MONITOR
S E C U R I T I E S
Fall 2006
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The Dating Game: Analyzing the Options Scandals
The number of companies ensnared
in the backdating scandal just keeps on
growing. Yet at the same time, many in
the business lobby continue to argue
that stock options
misdating is a
victimless crime.
Business Professor
H. Nejat Seyhun
begs to differ.
In a soon-tobe-published
H. Nejat Seyhun
study, Seyhun
and his colleagues at the University
of Michigan’s Ross School of Business
found that 48 companies linked to the
backdating scandal lost an average of
$510 million in market value – or 8%
average loss – in the three weeks after
disclosure of their involvement. By
comparison, the executives involved
gained at most a total of $600,000.
As the study notes: “It appears that
the potential benefit to executives from
clandestine backdating is miniscule
compared to the potential damage to
shareholders.”
The Securities Fraud Monitor spoke with
Seyhun about the options scandal,
his research and the implications for
shareholders.
Oklahoma Firefighters v. El Paso Corp.:
How a Small Fund Made a Big Difference
When it comes to securities class actions, many public pension funds make
a clear distinction between fulfilling
their obvious fiduciary duties – monitoring potential losses and collecting
settlement money – and actually filing
lawsuits.
Some small and mid-sized funds
figure they may never be lead plaintiff,
especially in a major case, where a
larger institution often holds sway.
So it was with some surprise that the
$1.5 billion Oklahoma Firefighters Pension & Retirement System found itself
in a position to play a vital role in the
securities class action against El Paso
Corp., which settled for $285 million
in August.
“When we first got involved with
this case, it was mostly a question of
covering ourselves and being a responsible fiduciary. It was strictly about
monitoring our stock losses,” said Bob
Jones, the fund’s executive director.
“We didn’t think a little fund like
ours would ever be lead plaintiff. Now
here we are making a big difference
with one of the biggest settlements of
all time.”
Continued on page 5
SECURITIES FRAUD MONITOR:
Your study analyzed the market value
losses of 48 firms that have been
accused of backdating practices. Do
you think the findings apply to an
even broader spectrum of Wall Street
companies?
H. NEJAT SEYHUN: We have just updated that initial study to include [a total of] 88 firms that have been identified
by The Wall Street Journal or otherwise
linked to the scandal. The numbers
did not change significantly, although
the losses did fall slightly – from $500
million per firm to about $436 million
per company. The corresponding gain
for executives also fell from $600,000
to $500,000 per year. But qualitatively,
our earlier results continue to hold.
This scandal will eventually cost shareholders up to $100 billion.
SFM: We understand you and your
colleagues were studying these backdating scams long before the regulators and the media caught onto it.
HNS: The stock price patterns around
option grant dates were well known
for a long time. David Yermack [of
New York University] had done a lot
of work in the mid 1990s. He showed
stock prices were rising after the grant-
Continued on page 6
EDITORIAL
Berman DeValerio Pease Tabacco
Burt & Pucillo prosecutes class actions
nationwide on behalf of institutions
and individuals, chiefly victims of
securities fraud and antitrust law
violations. The firm, which was
founded in 1982, has offices in Boston,
San Francisco and West Palm Beach.
In addition to conducting litigation,
the firm provides securities fraud
monitoring, evaluation and advisory
services to public pension funds and
other institutional investors.
The Securities Fraud Monitor is published
by the law firm of Berman DeValerio
Pease Tabacco Burt & Pucillo, One
Liberty Square, Boston, MA 02109,
(800) 516-9926. This newsletter
is designed to inform Berman
DeValerio’s clients and friends about
current securities fraud and corporate
governance issues. It is not a substitute
for legal advice.
If you would like to receive additional copies of this issue, or
if you would like to be added to
our mailing list for future issues,
please contact Richard Lorant,
Director of Marketing & Communications, at (617) 646-1825 or
[email protected].
