Cornerstone And Stanford Release Report On Filings In 2008

Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse have released a report on federal securities class action filings in 2008. The findings include:

(1) There were were 210 filings (through 12/15), a 19% increase over the previous year. As usual, Cornerstone reports a lower number of filings than NERA, presumably due to different counting methodologies.

(2) Almost half of the 2008 litigation activity, or 103 securities class actions, involved firms in the financial services sector. Indeed, nearly a third of all large financial firms were a named defendant in a filing.

(3) For the first time since 2002, companies listed on NYSE or Amex had more securities class action
filings than companies listed on NASDAQ (likely because of the plaintiffs' focus on the financial sector).

(4) Among the resolved class actions filed since 1996, 41 percent were dismissed and 59 percent settled. The majority of cases were resolved after the first ruling on the motion to dismiss but before a ruling on summary judgments, with 71 percent of dismissals and 59 percent of settlements occurring during this stage.

The joint press release announcing the report can be found here.

Quote of note (Professor Grundfest): "The data suggests an intriguing possibility that the pool of major financial services defendants might be getting fished out. Many major financial services firms have already been sued and plaintiffs may be choosing to focus on filing amendments to existing complaints rather than initiating new ones. Litigation activity against the financial sector may decline next year because the supply of new defendants might be drying up, not necessarily because plaintiffs believe there is less fraud."

The D&O Diary has an interesting analysis of the report and predicts another big year for filings in 2009.

Year In Review

Securities Docket will be hosting a "2008 Year in Review - Securities Litigation and Enforcement" webcast on Tuesday, January 6 at 2 p.m. ET. All of the details on the free program, which will include a number of prominent bloggers, can be found here.

NERA Releases "2008 Trends In Securities Class Actions"

NERA Economic Consulting has released a study entitled 2008 Trends in Securities Class Actions. The study reaches the following notable conclusions:

(1) There have been 255 securities class action filings this year (through Dec. 14), on pace for a 10-year high for "standard" cases.

(2) Credit crisis-related cases made up approximately 50% of the filings, causing a spike in the number of filings against financial sector companies.

(3) Median and average settlement values have held roughly steady at $7.5 million (median) and $29 million (average, excluding settlements over $1 billion).

The press release accompanying the report can be found here.

Competitive Advantage

The U.S. Court of Appeals for the Fourth Circuit has issued its first opinion applying the Tellabs decision on the pleading of scienter (i.e., fraudulent intent). Those who follow the Fourth Circuit's jurisprudence in this area will be unsurprised to learn that the decision creates good law for defendants.

In Cozzarelli v. Inspire Pharmaceuticals, Inc., 2008 WL 5194311 (4th Cir. Dec. 12, 2008), the plaintiffs alleged that Inspire made false statements regarding a drug trial. The court found that in defining the PSLRA's "strong inference" pleading standard for scienter, the Supreme Court "gave that standard teeth, using adjectives like 'cogent,' 'compelling,' 'persuasive,' 'effective,' and 'powerful.'" Moreover, an inference of scienter "can only be strong - and compelling, and powerful - when it is weighed against the opposing inferences that may be drawn from the facts in their entirety."

Based on the facts before it, the court found the inference that any allegedly omitted information about the drug trial was withheld "to protect [Inspire's] competitive advantage" more "powerful and compelling than the inference that defendants acted with an intent to deceive." Moreover, the plaintiffs' motive allegations based on the company's need to raise capital, the CEO's performance-based compensation, and a limited amount of stock sales were "conclusory" and "lack[ed] merit."

The court also joined a number of other circuit courts in holding (a) the signing of allegedly false SOX certifications does not contribute to an inference of scienter, and (b) Section 11 and 12(a)(2) claims that "sound in fraud" must be plead with particularity pursuant to Fed R. Civ. P. 9(b).

Holding: Dismissal affirmed.

Quote of note: "All investments carry risk, particularly in a field like biopharmaceuticals. If we inferred scienter from every bullish statement by a pharmaceutical company that was trying to raise funds, we would choke off the lifeblood of innovation in medicine by fueling frivolous litigation-exactly what Congress sought to avoid by enacting the PSLRA. Furthermore, the fact that some analysts relied on defendants' hopeful statements to speculate-as the analysts admitted they were doing-that Study 109 would succeed adds little to an inference of scienter. Speculation by investors and subsequent buyers' remorse cannot support an Exchange Act suit alone."

Disclosure: The author of The 10b-5 Daily has previously represented the defendants in this case.

Crystal Ball

SCAS Alert (RiskMetrics) has an article on what the coming year may bring for securities litigators. The main speculation is whether the Democratic majorities in Congress will seek to overturn the Supreme Court's decisions in Central Bank (no aiding and abetting liability) and Stoneridge (limiting scope of "secondary actor" liability).

Quote of note: "Likewise, James Cox, a securities law professor at Duke University, told the SCAS Alert that he expects that Congress would address securities litigation reform after grappling with 'the 800-pound gorilla in the room--the issue of regulatory reform.' He said he had heard that prominent plaintiffs' firms and Senate offices have been working on draft legislation to address Stoneridge."

Sliding Scale

What triggers the running of the statute of limitations for a securities fraud action is suddenly a hot topic, thanks to a possible Supreme Court case and a recent Second Circuit decision.

In Staehr v. Hartford Financial Services Group, Inc., 2008 WL 4899445 (2d Cir. Nov. 17, 2008), the court considered whether the plaintiffs had been put on inquiry notice of their claims based on the "cumulative effect" of news articles, public filings, and lawsuits referring to an industrywide fraudulent scheme. The court found that the news articles mostly did not mention Hartford and were in specialty publications, the company's public filings did not offer enough information about the subject of the fraud, and the lawsuits either did not mention Hartford or were not sufficiently publicized so as to be "reasonably accessible" to an ordinary investor. The New York Law Journal has a column (Dec. 10 edition - subscrip. req'd) on the decision.

Holding: Dismissal based on statute of limitations vacated.

Quote of note (decision): "Given the objective standard for inquiry notice, there is an inherent sliding scale in assessing whether inquiry notice was triggered by information in the public domain: the more widespread and prominent the public information disclosing the facts underlying the fraud, the more accessible this information is to plaintiffs, and the less company-specific the information must be."