When the Private Securities Litigation Reform Act was enacted more than three years ago, some commentators predicted a substantial decline in shareholder class action litigation. Unfortunately, the passage of time has proved them wrong.
A recent study by PricewaterhouseCoopers found that, during 1998, the number of securities litigation cases filed in federal courts increased for the third straight year to 239 in 1998, up from 154 in 1997 and 102 in 1996. For those who hoped that the Reform Act would reduce the number of filings, the verdict is in, and it is negative.
Still, it is too soon to pass judgment on the overall efficacy of the act. While there are a number of district court decisions construing the law, the volume of appellate decisions is minuscule. We will discuss significant tactical battles over the past year and attempt to project the battles to come. In the spirit of the Reform Act, we should note that actual results may differ materially from our projections.
The Reform Act's stated purpose is to "discourage frivolous litigation." Toward that end, Congress implemented substantive and procedural changes designed to make it more difficult for plaintiffs to pursue cases based upon nothing more than a stock drop. Chief among these reforms are a "heightened" pleading standard; a discovery stay during the pendency of a motion to dismiss; and "safe harbor" for forward-looking corporate statements. Although the plaintiff and defense bars have wrangled over the proper application and scope of these provisions, both agree that Congress raised the bar for pleading garden-variety Sec. 10(b) claims in federal court.
The months that followed the Reform Act's passage brought an unanticipated change to the securities litigation landscape. In an effort to avoid the federal reforms, plaintiffs lawyers began filing securities class actions in state courts, where the new federal law did not expressly apply. A Stanford University study reported that the percentage of securities class actions filed in state court doubled in the 10 months following the Reform Act's passage. Many of these state court actions were filed in tandem with a federal lawsuit.
DIAMOND AND STORMEDIA
The shift of class actions from federal to state venues has transformed California's courts into a major battleground. Although California's Corporate Securities Law has been on the books since 1968, there was scant discussion of its application in the class action context before the Private Securities Litigation Reform Act was passed. Because federal law was well developed and provided little barrier to certification of nationwide classes, plaintiffs' lawyers previously were content to file the bulk of their securities class actions in federal court.
In fact, the California Supreme Court had considered Corporations Code secs. 25400 and 25500 -- the principal anti-manipulation provisions of the Corporate Securities Law -- in only one case before this year. In the 1993 matter of Mirkin v. Wasserman, 5 Cal.4th 1082, the Supreme Court observed in dicta that proof of actual reliance on a false representation or omission -- although an element of a common law fraud claim -- was not required under Sec. 25400. The first significant dispute to erupt in the post-Reform Act era was the extent to which a nationwide class action could be maintained under Sec. 25400 and 25500. Defendants argued that the civil liability provisions of California's Corporate Securities Law were intended to provide a remedy only to persons who bought or sold securities in California. Plaintiffs argued that the statute's scope was significantly broader, reaching any defendant who engaged in manipulative conduct in California without regard to where a plaintiff acquired or disposed of a security.
Reflecting the importance of this question, the California Supreme Court granted review after the court of appeal summarily denied defendants' petition for a writ of mandate in a case filed against Diamond Multimedia and certain of its officers and directors. In Pass v. Diamond Multimedia Systems Inc., CV758927, a state trial judge held that Sec. 25400 and 25500 afforded a remedy for out-of-state securities purchasers whose shares allegedly were inflated by false statements made by a company based in California.
On Jan. 4, the California Supreme Court agreed, in Diamond Multimedia Systems Inc. v. Superior Court, 99 C.D.O.S. 84. Setting aside policy concerns about the propriety of opening up California's courts to nationwide class actions, Justice Marvin Baxter analyzed each of the five subdivisions of Sec. 25400, concluding that the statute "is very clear" and is directed only at manipulative conduct "in this state" that affects the price of a security. The court found nothing in Sec. 25400 making the purchase or sale of a security in California a prerequisite to bringing an action under this provision. The court also found persuasive the absence of any "in this state" qualification in Sec. 25500, which establishes a civil remedy for any "person who purchases or sells any security at a price which was affected" by an act or transaction in violation of Sec. 25400.