Peter A. Pease, Executive Editor
Richard Lorant, Managing Editor
Copyright 2006
Berman DeValerio Pease Tabacco
Burt & Pucillo
www.bermanesq.com
Dis-Implying Investors
With a Democratic majority, the
next Congress may prove less sympathetic to corporate complaints about
burdensome regulation than its Republican-led predecessors. Not to worry.
Business leaders have formed their own
“independent committee” to sidestep
that hurdle.
The Committee on Capital Markets Regulation has been floating trial
balloons about its plans to make U.S.
stock markets more competitive. None
of them bode well for investors.
Formed with an endorsement from
Treasury Secretary Henry Paulson,
the committee includes current and
former CEOs of a host of firms, notably
PricewaterhouseCoopers, the NASD,
DuPont, Deloitte and Lehman Brothers.
Committee members have been
quoted as saying their recommendations may include urging the Securities
and Exchange Commission to “dis-imply” the private right to sue for securities fraud, leaving enforcement solely to
the government.
The rationale offered is that IPOs by
foreign companies are increasingly taking place in countries which don’t have
pesky requirements and remedies concerning the truth or falsity of financial
statements. If U.S. investment banks
are going to compete for this business,
it is said, they need to be able to offer a
kinder, gentler regulatory environment.
Perhaps it is not surprising that
Paulson, formerly the CEO of Goldman
Sachs, would prefer to limit regulation
of the markets in favor of his investment banking brethren. After all, they
and the accounting firms have had to
pay billions to compensate defrauded
shareholders in recent years. Plaintiffs,
SECURITIES FRAUD MONITOR
2
frequently led by institutions, have
surmounted formidable legal barriers
to win these cases, proved egregious,
knowing misconduct, and achieved
record settlements. The florid details of
these huge fraud cases are well known;
many of their perpetrators are serving
lengthy jail terms.
If only the understaffed, underpaid
SEC and Justice Department had any
hope of prosecuting all the wrongdoers.
There always have been, and always
will be, too many. The CEO Committee knows this, and is counting on it,
This is no time to race to the
deregulatory bottom.
not to mention the prospect of limiting
enforcement by the SEC by applying
political pressure.
This is no time to race to the
deregulatory bottom. Indeed, recent
efforts to force improvements in corporate conduct have been successful.
The 2002 Sarbanes-Oxley reforms have
dramatically improved the competence
and performance of corporate financial
officers and directors and their auditors,
and fraud cases are way down.
The past year ending June 30, 2006,
saw only 129 fraud cases filed, fewer
than any one-year period since 1996,
and the percentage of filings per issuer
in the first six months of 2006 was
only 0.9%.
One would think that the committee
of CEOs would be pleased that their
ranks may soon become respectable
again. They can thank healthy regulation and remedies for that. ■
Firm Settles Three Cases For Total of $103.5 Million
Berman DeValerio has recently
negotiated three securities class action
settlements, obtaining $103.5 million
from defendant companies, auditors
and underwriters.
The firm reached a $61.5 million
partial settlement in a class action tied
to an accounting scandal at Philip
Services Corporation. Of that, $50.5
million will be paid by the bankrupt
company’s former auditors, Deloitte &
Touche, with another $11 million coming from its underwriters.
The class action is still proceeding
against individual defendants, with a
trial date tentatively scheduled for May
14, 2007.
The case stemmed from a January
1998 announcement that Philip Services would take charges to earnings of
between $250 million and $275 million
for fiscal 1997. That figure later rose to
over $381 million, with the company
restating financials for 1995, 1996 and
1997.
The 1995 restatement, for example,
disclosed that earnings had been overstated by approximately $22.5 million,
or a whopping 690%.
The share price plunged 80% over
the six months following these disclosures, and Philip Services filed for
bankruptcy protection.
Plaintiffs had alleged that the
company and its officers made false
and misleading statements regarding its
publicly reported revenues, earnings,
assets and liabilities.
