Shareholder Responsibility - Part 1
MALE VOICE 1: We've got a three-part presentation, just as everybody else has. Part one is to answer the question--are European shareholders being left out of U.S. securities class actions? Yes.
So let's move onto part two. How can European shareholders participate in U.S. securities class actions? And my partner Brian Murray is going to be handling that. And part three is securities class actions against non-U.S. companies, which come back to me.
The one thing I note is before I get started on part one is that in speaking to a number of you during the break, before the presentation started, and during lunch is that many of the terms that we're using are not familiar to you. You'll have to forgive all of us because we're generally speaking to other lawyers. In fact, we're generally speaking to judges. And it's usually in the United States. And we don't have a tendency to define our terms.
So I'd like to take a moment to just tell you a few things about what I'm talking about. Let's start with the basics. What is a class action? Class in a fraud action is defined as all those who purchased from the first materially false and misleading statement that the issuer, the company, made that caused the stock price to be artificially inflated, to be higher than it would've been absent that materially false and misleading statement.
Okay. It ends--that's the beginning of the class period. And it ends with the truth being disclosed or the final truth being disclosed. There could be intermediate disclosures where pieces of the truth are also disclosed. That gives rise to all sorts of damage calculation questions that you've heard about before. Okay. So a class action is all those who purchased the securities of the issuer during the time period from the first materially false and misleading statement until the truth and suffered damages thereby.
What type of securities are included in that? All of them, stocks, bonds, options, wild securities, tigers, feline packs, anything you can think of, anything you've purchased. They're all included. Okay. Now there are different types of class actions. And they're generally under Rule 23 of the Federal Rules of Civil Procedure.
Okay. Let's move on. Here we go. Rule 23 of the Federal Rules of Civil Procedure--Federal Rules of Civil Procedure are those rules promulgated by the courts that tell you how to proceed in any type of case. One of those rules, Rule 23, is what a class action is and basically is an assemblage of small claims, usually too small to be worth litigating separately but repaying the effort in the aggregate. That's from a court case.
What we're seeing here while we're focused right now on institutional investors--and basically, you're all pension managers and accountants and lawyers representing the big institutions. Generally speaking, class actions aren't designed for you. They're designed for the 100-share purchaser.
Now let's take the Worldcom case, billions in fraud, or Enron, $7 billion being recovered. Somebody has to lead that case. Somebody has to pay the disbursements and the costs associated with that case. Does anyone believe that 100-share purchaser, even though they suffered serious damages, could possibly lead that type of case? The answer of course is no.
Take the case of the Williams Companies cases, where Bernstein Witowitz [phonetic] is the lead counsel. We're on the executive committee. And we have a class representative in that case. The case settled for $311 million in Tulsa, Oklahoma. No one, no one came forward to represent the feline pack class, a $1 billion offering right before the end of the class period.
Our client was that client who eventually came forward and became the class representative. Our client lost $125. Now he shouldn't have lost anything. It was a fraud. The fraud was settled. And what you wind up with here is--who looks after the little guy? Generally, it's the lawyers. Now after something called the PSLRA, the Private Securities Litigation Reform Act of 1995, which was passed by Congress over President Clinton's veto. That was passed to purportedly get rid of certain of the abuses in the old American style class actions. And since that time, you people are being marketed to.
We want people who are more sophisticated or Congress wanted people who are more sophisticated to come forward to help us run the cases. And I think that's led to something that was unforeseen. It's called the Law of Unforeseen Consequences. Whenever a legislative body passes a law, they think they know what they're doing. But at the end of the day, something entirely different happens.Well, that's what happened under the PSLRA. Everybody thought they were going to put the class-action lawyers out of business. In fact, we as class-action attorneys thought they were putting us out of business. And we got very nervous. And in fact, business has never been better.
The reason business has never been better is, A, litigation proceeds better with institutional investors as the lead. And the reason for that is you actually have someone not only who you have to talk to as to how to proceed. I mean, it's not a daily hour-long conversation with our clients that you're going to be subjected to, isn't anything like that. But when something significant happens, we have someone who actually has a dime in the game, who's interested in what the recovery is and proceeding trying to protect their own rights to talk to, where we never had that before, before the PSLRA.
Who would've thought it that actually clients are valuable? And it turned out that they are. And that's why we're glad that we're here with you.
