Securities class actions against boardrooms



FW moderates an online discussion looking at securities class actions against boardrooms between Douglas W. Henkin, a partner at Milbank, Tweed, Hadley & McCloy, and Joseph N. Sacca, a partner at Skadden, Arps, Slate, Meagher & Flom.

FW: Are there any common themes in the allegations made against companies, directors, and officers? To what extent is the current economic climate fuelling these cases?

Sacca: In many securities class action litigations, directors are less often accused of active complicity in wrongdoing than they are of failure of oversight. One notable exception is in cases challenging M&A transactions, where the allegations are often levelled primarily against the directors of the target company, and accuse them of violating their fiduciary duties to shareholders by agreeing to sell their company too cheaply, or without due care in the sales process. To the extent M&A activity increases, we are likely to see more of these types of suits.

Henkin: There are common themes, although in recent years it may be more interesting to look at how certain types of claims have decreased after ‘trending’ or ‘being hot’ for some time. For example, it is very common for securities class actions to be based on allegations regarding violations of GAAP or to follow a company’s restatement of its financials or the announcement that a restatement is possible. However, the numbers of cases that have settled in recent years that have involved alleged GAAP violations and restatements or possible restatements have declined significantly – by more than 30 percent using some measures. One possible reason for this may be that restatements and other types of accounting-related issues may in fact have declined across the board since Sarbanes-Oxley was enacted. Similarly, as we get farther away from the credit crisis, the number of securities class actions being brought that relate to the credit crisis has been declining.

FW: How have recent significant cases influenced key issues such as what types of claims can be brought in the first instance and when a case can be certified as a class action?

Henkin: There have been several significant developments in this area during the past year and there are likely to be others during the next year. Some examples relate to who can be sued in a securities case and what the basis for the claims can be. Recent decisions have narrowed who can be a defendant in the first place – as a result of cases like Janus, someone who did not ‘make’ a statement cannot be sued about it, and this can have a significant impact on who the potential defendants in a given case will be. Similarly, courts have begun clamping down on certain types of claims that have been favourites of the plaintiffs’ bar in a way that may make it harder to bring those claims in the future. An example of this is Fait v. Regions Financial Corp. These cases make it harder to bring claims about statements that are inherently about opinions – things like loan loss reserves, good will measurements, evaluations of portfolio values, and so on. The effect of these decisions is only now playing out in existing cases and may have a significant impact on what claims are brought down the road in future cases because plaintiffs’ lawyers adapt the cases they bring as the law changes.

Sacca: One significant case to keep an eye on is Amgen Inc. v. Connecticut Retirement Plans and Trust Funds. In that case, the US Supreme Court recently agreed to decide whether a plaintiff must prove, and the defendant be given the opportunity to rebut, the ‘materiality’ of an alleged false statement – essentially, that the statement would have been important to investors – at the time it asks the court to certify a class in a securities class action, or whether the plaintiff need offer that proof only at trial. The outcome of this case could have enormous practical impact. Certification of a class, which permits the plaintiff to prosecute the case on behalf of typically thousands of additional claimants who will never need to appear in court to prove their claims individually, causes significant pressure on defendants to settle, even where they think they have strong cases on the merits, because it multiplies the potential exposure exponentially. If the Supreme Court creates a rule that makes it more difficult for a plaintiff to obtain class certification, plaintiffs will lose some of this leverage. Argument will be heard during the Supreme Court’s next term, which begins in October 2012.

FW: Companies need to give careful consideration to how they make certain disclosures on an ongoing basis. Based on recent developments, to what extent can ‘opinion’ statements – such as loan loss reserves and goodwill impairment testing – be actionable without claiming fraud?

