Securities class action landscape
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Volume 2 Number 2
Securities class action landscape Douglas J. Clark and Cheryl W. Foung Received (in revised form): 22nd March, 2005 Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, CA 94304-1050, USA; Tel: +650 493 9300; Fax: 650 565 5100; E-mail: [email protected]
Douglas J. Clark is a partner at Wilson Sonsini Goodrich & Rosati.
Cheryl W. Foung is special counsel at Wilson Sonsini Goodrich & Rosati. The views expressed in this paper are those of the authors, and do not necessarily represent the views of Wilson Sonsini Goodrich & Rosati or its clients.
ABSTRACT KEYWORDS: confidential witnesses, corporate scienter, Private Securities Litigation Reform Act, loss causation, Ninth Circuit Court of Appeals, safe harbour, scienter
International Journal of Disclosure and Governance, Vol. 2, No. 2, 2005, pp. 130–141 © Henry Stewart Publications, 1746–6539
Page 130
This paper discusses recent developments under the Private Securities Litigation Reform Act, which was enacted nearly ten years ago. First, the paper addresses recent reversals of dismissals by the Ninth Circuit Court of Appeals finding that a strong inference of scienter was raised where plaintiffs were found to plead adequately the requirements for confidential witnesses, insider stock sales and the totality of the allegations. Secondly, recent decisions may signal a trend with respect to corporate scienter where dismissals were affirmed against individual defendants for lack of scienter but dismissal was reversed against corporate defendants. Thirdly, the US Supreme Court reversed a Ninth Circuit decision on the basis that plaintiffs did not allege adequately loss causation. Fourthly, a recent Seventh Circuit’s reversal shows that it may be increasingly difficult to dismiss a complaint on the basis that the company provided safe harbour warnings.
INTRODUCTION As the tenth anniversary approaches of the Private Securities Litigation Reform Act of 1995 (the ‘Reform Act’), something should be known about the market for securities cases and how those cases will fare in litigation or in settlement negotiations,1 and it is. It is known that approximately 200 public companies a year are sued for securities fraud, not including companies caught up in a one-time batch of cases such as the IPO allocation cases (2001), analyst cases (2002– 2003), or mutual fund cases (2003–2004).2 It is known that over a five-year period, the average public company faces a 10 per cent probability that it will face a class action suit and that the likelihood of being sued has risen 23 per cent since the passage of the Reform Act.3 It is known that growth companies, such as technology companies, are more likely to get sued than those in less dynamic market sectors (eg industrial).4 Also, the cost of settling class actions has increased. While the median settlement for 2004 decreased slightly to $5.4m, the average settlement amount increased from $20m to $27m.5 The increase in the average settlement value was driven by several large settlements, but the prevailing sense in
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