I.          Introduction

I’ve seen many changes during the more than 30 years I’ve defended securities class actions. The types of claims have evolved.  From the indiscriminate claims that led Congress to pass the Private Securities Litigation Reform Act of 1995 (“Reform Act”), to the IPO laddering claims of the late 1990s, to the corporate-scandal claims of the early 2000s, to the market-timing claims of the mid-2000s, to the stock-option backdating claims of the mid to late 2000s, to the credit-crisis claims of the late-2000s and early 2010s, to the Chinese reverse-merger claims of the early 2010s, securities litigation trends come and go.  We as a community of defense lawyers and D&O insurance specialists have capably handled these trends. 

But over the past 10 years, two persistent and now-permanent trends have converged to increase the risk that defendants face: (1) claims against smaller public companies brought primarily by the so-called “emerging” plaintiffs’ firms – who have now clearly emerged – and (2) skyrocketing defense costs caused by ever-increasing billing rates and staffing practices. 

We must fix this problem very soon.  I believe the only way to do so is for D&O insurers and brokers – the repeat players in securities litigation on the defense side – to have greater involvement in the defense of securities litigation.  Insurers and brokers need to be involved starting with selection of defense counsel – the most pivotal decision in the litigation.  Since relatively few companies have faced a securities class action, the vast majority of companies need guidance to help them choose the right defense lawyer for their particular case.  Insurers and brokers are best suited to help make this match.  And they need to stay involved in key strategic decisions: no defense lawyer has been involved in as many securities class actions as the claims professionals who oversee securities litigation for the most prominent primary insurers and brokers.  Without question, it is a strategic blunder not to involve them as colleagues in the defense of securities litigation: their strategic involvement in all questions, from defense-counsel selection to whether to take a case to trial, would vastly improve the effectiveness and efficiency of securities litigation defense. 

II.        Scope of Analysis

This post focuses on securities class actions brought under Section 10(b) of the Securities Exchange Act of 1934 (“1934 Act”) and Sections 11 and 12 of the Securities Act of 1933 (“1933 Act”).  Although the world of securities and governance litigation involves a broader set of claims, including shareholder derivative litigation, shareholder challenges to mergers, and SEC enforcement, the business of defense lawyers and risk management of D&O insurers revolves around the state of securities class action litigation.  The legal centerpiece of securities class action litigation is the Reform Act, which added various procedural and substantive requirements to the 1933 Act and 1934 Act.  To ensure that all readers are working with the same terminology and concepts, following is a brief overview of the types of claims this post addresses.

A securities class action asserts that the defendants made false or misleading public statements that made the stock price higher than it should have been, and that when the alleged “truth” came out about those statements, the stock price dropped to its “true” value. The proposed class period usually begins at the time of the first alleged false or misleading statement and ends when plaintiffs allege the “truth” was revealed.

A securities class action involves a well-established procedural course.  Plaintiffs who wish to serve as the “lead plaintiff” must file a motion to be so appointed within 60 days of the first action filed.  After the court appoints a lead plaintiff and lead plaintiff’s counsel, the lead plaintiff files a consolidated and amended complaint, and the defendants make a motion to dismiss the action.  During the motion-to-dismiss process, all discovery is stayed. 

If the court denies the motion, the case proceeds to discovery and to the class-certification process.  Defendants can oppose class certification through a number of arguments, including a challenge to the efficiency of the trading of the company’s stock, under the Supreme Court’s decision in Basic Inc. v. Levinson, 485 U.S. 224 (1988), or the impact of the challenged statements on the market price of the stock, under the Supreme Court’s decisions in Halliburton Co. v. Erica P. John Fund, Inc. (“Halliburton II”), 573 U.S. 258 (2014), and Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System, 594 U.S. 113 (2021).  If the court certifies the case as a class action, the parties complete fact and expert discovery, and defendants file a motion for summary judgment.  If the court denies summary judgment in whole or part, the case proceeds to trial. 

Securities class actions, if fully litigated, give defendants four opportunities for victory: (1) the motion to dismiss, (2) opposition to plaintiffs’ motion for class certification, (3) summary judgment, and (4) trial.

III.       The State of Securities Class Action Defense

A.        Wide Range of Cases

            1.         History of the plaintiffs’ bar

Securities class action litigation got its wings in the 1970s and 1980s, through the “fraud-on-the-market” presumption of reliance, which posits that individual purchasers of an efficiently traded stock rely on the integrity of the market price.  This means that individual plaintiffs are not required to show that they specifically relied upon a particular statement in purchasing stock. Instead, they are presumed to rely on all public statements, including the allegedly false ones, since the market price reflects (and thus “relies” upon) all publicly available information about a company.

For the first three decades of securities class action litigation, the plaintiffs’ bar was dominated by Mel Weiss, his partner Bill Lerach, and a handful of other prominent plaintiffs’ lawyers.  This oligopoly of lawyers pioneered securities class actions, initiated most securities class actions, and shaped securities litigation law and practice. 

The criminal prosecutions of Weiss and Lerach and their then-separate firms in the mid-2000s left a void in the plaintiffs’ bar, and even led to speculation about the demise of securities class actions.  But a remarkable thing has happened: the protégés of Weiss and Lerach as well as other senior plaintiffs’ lawyers and their protégés, plus some new entrants into the plaintiffs’ securities class action market, described below – have not only filled the gap, but have bolstered the bar. The plaintiffs’ bar is back, and arguably better than ever.

Looking back, several things converged to cause this. The first was the stock options backdating scandal, which began with a study by University of Iowa professor Erik Lie that showed an unusually large number of stock option grants to executives at stock-price lows.  Since few of the companies exposed in the scandal suffered stock-price drops, the vast majority of the dozens of options cases were filed as shareholder derivative claims, on behalf of the company, alleging breaches of fiduciary duty and proxy-statement misstatements.

At the time, the most prolific securities class action firm was Coughlin Stoia Geller Rudman & Robbins, the successor of Lerach’s firm and the predecessor of leading plaintiffs’ firm Robbins Geller Rudman & Dowd.  If Coughlin Stoia filed a derivative suit on behalf of a company, it meant they could not sue the company in a securities class action.  For this simple reason, many people did not think they would file many options backdating derivative cases.

But they did – and they filed a lot of them.  Their bet paid off: they defeated motions to dismiss at a high rate and obtained settlements involving unprecedented types of corporate governance reforms and plaintiffs’ attorneys’ fee awards.  Their large fee awards increased the fee awards of smaller plaintiffs’ firms.  By the time they were finished, the plaintiffs’ firms that filed options backdating cases made a mint.

Then, toward the end of the options backdating scandal, the credit crisis happened and started a new wave of shareholder litigation – this time both securities class actions and shareholder derivative actions.  The plaintiffs’ bar had a war chest and was ready for battle. The larger plaintiffs’ firms, such as Robbins Geller, Bernstein Litowitz, and Labaton won lead-plaintiff roles in the mega securities class actions and also represented plaintiffs in large individual actions.

While that was going on, the Chinese reverse-merger scandal happened. That created a new breed of securities class action plaintiffs’ firms.  Historically, the Reform Act’s lead-plaintiff provisions incentivized plaintiffs’ firms to recruit institutional investors to serve as plaintiffs.  For the most part, institutional investors have retained the larger plaintiffs’ firms, and smaller plaintiffs’ firms have been left with individual investor clients who usually can’t beat out institutions for the lead-plaintiff role.  At the same time, securities class action economics tightened in all but the largest cases, placing a premium on experience, efficiency, and scale.  As a result, larger firms filed the lion’s share of the cases, and smaller plaintiffs’ firms were unable to compete effectively for the lead-plaintiff role, or make much money on their litigation investments.

The China cases changed this dynamic.  Smaller plaintiffs’ firms, such as the Rosen Law Firm, Pomerantz, and Glancy Binkow (now Glancy Prongay), initiated the lion’s share of them, as the larger firms were swamped with credit-crisis cases and likely were deterred by the relatively small damages, potentially high discovery costs, and uncertain insurance and company financial resources.  Moreover, these cases fit smaller firms’ capabilities well; nearly all of the cases had “lawsuit blueprints” such as auditor resignations or short-seller reports, thereby reducing the smaller firms’ investigative costs and increasing their likelihood of surviving a motion to dismiss (and thus reducing the likelihood of dismissal and no recovery).  The dismissal rate was indeed low, and limited insurance and company resources prompted early settlements in amounts that, while on the low side, yielded good outcomes for the smaller plaintiffs’ firms.

2.         The new wider world of claims

With these recoveries, smaller plaintiffs’ firms built up momentum that kept them going even after the wave of China cases subsided.  Since then, following almost every “lawsuit blueprint” announcement, a smaller firm has launched an “investigation” of the company, and they have initiated an increasing number of cases.  Like the China cases, these cases tend to be against smaller companies.  Thus, smaller plaintiffs’ firms have discovered a profitable class of cases: cases against smaller companies that have suffered well-publicized problems (reducing the plaintiffs’ firms’ investigative costs) for which they can win the lead-plaintiff role and that they can prosecute at a sufficient profit margin.

As smaller plaintiffs’ firms have gained further momentum, they have expanded the cases they initiate beyond “lawsuit blueprint” cases – and they continue to initiate and win lead-plaintiff contests primarily in cases brought by retail investors against companies with small market capitalization.  Over the past 15 years, about half of all securities class actions have been against small-cap and micro-cap companies. 

The securities litigation landscape now clearly consists of a combination of two different types of cases: smaller cases brought by a set of smaller plaintiffs’ firms on behalf of retail investors, and larger cases pursued by the larger plaintiffs’ firms on behalf of institutional investors.  This change appears to be here to stay.

B.        Most securities cases are manageable, and are not bet-the-company cases

Securities class actions are often spoken of as “bet-the-company” cases, because they typically involve a loss of market capitalization in excess of the resources of the company or their directors and officers, and of their D&O insurance limits.  But relatively few securities class actions involve real risk.  Decades of data shows that nearly all cases are dismissed early on or settled within policy limits, with companies and their executive contributing little or nothing beyond their self-insured retention.