The class period covers those who
purchased Philip Services stock between Feb. 28, 1996, and Jan. 26, 1998.
In September, Berman DeValerio
received final approval for another $24
million settlement from Deloitte – this
one relating to the auditors’ work for
Symbol Technologies, Inc. Berman
DeValerio had already negotiated a
$139 million partial settlement in the
Symbol lawsuit in 2004, acting as colead counsel on behalf of the Municipal
Police Employees’ Retirement System
of Louisiana.
The class period in the related case
against Deloitte covers those who purchased Symbol stock between March 2,
2000, and Oct. 17, 2002.
The company, which makes mobile
and wireless computer devices, was
accused of improperly booking a $10
million royalty payment in the third
quarter of 2000 and of improperly
recording more than $40 million in
revenue in the first quarter of 2001.
The plaintiffs alleged that Deloitte
had made false statements and/or omissions on Symbol’s financial statements
for 1999, 2000 and 2001.
The case continues against four
individual defendants.
Lastly, the firm has received preliminary approval of an $18 million settlement in the case against telecom firm
ICG Communications Inc. The firm
served as co-lead counsel on behalf of
the Strategic Market Analysis Fund.
The case alleged that ICG executives misled investors, touting the
company while failing to disclose problems that threatened the company’s
entire ISP business, and while misrepresenting growth, revenues and network
capabilities.
ICG filed for bankruptcy protection
in November of 2000. A final court
hearing on the proposed settlement has
been scheduled for Jan. 12, 2007.
“We’re very pleased with these three
settlements, particularly given that two
of the companies involved had filed
for bankruptcy protection, making it
harder to obtain payments for investors,” said Norman Berman, a partner
involved in both the Philip and ICG
cases. ■
“All in favor of a cap on our liability?”
SECURITIES FRAUD MONITOR
3
Two More Defendants Added to Fannie Mae Case
Goldman Sachs & Co. and KPMG
LLP have been added as defendants
in the Fannie Mae securities fraud
case. The two firms join the mortgage
company itself and three former senior
officers as defendants in a fraud that is
expected to result in an $11-billion-plus
restatement.
KPMG had been Fannie Mae’s
outside auditor for 35 years. Goldman
Sachs served as the dealer and underwriter for a number of Fannie Mae real
estate mortgage investment conduit, or
REMIC, transactions.
Berman DeValerio, acting as co-lead
counsel, represents the lead plaintiffs,
the Ohio Public Employees Retirement
System and the State Teachers Retirement System of Ohio. Fannie Mae,
also known as the Federal National
Mortgage Association, is the nation’s
largest source of financing for home
mortgages.
The Securities and Exchange Commission has ordered Fannie Mae to
restate its financials from 2001 through
mid-2004.
The new defendants were included
in an amended consolidated class action complaint filed in August 2006.
The additions follow a report by Fannie
Mae’s regulator, the Office of Federal
Housing Enterprise Oversight, which
outlined the two firms’ roles in the
fraud.
Jeffrey Block, a Berman DeValerio
partner overseeing the Fannie Mae case,
said new evidence discovered by the
firm and co-counsel led to the decision
to add the new defendants.
“It became increasingly clear to us
that KPMG and Goldman Sachs were
active participants in the Fannie Mae
fraud and that they should be held ac-
countable,” Block said.
Goldman Sachs noted its inclusion
as a defendant in the quarterly report it
filed in October with the SEC.
According to court documents, the
three individual defendants – former
CEO Franklin Raines; former CFO
Timothy Howard; and former controller Leanne Spencer – manipulated
Fannie Mae’s financial results in order
to receive additional compensation.
If Fannie Mae’s earnings hit certain
targets, they were rewarded.
“It became increasingly
clear to us that KPMG and
Goldman Sachs were active
participants in the
Fannie Mae fraud and that
they should be
held accountable,”
partner Jeffrey Block said.
