To allege scienter (intent or knowledge of wrongdoing) in securities fraud cases, lawyers sometimes avow to the court that they have one or more confidential sources who tipped them off to the wrongdoing. If the court accepts this story, they may keep a case alive for which there would otherwise be no or inadequate evidence. Trouble is, the confidential informants can be, if not entirely a mirage, then flimsier on inspection than the court might have assumed. Cory Andrews of WLF tells of a recent ruling by Judge Richard Posner in a case called City of Livonia Employees’ Retirement System v. Boeing:
Seeking hundreds of millions of dollars in damages, plaintiffs filed a putative class action alleging that Boeing Company, along with its CEO and the head of its commercial aircraft division, committed securities fraud in violation of federal law. The district judge dismissed the complaint for failing to allege sufficient facts to properly plead the requisite scienter for fraud. Not to be deterred, plaintiffs promptly filed an amended complaint, but this time with detailed bombshell revelations from a confidential source. Ultimately, however, the allegations in the amended complaint could not withstand even the slightest scrutiny.
As Posner describes it:
The plaintiffs’ lawyers had made confident assurances in their complaint about a confidential source — their only barrier to dismissal of their suit — even though none of the lawyers had spoken to the source and their investigator acknowledged that she couldn’t verify what (according to her) he had told her.
Their failure to inquire further puts one in mind of ostrich tactics —of failing to inquire for fear that the inquiry might reveal stronger evidence of their scienter regarding the authenticity of the confidential source than the flimsy evidence of scienter they were able to marshal against Boeing.
Noting that the same law firm [Robbins Geller Rudman & Dowd] had been accused of “similar conduct” in three other reported cases, Posner [on behalf of a unanimous panel] remanded the matter back to the district judge, who would be in a better position to calculate a dollar amount for Rule 11 sanctions.
Never mind the (alleged by former employee) lurid sex stuff, says Daniel Fisher, let’s talk about this law firm’s shortcomings in filing securities actions [Forbes]
“I mean, frankly, I am totally puzzled, given that plaintiffs’ bar in this area uses the Wall Street Journal as their source of clients and cases, right? You guys read it every day, looking for scandal, right? Other people read People Magazine, but you read the Wall Street Journal.” – Judge Naomi Reice Buchwald (S.D.N.Y.), during a proceeding on the LIBOR class actions. [Staci Zaretsky, Above the Law] “And in other news, the Sun rose today.” [@LawyerKitty]
The Economist on an unplanned (at least one hopes it was unplanned) effect of Dodd-Frank:
THE Dodd-Frank law of 2010 requires a “say-on-pay” vote for shareholders of American companies. Clever lawyers scent a payday for themselves.
One law firm in particular, Faruqi & Faruqi, has filed a series of class-action suits demanding more information about how companies decide what to pay their senior executives. It seeks to prevent its targets from holding their annual meetings until the extra information turns up. One such suit, against Brocade Communications, a Californian company, forced the suspension of the annual meeting last February. Brocade quickly settled. Faruqi’s fees were $625,000. Several other companies, not wanting to delay their meetings, have settled similar suits.
Prof. Bainbridge is reminded of the specialized group of non-lawyers in Japan known as sokaiya, who extract money from target companies by threatening (among other things) to disrupt annual meetings.
Putting the 2010 bill to work:
Now, lawyers have found a new way to bring lawsuits over executive pay, resulting in a handful of legal settlements. But the settlements to date have produced no changes in executive compensation and no money for investors. In fact, the main financial beneficiary so far has been a small New York law firm that brought the bulk of the cases.
[Nate Raymond, Reuters; Prof. Bainbridge]
“The U.S. Chamber’s Institute for Legal Reform today released a study on merger-related litigation that concludes plaintiff lawyers take advantage of the court system to extract tens of millions of dollars a year in fees from companies at the expense of shareholders. A loophole in the federal law designed to cut down on securities class-action abuses allows lawyers to file suits challenging mergers in multiple state and federal courts, the study found, making it impossible for companies to consolidate the litigation in one place and increasing the odds they’ll pay the lawyers a fee to go away.” [Daniel Fisher, Forbes]
The Economist on “Why American firms cannot do deals without being sued”:
In 2005, 39% of M&A deals were challenged by lawsuits, one study found. By 2011 a hefty 96% of acquisitions worth more than $500m were attracting suits…
J. Travis Laster of Delaware’s Chancery Court [has] become an outspoken public critic of “worthless”, “sue-on-every-deal” lawsuits. In March he told one group of plaintiffs’ lawyers: “I don’t think for a moment that 90%—or based on recent numbers, 95%—of deals are the result of a breach of fiduciary duty.”
According to the Harvard Law School online catalog, the SRP is “a newly established clinical program” that “will provide students with the opportunity to obtain hands-on experience with shareholder rights work by assisting public pension funds in improving governance arrangements at publicly traded firms.”
Marty Lipton and others at Wachtell, Lipton don’t like the idea and criticize it here. More at NYT DealBook (via Bainbridge).
Reader J.B. emails to say:
Whatever one thinks of Wachtell’s substantive critique of the attack on classified/staggered boards, it’s kind of interesting for a law school to be promoting a “clinical program” in which the kids get to work for institutional investors with bajillions of dollars in assets (and, you know, the wherewithal to retain sophisticated counsel at market rates) rather than the sort of boring old indigent individuals that are the traditional law school clinic client base.
A different view: Max Kennerly.
Merger announcements often trigger a spate of press releases announcing that securities plaintiff’s firms are “investigating” the situation. Even if the evidence of wrongdoing is absent and the financial analysis thin, lawsuits may be the next step, because that’s where the money is [David Nicklaus, St. Louis Post-Dispatch]