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

The rating agencies have to this point been totally immune from liability, he reported. "They partly rely on First Amendment defense [and] more often rely on the difficulty of alleging scienter," he said, explaining that this hurdle to bringing securities cases requires investor plaintiffs to plead "facts with particularity 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. They don't get up close and personal the way the auditor does."

He predicted, however, that federal lawmakers will attempt to devise a new standard for rating agency liability. "I don't know the Republicans will throw themselves in the path of that," he said.

Mr. Coffee was responding to the question of whether Congress might act to lower high procedural hurdles to federal securities class actions that were imposed by the Private Securities Litigation Reform Act of 1995, given a changed political climate in Washington and the backdrop of a financial meltdown.

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

While Mr. Coffee said he doubted Congress could be persuaded to change any rules of the game outside of "the special case of the credit rating agencies," Mr. Feldman and Sherrie Savett, a plaintiffs' attorney with Berger & Montague, P.C. in Philadelphia, identified several areas they believe are ripe for reform.

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

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

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

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

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

"Plaintiffs have vastly improved their complaints, still to no avail, even though we do intensive investigations [and] speak to confidential sources, often former employees," to bolster complaints, she noted. "We hope that will change with the new administration, influx of new judges and possibly with some new legislation."

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

o Clarifying the loss causation standard in securities cases articulated by the U.S. Supreme Court in 2005 in Dura Pharmaceuticals v. Broudo.

o Aiding and abetting liability, now restricted by the January 2008 Supreme Court decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta.

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

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

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

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

Mr. Coffee predicted that changes in aiding and abetting liability rules won't get through Congress this term. "The critical question in the Congress is whether you can obtain cloture in Senate," he said, referring to the 60 Senate votes needed to prevent a filibuster. "I don't think that's going to be feasible in the current environment. [Lawmakers] want to look at financial regulation and bailouts. I don't think they want all their time geared up to fight over securities litigation."

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

So changes won't occur legislatively, but instead as the Democratic White House and Democratic Senate fill bench vacancies, particularly in appellate courts. In particular, he highlighted the 4th Circuit as "the worst place to be a plaintiff," adding that given current and potential vacancies there, the court could soon be filled with more Democratic than Republican appointees.

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

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

"Judges are human beings that live in society. They have neighbors. They read newspapers," he argued. "So even if a judge was very conservative in 2000 with respect to [securities litigation] issues, given the mood and the climate in the country, [that judge] may suddenly become more receptive" to shareholder arguments.

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

"There is opportunity for plaintiffs to latch onto the financial crisis" in the same way defendants seized upon "the poster child biotechnology companies trying to cure cancer when the Reform Act passed. Everybody hid behind that to get the PSLRA through," he reported.

"One could now imagine the plaintiffs bar using egregious Ponzi schemes to advance arguments on aiding and abetting," Mr. Feldman said. "Were I a plaintiff lawyer, I would use the whirlwind of legislation around the meltdown...to try to get through some little tweaks" in the PSLRA, he added.

For example, he suggested that a potential plaintiffs' proposed tweak would be a change in the stay of discovery pending a motion to dismiss. To remove the stay, "a high showing" of cause is needed, he said, noting that plaintiffs might lobby to get that changed to "for good cause shown."

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

The experts also disagreed about the impact new judges would have on settlement dollars paid out in securities class actions.

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

Ms. Savett noted, however, that even though dismissal rates have been going up, settlement values had also been going up and are now stabilizing at a higher level. "That's because good cases which survive motions to dismiss command larger settlements," she said.

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

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

The debt market cases are a new development. "We have now a crisis that originated in the debt markets," and while there are class actions being brought against financial companies involved in structuring and selling the collateralized debt obligations and other exotic securities, the institutions that bought the exotic securities are going to bring some individual cases, he predicted.

He explained that because the debt markets are not efficient markets, only individual cases are possible because the fraud on the 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, he said.

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

"Their accountants can get up and explain to the jury that all the schoolteachers in Wisconsin are going to lose their pensions because of this terrible investment, and that they were defrauded by evil underwriters in New York," he said. "That's an attractive story to tell a state court jury," he said.

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

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

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

Speaking at a later PLUS session on emerging D&O liability trends, Randall Bodner, a partner for Ropes & Gray, LLP in Boston, said that "you can absolutely take to the bank that SEC and DOJ [Department of Justice] enforcement--especially SEC enforcement--is going to increase dramatically and relatively quickly."

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

Former SEC Chair Christopher Cox "was not an enforcement advocate, and in fact put procedural hurdles in place that made it tougher for enforcement attorneys in the SEC to bring cases." Those are being removed, said Mr. Bodner, a former assistant district attorney who now assists companies with regulatory matters.

He also noted that Robert Khuzami, a former colleague when he worked in the U.S. Attorney's Office in New York, is now heading up the SEC securities fraud unit in New York. Mr. Khuzami "will bring back enforcement zeal to that office that will energize the enforcement 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 these cases," the professor said.

Mr. Feldman asked what impact the SEC's more aggressive enforcement posture might have on private litigation, addressing his question to Michele Hirshman, a partner with Paul Weiss Riftkind Wharton & Garrison LLP in New York, who was a deputy attorney general under Eliot Spitzer.

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

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

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

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