While plaintiffs' lawyers may be welcoming a new administrationin Washington and eyeing the prospect of convincing federallawmakers to lower restrictions on securities class actions,they're likelier to get a clear shot at credit rating agencies thancorporate directors and officers, one expert says.

"There is no one Congress is angrier at than the credit ratingagencies," said Professor John Coffee of Columbia University,speaking last month at the opening session of the ProfessionalLiability Underwriting Society's D&O Symposium.

The rating agencies have to this point been totally immune fromliability, he reported. "They partly rely on First Amendmentdefense [and] more often rely on the difficulty of allegingscienter," he said, explaining that this hurdle to bringingsecurities cases requires investor plaintiffs to plead "facts withparticularity giving rise to strong inference of fraud."

Suggesting a reason why they have so far escaped liability, Mr.Coffee said "rating agencies are quite divorced from issuers. Theydon't get up close and personal the way the auditor does."

He predicted, however, that federal lawmakers will attempt todevise a new standard for rating agency liability. "I don't knowthe Republicans will throw themselves in the path of that," hesaid.

Mr. Coffee was responding to the question of whether Congressmight act to lower high procedural hurdles to federal securitiesclass actions that were imposed by the Private SecuritiesLitigation Reform Act of 1995, given a changed political climate inWashington and the backdrop of a financial meltdown.

"Many believe we're now on the cusp of a counter-reform--thatplaintiffs have a good shot at enacting their legislative andregulatory priorities," said Boris Feldman, a partner with WilsonSonsini Goodrich and Rosati in Palo Alto, Calif., who moderated thePLUS session on developments in securities litigation.

While Mr. Coffee said he doubted Congress could be persuaded tochange any rules of the game outside of "the special case of thecredit rating agencies," Mr. Feldman and Sherrie Savett, aplaintiffs' attorney with Berger & Montague, P.C. inPhiladelphia, identified several areas they believe are ripe forreform.

Other experts said they see more serious threats to corporatedirectors and officers and their insurers coming from regulators,especially enforcers at the Securities and Exchange Commission, andfrom a new crop of judges--and even from current judges, who arelikely to have a less favorable view of the business communitygoing forward.

Picking up on Mr. Coffee's comment about rating agency immunity,Ms. Savett reported that the picture has already gotten gloomierfor raters at the hands of one judge--Judge Shirley Wohl Kram inthe Southern District of New York--who, in a late Februarydecision, denied defendant Moody's motion to dismiss a liabilitycase "in large part," and also held in the corporation and thedefendant's chief executive officer "for making false statementsabout their independence and their method of rating."

As for legislative activity, she said that "after more than adecade of restriction...since the enactment of thePSLRA...plaintiffs for the first time see a better environment toshape the opinions of Congress and the administration in a way thatmore favors the rights of shareholders."

From her vantage point, "the PSLRA has been interpreted by manycourts as a way to knock out in many cases legitimate securitiescases" over the past decade.

"The bar has been lifted too high," she said, noting that suitstatistics reveal more than one-third of cases "are cut off at thepass on the initial pleadings motion."

"Plaintiffs have vastly improved their complaints, still to noavail, even though we do intensive investigations [and] speak toconfidential sources, often former employees," to bolstercomplaints, she noted. "We hope that will change with the newadministration, influx of new judges and possibly with some newlegislation."

On that score, the areas that plaintiffs will focus on toinfluence lawmakers' opinions are:

o Clarifying the loss causation standard in securities casesarticulated by the U.S. Supreme Court in 2005 in DuraPharmaceuticals v. Broudo.

o Aiding and abetting liability, now restricted by the January2008 Supreme Court decision in Stoneridge Investment Partners, LLCv. Scientific-Atlanta.

In Dura, the Supreme Court held that a securities fraud casecan't simply allege that a stock price was inflated because of amisrepresentation but must demonstrate a causal connection betweenthe material representation and investor losses.