Henkin: Recent decisions, particularly in the courts within the jurisdiction of the US Court of Appeals for the Second Circuit, have made it more difficult for plaintiffs to assert claims based on statements that are ‘opinions’ rather than ‘facts’. For example, because the determinations that go into making a loan loss reserve evaluation, determining good will, and deciding the value of a portfolio of assets – such as mortgage-backed securities – require judgments and choices about methodologies and assumptions, they are opinions rather than facts. As a result, decisions such as Fait and City of Omaha v. CBS have held that a plaintiff who wants to base a securities class action on a statement of opinion must allege both that the statement was false when it was made and that the defendant who made it did not honestly believe the statement when it made the statement. Importantly, the Second Circuit has confirmed that this rule applies to claims brought under both the Securities Act of 1933, used primarily to bring claims relating to IPOs and other public offerings, and the Securities Exchange Act of 1934, used primarily to bring claims related to post-offering trading. These decisions make it more difficult for plaintiffs to bring claims based on statements of opinion, and, in particular, they make it more difficult for plaintiffs to bring such claims in cases based on alleged misstatements in IPO offering materials. Prior to the Fait decision, for example, a plaintiff would only have had to allege that a statement in the IPO registration statement was false and would not have had to make any allegations about what the maker of the statement believed at the time the statement was made.

FW: What specific procedures and processes apply when filing a securities class action?

Sacca: The law requires that a plaintiff seeking to represent a class in a securities case must publish, within 20 days of filing the complaint, a notice advising potential class members of the case. Within 60 days of that notice, any potential class member can ask the court to appoint it the ‘lead plaintiff,’ even if it has not filed its own complaint. The court typically appoints the applicant with the largest financial interest in the case. This entire process usually takes a minimum of 90 days, after which the newly-appointed lead plaintiff is generally given a period of 30 to 60 days to file an amended complaint, which is then generally followed by months of briefing on a motion to dismiss the case brought by the defendant. Discovery – the process by which the parties exchange documents relating to the subject of the case, take sworn testimony, and exchange reports of expert witnesses – is stayed until the court acts on the motion to dismiss and never takes place if the court actually dismisses the case. In short, it is often not until six months or more following the filing of a securities class action that full-scale litigation begins in earnest.

FW: Can you offer some insight into the discovery processes and challenges along the way?

Sacca: The discovery process has always been intrusive, expensive, and burdensome. With the advent of electronic discovery – the process of searching files stored on a company's computers – the costs and burdens associated with the discovery process have skyrocketed. Whereas not that long ago teams of lawyers would have to review tens or possibly even hundreds of thousands of pages of files located at a company's offices to look for documents that had to be turned over to the opponent in a case, now lawyers more often have to review millions of pages of different types of documents including emails, text messages, social media posts, word documents, spreadsheets, and so on, located within a company's computer systems, and even on the personal electronic devices of employees relevant to the litigation. Though this burden can be lessened slightly by evolving technology such as software that permits relevant documents to be located through searches for key words, or even newer software that permits computers to be trained to identify relevant documents on their own, the cost and time required for discovery in the electronic age is still substantial enough that it alone can cause a defendant to settle a case, regardless of the merits of the claims.

Henkin: By statute, US securities class actions are subject to automatic stays of discovery until a complaint has survived a motion to dismiss, so discovery generally does not start until after a consolidated amended complaint has been filed and survived a motion to dismiss. Even though it may take a long time for discovery to begin – if it happens at all – it is important to ensure that potentially relevant documents and information are preserved. This may require ‘litigation holds’ to be placed on both paper and electronically stored documents to ensure that they are not destroyed. It is crucial that counsel be involved in those efforts, which may also need to involve senior IT staff. Sometimes it is also useful to retain forensic experts to assist in ensuring that relevant documents are preserved. Once discovery begins in a case, often ‘e-discovery’ – discovery relating to electronically stored information – becomes a focus of attention. Because of the rapid growth of the amount of information stored electronically and the number of places it can be stored, e-discovery can require the review and production of vast amounts of information and can be very costly if not managed appropriately. Even though discovery might begin months or years after a case is filed, it is useful to begin thinking about what might be subject to discovery early on and what processes might be used to limit the scope and cost of that discovery. That could include early agreements with the plaintiffs about what sources should and should not be searched, whether backup files will need to be restored and searched – such as backups of email mailboxes and shared drives – and how searches will be conducted. How searches are done is evolving quickly, with many companies offering systems designed to reduce the amount of manual review of documents that is necessary, which is intended to offset one of the most significant expenses associated with e-discovery.

