Securities Class Action Opt-Outs: Back with a Vengeance?

One of the more interesting story lines in the securities class action litigation arena in recent years has been the emergence of substantial class action opt-out litigation, whereby various claimants representing significant shareholder ownership interests select out of the class suit and separately pursue their own claims - and settlements. The class action opt-out litigation emerged as a significant phenomenon in the litigation arising out of the era of corporate scandals a decade ago. After attracting a great deal of attention and concern at the time, the phenomenon seemingly faded into the background -- that is, until several large public pension funds and mutual fund families opted out of the $624 million Countrywide subprime-related securities lawsuit settlement, about which I previously commented here.

Now more than a year after the high-profile Countrywide opt-out suit, some of the same claimants, represented by the same law firm, have now opted out of the class action Pfizer securities litigation pertaining to the company's disclosures about the safety of its Celebrex and Bextra pain medication. In their November 15, 2012 complaint (here), seven public pension funds (including CalPERS and CalSTRS) and dozens of mutual funds from four separate mutual fund families have filed a separate lawsuit against the company and five of its individual directors and officers. The Pfizer opt-out litigation has a number of interesting features and raises a number of possible implications.

Pfizer's disclosures and marketing practices relating to the two pain medications have already caused some serious problems for the company. On August 31, 2009, a Pfizer subsidiary agreed to plead guilty to a criminal felony charge. In order to settle the criminal charges, the company paid a fine of $1.195 billion, in what was at the time the largest criminal fine in U.S. history. The company also agreed to pay another $1 billion to settle related civil claims, and also agreed to pay an additional $894 billion to state governments and private litigants to settle the bulk of personal injury litigation and state government probes concerning the two pain medications.

In addition, since December 2004, the company has also been involved in securities class action litigation related to the company's disclosures about the two pain medications, as discussed in detail here. The lead plaintiff in the pending class action securities suit is the Teachers' Retirement System of Louisiana. Much has happened in this long-running case. On July 1, 2008, Southern District of New York Judge Laura Taylor Swain denied the defendants' motion to dismiss (refer here), after which the parties proceeded to conduct discovery. On March 28, 2012, Judge Swain granted the plaintiff's motion to certify a class (refer here, and refer here for the amended order of class certification). Judge Swain certified a class of shareholders who purchased their shares between October 31, 2000 and October 15, 2005. On September 7, 2012, pursuant to the notice sent to the class concerning the litigation, the opt-out claimants filed a request for exclusion from the class.

Though the opt-out claimants have selected out of the class suit, they enjoy numerous advantages in their separate lawsuits as a result of the years of class litigation. First, the opt-out claimants are actively relying on the long pendency of the class litigation in order to try to avoid possible statute of limitations concerns. In paragraph 548 and following of their separate complaint, the opt-out claimants contend the timely filing and pendency of the class litigation tolls the statute of limitations (through what is known as American Pipe tolling).

In addition, in their complaint the opt-out litigants expressly rely on information developed in the class litigation in support of their claims. In citing the sources on which they are relying as the bases for their allegations, the plaintiffs state in their complaint that they are relying on "documents and information, including internal emails produced by Pfizer, deposition testimony provided by its former officers and employees and court filings in related cases brought against the Defendants" in the consolidated securities (as well as other related cases filed against Pfizer). Of course, the opt-out claimants also get the res judicata benefits of the Judge Swain's dismissal motion ruling as well.

Which is another way of saying that the opt-out litigants, like all of the other prospective class members, are the beneficiaries of the class action litigation which had been filed and was being litigated on their behalf.

Which does raise the question -- given that the class representative has actively and successfully pursuing the class litigation on behalf of a class of shareholders including these opt-out claimants for almost eight years, why are the opt-out claimant selecting out of the class?

The answer is that the institutional investor opt-out claimants think the can do better for themselves by proceeding separately. In a November 15, 2012 Am Law Litigation Daily article (here), counsel for the opt out claimants is quoted as saying, among other things, that in other opt-out claims that the firm has filed in connection with other pending securities class action lawsuit, the firm has resolved the opt-outs claims for "multiples" of what they would have recovered as class claimants. The article explains that the firm has represented opt-out claimants in numerous cases, many of which have resulted in confidential settlements. In addition, based on counsel's remarks in the news article, there has been a level of significant opt-out activity in recent years that has been going on beyond the radar scree -- indeed, the plaintiffs' firm filing the Pfizer opt-out complaint reportedly has been involved in 14 additional opt-out suits just in the first nine months of 2012.