Two justices -- Janice Rogers Brown and Ming Chin -- dissented from the majority's ruling, finding that legislative history evinced the California Legislature's intent to regulate only intrastate transactions and that the Reform Act impliedly preempts conflicting state law.
If there is a silver lining for securities defendants in Diamond, it is the Court's apparent recognition that scienter is an element of a claim for civil damages under Secs. 25400 and 25500. In support of its conclusion that these provisions provide a nationwide remedy, the court cited a treatise, authored by two of the principal draftspersons of the Corporate Securities Law, which suggests that a stringent mental state requirement was the quid pro quo for the expansive liability created under the statute.
STORMEDIA'S MARKET ACTIVITY REQUIREMENT
In addition to Diamond, the Supreme Court accepted review in another case -- Werczberger v. StorMedia Inc., CV760825, in Santa Clara County Superior Court -- that raised important questions concerning the scope of liability under Sec. 25400 and Sec. 25500. Counsel for StorMedia, a disk-drive maker, distinguished his case from a federal Sec. 10(b) claim. In order for liability to attach under Corporations Code Sec. 25400(d), a defendant who is alleged to have made a false statement must also have engaged in some type of "marketing activity," by buying or selling securities, or offering to do so.
Plaintiffs countered with the argument that Sec. 25500's imposition of liability upon "[a]ny person who willfully participates in any act or transaction in violation of Sec. 25400" negates any market activity requirement for purposes of establishing civil liability. Plaintiffs also argued that, to the extent that any market activity requirement exists, it was satisfied in this case by, among other factors, StorMedia's maintenance of employee stock purchase and option plans.
StorMedia and Diamond were argued to the state Supreme Court on the same day. But the StorMedia ruling is not likely to come down soon; the case has been delayed by StorMedia's bankruptcy petition.
FEDERICO A. MORENO:
"This action is exactly the kind of legal claim that Congress sought to foreclose when it enacted the reform act's safe harbor," the Miami federal judge wrote in dismissing a securities fraud class action against Ivax Corp.
SHELLEY EADES
CONGRESS' NATIONAL STANDARD
Although the defense bar was disappointed with the California Supreme Court's Diamond decision, the case was instrumental in drawing attention to the state court securities litigation phenomenon and the extent to which it threatened to undermine the Reform Act's objectives. In response to those concerns, Congress in November enacted the Securities Litigation Uniform Standards Act of 1998. The statute purports to establish "national standards for securities class action lawsuits involving nationally traded securities." The Uniform Standards Act makes federal court the exclusive venue for "covered class actions" (defined primarily as any action or actions brought on behalf of more than 50 persons), which also must be resolved under federal law. The Uniform Standards Act does not apply retroactively or to state court class actions that were pending on the date of its enactment. It also does not apply to derivative actions.
Though Diamond may be the precedent applied to the pending California cases, the policy underlying the Uniform Standards Act -- which echoes the objectives behind the PSLRA -- may still buttress motions to stay state court actions where a parallel federal action is pending. Also, defendants are likely to vigorously contest class certification in state cases on the basis of the Uniform Standards Act.
The court of appeal's decision in Schneider v. Vennard, 183 Cal.App.3d 1340 (1986), provides strong grounds for attacking certification in a state securities class action when a parallel federal action involving the same allegations is pending. In Vennard, a case against Apple Computer Inc., two sets of shareholders filed parallel lawsuits -- with identical facts, but distinct causes of action -- in state and federal court. The suits essentially claimed that the company had misled the investing public with a series of allegedly false statements about Apple's "Lisa" computer. In the name of judicial economy, Santa Clara County Superior Court Judge John Flaherty declined to certify the state class actions. Flaherty's ruling, upheld on appeal, cited Federal Rule of Civil Procedure 23, which favors denial of class certification where "superior" remedies to class litigation are available -- in this case, the pendency of class litigation in federal court.
Other defenses to state class actions may be available, notwithstanding Diamond. To the extent that California's Corporate Securities Act conflicts with the law of other jurisdictions, defendants may also try to challenge the application of California law to a nationwide class on constitutional grounds. Another option concerns the extent to which individual or derivative actions may be used to obtain discovery that cannot be garnered in a pending federal class action under the PSLRA. Anticipating this potential strategy, Congress included a provision in the Uniform Standards Act granting federal courts the authority "[u]pon a proper showing" to "stay discovery proceedings in any private action in a state court."