Securities class actions are highly winnable.  The dismissal rate across all firms is about 40%.  Even if a case gets past a motion to dismiss, a good litigation team can make a strong argument in opposition to class certification or position the case to win at summary judgment or trial.  The smaller plaintiffs’ firms mostly operate on a volume model and could not withstand a full-blast defense by even a modest fraction of the companies they sued.  Larger plaintiffs’ firms have more resources to litigate cases more aggressively but likewise are not set up to strenuously litigate more than a handful of their cases at once.

Damages claims, if subjected to economic analysis, are manageable.  Traditionally, it has taken a 20% or greater stock-price drop to trigger a claim, but the smaller firms sue on smaller drops, sometimes under 10%.  Investor losses, large or small, can be significantly reduced through a variety of economic-analytic tools that the Supreme Court has blessed under a series of decisions.[1]  A large stock drop can be whittled to a relatively small damages claim.    

Beyond the statistics, securities class actions are not particularly complicated to defend.  They follow a well-established procedural process, outlined above.  The plaintiffs’ bar is relatively small and full-time securities defense lawyers know them and their playbooks.  The law is relatively stable, with the Supreme Court having issued decisions on each of the key elements of the claims:  falsity,[2] scienter,[3] reliance,[4] and loss causation.[5]  The types of claims are well known and the ways to fight them follows familiar formats.  To be sure, there are outlier cases – some are especially risky or virulent for one reason or another.  But these are easy for repeat players to spot at the outset of the litigation.  The wide range of other cases are straightforward. 

Few executives appreciate the lack of real risk they face, because few new defendants have ever faced a securities case, and their corporate counsel often benefit from this lack of familiarity and the perception of a securities case as life-threatening for the company.  It is incumbent upon the repeat players in securities class action defense – insurers, brokers, and specialized defense counsel – to educate them and design defense strategies and economic protections that reflect the real risk they face. 

C.        One-Size-Fits-All D&O Policy

While the risk executives face from securities class actions is small and decreasing, the risk they face from the skyrocketing cost of defense is increasing – dramatically.  Executives effectively fight with their defense counsel for their insurance proceeds.  Indeed, it may well be the case that executives’ main securities litigation risk is the reduction of their insurance proceeds due to increasing defense costs, and the collateral consequences, such as strategic sacrifices and corner-cutting involved in making case tasks fit within a reasonable budget.  This problem is especially acute in the smaller half of all cases. 

Meanwhile, the D&O insurance product has remained a one-size-fits-all product, with the same basic coverages for micro-cap and mega-cap companies alike – for both Coca-Cola and Jones Soda.  And, as a matter of contract and culture, the policy takes a hands-off approach to the defense of claims.  That may make sense for the very largest cases, but it makes little or no sense for the vast majority of claims.  

            1.         Lack of value pricing by many defense practices

Securities class action defense counsel primarily come from law firms in the AmLaw 100, and mostly the most marquee firms on that list.  Over the past 20 years, these firms’ profitability has increased dramatically, and securities class action defense costs have skyrocketed accordingly.

Billing rates are certainly a part of the problem, but more significant than rates is over-staffing.  Many typical defense firms are structured to handle large matters with large teams.  While some securities class actions require large teams, the vast majority do not.  When firms that are used to large cases handle small cases, it can result in over-staffing or no-stone-left-unturned approach when the economics of the case simply can’t handle it and a vigorous defense doesn’t require it anyway.

Instead, the lion’s share of cases require no more than several lawyers through a motion to dismiss – a senior partner to do the architectural work, a junior partner to do the background interviews and drafting, and an associate or two to help with factual and legal research.  Intensive legal research rarely is necessary; an experienced team knows the key Reform Act cases by heart, and the best motions to dismiss rely on a persuasive narrative more than a litany of cases.  Past the motion to dismiss, the team needs to expand, but staffing needs to be bespoke: each team member must have a specific and necessary role.  And we have to utilize AI and skilled and relatively inexpensive document reviewers to separate wheat from chaff.  It’s neither necessary nor efficient for $1,200 per hour associates to do that work – to state the obvious. 

            2.         One-size-fits-all D&O can result in an ill-fitting defense for most cases

D&O insurance plays into this dynamic.  While securities litigation claims have expanded to include companies of all sizes, from tiny to huge, and defense costs have skyrocketed, D&O insurance has remained a static product. 

The most injurious consequence of the product’s failure to evolve is its hands-off approach to defense counsel selection and strategy.  This forces defendants who have never faced a securities class action to figure out who among the dozens of lawyers who descend on them is the right one for them.  Yet it is impossible for them to choose wisely – few have ever faced a securities class action, and don’t know who’s who among defense lawyers or the real risk they face.  As a result, defendants tend to default to firms who do their corporate work or to other names they know, but that often are the wrong fit for the particular case.  Insurers and brokers frequently scream about the decision behind the scenes, seeing an accident coming but feeling powerless to prevent it. 

The main mistake defendants make is to choose a law firm that has a billing and staffing structure that is bigger than the economics of the case can take.  Although every defense firm should be able to defend a case vigorously through trial for a price that fits the particular case, most defendants, without guidance from repeat players, choose firms with billing and staffing structures that make it difficult to defend the case well through trial without charging more than the settlement value of the case.  

This problem has caused bloated settlement values.  After hovering around $7 million for years, the median settlement amount has now doubled, to $14 million, over the past several years.  Foremost among the reasons for this drastic increase is the inability of most defense firms to defend a case through summary judgment (much less trial) for less than the median settlement without cutting corners.  This means that defendants have little or no settlement leverage after losing a motion to dismiss.    

Thus, the market for defense counsel is wildly inefficient.  In an efficient defense-counsel market, a rational company paying for its own defense would choose a law firm that could defend a $7 million case for an amount of money that is some fraction of this claim – even as much as 50%, or $3.5 million.  But most defense firms are unable to accomplish this right-sized defense.  Defense-counsel selection needs a guiding hand. 

Imagine that a single insurer decided to take on all securities class action risk – in exchange for large premiums, it would assume the complete defense of all securities class action defendants, both defense costs and settlements and judgments. 

How would that hypothetical insurer choose defense counsel?  It would choose a lawyer who will do superior work for an amount that fits the economics of the case – in other words, a lawyer who provides the right value.  The single insurer may well hire Dewey Cheatham & Howe to defend cases against the largest companies.  Some cases need the resources that particular firms can best marshal. 

But that hypothetical insurer would never – ever – hire Dewey Cheatham & Howe to defend small and medium-sized cases if the firm defended cases under their standard rates and staffing.  For example, if Dewey Cheatham & Howe defended the $7 million median-sized case under its standard approach, it would charge at least twice the settlement value to defend the case through trial.  Obviously, it makes no sense to spend $14 million to defend a $7 million case.  Instead, for small and medium-sized cases, our single-company insurer would find a lawyer who could and would agree to defend the case through trial for an amount commensurate with the value of the case. 

This is how nearly all other types of litigation works.  Companies and/or their insurers choose the right lawyers for the size of the case and have relationships with various lawyers that allow them to choose quality lawyers for a price that reflects good relationships and discounts for a volume of work.  Excellent lawyers routinely reduce their rates and staffing, or take risks through alternative fee arrangements, in exchange for a volume of work and relationship-building.  Public D&O-insured work stands alone in failing to take advantage of this purchasing advantage. 

Insurers understandably don’t want to alienate defense firms by whittling the number of firms that are right for small and medium-sized cases.  But law firms don’t have a right to do securities class action defense work, or any other type of work.  And law firms routinely decide to forego certain types of work or particular cases all the time, based on whether it can do a good job given the economics.  D&O insurance relieves firms of making this decision in securities cases.   

D.        Most Securities Cases are Not Zealously Defended

The failure to help defendants make good decisions causes a lot of problems.  Beyond the obvious one – that defendants spend far more money than necessary on their lawyers – the biggest one is strategic: securities defense counsel generally don’t actually defend securities litigation anymore. 

In days gone by, if the court denied the motion to dismiss, defendants would oppose class certification and defend the litigation through a summary judgment motion; in other words, defendants would actually defend the case.  But today, cases typically settle soon after the court denies a motion to dismiss.  Because defense costs have skyrocketed, it makes no economic sense to defend securities cases past the motion to dismiss, and plaintiffs can always make the defendants and insurers a settlement offer they can’t refuse. 

This lop-sided economic dynamic is reflected in many defense firm budgets. Defense firms are increasingly pitching artificially low fixed fees for motions to dismiss.  This is a short-sighted arrangement for everyone.  Winning the motion to dismiss is at best a 50/50 proposition on average.  A trick I see more and more is defense firms offering a very small budget or fixed fee for the motion to dismiss  This does not solve the defense-cost problem – indeed, it creates the equivalent of a balloon-payment mortgage in the cases that survive a motion to dismiss, as firms are basically buying an option for a large case if it isn’t dismissed.  And defense firms actually lose their loss-leader game because they don’t get to make up their losses through bloated billing later: as discussed above, their clients and clients’ insurers increasingly are choosing to spend their policy proceeds on settlements, not their lawyers. 

These law-firm economics leave defendants with only one of the four possible paths to victory, the motion to dismiss, and leave unused the three other paths, class certification, summary judgment, and trial.  This is wrong.  Class certification offers tremendous opportunities for defendants to defeat or greatly reduce class-claim exposure and settlement value – indeed, Halliburton II had the potential to be revolutionary – and summary judgment was once a central strategic tool and presented a real opportunity to win. 

But today, the defense bar rarely opposes the economics of class certification or moves for summary judgment.  And trial isn’t even a consideration.  Imagine that: a lawsuit that the defendants can’t even take to trial.  That isn’t how litigation is supposed to work.

E.        Settlements Are Bloated

The only winner in this system is plaintiffs’ counsel.  Because they know defendants can’t rationally litigate a case all the way through, settlement values are simple:  they are the lowest amount plaintiffs’ counsel are willing to take.  As a result, settlement values have little or nothing to do with the value of the case – the litigation’s merit, or lack of merit, is nearly irrelevant.  Although no one can know for sure, I believe that settlement values are 30-50% higher than they would be if defendants and their insurers were comfortable defending cases through class certification and summary judgment.

The data reflects this trend: settlement values as a percentage of damages are increasing, and are especially high in smaller cases, where the problem of defendants and insurers having to throw in the towel after losing the motion to dismiss is especially acute.  High defense costs increase settlement values too, since settling for an amount less than defense costs would reveal that the lawyers billed too much, and the theoretical damages can always support a higher but still “reasonable” settlement. 

