In a comprehensive study, Big Four accounting firm PricewaterhouseCoopers LLP (PWC) evaluated the 2007 trends of the private securities class action landscape. Grace Lamont, leader of PWC's Securities Litigation Practice, and James R. Meehan, partner at PWC, presented the 12th annual Securities Litigation Study in San Francisco.
Word of the Year: Subprime
"Without a doubt, most notable in 2007 was the escalation of what has been termed the subprime crisis, the full implications of which have yet to be seen in the financial and legal worlds," Lamont stated.
Subprime investigations are still in motion, and there remains uncertainty as to which filings and allegations will be successful against which defendants. "As these cases play out and settlements are reached, it will be interesting to see if the subprime issue spurs even more cases in 2008 and beyond," Meehan commented.
Increase in Foreign Corrupt Practices Act (FCPA) Violations
Over the past year, there has been a noticeable increase in FCPA violations. 2007 saw twenty-nine new investigations by the Department of Justice (DOJ) and Securities Exchange Commission (SEC). According to Lamont, the caseload of Alice Fisher, the Assistant Attorney General who heads the Criminal Division of the DOJ, has doubled over the past year.
Enacted in 1977 and substantially revised in 1988, the FCPA: 1) makes it illegal for a U.S. citizen or company (or any person acting on behalf of a U.S. person) to bribe a foreign government official for the purpose of obtaining or retaining business; and 2) prescribes accounting and record-keeping practices. The anti-bribery provisions of the FCPA are enforced by the DOJ, while the accounting and record-keeping provisions of the FCPA apply to companies which are publicly traded in the U.S.
"For years, the FCPA has been a growing focus of investigations and prosecutions inside the U.S. But in 2007, the FCPA's application to cases outside the United States shifted into a markedly higher gear," noted David Pitofsky, a partner at Goodwin Procter LLP.
As many U.S. companies have rushed to establish business in China, Russia and India (three countries on the bottom of Transparency International's Bribe Payers Index), FCPA investigations and prosecutions by the DOJ will likely continue to increase in 2008.
Foreign Securities Litigation
"Another interesting trend to watch will be the U.S. Government's increasing focus on multi-national companies and their related global issues," Meehan stated. The study shows an increase of actions against foreign private issuers (FPI), businesses that trade on a U.S. exchange but are headquartered or incorporated outside the U.S. According to the report, the number of federal securities class actions filed against FPIs increased by 93% in 2007.
"Foreign issuers are continuing to question whether the benefits of trading on the U.S. exchange outweigh the costs of accessing the largest capital market in the world," said Patricia Etzold, a partner with PWC.
Recent Supreme Court Decisions
In addition to a record number of securities class actions filings, the industry saw two key court decisions by the Supreme Court of the United States: Tellabs and Stoneridge. Both decisions are expected to impact other trial decisions in the future.
- Decided July 27, 2007
- Case Docket
- Case Summary: In the context of private securities fraud actions and the pleading requirements of the Private Securities Litigation Reform Act (PSLRA) intended to check abusive litigation, to qualify as "strong" within the intent of section 21D(b)(2), an inference of scienter must be more than merely plausible or reasonable -- it must be cogent and at least as compelling as any opposing inference of non-fraudulent intent.
The full extent of Tellabs impact is yet to be seen, but many are watching to observe whether the decision will shift the balance of power at the pleading stage to corporate defendants.
Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc.
- Decided January 15, 2008
- Case Docket
- Case Summary: In a class action brought by investors alleging losses after purchasing common stock, the investors sought to impose liability on entities who, acting both as customers and suppliers, agreed to arrangements that allowed the investors' company to mislead its auditor and issue a misleading financial statement affecting the stock price. Dismissal of the action was affirmed, as the Justices ruled that the Securities Exchange Act of 1934 section 10(b) private right of action does not reach the customer/supplier companies because the investors did not rely upon their statements or representations.
According to Jonathan Dickey, partner at Gibson Dunn & Crutcher, "The plaintiffs' bar is seeking to capitalize on the Supreme Court's observations about the 'deceptive act' requirement and to argue that Stoneridge still allows claims to be asserted against secondary actors in some cases. . . Trial court decisions will be closely watched in 2008."
In 2007, 113 settlements were reached with a total value of $6.37 billion. The average settlement in 2007 was $56.3 million.
The following 2007 settlements above $100 million were as follows:
- Tyco, $3.2 billion (the largest settlement on record)
- Cardinal Health, $600 million
- Delphi Corp., $333.4 million
- CMS Energy Corp., $200 million
- Motorola, $190 million
- Refco, $147.6 million
- Biovail Corp., $138 million
- Doral Financial Corp., $130 million
- Mercury Interactive Corp., $117.5 million
Other Key Study Findings
- 163 federal class actions were filed in 2007, compared to 109 in 2006.
- 25% of filings involved technology companies, followed by the banking and financial services industries (21%) and pharmaceutical industry (13%).
- The majority of securities filing activity continued to be in the Second Circuit (55) and Ninth Circuit (44) U.S. Courts of Appeals.
- Companies involved in DOJ FPCA-related prosecutions in 2007 settled for a total of $72.7 million.
- The number of accounting-related cases fell in proportion to the total number of cases filed in 2007 (50%) compared to 61% in 2006, although the largest class action case settlement of the year was accounting-related.
The 2007 Securities Litigation Study suggests that the U.S. is poised to see more cases involving subprime matters, the FCPA, and foreign issuer activity in the 2008 securities litigation arena. The impact of recent U.S. Supreme Court decisions on federal securities cases will also become clear.
As subprime issues move forward, the naming of Union/Public pension funds as lead plaintiffs in class actions is a trend Lamont believes will continue to grow in 2008. When pensions are involved in litigation, settlements tend to be much higher than cases in which an individual is the lead plaintiff.
Lamont concluded, "Above all, 2007 was a year of change and a good deal of turmoil. How this change and instability specifically affects the outlook for 2008 remains to be seen, but one thing is certain: it is likely to be a bumpy ride."