STATE COURT FLURRY A BLIP?
In the end, the recent flurry of state court activity may prove to be merely a blip on the radar screen. As state court class actions filed before the Uniform Standards Act wind down, the focus will shift to federal court, where virtually all securities class action battles will be waged. With this in mind, we now review recent developments in the federal arena and others looming on the horizon that will affect the outcome of these contests. Searching for a Friendly Federal Forum. Historically, securities cases were filed in the federal district in which the defendant company was headquartered. This explains in large part why the Ninth Circuit U.S. Court of Appeals and the Northern District of California -- home to securities-litigation-prone high technology companies -- have led the country in shareholder class action filings for the most of this decade.
But thanks to passage of the Reform Act, 1998 marked the first year in which the Ninth Circuit did not lead the federal circuits in securities class actions filings. The past year, however, has seen plaintiffs file actions against Silicon Valley companies in federal courts in New York, New Jersey, Chicago, Virginia, Illinois and other remote districts. Often, plaintiffs have resorted to filing in the remote federal forums after filing an parallel action in federal court here. In our opinion, two factors have motivated plaintiffs to file cases in districts other than the defendant companies home forum.
First, plaintiffs have sometimes sought to establish a second, parallel federal action to avoid competing for the role of "lead plaintiff" with the plaintiff in the first-filed case. This tactic has failed miserably, due in large part to the basic judicial disdain for duplicative litigation and the common sense notion that there should be only one lead plaintiff per case -- not one per coast.
Second, plaintiffs have filed actions in remote districts to avoid the district judge who drew the first-filed case. This tactic also will fail not only for the reasons above, but because this will be seen as transparent forum shopping.
Should the trend of multiple, federal-court filings continue, the next year will see a proliferation of transfer motions and will see securities litigators joining the crowds of mass-tort lawyers at hearings conducted by the Judicial Panel on Multidistrict Litigation.
The Race to the Courthouse Goes High Tech. The Reform Act contained several measures designed to stop the practice described by Congress as the "race to the courthouse." Prior to the Reform Act, plaintiffs tried to be the first to file a complaint because courts often appointed the first-to-file as the lead plaintiff. To end the race, the Reform Act requires parties filing a class action to publish notice of the filing and allows other class members to come forward to serve as the name plaintiff. The court is required to choose the applicant with the largest financial interest to serve as lead plaintiff.
RACE TO THE COMPUTER
But rather than ending the race to the courthouse, the Reform Act inspired a race to the computer. Plaintiffs now compete to see who can post the first press release on the Internet in the hope of attracting additional class members. The same plaintiffs' law firm, in fact, may file several complaints and issue corresponding notices to refresh the search for additional plaintiffs. The end game of quickly posting multiple press releases serves to attract the largest conglomeration of plaintiffs to better compete for lead-plaintiff designation. District court decisions approving aggregation of plaintiffs to form a larger, combined financial interest for the lead-plaintiff competition have encouraged the race. And while there are district court decisions rejecting the use of lead-plaintiff groups, they are in the minority. In the next year we will see continued skirmishes over the practice of aggregating plaintiffs and over the use of repetitive lead-plaintiff notices as a means of attracting potential plaintiffs. But the trend in this area of Reform Act interpretation still favors plaintiffs.
Clarification of Safe Harbor Requirements. One of the primary purposes of the Reform Act was to deter frivolous "missed forecast" lawsuits filed after a company failed to meet Wall Streets earnings targets and got sued after its stock dropped. In response to this type of action, Congress created a "safe harbor" for forward-looking information so that companies could provide guidance to investors about future results without fear of liability if actual results did not meet expectations. The reform act provides relatively detailed instructions on how to craft oral and written disclosures so as to obtain the protection the safe harbor affords.