Defense costs waste an especially high percentage of insurance limits in cases against small and middle-market companies.  A typical defense firm cannot zealously defend a claim against such a company without threatening to exhaust its D&O insurance, or uncomfortably shrinking the margin of error.  Most of these companies can’t or won’t buy more limits – and why should they, just to transfer more money to lawyers who make more than the CFO?  For most of them, every penny counts – the difference between breaking even, or not; of meeting their loan covenants, or not; of meeting Wall Street expectations, or not.   

Without enough insurance proceeds to defend the case past the motion to dismiss stage and still be confident they can settle later, if necessary, defendants simply settle if the court denies the motion to dismiss. 

IV.       Defendants Deserve a Zealous Defense

Premature settlements hurt directors and officers.  Defendants want to win – they don’t want to have to tell people they settled a fraud case against them for an amount of money that suggests they did something wrong.  No-admission settlements don’t erase the taint a large settlement causes.  For many smaller companies, a securities class action can depress the stock price, suspend necessary financing, and kill business combinations.  An early settlement for a bloated amount is not sufficient vindication to allow these companies to dispel the market’s suspicion about them.

To be sure, insurers and brokers do indeed often receive panicked pleas from defense counsel that the defendants want to settle.  But, often, it is defense counsel, not their clients, who want to settle because of a lack of adequate preparation or staffing for trial, or because the cost of trial would leave no money for settlement.  In my experience, the defendants would be happy to defend the litigation as long as necessary for them to prevail, if they have enough insurance protection and a good relationship with their insurers and broker.   But the cycle of premature settlement is now such a structural part of securities class action litigation that it doesn’t discern or accommodate the defendants’ wishes. 

Sophisticated, full-time securities litigators would prefer to break this cycle as well. Securities litigation defense that doesn’t involve actual litigation deprives defense lawyers of the opportunity to capitalize on their legal talent, tools, and creativity.  We’d love to be able to actually litigate again.  And it undercuts the economic viability of dedicated securities class action defense practices, since securities class action defense engagements are becoming smaller and smaller with early settlements. 

The system is broken for everyone on the defense side – defendants, insurers, brokers, and defense counsel.  It only works for the plaintiffs.  We need to fix it, or securities litigation defense strategy and economics will continue to spiral downward.  To stop it, defendants need help from the repeat players and experts – insurers, brokers, and full-time defense lawyers.  Defendants cannot do it themselves.

V.        The Interests of Insurers and Insureds are Aligned in Defense of the Case

            A.        D&O Insurers are Friends, Not Foes

                        1.         Defendants want their insurer to be their partner

If I had one wish for D&O insurance, it would be to dispel the myth that directors and officers want insurers to stand aside in the defense of claims. It’s just not so.

When people think about insurance, they think about insurers paying for the expense associated with a problem.  They think of auto insurance or other duty-to-defend insurance, under which the insurer assumes the defense of the claim for the insureds. They don’t think about insurance that requires them to go out of pocket and pay and then get paid back.  Indemnity insurance thus is counterintuitive – in fact, it doesn’t actually seem like “insurance” in the way most people think of it.

This is no less true for D&O claims.  The priority for most companies and their directors and officers is simply the greatest protection possible, including assurances that they will not be left to pay any uncovered legal fees or settlement payments.  In fact, not only do most insureds not want to be stuck paying their lawyers for short-pays, they don’t even want to write any checks at all after satisfying the deductible.  Instead, they prefer that the insurer take charge of the bills and pay the lawyers and vendors directly. In other words, many public companies actually want their D&O insurance to respond like duty-to-defend insurance.

This preference is especially prevalent among smaller and middle-market companies.  These companies often lack in-house lawyers and other infrastructure of larger public companies.  For many smaller companies, a five- or six-figure savings on their premium and/or self-insured retention could make the difference between profit and loss, and success and failure.  They need a D&O product that maximizes their insurance protection and reduces their out-of-pocket cost.

But even many larger companies would welcome more insurer control of claims in exchange for some reduction in the premium or self-insured retention.  I’ve never met a CFO who didn’t want to save money on insurance.  And, unfortunately for us lawyers, very few individual defendants are beholden to any particular lawyer or law firm – that type of connection typically happens at the level of in-house counsel, who unlike directors and officers, are not named as individual defendants in securities class actions.

To be sure, after a claim is filed, the insurer often gets an earful from the insureds’ lawyers about the insureds’ right to select whichever defense counsel they choose and their strategic freedom to spend whatever they want and settle whenever they want.  But these aggressive positions are typically not the positions of the insureds themselves.  Instead, these positions are driven by defense counsel, usually for self-interested reasons: to get hired, to justify excessive billing, or to settle a case for a bloated amount because the defense is compromised by mounting costs or the defense lawyer’s inability to take the case to trial.

                        2.         Poor communication causes consternation

a.         Defense counsel sometimes set up the insurer as an adversary

D&O insurers are typically shut out of meaningful involvement in the defense, with most defense lawyers treating them almost like adverse parties and other defense lawyers merely humoring them.  Given their extensive experience and wide perspective, why do defense counsel treat insurers this way?  In my experience, the reason is that defense lawyers can benefit from a strained relationship with their insurers, so that the lawyers have maximum freedom to do whatever tasks they want, at whatever cost they want to charge. 

This set-up occurs with some variation of these stock talking points with their clients:

  •  “This is a bet-the-company case that requires us to go all-out to defend you, so we have to pull out all the stops and do whatever is necessary, no matter what the insurer has to say.”
  • “The insurer may ask you to interview several defense firms before choosing your lawyers. Don’t do that. They’ll just want to get some inferior, cut-rate firm that will save them money.  But you’ll get what you pay for – we’re expensive for a reason!  And don’t forget that we’ve stood by you through thick and thin since before your IPO, back when you were a partner here.  Plus, we gave you advice on your disclosures and stock sales, so we’re in this thing together.”
  • “The business of any insurance company is to try to avoid paying on claims, so the insurer may try to curtail our level of effort and even refuse to pay for some of our work. But trust us to do what we need to do for you. You might need to make up the difference between our bills and what the insurer pays, but we can go after the insurer later to try to get them to pay you back for those amounts.”
  • “We’ll need you to support us in these insurance disputes.  You don’t have to get involved directly – we can work with the insurer and broker directly if you agree.  Agree? Good.”

In this way, defense lawyers set the insurer up as an adversary.

But pre-claim, directors and officers don’t think that way. As I look back on the scores of clients I’ve defended or advised on D&O insurance procurement, I can’t think of any who regarded the insurer as an adversary.  Just the opposite is true: they’ve often expressly regarded the D&O insurer as a teammate in the defense of the case.  While every case involves a back-and-forth on strategic, coverage, and economic issues, these issues nearly always can be worked out with collegiality and communication.

b.         Reservation of rights letters and billing guidelines and deductions create unnecessary tension

But, in two ways, insurers can inadvertently contribute to breakdowns in collegiality and communication.  First, reservation of rights letter are totally normal, but they can hit defendants the wrong way without good defense counsel anticipating them and letting the defendants know they’re normal.  To an uncounseled defendant, a straightforward reservation of rights letter can make defendants feel their coverage is in doubt – though, as all repeat players know, a reservation of rights letter rarely ripens into a coverage denial. 

Second, although billing guidelines and deductions are well-intentioned ways to try to control runaway defense costs, they backfire – often badly.  Defense counsel hate them, because they restrict professional judgment, feel like accusations of dishonesty, and pit defense counsel, who must collect their bills, against their clients, who don’t want to go out of pocket to pay the difference.  In this way, insurers can become the bad guy to their insureds as well as the broker and defense counsel. 

I do not favor insurers abandoning their scrutiny of defense counsel’s work and billing, but billing guidelines and deductions are the wrong way to do it.  Instead, as detailed below, insurers should increase their scrutiny but through a system that promotes collegiality and trust with the insureds, broker, and defense counsel.  In the vast majority of cases, the interests of each of these defense-side colleagues are aligned, and it’s a shame that they are so often at odds.

B         D&O Insurers’ #1 Goal is to Win

The world of securities litigation defense in which I grew up involved collaboration with insurers in the defense of claims.  As other defense lawyers’ relationships with insurers have become increasingly frayed, I have spent a lot of time reflecting and discussing why I feel so strongly that insurers are friends, not foes.

First and foremost, as much as defendants, insurers want to win each case or settle for as little as possible.  I sometimes hear cynical defense counsel say that insurers’ interest is just to avoid spending money.  In my experience, insurers simply don’t want to spend more money than they need to – and, of course, the best way to do that is to win.  Winning or settling for as little as possible not only reduces the cost of each case, but decreases the overall severity of securities claims. 

D&O insurers aren’t penny-pinchers.  Indeed, in my 30+ years of securities class action defense, I don’t recall a single instance – not one – in which an insurer didn’t approve or fully fund a project that I discussed with them in advance.  They just don’t like wasting money on bloated settlements or wasteful defense costs, which unfairly deprives defendants of their policy proceeds. 

            C.        D&O Insurers and Brokers are Allies

D&O Insurers and brokers are also important teammates in the defense of claims.  Because they are involved in myriad more securities cases than even the most experienced defense lawyer, they see the big picture in a unique and valuable way, albeit in a different role.  They have extensive experience with securities class action mediators and plaintiffs’ counsel, and they often have key strategic thoughts about how to approach settlement.  Insurers can also help defense counsel pick cases to take through summary judgment or even to trial if the plaintiffs won’t settle in the right range.

I have achieved superior results for many clients by working collegially with insurers and brokers – from helping shape motion-to-dismiss arguments, to learning insights about particular plaintiffs’ lawyers and their latest tricks, to selecting the right mediator for a particular case, to achieving favorable settlements that don’t leave the impression of guilt.  Indeed, if I were sued in a securities class action and could assemble a dream defense team, I would hire a prominent D&O insurance lawyer on the team as a strategic quarterback – on securities class action issues.

VI.       Securities Defense Needs to Be Tailored for Each Case

Utilizing D&O insurers’ and brokers’ expertise is the key to helping us move past a one-size-fits all approach to securities class action defense.  They can and should exercise more control in helping defendants choose the right lawyers for each particular case.  With few exceptions, the defendants themselves have only a fraction of the experience and knowledge that insurers and brokers have.  It isn’t fair to ask them to make this highly consequential choice on their own.  Insurers and brokers are essential to defense-counsel selection. 

