It was a great honor to moderate a Professional Liability Underwriting Society D&O Symposium panel on the ability of Contingent Liability (CL) insurance to improve outcomes in securities class actions (SCA).

Randy Hein, President of Berkley Transactional (Berkley Professional Liability), pioneer of CL for SCAs; Kara Altenbaumer-Price, executive risk broker at McGriff; Paul Bessette, co-chair of King & Spalding‘s securities litigation group; and Elizabeth Neumann, AXIS‘s head of professional liability claims, discussed how SCA outcomes are worsening for defendants and how CL for SCAs can help improve them.

Until 10-15 years ago, defendants often defended an SCA that survived a motion to dismiss (MTD) through class certification and summary judgment. Now, most SCAs settle soon after an unsuccessful MTD—a practice that inflates settlement amounts because defendants lack the leverage that litigation on the merits creates. As a result, the settlement value of every SCA has become simple to calculate: it is the lowest amount the plaintiffs will take. That amount continues to escalate as a percentage of plaintiff-style damages, especially in SCAs against companies with a market capitalization under $2 billion—a cohort perennially comprising more than 50% of all SCAs.

This lack of litigation owes to a variety of factors, including two important financial considerations:

  • Due to escalating defense costs, defendants often can’t defend an SCA past the MTD through class certification or summary judgment, much less trial, while still preserving sufficient D&O proceeds to settle later–a problem especially acute in the large cohort of sub-$2 billion market cap SCAs; and
  • Defendants fear an improbable but non-zero risk of a potentially catastrophic financial loss.

The insurance industry has a long history of resolving such large but improbable financial risks. In the right situations, Transactional Risk underwriters may be able to provide enough capacity to remove the risk of (improbable) catastrophic financial loss, enabling defendants the freedom to defend themselves in such litigation. This protection would better promote more vigorous litigation and better align settlement amounts with the merits.

Many thanks to Symposium co-chair Justin Kudler of AXA XL for his collegiality and insights as we planned the panel, and to Megan Moore and Cary Hepp for their help and support.

Randy Hein and I wrote a paper for PLUS Journal on CL for SCAs, which we also submitted for the D&O Symposium: A Free-Market Solution to Meritless Securities Litigation (at p. 23).

The history of securities litigation is marked by waves: from the IPO laddering cases, to the Sarbanes-Oxley era corporate scandal cases, to stock options backdating, to the credit crisis, to the Chinese reverse-merger cases, to event-driven/lawsuit blueprint cases, certain types of cases have predominated at different times.

Are we entering a wave of COVID-19 cases? My view is:

  1. We will not see a wave of cases challenging pre-COVID-19 disclosures and governance triggered by the fallout from COVID-19 in February, March, and April 2020.
  2. But companies and their directors and officers who are not hyper-vigilant about what they say and how they say it and/or whose boards are not highly attentive will face shareholder suits if and when they suffer problems in the next several years precipitated or exacerbated by COVID-19.

First, why don’t I think there will be a wave based on the economic downturn over the past two months? Everyone is in the same boat, so it’s difficult for plaintiffs to identify and prove that any particular company’s disclosures or governance problems caused economic harm. And plaintiffs need to choose extra-wisely, because many judges would be offended by accusations of fraud and poor oversight over problems caused by a pandemic – it would feel opportunistic.

But going forward, disclosure and governance will be judged far differently – almost in the polar-opposite way.  Moving forward, judges will have no patience for companies whose disclosures are not careful or boards whose oversight fails to meet the moment. The legal standards governing disclosure and governance litigation are judged from inferences drawn in context by judges who are themselves living the context. They will be critical of disclosures that feel exaggerated and governance that feels lax. Company-specific stock drops and governance failures will be easy for the plaintiffs’ bar to spot in the coming months and years.

So, how does a company and its directors and officers stay out of category (2) – how do they avoid securities and governance suits in the next several years based on disclosures and governance in the next several quarters? The tools the law gives companies to win shareholder suits allow them to avoid them or prevail if they’re sued incorrectly. I break it down by type of shareholder suit.

Securities Class Actions

Under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 under it, a plaintiff must show (1) a false or misleading statement (2) made with intent to defraud (scienter), among other elements. The Private Securities Litigation Reform Act of 1995 (Reform Act) protects forward-looking statements if the statement is accompanied by meaningful cautionary language.

The U.S. Supreme Court’s Omnicare decision says that courts must examine the full factual context to determine whether a statement was false or misleading, and its Tellabs decision says that courts must weigh competing inferences, both fraudulent and non-fraudulent, from the full set of contextual facts to determine whether any false or misleading statement was made with scienter.

The full-context rule helps defendants win more cases, because it lessens litigation-by-soundbite – defendants almost always fare better if what they said is examined in a broader frame. And it allows defendants to avoid being sued in the first place through thoughtful disclosure that reduces investor surprise and deters plaintiffs’ lawyers from suing or, if one does, from piling on.