Recent district-court safe-harbor decisions have placed a premium on complying with the statute's requirements for obtaining safe harbor immunity. In Harris v. Ivax Corp., 97-559-CIV, Miami U.S. District Judge Federico Moreno granted Ivax's motion to dismiss on safe harbor grounds because forward-looking statements in a company press release were clearly identified, as were the specific risks associated with those statements. "This action is exactly the kind of legal claim that Congress sought to foreclose when it enacted the Reform Act's safe harbor," Moreno wrote on March 30, 1998 in his dismissal order. In contrast, defendants in In Re Boeing Securities Litigation, pending in federal court in Seattle, did not prevail on safe harbor grounds because the court found that the risks accompanying forward-looking statements were "boilerplate." The difference in the outcome between Ivax and Boeing turned on the quality and specificity of the cautionary language employed.
MISSED-FORECAST CASES DECLINING
It should be noted that missed-forecast cases have declined. Before the Reform Act, they represented 75 percent of the cases filed, compared to 53 percent in 1998. We believe this decline is attributable more to business trends in various industries and the SEC's focus on merger accounting techniques than to the use of the safe harbor.
Clarification of the Pleading Standards. Last June, the Ninth Circuit heard argument in In Re Silicon Graphics Securities Litigation, an appeal taken from an order dismissing a securities class action complaint. The Ninth Circuit's decision is awaited eagerly by both sides of the securities class action bar, as it is expected to clarify the standards for pleading the state of mind required for liability and the specificity with which falsity must be alleged. As to state of mind, the dispute focuses on whether allegations of recklessness or "motive and opportunity" are sufficient. As to falsity, Silicon Graphics is expected to shed light on the degree and nature of information plaintiffs must allege to demonstrate that defendants' statements were false when made. Simply put, the outcome of the Silicon Graphics case will have a tremendous impact on the ability of plaintiffs to state a claim for securities fraud in the Ninth Circuit -- and across the nation. Subject to the timing of the court's decision, much of the next year will be spent sorting out the impact of the Silicon Graphics decision on pending securities complaints.
AUTHORS
LLOYD WINAWER and DOUGLAS CLARK are members of the securities litigation group at Palo Alto's Wilson Sonsini Goodrich & Rosati.
When the Private Securities Litigation Reform Act was enacted more than three years ago, some commentators predicted a substantial decline in shareholder class action litigation. Unfortunately, the passage of time has proved them wrong.
A recent study by PricewaterhouseCoopers found that, during 1998, the number of securities litigation cases filed in federal courts increased for the third straight year to 239 in 1998, up from 154 in 1997 and 102 in 1996. For those who hoped that the Reform Act would reduce the number of filings, the verdict is in, and it is negative.
Still, it is too soon to pass judgment on the overall efficacy of the act. While there are a number of district court decisions construing the law, the volume of appellate decisions is minuscule. We will discuss significant tactical battles over the past year and attempt to project the battles to come. In the spirit of the Reform Act, we should note that actual results may differ materially from our projections.
The Reform Act's stated purpose is to "discourage frivolous litigation." Toward that end, Congress implemented substantive and procedural changes designed to make it more difficult for plaintiffs to pursue cases based upon nothing more than a stock drop. Chief among these reforms are a "heightened" pleading standard; a discovery stay during the pendency of a motion to dismiss; and "safe harbor" for forward-looking corporate statements. Although the plaintiff and defense bars have wrangled over the proper application and scope of these provisions, both agree that Congress raised the bar for pleading garden-variety Sec. 10(b) claims in federal court.
The months that followed the Reform Act's passage brought an unanticipated change to the securities litigation landscape. In an effort to avoid the federal reforms, plaintiffs lawyers began filing securities class actions in state courts, where the new federal law did not expressly apply. A Stanford University study reported that the percentage of securities class actions filed in state court doubled in the 10 months following the Reform Act's passage. Many of these state court actions were filed in tandem with a federal lawsuit.
DIAMOND AND STORMEDIA
The shift of class actions from federal to state venues has transformed California's courts into a major battleground.
Although California's Corporate Securities Law has been on the books since 1968, there was scant discussion of its application in the class action context before the Private Securities Litigation Reform Act was passed. Because federal law was well developed and provided little barrier to certification of nationwide classes, plaintiffs' lawyers previously were content to file the bulk of their securities class actions in federal court.