“They each had a strong motive
to manipulate Fannie Mae’s earnings
to meet the established targets,” the
complaint says.
The complaint says that KPMG
“knowingly or recklessly” issued false
and misleading audit reports that
certified Fannie Mae’s financial results
for 2001 through 2003, even though
KPMG knew or recklessly disregarded
the fact that the audits were not in
accordance with Generally Accepted
Auditing Standards, or GAAS.
Between 1998 and 2003, Fannie Mae
paid KPMG nearly $53 million in fees
– approximately 83% of which went to
non-audit work.
SECURITIES FRAUD MONITOR
4
“By virtue of the substantial fees
reaped from Fannie Mae, including tens
of millions of dollars in non-audit fees,
KPMG had a self-interest in providing
Fannie Mae with healthy audit opinions
and, therefore, an incentive to turn a
blind eye to the company’s fraud,” the
complaint says.
KPMG was terminated as Fannie
Mae’s auditor on Dec. 21, 2004.
The complaint accuses Goldman
Sachs, meanwhile, of furthering the
fraudulent scheme through two REMIC
transactions “for the sole economic
and improper purpose of shifting $107
million of Fannie Mae’s earnings into
future periods.”
Goldman Sachs “deceived the
investing public by intentionally
designing and implementing sham
transactions with no legitimate business
purpose in order to create losses for
Fannie Mae and create the false appearance that Fannie Mae’s earnings were
stable and not volatile,” the complaint
continues.
The complaint also says that Goldman Sachs had a motive to make Fannie
Mae happy; Fannie Mae was one of
Goldman Sachs’ largest trading clients.
“Indeed, before, during and after
the Class Period, Goldman Sachs acted
as lead manager, co-manager, and
underwriter in numerous securities offerings for Fannie Mae, through which
Goldman Sachs received substantial
compensation,” the complaint reads.
The case was filed on behalf of
anyone who purchased the publicly
traded common stock or call options or
sold the publicly traded put options of
Fannie Mae during the period between
April 17, 2001, and Sept. 27, 2005. ■
Small Fund,
Big Result
Continued from page 1
Not that the fund stepped into its
new role lightly.
In 2003, Oklahoma’s board adopted
a securities litigation policy, setting a
loss threshold for case analysis, retain-
ing counsel to monitor its portfolio,
and making its trading data available
electronically for swifter analysis.
Berman DeValerio began providing
monitoring services, calculating potential losses and issuing periodic case
recommendations and updates.
“Our relationship with Berman
DeValerio’s attorneys strengthened over
time,” said Marc Edwards, the board’s
attorney. “We were comfortable with
them, and confident in the high quality
of their work. Moving forward as lead
plaintiff simply made sense in this case.”
The Oklahoma fund had no role
in the case when it was initially filed
in 2002. But two years later, the fund
applied for lead plaintiff after El Paso
announced that it had overstated its
proved oil and gas reserves by 41%.
With Berman DeValerio as counsel,
the fund was appointed deputy lead
plaintiff, and was later elevated to colead plaintiff in 2005.
The fund played an active and vital
role throughout the litigation, particularly when it came time for settlement
negotiations, said Michael J. Pucillo,
the Berman DeValerio partner who
directed the case.
Several recent studies have highlighted the power of public
fund lead plaintiffs in securities
class actions. Cases prosecuted
by institutional lead plaintiffs
have resulted in higher recoveries, lower attorneys’ fees and
improved corporate governance at companies accused of
wrongdoing.
“By choosing to participate in this case, Oklahoma
protected the retirement assets
not only of its 19,000 members
but of all investors who were
misled by El Paso,” Pucillo
said. “By taking a pro-active approach,
the fund demonstrated how important
it is for smaller funds to get involved.”
The Oklahoma fund also is expected
to recoup the expenses it incurred by
taking the lead role.
