A Closer Look at M&A (“Takeover”) Securities Suits

My November 19 post referenced Dan Fisher’s recent Forbes piece on a securities suit filed against Berkshire Hathaway a few hours after it’s announcement of a $26 billion acquisition of BNSF.  This and similar lawsuits usually allege that the officers/directors negotiated/agreed to terms which failed to maximize shareholder value.

Unlike traditional securities class actions which allege violations of Rule 10b-5, or shareholder derivative cases which are brought by a shareholder in the name of the corporation, takeover suits are traditionally brought in state courts under state law and are not governed by the Private Securities Litigation Reform Act (the PSLRA).

The inapplicability of the PSLRA means the the “first to file” rule (and all it implies) still applies to takeover litigation. Indeed, Fisher argues that these lawsuits are filed without so much as a good faith belief in the very claims they advance, but are rather:

…designed to capitalize on the dynamics of acquisitions. To avoid further lawsuits companies frequently announce a takeover price that they later negotiate upward, providing strong evidence that the ultimate price was arrived at through arms-length bargaining.

If a substantial portion of takeover litigation is lawyer-driven and aimed at recovering fees for doing little more than filing a complaint with the court clerk faster than anyone else (not an Olympic event as far as I know) then the transactional inefficiencies on mergers and acquisitions generally could be quite significant.

However, even if the litigation costs associated with a single major acquisition can easily be shrugged off, the systemic inefficiencies cannot. A 2004 Vanderbilt Law Review Article by Robert Thompson and Randall Thomas highlights just how prevalent these suits are:

When we analyzed data that we had collected on all suits filed in 1999 and 2000 in the Delaware Chancery Court, the nation’s leading corporate trial court, we were surprised to find that approximately 80 percent of the breach of fiduciary duty claims, the vast bulk of state court representative litigation are class actions against public companies challenging director action in an acquisition.

These acquisition-oriented class actions dominate all other forms of state court shareholder litigation.  Moreover, in 1999 and 2000, the number of these class actions filed in Delaware alone equaled about half of the total number of federal securities fraud class actions filed in all federal district courts during that same two-year period.

Given the potentially unnecessary systemic litigation costs  involved,  this issue cries out for further empirical investigation.

Filed under: Litigation, Opinion, PSLRA, securities

Supreme Court to Weigh In on F-Cubed Securities Case

Despite a petition by the United States Solicitor General urging the Supreme Court to reject certiorari, the Court granted cert today in Morrison v. National Australia Bank Ltd., 547 F.3d 167 (2d Cir. 2008).  The future of F-Cubed litigation could hinge on the issues the court will consider. According to Securities Law Prof Blog, the issues before the Court include:

I. Whether the antifraud provisions of the United States securities laws extend to transnational frauds where: (a) the foreign-based parent company conducted substantial business in the United States, its American Depository Receipts were traded on the New York Stock Exchange and its financial statements were filed with the Securities Exchange Commission (“SEC”); and (b)the claims arose from a massive accounting fraud perpetrated by American citizens at the parent company’s Florida-based subsidiary and were merely reported from overseas in the parent company’s financial statements.

II. Whether this Court, which has never addressed the issue of whether subject matter jurisdiction may extend to claims involving transnational securities fraud, should set forth a policy to resolve the three-way conflict among the circuits ( i.e., District of Columbia Circuit versus the Second, Fifth and Seventh Circuits versus the Third, Eighth and Ninth Circuits).

III. Whether the Second Circuit should have adopted the SEC’s proposed standard for determining the proper exercise of subject matter jurisdiction in transnational securities fraud cases, as set forth in the SEC’s amicus brief submitted at the request of the Second Circuit, and whether the Second Circuit should have adopted the SEC’s finding that subject matter jurisdiction exists here due to the “material and substantial conduct in furtherance of” the securities fraud that occurred in the United States.

We previously reported on the opening of the Vivendi trial in the Southern District of New York (also in the Second Circuit).  For a thorough and prescient look at how the Morrison issues above may impact the Vivendi case, I recommend Kevin LaCroix’s October 6 piece in The D&O Diary, Vivendi Securities Suit Goes to Trial.

