By Douglas
W. Greene
on April 30th, 2016
Posted in Board Oversight, D&O Insurance,
Defense Costs, Defense Counsel, Falsity Analysis, Litigation Reforms, Motions
to Dismiss, Securities Class Action, Statements of Opinion, Supreme Court
I am committed
to helping shape a system for securities litigation defense that helps
directors and officers get through securities litigation safely and
efficiently, without losing their serenity or dignity, or facing any real risk
of paying any personal funds.
But we are actually moving in the opposite direction
of this goal, and unless some changes are made, securities litigation will pose
greater and greater risk to individual directors and officers. It is time
for the “repeat players” in securities litigation defense – D&O insurers
and brokers, defense lawyers, and economists – to make some fundamental changes
to how we do things.
Although most cases still seem to turn out fine for
the individual defendants, resolved by a dismissal or a settlement that is fully
funded by D&O insurance, the bigger picture is not pretty. The law
firms that have defended the lion’s share of cases since securities class
actions gained footing through Basic v. Levinson –
primarily “biglaw” firms based in the country’s several largest cities – are no
longer suitable for many, or even most, securities class actions.
Fueled
by high billing rates and profit-focused staffing, those firms’ skyrocketing
defense costs threaten to exhaust most or all of the D&O insurance towers
in cases that are not dismissed on a motion to dismiss. Rarely can such
firms defend cases vigorously through summary judgment and toward trial
anymore.
Worse, these high prices too often do not yield strategic
benefits. A strong motion to dismiss focuses on the truth of what the
defendants said, with support from the context of the statements, as directed
by the U.S. Supreme Court in Tellabs and Omnicare. Yet far too often, the
motion-to-dismiss briefs that come out of these large firms are little more
than cookie-cutter arguments based on the structure of the Reform Act.
And if a motion is lost, settlements are higher than necessary because the
defendants often have no option but to settle in order to avoid an avalanche of
defense costs that would exhaust their D&O insurance limits.
On the
other hand, if settlement occurs later, it can be difficult to keep settlement
within D&O insurance limits – and defense counsel’s analysis of a “reasonable”
settlement can influenced by a desire to justify the amount they have billed.
At the same time that defense costs are continuing to
rise exponentially, securities class actions are becoming smaller and smaller,
with two-thirds of cases brought against companies with market caps less than
$2 million, and almost half under $750 million. Although catawampus
securities litigation economics is a systemic problem, impacting cases of all
sizes, the problem is especially acute in the smallest half of cases. Some
of those cases simply cannot be defended both well and economically by typical defense firms.
Either defense costs become ridiculously large for the size of the case and the
amount of the D&O insurance limits, or firms try to reduce costs by cutting
corners on staffing and projects – or both. We see large law firms
routinely chase smaller and smaller cases. From a market perspective, it
makes no sense at all.
So how do we
achieve a better securities litigation system? Five changes would have a
profound impact:
1. Require an interview process for the selection
of defense counsel, to allow the defendants to understand their options; to
evaluate conflicts of interest and the advantages and disadvantages of using
their corporate firm to defend the litigation; and to achieve cost concessions
that only a competitive interview process can yield.
2. Move damages expert reports and discovery ahead
of fact discovery, to allow the defendants and their D&O insurers to
understand the real economics of cases that survive a motion to dismiss, and to
make more informed litigation and settlement decisions.
3. Increase the involvement of D&O insurers in
defense-counsel selection and in other strategic defense decisions, to put
those who have the greatest overall experience and economic stake in securities
class action defense in a position to provide meaningful input.
4. Increase the involvement of boards of directors
in decisions concerning D&O insurance and the defense of securities
litigation, including counsel selection, to ensure their personal protection
and good oversight of the defense of the company and themselves.
5. Make the Supreme Court’s Omnicare decision a primary tool in the defense of
securities class actions. Obviously, Omnicare should
be used to defend against challenges to all forms of opinions, including
statements regarded as “puffery” and forward-looking statements protected by
the Reform Act’s Safe Harbor for forward-looking statements. But defense
counsel should also take advantage of the Supreme Court’s direction in Omnicare that courts evaluate challenged
statements in their full factual context. Omnicare supplements
the Court’s previous direction in Tellabs that
courts evaluate scienter by considering not just the complaint’s allegations,
but also documents incorporated by reference and documents subject to judicial
notice. Together, Omnicare and Tellabs allow defense counsel to defend their
clients’ honesty with a robust factual record at the motion to dismiss stage.
These five changes are among the top wishes I
have to improve securities litigation defense, and to preserve the protections
of directors and officers who face securities litigation. Over the next
several months, I will post about each one. This month, I start with a post
that I have already written: my October 2015 post titled “Securities Class Action Defense
Counsel Selection: An Interview Process is Essential.”
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