According to the complaint, El Paso
materially misrepresented its financial
condition, causing its stock to trade at
artificially high prices. The plaintiffs
alleged, among other things, that the
company reported strong “proved”
global oil and natural gas reserves.
Proved reserves – defined as those
that can be extracted from known fields
under existing economic and operating conditions – represent a key metric
in assessing an oil company’s future
growth.
SECURITIES FRAUD MONITOR
5
However, the lawsuit alleged that,
the company’s statements of proved
reserves were artificially inflated.
On Feb. 17, 2004, the company
announced that an independent review
of its proved oil and gas reserves revealed that, as of Jan. 1, 2003, El Paso
overstated such reserves by 41%, or
3.64 trillion cubic feet. As a result, the
company said it would take a pre-tax
The fund played an active
and vital role throughout the
litigation, particularly when it
came time for settlement
negotiations.
charge of approximately $1 billion for
the fourth quarter of fiscal year 2004.
Following these announcements,
the company’s common stock fell 17.6
percent, from a closing price of $8.81
on Feb. 17, 2004, to a close of $7.26 on
Feb. 18, 2004.
Under the terms of the settlement,
$273 million of the total amount will
come from the company and its insurers, and, separately, $12 million from
auditors PricewaterhouseCoopers.
Notices advising class members of the
settlement should be mailed out shortly.
A hearing on approval of the settlement
is pending.
The case, captioned Oscar Wyatt v.
El Paso Corp., was brought in the U.S.
District Court for the Southern District
of Texas. The class period covers all
investors who bought El Paso common
stock from Feb. 22, 2000, through Feb.
17, 2004. ■
Backdating Scandal
Continued from page 1
ing of options, and he attributed it to
springloading. Then other researchers
noticed that stock prices were falling
before the grant date as well. That was
called bullet-dodging.
We were not convinced that that
was all that was going on, because we
noticed that the companies whose
stock price fell before the grant date
were also the ones whose stock price
bounced back after the grant date.
While we could believe that bulletdodging and springloading could occur
“No one could believe that
top-level corporate executives
would do this. They thought
our claims were outlandish.”
in different companies at different
times, we just did not find it credible
that the same firms could be experiencing both at the same date. It seemed
too risky and we thought it would be
impossible to pull off. The company
would have to announce some bad
news only to be followed a few days
later by especially good news.
Then, in early 2004, my colleague
M.P. Narayanan had lunch with an
executive who said that they were actually backdating options in his own firm.
Backdating could easily explain both
the falling as well as the rising stock
price patterns.
Our intuition was the following: if
companies were backdating, and they
had to report option grants immediately, then there would be built-in reporting lags. So if I get the option today
and report it tomorrow, but pretend I
got it six months ago, then there would
be a built-in six-month delay.
We looked to see if these V-shaped
patterns around the granting of the options were more pronounced the bigger
the reporting delays. Data confirmed
our hypothesis. The bigger the reporting lag, the bigger the V-shaped price
reversals around the grant date. We
finished our paper in January 2005
and sent it to an academic journal for
publication consideration. Unfortunately for us, no one could believe that
top-level corporate executives would
do this. They thought our claims were
outlandish.
SFM: How long did it take before
people did start to believe?
HNS: We kept trying to publicize our
findings. But it wasn’t until The Wall
Street Journal wrote its backdating story,
“Perfect Payday,” in March that people
started paying attention.
SFM: Would you say your analysis
provides backdating proof?
HNS: I wouldn’t say it’s proof, exactly.
For proof that would stand up in court,
you need to look at actual corporate
documents to see when did the board
meet and when did the person receive
the option grant. Our research provides
convincing statistical evidence. I would
say it is highly persuasive statistical evidence, but it is still statistical evidence.
There’s always a chance that somebody may have reported their options
grant late and then got lucky by getting
the stock for a minimum price. But
based on our research, we can make
statements such as “there’s only a onein-a million chance that these options
grants were due to random events.”