Insurers and brokers bring more to this strategically pivotal process than just their knowledge.  They have the ability to effectively create a rational buyer of litigation services – a buyer with the ability to work with a small pool of excellent lawyers in exchange for the prospect of a greater volume of work.  To be sure, many typical defense firms could not or would not defend small and medium sized cases for a rational price.  That doesn’t work an injustice on high-priced firms – they get priced out of work or decide against it all the time. 

But a number of the relatively small group of full-time securities class action lawyers, whether from high-priced firms or high-value firms, would find a way to work with their firm management to allow them appropriate flexibility through accommodations on rates and staffing, based on the prospect of increased volume of work – just like for other types of litigation.   

But how can insurers do this within a non-duty to defend model? 

I see three main ways in which insurers and brokers can help with defense counsel selection. 

1.         D&O insurers with panels can continue to refine them.  In my opinion, more control and narrow tailoring is needed.  There are panel firms on each insurer’s list that are right for some cases, but wrong for others.  Through panels and tweaks to the policy (such as those discussed below), insurers and brokers need to help insureds find the right lawyer for each particular case.

2.         Insurers can create small panels of lawyers.  The panels must be small enough to give the lawyers an expectation of a sufficient volume of work to seek approval from firm management to give rate and staffing accommodations – just as lawyers do for clients or insurers in other types of litigation.  For insurers with existing larger panels, there could be tiers of panels and concessions that lawyers must give based on factors such as the company’s market cap or other case characteristics.

3.         Through a tweak in the defense-counsel consent provision, insurers can contractually require defendants to consult with the primary insurer on defense counsel selection before engaging defense counsel.  Insurers could require insureds to conduct an interview process and even require insureds to interview one or more lawyers the primary insurer suggests.  Far too often, defendants present insurers with their defense counsel selection, without any input from the insurers.  It’s never to the defendants’ advantage not to get the insurers and broker’s input and to forego an interview process. 

Beyond the benefits of helping defendants decide on defense counsel, more active involvement by insurers and brokers is critical to being able to actually litigate securities class actions.  We can put tremendous pressure on the plaintiffs’ bar simply by defending the litigation, since many of them operate on a volume model and literally don’t have the ability to litigate their inventory of cases.  It is a shame that we let them file lawsuits that they don’t have to litigate. 

If we make plaintiffs litigate, we can settle for what defendants and their insurers will pay, not the lowest amount the plaintiffs’ lawyers will take – we can understand the merits and settle based on a real litigation risk analysis.  Imagine the reduction in severity. Frequency will begin to be reduced as well – plaintiffs’ lawyers will begin to forgo filing dubious cases, and they will be forced to spend more time on litigation and less time on case origination.

This is not a pipe dream.  We simply need to engage early on in a collegial way, and be willing to spend $50,000 – $100,000 on early case assessment to identify good litigation candidates.  My vision is for defense counsel and a damages expert to do a meaningful but high-level analysis of the litigation and to meet with the insurers, broker, and one or more individual defendants to discuss the litigation and the defendants’ litigation goals, and to make a strategic plan for the case.  For cases that do not actually involve fraud or bet-the-company damages, we should have a plan to defend those cases through summary judgment or even trial, if necessary, if we don’t win the motion to dismiss or get a settlement offer from plaintiffs’ counsel that we can’t refuse. 

There is no real downside to more litigation if we do it under an honest and viscous budget – or even a fixed-fee or capped-fee – which eliminates the risk of runaway defense costs.  For example, if defense counsel agrees to a fee cap of $5 million through summary judgment, there would be $7 million (until recently, the perennial median settlement value) of primary policy proceeds remaining for settlement assuming a $10 million primary and $2 million self-insured retention.  Of course, a good percentage of cases defended through class certification and summary judgment will be dismissed, eliminating the need to settle at all, or will be limited, reducing the settlement value.  And who knows: with early case-assessment meetings among the insureds, broker, and insurer, and ongoing coordination throughout the litigation, we might even take the right cases to trial.

Larger cases, though not subject to these arrangements, would benefit as well; the small and medium-sized cases would set standards for the reasonableness of defense costs – indeed, the small, collegial panel lawyers defend some of the large cases too, and could be used to persuade other defense lawyers to be more reasonable – and would lower the settlement tide overall.  The defense-cost and settlement-value reductions may well bend the loss exposure curve in securities class actions enough to begin to straighten out the economics of D&O insurance – though I’ll leave that piece of the analysis to D&O insurers. What I can say is that I welcome a return to a specialized securities litigation defense bar, client-focused economics, and collegiality among insurers, brokers, and defense counsel.

VII.     Conclusion

We are at a crossroads in securities class action defense.  The road we’re on is perilous, with defendants not getting the defense they deserve and taking greater risk than they should.  And the road may well lead to a cliff.  We have a chance to take a new road – one that is smoother and safer but must be built by insurers and brokers.  

[1] Goldman Sachs, 594 U.S. 113; Halliburton II, 573 U.S. 258; Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005); Basic, 485 U.S. 224. 

[2] Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S.Ct. 1318 (2015).

[3] Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007).

[4] Halliburton II, 573 U.S. 258; Basic, 485 U.S. 224.

[5] Dura, 544 U.S. 336.

In my May post, Making Better Judgments about Summary Judgment in Securities Class Actions, I discussed how we can pick more cases to defend through summary judgment.  But, of course, the vast majority of cases will still settle, so we need to discuss how to improve mediation outcomes. 

Far too often, defense counsel sets up mediation to settle for whatever amount the plaintiffs’ lawyers will take, without considering the impact of the settlement on the defendants’ reputation, the impact of an over-sized settlement on the defendants’ future insurance programs and pricing, and the target a bloated settlement will put on the defendants’ backs.  We have an obligation to mediate zealously and balance all these considerations.  We all should want to win mediations.  

How do we do that? 

We need to be prepared to defend the case on the merits if and when the motion to dismiss is denied.  A significant reason cases reflexively settle once the motion to dismiss is denied, with little or no productive work on damages and the merits, is that the defendants aren’t prepared to defend the case.  At the beginning of the litigation, defense lawyers competing for the case typically tout the chances of winning the motion to dismiss.  But most motions to dismiss fail, which means far too many defendants are surprised when they lose the motion.  And since the motion to dismiss process takes a year or more, the denial seems to come out of nowhere and feels like a blindside.  This situation is worse when the defendants haven’t conducted an interview process in which they selected a lead lawyer they trust, as opposed to working with a litigator “assigned” to the case by the firm’s corporate lawyer for the client.  The defendants often don’t know if they have the right lawyer to take them through the meat of the litigation.  So panic sets in and settlement seems like the only safe strategic course. 

This problem is exacerbated by the unfortunate decline in early merits assessment.  In days gone by, a thorough but targeted initial background review and merits assessment was de rigueur.  It is not an internal investigation but instead a focused, tailored, and balanced effort that can be done in the low six figures in all but the largest cases.  We would ask the company for a set of key internal documents, assemble and review relevant public documents, identify a handful of people to interview, and assess the strengths and weaknesses of the claim.  We would discuss the outcome with management and the board, as well as the D&O broker and insurers.  This allowed for thoughtful strategic planning through the motion to dismiss and beyond: the company could understand the risk it faced, the insurers could calibrate their involvement and set reserves, and defense counsel could defend the case with the right amount of effort and cost.

But today, far too often, this type of review does not occur.  There are multiple causes, including a low cap or budget offered to secure the engagement; the (incorrect) view that a motion to dismiss is mostly a matter of identifying what the complaint does not allege, as opposed to an affirmative narrative that sticks up for the defendants’ honesty and good faith; and understandable backlash over some firms’ use of the background review to do a full-blown internal investigation.  We need to get back to early case assessments. 

We need to develop our economic defenses.  In a typical mediation that occurs before class certification, the parties have not done damages discovery or rigorous analysis – much less the work required to analyze price-impact issues under Halliburton II and Goldman Sachs. 

Instead, the parties typically come to the mediation only with a plaintiff-style damages estimate that neither side has thoroughly analyzed, much less tested through intensive work with the experts and expert discovery.  Rigorous expert work often significantly reduces realistic damages exposure.  For example, stock drops that lead to a securities class action are often the result of multiple negative news items.  A rigorous damages analysis parses each item from the total stock drop to isolate the portion caused by the revelation of the allegedly hidden truth that made the challenged statements false or misleading.

Reductions in damages through work with defendants’ economist can make an enormous difference in the settlement value of a case, since settlement value is a percentage of damages.  In my cases, the best estimate of damages is often 50% or less of plaintiff’s style damages. 

Yet far too many defense lawyers don’t just use but often embrace plaintiff-style damages in order to put pressure on the insurers to settle for an amount within policy limits, even if well above the case’s settlement value.  In my experience, the best way to obtain the insurers’ consent to and payment of a settlement is to work collegially with them: conduct a rigorous damages analysis and assessment of the merits, speak candidly with them about the settlement value, and fight hard together for a settlement at or near the settlement value. 

Advocating bloated damages isn’t actually in the defendants’ interest.  Insurers know when defense counsel hasn’t done rigorous damages work or, worse, has done it but doesn’t share it.  Again, the defendants are prejudiced through higher premiums and retentions, and are a magnet for future securities class actions when their defense counsel doesn’t approach mediation zealously.  Moreover, insurers are increasingly engaging their own resources to understand a verifiably independent view of damages.  And once licenses for Securities Analytics Research’s data and econometric analyses become ubiquitous among insurers (which I believe is inevitable), they will have an independent, clear view of objective damages estimates. 

In the meantime, defendants are entitled to a zealous defense, including at mediation.  I hope that the approach I’ve outlined becomes the norm. 

“Securities litigation” isn’t really “litigation” anymore.  For the first 15 years of my career, securities class actions that were not dismissed would head into litigation, where we would test class certification, map out our summary judgment motion, and engage in fact discovery designed to establish the facts we needed to prevail on the merits.  A great many cases were dismissed on summary judgment or were settled while the summary judgment motion was pending. 

