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A. BACKGROUND

The Private Securities Litigation Reform Act (PSLRA) was adopted on December 19, 1995 over the veto of then President Clinton. The class action provisions are incorporated into the Securities Act as Section 27 and into the Exchange Act as Section 21D. The safe harbor provisions are incorporated into the Securities Act as Section 27A and into the Exchange Act as Section 21E. The Act is directed at entrepreneurial class action lawyers and the race to the courthouse to file what Congress viewed as largely frivolous securities fraud class actions. The race continues under different rules, the players remain much the same, there were 949 companies named as defendants in securities fraud class actions in the five years preceding the adoption of the Act and 949 companies named as defendants in the five years immediately following the adoption of the Act. In the sixth year (2001) following adoption of the Act, 487 companies were named as defendants or twice the number filed in any year prior to or after the adoption of the Act. We will discover that the number of cases filed in 2001 may be an aberration, involving the allocation of IPOs during a specific period of time. During the seventh year (2002) there were 245 cases filed through December 9, 2002 exceeding modestly the record (disregarding 2001) 233 cases filed in 1998. Stanford Clearinghouse (hereinafter, sometimes “Stanford”) keeps the scorecard and is a source of invaluable information about securities fraud class actions. You should visit it and roam at your leisure (http://securities.stanford.edu). We have attached the home page of Stanford at December 9 (HERE) showing the number of class actions (measured by the number of companies sued) for each year commencing with 1991 through December 9.

A principal objective is to assure that the plaintiff is a real party in interest who will at a minimum be actively involved in the direction of the litigation. The aim is to eliminate or at least mitigate lawyer driven litigation. In Chapter 2 and Hypothetical 2 we explore the means by which the PSLRA attempts to accomplish that objective. In the process, we will focus on the race to be named lead plaintiff and lead counsel in the Enron litigation and the surprising (to some) results.  The SEC and the Department of Justice filed the initial Enron coordinated civil and criminal actions on August 21, 2002, over ten months after Enron made its initial disclosures of the need to restate its financial statements. See See Litig. Release No. 17,692 (Aug. 21, 2002), available at <http://www.sec.gov/litigation/litreleases/lr17592.htm> Milberg Weiss had filed its  first complaint on October 22, 2001, within 7 days of the first Enron bad news press release, and according to the consolidation order in that case a complaint filed by other counsel had been filed a few hours earlier on the same date. See Newby v. Enron Corp. (S.D.Tex. CA No. H-01-3624, Dec. 12, 2001), available on the Milberg Weiss website at <http://www.enronfraud.com/pdf/consol_order.pdf>.

                                                                     The Enron blues--Laid-off employees

What triggered the filing of the private actions in Enron is apparent, but what triggers the 200 plus actions class action lawyers have been filing year in and year out? That number incidentally is based on number of companies named; each such action typically involves the filing of several actions by different plaintiffs and counsel that eventually get consolidated as we shall see. To explore what triggers the filing of class actions let us take a look at the new cases listed on the home page of Milberg Weiss on December 12, 2002, a date chosen by random. There were 7 cases listed as having been filed between November 14, 2002 and December 12.  Click HERE, but first note the following directions: Use the bookmarks to select the specific cases. Click on the first bookmark for SmartForce in which Milberg Weiss gives you the opportunity to serve as lead plaintiff. This is included for each of the new cases, but we have deleted it for the six other cases. The second bookmark for Smartforce is the Press Release announcing the filing of the case as are the next several bookmarks for the six other cases and it is on the Press Release for each case that we focus. The press releases substantially duplicate the notice of filing required by the PSLRA. In this regard, compare the press release for Smartforce with the Notice of Filing that Milberg Weiss filed on the Business Wire. Click HERE.

With respect to each of the 7 cases note the following:

1. How many days elapsed from the last day of the class period to the filing of the action.
2. What was the apparent triggering event, if any, for filing the action.
3. Under what section(s) of the Securities Acts are the claims being asserted.
4. Who are named as defendants—company?CEO?CFO?Board?Underwriters?Accountants?Others? You may have to look at the complaints, if available,  to determine the specifics.

Restatements of financial statements is not a new phenomenon, but has become remarkably routine. This is good news for the class action lawyers as restatements are grist for the class action mill. The Wall Street Journal, which is now keeping a running tab on restatements, included in its tabulation  80 companies that had announced restatements or an intention to restate financial statements between October 1, 2002 and December 12, 2002. Click HERE.

Class action lawyers cannot file a class action, of course, without an appropriate plaintiff. A class action under the PSLRA is not different in this respect from any other class actions – law firms do not file an action in their own name. Before adoption of the PSLRA, some suspected that class action lawyers had potential plaintiffs in their pocket and the Act includes a few provisions directed at professional plaintiffs. See § 2.05[2]. The plaintiff obviously has to fit the action; typically have purchased the security during the class period. It might be a bit difficult to have in your pocket such a shareholder for every company that makes a bad news announcement that triggers the filing of the action. Nor is it necessary as this is the day of the Internet. Private investors stay tuned to Wall Street Journal online, Business Wire, CBS Marketwatch, MSN.com, etc. etc. – it is almost impossible for them to avoid hearing the bad news if it pertains to their portfolio. The bigger they are, the harder they fall as we shall see in the case of Enron and WorldCom. Class action lawyers all have Home Pages on the Internet. We went to some as part of Hypothetical 1 and can go there again. The one thing that is apparent is that class action firms have no problem in finding that initial plaintiff. If you doubt it, you can go BusinessWire, do a search (Search News) for today and the last six days using [class action] as your search term, use show summaries and go to some of the notices and observe how close the date of the Notice of the filing of is to the last day of the class period, which is more often than not is the day of the bad news announcement. To be fair, there are situations in which several months elapse from the end of the class period to the filing of the first complaint, but that situation is atypical. So finding an initial plaintiff to bring the action is not that difficult for many firms and the fact the plaintiff has only a limited number of shares is likely to be a temporary problem.

