The current edition of Pat McGurn's "This Week in Governance" interview series features a Q&A session with yours truly that covers topics including the new Settlement Pipeline, settlement claims filing, and governance reforms in securities litigation. An audio link to this 9-minute interview is available here.

As far as I know, not a single company has announced today that the securities class action filed against is "without merit" and that the company intends to "vigorously" defend itself. But GBC Acquisition Corp. said just that yesterday. And Ligand Pharmaceuticals said it the day before. And of course Biolase Technology said the exact same thing on Monday. And so on, and so on.

My point here (and I do have one) has nothing to do with the substance of any of those cases, but rather with the apparently unanimous use of the word "vigorous" for these "denial" press release by defendants. Is there no other word that can be used for this purpose? I will concede that the thesaurus is of little use here, offering the following unusable synonyms for "vigorous":

active, athletic, bouncing, brisk, dashing, driving, dynamic, effective, efficient, enterprising, exuberant, flourishing, forceful, forcible, hale, hard-driving, hardy, healthy, hearty, intense, lively, lusty, masterful, mettlesome, peppy, persuasive, potent, powerful, red-blooded, robust, rugged, snappy, sound, spanking, spirited, steamroller, strapping, strenuous, strong, sturdy, take-charge, take-over, tough, virile, vital, zealous, zippy

None of these really seem to work. "Zippy"? Too silly. "Athletic"? Hardly. "Masterful"? Too boastful. "Steamroller"? Um, no. "Strong" is not bad but it's more boring than "vigorous" and probably would not be used.

So I ask: is there some other word that can be used for this purpose, if only to mix things up once in a while? Or are we stuck with "vigorous" from here on out?

The June 2004 edition of Weil Gotshal, & Manges' excellent Business & Securities Litigator newsletter contains an interesting article entitled, "Institutional Investors As Lead Plaintiffs: Does The PSLRA's Prohibition Against Professional Plaintiffs Apply?" The article explains that the PSLRA contains a presumption that a litigant should be prohibited from serving as lead plaintiff in a federal securities class action more than five times in three years. Although court decisions have gone both ways on this issue, the article notes that

most recently, the United States District Court for the District of Minnesota, in Meeuwenberg v. Best Buy Co., overrode the presumption against professional plaintiffs and appointed an institutional investor, Louisiana School Employees' Retirement System ("LSERS"), lead plaintiff in a federal securities class action. Noting that the "majority of courts have held institutional investors exempt from the statutory professional plaintiff restriction," the Meeuwenberg Court found "it appropriate to appoint the LSERS Group, the Movant with the greatest financial interest and no evident inability to vigorously pursue th[e] litigation, as lead plaintiff in the consolidated action."

A copy of the Meeuwenberg case is available here.

Jonathan Dickey of Gibson Dunn & Crutcher has produced an excellent document entitled "Current Trends in Securities Litigation," which was prepared for the 31st Annual Advanced ALI-ABA Postgraduate Course in Federal Securities Law.

ISS's Friday Report from last week included this article discussing the Settlement Pipeline. By the way, the Settlement Pipeline has grown to $6.08 billion as of this morning.

The following article appeared in the August 2004 edition of ISS's SCAS Alert:

The Elusive Law of Insider Trading
By Bruce Carton, Executive Director

The Martha Stewart case has propelled insider trading back into the news, demonstrating once again the need to sharpen the current laws prohibiting such trading.

Few would disagree with the proposition that trading on nonpublic information is unethical and harmful to shareholders who do not benefit from the same inside information, and that it undermines public faith in the markets. Although we may feel that we will know insider trading when we see it, case after case shows that this simply is not so. Indeed, after reviewing the exact same set of facts, federal prosecutors elected not to charge Ms. Stewart with the crime of insider trading while the Securities and Exchange Commission (SEC) came to the opposite conclusion and filed a civil lawsuit against her alleging insider trading.

The root of the problem with the "insider trading laws" is that there really aren't any. The offense of insider trading stems from Section 10(b) of the Securities Exchange Act of 1934, a vague statute that prohibits the employment of "any manipulative or deceptive device" in connection with the purchase or sale of securities. Although insider trading is sometimes loosely defined as any trading based on "material, nonpublic information," the legal definition flowing from case law is much more complicated and relies heavily on concepts such as fiduciary duty and the "familial duty of trust and confidence."

For instance, in the 1980s, football coach Barry Switzer attracted the attention of the SEC when, after overhearing a corporate executive discuss the imminent "liquidation" of a public company merger, he profitably traded on that information in advance of the liquidation. The SEC brought an enforcement action against Switzer alleging insider trading.

Although Switzer's conduct would seem to meet any commonsense definition of insider trading, he nonetheless defeated the SEC's case against him. The court ruled that the necessary "duty" had not been breached--because the corporate executive was unaware that Switzer had overheard his discussion of the liquidation, the executive had not breached his fiduciary duty to the company. Accordingly, because Switzer's potential liability as a "tippee" under Section 10(b) would have been derivative of his "tipper's" liability, the court's finding that the executive did not breach his fiduciary duty meant that Switzer's trading based on nonpublic information was actually legal.