Here are practical tips to reduce the risk of making false or misleading statements, and failing to obtain safe-harbor protection:

  • Speak factually. This seems obvious, but companies must be more factual than ever in their disclosures. Although statements of opinion receive heightened protection under Omnicare, in the current environment, companies should be careful with words like “significantly” or “improving” when they can use facts and figures, and when they use those sorts of terms, they need to give more context than usual.
  • Show your work. Create the context under which your statements will be judged by explaining yourself. Investors are listening to every word and interpreting, extrapolating, and perceiving hopeful overtones. Investors will create the context if you don’t.
  • Describe your real risks. The Reform Act’s safe harbor for forward-looking statements only applies if a company’s cautionary statements are “meaningful.” In ordinary times, judges hesitate to apply the safe harbor unless the company’s risk disclosures feel like the real and dynamic risks the company faces and are not boilerplate or static. In these times, companies need to lay out their risks extra-authentically to have a decent shot at safe harbor protection. Here too, investors will hear hope in risk disclosures that aren’t extremely candid.

Here are practical tips to reduce the risk of a plaintiff’s lawyer or judge feeling like any false statement was made with intent to defraud:

  • Avoid unnecessary discretionary stock sales. A director or officer should not unnecessarily sell significant amounts of stock outside of 10b5-1 plans absent an understandable reason, which the company should disclose so their securities class action defense lawyer can use it to combat allegations of a motive for fraud. In these times, large, unexplained stock sales are more likely to be viewed as suspicious by judges.
  • Avoid executive compensation increases. Executives should be careful about taking new, enhanced, or special compensation. While I believe judges decide motions to dismiss based on whether they think executives are honest, and not whether they are well compensated, increased compensation during this time is perilous. Executive compensation cuts are a personal and company-specific matter, and I don’t think judges should or will judge an executive negatively based on failure to take cuts.
  • Let your candor shine. Candid, abundant, and generous disclosure will help executives avoid scienter allegations even if they said something that is technically inaccurate or misleading in context. Generous disclosure will help the judge see that executives were doing their best to be honest in challenging circumstances and find a way to dismiss the litigation. (For a discussion of the relationship between the falsity and scienter elements, please see my post “Falsity is Fundamental.”)

Shareholder Derivative Litigation

In general, directors will not be liable for harm to their corporations if they are engaged, informed, inquisitive, and avoid or appropriately address conflicts. As with corporate disclosures, governance will be judged by judges who understand that COVID-19 is a big deal for all people and companies, and directors who are engaged in genuine and documented ways will fare best.

Here are practical tips to avoiding governance problems and suits or, if one is filed, setting up a successful defense:

  • Trust your intuition. Companies set up processes for board engagement and often appropriately filter things to directors. That is perfectly fine for normal times, but in this environment, directors need to trust their intuition about what their companies need from them, and then engage in ways that make sense in the circumstances. This should be an explicit discussion: boards and management should decide together what information board should receive during this unprecedented time. Many judges are going to take almost a strict liability approach for directors, and fine distinctions between director and management duties aren’t going to predictably carry the day.
  • Don’t worry about liability. Just govern. Directors who are engaged and working hard have less to worry about than directors who worry that greater involvement will expose them to greater liability. I believe judges will apply the spirit of Good Samaritan laws – relieving good-faith helpers from liability – to director liability in this environment. Many directors and their advisors say, “nose in, fingers out.” In this crisis environment, I think directors need to have the courage to stick their fingers in – and toes too – if it’s helpful to management.
  • Be a trusted advisor to management. Be there for your executives holistically. They need your kindness, courage, and creativity – and maybe basic friendship – now more than ever.

The chance to help Washington Legal Foundation with a U.S. Supreme Court amicus brief in the Omnicare case was an honor.  Statements of opinion are ubiquitous in corporate communications on issues as diverse as asset valuations, strength of current performance, risk assessments, product quality, loss reserves, and progress toward corporate goals.  Many of these opinions are crucial to investors, providing them with unique information and insight.

Yet, for the first 20 years of my securities litigation career, the law governing evaluation of opinions was a tangle.  Omnicare gave me the opportunity to help improve the law in this important area, and our amicus brief shaped the Court’s standard for what makes an opinion false or misleading – a standard the Court said is “no small task” for a plaintiff to meet.

In the five years since the decision, Omnicare has helped defendants win more cases.  But we in the defense bar can use Omnicare better, as my colleagues and I explain in this WLF Legal Backgrounder:

Omnicare, Five Years Later: Strategies for Securities Defense Lawyers’ More Effective Use of the Decision

In Salzberg, et al. v. Sciabacucchi, No. 346, 2019 (Del. Mar. 18, 2020) (“Blue Apron”), the Delaware Supreme Court upheld the facial validity of federal-forum provisions (FFPs) in a Delaware corporation’s certificate of incorporation requiring actions arising under the Securities Act of 1933 to be filed exclusively in federal court. Here is Kevin LaCroix’s helpful summary of the decision and discussion of its background, including the valiant litigation funding effort by D&O insurers and brokers: “Delaware Supreme Court Holds Federal Forum Provisions Facially Valid.”

In many cases, Blue Apron will help Delaware corporations better coordinate multiple securities class actions challenging disclosures in a registration statement and prospectus for an initial public offering (IPO) or secondary offering, by reducing the chances that a company will face concurrent federal-court and state-court 1933 Act actions. For this reason, Blue Apron is important.

