“Event-Driven Litigation Defense,” Harvard Law School Forum on Corporate Governance and Financial Regulation
By Julie G. Reiser and Steven J. Toll are partners at Cohen Milstein Sellers & Toll PLLC. This post is based on their recent Cohen Milstein memorandum.
The authors address criticism of shareholder lawsuits presented in two recent reports by the U.S. Chamber’s Institute for Legal Reform (“ILR”). Released in October 2018 and February 2019, the ILR reports emphatically urge Congress, the Securities and Exchange Commission, and federal judges to act to curb a “contagion” of “abusive” securities class action litigation.
Reiser and Toll focus on securities lawsuits that have been targeted by the ILR as nuisance cases that warrant legislative intervention. These “event-driven” lawsuits seek to compensate shareholders, who allege that a company has recklessly concealed or misrepresented business or operational risks, leading to a catastrophic event that, among other things, drives down the company’s stock price. Examples include the BP Deepwater Horizon disaster, where the company for years had failed to implement safety systems despite repeated public claims to the contrary. Reiser and Toll find that the ILR relies on flawed logic and circular reasoning to argue that the legislature must intervene to limit these cases rather than allowing the courts to make such determinations. Indeed, many of these suits provide an important remedy for investors and have resulted in large settlements that could not have been achieved otherwise.
The purported mission of the U.S. Chamber of Commerce’s Institute for Legal Reform (“ILR”) is to bring about “civil justice reform” by, among other things, lobbying Congress to limit investors’ access to the courthouse. For decades, the ILR has allied itself with powerful publicly traded corporations under the pretext of protecting their defrauded investors. The ILR’s latest campaign, like so many of its previous endeavors, relies on the illogical premise that investors and the economy are harmed by securities fraud litigation rather than by corporate fraud and malfeasance. In two reports authored by Mayer Brown Partner Andrew Pincus, A Rising Threat the New Class Action Racket that Harms Investors and the Economy (October 2018) and Containing the Contagion, Proposals to Reform the Broken Securities Class Action System (February 2019), the ILR asserts that the 1995 Private Securities Litigation Reform Act (“PSLRA”) has failed to curtail meritless securities lawsuits and that Congress therefore must place additional constraints on investors’ ability to hold companies accountable for fraud.
Citing the increase in the number of securities-related lawsuits over the past several years, the ILR argues that courts should not be permitted to separate the meritorious cases from the weak and that certain types of cases must be scaled back through legislation. Both ILR reports specifically target federal securities class actions that: (i) challenge M&A transactions; and (ii) arise from corporate disasters. This article focuses only on the category of lawsuits the ILR calls “event-driven litigation.”
The ILR insists that cases involving corporate disasters “extort large settlements” from corporations for meritless claims. That bold assertion conveniently ignores the fact that many cases of this type have settled only after hard-fought litigation in which the corporate defendants were vigorously represented by lawyers from the country’s most elite law firms, making the ILR’s efforts to victimize the companies even more of a distortion. Contrary to the ILR’s claims, the existence of “event-driven litigation” simply reflects the reality that when companies behave recklessly, there often are two groups of victims: individuals who suffer personal or property injuries, and shareholders who sustain investment losses.
The ILR’s assertion that the increase in event-driven litigation causes damage to investors and companies, rather than reflect it, is as fundamentally unsound as the idea that the number of firefighters dispatched to a fire causes greater fire damage. To the contrary, event-driven cases serve as a deterrent to companies who might otherwise conceal or misrepresent their operations because they recognize that investors will hold them accountable for doing so.
The complete online article can be accessed from Harvard Law School Forum on Corporate Governance and Financial Regulation here.
A PDF of the complete article can be accessed here.