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In the last decade, all but a handful of the federal securities class actions that were not dismissed were settled, usually because of their substantial potential exposure. In fact, from the enactment of the Private Securities Litigation Reform Act of 1995, which raised the pleading requirements for securities fraud actions, through the first half of 2004, there have been only two known class actions involving post-Reform Act claims that concluded in a trial verdict. When trials involving pre-Reform Act claims are counted, that number increases to just five. But the past 12 months have seen a significant acceleration in the pace of these cases going to trial and verdict; during this short time alone two securities class actions have been tried to a verdict and at least four have settled mid-trial. This recent increase coincides with significant changes in the settlement landscape within the past two years. Those changes have played a significant role in changing the economics of securities settlements and the increased willingness of both plaintiffs and defendants to go to trial. Economists have consistently reported increasing trends in settlement amounts since the enactment of the Reform Act, and more dramatic increases within the past two years. According to Cornerstone Research, the average settlement of a securities class action in 2004 was $46.2 million, as compared to $26 million for all post-Reform Act settlements through 2003. Similarly, NERA Consulting reports that mean settlements from 2002 to 2004 were $23.6 million versus $13.5 million for settlements between 1996 and 2001. 2004 saw a substantial increase in the number of large settlements, with WorldCom’s $2.6 billion partial settlement and six other settlements coming in at more than $100 million each. The total value of settlements in 2004 reached a record $5.5 billion, more than double the total for 2003. 2005 is on pace to more than double the 2004 record, with JPMorgan Chase, Citigroup and Canadian Imperial Bank of Commerce agreeing within the past two months to settle the claims against them arising from Enron for $2.2 billion, $2 billion and $2.4 billion, respectively, and Time Warner agreeing earlier this month to settle actions arising from its merger with AOL for $2.4 billion. The economics of settling a securities class action have thus fundamentally changed from just several years ago, and that is affecting the traditional risk and benefit analysis of going to trial for both plaintiffs and defendants in many cases. As average settlement values rapidly appreciate, plaintiffs are demanding ever-higher amounts to settle cases, encouraged by the increasing number of large settlements (more than $100 million) within the past two years. Moreover, although the results from the trials that have gone to verdict have been largely mixed, there have been two large jury verdicts from recent trials (Real Estate Associates and ICN/Viratek, described below) that provide further encouragement to plaintiffs that believe they have a good case for trial. This changed landscape appears to be creating an environment that is encouraging more litigants to go to trial: The federal courts have seen at least six securities class actions go to trial within the past 12 months, with two going all the way to verdict within months of each of other. The first of these, in February, was against the chairman of Clarent Corp. and its auditor Ernst & Young, arising from Clarent’s overstatement of revenues and restatement of earnings. ( In re Clarent Corporation Securities Litigation, 01-CV-3361). The jury returned a mixed verdict, finding that the chairman knowingly participated in an accounting violation, but finding no liability against Ernst & Young. Two months later, a securities class action was tried to a defense verdict in the Central District of California ( Miller v. Thane International, SACV 03-1031). In that case, shareholders in a company acquired in a stock-for-stock transaction alleged that the merger prospectus and proxy statement materially misrepresented the merged company’s plans to list its stock on the Nasdaq’s national market system rather than the over-the-counter bulletin board, where it traded after the merger. Following a bench trial in April, the court returned a defense verdict on all claims. The remaining four cases that have gone to trial within the past 12 months have settled mid-trial for significant sums. After three weeks of trial in October 2004 in the District of New Jersey, AT&T Corp. settled a securities class action in connection with its initial public offering of AT&T Wireless for $100 million. PricewaterhouseCoopers and several officers of Safety-Kleen Corp. settled an action in the District of South Carolina in April (in connection with Safety-Kleen’s bond offerings prior to its bankruptcy in June 2000) for a combined $84 million after seven weeks of trial. That same month in the Southern District of New York, Arthur Andersen settled claims arising from its role as WorldCom’s auditor for $65 million after four weeks of trial. Just weeks ago, in mid-July, a securities class action in the Southern District of New York, In re Globalstar Securities Litigation, was settled mid-trial for $20 million. This recent surge in trials during the past 12 months is significant because only a handful of cases had been tried to verdict in the decade before. Of those, two were post-Reform Act cases tried to differing results. The first was in 1999 in the Eastern District of New York against BDO Seidman for its audits of Health Management Corp. ( In re Health Management Securities Litigation, 96-CV-889). That trial resulted in a defense verdict for BDO Seidman. By contrast, in the Real Estate Associates trial in 2002, plaintiffs achieved a significant victory in the Central District of California ( In re Real Estate Associates Limited Partnership Litigation, CV 98-7035). After a five-week trial involving allegations of misstated proxy solicitations concerning the sale of interests held by certain publicly limited partnerships, the jury returned a verdict for plaintiffs in the amount of $185,095,112 ($92,550,056 in compensatory damages; $92,545,056 in punitive damages). Three known pre-Reform Act cases have also been tried to verdict within the last decade. The first was a trial in the Southern District of New York involving a pharmaceutical company’s knowing misstatements concerning an anti-viral drug. ( In Re ICN/ Viratek Securities Litigation, 87 Civ. 4296 (1996)). The 1996 trial resulted in a partial jury verdict, after which the case settled for $14.5 million. Biogen Inc. and its chairman also went to trial in 1998 in an action based on a positive remark made at an analyst conference regarding a drug then in clinical trials, which did not disclose that parts of those trials were not going well. ( Lazar v. James, 94-CV-12177 (1998)). The jury in the District of Massachusetts returned a verdict for defendants. Finally, the chairman and CEO of Everex Systems Inc. went to trial twice in a securities fraud class action in the Northern District of California, in which plaintiffs alleged misrepresentations of the company’s inventory and accounts receivable. ( Howard v. Hui, 92-CV-3742). In 1998, the first trial resulted in a directed verdict for defendant at the close of plaintiffs’ case. After the Ninth Circuit remanded the case for a new trial, a second jury in 2002 returned a defense verdict. The varying results from these trial verdicts gives both plaintiffs and defendants reason to believe that they can, under the right circumstances, take their cases to trial and win. With the increasingly aggressive settlement postures now being taken by plaintiffs in many cases decreasing the defendants’ relative risk of going to trial, defendants are less likely to settle when they believe they have a defensible case. Michael Tu is a partner in the Los Angeles office of Orrick, Herrington & Sutcliffe and specializes in securities litigation matters.

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