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The State of Securities Litigation: Good Communication is Key to Improving Securities Litigation Outcomes


I am evangelical about the importance of defense counsel working collegially with D&O insurers and brokers – the repeat players in securities and governance litigation – in the defense of litigation against our common clients.  In the big picture, this type of collegiality is the key to putting “litigation” back in “securities litigation” and to improving the effectiveness and efficiency of securities litigation defense, through better case evaluation and strategic and economic planning.  But, of course, the big picture is made up of individual cases, and each individual case comprises countless communications, and instances of lack of communication, amongst the triad of insurers, brokers, and defense counsel.

With a focus on four areas of communication – (1) a pre-motion to dismiss initial merits assessment and post-motion to dismiss strategic summit, (2) periodic updates from defense counsel, including an initial kick-off call, (3) insurer-insured relations around coverage issues, coverage letters, and deductions based on insurers’ billing guidelines, and (4) mediation and settlement – this post discusses how we can collectively improve our communication for the benefit of our common clients.

  1. Initial Merits Assessment and Overall Case Strategy

The most fundamental failure of communication is the absence of a meaningful merits assessment at the outside of the litigation.  In days gone by, a thorough but targeted initial background review and merits assessment was de rigueur.  It is not an internal investigation but instead a focused, tailored, and balanced effort that can be done in the low six figures in all but the largest cases.  We would ask the company for a set of key internal documents, assemble and review relevant public documents, identify a handful of people to interview, and assess the strengths and weaknesses of the claim.  We would discuss the outcome with management and the board, as well as the D&O broker and insurers.  This allowed for thoughtful strategic planning through the motion to dismiss and beyond: the company could understand the risk it faced, the insurers could calibrate their involvement and set reserves, and defense counsel could defend the case with the right amount of effort and cost.

But today, far too often, this type of review does not occur.  There are multiple causes, including a low cap or budget offered to secure the engagement; the (incorrect) view that a motion to dismiss is mostly a matter of identifying what the complaint does not allege, as opposed to an affirmative narrative that sticks up for the defendants’ honesty and good faith; and understandable backlash over some firms’ use of the background review to do a full-blown internal investigation.

Whatever the causes, the lack of initial merits assessment has eroded the effectiveness of securities litigation defense, for several reasons:

  • Motions to dismiss are not as strong if defense counsel don’t know the real facts.  While we can’t use internal facts on a motion to dismiss, knowing them allows for arguments based on inferences that we can make if we know the asserted inference to be true, and ethically can’t if we don’t.  This is substantively critical; the Supreme Court’s Omnicare and Tellabs decisions require courts to consider context and draw inferences, so failing to know the real facts weakens a motion to dismiss.
  • Motions to dismiss are just the first step in the litigation and are subject to the vagaries of the judicial process, such as judicial experience in Reform Act cases and clerk resources.  Some motions to dismiss are granted that probably shouldn’t be, and vice versa.  We file motions and they go into the judicial vortex, and it’s impossible to predict when we’ll get a decision.  So the decision usually comes as a surprise, and if the decision is a denial, it is jarring.  At that point, the reflex of everyone – the defendants, defense counsel, the broker, and the insurers – is to try to settle.  So we go into a mediation to resolve a claim that is untested on class certification, discovery, or summary judgment – without even holding a strategic summit to decide how to proceed.
  • Defense counsel can take a credibility hit if a motion to dismiss is denied, absent early and candid counseling of the risk of a denial.  After a year or more of positivity about the motion’s prospects, conveyed to get the engagement and/or due to lack of a good up-front merits evaluation, the defendants are understandability extra disturbed when the motion to dismiss is denied.  Defense counsel feels pressure to just resolve the case since, at that point, it’s hard to methodically analyze the merits when the focus is making a plan to respond to plaintiffs’ document requests.  The insurers too can feel adrift because of the lack of true communication about the merits.  Everyone thus becomes extra conservative due to a lack of informed communication up front.  The reflexive reaction is to simply settle.  For insurers, reflexive settlements are especially counter-cultural – insurance claims adjustment is about risk assessment, and without good communication about the real risks, the process becomes purely practical.  Or, worse, defense counsel goes through the burdens and expense of document production without knowing where it should lead – with a settlement red-flag thrown up only later, after many millions of dollars in fees.

These are just some of the consequences of the lack of early merits assessment and communication about the risks.  An early case assessment that helps everyone align and sets a strategic summit after a denial of motion to dismiss ruling would solve a lot of problems.  Here’s an overview:

Initial case assessment.  This does not need to break the bank but it shouldn’t be done on a shoestring budget either.  Ideally, in each case, the clients would give defense counsel an overview and a set of key documents (e.g., forecasts in an alleged false forecast case).  Defense counsel can develop AI-based searches for key emails from the emails of 3-5 people, yielding a relatively small number of documents to use in targeted and focused interviews.  If we prime the AI-pump properly, the process should identify problematic emails, and we can include them in our case analysis from the beginning rather than millions of dollars later.  Ideally, the initial case assessment should include an initial damages estimate and an assessment of areas for further work during class certification and expert discovery that would help defeat or mitigate materiality, loss causation, and damages.  Based on this work and discussions with management, the board, and the broker and insurers, the group can rough out what the defense might look like if the motion to dismiss is denied, including a strategic summit to decide how to proceed.