FW: What can we learn from settlement figures in recent securities class action cases?

Henkin: In recent years, average and median settlement amounts for US securities class actions have declined, and they have recently been lower than the historical average since the Private Securities Litigation Reform Act of 1995 – the last major revision of the federal securities laws – was enacted. Part of that is due to the absence of very large settlements like Enron and Worldcom in recent years, and part of it is due to the fact that even the average ‘big settlement’ has declined in comparison to prior years. One possible cause of at least some of the decline in settlement values is relatively lower securities trading volume following the credit crisis, because lower trading volume is generally associated with lower damages claims by plaintiffs and lower damages claims lead to lower settlement amounts. Thus, if the economy improves significantly and trading volumes increase, it is possible that some of this average decline in settlement values could be reversed. Another interesting aspect of recent settlement data is that as the amounts of settlements have declined in recent years, the proportions of the settlements that have been paid by D&O insurance policies has increased. For example, the number of settlements that seem to have been funded entirely through D&O coverage increased by approximately 33 percent from 2010 to 2011. That has a direct impact on companies, directors and officers, because it means that on average they have been less likely in recent settlements to have to go out of pocket to fund the resolution of the cases. This highlights the importance of making sure that companies have adequate D&O coverage based on current market conditions and that they maintain good relationships with their carriers.

Sacca: It is difficult to draw general lessons from looking at settlements of securities class actions over any period of time because some settlements are driven by factors truly unique to their cases and thus provide no useful instruction, and a few large settlements can make averages misleading. What does seem to be true, however, is that the median settlement amount has remained fairly constant year over year for a number of years, dating back even before the credit crisis. What this means, though, is uncertain. Perhaps the quality of the cases brought by plaintiffs has remained consistent, or perhaps – except for outliers in which settlement amounts are particularly large – settlements are driven more by factors common to all cases, such as the high cost of discovery, than they are by factors specific to each case, such as the strength of the allegations made.

FW: In the event that a boardroom does face a securities class action, what basic steps should it take to defend itself?

Sacca: Short of avoiding altogether the US capital markets, there is virtually no certain way for a company to ensure that it will not be subjected to a securities class action. Even having a strong defence to a securities claim is not necessarily a barrier to being sued, nor does it guarantee that the litigation will be terminated at an early stage. Courts often conclude that fact-based defences are not suitable for resolution short of trial. In terms of preparing for the possibility of a suit, a board of directors should strive to ensure that their company has strong, well-documented internal controls, and that it adequately discharges its oversight function. Those steps should at least help to mitigate the chances of an adverse decision if the board and the company find themselves defendants in a securities class action. In the event that a firm does face such an action, the first step should be to hire counsel experienced in defending securities class actions, which are complex and somewhat specialised cases. In addition, the board should ensure that the company’s D&O carrier is given prompt notice of the suit, because D&O insurance often covers all or most of the costs of defending a suit and often provides all or substantially all of any amount paid to settle a suit. Additionally, a board should make sure the company is taking all appropriate steps to preserve any potentially relevant documents – both hard copy documents and electronic data – because the consequences of failing to do so can be severe. In extreme cases, destruction of relevant documents can lead a court to enter judgment against the offending party or to instruct a jury that it can presume the contents of the documents would have been harmful to the party's case.

