lessons from the first year: the emerging impact of sarbanes-oxley plus 2003 16th annual...
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Lessons from the First Year:The Emerging Impact of Sarbanes-Oxley
PLUS 200316th Annual International Conference
Lisa Klein WagerMorgan, Lewis & Bockius LLP
Stephen RadinWeil, Gotshal & Manges
John F. McCarrickDuane Morris , LLP
Vinita M. Juneja, Ph.D.National Economic Research Associates
Robert WallnerMilberg Weiss BershadHynes & Lerach LLP
2
Topics
Overview of Relevant Sarbanes-Oxley Provisions Impact on Class Action Litigation Impact on Derivative Litigation Strategic and D&O Coverage Implications
3
Overview of the New World Under Sarbanes-Oxley
Signed into law on July 30, 2002 Response to rapidly spreading Enronitis Virus
– and the Sergeant Shultz defense Designed to restore investor confidence by:
– improving corporate disclosures– increasing personal accountability of officers – expanding the role of the audit committee/outside directors– improving independence and reliability of outside auditors– addressing analyst conflict of interest concerns
Broad ranging set of reforms– some immediately effective– some mandating SEC rule-making
Only one piece of a sea change
4
Key Provisions Impacting Litigation
More detailed MD&A Principal officer certifications
– of disclosure controls and procedures– of fair presentation
Code of ethics disclosures
5
Key Provisions Impacting Litigation
Current event disclosures– enhanced and expedited 8-K filing– expedited disclosures of discretionary insider sales
Pro forma financials
6
Key Provisions Impacting Litigation
Greater Audit Committee Responsibilities Prohibition on personal loans to D&O’s
– implication for advancement of defense costs Principal officers must disgorge profits/bonuses during
periods subsequently restated Expanded statute of limitations
– lesser of 2 years from discovery/5 years from event
7
Key Provisions Impacting Litigation
Whistleblower protections
Attorney conduct rules
8
Key Provisions Impacting Litigation
New/Enhanced Criminal Offenses
– Destruction of documents
– Fraudulently Misleading an Auditor
• note warning for lawyers, non-audit accounting firm personnel, and
bankers in Final Rule Release
Additional Increased Penalties Under ERISA
– separate program this afternoon
New Private Right of Action for Retaliation by Whistleblowers
– mock mediation this afternoon
9
Impact on Federal Litigation
Are more cases being filed?
PLUS 200316th Annual International Conference
November 10, 2003
Lessons From the First Year:The Emerging Impact of Sarbanes-Oxley
Vinita M. Juneja, Ph.D.Senior Vice President
Heard on the Street
Filings are on the rise?
Huge settlements are the norm?
Settlements are bigger than they used to be?
Heard on the Street
Filings are on the rise?
Huge settlements are the norm?
Settlements are bigger than they used to be?
Federal filings seem to be on the rise,
* Through late June, 2003
1991 1992 1993 1994 1995 1996 20001997 19991998
164
202
163
233
191
127
193
268
241223
2001
503
2002
280
0
50
100
150
200
250
300
350
400
450
500
129
252
2003*
123
Federal Filings by Year
123
129
252
1991 1992 1993 1994 1995 1996 2000 2001 20021997 19991998
164
202
163
233
127
193
268
241223
503
280
2003*0
50
100
150
200
250
300
350
400
450
500
Federal Filings by Year
…but, that includes laddering and analyst cases
* Through late June, 2003
40
240
Analyst Cases Laddering CasesStandard Filings
191
110
13
303
1955
Filings Vary by Circuit
2002 Filings by Circuit
1st 2nd 3rd 4th 5th 6th 10th 11th0
10
20
30
40
50
60
70
80
90
100
7th 9th8th
12
88
25
7
19 1621
16
47
4
22
What Is Your Likelihood ofBeing Sued?
Annual Probability of Facing aSecurities Class Action Lawsuit
20021998-20011995
1.6%
1.9%
2.3%40% Increase
0.5%
1.0%
1.5%
2.0%
2.5%
0.0%
Disposition
Dismissal 19%
Lawsuit Filed
Dismissals Have Slowed PostSarbanes-Oxley
Two Year Dismissal Rate
Year Filed
0%
5%
10%
15%
20%
1996 19981997 1999 2000
Dismissal Rates Vary by Circuit
1st 2nd 3rd 4th 5th 6th 10th 11th7th 9th8th
Two Year Dismissal Rate
0%
10%
15%
20%
25%
30%
5%
11%
7%
20
Impact on Federal Litigation
Are more outside directors being sued?
21
Impact on Federal Litigation
What has been the impact of the expanded statute of
limitations?
– Are time-barred claims revived?
22
Expanded Statute of Limitations
[A] private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws, as defined in section 3(a)(47) of the [Exchange Act], may be brought not later than the earlier of (1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation.
23
Retroactivity
The limitations period…shall apply to all proceedings addressed by this section that are commenced on or after the date of enactment of the Act.
24
Impact on Federal Litigation
What has been the impact of the expanded statute of
limitations?
– Is the statute of limitations changed for section 11 claims?
25
Expanded Statute of Limitations
[A] private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws, as defined in section 3(a)(47) of the [Exchange Act], may be brought not later than the earlier of (1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation.
26
Impact on Federal Litigation
Will litigation be more protracted?
– What has been the impact of the Principal Officer Certifications?
– What has been the impact of the new MD&A requirements?
• Creation of a duty?
– What has been the impact of the real time disclosure requirements?
– Has there been more record-keeping and note taking?
• To what end?
Continuing complications of PSLRA lead plaintiff procedures
27
Impact on Federal Litigation
Is settlement more expensive?
Disposition
Dismissal 19%
Settlement 80%
Lawsuit Filed
Judgment 1%
Heard on the Street
Filings are on the rise?