Post-motion to dismiss strategic summit.  My vision for this is to meet in person or virtually within two weeks, before discovery gets revved up.  Defense counsel can amplify their merits assessment, and also discuss class certification opposition issues and class structure – an especially significant issue in short-seller report cases and in cases in which plaintiffs’ counsel stretches the class forward or backward, and to take advantage of the series of Supreme Court class certification cases.  And defense counsel can discuss whether the structure of the litigation makes summary judgment a realistic opportunity.  It is in everyone’s interest to see if it makes sense to take advantage of one or both of these two further pre-trial opportunities to limit or eliminate the litigation.

  1. Periodic Updates

It is equally critical for defense counsel to provide periodic updates to insurers.  First, there should be an introduction call among the company, defense counsel, the broker, and insurers shortly after defense counsel is hired.  Most defense counsel and claims handlers don’t have a pre-existing relationship, and it’s helpful for them and the broker to get to know each other, explain how they typically work, and develop expectations for communication.  In my kick-off calls, I walk through our to-do list through the motion to dismiss and explain what we’re doing and why.  I also ask the insurers for their communication preferences and clarify how the broker and I will work together to make sure the insurers get the information they need in a timely way.

With this foundation of communication, as the litigation proceeds, we’re able to have more efficient and effective updates at natural points, e.g., when the lead-plaintiff is appointed, the consolidated and amended complaint is filed, and the motion to dismiss is being briefed.  And, if defense counsel conducts an initial case assessment, that should the subject of another call.

In periodic updates, defense counsel should call it like they see it.  Too often, defense counsel’s updates go from bullish to bearish on a dime.  Whether out of loyalty to the defendants or lack of knowledge of the case, defense counsel often fails to share the realistic risks.  The most frequent reason given for this stark shift is negative-sounding emails.  But sound bites in emails are par for the course in any litigation, and one of the main skills of litigation defense is to contextualize them.  So, not surprisingly, insurers can be suspicious about a quick shift from optimism to pessimism based solely on email sound bites; it can feel pretextual.  So we defense counsel need to be candid about the real risks from the beginning.

And it’s important for insurers to ask questions and share their views of the litigation.  With email sound bites, for example, insurers should put on their defense-counsel caps and ask probing questions.  While defense counsel’s judgment is entitled to some amount of deference on assessment of the merits, probing questioning is often necessary to determine the true content and foundation of that judgment.  In my experience, one of the fundamental truths about insurance claims professionals is that, while they play a different role in the defense of claims, they have overseen myriad more claims than most defense counsel have handled, and their instincts are typically excellent.  It benefits our common clients for insurers to trust their instincts and ask probing questions.  If a claim on which defense counsel wants to throw in the towel is actually defensible, it is short-sighted for anyone to overpay for a quick settlement.  We are all in this together for our common clients, in our respective roles, so please push us.

It’s worth noting, however, that defense counsel’s views on the safety of sharing case assessments with insurers varies widely.  My view is that I don’t need to share truly privileged information with them to provide a meaningful case assessment – i.e., I don’t need to say that the CEO said this, the CFO said that, etc.  Instead, I share my impressions based on what we’ve learned in the context of my experience, which is attorney work product that is not waived if I disclose it to someone aligned with my clients.  Other lawyers play it super safe and don’t share attorney work product.  Others are in the middle.

  1. Insurer-Insured Relations

There are a few common, communication-based forces that can disrupt good insurer-defense counsel relationships.

Reservation of rights letters.  Reservation of rights letters can get the litigation off on the wrong foot.  Of course, there are relatively few true coverage problems in securities class action litigation, especially given state-of-the-art final adjudication of the conduct exclusions, but the reservation of rights letter makes many clients feel uneasy – like the insurer is on the plaintiffs’ side or their coverage is actually in doubt.  While the most experienced securities litigators prepare their clients for ominous-sounding reservation of rights letters, many lawyers engaged to defend securities class actions are generalists and some, unfortunately, seem to use the letter to turn the insurers into adversaries.  Most insurers have softened their letters to address this problem.  I suggest that everyone look at their forms and see if there is room for further improvement.