Henkin: The first step should be to ensure that it has trusted counsel to advise it. In some instances the same counsel can advise all the defendants in a case, but some cases will require separate representation of the company and individuals. The board should ensure that necessary steps are taken as soon as possible to make sure that potentially relevant sources of discovery are preserved. It is important to make sure that this process starts as early as possible and is followed up regularly to make sure that, first, the preservation requirements are being followed, and second, they are amended as necessary during the litigation. Although US securities class actions generally take several months or more from the filing of the first complaint to begin focusing on the merits of a case (because of the statutory requirements for the appointments of lead plaintiffs and lead counsel), it is important to begin evaluating potential defences immediately so that the company is ready to begin asserting them at the appropriate time. One key is that the first complaints filed are generally placeholders – the lead plaintiffs and counsel that are appointed by the court may not be the same ones who filed the initial complaints, and the allegations against the company often change a lot between the first complaints and the one that is ultimately tested by motion to dismiss. It is therefore important to think about not only what has been alleged in the initial complaints and what the defences might be, but also what else could be alleged and what defences might be to those allegations. This may require thinking about more than one set of events, such as both an initial disclosure of negative information and subsequent disclosures.

FW: Looking ahead, do you expect to see a continued rise in securities class actions? If so, why?

Henkin: It is very difficult to predict trends in securities class action filings because they generally lag market developments – a major event for a sector will often lead to an increase of filings related to that sector – for example, the announcement of a criminal or regulatory investigation into particular business practices will often lead to securities class actions against not only the particular companies mentioned, but also other companies in the same sector. These trends tend to have fairly well-defined life spans and to be replaced by new filing trends. For example, securities class action filings related to the credit crisis were replaced by filings related to Chinese reverse-merger companies, and that trend is now starting to decline as the plaintiffs’ lawyers exhaust the supply of companies to sue based on similar allegations. Apart from sector and other trends, when there is a negative announcement for a particular company, it will tend to attract the attention of plaintiffs’ lawyers if the stock price reaction is large enough. Although the numbers of cases and their drivers will always fluctuate, securities class actions will continue to be filed simply because they are how plaintiffs’ securities lawyers make money. Just as a car company makes money by making and selling cars and tries to innovate to keep customers buying new cars, securities class action plaintiffs’ lawyers make money by filing lawsuits and either winning judgments or securing settlements.

Sacca: According to most observers, securities class actions continue to be filed at their historical pace. The structure of the US legal system, which does not require the losing party to pay the winner's costs, and which allows for plaintiffs' lawyers to be paid contingency fees at a multiple of their actual investment in a case, provides incentives for these cases to continue to be filed. Unless and until we see another far-reaching event like the credit crisis in the US, one might expect the pace of securities class action filing to remain fairly constant.


Douglas W. Henkin is a partner in the New York office of Milbank, Tweed, Hadley & McCloy and a member of the firm’s Litigation & Arbitration Group. He concentrates primarily on federal and state court securities and complex commercial litigation in trial and appellate courts and arbitration fora, as well as regulatory matters. Mr Henkin has extensive experience working with complex securities and other financial products. He has been recognised in Chambers USA and Legal 500 for his work in securities litigation. Mr Henkin can be contacted on +1 212 530 5393 or by email:

Joseph N. Sacca is a partner at Skadden, Arps, Slate, Meagher & Flom. He represents a broad spectrum of US and international clients in complex corporate, commercial and securities litigation in federal and state courts, and in arbitration proceedings. He has also represented public corporations and accounting firms in significant securities litigations, including class actions against DaimlerChrysler AG and Cendant Corporation. He has repeatedly been selected for inclusion in ‘The Best Lawyers in America’. Mr Sacca can be contacted on +1 212 735 2358 or by email:

© Financier Worldwide



Douglas W. Henkin

Milbank, Tweed, Hadley & McCloy 


Joseph N. Sacca

Skadden, Arps, Slate, Meagher & Flom

©2001-2019 Financier Worldwide Ltd. All rights reserved.