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In South Carolina, juries think investing in stock is like gambling and it’s sinful, while in New York City, jurors are disappointed if lawyers don’t rip up witnesses during questioning, but in Detroit they are more likely to hold the corporate top dog to account. That’s what lawyers in securities class action cases have been learning in mock trials as they prepare for that remote chance that a securities case might really go to trial. Since the passage of the Private Securities Litigation Reform Act of 1995, nearly every case has settled, and that’s out of an average of about 190 filings a year. But this year, an unusual thing is happening. Six securities class actions have gone to trial, out of a total of nine such trials involving alleged misconduct after the law took effect a decade ago, according to figures compiled by Bruce Carton, director of Institutional Shareholders Services. This is out of roughly 1,733 federal securities class actions that were filed between 1996 and 2004, according to Cornerstone Research in Menlo Park, Calif. Theories differ as to why there has been the spate of trials this year, but two factors loom large for lawyers on both sides of the securities ramparts: The dollar size of settlements is growing, thus increasing the defense’s willingness to risk a trial, and lawyers have gotten much more sophisticated about honing their cases before mock juries. Last year set a record for the value of cases settled, at $5.45 billion in total settlement dollars, with seven settlements above $100 million each, including WorldCom’s $2.6 billion partial settlement, according to Cornerstone Research. And 2005 will easily shatter that record. In one 48-hour period last week, just two announced settlements totaled $4.8 billion. Canadian Imperial Bank of Commerce agreed to pay $2.4 billion to settle investor fraud claims arising from Enron Corp., and a day later Time Warner Inc. agreed to pay $2.4 billion to settle a class action over its merger with AOL. Michael Tu, a partner in Orrick, Herrington & Sutcliffe’s securities litigation group in Los Angeles, is one lawyer who suggests that trials are increasing because settlement amounts are skyrocketing. “It is causing a shift in the settlement landscape and a shift in the way both sides look at a case,” he said. Tu won a defense verdict this year in the Thane International Inc. securities trial in Southern California. Thane, which develops infomercials and direct marketing products, was accused of misleading investors in its merger prospectus. A whole generation of cases that began after the stock market bubble burst has reached the point of maturity, surviving dismissal or summary judgment motions, Tu said, and people now have to make decisions about whether to go to trial. And regulators such as New York Attorney General Eliot Spitzer have been much more aggressive, which generates a lot of discoverable material that plaintiffs can use in their civil suits, he said. MOCK TRIALS Back in 1999, Michael R. Young of New York’s Willkie Farr & Gallagher had no idea he would be the first lawyer to take a case to trial based on post-litigation reform act conduct by a client. When he started looking for sample jury instructions, the judge in New York said there were no models available because his 1999 trial was the first. Young’s defense in a four-week trial absolved Chicago accounting firm BDO Seidman LLP of wrongdoing in its audit of Health Management Inc. of Holbrook, N.Y. Young started months ahead of trial by hauling three secretaries at his office into a conference room to test-run his case. “I was sure I would get a favorable reaction,” Young said. He gave both his defense and a potential plaintiff’s presentation. “One was for me, one against and the other was silent, to her career benefit,” he said, laughing. “But I saw the strengths and weaknesses of the case,” he said. Young then moved on to serious mock-jury testing. “It allows you to tailor a case to avoid pitfalls,” he said. Stuart Grant, a plaintiffs lawyer who represents institutional investors at Grant & Eisenhofer in Wilmington, Del., agrees. He did three mock trials to test his case against Safety-Kleen Corp., in what became a seven-week, all-out war of a trial in Columbia, S.C. At the end of the trial, but before closing arguments, PricewaterhouseCoopers LLP, Safety-Kleen’s outside auditor, settled for $84 million. The judge took the remainder of the case away from the jury, handing Grant a $200 million verdict as a matter of law against two top company executives. It was the largest judgment ever in a South Carolina federal or state court, he said. “The mock trials taught us a few things,” he said. South Carolina jurors are relatively poor, and dollar amounts that would not shock jurors in New York or Los Angeles were incredibly large to them. “A very significant number of prospective [South Carolina] jurors believed investing in stock was akin to gambling and is inherently evil. Clearly, the defendants learned that from their mock jury tests because they tried to taint us as irresponsible gamblers,” he said. “We had to cut out the A-type personalities. They didn’t like fast-talking or challenging witnesses,” Grant said. But in New York, jurors expect TV-style witness questioning. “If you can’t cut up a witness, New York jurors don’t think you’re worth it. It is very different than mock trials in Detroit. Maybe because it is so unionized, people there are in the Harry Truman mold of ‘the buck stops here,’ and they are prepared to hold the man at the top responsible,” he said. LIKE A FOCUS GROUP According to lawyers who use them, mock trials are pared-down versions of the real thing. Participants are recruited from the jury pool in the area of the trial. They are told this is a real dispute that they may have a hand in resolving prior to trial. “It is focus-group testing like a new soap,” said one lawyer. Typically, they may see a video of deposition testimony and hear a 30-minute opening statement and a 15-minute closing argument. The dozen jurors are split into three groups to deliberate, and lawyers watch deliberations through one-way mirrors. Lawyers from both sides said they got a clear idea of the ballpark numbers jurors might return, and how to phrase arguments to the best advantage. Ron Miller, an economist at NERA Economic Consulting in New York, suspects that the cases with bigger market losses are more likely to go to trial because of the cost-benefit analysis. Trials are expensive, and a small case is not worth anyone spending all that time or money in court. “My suspicion is that there have been so few of these trials that a few people have gotten the same idea at the same time; it is time to test the waters,” he said. Grant thinks that the WorldCom, Adelphia, Global Crossing and Enron scandals have made judges more willing to sustain complaints than a decade ago, and the public much more skeptical of corporate America, to the plaintiffs’ advantage. Young said he is heartened to see “greater willingness on the part of the defense bar to try cases. At the end of the day, this is the main way to establish credibility as a fighter. With settlement demands increasing, I would expect the willingness to go to trial to increase and not be surprised if the trend continues,” he said. However, Nicholas E. Chimicles of the Haverford, Pa., plaintiffs firm Chimicles & Tikellis expressed skepticism at finding a single cause for the uptick in trials. “Each case has its own characteristics. A trend is not discernible,” he said. In 2002, Chimicles pulled down a $184 million jury verdict for 18,000 investors in In re Real Estate Associates Limited Partnerships, No. C98-7035DDP (C.D. Calif.). “Our demand was much higher than the defendant was willing to pay before trial; that’s why it didn’t settle,” he said. Some plaintiffs lawyers are not prepared to try a case, and instead they string it out as long as they can in hopes a judge or mediator will force a settlement, he said. “That’s not the way we approach it. We get ready for trial,” said Chimicles. He too used a mock trial as preparation by doing an opening and recitation of the facts. “We used it as a gauge of what resonated,” he said. But, he added, “I’m not sure using them in securities cases is all that effective. Clients that are very technically sophisticated want to see what kind of feedback they get from a consultant who handicaps their chances. It sounds nice, but I think it is voodoo science,” he said. Each case is so different and dependent on how aggressive the plaintiffs are, Chimicles said. But Young expects to keep using mock trials to test his cases. “The secretarial testing gave me a sense of how to pitch a mock trial,” he said. “I’ve tried it before paralegals. I’ll even try out an argument at a cocktail party.”

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