In fact, the California Supreme Court had considered Corporations Code secs. 25400 and 25500 -- the principal anti-manipulation provisions of the Corporate Securities Law -- in only one case before this year. In the 1993 matter of Mirkin v. Wasserman, 5 Cal.4th 1082, the Supreme Court observed in dicta that proof of actual reliance on a false representation or omission -- although an element of a common law fraud claim -- was not required under Sec. 25400. The first significant dispute to erupt in the post-Reform Act era was the extent to which a nationwide class action could be maintained under Sec. 25400 and 25500. Defendants argued that the civil liability provisions of California's Corporate Securities Law were intended to provide a remedy only to persons who bought or sold securities in California. Plaintiffs argued that the statute's scope was significantly broader, reaching any defendant who engaged in manipulative conduct in California without regard to where a plaintiff acquired or disposed of a security.
Reflecting the importance of this question, the California Supreme Court granted review after the court of appeal summarily denied defendants' petition for a writ of mandate in a case filed against Diamond Multimedia and certain of its officers and directors. In Pass v. Diamond Multimedia Systems Inc., CV758927, a state trial judge held that Sec. 25400 and 25500 afforded a remedy for out-of-state securities purchasers whose shares allegedly were inflated by false statements made by a company based in California.
On Jan. 4, the California Supreme Court agreed, in Diamond Multimedia Systems Inc. v. Superior Court, 99 C.D.O.S. 84. Setting aside policy concerns about the propriety of opening up California's courts to nationwide class actions, Justice Marvin Baxter analyzed each of the five subdivisions of Sec. 25400, concluding that the statute "is very clear" and is directed only at manipulative conduct "in this state" that affects the price of a security. The court found nothing in Sec. 25400 making the purchase or sale of a security in California a prerequisite to bringing an action under this provision. The court also found persuasive the absence of any "in this state" qualification in Sec. 25500, which establishes a civil remedy for any "person who purchases or sells any security at a price which was affected" by an act or transaction in violation of Sec. 25400.
Two justices -- Janice Rogers Brown and Ming Chin -- dissented from the majority's ruling, finding that legislative history evinced the California Legislature's intent to regulate only intrastate transactions and that the Reform Act impliedly preempts conflicting state law.
If there is a silver lining for securities defendants in Diamond, it is the Court's apparent recognition that scienter is an element of a claim for civil damages under Secs. 25400 and 25500. In support of its conclusion that these provisions provide a nationwide remedy, the court cited a treatise, authored by two of the principal draftspersons of the Corporate Securities Law, which suggests that a stringent mental state requirement was the quid pro quo for the expansive liability created under the statute.
STORMEDIA'S MARKET ACTIVITY REQUIREMENT
In addition to Diamond, the Supreme Court accepted review in another case -- Werczberger v. StorMedia Inc., CV760825, in Santa Clara County Superior Court -- that raised important questions concerning the scope of liability under Sec. 25400 and Sec. 25500. Counsel for StorMedia, a disk-drive maker, distinguished his case from a federal Sec. 10(b) claim. In order for liability to attach under Corporations Code Sec. 25400(d), a defendant who is alleged to have made a false statement must also have engaged in some type of "marketing activity," by buying or selling securities, or offering to do so.
Plaintiffs countered with the argument that Sec. 25500's imposition of liability upon "[a]ny person who willfully participates in any act or transaction in violation of Sec. 25400" negates any market activity requirement for purposes of establishing civil liability. Plaintiffs also argued that, to the extent that any market activity requirement exists, it was satisfied in this case by, among other factors, StorMedia's maintenance of employee stock purchase and option plans.
StorMedia and Diamond were argued to the state Supreme Court on the same day. But the StorMedia ruling is not likely to come down soon; the case has been delayed by StorMedia's bankruptcy petition.
FEDERICO A. MORENO:
"This action is exactly the kind of legal claim that Congress sought to foreclose when it enacted the reform act's safe harbor," the Miami federal judge wrote in dismissing a securities fraud class action against Ivax Corp.