But beyond that, more important than that, it opened--it just--some of the rules that were passed by the PSLRA were a major, major boom to business. The first rule that was passed is that upon the filing of a class action, we as class action attorneys have 20 days to put out a notice in a large business publication. So we generally go over the business wire, the PR news wire, and announce the filing of the case. And those cases then, of course, get picked up by Yahoo! Finance and the internet. And all of your clients and you people hopefully find out that there's a class action now available.
That's one thing. So we have new clients coming forward and contacting us. But more importantly, what it did is it protected the underwriters and the accountants from liability. And that was a very, very bad thing to do. What happened there is once you protect the gatekeepers from liability, the gatekeepers stop being the gatekeepers. All of a sudden, no problem. You want to change the accounting rules and do something like that in a situation for which the accounting rules are certainly not designed? Well, I'm not going to be liable for that. Looks good to me. Go do it.
And five to seven years after the passing of the PSLRA, we had wonderful ways to make money and for you to lose money in Adelphia, Enron, Worldcom, Global Crossing. Billions were lost.
Now with those cases, Congress got nervous again. And this time, they passed Sarbanes-Oxley. And Sarbanes-Oxley actually--SOX--actually has a terrific effect. It has reduced securities fraud or at least apparently so far. It's still a relatively new statute. And when I say it's reduced it, you'll see that the number of cases filed in the last couple of years since the passing of SOX has been way down because the companies had to spend substantial sums in order to put the accounting controls in place. And the Chairman of the Board and the Chief Financial Officer--not the Chairman of the Board--the Chief Executive Officer and the CFO had to sign the various documents filed with the SEC and had to state that, you know, they looked at it. And things are supposedly right.
And of course, that's not so good for those people who want to make excessive compensation and so forth. So now Sarbanes-Oxley is being rolled back. And I would assume in five years, there's going to be another boon to our practice.
Another piece I want to get into is--what are the U.S. courts? I was talking to this wonderful woman at lunch, who told me, well, of course, you have two different systems in the United States, the state system and the federal system. That's really untrue. We have at least 50 different systems in the U.S.
First, let's start with the federal system. You have what's called the U.S. district courts. In New York, where we're from, you have four district courts, the southern district, the New York-based, the Manhattan and White Plains, the eastern district of New York and Long Island, the northern district of New York, which is the Albany area, the mid-center area, and the western district of New York.
They don't necessarily have the same rules. In fact, they don't necessarily follow the same federal rules of civil procedure. They have their own local rules. So things are different within the state of New York.
Now you have the Second Circuit, which is the appellate court, United States Court of Appeals for the Second Circuit. The Second Circuit is New York, Connecticut, and I think Vermont. Not too many companies are in Vermont so don't remember it too well.
The Second Circuit, there are 11 U.S. circuit courts plus the District of Columbia Circuit I think. The one thing that you can absolutely be certain on is that the circuit courts in California, the Ninth Circuit, will not agree with the Second Circuit. They have to be different.So the rules for Syenter [phonetic], which I believe Todd Collins [phonetic] gave you the explanation of what Syenter is--this is a fraud action we're talking about. It has to--you have to intend to deceive someone or at least such a reckless disregard of the facts that it approaches actual intent to deceive. And California has a very different standard for how to show--how showing deception and intent to deceive than New York does. So they don't want to agree with each other.
So wherever--so now the question is--where do you file a case? Well, you file a case basically where you can file a case. And generally speaking, that's wherever the company is located. So if you're unfortunate enough to have a company that commits fraud located in Dallas, Texas, the northern district of Texas in the Fifth Circuit, that's where you're going to file your case under most circumstances. There are some certain circumstances where you could avoid it. But if you try to file someplace else, you're going to be moved to Texas. And if you're moved to Texas, you've got problems because they have entirely different set of laws than New York has.
And you know, an example--they just came down with a very interesting decision in a case in Texas, in northern district of Texas in Dallas, around redefining on class certification. And class certification, all of a sudden, they just made it so that you had to prove loss causation, that the falsity caused your loss.
Now you always had to show loss causation at some point, but not that early before you actually got discovery. So now you don't really want to file the cases in Texas. But if that's where the company is--and that's where Enron is in Texas--that's where you go.So then you have the state actions. And basically, most companies are incorporated in the state of Delaware. Now every state has different corporate governance than every other state. Now the reason that companies incorporate in Delaware--so if you want to bring a suit for a derivative action for breach of fiduciary duty, you're generally going to bring it in Delaware because that's where most companies are incorporated.
