In 2012, I started the D&O Discourse blog to have a discussion among the repeat players in securities and corporate governance litigation: insurers, brokers, mediators, economists, plaintiffs’ counsel, and defense counsel. I share opinions from the defense-counsel perspective, but I call it like I see it. For example, in a post in anticipation of the Supreme Court’s decision in Halliburton II, I advocated for the usefulness of the fraud-on-the-market presumption of reliance at a time when fellow defense counsel sported pitchforks. My palms were sweaty, literally, when I pushed enter and sent my post forever into the internet. But I felt strongly that the fraud-on-the-market presumption creates a superior securities-litigation system for everyone, including, counterintuitively, public companies and their officers, directors, and insurers, by facilitating collective resolution of securities matters. I believed I was right, and still do.
I love being part of the D&O liability community. It gives me great satisfaction to team up with brokers and insurers to help our mutual clients safely through the thicket of securities and derivative litigation. For us repeat players, each case follows a fairly predictable course, but most of the clients we guide through it are newcomers, and connecting with them and keeping them comfortable requires more listening than talking, and more EQ than IQ. While we’re proud when we strategize smart arguments—e.g. that substantive law trumps procedural law on motions to dismiss—our #1 metric is that clients feel like the litigation was a Sunday drive rather than a rollercoaster ride.
These are the things I write about. Over the years, my posts have fallen into several general categories:
- The state of the law and how we can improve it through legal reforms, better strategy, and more effective motions to dismiss.
- How we can improve the culture of securities litigation defense through collegiality among insurers, brokers, and defense counsel.
- How the plaintiffs’ bar has developed into a broader group of specialized, formidable foes.
- How the defense bar can increase its specialization and improve its efficiency—and thus give companies and their directors and officers greater value and be better stewards of their insurance policy proceeds.
- How we can put “litigation” back in “securities litigation” by litigating cases further down the road, prioritizing challenges to class certification, and considering judgment protection to create a safety net for cases that might be worthy of a trial.
If you’re new to the blog, I invite you to browse the categories in one of the drop-down menus on the right. If you’ve followed along over the years, I invite you to take a look back through the posts and categories.
This post is the first of a new quarterly series on the state of securities and governance litigation, which will take a big-picture view of these subjects.
This specific post focuses on the state of securities class actions.
So where are we?
More than any other time in my career, securities law and practice is super stable: we have seminal, defendant-friendly Supreme Court decisions on the primary motion to dismiss issues—falsity (Omnicare), materiality (Matrixx), scienter (Tellabs), and loss causation (Dura)—and on class certification (Halliburton I, Amgen, Comcast, Halliburton II, Goldman Sachs). The circuits’ scienter standards are settled, uniform, and high bars. The number of stock-drop securities class action filings each year varies, but centers around 200. Motion to dismiss practice is relatively routine and rhythmic, with the primary doctrinal arguments mostly the same, customized for each case, and the Reform Act’s discovery stay continues to stabilize litigation activity and defense costs through the motion to dismiss stage in most cases.
But, despite this stability and defendant-friendly law, plaintiffs’ lawyers are doing well. The longstanding securities plaintiffs’ firms continue to thrive, with increasingly large settlements. The so-called “emerging firms” that hit their stride during the Chinese reverse merger cases and never looked back have now, in fact, emerged. They win a lot of lead plaintiff contests, get past their fair share of motions to dismiss, and achieve settlements that creep higher and higher as a percentage of alleged damages. All securities class action plaintiffs’ firms are adept at crafting a fraud narrative in their complaints and oppositions to motions to dismiss—that is their core skill. And all plaintiffs’ firms have a negotiating trump card in mediations: the defense side rarely has sufficient insurance resources and/or resolve to defend a case through trial, so the settlement value in every case isn’t its actual settlement value, but instead is the lowest amount the plaintiffs will take.
In contrast, the issuer securities defense bar is increasingly splintered. There remains a small group of full-time issuer-focused securities defense lawyers, but that group is shrinking as a great many cases are defended by a larger group of lawyers with more varied practices of which securities litigation is just one component.
This splintering has consequences. One is the lack of lineage to practice before and through the Reform Act. Fewer and fewer securities defense lawyers have defended cases brought by Bill Lerach and Mel Weiss, whose philosophies and tendencies will always shape the plaintiffs’ bar. And fewer and fewer defense lawyers appreciate just how revolutionary the Reform Act was. It’s a securities-litigation Fabergé egg and, unfortunately, some defense lawyers don’t sufficiently respect and protect it, partly due to lack of first-hand knowledge of pre-Reform Act practice.
Another consequence of the splintered defense bar is a loss of emphasis on early case investigation and development of a defense narrative. Motions to dismiss increasingly consist of simple exercises in pointing out facts the complaint doesn’t allege, rather than crafting a narrative of good faith with the confidence that can only come from knowing the real story. Some of this approach may be defense lawyers’ reaction to pricing pressure, and while I applaud their efforts to be efficient, we’d all be better off with better defense narratives and motions to dismiss.
Beyond the motion to dismiss, securities litigation defense increasingly involves very little actual litigation. Cases that survive a motion to dismiss typically settle before class certification, merits and expert discovery, and summary judgment—much less trial. To add insult to injury, the lack of early fact development means that these early settlements are not rooted in the merits.
This trend away from actually litigating securities litigation cases started about 10 years ago, and it has become part of the culture of securities litigation. I will always favor more litigation in the right cases, so those who support my effort to put “litigation” back in “securities litigation” should not fear that I’ve given up. I’m going to continue to advocate for greater efficiency and collegiality among insurers, brokers, and defense counsel, so that defendants’ policy proceeds stretch farther. I’m going to continue to advocate for greater involvement by insurers and brokers in defense-counsel selection, to help defendants engage the right lawyers for the particular case. I’m going to continue to advocate for use of contingent-liability policies in securities class actions, so that defendants with the resolve to defend cases through trial have the right resources and their own trump card. But, if our securities litigation system remains one solely of motions to dismiss, I’m going to press for prioritizing class certification and damages analysis up front, so that plaintiffs’ one-sided assertions on those important issues don’t continue to dominate mediations. And I’m going to begin to advocate for limited, focused fact inquiry in advance of mediations to make them more merits-based—stay tuned.