When that initial plaintiff comes into the Internet door, the class action lawyer, of course, needs to get the parties informed consent to act as plaintiff, enter into an agreement under which the shareholder retains the firm and set forth the fee arrangement; presumably, a contingent one under which counsel advances costs. There are some general ethical considerations that do or should come into play, but they are beyond our immediate scope. The one thing the Class Action attorney cannot do without is certain basic information concerning the plaintiff’s transaction in the security in the form of a certification. See § 2.05[2]. We go back to our Milberg Weiss new cases and walk through one avenue for obtaining prospective plaintiffs. When you do use the Bookmark to go to SmartForce Notice of Opportunity. Then click on Participate in Action, which opens to the Certification, and when there click on  Retention Agreement where the prospective plaintiff retains Milberg Weiss. Click HERE to start. To finish, take a look at the separate effort on the Milberg Weiss home page to attract institutional investors as potential plaintiffs.

The proponents of the PSLRA referred to securities fraud class action lawyers as entrepreneurial lawyers. "Bandits," "pirates," "ambulance chasers," "extortion artists," "greedy, avaricious lawyers" were among some of the epithets directed at class action lawyers during the Senate and House debates. The term entrepreneurial lawyers was used with disdain; notwithstanding, that as a society we admire entrepreneurs. Click HERE for excerpts from the Senate debate. We have and may continue to use the term to identify securities fraud class action lawyers, but do not intend it in a derogatory sense. Today all successful law firms to some extent are entrepreneurs, with business plans, marketing personnel and a home page on the Internet. The law firm specializing in the defense of securities fraud class actions is no less an entrepreneur than its plaintiff counterpart. If you doubt this, visit their home page on the Internet.

The Introduction of the Conference Committee Report notes the objective of the PSLRA is "to protect investors, issuers, and all who are associated with our capital markets from abusive securities litigation. This legislation implements procedural protections to discourage frivolous litigation." The Introduction stresses that the procedure established by the Act for selection of lead plaintiff/lead counsel is central to this objective, stating: "It protects investors who join class actions against lawyer-driven lawsuits by giving control of the litigation to lead plaintiffs with substantial holdings of the securities of the issuer."

The Conference Committee Report describes the procedures the PSLRA puts in place with a view to ending the race to the court house as a process for determining the "most adequate plaintiff." The Committee Report sets forth the problem as seen by Congress and seeks as part of the solution "to increase the likelihood that institutional investors will serve as lead plaintiffs." The Committees description of that process is also a step by step guide to what the Act requires. See ATTACHED;

The Class Action lawyer as we shall see doesn’t have to file a complaint to compete if the firm has a willing plaintiff in hand, but likely will do so. If the action is against a company in which there has been significant trading in its stock at least at the Nasdaq National Market level, several other class action lawyers will file complaints on behalf of other named plaintiffs. The first to file is required under the PSLRA to file a notice of the action, but in all likelihood every firm that files a complaint will file a notice; probably, on BusinessWire. See § 2.04.

The Notice under the PSLRA must advise the world in general and putative members of the class that they may file a motion to be named lead plaintiff and that such motion must be filed by a specified date (60 days from the date of the first notice). Prospective plaintiffs could by-pass the filing of a complaint and through counsel enter the fray by moving to be named lead plaintiff. This happens, but not often. See § 2.05[2].

The  notice of the filing of the action often includes links to the firms Home Page where others are invited to join the action as plaintiff. Sometime before the expiration of the 60 day period the Class Action firm on behalf of its aggregated plaintiff or, perhaps, a selected plaintiff with the best pedigree for the job under the PSLRA will file a motion on behalf of the client(s) to be named lead plaintiff. In some instances, several of the class action firms will combine forces and join in seeking to have their plaintiff(s) named lead plaintiff. The Act provides a presumption that the applicant who has the largest financial interest in the relief sought is the most adequate plaintiff (presumed to be an institutional investor); hence, the objective is to have such a plaintiff(s) in hand by the time firm is ready to file a motion to be named lead plaintiff. The competition to be named lead plaintiff has been keen and somewhat different from what was envisioned. See § 2.05[4].

The final act of the drama from the perspective of the class action firm is the naming of lead counsel. Lead plaintiff names lead counsel, subject to the approval of the court. See § 2.09. Several judges have seen it otherwise, insisting on competitive bidding, requiring lead counsel selected by the lead plaintiff to meet the best qualified bid in order to be approved. We will in due course take a close look at the selection of lead counsel as well and the extent to which courts may appropriately require that counsel be selected by option.

To summarize – Chapter 2 and Hypothetical 2 covers the following: