Lessons for Wall Street litigation — from a Casino

May 27, 2009

Ever since I began working at the intersect of Electronic Discovery and Subprime/Credit Crisis Securities Litigation, I’ve found several sites to be absolutely invaluable sources of insight and information.  High among these is Kevin LaCroix’s D&O Diary, www.dandodiary.com.  How Kevin finds the time to write as prolifically as he does, I don’t know, but hardly a day goes by that there isn’t something new, useful, and important on his blog. 

 Two of the most popular ongoing features of Kevin’s blog are the list of subprime lawsuits, currently standing at 191 in various federal district courts throughout the US (mostly in New York and California), here, and a separate list tracking the settlements, dismissals, and denials of dismissal motions, here.   

In any securites class action, after the housekeeping step of selecting a lead plaintiff and counsel, the first event is the Motion to Dismiss under Rule 12(b)(6) and the specially high bar that a plaintiffs’ case must get over to survive that motion pursuant to the Private Securities Litigation Reform Act at 15 U.S.C § 78u-4(b).

It’s now been 18 months since the first motion to dismiss, and there have been 23 other motions decided since then.  That’s long enough to discern a trend.  The earlier decisions had favored the defendants – dismissals were common.  Now the trend favors the plaintiffs.  While there are still cases being dismissed, the net score stands in the plaintiffs’ favor.   

                                                                                                      21-movie-interna%3B        To ascertain this trend, I worked from Kevin’s Dismissals Granted (Table II) and Dismissals Denied (Table III), by merging them and then sorting by date. 

I then assigned a numeric value to the outcome of each motion, using a system similar to card counting in Blackjack — not that I have any personal experience doing that, of course.  

  • A dismissal with prejudice is a high (10-A) card; in Blackjack card counting, when you see a high card you count it as Minus One. 
  • A denial of a motion to dismiss is a low (2-6) card: Plus One. 
  • Originally I had thought that a dismissal with leave to amend the Complaint should be a neutral (7-8-9) card: value Zero.  But a dismissal with leave to amend is still a better outcome for the defendant than the plaintiff, so I decided to give it a provisional minus 0.5.  However, when it gets decided finally one way or the other, that minus 0.5 goes away and is replaced further down the list by either the full Minus One if the case is finally dismissed with prejudice, or by the full Plus One if the next motion to dismiss is denied.  One exception is the recent WaMu decision in the Western District of Washington, where the result was mixed, so I gave it a score of minus 0.25.
Some have a gift for this.

Some have a gift for this.

So, as with counting cards in Blackjack, you arrive at a running count by adding together all the  plus ones, minus ones, minus zero point fives, and zeroes. 

At the beginning, in November 2007 and the twelve  months following, the running count started out in the negative numbers, favorable to defendants, but by late December 2008, the line crossed into positive numbers and has stayed there ever since.  With the Moneygram decision May 20, 2009, the running count is now at 2.75.  When the count is this positive in Blackjack, it’s better to be the player than the house,  or so I’ve been told.  If you think of the player as the plaintiffs and the house as defendants, the deck is running in the plaintiffs’ favor right now.

GraphMay2709The graph appears at the left, and more legibly, here, and a link to a pdf of the spreadsheet from which it was derived, here.  As you can see, the trendline is moving upward in favor of dismissals being denied. 

Obviously, the weight to be given to dismissals with leave to amend is subjective.  If you call them zero, the trendline in favor of the plaintiffs is even sharper.  If you call them minus one, same as outright dismissals with prejudice, then the trendline, while still moving in a favorable direction for the plaintiffs, still doesn’t get out of negative numbers.  My justification for giving dismissals with leave to amend a minus 0.5 rather than a full minus 1.0 is partly based on the fact that the three cases that have gone to second motions have gone 2-1 in favor of the plaintiffs.  In other words, we’re not seeing any signs that a dismissal with leave to amend is merely a delay of ultimate final dismissal.

Why is an e-discovery consultant blogging about securities class actions?  First of all, because it’s train-wreckinteresting.  This is the arena in which we may achieve some understanding and resolution of what happened to our economy. 

Counsel for both sides of the cases that do go to trial will be carrying much more than their own clients’ interests on their shoulders.  Trials will become showpiece inquiries into the financial sector. 

I’ve also come to the conclusion that to do the best they can for their clients, e-discovery consultants have to know their substantive area nearly as well as their clients do.  The substantive area that grabs my interest the most right now is securities litigation arising out of the subprime/credit crisis.  For the present, this is where it’s at.   More of these cases are surviving dismissal and going on to discovery.  Discovery had better be done right.  Blind cookie-cutter e-discovery processing and a dumb “let’s throw some keywords at it” approach will be completely inadequate for efficient discovery in this highly-specialized area. 

Those who forget the past are condemned to repeat it, and our recent economic past is something none of us ever want to repeat.


What part of No don’t you understand?

