Shareholder Advocate - April 2017
With the addition of Laura Posner as a partner in our Securities Litigation & Investor Protection Practice Group, Cohen Milstein continues a tradition of bringing aboard attorneys with significant experience in government, in Laura’s case, as chief securities regulator for the State of New Jersey. The Shareholder Advocate sat down with her to discuss the issues facing today’s institutional investors, and how her experience in government has shaped her thinking about how private lawyers can help investors impacted by fraud and other unlawful behavior.
Shareholder Advocate: You spent the last three years as Bureau Chief for the New Jersey State Bureau of Securities, acting as the top securities regulator for the state. In that role you administered and enforced the state’s securities law and associated regulations, forming part of the first line of defense against securities fraud and other unlawful behavior. What is the state of investor protection today? What are some major threats?
Laura Posner: From a regulatory perspective, investor protection requires diligent prosecution of both small, localized securities fraud and Fortune 500-orchestrated corporate securities fraud. State securities regulators are widely considered the local “cops on the beat.” They are typically the first regulators to uncover emerging frauds, new misleading financial products and innovative deceptive sales tactics. State securities regulators work incredibly hard to obtain justice for victims taken advantage of by unregistered fraudsters or dishonest brokers who use investor money to fund lavish lifestyles or to obtain exorbitant and unwarranted fees. State securities regulators also spend considerable time and effort prosecuting Fortune 500 corporate fraud. This type of fraud can be just as devastating to its victims, but it is also often more far-reaching – both in terms of the number of victims impacted and its effect on entire markets.
Unfortunately, I do not think investment fraud will ever go away. While certain types of frauds fall out of favor or are effectively stopped by regulation or litigation, without fail, a new type of fraud emerges shortly thereafter. The consensus seems to be that over the next few years there will be considerable deregulation in the financial sector, including a roll-back of the Dodd-Frank regulations put in place following the 2008 financial crisis. If, in fact, that occurs, the market will be more susceptible to fraud and unscrupulous executives will have greater opportunity to take advantage of investors.
S.A.: While you ran the Bureau of Securities, you were in the position of being a client to outside law firms. What lessons did you learn that you can apply to your work here at Cohen Milstein?
Posner: The most important lesson I learned is to be extremely circumspect about when and whether to approach large public fund clients about a potential case. The fact is that, with few exceptions, it just does not make a lot of sense for large public pension funds to be involved in relatively small cases. Another lesson I learned is to ensure that the damage and loss figures we provide to our clients are as realistic as possible. The losses used to calculate leadership at the outset of a securities class action often are very different from recoverable damages, which are calculated using complex formulas and reliant on expert testimony. It is very important to make sure that the case is large enough to justify a large public pension fund’s involvement or, if not, that the behavior is particularly egregious or somehow tied to the state where the fund is located so as to justify the pension fund’s time and resources.
Like many other major public pension funds, New Jersey takes its responsibilities in this area very seriously. Its lawyers take an active role in overseeing litigation. They attend depositions, hearings and settlement conferences. They review complaints and briefs. It is a tremendous amount of work. So, it is also extremely important for firms like ours to do everything we can to acknowledge and alleviate those burdens. And I’m happy to say that Cohen Milstein does just that. For example, we don’t just tell our clients to look for the documents we need. We go on site, help them figure out exactly what is needed and where it is located, and handle whatever work we can directly. That’s also how you further develop a relationship: by getting into the trenches with your client and doing everything you can to help.
S.A.: You were appointed Bureau Chief in 2014 by the New Jersey Attorney General and over the next three years the Bureau returned hundreds of millions of dollars to investors and worked with criminal authorities to obtain some 20 criminal convictions. Do you think the role of state regulators will expand in an era where there may be some pullback of federal oversight of securities regulation and enforcement?
L.P.: State regulators have always played an essential role in enforcement of the securities laws, but I think that role is going to become even more critical over the next few years. We don’t know how active the next SEC Chair will be in enforcing the federal securities laws. However, a number of state attorneys general and state securities regulators have already publically stated that they intend to pick up any slack, and will continue to actively police the securities markets and take enforcement action when warranted. People sometimes mistakenly think that state regulators and state attorneys general are significantly limited in the types of cases they can pursue; but most have broad authority to investigate or prosecute any fraud with a nexus to their state. For states like New York, New Jersey, California, Texas and Florida, where thousands of companies are headquartered and millions of investors live, the authority is quite broad.
S.A.: You were a very active member of the North American Securities Administrators Association, chairing its Enforcement Section Committee, and serving on its Multi-Jurisdictional Action, Technology and State Legislation committees. You recently worked with NASAA on a “friend of the court” brief for CalPERS v. ANZ Securities, a securities case scheduled to be argued in April before the U.S. Supreme Court. Tell us about that?
L.P.: The NASAA brief, which we produced in consultation with NASAA’s in-house legal team, focused on the critical role securities class actions play in providing recovery to retail investors.
At issue, for those who aren’t already familiar with the matter, is how the Supreme Court will interpret its own 1974 decision in the American Pipe case; specifically whether courts will continue to give investors the benefit of what is known as the “American Pipe rule.” Under that rule, courts had agreed that filing a class-action lawsuit effectively stopped the clock on statutory deadlines under federal securities laws, protecting the ability of all purported class members – even investors who had not yet formally joined the lawsuit – to bring individual claims if they were unsatisfied with a class settlement or if the class was not certified. In ANZ and another case, however, the Second U.S. Circuit Court of Appeals employed a more narrow interpretation of the American Pipe rule, holding that filing a class action did not suspend – or “toll” – the three-year “statute of repose” deadline to file claims under Section 13 of the Securities Act of 1933.