But it is important for companies and their D&O insurers and brokers to appreciate that Blue Apron will not eliminate concurrent state-court 1933 Act cases – it doesn’t affect state-court claims against non-Delaware corporations, and I predict that some plaintiffs’ firms will continue to file cases against Delaware corporations with FFPs in state court, leaving us with inefficient pre-Cyan-like jurisdictional battles. And only time will tell, but I wouldn’t be surprised if the Supreme Court were to end up addressing this issue, either through a cert petition by the Blue Apron plaintiffs or through one of the jurisdictional battles in subsequent cases. At a minimum, the post-Blue Apron environment almost certainly will not be serene and certain.

The only way for companies and their D&O insurers and brokers to improve 1933 Act outcomes is to help create a system that results in more effective and efficient litigation defense. After exploring Blue Apron‘s limitations, I chart a course forward to more effective and efficient defense strategies.

  1. Blue Apron’s Limitations

a.  Scope of Application

Blue Apron will not apply to non-Delaware IPO cases, or to non-Delaware secondary- or debt- offering cases. More than 40% of public companies are incorporated outside of Delaware, so there will remain a nagging number of concurrent federal and state cases. We can all think of many of our cases over the years involving non-Delaware companies: most REITs are incorporated in Maryland, an increasing number of companies are incorporated in Nevada, and many companies remain incorporated in their home state – for example, General Electric is a New York corporation, Target is a Minnesota corporation, and Apple is a California corporation.

Although secondary-offering 1933 Act claims are less frequent than IPO claims, there are plenty. I’m currently defending concurrent secondary-offering securities class actions. It is indeed more difficult for plaintiffs’ lawyers to find plaintiffs who can prove they bought stock in or traceable to secondary offerings, since secondary-offering stock is scrambled in the market, but they do find them, largely because of the institutional investor relationships the Private Securities Litigation Reform Act of 1995 incentivized. And the larger plaintiffs’ firms have now spent 25 years developing relationships with the types of institutions who directly purchase in secondary offerings.

Blue Apron will have the biggest impact in IPO securities class actions. Although Blue Apron only applies to Delaware corporations, of course, more than 80% of IPO companies are incorporated in Delaware, and with Blue Apron, that number is bound to increase. But beware: the allure of Delaware can be a trap for the unwary litigant; it is a great forum for defendants facing meritless litigation, but it is a buzz-saw for questionable conduct or inexcusable inaction – think Southern Peru Copper and Blue Bell.

b.  Practical Problems

I expect that some plaintiffs’ lawyers will continue to file state-court 1933 Act cases against Delaware corporations with FFPs. In those cases, a company with an FFP will make a motion to dismiss in state court on the basis of the FFP or remove the case to federal court. The plaintiffs will argue that, notwithstanding Blue Apron, a company can’t eliminate state-court 1933 Act jurisdiction, as confirmed by the 9-0 decision in Cyan, or that the FFP, while facially valid, is not valid as applied in the particular case for one reason or another.

While I expect defendants will win many of those battles, or even most, they will all be costly to fight. And whatever the win-loss record, for public companies and their D&O insurers and brokers, the outcome will be additional defense costs and a lack of certainty. We will not be able to plan on federal court being the exclusive jurisdiction for 1933 Act claims.

2.  Charting a Path Forward

a.  The first step: increasing specialization. 

The only way that public companies and their D&O insurers and brokers will achieve better outcomes in 1933 Act cases is to improve the effectiveness and efficiency of securities class action defense. It is that simple. There are no shortcuts.

Effectiveness and efficiency are at an all-time low, primarily due to a splintering of the defense bar. Although there remains a small group of full-time securities defense lawyers, the so-called defense bar comprises an increasing number of general commercial litigators. Some of these lawyers are fabulous litigators for other types of cases, or to help the securities class action specialist shape litigation strategy, but they are rarely the right choice to lead the defense. (For more on the deterioration of the defense bar, see, for example, my multi-part series “The New Securities Litigation Landscape: How D&O Insurers and Brokers Can Help Defendants Navigate” and my most recent D&O Discourse post, “Putting ‘Litigation’ Back in ‘Securities Litigation.’”)

D&O insurers and brokers need to increase their involvement in securities class action defense to ensure that only specialists defend these specialized cases. Doing so requires a shift in the way we think but otherwise is straightforward: the D&O insurance contract needs a tweak to increase insurers’ contractual right to be more involved in defense counsel selection and defense strategy.

With increased specialization, supply and demand will take over to improve quality and cost. With a more specialized bar, each lawyer will defend a greater number of cases – which will yield game-changing benefits.

b.  The second step: increasing volume of cases for specialists

Increasing the volume of work for securities defense specialists will improve both effectiveness and efficiency.

Increasing volume will improve effectiveness. As specialists devote more time, attention, and resources to improving their knowledge, strategies, and relationships, and they do not want to let their repeat-play insurer and broker colleagues down with bad results.