Plaintiffs agree that Dura was a good decision that articulateda "loss causation/proximate cause standard that is rational," Ms.Savett said, noting that the problem arising out of Dura is thatsome district courts have interpreted the ruling "so strictly as torequire a fact-for-fact comparison between the misrepresentationand the ultimate disclosure of problems--practically a one-for-onecomparison, amounting almost to a confession."

"Companies are too clever to make their disclosures that way.They leak out information--combine good and bad information," sheasserted. "So we think this is also a fertile area for somelegislative improvement."

Referring to the Stoneridge decision, she said, "Right now, thestate of the law is that unless a person spoke to the public andissued a false statement, you cannot get liability against a thirdparty, even one that...structured or created a fraud [or otherwise]actively participated in one."

Mr. Coffee predicted that changes in aiding and abettingliability rules won't get through Congress this term. "The criticalquestion in the Congress is whether you can obtain cloture inSenate," he said, referring to the 60 Senate votes needed toprevent a filibuster. "I don't think that's going to be feasible inthe current environment. [Lawmakers] want to look at financialregulation and bailouts. I don't think they want all their timegeared up to fight over securities litigation."

Stuart Grant, managing director of Grant & Eisenhofer, P.A.in Wilmington, Del., who also represents plaintiffs, agreed. "Idon't think Congress sees problems with the financial markets aslitigation-oriented problems," he said, adding he believes "all ofthe ratcheting back of shareholders' rights has been done by thecourts," not Congress.

So changes won't occur legislatively, but instead as theDemocratic White House and Democratic Senate fill bench vacancies,particularly in appellate courts. In particular, he highlighted the4th Circuit as "the worst place to be a plaintiff," adding thatgiven current and potential vacancies there, the court could soonbe filled with more Democratic than Republican appointees.

Mr. Feldman said Republican presidents tend to appoint morebusiness litigators, while Democrats appoint more people from thepublic interest community or academics. "There's a big difference"in how the two groups of appointees look at a given case, heobserved.

"It's not just that," Mr. Grant said, noting he wasn't simplysuggesting that "a bunch of leftist, anti-businessexecutive-haters" would be put on the bench. "There are shifts in[thinking] even with people who have been sitting for a number ofyears."

"Judges are human beings that live in society. They haveneighbors. They read newspapers," he argued. "So even if a judgewas very conservative in 2000 with respect to [securitieslitigation] issues, given the mood and the climate in the country,[that judge] may suddenly become more receptive" to shareholderarguments.

Unlike Mr. Grant, Mr. Feldman, a defense attorney, agreed withMs. Savett about the potential for legislative activity.

"There is opportunity for plaintiffs to latch onto the financialcrisis" in the same way defendants seized upon "the poster childbiotechnology companies trying to cure cancer when the Reform Actpassed. Everybody hid behind that to get the PSLRA through," hereported.

"One could now imagine the plaintiffs bar using egregious Ponzischemes to advance arguments on aiding and abetting," Mr. Feldmansaid. "Were I a plaintiff lawyer, I would use the whirlwind oflegislation around the meltdown...to try to get through some littletweaks" in the PSLRA, he added.

For example, he suggested that a potential plaintiffs' proposedtweak would be a change in the stay of discovery pending a motionto dismiss. To remove the stay, "a high showing" of cause isneeded, he said, noting that plaintiffs might lobby to get thatchanged to "for good cause shown."

Norman Blears, a partner for Hogan & Hartson LLP in PaloAlto, Calif., who also represents defendants, said "that would bemore than a little tweak. That would be a sea change and probablythe biggest single disaster for companies and D&O insurers." Hebelieves "the one thing that has been effective about the PSLRA forcompanies in terms of saving money is the discovery stay."

The experts also disagreed about the impact new judges wouldhave on settlement dollars paid out in securities classactions.

"One can imagine the stellar dismissal rates of the last fewyears will start coming down, in which case settlement values willstart going up," according to Mr. Feldman.