Well, Delaware is very business friendly. And that's why companies have incorporated there. But not necessarily every company's incorporated there. You have lots of companies incorporating in lots of other states. And every one of those states likes to do their own thing and protect their own companies in various and sundry ways. And you wind up in a situation in which you have to become an expert in every one of those cases, in every one of those states for that case.
So here we are. We're New York lawyers. Generally speaking, Bernstein Witowitz is a New York firm also with, you know, an office in Louisiana. But generally most--anyone in California--Burger Montaig [phonetic] is from Philadelphia. Well, how do we litigate all over the country? We do. We learn it.
When you are in a court that you're not familiar with, you first--you have to hire a local counsel who's purportedly learns or tells you what you're doing wrong and what you can do. But that doesn't happen. You become an expert in whatever case or whatever court you're in. That's what we do.
So that's more of a clarification on what the overall litigation landscape is in the United States, probably more than you'll ever want to know. But you know, now you'll at least be able to understand many of the things that we said and where we are and what we're doing. In other words, it's a very complex business.
Let's talk about class actions again. We went to a conference in Rome last week, where there was a discussion from the International Bar Association as to the establishment of class actions in Europe. European Commission is looking into it. What type of class actions should you have in Europe? And the answer was--well, the question really was--should you incorporate or just transfer whole hog the American system of justice over to Europe?
We have all these different courts in America. You certainly could match us in Europe. So that would be a good start. However, you need a certain number of other things besides class actions. And those are contingency fees, no loser-pay rules, and opt-out class action laws. This is the basics for what a class action is.
The rules that are being thought about currently in Europe are opt-in class actions. And in fact, I believe you have in the UK some form of opt-in class action. That's not a class action. That doesn't bring justice to the little guys. They're not going to opt in. In fact, the U.S. has opt-in class actions. Every opt-out class action, meaning you have to tell us or the court that you don't want to be included in this class action--otherwise you are. Every U.S. opt-out class action has an opt-in component.
What am I talking about? Okay. Basically, at the end of the day when there's money to be distributed, if there's money to be distributed, you have to file a proof of claim form. And if you don't do that--you don't have to participate if you don't want to. You don't have to take your money off the table. In fact, most people don't. In the U.S., 30 percent participate in the class action. They fill out the forms. They send it in. Now that's true of institutions also. Institutions aren't participating.
Now let's get to where I was supposed to start with from the beginning. Are European shareholders being left out of U.S. securities class actions? And I said yes. But again, that's not too surprising because U.S. institutions are being left out of U.S. class actions. So why wouldn't Europeans be left out?
But you're being left out at a much higher rate than Americans are being left out. And that's where you're going wrong because there is money on the table to help you provide the benefits you need to provide to your pensioners, to your investors, to whoever else you're investing money for.
Okay. Losses--let me give you one other piece. We talked about losses a little bit. At the very beginning of the case, you're going to think you lost hundreds of millions of dollars. That may not be true at the end of the case because all you're going to do at the very beginning of the case is look to see what you purchased the security for, what it's trading for in the 90 days, you know, following the announcement of the truth that caused the stock price to decline. You're going to do a simple mathematical calculation. And you're going to say, "Oh, I lost $100 million."
Well, if the market is going down in general or the market for your sector--the entertainment sector, for example--that stock is in is going down, those have to be excluded from the loss because we're not insuring general market losses. We're talking about fraud here. What portion of that decline was caused by the artificial inflation, the price being too high at the beginning because of the fraud? That's where we get into the expert that Todd was talking about.
You have to hire--and they are expensive. My lord, you think we're expensive? I'd rather be an expert. They get paid right upfront. They charge a lot. And it's very complex. And it becomes a battle of the experts when you go to trial. Or even before trial, you have to have expert discovery, where you've put in your export reports. They've put in their export reports. And then they beat each other up in reply reports.
Okay. I want to take a break right now just to ask a question. I tried to go over the ground rules, the basics of where we are. I have a tendency to be a New Yorker and speak to fast and maybe not define some of my terms. Is there anyone who wants to--you know, has a question as to any of the terms we've been using today? And you know, I'll try to straighten that out and clarify.
Come on. I can't be that good. Okay.
Let's talk about now--let's go onto the few remaining slides I have because I don't have that many. Relevance of U.S. securities class actions globally--$17.2 billion in settlements in 2006, a hefty number; $9.6 billion in settlements in 2005. It wasn't that there was that much more fraud in 2006. It was generally one case. I think it was Worldcom in fact.