But something happened in the early 2010s: securities class actions that survived a motion to dismiss increasingly started to settle reflexively, before significant development of the merits of class certification or summary judgment.  This trend yielded a cultural shift – we just don’t litigate securities cases anymore.  This is a shame; premature settlement leaves defendants with only one of the three possible pretrial escape hatches, the motion to dismiss, and leaves unused the two other escape hatches, class certification and summary judgment. 

Over the years, I’ve explained the reasons for and adverse consequences of this trend and issued calls to action to fellow securities defense lawyers, public companies, and D&O insurers (for example, here).  In my own cases, I’ve tried to do something about it in the right cases.  Most recently, we won complete dismissal on summary judgment of a securities class action brought against COVID-19 test manufacturer Co-Diagnostics, Inc. in Gelt Trading Ltd. v. Co-Diagnostics, Inc. (District of Utah).  Because it’s so (unfortunately) rare for defendants to make a summary judgment motion in securities class actions, much less win, this victory earned American Lawyer “Litigator of the Week” honors. 

After describing the Co-Diagnostics case, I’ll share thoughts about picking the right cases to defend through summary judgement. 

Gelt v. Co-Diagnostics

At issue was Co-Diagnostics’ May 1, 2020, press release that disclosed, among other things, that its Logix Smart COVID-19 test demonstrated “100% sensitivity and 100% specificity” – well-defined scientific metrics – across independent evaluations. Gelt Trading alleged that the press release was false and/or misleading because it conveyed to investors that the Logix Smart test was “100% accurate,” allegedly inflating Co- Diagnostics’ stock price. Gelt Trading claimed that this artificial inflation was removed, and investors suffered losses, when Co-Diagnostics’ stock price dropped on May 15, 2020, following three disclosures that allegedly revealed the press release to be false.

We were retained to replace prior counsel after the initial motion to dismiss was denied and the case was in the early phases of discovery. On summary judgment, we argued that Plaintiff could not establish any genuine issue of material fact supporting liability as to any element of a Section 10(b) claim—falsity, scienter, reliance, loss causation, or damages. We also argued that Plaintiff’s experts’ testimony—which related to clinical testing and loss causation—should be excluded on summary judgment under Daubert.

On March 4, 2025, after oral argument, the Court granted defendants’ Daubert motion to exclude the testimony of Plaintiff’s loss causation expert and granted summary judgment for Defendants, concluding that Plaintiff could not demonstrate loss causation with or without the excluded testimony.

With respect to the motion to exclude, the Court found that Plaintiff’s loss causation expert’s testimony was not admissible evidence for two reasons: (1) Plaintiff’s expert failed to subscribe his report under penalty of perjury as required under 28 U.S.C. § 1746, and (2) Plaintiff’s expert failed to account for obvious alternative explanations for the May 15 stock price drop. As for the motion for summary judgment, the Court concluded that none of the three alleged corrective disclosures “corrected” the May 1 press release, either because they did not discuss the Company’s Logix Smart Test, or because the allegedly contradictory information was long known to the market and already incorporated in the Company’s stock price. Accordingly, Plaintiff could not establish that the May 1 press release was the cause of Plaintiff’s or the class’s losses. Having reached this conclusion, the Court declined to address the other summary judgment arguments or Daubert motions.

Evaluating Cases for Summary Judgment

I’m not suggesting that, after the denial of a motion to dismiss, cases should always careen toward summary judgment.  We need to pick the right cases.  How do we do that? 

Pick the right defense counsel.  The most important decision happens right away: companies should choose defense counsel who are not just good at winning motions to dismiss, but who also have the ability to litigate effectively and efficiently through the subsequent stages of the litigation.  Identifying those people requires companies to rely on the guidance of their D&O insurers and broker.  This is so for two reasons.  First, the right people are not just those who have sufficient SCA summary judgment (and class certification) experience to be effective but also have the right team and economic flexibility to be able to defend the litigation through summary judgment and still leave enough insurance proceeds to settle, if necessary.  D&O insurers and brokers can identify these.  The vast majority of companies can’t; they haven’t defended a securities class action before.  Second, the D&O insurers need to trust defense counsel or they won’t be comfortable with the case analysis and/or strategic decision to defend a case through summary judgment. 

Evaluate the case early.  The next step happens before the motion to dismiss process begins: defense counsel needs to size up the case early, advise the defendants about the merits, and then have a strategic summit with the insurers, broker, and the individual defendants – not just the GC or head of litigation.  Early case assessment doesn’t need to be a ransacking.  In the vast majority of cases, it only requires 50 – 100 hours of work by defense counsel to review key documents, speak with key witnesses, and figure out if the case is strong or weak.  Evaluate structural flaws in the case – things that more words in a complaint can’t cure.  For example, are the challenged statements opinions subject to Omnicare’s high substantive standard? Are they forward-looking opinions giving double protection?  Was there a concrete financial motive for the individual defendants to engage in fraud?  Is there a loss causation problem?  Is there another economic flaw?  And assess the story and documents the early assessment revealed.  By the strategic summit, a seasoned, full-time securities litigators can size up the case and know where it’s headed.  In structurally flawed cases, please resolve to take a beat if the court makes a mistake and denies the motion to dismiss. 

Refine the case analysis upon the denial of a motion to dismiss.  The next step is more refined case analysis of the chances of winning on summary judgment, element by element. The right cases for summary judgment are ones with strong summary judgment arguments on multiple grounds; more chances to win makes everyone more comfortable. In the Co-Diagnostics case, we had five independent summary judgment arguments, which made the motion a comfortable strategic step.  I think the key element on which it’s important to have a good summary judgment argument is falsity – insufficient or even weak falsity evidence tends to set up a strong argument on lack of scienter and loss causation. 

This step requires more elaborate fact and expert evaluation.  While it can’t be completely finished until the close of discovery, it must be started at the outset of discovery, and good assessments can occur early on and be confirmed as discovery progresses. 

Evaluate the economics.  If the case is a good summary judgment candidate, it’s essential that the economics of continuing to litigate make sense.  The factors of the analysis are:  damages analysis, evaluation of settlement value, and defense costs.  Good damages analysis is essential – not just plaintiff-style, but exploration of the ways damages can be reduced.  From the damages analysis, we can assess settlement value. And defense counsel must make a viscous budget or even give a cap.  From this, we can do this math problem: [insurance limits + retention] – [defense cost cap + settlement value]. The result tells us whether the case can be settled within the insurance limits if we lose on summary judgment. 

Communicate.  Throughout, communication is critical.  There must be excellent communication about the merits and economics among defense counsel, the defendants and their D&O insurers and brokers. The better the defendants and their D&O insurers know and trust the chances of winning on summary judgment (and class certification) and at what cost, the more comfortable they will be about defending the case beyond the motion to dismiss.

Bill Lerach gave the best motion to dismiss oral argument I’ve ever seen.  Using a stock-price chart with key events and allegations plotted along the alleged class period, he told the complaint’s story with a wooden pointer and his superb narrative skill.  Far too often, plaintiffs’ and defense lawyers get bogged down in the nitty-gritty of the allegations and fail to analyze whether the case hangs together structurally.  And they often fail to understand the interrelatedness of all of the elements – for example, weak causation tends to show the challenged statements aren’t false or misleading, and weak falsity makes scienter hard to show because it’s hard to infer that someone intended to mislead investors through a barely-false statement.  The effectiveness of Lerach’s argument was its use of the class structure a to tie together falsity, scienter, and loss causation. 

That argument improved the way I analyze and defend securities class actions in multiple ways, including:

I can size up case structure better and earlier. 

I started looking at the structure of securities class actions rather than the level of detail in the complaint.  That allows me to analyze the entire litigation based on the initial complaint – waiting for the lead plaintiff’s amended complaint is frequently unnecessary.  For example:

  • What was the subject matter of the corrective disclosure?  Under Dura, that defines and limits the subject matter of the litigation.  For example, the lead plaintiff can’t take a restatement announcement and allege false financial forecasts; that would fail for lack of loss causation.  With that limitation, we can identify and evaluate the challenged statement candidates. 
  • Were there non-10b5-1 plan stock sales?  If not, it will be very difficult for the lead plaintiff to plead scienter – rarely does a case without a concrete personal financial motive for fraud pan out, and those either exist or do not exist at the inception of the case. 
  • What types of statements are or could be at issue?  If they are opinions, Omnicare will make it very difficult to plead a false or misleading statement – in the Supreme Court’s words, Omnicare’s standard is “no small task” for a plaintiff to meet.  If the challenged statements are forward-looking opinions, in addition to arguing lack of falsity, they are protected by the Reform Act’s safe harbor if accompanied by meaningful cautionary statements. This too is typically discernable at the outset based on disclosures that also either exist or do not exist at the inception of the case. 
  • Whatever the types of statements, we can look at their subject matter and the facts that would undermine those statements and build a “full context” record under Omnicare, which, properly understood, applies to both fact and opinion statements.  Does that full context make the challenged statements (and those that might be in an amended complaint) feel fair?  The full context is structural because the amended complaint can’t erase the public record within which the court will evaluate the challenged statements. 

I look for economic flaws. 

Focusing on the structure of the case necessarily involves spotting potential economic flaws.  While these are mostly post-motion to dismiss issues, if I see a potentially good economic argument, it makes sense to engage an economist early to explore it so that the motion to dismiss can help set it up or at least not be inconsistent with it.  For example:

  • Is there a mismatch between the challenged statements and one or more of the corrective disclosures?  If so, there’s a good argument under Dura that the challenged statements did not cause loss, and a class certification defense under Halliburton II and Goldman Sachs
  • Are the challenged statements vague (e.g. “Our internal controls are effective”) and one or more of the corrective disclosures specific?  If so, there may be a “genericness” Halliburton II/Goldman Sachs class certification issue.
  • Did the stock price increase with each challenged statement?  If not, the plaintiffs may have trouble showing price impact under Halliburton II, depending on whether there are valid price maintenance allegations and how the price reacted following the corrective disclosure(s). 
  • Are there multiple corrective disclosures?  If so, on class certification, there may be a problem proving class-wide damages under Comcast.

Again, only lack of loss causation is a motion to dismiss argument, but the class certification/summary judgment analyses often influence how I argue the motion to dismiss, and definitely influence how I think about defense of the case if it survives the motion to dismiss.

