Legal Strategies

Lawyers on both sides of the courtroom face obstacles in dealingwith hundreds of IPO tie-in/laddering cases, but representatives ofopposing litigants remained undaunted as they revealed some novellegal strategies during a recent meeting of the ProfessionalLiability Underwriting Society.

For plaintiffs lawyers, some of the biggest problems in thesecurities cases are procedural hurdles of the Private SecuritiesLitigation Reform Act, such as the need to appoint a lead plaintiffand a provision that imposes a stay of discovery once a motion todismiss is made.

One way to avoid such hurdles is to file cases allegingantitrust law violations, according to Fred Isquith of Wolf,Haldenstein, Adler, Freeman & Herz in New York.

“It is highly unlikelyI would say economically unfeasibleforthese practices to have gone on withoutan economic agreement” amongthe securities underwriters, he said.

Melvyn Weiss of Milberg, Weiss, Bershad, Hynes & Lerach inNew York said, the two parallel tracks of cases will force thecourts to deal with the discovery issue quicklysince theres a stayin securities cases and not the antitrust cases.

Complicating the picture, however, are investigations by theU.S. Securities and Exchange Commission and the U.S. Attorneysoffice, according to Richard Zabel, a partner with Akin, Gump,Strauss, Hauer & Feld.

The SEC and the U.S. Attorney are the “invisible gorilla[s] inthe corner,” said Mr. Zabel, who was a federal prosecutor in NewYork for eight years. Interviews by the U.S. Attorneys office andtestimony before the SEC are not matters that are open to thepublic. But the important decisions that the two enforcement bodiesare making “obviously have a tremendous impact on any civilsecurities litigation,” he said.

Nicki Locker, a defense attorney for Wilson, Sonsini, Goodrich& Rosati in Palo Alto, Calif., had some good news for D&Oinsurers regarding SEC activities. Noting that the SEC hadinterviewed executives of issuers that her firm represents, shesaid: “If you actually listen to their questions,…it appears thatthey believe that the issuers were the victims of any allegedmisconduct by the underwriters.”

“I think they believe the issuersleft too much money on thetable,” she said, explaining the SECs view that if certaincustomers were willing to pay extra money in the form of excessivecommissions to get allocations in an IPO, then they may have beenwilling to pay higher offering prices.

While the SEC may not have designs on making issuers the targetsof enforcement actions, attorneys admit theyll face difficultchallenges defending the issuers in court. In particular, theypoint to the fact that many securities cases were filed underSection 11 of the Securities Exchange Act of 1933.

“For the issuer, its largely a no-fault statute,” Greg Markel,an attorney for Brobeck, Phleger & Harrison in New York,explained, noting that Section 11 holds that issuing companies arestrictly liable as long as there is any material misrepresentationor omission in a registration statement.

Individual directors and officers can offer a due diligencedefense under the 33 Act, Kevin LaCroix, president of GenesisProfessional Liability Managers of Beachwood, Ohio, toldNational Underwriter. He explained that an individualdirector or officer, who did his or her homework and believed allthe statements were true, cannot be held liable.

But such a defense is not available to the issuing company, Mr.LaCroix said.

“In my opinion, these cases will test the whole notion of havinga strict liability standard for companies,” he continued. “There issomething wrong at a deep intuitive level in holding companiesliable for not disclosing information that they could have neverknown. Laddering schemes can work only if investment banks andinvestors are the only ones that know about it.”

Joseph Monteleone, vice president of Hartford Financial Productsin New York, said that cases filed under Section 10-b-5 of the 1934Act have the potential to result in greater damages for issuers anddirectors and officers than Section 11 claims, if alleged wrongsare proven. But proving wrongs will be hard for plaintiffs, hepointed out, since evidence of intentional fraud ormisrepresentation must be presented.

At the PLUS meeting, Mr. Weiss said that he was willing to“backburner” claims against issuers and Ds and Os for a while, andto delay “hunting for 10-b-5″ facts against both groups, savingD&O insurers defense cost dollars in the bargain.

But Mr. Monteleone and defense lawyers dismissed his remarks,noting that hurdles caused by the Private Securities LitigationReform Act had likely prompted his offer.

Mr. Monteleone said the biggest hurdle looming in front ofplaintiffs bar is the issue of loss causation.

“Even if some of the allegations can be proven, is that whatcaused the decline” of stock prices? Or was it just the “burstingof the NASDAQ bubble?” he said.

The concept of loss causation “is something the defense bar isvery excited about,” said Ms. Locker.

Many of the companies were dot-com companies that “didnt do sowell,” she said, pointing to a collapse in technology stocks(starting in Spring 2000) and to company-specific events (likerestructurings) “that we would say caused the stock decline ratherthan the supposed wrongs.”

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, November 12, 2001.Copyright 2001 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.

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