Congratulations. The perfect storm, terrible fraud, people go to jail. A lot of people lost their money while there were billions recovered for the Worldcom securities holders. A lot more was lost due to the fraud that just could not be recovered because the one thing you have to have when you're settling the case is an ability to pay on the part of the client--or not of the client--on the part of the defendants. They have to have a company there.
They could be bankrupt and maybe limited to the insurance. And when you go after the individuals, the individual defendants, there's a nice ability to hide that money. Or sometimes, the stock market losses are so high that they can't possibly make up the difference. So you're going to wind up getting less per dollar than your loss. That's what the settlement's going to be.
And 80 percent of U.S. class actions filed involve securities with European listing. So here you are. You've got all of that, lots of money, lots of ability for you people to get involved. In fact, I'll give you an example from the Enron case. In the Enron case, the reason we wound up with a number of the clients, the European clients that we're representing, German banks and so forth, is because Enron marketed certain securities, debt instruments, only in Europe. They didn't sell them in the U.S. They sold them in Europe. And we went around from place to place and, you know, gave this type of presentation trying to explain what a class action is and why you should be involved and said at the end of the presentation, "And by the way, does anybody here own this list of Enron bonds?"
A number of people came up to us and said, "You know, I have one of those." You know, I said, "Good, we'll get you some money back." But it took us going around to search these people out, despite all of the publicity of Enron besides the incredible decline in the price of Enron securities. It took us going around asking, "Please, come forward and represent these types of securities. Be a class representative. And we'll get you and the rest of the class back some money." And that's still going on today.
As I mentioned before, which securities are included? Well, of course, equities, preferred securities, convertibles, bonds, options. But again, it was mentioned earlier today. I won't mention it again. You need a class representative for each type of security, including the action, and probably one for each type of security purchased on each foreign exchange--different rules for where you purchase it. Okay?
This is where vigilance in monitoring your portfolio and pending actions can pay dividends. Without a representative in the case for your type of security and your exchange, that security may be excluded from the action. And we're going to go on a little later and give you some cautionary tales of people who lost lots of money because they did not include European purchasers and non-U.S. purchasers.
Okay. Now coming to the end of my slides, why would you be left out? Again, the obvious reason, the easiest reason--you haven't filed the proof of claim form. I mean, that's at the very end of the case. You're effectively opting out with no, opting out with no recourse. Just fill out the form. In fact, if you're an institution, generally speaking, you could provide magnetic tapes on the claims processors, those big data processing organizations that actually handle the receipt of all the claims and the calculations of the percentage ownership in the settlement fund and so forth. They will accept--well, I keep saying magnetic tape. I guess nowadays, it's called an email or a transmission or something. All they want from you, from an institution, is an affidavit saying, "These were my transactions, buys, sells, what I owned before the class period, what I sold during the class period, things of that nature." Just tell them. They want to give you the money.
And then they'll look it over and tell you what the deficiencies in the filing was. And they'll have a conversation with you. And you'll correct it. And you know what? You'll get some money. You don't do that, you'll get nothing.
Over $1 billion of the $5 billion in settlement funds were unclaimed in 2004. That comes from a research report from a Duke University law professor who has a database, who monitors these things. Twenty percent of the settlement funds weren't claimed.
Okay. Institutions submit claims. And less than 30 percent of the time, they are eligible to do so. Now that's U.S. institutions we're talking about. Europeans is far less than that. I mean, generally speaking, when we come to these events and we have conversations with people, they start off not understanding anything we're talking about. What is a class action? What is a contingency fee? We don't do that. Well, we do.
You could be excluded from the class and the class definition so you never get a proof of claim form. That's what I'm saying forward--before. You need a class representative to come forward for each type of security. You've got to get them in there. Or you're not getting anything.
Now I'll even tell you that some of your institutions don't know that they even hold the securities or that they're members of a class. I had an argument with a U.S. hedge funds manager that we were pretty sure that they owned a large chunk of this one company, a special type of security. We called them and--because I knew the president of the fund or the managing director I guess. And he said, "No, we don't. You're wrong."
I said, "I know I'm not wrong. I know you bought it. Maybe you sold it and they don't know about it. But you bought it." He called me back a week later and said, "Never bought it." I said, "You're just wrong. This is just crazy. Go back." About two weeks after that, he called back. He said, "You're right. We own it." He had bought it. Now how does an institution--this is a substantial investment fund--not know that they own the security? The fact is--they didn't know. You have to look.
