Anticipated legislative and judicial developments:  Sherrie Savett sees an opportunity in the current political environment for legislative reform in two areas:  (1) extending aiding and abetting liability beyond the restrictions established last year by the United States Supreme Court in Stoneridge Investment Partners v. Charter Communications; and (2) some clarification on loss causation as articulated by the United States Supreme Court’s decision in Dura Pharmaceuticals, Inc. v. Broudo.  Boris Feldman agreed with her.  The other panelists, however, disagreed.  They do not foresee significant legislative changes.  Instead, they said that judicial appointments by President Obama would have a far greater impact on securities litigation in the near future.  Professor Coffee also warned that the public would likely be outraged if banks were forced to use bailout money to settle the substantial number of securities class actions currently pending against them.

Turmoil in the plaintiffs’ bar (e.g. William Lerach):  The panel generally agreed that there would be no significant decrease is securities filings now that Bill Lerach and Mel Weiss have left the bar.  According to the panelists, the plaintiffs’ bar remains well funded.  They viewed market conditions as having a far greater impact on the number of claims filed.  The panel also believes that policyholders will continue to face additional “opt-out” cases.  According to Professor Coffee, “op-out” plaintiffs have generally achieved settlements ten to twenty times greater than the class.  He warned that even mutual funds now are considering bringing their own “opt-out” suits.

Madoff scandal:  The panel agreed that the real source of recovery for these claims was not Madoff or his firm, but more likely hedge funds that acted as “feeder funds” for the Madoff investments.  Some panelists also felt that the plaintiffs would look to the auditors of those “feeder funds” for failing to identify problems with the Madoff investments.  In both cases, claims would be based on alleged breach of fiduciary duty and lack of due diligence.  Currently, the United States Court of Appeals for the Second Circuit is considering Judge McMahon’s dismissal of Southern Cherry Street LLC v. Hennessee Group LLC.  In that case, Judge McMahon dismissed claims brought by investors in Hennessee Group LLC (“Hennessee”) who complained about Hennessee’s investments in Bayou Capital – which itself turned out to be a fraudulent ponzi scheme.  Judge McMahon dismissed those because she said that Hennessee did not have actual knowledge of Bayou Capital’s fraud.  She apparently rejected the plaintiffs’ argument that Hennessee would have discovered the fraud if it had performed adequate due diligence.  Today’s panel believes that the Second Circuit decision in that case will obviously have a substantial impact on similar claims brought against hedge funds that invested in the Madoff funds.

Rating agency and auditor liability:  The panelists also touched upon the liability of rating agencies, such as Moody’s and S&P, in the context of securities class actions.

Panelist Sherri Savett of the Berger Montague firm pointed to In re Moody’s Corporation Securities Litigation, a recent decision in which the Southern District denied the defendants’ motion to dismiss in a securities fraud class action brought against Moody’s and several of its directors and officers alleging that they misled investors with respect to Moody’s impartiality and independence in providing ratings to asset-backed securities. According to Savett, this decision may open the door to further litigation against other rating agencies.  Indeed, rating agencies have been increasingly targeted as defendants in subprime-related securities class actions under the Securities Act of 1933 in connection with their assignment of ratings to offerings of mortgage-backed securities that have allegedly declined in value.

Savett and Stuart Grant of Grant & Eisenhofer also discussed the liability of auditors in securities class actions.  Grant noted that there had been a decrease in the number of securities class actions that named auditors as defendants.  He posited two reasons for this phenomena: (1) the auditing firms had “cleaned up their act”; or (2) they benefited from the timing of the financial crisis, which resulted in an increase in securities class action filings in the summer/fall 2008, prior to the auditors certifying the year-end financial statements.

Settlement trends:  The panelists discussed some current settlement trends, including personal contributions from individual defendants.  The panelists disagreed over the extent to which a lead plaintiff could require such contributions if its insistence on those contributions might disrupt the settlement.

Impact of anticipated increased enforcement:  The session concluded with a discussion of anticipated increased regulatory enforcement.  First, they noted that in the past, plaintiffs have cited as corrective disclosures statements made as part of a regulatory settlement, which might mean that increased regulatory enforcement will lead to more suits being filed.  On the other hand, the panelists said that the fair funds established as part of those regulatory settlements have been used to off-set civil damages, decreasing exposure to civil claims.