While “tolling the statute of repose” may sound incredibly arcane, the fact is that if the Supreme Court agrees with the Second Circuit, it will undermine the purpose of class actions. Large institutional investors will be forced to file preemptory claims to preserve their ability to opt out of cases where they have major losses. That will cost them time and money, and clog the courts with additional cases. But at least large institutional investors have that option. Retail investors generally do not have the resources, the sophistication or large enough losses to benefit from an opt-out claim if a class action isn’t handled properly. For those investors, the class case is always going to be superior to an individual claim. Also, state regulators are among those charged by Congress to make sure any given securities class action offers investors the best available resolution of their claims. From a practical perspective, state regulators are never going to object to a settlement reached after the statute of repose expires since the claims could not be pursued elsewhere. If the Supreme Court goes the wrong way here, it will make the system incredibly burdensome and costly for institutional investors, and leave retail investors without a viable alternative if a class action fails.
S.A.: Why did you decide to return to the private sector, where you spent a number of years before joining state government, and why specifically did you choose to join Cohen Milstein?
L.P.: When I applied to law school, my plan was to work for the federal government doing civil rights litigation after I graduated. However, by the time I was in law school, the federal government was not really focused on bringing civil rights cases. I needed a Plan B. I had no interest in being a defense attorney. I wanted to help people. One of my law school professors had worked as an expert witness in the tobacco cases and encouraged me to look at plaintiffs firms and I ended up joining one. I not only enjoyed the work and got a lot of great litigation experience early on, but I felt good about the work I did every day. In my securities fraud cases I was helping to protect teachers (including my now husband!), firefighters, police officers and other public employees’ retirement savings. In my employment cases, I was helping people who lost out on promotions, salary increases and often their jobs due to discrimination. In my consumer fraud cases, I was helping consumers who had been taken advantage of by service providers and manufacturers. But, I still harbored a desire to fulfil my civic duty and work for the government. So when I was approached about the position at the Bureau of Securities, I realized that public enforcement offered an interesting way for me to keep doing the work that I love, while providing an opportunity for me to be a part of something much bigger than myself. The regulatory aspects of the job were totally new to me, so it also provided me with an opportunity to learn about a critical piece of the securities regulatory environment. Ultimately, I decided to return back to the private sector because I truly do believe that large class action litigation is the best deterrent to fraudulent behavior. Further, private class actions recover far more money for victims than the government typically does. And, from a personal perspective, I missed litigating. As New Jersey’s securities regulator, I was the client and the judge. I missed being the litigator – taking depositions and arguing in court.
As for why I chose Cohen Milstein, I didn’t want to go to a firm focused exclusively on securities litigation. While that is my primary background, I think that focusing exclusively on securities cases is short-sighted from a client perspective. I don’t want to be restricted in the types of claims I can bring on behalf of my clients. What matters is not whether I bring claims under the federal securities laws, the Sherman anti-trust act or state consumer protection statutes – what matters is achieving the best possible recovery and result for my clients and the class. Accordingly, I wanted to join a firm with expertise in multiple practice areas and with the skill set and experience to think about issues of fraud from a broad perspective. Cohen Milstein does that better than anyone in the plaintiffs’ bar. For example, the innovative cases Cohen Milstein brought alleging antitrust market manipulations pull from our expertise in both the antitrust and securities areas. I also wanted to join a firm where I would have the opportunity to work with other former government attorneys, who have found a home here at Cohen Milstein.
S.A.: As Bureau Chief, you collaborated extensively with the Securities and Exchange Commission, the Department of Justice, and other state Attorneys General and securities regulators on issues of common concern. Do you believe the appetite for this type of cooperation remains strong? What are some areas where you would like to see future efforts to focus?
L.P.: The interest in collaboration on the federal level waxes and wanes depending on who is running the various agencies at any given time. State regulators are always eager to collaborate with their federal counterparts. As NASAA’s Enforcement Chair, I worked with my counterpart at the SEC to adopt an enforcement cooperation agreement that provided a structure for how the SEC and state securities regulators should collaborate on cases where both a federal and state agency have jurisdiction. I am proud of that agreement: it not only avoids unnecessary and wasteful duplication, but it establishes a framework for mutual assistance where appropriate.
S.A.: We view investor protection as a non-partisan issue. That said, there seems to be a push to focus on securities regulators’ mission to facilitate capital formation and broaden consumer choice by reducing what some view as overly burdensome regulation. Should we be concerned about whether this will reduce vigorous rule-making, oversight and enforcement?
L.P.: There are areas of the securities laws that could benefit from some streamlining. But overall, the current regulatory structure is quite effective at ensuring that investors get the information that they need and regulators have the tools necessary to protect investors from fraud. If we are not careful, and too many regulations and requirements are cut because they are seen as too burdensome or costly, you risk opening up investors to fraud and the market to disruption. Further, there is significant empirical evidence demonstrating that robust regulatory structures lead to better and more robust capital formation, so the idea that we need to deregulate in order to encourage capital formation is simply incorrect.