Ms. Savett noted, however, that even though dismissal rates havebeen going up, settlement values had also been going up and are nowstabilizing at a higher level. "That's because good cases whichsurvive motions to dismiss command larger settlements," shesaid.

Mr. Grant believes that as more cases come through, the averagemedian federal securities class-action settlement will fall"because there [are] just more cases [and] those cases are allcoming from the bottom."

Mr. Coffee pointed out that "the class-action world is only thetip of the iceberg today." Beyond federal class actions, "there isa larger reality of [individual] opt-out cases and debt marketcases" that are brought in state court, he noted.

The debt market cases are a new development. "We have now acrisis that originated in the debt markets," and while there areclass actions being brought against financial companies involved instructuring and selling the collateralized debt obligations andother exotic securities, the institutions that bought the exoticsecurities are going to bring some individual cases, hepredicted.

He explained that because the debt markets are not efficientmarkets, only individual cases are possible because the fraud onthe market theory does not apply.

While Mr. Coffee doesn't think these cases will be numerous,those that are brought will likely have high settlement values, hesaid.

A typical case might be brought by large school boards inWisconsin that together bought $100 million of CDOs from oneparticular brokerage firm, he said.

"Their accountants can get up and explain to the jury that allthe schoolteachers in Wisconsin are going to lose their pensionsbecause of this terrible investment, and that they were defraudedby evil underwriters in New York," he said. "That's an attractivestory to tell a state court jury," he said.

Mr. Blears believe the single biggest change that defendantcorporations and directors and officers need to watch for will be aregulatory shift. "We've already seen the SEC, which really feelsit has a black eye right now, bulking up," he said.

"After Madoff, the SEC is at the historic low point of itsprestige. It's been embarrassed, it's been picked on by Congress,and it wants to make a comeback," Mr. Coffee agreed, noting thatthe SEC entered into a weak settlement with Bernard Madoff, themastermind of a large Ponzi scheme, with respect to a pastinvestigation of his activities.

"The SEC's enforcement division for many years was dominated bya settlement culture, [and] overpressured SEC staff attorneys hadto start settling from an early point before they knew all thefacts," he said, giving one reason for the settlement.

Speaking at a later PLUS session on emerging D&O liabilitytrends, Randall Bodner, a partner for Ropes & Gray, LLP inBoston, said that "you can absolutely take to the bank that SEC andDOJ [Department of Justice] enforcement--especially SECenforcement--is going to increase dramatically and relativelyquickly."

"There was a lot of pent-up prosecutory zeal that was not beingsatiated by the former administration," he said.

Former SEC Chair Christopher Cox "was not an enforcementadvocate, and in fact put procedural hurdles in place that made ittougher for enforcement attorneys in the SEC to bring cases." Thoseare being removed, said Mr. Bodner, a former assistant districtattorney who now assists companies with regulatory matters.

He also noted that Robert Khuzami, a former colleague when heworked in the U.S. Attorney's Office in New York, is now heading upthe SEC securities fraud unit in New York. Mr. Khuzami "will bringback enforcement zeal to that office that will energize theenforcement staff," he said.

Mr. Coffee expressed a similar view at the earlier PLUS session."You'll see greater emphasis by the SEC on trying some of thesecases," the professor said.

Mr. Feldman asked what impact the SEC's more aggressiveenforcement posture might have on private litigation, addressinghis question to Michele Hirshman, a partner with Paul WeissRiftkind Wharton & Garrison LLP in New York, who was a deputyattorney general under Eliot Spitzer.

"What you may see is enforcers acting as discoverers," Ms.Hirshman responded, noting that some of the past enforcementactions coming from Mr. Spitzer's office "resulted in disclosures,which ended up spurring private litigation." The same type ofprivate-action stimulus could result from "a more vigorous,expanded SEC," she said.

On the other hand, the SEC might focus its attention on areaswhere it is more difficult to bring a private lawsuit--targetingsecondary actors, such as auditors, for example.