Sizing up the litigation straightaway is critical to improving securities litigation defense.  As I’ve written, the defense bar needs to get back to routinely doing an initial internal fact review to improve our motions to dismiss and planning.  The ability to size up the litigation based on the initial complaint allows defense counsel to focus early case assessment on the right documents and witnesses and avoid having to try to do a background review while being on the motion-to-dismiss clock, which often means an internal fact review is not done well or at all.  If defense counsel can effectively size up the initial complaint, the background factual review can be done efficiently, and cost shouldn’t be an impediment.  Effective and efficient initial background work, in turn, allows us to plan our overall case strategy better.  Defense counsel is able to have a pre-motion to dismiss strategic summit with the defendants, broker, and insurers (and sometimes an economist) to discuss together how to defend the litigation.  For example:

  • Is the risk so high that we should consider mediation during the motion to dismiss process?  Some cases should be settled early, and it’s best to know that before the motion to dismiss is denied. 
  • Is the case one that could be defended through summary judgment?  Some cases should be defended past the motion to dismiss if it is incorrectly denied.  Far too often, defendants are forced to throw in the towel because of a lack of information about the merits of the case, so the defendants and their insurers are unable to make a good cost-benefit decision about defending the case further.  In those situations, settlement seems safer and the right default decision – which is a shame when the case is, in fact, defensible.
  • Are there good economic defenses?  Whether the case is defensible or not, it’s smart to size up the economic defenses early.  Most cases are in the middle of these two extremes, and the right strategy will depend on the strength of economic defenses at class certification or summary judgment.  The defense bar has an effective kit of economic tools, and it’s a shame not to use them more.  I’d venture to guess that more effective and efficient use of these tools would reduce the net severity of securities cases by at least 10%, and quite possibly much, much more.  

All of this starts with an early understanding of the structure of the litigation. 

I started the D&O Discourse blog in October 2012 to generate discussion among the repeat players in securities and corporate governance litigation:  insurers, brokers, mediators, economists, plaintiffs’ counsel, and defense counsel.  While I share opinions from a defense-counsel perspective, I call it like I see it.  

Here are five of my favorite posts – well, there are actually more than five because two are a multi-part series (with links to the rest of the series):

Thanks so much to readers and supporters.  Just as I hoped, the blog has generated productive discussion among repeat players and helped me make and continue many friendships and collaborations. 

The Reform Act was passed by the Contract-with-America Congress to address its perception that securities class actions were reflexive, lawyer-driven litigation that often asserted weak claims based on little more than a stock drop, and relied on post-litigation discovery, rather than pre-litigation investigation, to sort the validity of the claims.  

The Reform Act’s centerpiece is its set of high hurdles plaintiffs must clear to avoid dismissal: heightened pleading standards for falsity and scienter and a safe harbor for forward-looking statements.  Together, these pleading standards yield a far higher dismissal rate for securities class actions than claims subject to notice pleading. 

But there are collateral consequences. 

Defendants and defense counsel too often put all of their eggs in one basket – the motion to dismiss.  In the interview process, there can be a myopic focus on the motion to dismiss, with defense-counsel candidates trumpeting the initial complaint’s weakness and their motion to dismiss record.  Nearly all defendants believe they didn’t say anything false, much less on purpose, so these evaluations are music to their ears.  To ramp up the optimism even more, some defense-counsel candidates make aggressive motion-to-dismiss pricing proposals. 

This is short-sighted.  Defendants then understandably don’t feel they need to pick the right lawyers to guide the litigation past the motion to dismiss stage.  Why would they, when all defense-counsel candidates have said the litigation will be dismissed?  Yet, overall, more cases survive the motion to dismiss than not, which means that defendants haven’t sufficiently evaluated the right lawyer for most of the litigation – class certification, fact and expert discovery, summary judgment, and mediation (and trial, if necessary).  

All of this means that when a motion to dismiss is denied, it is a jarring experience.  Defendants understandably are uncomfortable, their minds racing with many questions – for example: 

  • Do I have the right lawyer for the next stages?  Without having even discussed what happens after the motion to dismiss, they often have no idea. 
  • Do I have enough economic protection to win at one of the next stages and settle if I don’t win?  Since they didn’t evaluate the total litigation strategy and cost up front, they don’t know if they have enough D&O insurance to defend the litigation through class certification and summary judgment (and trial, if necessary) and still have enough to settle.  This problem is especially acute when each monthly bill after the motion to dismiss can be more than the entirety of the motion-to-dismiss billing. 

Far too often, this discomfort results in the defendants deciding they need to settle right away, before contesting class certification or evaluating the strength of a summary judgment motion.  And if defense counsel hasn’t conducted a good early case assessment, for cost reasons or otherwise, they aren’t in a good position to advise their clients or inform the insurers about the merits of the case.  This leads to premature and bloated settlements, detached from the merits of the litigation.  I’ve bemoaned the lack of “litigation” in “securities litigation” for years – please see here, for example. 

These dynamics have worsened the overall quality of motion to dismiss briefing too.  There are two ways to write a Reform Act motion to dismiss.  One is to lay out the pleading standards and point out what the complaint doesn’t allege.  That is simple, and simplistic, and can be done on a shoestring budget.  Yet given the Reform Act’s standards, this approach often results in dismissal.  The maxim “a broken clock is right twice a day” comes to mind.

The other way is to take full advantage of the Supreme Court’s directives in Omnicare and Tellabs that district courts consider, for falsity, the full context of the challenge statements and, for scienter, facts bearing on culpable and non-culpable inferences.  This allows defense counsel to tell a story of our clients’ honesty and good faith.  To state the obvious, this is the right way. 

But it can’t be done on a shoestring; it requires a thoughtful early case assessment (which can be done efficiently) since defense counsel need to know the facts to lean into the inferences.  And it requires lawyers truly devoted to the art of Reform Act motions to dismiss; even the very best general commercial litigators can’t capture the nuances a devoted securities litigator can. 

Just think what the dismissal rate could be if the defense bar filed excellent motions to dismiss in all cases. 

Finally, the blinkered focus on the motion to dismiss impacts derivative litigation.  As I wrote in my last post, we too often agree or move to stay derivative litigation pending the outcome of the securities class action motion to dismiss.  This is predicated on the hope that the securities class action will be dismissed.  This adds even more eggs to our securities class action motion to dismiss basket.  But if we engage in proper early case evaluation, we can make better decisions about which derivative cases to stay and which to move to dismiss. 

Over the years, I’ve bemoaned the lack of “litigation” in “securities litigation.”  In this post, I discuss the same problem in “derivative litigation:” why don’t we litigate derivative cases anymore? 

Derivative litigation – in which a stockholder asserts claims that belong to the company – takes multiple forms: tag-along cases to securities class actions; stand-alone claims related to other types of alleged legal or business problems; and challenges to mergers and acquisitions.  In this post, I focus on tag-along derivative claims.   

For the first 15+ or so years after tag-along derivative litigation became ubiquitous, we frequently filed motions to dismiss for failure to make a demand on the board – and won the vast majority of them.  But about 10 years ago, most defense counsel started to forego demand motions and, instead, began to negotiate stay agreements with derivative plaintiffs or moved for stays. 

Given the high success rate of demand motions, why did this shift happen?   

There are several culprits:

  • One reason is the perceived lack of a safety net if the demand motion fails.  That perception has roots in then-Vice Chancellor Leo Strine’s notorious 2003 decision in In Re Oracle Corp. Derivative Litigation, 824 A.2d 917 (Del. Ch. 2003), in which he held that the Oracle board’s SLC lacked sufficient independence from CEO Larry Ellison – the “too much vivid Stanford Cardinal red” decision.  Ever since Oracle, boards have hesitated to form SLCs.  The more recent Oracle SLC case, in which the SLC decided to let the shareholders take over the litigation, didn’t help boards’ confidence in SLCs.  On top of the perceived substantive risk, SLC investigations are often very expensive.
  • Stays seem smart in light of two additional trends: (1) confidence that the defendants will prevail on the securities class action motion to dismiss; and (2) reflexive settlement if the defendants lose the securities motion to dismiss.  Why take a risk that you’ll lose the demand motion, the thinking goes, when you’ll win the underlying securities motion to dismiss and will just settle if you don’t.  Stays seem more efficient than spending money on a demand motion.  As defense costs have consistently risen, companies and carriers have seen this as a place to save money.
  • Delaware forum bylaws have split apart the forums for securities class actions and derivative actions.  Before Delaware forum bylaws, federal derivative cases were frequently filed in or transferred to the securities class action forum, coordinated, and handled by the same judge.  And state court derivative cases were handled by judges in the same city as the federal judge, which tended to create sufficient coordination and cohesion. We thus could make sure that if we made a demand motion, it would lag behind the securities class action motion to dismiss.  Now, that’s more difficult to accomplish – creating the risk that the demand motion could be decided (and denied) before the securities class action motion to dismiss is decided. 

Failure to make demand motions has consequences.  Most significantly, the number of derivative cases overall and in individual cases continues to rise – if you’re a derivative plaintiffs’ lawyer, there’s little downside to filing a case or making a board demand if you find a client.  While there is only one derivative claim no matter how many plaintiffs’ lawyers file a case (or make a board demand), as a practical matter, the more derivative plaintiffs there are, the more difficult it is to obtain voluntarily dismissals if the securities motion to dismiss is granted or to settle if it is denied. 

What should we do about it?  I don’t think we should go back to routine demand motions.  There are good reasons, in particular cases and overall, to stay derivative cases.  Instead, I think we need to start at least making a deliberate, strategic decision whether to make a demand motion or agree to or move to stay based on the circumstances. 

But we definitely should not sell demand motions short.  They are a high-percentage motion, and they can (and usually should) be straightforward and utilize the already-developed securities class action arguments when arguing against a substantial likelihood of director liability.  The risk that a Delaware court could decide the demand motion first is a significant factor that needs to be weighed, but with good case management and communication with the court, it’s a manageable risk in many cases.  And even if a demand motion fails, an SLC is an effective procedure and doesn’t need to break the bank, as I’ve written. 

The key, as in so many areas of securities and derivative litigation, is improved strategic analysis and collegiality among the defendants, defense counsel, the insurers, and the broker.  Together, we can make good judgment calls and improve outcomes.   