SHELLEY EADES
CONGRESS' NATIONAL STANDARD
Although the defense bar was disappointed with the California Supreme Court's Diamond decision, the case was instrumental in drawing attention to the state court securities litigation phenomenon and the extent to which it threatened to undermine the Reform Act's objectives. In response to those concerns, Congress in November enacted the Securities Litigation Uniform Standards Act of 1998. The statute purports to establish "national standards for securities class action lawsuits involving nationally traded securities." The Uniform Standards Act makes federal court the exclusive venue for "covered class actions" (defined primarily as any action or actions brought on behalf of more than 50 persons), which also must be resolved under federal law. The Uniform Standards Act does not apply retroactively or to state court class actions that were pending on the date of its enactment. It also does not apply to derivative actions.
Though Diamond may be the precedent applied to the pending California cases, the policy underlying the Uniform Standards Act -- which echoes the objectives behind the PSLRA -- may still buttress motions to stay state court actions where a parallel federal action is pending. Also, defendants are likely to vigorously contest class certification in state cases on the basis of the Uniform Standards Act.
The court of appeal's decision in Schneider v. Vennard, 183 Cal.App.3d 1340 (1986), provides strong grounds for attacking certification in a state securities class action when a parallel federal action involving the same allegations is pending. In Vennard, a case against Apple Computer Inc., two sets of shareholders filed parallel lawsuits -- with identical facts, but distinct causes of action -- in state and federal court. The suits essentially claimed that the company had misled the investing public with a series of allegedly false statements about Apple's "Lisa" computer. In the name of judicial economy, Santa Clara County Superior Court Judge John Flaherty declined to certify the state class actions. Flaherty's ruling, upheld on appeal, cited Federal Rule of Civil Procedure 23, which favors denial of class certification where "superior" remedies to class litigation are available -- in this case, the pendency of class litigation in federal court.
Other defenses to state class actions may be available, notwithstanding Diamond. To the extent that California's Corporate Securities Act conflicts with the law of other jurisdictions, defendants may also try to challenge the application of California law to a nationwide class on constitutional grounds. Another option concerns the extent to which individual or derivative actions may be used to obtain discovery that cannot be garnered in a pending federal class action under the PSLRA. Anticipating this potential strategy, Congress included a provision in the Uniform Standards Act granting federal courts the authority "[u]pon a proper showing" to "stay discovery proceedings in any private action in a state court."
STATE COURT FLURRY A BLIP?
In the end, the recent flurry of state court activity may prove to be merely a blip on the radar screen. As state court class actions filed before the Uniform Standards Act wind down, the focus will shift to federal court, where virtually all securities class action battles will be waged. With this in mind, we now review recent developments in the federal arena and others looming on the horizon that will affect the outcome of these contests.
Searching for a Friendly Federal Forum. Historically, securities cases were filed in the federal district in which the defendant company was headquartered. This explains in large part why the Ninth Circuit U.S. Court of Appeals and the Northern District of California -- home to securities-litigation-prone high technology companies -- have led the country in shareholder class action filings for the most of this decade.
But thanks to passage of the Reform Act, 1998 marked the first year in which the Ninth Circuit did not lead the federal circuits in securities class actions filings. The past year, however, has seen plaintiffs file actions against Silicon Valley companies in federal courts in New York, New Jersey, Chicago, Virginia, Illinois and other remote districts. Often, plaintiffs have resorted to filing in the remote federal forums after filing an parallel action in federal court here. In our opinion, two factors have motivated plaintiffs to file cases in districts other than the defendant companies home forum.
First, plaintiffs have sometimes sought to establish a second, parallel federal action to avoid competing for the role of "lead plaintiff" with the plaintiff in the first-filed case. This tactic has failed miserably, due in large part to the basic judicial disdain for duplicative litigation and the common sense notion that there should be only one lead plaintiff per case -- not one per coast.
Second, plaintiffs have filed actions in remote districts to avoid the district judge who drew the first-filed case. This tactic also will fail not only for the reasons above, but because this will be seen as transparent forum shopping.
Should the trend of multiple, federal-court filings continue, the next year will see a proliferation of transfer motions and will see securities litigators joining the crowds of mass-tort lawyers at hearings conducted by the Judicial Panel on Multidistrict Litigation.