The comments in the Am Law Litigation Daily article suggest that institutional investors' interest in opt-out litigation is growing, largely due to the growing perception that their recoveries will be increased by proceeding outside of the class. The opt-out claimants also avoid the cumbersome process and delays involved in the class settlement process. Mutual funds, which traditionally have not been involved in opt out litigation, have become more interested and involved in opting out. The article quotes Columbia Law Professor John Coffee as that "the trend is toward opting out," and the article also notes that if the U.S. Supreme Court in the Amgen case currently pending before the court raises further barriers to securities lawsuit class certification, the trend toward individual securities suits could accelerate.

Though the Pfizer opt out suit is undeniably part of trend, it also is somewhat distinct and perhaps even unique, at least in certain respects. That is, in most of the other high profile opt-out litigation of which I am aware, the prominent opt-outs have chosen to select out of the class only after the class action lawsuit has already been settled. In this instance, the long-running securities suit remains pending.

The interesting challenge this poses for the opt-outs' counsel is that without a class settlement already on the table, the opt-outs have no ready gauge of how a prospective settlement of their case might compare to the recoveries that will be available to the class when and if the class claims ultimately settle. That is, it will be harder for them to ensure that they did better or are going to do better by proceeding separately. Of course, it does remain to be seen whether or not the opt-out suit or the class action settles first.

The opt-out litigation raises much bigger problems for Pfizer and the other defendants. Not only does the existence of the opt-out litigation mean that they will only be able to fully resolve the now years-old litigation in a piecemeal process, but it also means that settlement talks will represent a complicated process built around the awareness that settlement of either the class or opt-out litigation will have an enormous impact on whichever piece remains unresolved. Given the likely fragmented and complex process, defense costs undoubtedly will mount, as well.

For many years, class action lawsuits have been a favored whipping boy for conservative commentators. But for all of the ills that the class action process can sometimes involve, the prospect of a litigation process in which mass group claims are fragmented and can only be resolved in a piecemeal fashion in many ways is no improvement. Given the apparently increasing institutional investor interest in pursuing claims separate from the larger investor class, we could very quickly be getting to the point where resolution of class litigation is only one part of a multistep process.

To be sure, it is only going to be in institutional investors' interests to opt out in certain kinds of cases. As Adam Savett, the CEO of TXT Capital, notes in the Am Law Litigation Daily article, it will only make sense for institutional investors to opt out when the scale of shareholder losses are huge and where the is a solvent, deep-pocketed defendant available from how to try to recover.

But even not every securities class action lawsuit will also involve parallel opt-out litigation, there have still been enough opportunities for some plaintiffs' lawyers to develop a specialty and a growing practice in the opt-out suits. While this unquestionably represents an opportunity of sorts for the opt-out plaintiffs' attorneys and their institutional investor clients, it creates a host of problems for other players in the securities litigation process.

The class plaintiffs attorneys will see their prospective class recoveries shrink as large institutional investors representing a significant part of the class pursue their own suits separate from the class. The class plaintiffs' attorneys will watch their own prospective fee recoveries shrink commensurately even as the opt-out plaintiffs' attorneys' enjoy the benefits inuring from the class plaintiffs' attorneys efforts. The defendants will not only incur the additional litigation costs associated with a multi-front war, but they will see their overall litigation resolution costs rise (perhaps significantly) as opt-out plaintiffs pursue separate claims seeking recoveries greater than would be available to the class. Even the courts will face added burdens as suits previously resolved in a single process are fractured into multiple parts. To the extent the added defense fees and settlement costs are insured, these increased costs will drive insurance losses.

For all of these concerns, however, it now appears that significant institutional investor opt out litigation increasingly will be a regular feature of securities class action litigation - which has important implications for all concerned. A key consideration to keep in mind while considering all of this is that sophisticated and well-informed institutional investors are opting-out because they believe that at least in certain cases they wil do better by proceeding outside the class. Which in turn raises serious questions about what that means for the investors remaining in the class.