Five years ago, we surveyed a decade’s worth of federal district court decisions on motions to dismiss securities claims brought against development-stage biotech companies to answer an important question: are these cases more likely to survive a motion to dismiss—and therefore riskier to insure against—than other securities class actions, as D&O insurers have traditionally assumed?

The answer was a resounding no: our analysis showed that securities claims brought against small, clinical-stage biotech companies were actually more likely to be dismissed at an early stage than other types of securities class actions between 2005 and 2017.  These companies have historically been considered attractive targets for securities actions given the inherent risks of the industry and the volatility of their stock prices, and, as a result, often have relatively limited D&O insurance options.  But our study found the assumptions that have acted to limit their options to be incorrect—biotech startups do not in fact pose greater securities class action risk than other companies.

This spring we set out to analyze another 5 years’ worth of data to see whether the patterns we observed in our prior study have held true in more recent years.  Not surprisingly, they have.

Our article analyzing the decisions has been published in the PLUS Blog and The D&O Diary.

I am evangelical about the importance of defense counsel working collegially with D&O insurers and brokers – the repeat players in securities and governance litigation – in the defense of litigation against our common clients.  In the big picture, this type of collegiality is the key to putting “litigation” back in “securities litigation” and to improving the effectiveness and efficiency of securities litigation defense, through better case evaluation and strategic and economic planning.  But, of course, the big picture is made up of individual cases, and each individual case comprises countless communications, and instances of lack of communication, amongst the triad of insurers, brokers, and defense counsel.

With a focus on four areas of communication – (1) a pre-motion to dismiss initial merits assessment and post-motion to dismiss strategic summit, (2) periodic updates from defense counsel, including an initial kick-off call, (3) insurer-insured relations around coverage issues, coverage letters, and deductions based on insurers’ billing guidelines, and (4) mediation and settlement – this post discusses how we can collectively improve our communication for the benefit of our common clients.

  1. Initial Merits Assessment and Overall Case Strategy

The most fundamental failure of communication is the absence of a meaningful merits assessment at the outset of the litigation.  In days gone by, a thorough but targeted initial background review and merits assessment was de rigueur.  It is not an internal investigation but instead a focused, tailored, and balanced effort that can be done in the low six figures in all but the largest cases.  We would ask the company for a set of key internal documents, assemble and review relevant public documents, identify a handful of people to interview, and assess the strengths and weaknesses of the claim.  We would discuss the outcome with management and the board, as well as the D&O broker and insurers.  This allowed for thoughtful strategic planning through the motion to dismiss and beyond: the company could understand the risk it faced, the insurers could calibrate their involvement and set reserves, and defense counsel could defend the case with the right amount of effort and cost.

But today, far too often, this type of review does not occur.  There are multiple causes, including a low cap or budget offered to secure the engagement; the (incorrect) view that a motion to dismiss is mostly a matter of identifying what the complaint does not allege, as opposed to an affirmative narrative that sticks up for the defendants’ honesty and good faith; and understandable backlash over some firms’ use of the background review to do a full-blown internal investigation.

Whatever the causes, the lack of initial merits assessment has eroded the effectiveness of securities litigation defense, for several reasons:

  • Motions to dismiss are not as strong if defense counsel don’t know the real facts.  While we can’t use internal facts on a motion to dismiss, knowing them allows for arguments based on inferences that we can make if we know the asserted inference to be true, and ethically can’t if we don’t.  This is substantively critical; the Supreme Court’s Omnicare and Tellabs decisions require courts to consider context and draw inferences, so failing to know the real facts weakens a motion to dismiss.
  • Motions to dismiss are just the first step in the litigation and are subject to the vagaries of the judicial process, such as judicial experience in Reform Act cases and clerk resources.  Some motions to dismiss are granted that probably shouldn’t be, and vice versa.  We file motions and they go into the judicial vortex, and it’s impossible to predict when we’ll get a decision.  So the decision usually comes as a surprise, and if the decision is a denial, it is jarring.  At that point, the reflex of everyone – the defendants, defense counsel, the broker, and the insurers – is to try to settle.  So we go into a mediation to resolve a claim that is untested on class certification, discovery, or summary judgment – without even holding a strategic summit to decide how to proceed.
  • Defense counsel can take a credibility hit if a motion to dismiss is denied, absent early and candid counseling of the risk of a denial.  After a year or more of positivity about the motion’s prospects, conveyed to get the engagement and/or due to lack of a good up-front merits evaluation, the defendants are understandability extra disturbed when the motion to dismiss is denied.  Defense counsel feels pressure to just resolve the case since, at that point, it’s hard to methodically analyze the merits when the focus is making a plan to respond to plaintiffs’ document requests.  The insurers too can feel adrift because of the lack of true communication about the merits.  Everyone thus becomes extra conservative due to a lack of informed communication up front.  The reflexive reaction is to simply settle.  For insurers, reflexive settlements are especially counter-cultural – insurance claims adjustment is about risk assessment, and without good communication about the real risks, the process becomes purely practical.  Or, worse, defense counsel goes through the burdens and expense of document production without knowing where it should lead – with a settlement red-flag thrown up only later, after many millions of dollars in fees.

These are just some of the consequences of the lack of early merits assessment and communication about the risks.  An early case assessment that helps everyone align and sets a strategic summit after a denial of motion to dismiss ruling would solve a lot of problems.  Here’s an overview:

Initial case assessment.  This does not need to break the bank but it shouldn’t be done on a shoestring budget either.  Ideally, in each case, the clients would give defense counsel an overview and a set of key documents (e.g., forecasts in an alleged false forecast case).  Defense counsel can develop AI-based searches for key emails from the emails of 3-5 people, yielding a relatively small number of documents to use in targeted and focused interviews.  If we prime the AI-pump properly, the process should identify problematic emails, and we can include them in our case analysis from the beginning rather than millions of dollars later.  Ideally, the initial case assessment should include an initial damages estimate and an assessment of areas for further work during class certification and expert discovery that would help defeat or mitigate materiality, loss causation, and damages.  Based on this work and discussions with management, the board, and the broker and insurers, the group can rough out what the defense might look like if the motion to dismiss is denied, including a strategic summit to decide how to proceed.

Post-motion to dismiss strategic summit.  My vision for this is to meet in person or virtually within two weeks, before discovery gets revved up.  Defense counsel can amplify their merits assessment, and also discuss class certification opposition issues and class structure – an especially significant issue in short-seller report cases and in cases in which plaintiffs’ counsel stretches the class forward or backward, and to take advantage of the series of Supreme Court class certification cases.  And defense counsel can discuss whether the structure of the litigation makes summary judgment a realistic opportunity.  It is in everyone’s interest to see if it makes sense to take advantage of one or both of these two further pre-trial opportunities to limit or eliminate the litigation.

  1. Periodic Updates

It is equally critical for defense counsel to provide periodic updates to insurers.  First, there should be an introduction call among the company, defense counsel, the broker, and insurers shortly after defense counsel is hired.  Most defense counsel and claims handlers don’t have a pre-existing relationship, and it’s helpful for them and the broker to get to know each other, explain how they typically work, and develop expectations for communication.  In my kick-off calls, I walk through our to-do list through the motion to dismiss and explain what we’re doing and why.  I also ask the insurers for their communication preferences and clarify how the broker and I will work together to make sure the insurers get the information they need in a timely way.

With this foundation of communication, as the litigation proceeds, we’re able to have more efficient and effective updates at natural points, e.g., when the lead-plaintiff is appointed, the consolidated and amended complaint is filed, and the motion to dismiss is being briefed.  And, if defense counsel conducts an initial case assessment, that should the subject of another call.

In periodic updates, defense counsel should call it like they see it.  Too often, defense counsel’s updates go from bullish to bearish on a dime.  Whether out of loyalty to the defendants or lack of knowledge of the case, defense counsel often fails to share the realistic risks.  The most frequent reason given for this stark shift is negative-sounding emails.  But sound bites in emails are par for the course in any litigation, and one of the main skills of litigation defense is to contextualize them.  So, not surprisingly, insurers can be suspicious about a quick shift from optimism to pessimism based solely on email sound bites; it can feel pretextual.  So we defense counsel need to be candid about the real risks from the beginning.

And it’s important for insurers to ask questions and share their views of the litigation.  With email sound bites, for example, insurers should put on their defense-counsel caps and ask probing questions.  While defense counsel’s judgment is entitled to some amount of deference on assessment of the merits, probing questioning is often necessary to determine the true content and foundation of that judgment.  In my experience, one of the fundamental truths about insurance claims professionals is that, while they play a different role in the defense of claims, they have overseen myriad more claims than most defense counsel have handled, and their instincts are typically excellent.  It benefits our common clients for insurers to trust their instincts and ask probing questions.  If a claim on which defense counsel wants to throw in the towel is actually defensible, it is short-sighted for anyone to overpay for a quick settlement.  We are all in this together for our common clients, in our respective roles, so please push us.

It’s worth noting, however, that defense counsel’s views on the safety of sharing case assessments with insurers varies widely.  My view is that I don’t need to share truly privileged information with them to provide a meaningful case assessment – i.e., I don’t need to say that the CEO said this, the CFO said that, etc.  Instead, I share my impressions based on what we’ve learned in the context of my experience, which is attorney work product that is not waived if I disclose it to someone aligned with my clients.  Other lawyers play it super safe and don’t share attorney work product.  Others are in the middle.

  1. Insurer-Insured Relations

There are a few common, communication-based forces that can disrupt good insurer-defense counsel relationships.

Reservation of rights letters.  Reservation of rights letters can get the litigation off on the wrong foot.  Of course, there are relatively few true coverage problems in securities class action litigation, especially given state-of-the-art final adjudication of the conduct exclusions, but the reservation of rights letter makes many clients feel uneasy – like the insurer is on the plaintiffs’ side or their coverage is actually in doubt.  While the most experienced securities litigators prepare their clients for ominous-sounding reservation of rights letters, many lawyers engaged to defend securities class actions are generalists and some, unfortunately, seem to use the letter to turn the insurers into adversaries.  Most insurers have softened their letters to address this problem.  I suggest that everyone look at their forms and see if there is room for further improvement.