In 1933 Act cases, specialization is absolutely critical to achieving better results. We can win or substantially reduce 1933 Act case severity, but we need the right lawyers defending the cases. For example:

  • Omnicare is a powerful tool in Section 11 cases – it can even be used to argue that restated financial statements weren’t false – but far too few defense lawyers use it effectively, a shocking shortcoming I attribute to the decline of specialization. (I wrote a U.S. Supreme Court amicus brief in Omnicare, and just published an article on Omnicare‘s five-year anniversary for my amicus client, Washington Legal Foundation: “Omnicare, Five Years Later: Strategies for Securities Defense Lawyers’ More Effective Use of the Decision.“)
  • The key case-management skill in 1933 Act cases is knowledge of and relationships with the plaintiffs’ bar, D&O insurers, and mediators, and those can only come from decades spent in this practice (though it takes people skills too). Only a lawyer who is well known to the plaintiffs’ bar can understand the intra-plaintiff dynamics and the often-subtle strategies the plaintiffs are trying to pull. The lead lawyer also needs to manage the settlement dynamics among groups of plaintiffs’ lawyers and the tower of D&O insurers, among the fairly small number of repeat securities class action mediators.

Increasing volume will improve efficiency. Greater volume will also improve efficiency, as D&O insurers and brokers, on behalf of their public company clients, can insist on greater efficiency by defense firms, who will defend each case with an abundance mentality and the knowledge that they’d better not let the insurers and brokers down with an inefficient defense.

Let’s go back to General Electric. Imagine if GE decided it would take over all D&O insurance, primary and excess, and could have a meaningful right to help its insureds choose defense counsel. With its money at stake, GE would help its insureds choose excellent lawyers who will be willing to give GE an effective and efficient defense. Not one of these lawyers would ever do less than a stellar job or bill a penny more than necessary. And all of these lawyers would give rate and other economic concessions (e.g. volume discounts) well beyond what any defense firm would ever give to a D&O insurer today. D&O insurers and brokers need to find a way to approximate GE in my hypothetical.

c.  A journey of a thousand miles begins with a single step

How can insurers and brokers achieve this type of involvement under non-duty to defend policies? In the current hard market, and especially with IPO companies, D&O insurers have the ability to negotiate contractually tailored defense arrangements under a non-duty to defend policy, and brokers have ability to negotiate better terms for their clients through demystifying the claims process for underwriters – one that locks in a more effective and efficient defense at policy inception. And, most importantly, companies and their directors and officers would benefit from better terms while still obtaining an excellent defense that stretches their limits farther. Everyone would be better off.

So, why not negotiate, in the underwriting process, the insureds’ obligation to interview a set of 3-5 agreed-upon defense lawyers (specific lawyers, not firms) in the event of a claim? The underwriter and broker could even ask each defense lawyer candidate for a case management plan and budget for a typical type of claim that might arise for the particular insureds. The key is to set this up at policy inception.

With the right lawyer in the case, companies and their D&O insurers and broker can work with the lawyer to create a case management plan that addresses how to deal with concurrent federal and state cases, plans for litigation of the case past the motion to dismiss if it’s defensible, and includes litigation budgets and even caps – not every concurrent 1933 Act case involves unpredictable or intolerable defense costs (e.g. I just budgeted only 15% more for the presence of concurrent state cases).

A securities class action specialist who works collegially with D&O insurers and brokers can and will win 1933 Act cases and engage in thoughtful, reliable discussions about defense strategy and cost. That – and not any FFP or even a legislative fix to the 1933 Act – is the only way we can fundamentally improve outcomes in 1933 Act cases.



Last month, D&O insurance lawyer John McCarrick and D&O insurance executive Paul Schiavone published a guest post on Kevin LaCroix’s blog, The D&O Diary, titled “Is it Time to Revisit the Scope of D&O Coverage?” John and Kevin’s post has triggered response posts from four policyholder advocates: Kevin of RT ProExec (response at the bottom of John and Paul’s post); Paul Ferrillo of Weil Gotshal; Gil Isidro of Woodruff Sawyer; and Francis Kean of Willis Towers Watson.

They have joined issue over the following question: should D&O insurance coverages that expanded during the recent soft D&O insurance market be pared back now the market has hardened?

I appreciate the perspectives on both sides of this debate – insurers understandably would like to be paid appropriately for the risk they are taking, and brokers and policyholder lawyers want to continue to deliver good value to their clients and protect the significant gains they’ve made for them.

But I believe we need to ask three more fundamental questions:

(1)  Is the current D&O insurance product structure still the right one?

(2)  Are public company directors and officers better off, in individual cases and/or overall, engaging whomever they want to defend them and devising their own litigation strategy, with limited ability by carriers or brokers to guide them?

(3)  If officers and directors would benefit from greater involvement by insurers and brokers, how can we achieve it?

I strongly believe that the D&O insurance product’s one-size-fits-all feature is ill-suited for the shape of securities litigation today, in which the plaintiffs’ bar is increasingly diverse and creative and the defense bar is splintered and increasingly unspecialized.  See, for example, my multi-part series “The New Securities Litigation Landscape: How D&O Insurers and Brokers Can Help Defendants Navigate” and my most recent D&O Discourse post, “Putting ‘Litigation’ Back in Securities Litigation.

I’m actively discussing these three issues and the D&O Diary debate with many insurer and broker friends, and I know many of you are as well.  I’m cautiously optimistic that these discussions will yield a D&O insurance product that functions better for everyone – insurers, brokers, full-time securities defense lawyers, and of course, directors and officers.

I’ll be writing more about these issues in the coming months.  Stay tuned!