And that's where you get involved in the monitoring services that we're all offering. All our firms, who are the players in this business--and that's us--offer a monitoring service. You provide us with your transactions or the organizations that we use--one of them is here today--that you provide with those transactions. They'll tell you when you're in a case and help you prepare the proof of claim forms at the end of the day to submit to the claims processor to get your money back.
So you take all of the work out of it because otherwise you're just not going to know. It's impossible for you as organizations to individually look at every transaction that comes across with a case being filed and where the case stands and monitor it to understand whether or not you should be involved in the case.
Now the one thing we all provide in addition to this is advice, free advice. We don't charge you anything unless there's a collection effort at the end of the day. We lay out all the money. We lay out the disbursements in the Williams Companies cases, the $311 million recovery. It was just approved by the court a couple of months ago. We laid out $11 million out of pocket. That's not our time, which of course we charge at luxurious rates. But that's not that. That is talking about expert costs. And there were 18 million pages of documents. So we were paying $70,000 a month for two years for a database system that maintained those documents. We're writing those checks. And if there's a payday, we get reimbursed for those costs, no profits. Whatever the costs were, we get back. We make our profit if there is a profit on our fees. And sometimes there isn't.
There are also small cases out there. You don't know at the time you file a case how big the case is going to be. We settled the EIS securities litigation in Connecticut in December for a little less than $4 million after ten years of litigation. I guarantee you at the time we filed that case that we knew the damages were high. What we didn't know was the problems the company was going to have. And we certainly didn't know the amount of money at the end of the day that they were going to have to be able to pay for class action settlement.
Almost immediately after the filing of the case, the company was kind enough to get sold to a German institution. And then they got sold to another institution. And they did an LBO and split off. And my head is spinning from this case.
So we wind up in these relatively small cases not because of incompetence or inability. You just don't know. And that's what's going to happen to you, too. When you see a case, you've bought a stock. You lost substantial amounts of money, less than $100 million, less than $50 million, maybe less than $5 million. You still may want to get your money back.
The amount of work that's necessary for you to be a lead plaintiff or a class representative is not onerous. There's work to be done. There is discovery to be had. There's a deposition maybe to be taken. But it's not something that you should run and hide from. And you can still get some of your money back by participating in the class action.
I don't know where I am as far as time goes. I forgot to look. But I am certainly happy to take any questions.
MALE VOICE 2: Thank you very much. Do we have any questions from the floor?
MALE VOICE 3: I've got a question. You mentioned in your slides that U.S. institutions submit claims less than 30 percent of the time that they're eligible to do so. And there was some research done. I think it was Institutional Shareholders Services that said up to about 70 percent of European institutions don't claim when they're eligible. Is that a figure that you sort of agree with roughly, about 70 percent?
MALE VOICE 1: You said don't file?
MALE VOICE 3: Seventy don't claim. Is that--[Crosstalk]
MALE VOICE 3: --in the right ballpark? Or is that too high, too low?
MALE VOICE 1: Seventy--
MALE VOICE 3: [Interposing] Seventy percent don't claim when they're eligible.
MALE VOICE 1: I think it's more than that. I think it's far more than 70 percent don't claim because that matches the U.S. institution number. And that's not been our experience. Don't forget in the cases we're in--we're all in a lot of cases--we see who files and who doesn't. And we know who owns from the mailings that we have to do. And it's been my experience that I would guess less than ten percent of European institutions actually--Europeans and European institutions actually file proof of claim forms.
MALE VOICE 3: Okay. You also mentioned that you were in a conference last week that was talking about bringing class action in Europe. How far away is that in terms of reality? You know, is it a year, ten years? And just possibly, I'd be interested in your perspective as to why it has not emerged quicker in Europe.
MALE VOICE 1: I'm reading tea leaves here to give you an answer. But I'll give you my considered opinion. There will be some action, some legislation passed someplace within the next couple of years. I believe it'll be opt-in class actions with loser pays and no contingency fees. So in other words, you won't have a class action law. It won't be viable.
I think a more effective class-action mechanism will require additional Parmalots, Vivendis, Vandermullends [phoentic], and other disasters along the lines of our Enrons, our Adelphias, our Global Crossings, and Worldcoms. Until that happens--if that doesn't happen as quickly, I think my bones will turn to dust before you have an effective class action mechanism. That's just from speaking to people.