Filed under: Litigation, f-cubed, PSLRA, securities, Supreme Court

Blood in the Water: The State of BofA’s Privilege

In October, I wondered whether emails between Bank of America and its outside counsel regarding the bank’s acquisition of Merrill Lynch may eventually end up in the hands of plaintiffs lawyers.  Despite the bank’s assertion that handing over the sensitive documents created only a limited waiver of its privilege, it looks now like the class action firms may be getting their wish. Susan Beck at The American Lawyer reported on Thursday that Manhattan federal district court Judge Denny Chin lifted the statutory discovery stay in the fraud case:

Chin’s ruling does not carve out an exception for privileged materials. The protective order issued by Manhattan federal district court Judge Jed Rakoff in the SEC’s case against Bank of America states that BofA is not deemed to be waiving its privilege “regarding other information that may be of interest in related private lawsuits.” That language can be construed to mean that BofA can still claim privilege over materials government investigators didn’t ask for — not necessarily that plaintiffs in private lawsuits can’t have access to the documents the bank did turn over.

The class action plaintiffs asked Judge Chin to lift the discovery stay automatically imposed by the Private Securities Litigation Reform Act in an Oct. 6 letter to Chin. The three-page letter — signed by co-lead counsel from Kaplan Fox & Kilsheimer; Bernstein Litowitz Berger & Grossmann; and Barroway Topaz Kessler Meltzer & Check — argues that the discovery stay, which typically remains in place until after motions to dismiss have been decided — placed the class at a disadvantage compared to others investigating BofA’s merger with Merrill.

Wachtell, Lipton, Rosen & Katz, representing BofA, immediately objected to lifting the stay…

With this latest ruling and the fact that the protective order may have been flawed, the sharks are smelling blood.  It’s looking more likely than ever that Bernstein Litowitz, Kaplan Fox, and Barroway Topaz will get their way.

Filed under: Litigation, Bernstein, document review, SEC, securities

Drive-By Litigation: “Takeover Lawsuits”

In the current issue of Forbes, Daniel Fisher takes a closer look at a lawsuit filed against Warren Buffett’s Berkshire Hathaway a few hours after its announcement that it would be acquiring Burlington Northern Santa Fe Corp for $26 billion:

Berkshire’s offer of $100 a share was a 31% premium to the previous day’s closing price and only a little below the railroad’s all-time high of $113 a share in May 2008. But according to the suits drafted within hours of the deal’s announcement, management could–and should–have gotten more.

Securities-litigation reform laws were supposed to end the race to the courthouse, an unseemly practice designed to win control over litigation by being the first to file. But when a takeover is announced, it’s business as usual. With a speed that stretches the bounds of credulity, lawyers file suits soon after a takeover is announced in hopes of settling the case for a generous fee…

Takeover-related litigation is a specialized niche of the larger securities class-action bar, but like other shareholder actions it is largely financed by settlements. In the case of takeovers, lawyers sue hoping the ultimate purchase price is increased. If it happens they can petition the judge for a percentage of the increase, claiming it is due to their litigation.

“If the price gets modified upward, there is no doubt the lawyers will ask for a fee based on it,” said Michael Perino, a securities litigation expert at the St. John’s University School of Law. Since most of these suits can be settled for less than the cost of discovery, the court-overseen process of going through corporate records in search of evidence, companies settle them rather than litigate…

The suit was brought by the Employees Retirement System of New Orleans, a frequent plaintiff in securities cases.  Jerry Davis, the fund’s chairman, explained that the suit was brought “to determine whether the Buffett offer is the best available deal, or whether other offers have been properly analyzed.”

Without any evidence or other indication that some party breached a fiduciary obligation to the shareholders by approving the deal, these suits are attempting to use civil discovery rules to investigate whether some purely theoretical breach may have taken place.  I admit that I skipped a few days in law school, but I had no idea that particular power resided in the judiciary.