SECURITIES FRAUD MONITOR
6
SFM: You have also found strong
evidence of other games executives
play. Can you explain the difference
between backdating and forward
dating?
HNS: Backdating is when the board
grants options on a certain date, but
the grant date for the executive is then
set back to a date when the stock was
at a lower price. Since options are
issued with an exercise price equal to
the stock price on the grant date, that
means the options are immediately “in
the money.” What is happening here
is a form of fraud. The top executive is
basically changing the board’s intent
and decision in order to increase his or
her compensation.
Forward dating is another kind of
game. If stock prices have been falling
prior to the grant date, there is no point
in backdating. This would only increase
the exercise prices, and thus reduce the
value of the options. However, executives can benefit by waiting to see if the
stock prices will continue to fall. There
is incentive to wait for a lower price.
If prices continue to fall, they can
designate a date in the future (thus forward dating) with a lower stock price
as the grant date. If prices immediately
revert up, they can simply report the
original date as the grant date with no
loss of value. Forward dating is harder
to detect because there may not be a
built-in reporting delay anymore. [Sarbanes-Oxley requires options grants to
be reported within two days.]
Let’s say I intend to play the forward
dating game. Stock prices have fallen
from $50 to $40 and I get the option
award when the stock price is at $40.
I decide to wait and not report the
grants immediately to HR. If the price
continues to fall to $30 and then goes
up, I report the day it was $30 as the
grant date. I get to earn an extra $10
per share from playing the forward dating game.
If, instead, the stock price goes up
immediately to $41 and the day after
that to $42, I simply report that I got
the options two days ago when the
stock price was $40. In this case, it
looks like I was honest even though I
had intended to play the forward dating
game. No one will catch that. In the
end, if prices fall, I win. If the prices go
up, I don’t lose. This is a nice game
for me.
stand. It’s shocking that The Wall Street
Journal ran two or three stories defending backdating. [WSJ columnist] Holman Jenkins apologizes for corporate
fraud that this is not a big deal, but he
obviously missed the point. Somehow
it didn’t register that this is a fraud
going on. How can he or anyone else
defend fraud?
What makes this illegal is that toplevel management is tampering with
corporate documents to the detriment
of shareholders. It’s as if they added a
zero to their paycheck.
SFM: Is forward dating as prevalent as
backdating?
HNS: We find very strong evidence
for forward dating as well, but it’s more
subtle and much more difficult to catch.
It’s probably more egregious than
backdating. An executive could always
pin the blame on the HR department
by saying: “Look, I told HR to process
these grants, but they did not.” Or,
“Gosh, I forgot to tell HR to process
these.”
SFM: If forward dating is so egregious, how come we haven’t seen very
much about it in the popular press?
HNS: I don’t think people understand
what it is. We’re now yelling that
there’s another game – the forward dating game – just like when we initially
yelled about backdating. People didn’t
pay attention then either. We’re going
to continue to scream here.
SFM: Do you think the backdating
scandal has gotten the attention it
deserves?
HNS: I don’t really think so. Again,
there’s a lot that people don’t under-
“There’s a lot that people don’t
understand. It’s shocking that
The Wall Street Journal ran
two or three stories defending
backdating.”
SFM: Explain for us two other dating game terms: bullet-dodging and
springloading.
HNS: Bullet-dodging refers to announcing the bad news before the
granting of the options. With the bad
news out, the stock price is reduced,
allowing the executive to get the stock
at a lowered price.
With springloading, you get the options first, then you announce the good
news. These two practices are very
close to insider trading. If the executive
were to buy and sell shares on this news
– rather than granting himself options
– he would go to jail for the same
act. Bullet-dodging and springloading
shouldn’t be treated any differently
than insider trading.
SECURITIES FRAUD MONITOR
7
SFM: What does this scandal demonstrate about corporate America?
