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For the first time in years, the total amount of settlements paid by companies in securities class actions fell last year. The figure dropped to $2 billion from $2.5 billion in 2002, according to an annual study by Cornerstone Research, a law firm consulting group, in conjunction with Stanford Law School. Meanwhile, the average cost of each settlement rose, and the damages claimed in resolved suits rose higher. What did not change was the dominance of one plaintiffs’ firm, the recently divided Milberg Weiss Bershad Hynes & Lerach of New York. There were 96 settlements in 2003 compared with 112 in 2002. Settlements exceeding $100 million involved Oxford Health Plans, Mattel and Lucent, among others. These massive settlements drove up the 2003 average cost but were not typical. Most settlements — 85 percent of them — were for less than $20 million. The study looks only at settlements because they account for 95 percent of securities class actions, said the study’s director, Laura Simmons, and because of a constraint on resources. Institutional investors, according to the study, continued to play an ever larger role in securities class actions. They appear as lead plaintiffs in more and more cases. The reason, explained Simmons, resulted from the 1995 Private Securities Litigation Reform Act. The act required the largest stakeholder rather than a nominal shareholder to represent the class in a securities action, she said. The act’s authors, said Professor Deborah Hensler of Stanford Law School, proceeded “with the thought that institutional investors would do a better job of monitoring plaintiffs’ attorneys” and curb their control of the process. To some degree, it worked. Unlike small shareholders who may defer to their lawyers in managing a case and negotiating a settlement, institutional plaintiffs are likely to play a bigger role directing a case. State Comptroller Alan Hevesi of New York, for instance, sat alongside plaintiffs’ lawyers in negotiating this week’s $2.65 billion settlement with Citigroup over claims arising from its role in the problems of WorldCom. Cases in which institutional investors have taken the role as lead plaintiff have returned higher settlements year after year, according to the study. But the act had the unintended effect of concentrating plaintiffs’ work in larger law firms, said Pamela Gilbert, a lawyer working with the National Association of Shareholders and Consumer Attorneys, a trade association for law firms representing plaintiffs in securities class actions. Because procedural changes heighten pleading requirements, and because discovery is blocked until a court rules on a motion to dismiss and sends cases to federal courts, the bigger plaintiffs’ firms dominate the field, said Gilbert. They bring a large pool of qualified attorneys and the vast amounts of capital necessary to survive the early portions of these cases, she said. These plaintiffs’ firms, said John Beisner, head of the class action practice group of O’Melveny & Myers, also cultivated institutional investors through seminars and newsletters. Melvyn I. Weiss, head of the newly forged Milberg Weiss Bershad & Schulman that grew out of his old partnership, said this week that his firm also monitored portfolios for institutional investors to track losses and point to potential lawsuits on their behalf. Weiss’ firm also assigned one of its counsel to direct its outreach program to institutional investors, but he added that his firm’s reputation obviated the need “to convince everyone that we were the best.” The Cornerstone study confirmed the former Milberg Weiss’ dominance. It was involved as lead or co-lead plaintiff counsel in 53 percent of last year’s securities class action settlements, including the $600 million Lucent settlement, which at the time was the second largest securities class action settlement. No other firm came close to handling that many cases. Weiss said that after the split between the firm’s East Coast and West Coast partners that took effect on May 1, the two new firms evenly shared the cases in progress. As for new clients, he said, several have made his firm co-counsel with that of his former colleagues on the West Coast, the new Lerach Coughlin Stoia & Robbins. OTHER EFFECTS OF THE ACT The 1995 securities act has led to larger settlements for plaintiffs winning initial motions to dismiss, the study said. “Despite the decline in aggregate settlement values, private class action securities claims continue to represent a significant risk for issuers who are targeted by these lawsuits,” Professor Joseph Grundfest of Stanford Law School said in a statement accompanying the study. “Unless the litigation is terminated through a motion to dismiss or summary judgment, a settlement in the seven to nine figure range is highly likely,” Grundfest said. The average damages originally claimed in these suits rose for the sixth consecutive year, according to the study. In 2003, that increase took a sharp turn by rising 55 percent for cases settled during the year. “This dramatic increase in plaintiff-style damage calculations is almost certainly caused by the broad-based stock market decline that began in 2000,” Grundfest said. But as claims rose, settlements in 2003 accounted for a smaller percentage of damages claimed by plaintiffs, according to the study. This may have resulted from a lack of means on the part of financially strapped defendants to pay out large settlements, said sources, combined with the high damages arising from the drastic losses suffered in the stock market. Several defense lawyers said they do not foresee a glut of new cases in the near future, noting that the corporate scandals that prompted many of the lawsuits filed in the past three years have begun to wind down. But if the stock market drops precipitously, Beisner warned, he expects to see a continued steady stream of cases. Cell phone maker Nokia was hit with a class action securities suit days after announcing an unexpected shortfall in its quarterly earnings. The announcement led to a sharp drop in its stock price. Such actions are unlikely to wane, said Beisner, even with a modest slowdown. Gilbert said she is not sure the days of the corporate scandals have finished. She cited the mutual fund scandals that arose last autumn as an example of the unknown areas of fraud that may come to light. The 1995 act’s limitations on discovery and heightened pleading requirements made it difficult for cases to survive motions to dismiss without showing overt acts of fraud or wrongdoing, she said. These restrictions encouraged corporate wrongdoing, she said. As an example, she claimed that earlier securities class actions against both Tyco and WorldCom — two companies at the center of the wave of corporate scandals — proved unsuccessful because of the act. Stanford Law’s Hensler said it was impossible to measure the impact of the 1995 act on the wave of corporate scandals. “But cultural values do affect behavior,” she explained, “and in that context one could see the passage of the 1995 act over a presidential veto to be a cultural signal” for corporate decision makers.

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