May 19, 2009

April hasn’t been easy for securities class action defendants seeking second bites at the apple.  Twice in the same month a federal judge has “re-denied” a motion to dismiss brought by the defendants in a subprime/credit crisis securities class action.  

Los Angeles, April 6:  Justice Mariana Pfaelzer (C.D. Cal.) denies the defendants’ motion to reconsider her earlier (Dec. 3, 2008)  denial of their motion to dismiss in the Countrywide litigation.   (Alison Frankel’s article about this in the AmLaw litigation daily is available here.)  

What the plaintiffs got in February

What the plaintiffs got in February

Then New York, April 29:  Judge Shirley Wohl Kram  (S.D.N.Y.) denies the defendants’ motion to reconsider her earlier (Feb. 18, 2009) denial of their motion to dismiss in the Moody’s litigation.   A copy of the February decision is available here and a copy of her honor’s order reconfirming that decision is here.

What the plaintiffs got in April

What the plaintiffs got in April

Moody’s is one of a handful of agencies that assign ratings to securities and other debt instruments including bonds.  The other two major rating agencies are Standard & Poor and Fitch.  Ratings permit the investing community to assess the riskiness of a bond offering.  The complaint alleges that Moody’s assigned unjustifiably high ratings to collateralized debt obligations — bonds —  that were in fact quite risky due to their underlying security containing an excessive amount of subprime mortgages.  The plaintiffs who had acquired these bonds during the specified class period suffered losses as a result.  The claims are that by these misrepresentations, Moody’s and the individual defendants violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78(j) and SEC Rule 10b-5, 17 C.F.R. 240.10b-5.

The first event — which is sometimes the main event — in a securities class action is a motion to dismiss under Feb. R. Civ. P. 12(b)(6).   This is no ordinary motion to dismiss.    The Private Securities Litigation Reform Act of 1995 sets the bar especially high for securities class actions to survive.    

  • First, plaintiffs have to plead the alleged misleading statements with particularity. 15 U.S.C. § 78u-4(b)(1). 
  • Second, plaintiffs must show in their pleading that the false statement was made knowingly or recklessly, in other words, that the defendants acted with scienter.  15 U.S.C. § 78u-4(b)(2).  Not only that, the Supreme Court ruled that the pleading has to show a “cogent inference” of scienter.  Tellabs Inc. v. Makor Issues & Rights, 551 U.S. 308 (2007).  
  • Third, because the plaintiff must prove causation of its loss by these misrepresentations under 15 U.S.C. 78u-4(b)(4), the complaint must clearly allege loss causation. 

Judge Kram decided in February that the plaintiffs fulfilled those requirements.   The defendants moved for reconsideration and didn’t get very far; her only concession was to declare that part of one paragraph of her earlier decision was to be removed, characterizing it as a mere clerical error.  In her earlier order, the judge included this passage at page 45:  

Plaintiffs also cite an instant message conversation as evidence of the Company’s scienter.  In that exchange, Moody’s executives commented that their “model def [sic.] does not capture half the risk,” and joke that an issuance could be “structured by cows and [they] would rate it.” (Hume Decl. Ex. H.) The conversation ends with one Committee member saying that he or she “personally doesn’t feel comfortable signing off” on that issuance. (Hume Decl. Ex. H.)

Collateralized Debt Obligations are complex and require teamwork

Collateralized Debt Obligations are complex and require teamwork

This is a reference to the “structured-by-cows” passage that was read aloud at a congressional grilling of ratings agency executives on Capitol Hill last October.  The New York Times account of that exchange can be read here.  By including it in her decision, the judge added color, like the cherry on top of a sundae.  The only problem?  This was an instant message exchange between two analysts at Standard & Poor, not Moody’s.  This may have been the plaintiff’s error, as the judge cites an exhibit filed by the plaintiff as the source.  In any event, in her reconsideration decision, the judge treats this passage as not in any way critical to her finding that the plaintiff had sufficiently pleaded that the defendants acted with scienter, and simply declared at page 10 of her April 29 order that it should be removed from her February 18 order: 

Rule 60(a) permits the Court to correct a “clerical mistake or mistake arising from oversight or omission whenever one is found in a judgment, order, or other part of the record.” Fed. R. Civ. P. 60(a). Based upon the record, the sentence beginning “Plaintiffs also cite . . . .” at  [p.45 of the February order]  through the sentence beginning “The conversation ends . . . .” should be deleted from the Court’s Opinion.

The defendants wanted her honor to take the entire sundae away from the plaintiffs.  Instead all she did was remove the cherry on top.  

As this was already in the plaintiffs’ “win” column in the tally of outcomes on motions to dismiss, nothing on the scorecard has changed.  I’ll be analyzing that scorecard and the way it has trended over time in an upcoming post.  

I have to comment that I find motions to reconsider one of the more bizarre features of federal practice in the US.    You go back to the same judge who made an order you don’t like, asking to overturn it?  Another topic for another day, maybe.