Update (March 20, 2017): About three years ago, in connection with the lawsuit of Kokocinski v. Medtronic, Minnesota Litigator expressed reservations about the tough obstacle before plaintiffs’ lawyers placed by the PSLRA (Private Securities Litigation Reform Act) and an alternative avenue toward recovery that plaintiffs and their lawyers were forced to pursue: the shareholders’ derivative lawsuit (see the original post, below).
This month, the U.S. Court of Appeals for the Eighth Circuit validated our pessimism for the plaintiffs, affirming the district court’s “termination” of the plaintiffs’ derivative lawsuit in deference to Medtronic’s SLC (Special Litigation Committee) and the SLC’s conclusion that plaintiffs did not have worthwhile claims against the company.
Whether you think this trend represents a positive development for corporate America, helping to free corporations from weak or even meritless “shakedown” lawsuits, or a negative development, stripping investors of essential weapons in the fight against corporate self-dealing, greed, and wrong-doing, will likely depend on your political ideology or your biases.
Without a doubt, policy wonks and academics are collecting and analyzing the data or evidence that should yield proof one way or the other. Over the next 5-10 years, we should have a better understanding of societal cost (or positive value) of this tectonic shift in the landscape of shareholder litigation
Original post (April 29, 2014) (under headline: For Medtronic or Against Medtronic? Recovering Money for Alleged Executive Misconduct: Plan B): Humans behave in certain ways quite reliably and when society erects walls, hurdles, or road-blocks to change or redirect human behavior, it sometimes works and sometimes simply creates detours by which we reach the same destination (albeit at greater cost, risk, etc.). Our country’s experiment with “Prohibition” is evidence of the phenomenon.
The securities fraud plaintiff’s bar is working hard to blaze a new trail toward recovery in light of the past 10-15 years of particularly challenging law interposed making cases under the Securities Act of 1933 and Securities Exchange Act 1934 (“SEA/’34”) nearly impossible (most notably including but not limited to the 1996 Private Securities Litigation Reform Act (“PSLRA”)).
This could be a very difficult bushwhack for plaintiffs and their counsel.
The linked amended complaint sets out an alternative means of recovery. Rather than suing on behalf of shareholders who have been damaged by false or misleading information about a company which, when brought to light, results in a loss in value (a so-called 10b-5 claim under the SEA/’34), plaintiffs’ lawyers are trying to bring the claims in the name of the companies themselves, so-called “derivative claims.”
After all, when corporate executives allegedly line their own pockets through improper means, are they not hurting their companies as much or maybe even more than they hurt company investors (if for no other reason than that all intelligent investors hedge their risk and keep a balanced/diversified portfolio)?
But plaintiffs’ lawyers alternative routes to recovery face their own substantial challenges. For example, before plaintiffs can bring derivative claims, they have to essentially ask companies to police themselves under normal circumstances (appointing a so-called Special Litigation Committee to evaluate the plaintiffs’ claims and determine whether pursuing the claims is in the best interest of the company).
Critics of this procedure (that is, plaintiffs’ lawyers and others) suggest this is like asking criminal syndicates to turn in their hit men as a prerequisite to charging the syndicates with the assassins’ crimes. If the syndicates determine that there is insufficient evidence or any likely prosecution would be cost-prohibitive, then the syndicates reject the proposed prosecutions and going forward with the cases is barred. How often would that NOT happen?
Believers in the “derivative claim procedure,” on the other hand, adopt a far less cynical view of the Special Litigation Committee and a far more cynical view of the plaintiffs and their counsel.
Whether you take one side or the other, one thing is for sure and that is that recovering against corporations for alleged corporate wrong-doing through civil litigation has become a lot more difficult for plaintiffs and plaintiffs’ counsel over the past twenty years.