The PSLRA and Obtaining Early Proof of Claims Information in Securities Class Actions

Securities Regulation Law Journal

Volumn 29, Issue 3, 2001, Pages 262-274

  Friedman, Alan R ^a   Freeman Bosworth, Lauren ^a  

^a NONE

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EID: 0035599844     PISSN: 00979554     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (50)

1. 789 F. Supp. 1001 (W.D. Mo. 1992).
2. Rule 23 (d) authorizes the court to enter various orders in a class action, and courts have relied on this provision as a source of authority to order discovery from absent class members. See, e.g., Schwartz v. Celestial Seasonings, 185 F.R.D. 313, 316 (D. Colo. 1999).
3. Biben, 789 F. Supp. at 1004.
4. Id.
5. Id.
6. Id. Some courts have adopted the principle of Biben that a court may require early proof of claims information from the class, but have denied motions for early proof of claims forms on the ground that, under the particular factual circumstances and unlike Biben, absent class members lacked sufficient incentive to return the forms because of the lack of any settlement funds. See Feinberg v. Hibernia Corp., 1994 WL 685427 (E.D.La. 1994).
7. 185 F.R.D. 313 (D. Colo. 1999).
8. Schwartz, 185 F.R.D. at 315.
9. Id. at 318.
10. Id.
11. 1994 WL 1718450 (D. Colo. 1994).
12. In re Storage Technology Securities Litigation, 1994 WL 1718450, at *1.
13. Id.
14. Id.
15. Id. at *2.
16. Id.
17. 85 F.R.D. 325 (S.D.N.Y. 1980).
18. Enterprise Wall Paper Mfg., 85 F.R.D. at 327.
19. 135 F.R.D. 39 (E.D.N.Y. 1991).
20. In re Crazy Eddie Securities Litigation, 135 F.R.D. at 42 (internal quotations omitted).
21. Id.
22. 164 F.R.D. 309 (D. Conn. 1995).
23. McCarthy, 164 F.R.D. at 313.
24. Id. at 312.
25. 1990 WL 210305 (S.D.N.Y. Dec. 11, 1990).
26. All of these cases were decided prior to the passage of the Act in 1995, with the exception of Schwartz v. Celestial Seasonings, Inc., 185 F.R.D. 313 (D. Colo. 1999), which is not governed by the PSLRA because it was filed prior to the effective date of the Act.
27. Private Securities Litigation Reform Act of 1995, Committee Reports, 104 S. Rpt. 98 (June 19, 1995).
28. Id.
29. 15 U.S.C. § 78u-4(7)(emphasis added).
30. 104 S. Rpt. 98.
31. Id.
32. Securities Litigation Reform, Committee Reports, 194 H. Rpt. 369 (1995).
33. 104 S. Rpt. 98. In fact, prior to passage of the PSLRA, at least one court had remarked on the frequency of settlements of security class action litigation: "Indeed, no securities class action has [ever] gone through trial in the Northern District of California, where many such cases are filed." In re Oracle Securities Litigation, 829 F. Supp. 1176, 1177 (N.D.Ca. 1993) (quoting J. Cooper Alexander, Do the Merits Matter?: A Study of Settlements in Securities Class Actions, 43 Stan. L. Rev. 497, 526 (1991)).
34. Id.
35. Unreliable damages estimates also undermine the court's evaluation of a proposed settlement to determine whether it is fair, reasonable, and adequate, as required under Rule 23(e). See Fed. R. Civ. P. 23(e).
36. Kenneth Cone and James Laurence describe the model as follows: "[t]he [Proportional Decay] model performs these calculations under the basic assumption that all shares are equally likely to trade on any given day. Thus, if the 10,000 shares that traded on the day in question represent one percent of the total shares available for trading (float), the model would estimate that one percent of the untraded shares were sold on that day, as well as one percent of the shares purchased (and not yet resold) on each previous day in the class. The model derives its name from the gradual decay of the untraded shares. The model therefore generates a prediction of how many shares entered the class, and how many of those shares were held to the end (buy-and-holds) as opposed to sold during the class period (in-and-outs)." Kenneth R. Cone, James E. Laurence, How Accurate are Estimates of Aggregate Damages in Securities Fraud Casesquest; 49 Bus. Law. 505, 510 (1994).
37. See, e.g., Robert A. Alessi, The Emerging Judicial Hostility to the Typical Damages Model Employed by Plaintiffs in Securities Class Action Lawsuits, 56 Bus. Law. 483 (2001), for an extensive discussion and critique of this damages model. Mr. Alessi notes that, "[s]everal commentators have observed that a more accurate calculation of the shares that were purchased during and held until the end of the class period would result from the actual polling of each individual shareholder. Because plaintiffs' damages model is not based upon such data, plaintiffs are hard pressed to cite empirical research that concludes that their Proportional Decay Model bears a rational relationship actual damages data." Id. at 485.
38. Daniel R. Fischel, David J. Ross, The Use of Trading Models to Estimate Aggregate Damages in Securities Fraud Litigation: A Proposal for Change, Securities Class Actions 131, 139 (1994).
39. See Kenneth R. Cone and James E. Laurence, How Accurate are Estimates of Aggregate Damages in Securities Fraud Cases? 49 Bus. Law. 505, 506 (1994).
40. 2000 WL 1506892 (N.D. Ill. Sept. 21, 2000).
41. Kaufman, 2000 WL 1506892, at *1.
42. 509 U.S. 579 (1993).
43. Id. at *2.
44. 1999 WL 707737 (N.D.Ca. 1999).
45. In re Clearly Canadian Securities Litigation, 1999 WL 707737, at *4.
46. Id. at *5.
47. Id. Other courts have questioned the reliability of plaintiffs' damages models on other grounds. For instance, in In re Executive Telecard, Ltd. Securities Litigation, 979 F. Supp. 1021, 1027 (S.D.N.Y. 1997), the court noted that the failure of plaintiff's damages expert witness to conduct an event study called into question the reliability of the witness' proposed testimony.
48. 829 F. Supp. 1176 (N.D. Ca. 1993).
49. One court did note that claims information was essential for the court to review adequately a proposed settlement: "[l]ike the information required by the PSLRA, the Court sought this [claims] information because it is essential to an understanding of what the settlement means for class members in real terms. Indeed, the court has withheld this decision so as to be able to review the claim information." Lyons v. Scitex Corp., 987 F. Supp. 271 (S.D.N.Y. 1997). In Lyons, the settlement was presented after the passage of the PSLRA, but because the case was filed before the statute's enactment, it was not governed by the Act. At the court's request, plaintiffs' counsel in Lyons submitted a damages analysis based on the proportional decay model, which the court used in connection with the claims data already filed with the claims administrator. Although the information was not complete, the court relied on that information in determining how much individual class members would recover from the settlement award.
50. In re California Micro Devices Securities Litigation, 965 F. Supp. 1327, 1336 (N.D.Ca. 1997).