Speciall thanks to a loyal reader for providing me with a copy of the Pfizer opt-outs' complaint.

Another Georgia Failed Bank Lawsuit: During the current wave of bank failures, Georgia has been the state with the highest number of bank failures. For that reason, it may be unsurprising that the state also has the highest number of failed bank lawsuits. But though the fact that Georgia more bank failure lawsuits than any other state might be expected, the number of lawsuits filed in Georgia is disproportionately high, higher than would be expected just from Georgia's share of the total number of bank failure. And late this past week, the FDIC filed yet another bank failure lawsuit in Georgia.

On November 15, 2012, the FDIC, as receiver for the failed Community Bank of West Georgia, in Villa Rica, Georgia, filed a lawsuit in the Northern District of Georgia, against three of the bank's former officers and eight of its former directors. The complaint asserts claims for both negligence and gross negligence "for numerous, repeated and obvious breaches and violations of the Bank's loan policy and procedures, underwriting requirements, banking regulations and prudent and sound banking practices" as "exemplified" by 20 loans made between May 17, 2006 and October 7, 2007, that allegedly caused the bank losses in excess of $16.8 million. A copy of the FDIC's complaint can be found here.

Interestingly, three of the individual defendants are named "only to the extent of liability insurance." The complaint recites that the three individuals have each separately filed for Chapter 7 bankruptcy, and that in connection with each of the separate bankruptcy proceedings, the FDIC has obtained an order from the bankruptcy court allowing the agency to name the individuals as defendants "nominally and only to the extent of insurance coverage." The FDIC expressly does not seek to recover from personal assets. (The question of whether or not a liability insurance policy can apply when the insured person can have no liability is an interesting one that I am sure will be addressed in the course of the FDIC's suit.)

Another interesting feature of the FDIC's suit is that it was filed well after the expiration of the three-year period following the bank's closure. The bank was closed on June 26, 2009, but the FDIC did not filed its lawsuit until November 15, 2012 - which, all else equal, would seem to raise statute of limitations concerns. It seems likely that at some point prior to the expiration of the three year period that the parties entered a tolling agreement; however, the complaint says nothing either way in this regard.

There is one other interesting feature of the lawsuit, which is that the FDIC has included allegations of ordinary negligence. This is interesting because of the recent decision in the Northern District of Georgia in the Integrity Bank case, applying Georgia law and holding that because of their protection under the business judgment rule, directors cannot be held liable of ordinary negligence. More recently (as discussed here), in the FDIC's lawsuit against former directors and officers of the failed Haven Trust bank, Northern District of Georgia Judge Steve C. Jones affirmed that Georgia's business judgment rule is applicable to the actions of bank directors and officers. Based on that determination, Judge Jones dismissed the FDIC's claims against the directors and officers for ordinary negligence and breach of fiduciary duty. In light of that earlier decision, it would seem that the defendants in the new lawsuit have a basis on which to seek to have the negligence claims against them dismissed. (The FDIC, undoubtedly anticipating this argument, included in its complaint specific allegations asserting that the defendants are not entitled to rely on the business judgment rule, at paragraph 55.) 

This latest lawsuit is the tenth that the FDIC has filed as part of the current bank wave involving directors and officers of a failed Georgia bank. Because the FDIC has not updated its online litigation page in over a month, I am not completely sure of the current overall number of lawsuits filed, but I believe that this latest suit represents the 35th that the agency has filed against directors and officers of failed banks so far. In other words, over 28 percent of all the D&O lawsuits the FDIC has filed so far have been filed in Georgia. Of the approximately 440 banks that have failed during the current bank failure wave, about 80 were in Georgia, or about 18 percent of the total. For whatever reason, the FDIC's D&O litigation activity is disproportionately concentrated in Georgia. By contrast, Florida, which also has seen a significant number of bank failures as part of the current bank failure wave, has only seen one lawsuit - so far.

Scott Trubey's November 16, 2012 Atlanta Journal-Constitution article about the latest lawsuit can be found here. Special thanks to a loyal reader for providing me a link to Trubey's article and alerting me to the latest lawsuit.

Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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