A case brought by the SEC last month, SEC v. Galluci, also is illustrative of the vagaries of the insider trading laws. In that case, the SEC alleged as follows: A secretary for a prominent corporate lawyer told her husband about confidential, pending mergers and acquisitions on which her boss was working. Husband shared information about imminent mergers with Friend A, and Friend A then shared this information with his own Friend B. Friend A initially did not tell Friend B the source of his information. Later, Friend A told Friend B only that "he had a good friend who worked for an attorney that did mergers and acquisitions."

Can Friend B, presented with this information from Friend A, trade based on this information? The safe answer in terms of both potential liability and ethics, of course, is to refrain from trading. As a purely legal matter, however, is it even possible for Friend B to determine whether trading is against the law in this situation? To answer this question, Friend B would first need to be aware that under applicable case law, his trading would be illegal if (a) the "tipper" breached his duty of confidentiality, and (b) Friend B was aware of that breach.

Even assuming this level of knowledge, however, the answer is still out of the grasp of mere mortals: who is the "tipper" at issue in this situation (Secretary? Husband? Friend A?) and what duty is in question (Secretary's duty to law firm? Husband's duty to Secretary, his wife? Friend A to someone else?)? Does it matter that neither Secretary nor Husband ever traded at all? Does the answer vary given that Friend B initially did not know the source of the information about imminent mergers (when he made some of his trades) but later did possess sketchy information about Friend A's "good friend who worked for an attorney..." (when he made several other trades)?

Notably, as in the Martha Stewart case, the entities responsible for enforcing the securities laws appear to have again come to opposite conclusions: the SEC concluded that Friend B engaged in insider trading (and sued Husband, Friend A and Friend B) while federal prosecutors reportedly brought criminal insider trading charges only against Husband and Friend A.

It can be argued that the continued vagueness of the insider trading laws serves the useful purpose of deterring all trading based on nonpublic information, whether it is technically "legal" or not. While vague laws may have that desired effect, a fairer and more direct use of the law to achieve society's goals in this area would be for Congress to identify what is legal insider trading and what is not, and to articulate the distinction in a coherent statute.

Yesterday, ISS's Securities Class Action Services announced its new "Settlement Pipeline," which calculates the total dollar amount in securities class action settlements that is now, or will soon be, available for investors to file claims on to recover investment losses. The Settlement Pipeline, initially announced at $5.55 billion, has already grown to $5.96 billion with the recent announcement of settlements in cases such as Bristol-Myers Squibb ($300 million) and FirstEnergy ($89.9 million).

The L.A. Times reports in this article that for the first time in several years, the number of SEC enforcement actions looks as if it will decline year-over-year. According to the article, in the nine months ended June 30, the SEC brought 378 enforcement actions against companies and individuals. In the same period last year, the SEC brought 443 enforcement actions.

At its current pace, the SEC will log 504 actions for its 2004 fiscal year ending Sept. 30. This would fall well below the 679 enforcement actions in fiscal 2003 and the 598 in fiscal 2002, and barely exceed the 484 brought in 2001.

It is unclear what, if anything, is causing the lower numbers. SEC Chairman William H. Donaldson reportedly called the decline "encouraging" in that it could indicate that the SEC's efforts are having a deterrent effect, but was "quick to add that it was too early for the SEC to declare victory in the war on corporate corruption."

Another explanation could be a change in policy by the SEC's Enforcement's Division. In February 2004, Stephen M. Cutler, Director of the Division of Enforcement, noted in his remarks to the D.C. Bar Association that "cultural changes" encouraging more risk-taking in opening new cases were underway within the enforcement program that might well result in it bringing "fewer but more important cases each year."

The settlement notice in the massive settlement by the Citigroup Defendants in the WorldCom class action is now available. A copy is available here. The highlights:

--As previously announced, the Settlement Fund is $2.65 billion

--The average recovery per share is estimated at 48 cents, and the average recovery per $1,000 face amount of bonds issued in May 2000 and May 2001 is $95.26

--Lead counsel will be seeking fees not to exceed $144.5 million (5.45% of the Settlement Fund), plus $16 million in expenses

--A settlement hearing has been set for November 5, 2004

--The entire settlement amount (after deduction of Court-approved costs, expenses and attorneys' fees),
plus interest, will be distributed to Class Members who submit timely, valid Proofs of Claim. There will not be any reversion to the Citigroup Defendants of any portion of the settlement amount.

--The notice states that "based on Lead Counsel's experience and survey of claims administrators, it is reasonable to assume that 25-30% of potential claimants will not file claims for a distribution from the Settlement Fund...." If so, this will increase the recovery for Class Members who do file claims.

--Proof of Claim forms must be submitted by March 4, 2005