Filed under: Litigation, Opinion, document review, institutional investors, pension funds, securities

NVIDIA: Selecting Lead Counsel under the PSLRA

The PSLRA gives district court judges some latitude in their selection of class representatives in securities cases. It also vests in lead counsel the authority to select co-counsel for the class and the discretion to divide the contingency fee among its chosen co-counsel as it sees fit. Given such high stakes, the jockeying so often seen between competing plaintiffs firms for lead status should hardly come as a surprise.

But whose favor do the lawyers need to curry in order to attain this vaunted status; the lead plaintiff’s or the court’s? This was the question before the 9th Circuit Court of Appeals in the NVIDIA securities fraud litigation. (The underlying lawsuit alleges that NVIDIA improperly failed to disclose material defects in its manufacturing processes thereby inflating the company’s stock price which subsequently deflated once the information became public.)

The court’s discretion to select plaintiffs to represent the class is circumscribed by the PSLRA which states that the adequacy of a lead plaintiff should be determined by whether or not the individual or group “(a) has either filed the complaint or made a motion in response to the published notice; (b) in the determination of the court, has the largest financial interest in the relief sought by the class; and (c) otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure” 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I).

In the NVIDIA case District Court Judge James Ware applied these factors, selecting two lead plaintiffs: the New Jersey Carpenters Pension and Annuity Fund and Mr. Roberto Cohen. But Judge Ware also selected Milberg LLP and Girard Gibbs LLP to serve as lead plaintiffs representing the class despite Roberto Cohen’s selection of Kahn Gauthier Swick, LCC to serve as his counsel. Mr Cohen appealed the order claiming the Court overstepped it’s authority by substituting its own judgment for that of the lead plaintiff.

The Court of Appeals, relying on In re Cavanaugh, 306 F.3d 726 (9th Cir. 2002), agreed with Mr. Cohen and remanded the issue back to the lower court.

…more on the decision after the jump

Filed under: Litigation, Opinion, document review, monitoring agreements, pay-to-play, PSLRA, securities

Defendants du jour: Exchange Traded Funds

The D&O Diary has an interesting look today at a group of defendants who have lately become a fashionable target for the class action industry: Exchange Traded Funds (ETF’s).

By my count there have been at least eight or nine and arguably as many as eleven (or more) new securities class action lawsuits filed against ETFs since August. (See my note below about the difficulty in counting these cases.) Though these lawsuits are separate and are separately filed on behalf of separate investors against separate ETFs, the allegations of these suits are quite similar – indeed, in many cases, virtually identical.

Two recent cases filed against ProShares Ultra Short Dow 30 Fund (refer here) and Direxion Shares Daily Financial Bear 3X Fund (refer here) illustrate the nature of this category of securities suits. The lawsuits overall, like these two, generally are filed against some variation of the funds themselves, the funds’ investment advisors or managers as well as the funds’ distributors, and the funds’ individual trustees. The ETFs themselves allegedly were designed to provide some multiple of the return (or of the inverse of the return) of some benchmark index or measure…

Whether these cases will ultimately succeed or fail of course remains to be seen, but the plaintiffs’ firms’ actions clearly suggest that they think they are on to something.

These lawsuits already represent a significant part of the total number of securities class action lawsuits this year (depending on how you count, between five and ten percent of the total). If as seems likely at this point new ETF-related cases continue to be filed, the ETF cases will not only represent an even more significant portion of the total number of new securities cases this year, but they could also produce a material increase in the overall number of lawsuits that are filed this year.

 

 

Filed under: Litigation, PSLRA, securities

BofA’s Privilege Waiver may be Broader than Intended

Zach Lowe at The AmLaw Daily has done a great job covering the hullabaloo surrounding Bank of America’s waiver of attorney-client privilege in the Merrill Lynch merger case before Judge Jed Rakoff in New York’s Southern District.  As we reported last Wednesday, BofA wrote a letter to Attorney General Andrew Cuomo’s office in New York in which it relied on the newly revised Rule 502 of the Federal Rules of Evidence which it believed would prevent the otherwise privileged documents from being more widely disseminated (in particular, to plaintiffs’ firms in private securities suits against the bank).