HNS: To me, one of the lessons of this
debacle is just how much control the
top management has over the board of
directors. This really suggests that the
top management is running the board
– not the other way around. It suggests
that the checks and balances of corporate governance are not there to protect
shareholder interest.
SFM: So what are the possible fixes?
HNS: For starters, the chairman should
be a separate person from the CEO.
At companies where the CEO and the
chairman are one and the same, it’s
like the fox is guarding the chicken
coop. Another way to encourage board
independence is to make the votes of
the board members secret, so none of
the directors or the CEO knows how the
other directors voted. Only the chairperson should know.
SFM: Should regulators be doing more
to curb these abuses?
HNS: The SEC needs to address
springloading and bullet-dodging. I
applaud the new executive compensation changes the SEC implemented this
summer. But they need to put some teeth
into these changes. Sarbanes-Oxley is
all good and fine. But nothing happens
when Sarbanes-Oxley is ignored and
somebody doesn’t file options grants in
two days. There’s no penalty.
The SEC, for instance, could give
shareholders private rights of action.
So if somebody doesn’t report compensation in two days, investors can file
a lawsuit. Or they could put in some
explicit fines for each occurrence of noncompliance. ■
Securities Litigation: Myth and Fact
MYTH: Shareholder lawsuits are spiraling out of control.
MYTH: Most shareholder lawsuits are frivolous.
FACT: New lawsuits are actually declining. After a decade
in which filings held steady at about 200 a year, the number of new shareholder lawsuits has hit a historic low. The
number of federal securities fraud class action filings dropped
16% in 2005, declining to 179 cases from 214 the year
before. This year, filings are on track to fall to 123 – 36%
below the 1996-2005 average.1
FACT: High pleading standards effectively discourage
frivolous litigation. Congress amended the securities laws
in 1995 and 1998 to address concerns about so-called “strike
suits.”6 Since then, most securities fraud lawsuits are routed
to federal courts. There, heightened pleading standards make
them harder to prosecute than any other type of private action. Companies are further insulated from frivolous lawsuits
because shareholders’ lawyers can only begin gathering documents and testimony to support their case after a judge has
ruled the complaint meets the high pleading standard.
MYTH: Shareholder lawsuits are lawyer-driven, resulting
in little or no recovery for investors and large windfalls for
lawyers.
FACT: Recoveries are up and lawyers’ fees are down. The
growing involvement of public pension funds and other institutional investors as lead plaintiffs has increased recoveries
and lowered attorneys’ fees, according to a number of recent
studies.2 The latest, by St. John’s University Law School
Professor Michael A. Perino,3 suggested that public pension
funds serve as effective monitors of class counsel.
Billions of dollars are recovered each year. A total of $14.2
billion was available to investors in current securities class action settlements as of Oct. 1, 2006, according to ISS Securities Class Action Services.4 The average size of settlements
overall has increased for years, reaching $71.1 million in
2005, up 156% from the prior year’s average of $27.8 million. That figure does not incorporate mega-settlements in
the Enron and WorldCom cases.5
MYTH: Government authorities can prosecute corporate
wrongdoers all by themselves.
FACT: Private litigation is a vital complement to federal
and state regulatory efforts. The Securities and Exchange
Commission and other government regulators and prosecutors
have traditionally relied on the plaintiffs’ bar as an important
adjunct to their work. As then-SEC Chairman Arthur Levitt
testified in 1995: “Private rights of action are fundamental to
the success of our markets; they are an essential complement
to the SEC’s enforcement program; and they play a significant
role in helping to ensure full and complete disclosure. The
Commission must oppose any measures that would eviscerate
investors’ legitimate remedies against fraud.”7 What was true in
1995 is only more so in 2006 – following accounting scandals
at Enron, WorldCom, Global Crossing and, most recently,
more than 120 companies under scrutiny for improper practices in stock options backdating. ■
SECURITIES FRAUD MONITOR
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