There’s a good reason the exchange of information in civil litigation is called discovery. If you want an example of the kind of powerful facts shareholders can obtain once they’re finally allowed to take depositions from securities class-action defendants – and remember, they only get there after surviving defense motions to dismiss – look no further than the motion for summary judgment that plaintiffs’ lawyers filed Sunday against Bank of America in the securities class action over the Merrill Lynch merger. There’s nothing like a former CEO’s admission that insiders withheld dire predictions from shareholders to boost the class’s case.
Shareholder lawyers always knew they’d have more information than usual in the securities litigation against BofA, which allegedly failed to warn investors about Merrill Lynch’s precarious finances before shareholders approved the Merrill merger in the fall of 2008. When plaintiffs’ lawyers first filed lead counsel motions in the spring of 2009, the Securities and Exchange Commission, the New York Attorney General, the North Carolina AG and even Congress were all already poking at the Merrill merger. They were focused on whether BofA adequately disclosed the billions of dollars it had agreed to set aside for bonuses to Merrill executives, in addition to the bank’s communications with shareholders about Merrill’s mounting losses in the last quarter of 2008.
Just weeks after Denny Chin (then a federal district judge in Manhattan, now on the 2nd Circuit Court of Appeals) appointed lead counsel – Bernstein Litowitz Berger & Grossmann; Kaplan Fox & Kilsheimer; and Kessler Topaz Meltzer & Check – the SEC announced a settlement with BofA for disclosure violations. And when U.S. Senior District Judge Jed Rakoff rejected the SEC’s initial settlement and demanded more information about BofA’s disclosure decisions, plaintiffs’ lawyers in the class action pounced. In October 2009, they asked Chin to order the defendants to give them whatever BofA, Merrill and bank officials were turning over to regulators and congressional investigators. In November 2009, Chin granted the motion. Whatever documents the defendants were producing to anyone else, he said, they also had to turn over to shareholders.
That’s a lot more than plaintiffs usually get in the early stages of securities class actions. As you know, when Congress revised the law governing private securities litigation in 1995, it imposed an automatic discovery stay: Shareholders aren’t permitted to conduct any depositions or demand any documents from defendants until they’ve survived a defense motion to dismiss their case. Given that Congress simultaneously set the bar for alleging fraud very high, that discovery stay means lots of securities class actions have died before plaintiffs’ lawyers even got a chance to uncover what defendants really knew.
In the BofA case, shareholders’ lawyers took full advantage of Chin’s directive. Their first and second amended complaints, each weighing in at more than 150 pages, cited, for instance, memos and notes from BofA’s counsel at Wachtell, Lipton, Rosen & Katz, which had advised the bank on the Merrill merger. That material had been produced to Rakoff in the SEC case (or to Congress), so plaintiffs’ lawyers in the securities class action were able to get their hands on Wachtell’s advice on what to tell shareholders about those infamous Merrill bonuses, as well as Merrill’s escalating losses. It was juicy stuff, and in August 2010 U.S. District Judge Kevin Castel, who took over the case from Chin, found that most of the shareholders’ allegations included enough factual specificity to survive the defendants’ motions to dismiss.