“The Chief Justice is no longer recused in this case.”

This brief Supreme Court docket entry dated September 20, 2007 in the high-profile Stoneridge case has generated a considerable amount of interest, and deservedly so.  As previously discussed here, until yesterday, just 7 members of the Court were slated to hear the case as two justices–Roberts and Breyer–had recused themselves.  Both justices reportedly owned between $50,001 and $100,000 of stock in Cisco Systems Inc., the parent company of Scientific-Atlanta, one of the respondents in the case.

The Chief Justice is now back in the case, however, leaving an even number of justices to hear the case.  According to this article by Tony Mauro in today’s Legal Times, the development “almost certainly means that Roberts has sold the stock to cure the conflict of interest.”  Mauro also notes that during earlier speculation over whether Roberts and/or Breyer would “unrecuse” it “was generally agreed that if one or both did rejoin the case, it would help the cause of businesses seeking to limit liability.”

According to the SCOTUS Blog,

If the Court were to divide evenly, 4-4, on Stoneridge, the result would simply be to affirm the Eighth Circuit decision without an opinion. The Court might then seek another test case in which to address the underlying legal question. A major Enron case, California Regents v. Merrill Lynch, et al. (docket 06-1341), raises the same issue; that case apparently is being held to await the outcome of the Stoneridge case.

The high-profile Stoneridge case now before the Supreme Court, which will address the issue of liability for secondary actors in fraud cases, has already generated recusals by Chief Justice John Roberts Jr. and Justice Stephen Breyer.  Both justices reportedly own between $50,001 and $100,000 of stock in Cisco Systems Inc., the parent company of Scientific-Atlanta, one of the respondents in the case.

In an article in today’s The Legal Intelligencer, correspondent Tony Mauro wonders how many justices will ultimately participate and rule in the case.  The article notes that despite the initial recusals,

rumors have swept through the ranks of the lawyers involved that Roberts or Breyer or both might sell their stock and rejoin the case — driven by the court’s deeply held desire to bring as full a bench as possible to bear in deciding its cases. Their decision might not be known until close to the time the case is argued on Oct. 9.

‘Yes, I’ve heard that it is a possibility,’ said Stanley Grossman, the lawyer who will argue on behalf of Stoneridge investors in the case. Even though the re-entry of Roberts or Breyer might boost the chances of his opponent, Grossman, a partner in New York’s Pomerantz Haudek Block Grossman & Gross, stated diplomatically that, ‘Whatever the court is, I hope they will see the light for us.’

Copies of the Settlement Notice, Proof of Claim form, and other key documents related to the $20 million settlement of the HCA Inc. Securities Litigation are now available on the case’s Settlement Website. 

This post from the CFO Blog highlights some interesting comments by SEC Chairman Cox made in a chat with NPR earlier this week (listen to the chat here).  The post notes that:

• Cox stated that Sarbanes-Oxley "absolutely" has been worth the costs associated with it.
• Asked whether Sarbanes-Oxley had decreased instances of fraud, Cox stated that "there are many ways to measure that…. One way is the number of private securities class action suits that are brought to rectify instances of fraud. There is no government restraint or control on those actions. They are freely filed and filed when people are aggrieved. Those suits now are way down compared to just a few years ago, I’d say that is good news."

Copies of the Settlement Notice, Proof of Claim form, and other key documents related to the $3.2 billion settlement of the Tyco International Ltd. Securities Litigation are now available on the case’s Settlement Website. 

Bernstein Litowitz Berger & Grossmann’s Sean Coffey and Sullivan & Cromwell’s Robert Giuffra engage in a spirited and humorous debate over the topic of potential "scheme liability" in this article in today’s online WSJ that previews the Stoneridge Investment Partners LLC v. Scientific-Atlanta case slated to be heard this fall by the Supreme Court. 

One of the more amusing exchanges:

Coffey:  … A number of hysterical arguments are being thrown about that, in effect, predict the end of capitalism as we know it if "scheme liability" is endorsed by the Court. Since nobody I know makes these arguments better and more persuasively than my friend Bob Guiffra, let me turn it over to Bob.

Giuffra: … We both know that if the plaintiffs’ bar somehow can persuade the Supreme Court (and I doubt the justices will) to adopt so-called "scheme liability," plaintiffs will be able to extract millions, if not billions, from innocent investment banks, accountants, vendors and maybe even law firms (yikes!) whenever a company’s stock drops. As a securities defense lawyer, the creation of amorphous "scheme liability" may be good for my narrow practice, but it will be a disaster for our economy, especially in New York. I’m sure the Mayor of London is rooting for you.

