, with defendants threatening trial, as a way to try to leverage a better settlement.

On the other hand, if the JDS Uniphase plaintiff prevails and the jury awards substantial damages, an entirely new dynamic could be introduced into the securities litigation arena. We could see other institutional plaintiffs, emboldened by the JDS Uniphase plaintiff’s success, taking a more aggressive litigation approach and distaining settlement in favor of a jury trial – or making that threat to leverage settlement to their advantage.

All in all, this will be a very interesting case to watch. I wonder if Vegas has posted a line on the case.

Interesting blog posts about the case can be found on the WSJ.com Law Blog (here), the 10b-5 Daily (here) and the Securities Litigation Watch (here and here).

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