D&O Discourse is a forum for discussion of key issues in securities and governance litigation, to help improve litigation outcomes for public companies and their directors and officers, and D&O insurers and brokers, in specific cases and overall.

This post discusses a fundamental, structural, and deepening problem with securities class action defense: the lack of actual litigation past the motion to dismiss process.  In other words, there is virtually no “litigation” in securities and governance litigation.  Why is that so, and what can we do about it?  After diagnosing the problem and discussing the harm it is causing, I’ll discuss the solutions and how we can implement them.

The Problem

I have defended securities litigation full time for almost 25 years.  For the first 15 of those years, 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 about 10 years ago: securities class actions that survived a motion to dismiss increasingly started to settle shortly thereafter, before significant fact or expert discovery.  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.  And premature settlement means that defendants don’t develop damages defenses, making settlement more expensive than the facts and economics often warrant.

What a shame.  Class certification offers tremendous opportunities for defendants to defeat or greatly reduce class-claim exposure – indeed, the Supreme Court’s decision in Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014), had the potential to be revolutionary but is rarely used.  Summary judgment was once a central strategic tool and presented a real opportunity to win, but very few cases are litigated to summary judgment.  The Supreme Court’s decision in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), requiring a causal connection between challenged statements and the corrective disclosure, has failed to limit damages in the way we anticipated – because defendants rarely do true defense-style damages analysis anymore.  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, and it doesn’t serve defendants’ interests.

The only winner in this system is plaintiffs’ counsel.  Because plaintiffs’ counsel knows defendants can’t rationally litigate a case all the way through, settlement values are based on the lowest amount they are willing to take.  Settlement values have little or nothing to do with the value of the case – the merit or lack of merit of the litigation is nearly irrelevant.

Three factors have converged over the past 10 years to create this problem:

First, hourly billing rates and profitability targets at typical securities class action defense firms have skyrocketed – yielding defense-cost increases that vastly exceed the rate of inflation.

Second, the defense bar has become un-specialized.  Although there remains a small group of full-time securities defense lawyers, the so-called defense bar comprises an increasing number of general commercial litigators.  As a result, there are far more law firm partners pursuing securities litigation than there is securities litigation work to go around.  The result is a decline in specialization and an increase in inefficiency, as lawyers hoard the scarce work they win.  The heyday of securities litigation defense – think Silicon Valley in the 1990s – is dead.

Third, over the same period, the securities plaintiffs’ bar has expanded to include a set of firms who sue smaller companies.  These firms, sometimes called “emerging firms,” have now emerged – indeed, those firms now collectively initiate most securities class actions.  These firms tend to focus on cases against smaller companies.  As a result of the now-emerged firms’ approach, the median market capitalization of a securities class action defendant is about $1 billion, and two-thirds of all securities class actions are against companies with a market cap of $2 billion or less.

The economics of securities class actions against these smaller public companies are typically modest – for example, most such companies typically carry D&O insurance limits of $15 – $40 million.  A great many defense firms literally can’t vigorously defend a case against such a company without swamping a typical D&O insurance tower.  Although some might say “they should just buy more insurance,” most of these companies can’t or won’t – and why should they, just to transfer more money to their lawyers?  For them, every penny counts – the difference between breaking even, or not; between meeting their loan covenants, or not; between meeting Wall Street expectations, or not.

Because of this dynamic, plaintiffs’ firms hold all the cards at mediation:  defendants have just lost the motion to dismiss and have not developed the facts necessary to say with confidence that they will prevail, and they haven’t engaged in enough economic analysis to persuasively argue that plaintiffs can’t obtain class certification or prove significant damages.  And, in most cases, the defendants can’t credibly threaten to take the case to trial because the plaintiffs know further litigation would threaten to exhaust the insurance proceeds.  Because plaintiffs’ counsel knows defendants can’t rationally litigate a case all the way through, settlement values are based on 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 merit or lack of merit of the litigation is nearly irrelevant.  This problem significantly impacts cases against larger companies as well.  As settlement values increase in smaller cases because they aren’t defended, plaintiffs’ lawyers in larger cases expect higher settlement percentages too.

The Solutions 

There are two main solutions to these problems:  (1) in the medium and longer term, we need to improve the efficiency and effectiveness of securities class action defense by retooling the D&O insurance product and the defense bar; and (2) in the short term, we need to move economic analysis up front, so that defendants come to early mediations at least with class certification and damages arguments.

Securities Defense Reform

We need to create an efficient defense-counsel market, especially for the two-thirds of securities class actions against companies with market caps of $2 billion or less.  Imagine a hypothetical single purchaser of all securities litigation defense services.  That buyer may well hire Dewey Cheatham & Howe to defend cases against the largest companies.  Even sky-high defense costs fit within the large D&O towers large companies typically purchase.

But that hypothetical rational buyer would never – ever – hire Dewey Cheatham & Howe to defend small and medium-sized cases.  The median securities class action settlement hovers around $7 million.  If Dewey Cheatham & Howe defended such a case naturally, with high billing rates and high associate-to-partner ratios, 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 case that can be settled for $7 million.

Thus, our hypothetical purchaser would put the defense counsel work on cases against small and medium-sized companies out for bid, to be awarded to firms that could and would agree to defend the case through trial for an amount commensurate with the value of the case.  Firms that could not or would not do the work for the right amount would not try for the work or wouldn’t get it.   In securities class actions, many typical defense firms could not or would not defend small and medium-sized cases for a rational price.