On Friday Mr. Lowe reported on a fascinating conversation he had with Mr. Gregory P. Joseph, an attorney who helped draft the rule.  Mr. Joseph believes the bank’s lawyers’ misunderstanding of the rule may have the unintended consequence of extending the waiver to related lawsuits and investigations.

It turns out the bank’s first mistake is simple: They referred repeatedly to a “waiver” in their court order, and rule 502 does not deal with “waivers,” Joseph says. It gives corporations the ability to disclose privileged documents in a limited way under the terms of a court order, not a waiver. It may seem like a semantic distinction, and it is, but Joseph says its implications could be huge. Put simply, any privileged document the bank discloses to the SEC is now fair game for plaintiffs lawyers in those 58 cases we mentioned earlier, Joseph says. BofA’s order protects the bank against the SEC or those plaintiffs lawyers from getting their hands on documents the order doesn’t specifically cover. But what the bank turns over to the SEC is no longer protected, Joseph says. “They’ve waived the privilege” as it relates to documents the bank turns over to the SEC…”in this case and every other case.”

 

 

Filed under: Litigation, Opinion, document review, PSLRA, SEC, securities

How Broad is BofA’s Privilege Waiver?

Bank of America has waived its right to attorney-client privilege with respect to certain communications with its outside counsel leading up to its acquisition of Merrill Lynch.  The waiver is seen by many as an attempt to assert the “advice of counsel” defense which could leave the firm’s counsel, Wachtell, Lipton, Rosen & Katz, on the hot seat.  BofA’s waiver came in the form of a letter written to Attorney General Andrew Cuomo’s office in New York.

So how broadly does the privilege waiver extend?  Surely it doesn’t mean that Bank of America will hand over confidential emails with its outside counsel to plaintiffs lawyers in related private securities suits without a fight.  Losing that fight, however, is a real possibility.  The AmLaw Daily posted this yesterday:

We called Peter Henning, a professor at Wayne State University Law School and an editor of a widely-read blog on white-collar crime, and asked him about the privilege issue. Henning tells us the BofA waiver could be an interesting test case of two recent additions to the Rules of Evidence for United States Courts. Those new rules act to prevent a waiver in one federal proceeding from spilling over into other proceedings under certain circumstances, Henning says.

The old rule was that if you turn privileged documents over, the privilege is gone,” Henning tells us. “These new rules could offer [the bank] some protection.” Henning says. BofA’s case may become more difficult if they waive privilege in front of Congress, Henning says. State Rep. Edolphus Towns, chair of the House Committee on Oversight and Government Reform, has requested privileged documents form BofA as well, according to our prior reports.

 

 

Filed under: Litigation, Opinion, Bernstein, document review, SEC, securities

Discovery Stays and the PSLRA

Despite serious problems with the Private Securities Litigation Reform Act, some of its provisions actually do have positive public policy implications.  Micahel H. Gruenglas, Robert A. Fumerton and Patrick G. Rideout have a piece in the New York Law Journal which proposes that e-discovery in all civil litigation follow the rule set out in the PSLRA.  Under the PSLRA electronic discovery is stayed pending the outcome of the defendant’s motion to dismiss unless the plaintiff agrees to pay the costs associated with the production of electronic evidence where the motion to dismiss was granted:

This measure would prevent plaintiffs with legally insufficient claims from extracting settlements based on the threat of the costs and burdens associated with e-discovery. Indeed, when even the most frivolous complaint can require a defendant to expend millions of dollars responding to requests for e-discovery (often exceeding the real amount at issue), tremendous pressure is placed on defendants to immediately settle litigation.

 

 

Filed under: Litigation, Opinion, document review, PSLRA, securities

New Study on Cy Pres Awards

Nathan Koppel at the WSJ Law Blog reported today on a recent Northwestern Law School study which concluded that cy pres awards are really just an:

attempt to conceal “faux class actions,” which the study defines as a suit “where the individual damages are so minimal … that as a practical matter the function of the suit as a means of compensating injured victims is all but completely undermined.” In these cases, the argument continues, no one does well but the lawyers.

