The Wall Street Law Journal

Sherman Law Firm Predicts PSLRA Pleading Standards and Recent Novastar Subprime Dismissal Could Lead to Increased Bear Stearns "Opt-Outs"

Reprinted from June 9, 2008 prweb press release; written by Brett Sherman

Late last week, the United States District Court for the Western District of Missouri sunk one of the first 'subprime securities' class action claims, dismissing the Novastar Subprime Class Action (In Re 2007 Novastar Financial Securities Litigation, Case No. 07-0139-CV-W-ODS, U.S. District Court, Western District of Missouri) on the grounds that Plaintiffs were unable to satisfy the stringent pleading requirements of the PSLRA. The Novastar Subprime dismissal may influence Bear Stearns employee shareholders when it comes time to decide whether or not to "opt-out" of Bear class actions.

New York, NY (PRWEB) June 9, 2008 -- The Public Securities Litigation Reform Act (PSLRA) was enacted in 1995 in order to curb abusive tactics in the filing of securities litigation class actions. The perception at the time was that a class action was filed every time an issuer's stock price fell, regardless of the actual cause of the price drop. As a result of abusive class action filings, class legal costs were eating through the working capital of many corporations.

The PSLRA dramatically raised the pleading standards for plaintiffs in securities fraud cases. Among other things, the PSLRA requires class action complaints to describe in factual detail that a fraud was knowingly committed, and explain how the fraud caused - as a matter of fact and a matter of law - the losses for which the class seeks to recover.

The result of these heightened pleading standards is that the PSLRA makes it much more difficult for class action lawyers to draft a securities fraud complaint that is capable of surviving a motion to dismiss by corporate defendants. In fact, the website '10b-5 Daily' states that NERA Economic Consulting recently concluded that "more than 30%" of securities fraud class actions have been dismissed since the PSLRA became effective.

According to 10b-5 Daily, "NERA also reports that a significant portion of cases are dismissed within the first two years. The Second Circuit (New York) and Ninth Circuit (California), which together receive the most cases, dismiss approximately 20% within this time period. The Fourth Circuit has the highest rate, dismissing 31% of cases within two years..."

Most of the putative Bear Stearns litigation filings fall into the subprime class action category. While it certainly is too early to know what the PSLRA survival rates for class action complaints arising from the subprime securities collapse, the first major decision - the Novastar Subprime case - is not a great sign for the class action crowd. In what may be a harbinger of the fate of subprime crisis class actions, Kevin LaCroix reports in the June 6, 2008 post in the D&O diary that Judge Ortie Smith of the U.S. District Court for the Western District of Missouri dismissed the subprime-based NOVASTAR CLASS ACTION LITIGATION due to plaintiff's failure to satisfy the requirements of the PSLRA. According to Mr. Lacroix, Judge Smith dismissed the Novastar complaint with prejudice for failing to adequately plead falsity and scienter (knowledge and intent to defraud). Time will tell whether other subprime class actions, including Bear Stearns Class Actions, have similar problems surviving PSLRA dismissal motions.

Based on the post-PSLRA history of class action litigation, it is virtually certain that Bear Stearns class action complaints will be challenged under the heightened pleading requirements of the PSLRA. If Bear Stearns class action claims suffer the same fate as Novastar class action did last week, that would almost certainly be the end of the road for Bear Stearns class action participants. For individual "opt-out" Bear Stearns plaintiffs, on the other hand, the PSLRA is unlikely to impact opt-out litigation in any material way.

The decision to "opt-out" or "stay in" will very likely have serious consequences for Bear Stearns plaintiffs. Whether the dismissal of Novastar has a dramatic impact on the litigation strategy pursued by former Bear Stearns employees remains to be seen.

By Brett Sherman
The Sherman Law Firm

States Jockeying To Control Suit Over Bear Stearns Demise (from NY Sun, quotes Sherman Law Firm)

Reprint from business section of the New York Sun, May 27, 2008.

States Jockeying To Control Suit Over Bear Stearns Demise

By JOSH GERSTEIN, Staff Reporter of the Sun
May 27, 2008
http://www.nysun.com/business/states-jockeying-to-control-suit-over-bear/78656/

The state pension funds of Michigan and Massachusetts are among those battling for control of a federal securities lawsuit concerning the collapse of Bear Stearns.