But a number of the relatively small group of full-time securities class action lawyers would find a way to scale their practices to defend securities class action litigation against small and medium-sized companies.  We find the current system frustrating – especially the engagement of non-specialists to defend these specialized cases – and want to revive the effectiveness and efficiency of securities litigation defense.  Doing so would benefit us too, by lowering our cost of sales and restoring a system that provides defendants a real defense.  I’d bet that none of the 20+ year full-time securities defense lawyers set out to have a motion to dismiss and mediation practice.  I certainly didn’t.  Rather, we want to win, and know that we can win most cases on class certification, summary judgment, or even trial, even if we didn’t win the motion to dismiss.

This small group of lawyers can form a pool from which insurers and brokers can establish small, focused, and collegial panels – formal or informal – to defend securities class actions against small and medium-sized companies.  Under such a system, insurers and brokers can help defendants achieve a superior defense for amounts that allow defendants to actually defend securities class actions, while leaving plenty of policy proceeds to resolve claims.  For example, if defense counsel agrees to a defense-costs cap for tasks that total $3.5 million through summary judgment, the defendants and insurers would know that there will be $7 million (the median settlement value) of primary policy proceeds remaining for settlement, assuming a $10 million primary policy and $1 million self-insured retention.  Of course, a fair number 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.

This would transform securities litigation dynamics.  Cases can and should be defended through the motion to dismiss within the self-insured retention.  A collegial group of full-time securities defense lawyers could and would work more collegially with insurers and brokers and the defendants up front to make a plan up front to defend certain cases on the merits.  This would put pressure on plaintiffs’ lawyers, some of whom operate on a volume model and literally don’t have the ability to litigate their inventory of cases.

Beyond taking advantage of plaintiff-firm staffing and economics, there are myriad benefits to more actual litigation.  First and foremost, the defendants and their insurers and brokers would be able to understand the merits and settle based on a real litigation risk analysis – what the case is actually worth.  Although no one can know for sure, I believe that settlement values are at least 30% higher than they would be if defendants and their insurers were comfortable defending cases through class certification and summary judgment.  Imagine the reduction in severity.  Frequency will begin to be reduced as well – they will begin to forego filing dubious cases, and they will be forced to spend more time on litigation and less time on case origination.

In addition to allowing us to actually litigate again, reforming the defense bar would improve the quality of the defense bar.  Defense lawyers would be incentivized to devote more time and energy to shaping the law both in specific cases and through thought leadership.  We as a defense bar have generally failed to shape the law in recent years the way we did in the first 15 years after the Reform Act – a shortcoming I believe owes to a deterioration in specialization. Specialized lawyers can also more persuasively promote legislative changes of the type Chubb proposed in its June 2019 white paper, “From Nuisance to Menace: The Rising Tide of Securities Class Action Litigation.”

Early Damages Analysis

My friend John McCarrick has been outspoken about the problems caused by the lack of defense-style damages in the premature settlement system.  We wrote an article about this issue:  “Improving Securities Class Action Outcomes through Early Damages Analysis.”

In an early mediation, the parties typically come to the mediation only with a preliminary damages estimate that neither side has thoroughly analyzed, much less tested through intensive work with the experts and expert discovery.  Defense counsel uses a basic, plaintiffs-style damages analysis yielding large bet-the-company damages figures. 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.  A defense lawyer might say, “Our economist says that damages are $500 million, so the $35 million the plaintiffs are demanding is a reasonable settlement.”  But expert analysis and discovery may well push the $500 million number much lower, which in turn would dramatically reduce a reasonable settlement amount.

To allow us to better calibrate what is actually at stake in each case, John and I have proposed moving securities class action damages expert reports and discovery ahead of fact discovery.  Expert damages analysis and discovery really should be the first things we do after a motion to dismiss is denied.  This will help us know whether the case is really a big case, or is a small case that just seems big – an insight that would yield tremendous benefits for defendants. Plaintiffs and defendants would be able to reach a settlement, one based on true risk and reward, more easily. Defendants would not settle for bloated amounts that create a perception that they did something wrong.  Insurers would know that they are funding a settlement that reflects the real risk in terms of damages exposure.  And courts would feel more comfortable that they are approving (or rejecting) settlements based on a litigated assessment of damages. Indeed, placing damages expert work first would help serve the core policy of our system of litigation: “to secure the just, speedy, and inexpensive determination of every action and proceeding.”

There is no rule or procedural reason why parties cannot accomplish damages discovery ahead of fact discovery.  Courts should be willing to stay fact discovery for a limited period of time, to allow the parties to better understand the realistic size of the case from a damages standpoint.  Moreover, early expert discovery can be accomplished relatively quickly and efficiently, whereas fact discovery can be immediately and wildly expensive — which is primarily what drives very early settlements.  And although plaintiffs and defendants often disagree about the relevance of fact discovery to damages, the absence of fact discovery for consideration in damages analysis is a factor the parties can weigh in evaluating the damages experts’ opinions.