Coffey: …I happen to believe that the vast majority of corporate officers, lawyers, bankers, and yes, even auditors try to earn their keep honestly and act in an ethical manner. The conduct that scheme liability seeks to address is that (hopefully) very narrow band of conduct that is by its nature deceptive and fraudulent — fabricating loans, setting up bogus round-trip revenue deals, and the like. If corporate America feels that outlawing that type of conduct would have a material adverse effect on how it does business, then maybe I ought to move to London.

This article today by Jesse Westbrook of Bloomberg states that the debate over “the nuclear bomb issue”–whether the SEC should allow corporations to mandate arbitration of securities disputes–appears to be dead or at least dormant.

The article notes that despite the SEC’s “April 16 statement that it would consider whether shareholders should be able to propose changes to rules for lawsuits,” which sparked considerable discussion as to whether corporations could thereby mandate that securities disputes be settled with arbitration rather than by shareholder lawsuits, Chairman Cox said the SEC was never considering such a plan. “There is no pending rule or proposal before the Securities and Exchange Commission to allow corporations to mandate arbitration of shareholder claims,” the article reports that he told a Senate panel on May 16.

The $2.975 billion settlement announced yesterday in the consolidated Tyco securities class actions is reportedly the 4th largest of all-time, behind only the Enron ($7.14 billion), WorldCom ($6.15 billion) and Cendant ($3.18 billion) settlements.  Notably, it also will constitute the "single largest payment from any corporate defendant in the history of securities class action litigation" according to co-lead counsel Grant & Eisenhofer P.A.  The law firms Schiffrin Barroway Topaz & Kessler and Milberg Weiss & Bershad also served as co-lead counsel in the case.

The recovery for shareholders in this case may not be complete yet.  According to this WSJ article, as part of the settlement with Tyco, its shareholders also received the right to pursue, and benefit from, Tyco’s claims of accounting malpractice against its former auditor, PricewaterhouseCoopers.

On Friday, March 9, the state of Ohio and 23 other states and territories filed this amicus brief in the Tellabs case now pending before the U.S. Supreme Court that strongly disagrees with the amicus brief previously filed by the SEC.   In a brief filed last month, the SEC wrote that the Seventh Circuit got it wrong when it held that a complaint satisfies the "strong inference" standard "if it alleges facts from which, if true, a reasonable person could infer that the defendant acted with the required intent."   Such a standard, the SEC argued, was not consistent with Congress’ intent in the PSLRA to heighten the pleading standard beyond merely a reasonable inference.

In response, the states argued that the higher standard argued for by both the petitioner Tellabs, Inc. and the SEC was too high and could lead to

a return to the days of rampant fraud and distrust of the market. When investors are forced into federal court only to have reasonable inferences of recklessness or malice dismissed, the system is seriously unbalanced. The Court should preserve the balance by adopting the Seventh Circuit’s standard.

The states wrote that they were

alarmed by this case because not just Tellabs but the SEC—charged with protecting the States’ investing consumers—urges the Court to adopt a pleading standard that will effectively preclude most securities fraud suits. U.S.  Brief at 15-29. SEC’s standard would eliminate the “crucial component” of the checks against fraud and leave investors unprotected.

One line in the states’ brief seems to sum up their position particularly well:

"’Strike suits’ are bad for business, but fraud is worse." 

An article (subscrip. req’d) in the February 17 edition of the The Economist entitled "Stay Classy" "Classier Actions" says that the recent trend of larger securities class action settlements that also often come with "strings attached" (i.e., corporate governance reforms) reflects "the rise of a more knowing and demanding kind of plaintiff."

The article attributes this change to the growing power of institutional investors:

CalPERS, America’s largest pension fund, has led several class actions over the past three years, the latest being a case against UnitedHealth over its stock-option practices. The New York City Employees’ Retirement System, which manages $89 billion on behalf of municipal workers, agreed last month to lead an options-backdating lawsuit against Apple. Nowadays, when S&P 500 companies are sued, a respected investor will almost always step forward to lead the disgruntled masses.

And they lead them well. Cases fronted by unions, pension funds and mutual funds result in settlements that are around one-third larger than those led by small fry, according to a recent report by NERA, a consultancy.

Why are institutions having this apparent success?  The article offers several reasons:

• Keeping a "tight leash" on their lawyers–institutions "often employ their own advisers and are thus less willing to accept whatever deal counsel recommends."  In addition, institutions are "also better at squeezing lawyers’ fees and their share of settlements."
• Institutions may choose cases more carefully to start with. "Fewer lawsuits are being brought, but they are better," says Stuart Grant, managing partner of Grant & Eisenhofer, a law firm that specialises in securities cases.

Institutions may also be more inclined to hold out for a settlement requiring governance reforms by the defendant, such as " bringing in more independent directors, reforming executive-pay schemes, splitting the roles of chairman and chief executive, and even–in the case of TXU, a utility–creating a chief governance officer."  "They may want money, but they also want to send a message," says Adam Savett of ISS, a shareholder-advisory firm.