Huge settlements are the norm?
Settlements are bigger than they used to be?
Huge Settlements Are Rare
Percent of settlements over $100 Million
After Enron
4.4%
1996-Enron (October 2001)
3.4%
Most Settlements in Jan – Late June 2003 Were Under $25 Million
Nu
mb
er o
f C
laim
s
0
5
10
15
20
25
< $ 2 $2 -$5 $5-$10 > $100$10-$25 $25-$50 $50-$75 $75-$100
17
4 42 2
2021
12
Settlement Amount in Millions
Heard on the Street
Filings are on the rise?
Huge settlements are the norm?
Settlements are bigger than they used to be?
Average SettlementsHave Been Rising
Since Enron the average settlement has been $24.6 mm.
* 2000 Average Settlement Excludes Cendant
1996 1997 1998 1999 2000* 2001 2002$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
2003
Ave
rag
e S
ettl
emen
t ($
Mill
ion
s)
Investor LossesHave Also Been Rising
1996 1997 1998 1999 2000 2001 2002$0
$150
$300
$450
$600
$750
$900
$1,050
$1,200
$1,350
2003
Ave
rag
e In
vest
or
Lo
ss (
Mill
ion
s)
But Investor Losses Have Been Rising Even More Rapidly
Ave
rag
e S
ettl
emen
t ($
Mill
ion
s)
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
1996 1997 1998 1999 2000 2001 2002 2003
Ave
rag
e In
vest
or
Lo
ss (
Mill
ion
s)
$0
$150
$300
$450
$600
$750
$900
$1,050
$1,200
$1,350
* 2000 Average Settlement Excludes Cendant
There Is Good News for Companies
Expected Settlement for a Case with Investor Losses of $600 M
$0
$4
$8
$12
$16
$2
$6
$10
$14
1998
Expected Settlement
$2002
Expected Settlement
$
What DeterminesSettlement Values?
Investor Losses
Types of Plaintiffs Included– Debt holders => 70%+– Preferred shareholders => 60%+– Option holders => 30%+– Institutional lead plaintiff => almost 20%
What DeterminesSettlement Values?
Investor Losses
Types of Plaintiffs Included
Types of Allegations– Accounting fraud => 10%+– Admitted accounting irregularities => 20%+– Restatements => almost 30%– Accounting codefendants => 40%+– Section 11 claim => almost 30%
What DeterminesSettlement Values?
Investor Losses
Types of Plaintiffs Included
Types of Allegations
Market Capitalization of Firm
Whether the Issuer Is Bankrupt
When the Case Settles
Cases Are Taking Longer
Percentage of Filings Disposed Within 5 Years
0%
20%
40%
60%
80%
100%
1991–1995 1996–2002
One Impact of SOX on Directors’ & Officers’ 10b-5 Liabilities…
Statute of limitations on securities fraud: Two years after
discovery; Five years after
violation
DefensesLiability RisksProvision
Extends class period and increases damage volume
Effect on damage volume will be relatively small
Settlements and the Expanded Statute of Limitations in Sarbanes-Oxley
The average settlement would have increased by 9%. The median settlement would have increased by 6%. The range of settlement increase was from 0% to 33%.
Sample: 15 post-PSLRA cases in which the 3-year statute of limitations may have constrained the class period
Analysis: Compute expected settlement with the actual class period and a hypothetical 5-year class period
Results:
43
Anticipated Impact of SOA on Federal Class Action Litigation
Still to come– interpretation of terms– availability of private right of action where not explicit– will certifications of disclosure controls facilitate particularized
scienter pleading?– Will certification of content coupled with expanded MD&A facilitate
omission pleading?– Will discovery be complicated by an increase in note-taking/record-
keeping?– Will the new criminal penalties for attempting audit
influence/document destruction raise settlement pressure and costs?
44
Anticipated Impact of SOA on Federal Class Action Litigation
Is there an increase in requests for individual separate counsel or for separate counsel for D&O’s and issuer – implications of attorney conduct rules for “issuer’s” counsel – SEC emphasis on full cooperation
45
Impact on Derivative Litigation
Are we seeing more? – New rules versus new/evolving expectations– Warnings from Delaware judges in articles and speeches– Recent Delaware Supreme Court cases– Use of the Act and Exchange Listing Rules– Due Care versus Good Faith– Disney– Oversight “Caremark” claims– Section 220 Books and Records Actions
Settle for More Than $0
31%
Dismissed 28%
Non-cash settlement
39%
Trial Plaintiffs Win
0.6%
Trial Defense Wins
0.4%
Disposition of Derivative Suits
Millions of Dollars
1
12.5
25
50
100
200
400
0 4 8 12 16 20 24 28 32 36 40 44 48
Pay-Outs of Derivative Suits1977 to the Present
Millions of Dollars
1
12.5
25
50
100
200
400
0 4 8 12 16 20 24 28 32 36 40 44 48
Median $0
Pay-Outs of Derivative Suits1977 to the Present
Millions of Dollars
1
12.5
25
50
100
200
400
0 4 8 12 16 20 24 28 32 36 40 44 48
Pay-Outs of Derivative Suits1977 to the Present
Mean $3 Mean $3 MillionMillion
50
Strategic and D&O Coverage Implications
D&O underwriting environment Litigation defense strategies Settlement strategies
Where to Learn More About NERA
For more information on NERA’s Securities Practice, please contact:
Vinita M. JunejaSenior Vice President
New York, NY212.345.3148
For more information on NERA’s services and capabilities, please visit our global website:
www.nera.com
Lessons from the First Year:The Emerging Impact of Sarbanes-Oxley
PLUS 200316th Annual International Conference
© Lisa Klein Wager
[email protected](o) 212-309-6113(c) 917-881-8426