Unless and until the securities defense system changes, continuing the fact discovery stay while expert damages discovery proceeds would strike the right balance.  Even if fact discovery blows up from time to time, or defendants need to acquiesce to limited fact discovery that the plaintiffs persuasively argue is relevant to damages, everyone would be better off with a system that emphasizes early damages discovery and does not default to full fact discovery first. Accelerating the timing of damages expert discovery would align it with the work required by damages experts to analyze price-impact issues under Halliburton II.  Unifying these two overlapping economic expert projects would create efficiencies for the lawyers and economists.  Completing both of them before fact discovery starts would avoid unnecessary discovery costs if the Halliburton II opposition defeated or limited class certification, or if the damages analysis facilitated early settlement.


The securities litigation system is broken.  But these two solutions, one near term and the other longer term, will not just fix the current problems but will also result in a better and more sustainable system for defendants, their insurers and brokers, and sophisticated securities litigation defense counsel.

Hi, everyone:

When I moved to BakerHostetler to lead its firmwide Securities and Governance Litigation Team, I decided to take a break from publishing D&O Discourse — the blog I started in 2012 to provide in-depth opinion on key issues of law and practice in the world of securities and corporate governance litigation.  That break turned into a two-year hiatus.  But, better late than never, the blog is back!

During my time away from blogging, I continued to write and speak.  Here are some highlights, to catch you up.


Here are some of the pieces I wrote with colleagues and friends:

Federal Securities Law Should Supersede Conflicting Procedural Rules in Securities Class Actions

Board Oversight of Securities Class Action Defense: A Winning Path 

Improving Securities Class Action Outcomes Through Early Damages Analysis

The Coming Securities Class Action Storm: Multijurisdictional Litigation After Cyan

Making the Private Securities Litigation Reform Act’s Safe Harbor Safe Again

Amicus Brief in Support of Quality Systems’ US Supreme Court Cert Petition

Effective Securities Class Action Defense Post-Cyan

Back to Basics: Board and Special Litigation Committee Investigations in Shareholder Derivative Litigation

The New Securities Litigation Landscape: How D&O Insurers and Brokers Can Help Defendants Navigate

Winning Motions to Dismiss in Securities Class Actions

A Guide to Defense Counsel Selection in Securities Class Actions

Speaking Engagements:

I spoke at several excellent events:

“D&O Claims Trends,” ExecuSummit D&O Liability Forum, Uncasville, CT

“The U.S. Supreme Court and D&O Claims,” PLUS D&O Symposium, New York City

“The Post-Cyan Securities Litigation Landscape,” PLUS Webinar

“Cybersecurity Securities and Governance Litigation,” ExecuSummit D&O Liability Forum, Uncasville, CT

“Analysis of a Perfect Storm: The Metrics of M&A Liability Litigation,” American Conference Institute’s M&A Liability Conference, New York City

I started D&O Discourse to have in blog format the types of one-on-one and group discussions I’ve enjoyed throughout my career with other repeat players — brokers, insurers, economists, plaintiffs’ counsel, and fellow defense counsel.  I’ve always wanted this to be a forum for discussion among repeat players — thus the blog title D&O Discourse — and I only address issues of interest to me or other repeat players.  So please reach out with questions, comments, or blog topics.

Thanks very much for your support of the blog over its first five years, and I hope that the next stage of the blog is helpful to you as well.

In my law practice, I defend particular clients in particular securities and governance cases.  My mission is to get them through the litigation safely and comfortably.

But I’ve always had a broader interest in securities law and practice as well.  After Congress passed the Private Securities Litigation Reform Act of 1995, I read and chronicled every Reform Act court decision over the next several years.  As a senior associate and, later, a junior partner, I wrote articles, helped my mentors prepare for speeches, and then started speaking myself.  I also began to discuss securities litigation issues behind the scenes with other defense lawyers, plaintiffs’ lawyers, and D&O insurers and brokers, and enjoyed the collegiality those discussions involved.

My connection with this broader group of repeat players in securities litigation was the seed of the D&O Discourse blog—my posts are basically the types of discussions I’ve had over the years.  In setting up the blog, I got good advice from mentors:  write with at least one specific person in mind; address issues I care about; and avoid trying to chronicle new developments.  That advice led to the feature of the blog people seem to like the most:  I call it like I see it.  But, to be candid about this too, I get butterflies every time I hit “enter” to send a pointed post out into the insensitive internet.

I’m grateful for the time my colleagues let me spend on the blog; for friends who generously take time to kick around draft posts; and for readers who take time to read what I write—it’s still humbling that so many people care what I have to say.

People sometimes ask me about my favorite posts.  Here is a list of one of my favorite posts from each year of the blog:

Today, Kristin Beneski and I were honored to file a US Supreme Court amicus brief on behalf of the Washington Legal Foundation (“WLF”) in Cyan, Inc. v. Beaver County Employees Retirement Fund.

In Cyan, the Supreme Court will decide whether state courts have jurisdiction over securities class actions alleging violations of the Securities Act of 1933, or if federal courts have exclusive jurisdiction.

