Is the Defense Bar Losing the "Securities Class Action War?"
Douglas Greene, one of the United States’ most well-known securities litigators – on either side of the bar – recently wrote a four-part treatise, titled Who is Winning the Securities Class Action War – Plaintiffs or Defendants?, in which he discussed the various ways in which the defense bar is losing the “securities class action war.” Greene’s thorough analysis is well-worth reading in full, but we will briefly summarize and comment on his piece here.
In part I, Greene notes that, while defendants often win battles (such as the passing of the Private Securities Litigation Reform Act of 1995 and several victories at the U.S. Supreme Court), they are “losing the war.” Greene posits that this is due to several key differences between the plaintiffs’ bar and the defense bar. For example, while the plaintiffs’ bar is relatively small, the defense bar is highly splintered and filled with attorneys who may not be qualified or specialized enough to deal with the specific issues that arise in a securities class action lawsuit. He also points to the plaintiffs’ bar’s contingent-fee structure, which arguably incentivizes efficiency, in contrast to the defense bar’s arguably inefficient structure due to hourly billing and the safety net of D&O insurance reimbursement.
Greene goes on to explain the series of factors which he believes led to the plaintiffs’ bar’s current position as the industry leader. He notes cases such as the stock options backdating scandal giving valuable experience and cash windfalls to plaintiffs’ firms that filed options backdating cases. The same result occurred in the wake of the credit crisis, during which “the plaintiffs’ bar had a war chest and was ready for battle.” He also notes that the Chinese reverse-merger scandal created a new breed of securities class action plaintiffs’ firms when smaller plaintiffs’ firms inherited these cases while the larger firms were dealing with credit-crisis cases for higher damages. All of this combined to allow smaller firms to expand the cases they initiate beyond “lawsuit blueprint cases,” leading to the current landscape, which “now clearly consists of a combination of two different types of cases: smaller cases brought by a set of smaller plaintiffs’ firms on behalf of retail investors, and largest cases pursued by the larger plaintiffs’ firms on behalf of retail investors” (the larger cases may also benefit institutional investors). In other words, the plaintiffs’ bar is now relatively small, but it is experienced and centralized when compared to the defense bar.[1]
In part II, Greene discusses the splintering of the defense bar. Unlike the relatively small plaintiffs’ bar, the defense bar is enormous. “Every firm in the AmLaw 200 has a securities class action defense group and conceivably could be hired to defend a securities class action.” However, these firms generally do not specialize and do not consist of attorneys who work exclusively on securities litigation. Greene estimates that the number of actual securities litigation senior partners on the defense bar is about 10% of the “so-called securities defense bar.” Thus, because the defense bar is busy with non-securities matters, “the average defense lawyer handles far fewer – and a narrower range of – cases than the average plaintiffs’ lawyer.”
The problem, according to Greene, is that this structure results in sub-optimal defense, which is compounded by the rising rates of litigation defense. This results in the possibility that a company’s D&O insurance program will be unable to cover the fees, which Greene feels may be “the biggest risk directors and officers face from securities litigation.”
Greene of course adds that the defense bar wins a lot of dismissals at the pleading stage. However, this is tempered by the fact that those victories usually result in a dismissal without prejudice, allowing the plaintiff to replead. Greene posits that, given “skyrocketing” defense costs, most cases settle at this stage to avoid the danger that their D&O insurance policy would be unable to cover the fees of a strong defense and later settlement. This means that “motions to dismiss are the whole ballgame these days,” and Greene argues that they are not always being argued effectively.
Greene’s solution to this problem: use the D&O insurer representatives already associated with defending the litigation and give them a bigger voice in the defense process. He argues that “D&O insurers see the big picture in securities class action in a way no defense lawyer ever could, and could easily provide input that would help solve these problems.”
Greene expands on this and other solutions in part III, in which he discusses the reasons why his proposal should be considered. He lists several possible paths forward, outlining the pros and cons of each option. First, Greene discusses proposals to eliminate or otherwise reforming securities class actions. He states that this would be “an enormous error,” given that eliminating securities class actions would allow plaintiffs to file non-class securities actions that would be far less manageable for defendants than class action lawsuits. Second, he mentions the possibility of forming industry groups (like the accounting profession) to oversee securities class actions. He posits that public companies probably could not adopt this approach, since the types of companies sued in securities class actions have far more numerous and diverse issues than the accounting firms.
Finally, Greene turns to the possibility of giving D&O insurers greater control, which he states is “the only clear path.” He argues that D&O insurers are “the only repeat players on the defense side,” and that they have the greatest economic interest in the outcome. Greene also argues that these insurers have the experience and the motivation to work for an advantageous outcome for class action defendants at the lowest possible price.
While the defense bar is filled with talented and hardworking attorneys, it is true that they do not always experience the sheer volume of specialized cases that the plaintiffs’ bar does. That is why it is important that the defense attorney involved in the case actually has extensive experience with the types of issues involved in the case. In contrast, by creating new theories in novel areas, plaintiffs’ attorneys are gaining knowledge of the issues involving new areas more quickly. Giving a greater role to D&O insurers could help fill that experience gap. As Greene correctly points out, they have a vested interest in obtaining a positive outcome for defendants. Of course, this is not to suggest that defense attorneys do not have the same interest; they clearly do. Greene’s point is simply that D&O insurers should be given a greater seat at the table in order to ensure the best possible defense and result for defendants in securities class actions.
[1] The concentration of knowledge continues to increase in the plaintiffs’ bar. For example, the FX, Treasury, and Libor cases have allowed a small group of plaintiffs’ attorneys to gain valuable and unique experience in those novel areas. Indeed, some large law firms are now joining the plaintiffs’ side in such cases, apparently finding plaintiffs’ work more appealing.