The existence of cy pres in the first place is yet more evidence of the lawyer-driven nature of so many class actions.  This new study conducted by the Searle Center on Law, Regulation, and Economic Growth is yet another brick the wall and helps shed some more light on the class action industry.

Click here to see a video the lead author of the study, Prof. Martin Redish, discussing the cy pres doctrine.

 

Filed under: Litigation, Opinion, cy pres

Vivendi “F-Cubed” Class Action Underway

Called “F-Cubed” because it’s a securities case brought in a U.S. court by foreign investors of shares of a foreign corporation which were purchased on a foreign exchange. AmLaw reported today on the upcoming Vivendi trial:

Plaintiffs in the case, which has been around since 2002, are shareholders across the U.S. and Europe who allege that Vivendi–then known as Vivendi Universal–made false and misleading statements in 2001 and 2002, when Vivendi’s former CEO, Jean-Marie Messier, was transforming the French water company into a media conglomerate through a mad dash of acquisitions. Plaintiffs claim that Vivendi, Messier, and former chief financial officer Guillaume Hannezo concealed a liquidity crisis, whose revelation ultimately caused the stock to drop…

…The case is being watched closely by the plaintiffs bar, which would like to see more foreign investors file securities suits in U.S. courts. “It has the potential to send a very strong message that U.S. courts will not tolerate and will appropriately punish foreign companies who use the U.S. as a basis for engaging in fraudulent activity,” said William Fredericks of Bernstein Litowitz Berger & Grossmann, who is involved in a similar case against Alstom.

 

Filed under: Litigation, f-cubed, institutional investors, PSLRA, securities

The BacMerSaga – Agency Problems and the PSLRA

“Oscar Wilde once famously said that a cynic is someone “who knows the price of everything and the value of nothing.” Oscar Wilde, Lady Windermere’s Fan (1892). The proposed Consent Judgment in this case suggests a rather cynical relationship between the parties: the S.E.C. gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger; the Bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators.  And all this is done at the expense, not only of the shareholders, but also of the truth.” -Jed S. Rakoff (U.S.D.J.) in SEC vs. Bank of America 09 Civ. 6829 (JSR)

Judge Rakoff’s recent rejection of BofA’s $33 million dollar settlement with the SEC has the law blogs buzzing.  The WSJ Law Blog did an excellent job documenting what they have dubbed the “BacMerSaga” and followed up recently with a longer post entitled Looking at the Logic Behind Shareholder Class-Action Suits.  This piece was itself a follow-up to Michael Orey’s Sept. 17 noteworthy commentary in Businessweek, Do Shareholder Class Actions Make Sense?

Punishing current shareholders at the expense of previous (and sometimes still current) shareholders is like writing a check and putting it in your own piggy bank.  Others have documented this absurdity better than I can, but I take one of Rakoff’s points to be that such suits are an unlikely deterrent unless the actual human agents who made the false or misleading disclosures are held personally (or at least jointly) liable.

Filed under: Law & Politics, Litigation, Opinion, Bernstein, institutional investors, monitoring agreements, pension funds, PSLRA, securities

Portfolio Monitoring Agreements

Last Friday, I mentioned the recent controversy in the Merrill Lynch subprime class action regarding conflicts of interest that could result from the sorts of monitoring agreements routinely employed by plaintiffs firms looking for pension fund clients.  Here’s a redacted example of such an agreement:

Maybe I’m missing something but either this agreement is invalid for lack of mutual consideration or the pension fund is agreeing to retain the law firm if the fund decides to bring an action as a result of information provided by the firm under this monitoring agreement.  It’s no wonder the judge in the Merrill case based his decision on the testimony of the fund trustees rather than the mealy-mouthed language of the actual monitoring agreements.

Filed under: Law & Politics, Litigation, institutional investors, monitoring agreements, pension funds, PSLRA