In support of Cyan’s position that federal courts have exclusive jurisdiction, WLF argues that Congress intended that all securities class actions, both under Sections 11 and 12 of the 1933 Act as well as under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, be brought in federal court and decided under federal substantive and procedural law.  WLF agrees with the defendants’ interpretation of the statute at issue, the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”).  WLF then examines the entire statutory and judicial framework within which SLUSA operates—including the Private Securities Litigation Reform Act of 1995 (“Reform Act”), which SLUSA sought to reinforce—to argue that allowing state-court 1933 Act class actions would undermine the carefully balanced securities litigation system that Congress and the Court created and have sought to maintain.

Here is WLF’s Summary of Argument:

“WLF agrees with the textual arguments advanced by Petitioners in this case.  SLUSA’s full context reinforces them.  SLUSA is one piece of a multipart and interconnected regulatory scheme governing securities litigation.  WLF submits this brief to clarify the meaning of SLUSA by examining the broader legislative framework within which the statute was designed to operate.

SLUSA was designed to prevent plaintiffs from circumventing the Reform Act, which in turn was designed to discourage the filing of abusive, unmeritorious class actions resulting in extortionate settlements—to the ultimate detriment of shareholders and the economy as a whole.  When viewed in that context, it is overwhelmingly clear that SLUSA meant to establish exclusive federal-court jurisdiction over virtually all securities class actions, and thereby maintain a system in which related claims are consolidated and heard in the same federal forum at the same time, governed by the consistent standards established by the Reform Act.

The proper interpretation of SLUSA becomes even more clear upon examining the practical consequences of upholding Countrywide.  The same class of plaintiffs commonly asserts closely related claims for violation of Sections 11 or 12(a)(2) (under the 1933 Act) and Section 10(b) (under the 1934 Act).  These claims often challenge the very same allegedly false or misleading statements, and by definition involve identical class-wide causation issues.  The Reform Act and SLUSA envision that these intimately related claims will be consolidated and heard in the same federal forum, and would be subject to the “uniform standards” applied by all federal courts.

But under the interpretation of SLUSA adopted by Countrywide, plaintiffs can decide to split the Section 11 and 12(a)(2) claims from the 10(b) claims, filing the former in state court while the latter proceed in federal court.  Because Countrywide holds that a removal bar applies to securities class actions filed in state court, the 1933 Act claims cannot be consolidated with related 10(b) claims and must proceed in different courts, heard by different judges, subject to different procedural standards and pleading rules.  This results in wasted judicial resources, inconsistent results, and undue burdens on parties that must defend themselves on multiple fronts in already-expensive litigation.  More importantly, concurrent jurisdiction is antithetical to SLUSA’s stated purpose of preventing circumvention of the Reform Act and establishing a system of “uniform standards” governing class actions involving nationally traded securities.

Concurrent jurisdiction of 1933 Act claims would have broad ramifications for 1934 Act claims as well.  Under Countrywide’s interpretation of SLUSA, not only would the Reform Act’s protections be inapplicable to Section 11 and 12(a)(2) claims filed in state courts, but its consolidation and lead-plaintiff appointment procedure, automatic discovery stay, and heightened pleading standards would also be seriously undermined as to any related Section 10(b) claims proceeding simultaneously in federal court.  For instance, the automatic stay of discovery in a Section 10(b) case becomes a weaker shield against abusive lawsuits when discovery can proceed full bore in a closely related state-court case.  Likewise, plaintiffs who file their Section 11 and 12(a)(2) claims in state court do not have to hand control of the lawsuit to the lead plaintiff who is the “most adequate” class representative, and can more easily avoid the requirement of pleading claims that sound in fraud with particularity.

Thus, interpreting SLUSA to allow for concurrent jurisdiction of 1933 Act claims would undermine the Reform Act in a far-reaching way that Congress could not have intended.  In practical effect, allowing for concurrent jurisdiction would expand the Rule 10b–5 implied right of action beyond the limited scope Congress understood it to have.  See Stoneridge Inv. Partners, LLC v. Scientific–Atlanta, 552 U.S. 148, 165–66 (2008) (“[W]hen [the Reform Act] was enacted, Congress accepted the *** private cause of action as then defined but chose to extend it no further.”).  This would be a drastic shift.  Absent a clear directive otherwise, this Court should decline to upset the carefully balanced securities litigation framework that Congress created and sought to reinforce by enacting SLUSA.”

You can read the entire brief here.

In addition to the WLF lawyers with whom we worked, we would like to thank our colleagues Heidi Bradley, Aaron Brecher, Genevieve York-Erwin, and Taylor Washburn for their help with the brief.  We would also like to thank John McCarrick of White and Williams for his helpful strategic contributions.

How will the 2017 arrival of Justice Neil Gorsuch influence the US Supreme Court’s securities-fraud jurisprudence?

My colleague Kristin Beneski and I discuss this question in a Washington Legal Foundation Working Paper titled “US Supreme Court Securities-Fraud Jurisprudence:  An Emerging New Direction?

In our Working Paper, we analyze whether Justice Gorsuch may urge the Court to chip away at the viability of securities class actions—such as by revisiting the Basic v. Levinson fraud-on-the-market presumption or narrowing the meaning of scienter—and whether he may push for a return to the days of caveat emptor and the puffery doctrine in evaluating the falsity and materiality of statements challenged as fraudulent.  We also question whether such possible jurisprudential shifts would be in the best interest of securities-fraud defendants.

I hope you’ll review our Working Paper (here).