Coverage issues.  If there is a true coverage issue, I suggest insurers raise it right up front as part of the initial case assessment conversation discussed above, so that everyone can include it in their litigation strategic thinking and the company can determine whether it needs coverage counsel.  Without this type of proactive approach, companies tend to default to hiring coverage counsel.  I embrace engagement of coverage counsel when it’s necessary, but resist it when it’s not, since it changes the tone of the relationship with the carriers; it turns them from friend to (perceived) foe.  A candid discussion of these issues early on can prevent unnecessary tension.

Deductions.  Last but certainly not least are deductions based on billing guidelines.  This is a perennial problem, and it has many unintended potential consequences in individual cases and overall.  Setting aside whether guidelines are part of the insurance contract, as a default rule, I accept insurer deductions (subject to discussion/appeal).  It is incumbent on me to understand the guidelines and follow them.  If they are unreasonable as applied – such as a limit on lawyers at a hearing or internal discussions that are meant to generate ideas and strategies and updates that otherwise require a memo – I discuss the issue and rarely have had a problem.  Billing discussions are often really about time entries and projects touching on case evaluation and strategy, so I use them as an opportunity to discuss the case.  But I suspect my approach is the exception, and the result overall can be unnecessary friction for often relatively minor savings.  In the bigger picture, securities defense practices can suffer due to lower realization than other practices, which lowers internal clout within firms, which in turn affects the practice’s ability to get the right talent and firm resources.

Deductions also impact the defendants, since most defense counsel looks to the company to make up short-pays.  This can drive a wedge between the company and insurers and make the defendants worry whether the insurers will be there for them.  Experienced defense counsel should help the defendants understand the process, even if they look to the company to make up short-pays, but common sense says that the insurers are often scapegoated.

I don’t presume to understand whether insurers’ cost savings is worth enduring these types of consequences.  And to be sure, I support deductions for wasteful lawyer time and administrative costs that should not be on the bill in the first place – these simply are not reasonable defense costs, and most public companies long ago stopped paying for them.  But I know we’d all be happier – insurers, defense counsel, and our common clients – if deductions were taken more sparingly.  Of course, I’m sympathetic about runaway law firm economics, but that’s a different problem that typically can’t be effectively addressed by deductions – and over-deducting in those situations just intensifies the tension between the insurers and the company/defense counsel, given the large deductions defense counsel asks the company to make up.  (One solution to bad billing and bloated fees, about which I’ve written, is the formation of small, collegial panels of full-time securities defense lawyers who operate on volume economics and a system of trust.)

  1. Mediation and Settlement

Defense-counsel friends: everything we need to know about insurer relations during the mediation and settlement process, we learned in kindergarten.  When there is an event as important as mediation, at which we plan to ask our insurer colleagues to fund the settlement, we must involve them in all aspects of the discussion and not just tell them when you want to mediate, with whom, and provide (often insufficient) notice.

With an initial case assessment and discussion between the company, insurers, and broker, the path to mediation will naturally come up.  Does mediation during the motion to dismiss process make sense?  If so, why?  If the motion to dismiss plays out, we will discuss mediation at the post-motion to dismiss strategic summit: is this a good time to mediate or should we test the economics of plaintiffs’ proposed class on market efficiency, price-impact, and/or classwide damages through the class certification process?  And if the plaintiffs’ case is structurally weak, should we mediate late in the case, after summary judgment is pending?

But even if we don’t have an initial case assessment meeting or strategic summit, in each and every case, we need to discuss the mediation pathway and strategy with the insurers and seek their views.  To leave them out of the process is impolite, to say the least, and fails to maximize the effectiveness of our clients’ insurance protection – which includes not just the limits themselves but the strategic input we can get from the insurers’ claims professionals and their ability to help our clients better when they have sufficient lead time and information to support obtaining funding when the time comes.

Another point of friction in the insurer-defense counsel relationship is over settlement value and negotiation.  While it’s an over-simplification, most defense lawyers just want to reach a settlement, and most insurers want to pay the right amount (with that amount confounded by the problems I’ve discussed).  This set-up can lead to friction and strategic positioning between them with express or implied threats of bad faith by defense and/or coverage counsel.

But we’d all be better off, in individual cases (in my experience) and overall, with clear communication and collegiality.  There are few cases in which insurers will not fund a good settlement, especially if defense counsel has provided meaningful analysis in advance and set a target or range for the settlement amount.  Many D&O insurance professionals are, to a large extent, mediation specialists, and it’s wrong to jettison their judgment.

The solution to this is good two-way communication, as discussed above.  Defense counsel should call it like they see it, and insurers should ask probing questions along the way.  Together, we can reach good outcomes.  Sometimes that means not settling and continuing to litigate.  Sometimes that means a walk down the hallway with the carrier whose money is in play and explaining why this is a case whose settlement value isn’t the product of liability risk and our economist’s best estimate of damages, but instead the lowest amount the plaintiffs’ lawyers will take.  There are some such cases.  But we need to improve our communication so we can know which is which.



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