Coverage issues.  If there is a true coverage issue, I suggest insurers raise it right up front as part of the initial case assessment conversation discussed above, so that everyone can include it in their litigation strategic thinking and the company can determine whether it needs coverage counsel.  Without this type of proactive approach, companies tend to default to hiring coverage counsel.  I embrace engagement of coverage counsel when it’s necessary, but resist it when it’s not, since it changes the tone of the relationship with the carriers; it turns them from friend to (perceived) foe.  A candid discussion of these issues early on can prevent unnecessary tension.

Deductions.  Last but certainly not least are deductions based on billing guidelines.  This is a perennial problem, and it has many unintended potential consequences in individual cases and overall.  Setting aside whether guidelines are part of the insurance contract, as a default rule, I accept insurer deductions (subject to discussion/appeal).  It is incumbent on me to understand the guidelines and follow them.  If they are unreasonable as applied – such as a limit on lawyers at a hearing or internal discussions that are meant to generate ideas and strategies and updates that otherwise require a memo – I discuss the issue and rarely have had a problem.  Billing discussions are often really about time entries and projects touching on case evaluation and strategy, so I use them as an opportunity to discuss the case.  But I suspect my approach is the exception, and the result overall can be unnecessary friction for often relatively minor savings.  In the bigger picture, securities defense practices can suffer due to lower realization than other practices, which lowers internal clout within firms, which in turn affects the practice’s ability to get the right talent and firm resources.

Deductions also impact the defendants, since most defense counsel looks to the company to make up short-pays.  This can drive a wedge between the company and insurers and make the defendants worry whether the insurers will be there for them.  Experienced defense counsel should help the defendants understand the process, even if they look to the company to make up short-pays, but common sense says that the insurers are often scapegoated.

I don’t presume to understand whether insurers’ cost savings is worth enduring these types of consequences.  And to be sure, I support deductions for wasteful lawyer time and administrative costs that should not be on the bill in the first place – these simply are not reasonable defense costs, and most public companies long ago stopped paying for them.  But I know we’d all be happier – insurers, defense counsel, and our common clients – if deductions were taken more sparingly.  Of course, I’m sympathetic about runaway law firm economics, but that’s a different problem that typically can’t be effectively addressed by deductions – and over-deducting in those situations just intensifies the tension between the insurers and the company/defense counsel, given the large deductions defense counsel asks the company to make up.  (One solution to bad billing and bloated fees, about which I’ve written, is the formation of small, collegial panels of full-time securities defense lawyers who operate on volume economics and a system of trust.)

  1. Mediation and Settlement

Defense-counsel friends: everything we need to know about insurer relations during the mediation and settlement process, we learned in kindergarten.  When there is an event as important as mediation, at which we plan to ask our insurer colleagues to fund the settlement, we must involve them in all aspects of the discussion and not just tell them when you want to mediate, with whom, and provide (often insufficient) notice.

With an initial case assessment and discussion between the company, insurers, and broker, the path to mediation will naturally come up.  Does mediation during the motion to dismiss process make sense?  If so, why?  If the motion to dismiss plays out, we will discuss mediation at the post-motion to dismiss strategic summit: is this a good time to mediate or should we test the economics of plaintiffs’ proposed class on market efficiency, price-impact, and/or classwide damages through the class certification process?  And if the plaintiffs’ case is structurally weak, should we mediate late in the case, after summary judgment is pending?

But even if we don’t have an initial case assessment meeting or strategic summit, in each and every case, we need to discuss the mediation pathway and strategy with the insurers and seek their views.  To leave them out of the process is impolite, to say the least, and fails to maximize the effectiveness of our clients’ insurance protection – which includes not just the limits themselves but the strategic input we can get from the insurers’ claims professionals and their ability to help our clients better when they have sufficient lead time and information to support obtaining funding when the time comes.

Another point of friction in the insurer-defense counsel relationship is over settlement value and negotiation.  While it’s an over-simplification, most defense lawyers just want to reach a settlement, and most insurers want to pay the right amount (with that amount confounded by the problems I’ve discussed).  This set-up can lead to friction and strategic positioning between them with express or implied threats of bad faith by defense and/or coverage counsel.

But we’d all be better off, in individual cases (in my experience) and overall, with clear communication and collegiality.  There are few cases in which insurers will not fund a good settlement, especially if defense counsel has provided meaningful analysis in advance and set a target or range for the settlement amount.  Many D&O insurance professionals are, to a large extent, mediation specialists, and it’s wrong to jettison their judgment.

The solution to this is good two-way communication, as discussed above.  Defense counsel should call it like they see it, and insurers should ask probing questions along the way.  Together, we can reach good outcomes.  Sometimes that means not settling and continuing to litigate.  Sometimes that means a walk down the hallway with the carrier whose money is in play and explaining why this is a case whose settlement value isn’t the product of liability risk and our economist’s best estimate of damages, but instead the lowest amount the plaintiffs’ lawyers will take.  There are some such cases.  But we need to improve our communication so we can know which is which.

The most frequent question I’ve been asked about the SEC’s proposed SPAC rules concerns the provision that would make unavailable the Private Securities Litigation Reform Act’s safe harbor for forward-looking statements with respect to de-SPAC transactions: would this change increase the risk that SPACs and de-SPACs face in securities litigation?

Not much. Public companies understandably believe that the Reform Act’s safe harbor protects them from liability for their guidance and projections if they simply follow the statute’s requirements. But, as a practical matter, the safe harbor is not so safe; some judges think the Reform Act goes too far, so they go to great lengths to avoid the statute’s plain language. This is one significant reason why we always have advocated an approach to defending forward-looking statements that does not depend solely on the safe harbor, even when the statute’s plain language would indicate that it applies. Thus, while SPACs and de-SPACs are certainly better off with the safe harbor than without it, its loss should not be as consequential as some may think.

The safe harbor was a key component of the Private Securities Litigation Reform Act. Congress sought “to encourage issuers to disseminate relevant information to the market without fear of open-ended liability.” H. R. Rep. No. 104-369, at 32 (1995), as reprinted in 1995 U.S.C.C.A.N. 730, 731. The safe harbor straightforwardly says that a forward-looking statement is not actionable if it (1) is “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement,” “or” (2) is immaterial, “or” (3) is made without actual knowledge of its falsity. 15 U.S.C. § 77z-2(c)(1); 15 U.S.C. § 78u-5(c)(1) (emphasis added).

Yet courts’ application of the safe harbor has been anything but straightforward. Indeed, courts have committed some basic legal errors in their attempts to nullify it. Foremost among these is the tendency to collapse the three prongs—essentially reading “or” to mean “and”—and to hold that actual knowledge that the forward-looking statement is false means that the cautionary language can’t be meaningful. Courts also engage in other types of legal gymnastics, such as straining to convert forward-looking statements into present-tense declarations, in order to take statements out of the safe harbor.

Beyond prominent instances of judicial error, judges frequently evade the safe harbor by simply avoiding defendants’ safe harbor arguments, choosing either to treat the safe harbor as a secondary issue or to avoid dealing with it altogether. The safe harbor was meant to create a clear disclosure system; if companies have meaningful risk disclosures, they can make projections without fear of liability. When judges avoid the safe harbor, companies’ projections are judged by legal rules and pleading requirements that result in less-certain and less-protective outcomes, even if judges get to the right result on other grounds. And if companies come to realize that they cannot rely on the clear safe harbor protection Congress meant to provide, they will make fewer and/or less meaningful forward-looking statements, to the detriment of investors.

The root of these problems is that many judges don’t like the idea that the safe harbor allows companies to escape liability for knowingly making false forward-looking statements. Indeed, some courts have explicitly questioned the safe harbor’s effect. For example, in In re Stone & Webster, Inc. Securities Litigation, the First Circuit called the safe harbor a “curious statute, which grants (within limits) a license to defraud.” 414 F.3d 187, 212 (1st Cir. 2005). This judicial antipathy for the safe harbor won’t change until the Supreme Court establishes a standard that resonates with lower-court judges. (In an article on the Quality Systems case and our amicus brief on behalf of Washington Legal Foundation in support of Quality Systems’ cert petition, we explained these problems (and our suggested solution) in more detail.)

For these reasons, we take a dual approach to defending forward-looking statements.

  1. A forward-looking statement is also an opinion under the Supreme Court’s decision in Omnicare, Inc. v. Laborers Dist. Council Const. Industry Pension Fund, 135 S. Ct. 1318 (2015), so we start by arguing that the forward-looking statement is not false in the first place. Omnicare held that a statement of opinion is false under the federal securities laws only if the speaker does not genuinely believe it, and it is misleading only if it omits information that, in context, would cause the statement to mislead a reasonable investor. See generally “Omnicare, Five Years Later: Strategies for Securities Defense Lawyers’ More Effective Use of the Decision.”

Lack of falsity defeats the claim regardless of the safe harbor’s application, but we have found that judges who believe that the forward-looking statements are not false (and are thus assured that they were not knowingly dishonest) also are more comfortable applying the safe harbor.

  1. We then argue the safe harbor as an additional basis for dismissal and use that discussion to demonstrate that the company’s safe harbor cautionary statements show that it really did its best to warn of the risks it faced. Judges can tell if a company’s risk factors aren’t thoughtful and customized. Too often, the risk factors become part of the SEC-filing boilerplate and don’t receive careful thought with each new disclosure; risk factors that don’t change from period to period, especially when it’s apparent that the risks have changed, are less likely to be found meaningful. And even though many risks don’t fundamentally change every quarter, facets of those risks often do, or there might be another, more-specific risk that could be added. We can help convince judges of the defendants’ candor and good faith, as well as the applicability of the safe harbor, by demonstrating the thoughtful evolution of tailored risk factors over time.

Ultimately, the least effective arguments are those that rest on the literal terms of the safe harbor, which create the impression that defendants are trying to skate on a technicality. It is these types of arguments—lacking sophisticated supporting analysis of either the context of the challenged forward-looking statements or the thoughtfulness of the cautionary language—that cause courts to try to evade what they see as the unjust application of the safe harbor. Effective defense counsel should appreciate that safe harbor “law” includes not only the statute and decisions interpreting it but also the skepticism with which many judges evaluate safe harbor arguments.

So, while SPACs and de-SPACs would be better off with the safe harbor, effective use of Omnicare is the primary protection for forward-looking statements anyway.