The high-stakes jockeying to direct the case and pick the lawyers who will pursue it comes as some lawyers are advising employee-stockholders who lost money in Bear's implosion to sue independently and not take part in any class-action settlement that may be brokered.

Winning the designation of lead counsel in the Bear Stearns class action could mean tens of millions of dollars in legal fees for the plaintiffs' firm selected. Under federal law, the choice is usually made by whichever investor can show the largest loss and a willingness to pursue the legal claims.

"In this case, as every lawyer knows, you're going to have very lucrative class-action litigation," an attorney urging Bear employees to "opt out" of the group lawsuit, Brett Sherman of Demarest, N.J., said.

Legal papers filed last week in federal court in Manhattan suggest that retirement funds overseen by the state of Michigan are most likely to take the lead in the case. Pensions for schoolteachers, police officers, judges, and other state employees sustained reported losses of more than $62 million on Bear Stearns stock between December 2006 and March 2008.

The Michigan funds are represented by Labaton Sucharow LLP of Manhattan and Berman DeValerio Tabacco Burt & Pucillo, which is based in San Francisco and Boston.

State retirement funds from Massachusetts are also seeking to lead the case, claiming losses of $21 million. The Bay State plaintiffs are represented by Bernstein, Liebhard & Lifshitz LLP of Manhattan. A third claim for lead status came from a San Antonio pension fund in concert with a Spanish investment company, SICAV Inversiones Campos del Montiel.

Judge Robert Sweet is expected to make the lead plaintiff and counsel designations as soon as next month. Bear Stearns investors are to vote Thursday on whether to approve the merger with JPMorgan & Co., which the Federal Reserve arranged after Bear faced a liquidity crunch in March. The deal initially valued Bear's shares at $2 each; the figure was later raised to $10.

There is no sign that some of the largest losers in the Bear Stearns implosion plan to lead the class action. The Michigan pension losses pale in comparison with those incurred by a British investor, Joseph Lewis, who reportedly lost about $1 billion when Bear went south.

Mr. Sherman said settlements in cases involving other companies indicate that Bear employees and others who may have lost $200,000 or more may be better off pursing their own suit and passing up any settlement that may be offered to the class. "Not all would have done better, but probably most of them would have done better," he said.

In recent years, an increasing number of institutional investors have opted out of class-action settlements in order to seek better results through free-standing litigation. In some instances, the breakaway investors have done so well as to raise questions about whether individual investors who stayed in the class got a fair shake.

A settlement relating to Time Warner's ill-fated merger with America Online delivered only a few pennies for each dollar of investor losses. However, The New York Sun reported in 2006 that the state of Alaska cut a $50 million side deal that the state's lawyers said amounted to 83 cents on the dollar. Lawyers for the University of California claimed the $246 million payment the school negotiated from Time Warner was between 16 and 24 times more lucrative than the class-action settlement, while CalPERS said its $118 million payment was 17 times greater than it would have gotten in the class.

While most who opt out of class securities settlements are institutions with losses in the tens of millions of dollars, Mr. Sherman said he thinks such a strategy could work even for those who lost much less. "I absolutely think it's viable," he said.

The lawyer also warned that Bear is asking employees taking severance packages to sign a "comprehensive waiver" that would preclude joining any securities suit against the company or its likely successor, JPMorgan.

The mere fact that Bear's share prices dropped does not give rise to legal liability on the part of the company or its officers. However, the securities lawsuits allege that Bear misled investors about its financial condition, including the value of assets backed by so-called subprime mortgages. The suits also point to rosy statements by the firm's CEO, Alan Schwartz. "Bear Stearns's balance sheet, liquidity, and capital remain strong," he told CNBC two days before the firm was all but forced to sell out to JPMorgan at a fire sale price. "Our liquidity position has not changed at all, our balance sheet has not changed at all."

JPMorgan's CEO, Jamie Dimon, predicted last week that transaction-related costs of the merger, including litigation, would be about $9 billion, up from an earlier projection of $6 billion. In addition to the shareholder suit, JPMorgan will inherit a variety of litigation on behalf of Bear's retirement plans, business partners, and even the owner of the land beneath the company's Manhattan headquarters.

On March 17, the first business day after Bear imploded, a San Diego-based firm, Coughlin Stoia Geller Rudman & Robbins LLP, filed the first federal lawsuit over the collapse. However, the firm does not seem to have joined the bidding to lead the case going forward.