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5 Changes To Improve Securities Litigation Defense
Law360, New York (May 9, 2016, 11:12 AM ET) -I am committed to helping shape a system for securities litigation defense that
helps directors and officers get through securities litigation safely and efficiently,
without losing their serenity or dignity, or facing any real risk of paying any
personal funds.
But we are actually moving in the opposite direction of this goal, and unless some
changes are made, securities litigation will pose greater and greater risk to
individual directors and officers. It is time for the “repeat players” in securities
litigation defense — directors and officers insurers and brokers, defense lawyers
Douglas W. Greene
and economists — to make some fundamental changes to how we do things.
Although most cases still seem to turn out fine for the individual defendants,
resolved by a dismissal or a settlement that is fully funded by D&O insurance, the bigger picture is not pretty.
The law firms that have defended the lion’s share of cases since securities class actions gained footing through
Basic v. Levinson — primarily “BigLaw” firms based in the country’s several largest cities — are no longer
suitable for many, or even most, securities class actions. Fueled by high billing rates and profit-focused staffing,
those firms’ skyrocketing defense costs threaten to exhaust most or all of the D&O insurance towers in cases
that are not dismissed on a motion to dismiss. Rarely can such firms defend cases vigorously through summary
judgment and toward trial anymore.
Worse, these high prices too often do not yield strategic benefits. A strong motion to dismiss focuses on the
truth of what the defendants said, with support from the context of the statements, as directed by the U.S.
Supreme Court in Tellabs and Omnicare. Yet far too often, the motion-to-dismiss briefs that come out of these
large firms are little more than cookie-cutter arguments based on the structure of the Reform Act. And if a
motion is lost, settlements are higher than necessary because the defendants often have no option but to settle
in order to avoid an avalanche of defense costs that would exhaust their D&O insurance limits. On the other
hand, if settlement occurs later, it can be difficult to keep the settlement within D&O insurance limits — and
defense counsel’s analysis of a “reasonable” settlement can be influenced by a desire to justify the amount they
have billed.
At the same time that defense costs are continuing to rise exponentially, securities class actions are becoming
smaller and smaller, with two-thirds of cases brought against companies with market caps less than $2 billion,
and almost half under $750 million.
Although catawampus securities litigation economics is a systemic problem, impacting cases of all sizes, the
problem is especially acute in the smallest half of cases. Some of those cases simply cannot be defended both
well and economically by typical defense firms. Either defense costs become ridiculously large for the size of the
case and the amount of the D&O insurance limits, or firms try to reduce costs by cutting corners on staffing and
projects — or both. We see large law firms routinely chase smaller and smaller cases. From a market
perspective, it makes no sense at all.
So how do we achieve a better securities litigation system? Five changes would have a profound impact:
1. Require an interview process for the selection of defense counsel — to allow the defendants to understand
their options, to evaluate conflicts of interest and the advantages and disadvantages of using their corporate
firm to defend the litigation, and to achieve cost concessions that only a competitive interview process can yield.
2. Move damages expert reports and discovery ahead of fact discovery — to allow the defendants and their
D&O insurers to understand the real economics of cases that survive a motion to dismiss, and to make more
informed litigation and settlement decisions.
3. Increase the involvement of D&O insurers in defense counsel selection and in other strategic defense
decisions — to put those who have the greatest overall experience and economic stake in securities class action
defense in a position to provide meaningful input.
4. Increase the involvement of boards of directors in decisions concerning D&O insurance and the defense of
securities litigation, including counsel selection, to ensure their personal protection and good oversight of the
defense of the company and themselves.
5. Make the U.S. Supreme Court’s Omnicare decision a primary tool in the defense of securities class actions.
Obviously, Omnicare should be used to defend against challenges to all forms of opinions, including statements
regarded as “puffery” and forward-looking statements protected by the Reform Act’s safe harbor for forwardlooking statements. But defense counsel should also take advantage of the Supreme Court’s direction in
Omnicare that courts evaluate challenged statements in their full factual context. Omnicare supplements the
court’s previous direction in Tellabs that courts evaluate scienter by considering not just the complaint’s
allegations, but also documents incorporated by reference and documents subject to judicial notice. Together,
Omnicare and Tellabs allow defense counsel to defend their clients’ honesty with a robust factual record at the
motion to dismiss stage.
These five changes are among the top wishes I have to improve securities litigation defense, and to preserve the
protections of directors and officers who face securities litigation.
—By Douglas W. Greene, Lane Powell PC
Doug Greene is a shareholder in Lane Powell’s Seattle office and chairman of the firm’s securities litigation
practice.
A version of this article first appeared on Lane Powell's blog, D&O Discourse.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients,
or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes
and is not intended to be and should not be taken as legal advice.
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