The Race to the Courthouse Goes High Tech. The Reform Act contained several measures designed to stop the practice described by Congress as the "race to the courthouse." Prior to the Reform Act, plaintiffs tried to be the first to file a complaint because courts often appointed the first-to-file as the lead plaintiff. To end the race, the Reform Act requires parties filing a class action to publish notice of the filing and allows other class members to come forward to serve as the name plaintiff. The court is required to choose the applicant with the largest financial interest to serve as lead plaintiff.
RACE TO THE COMPUTER
But rather than ending the race to the courthouse, the Reform Act inspired a race to the computer. Plaintiffs now compete to see who can post the first press release on the Internet in the hope of attracting additional class members. The same plaintiffs' law firm, in fact, may file several complaints and issue corresponding notices to refresh the search for additional plaintiffs. The end game of quickly posting multiple press releases serves to attract the largest conglomeration of plaintiffs to better compete for lead-plaintiff designation. District court decisions approving aggregation of plaintiffs to form a larger, combined financial interest for the lead-plaintiff competition have encouraged the race. And while there are district court decisions rejecting the use of lead-plaintiff groups, they are in the minority. In the next year we will see continued skirmishes over the practice of aggregating plaintiffs and over the use of repetitive lead-plaintiff notices as a means of attracting potential plaintiffs. But the trend in this area of Reform Act interpretation still favors plaintiffs.
Clarification of Safe Harbor Requirements. One of the primary purposes of the Reform Act was to deter frivolous "missed forecast" lawsuits filed after a company failed to meet Wall Streets earnings targets and got sued after its stock dropped. In response to this type of action, Congress created a "safe harbor" for forward-looking information so that companies could provide guidance to investors about future results without fear of liability if actual results did not meet expectations. The reform act provides relatively detailed instructions on how to craft oral and written disclosures so as to obtain the protection the safe harbor affords.
Recent district-court safe-harbor decisions have placed a premium on complying with the statute's requirements for obtaining safe harbor immunity. In Harris v. Ivax Corp., 97-559-CIV, Miami U.S. District Judge Federico Moreno granted Ivax's motion to dismiss on safe harbor grounds because forward-looking statements in a company press release were clearly identified, as were the specific risks associated with those statements. "This action is exactly the kind of legal claim that Congress sought to foreclose when it enacted the Reform Act's safe harbor," Moreno wrote on March 30, 1998 in his dismissal order. In contrast, defendants in In Re Boeing Securities Litigation, pending in federal court in Seattle, did not prevail on safe harbor grounds because the court found that the risks accompanying forward-looking statements were "boilerplate." The difference in the outcome between Ivax and Boeing turned on the quality and specificity of the cautionary language employed.
MISSED-FORECAST CASES DECLINING
It should be noted that missed-forecast cases have declined. Before the Reform Act, they represented 75 percent of the cases filed, compared to 53 percent in 1998. We believe this decline is attributable more to business trends in various industries and the SEC's focus on merger accounting techniques than to the use of the safe harbor.
Clarification of the Pleading Standards. Last June, the Ninth Circuit heard argument in In Re Silicon Graphics Securities Litigation, an appeal taken from an order dismissing a securities class action complaint. The Ninth Circuit's decision is awaited eagerly by both sides of the securities class action bar, as it is expected to clarify the standards for pleading the state of mind required for liability and the specificity with which falsity must be alleged. As to state of mind, the dispute focuses on whether allegations of recklessness or "motive and opportunity" are sufficient. As to falsity, Silicon Graphics is expected to shed light on the degree and nature of information plaintiffs must allege to demonstrate that defendants' statements were false when made. Simply put, the outcome of the Silicon Graphics case will have a tremendous impact on the ability of plaintiffs to state a claim for securities fraud in the Ninth Circuit -- and across the nation. Subject to the timing of the court's decision, much of the next year will be spent sorting out the impact of the Silicon Graphics decision on pending securities complaints.
AUTHORS
LLOYD WINAWER and DOUGLAS CLARK are members of the securities litigation group at Palo Alto's Wilson Sonsini Goodrich & Rosati.