In the good old days of Delaware Chancery Court litigation – a mere 9 or 10 months ago – major corporate announcements would routinely be followed by shareholder suits. Then came last summer’s crackdown on disclosure-only settlements of M&A class actions. And just like that, Chancery Court filings dried up. When is the last time you heard about, say, a fight among plaintiffs’ firms to grab control of a Delaware shareholder suit?
(Reuters) – Remember Paul Ceglia, the upstate New York wood pellet salesman who once claimed to own half of Facebook by virtue of a contract he signed with Mark Zuckerberg before Zuckerberg left Harvard? Ceglia’s claims against Facebook and its founder backfired in the most spectacular fashion imaginable. Not only was his civil suit dismissed after a succession of law firms came and went from the case but federal prosecutors in Manhattan charged Ceglia with fraud for allegedly forging the critical document. Ceglia went on the lam last March, along with his family and his dog. He is now considered a federal fugitive.
Facebook and its defense lawyers at Kirkland & Ellis and Willkie Farr & Gallagher pulled an interesting trick to deal with a proliferation of shareholder derivative suits that followed the company’s $16 billion IPO in 2012. And on Friday, the 2nd U.S. Circuit Court of Appeals gave their tactic its blessing. Corporate defendants take note: You may be able to get a federal judge to toss state-law breach-of-duty suits without ever establishing federal court jurisdiction.
The first paragraph of Facebook’s motion to dismiss a securities class action that raised allegations about disclosures in its initial public offering was a no-brainer. Last February, U.S. District Judge Robert Sweet of Manhattan tossed four shareholder derivative suits based on the same underlying facts, concluding in a voluminous opinion that Facebook had “repeatedly made express and extensive warnings” about potential weaknesses in its revenue model as users shifted from desktop computers to mobile devices. So in May, when Facebook’s lawyers at Kirkland & Ellis and Willkie Farr & Gallagher moved to dismiss the parallel securities class action, which is also before Judge Sweet, they quoted the judge’s own words right back to him, not just in the first paragraph but seven more times in the dismissal brief.
Every company considering an IPO owes a hearty thanks to U.S. District Judge Robert Sweet of Manhattan for his decision Wednesday to dismiss four shareholder derivative suits against Facebook board members. Sweet’s painstaking 70-page opinion includes holdings that are great for Facebook’s defense of a parallel securities class action over its disclosures to IPO investors, but the judge also reached precedent-setting conclusions on standing and ripeness that will help other derivative defendants ward off IPO-based claims in state court. Facebook’s lead lawyers, Andrew Clubok of Kirkland & Ellis and Richard Bernstein of Willkie Farr & Gallagher, certainly deserve credit for coming up with innovative arguments to establish valuable precedent in IPO cases.
Bernstein Litowitz Berger & Grossmann and Robbins Geller Rudman & Dowd are the most successful members of the securities class action bar. Check the ISS rankings for 2011: Bernstein Litowitz is in the top slot, with $1.37 billion in settlements last year; Robbins Geller is second, with $1.14 billion. Those total dollars, though, mask the very different business models of the two firms, which are reflected in two other numbers on the ISS chart. Bernstein Litowitz settled only 13 cases in 2011, for an average settlement of about $106 million. By contrast, Robbins Geller settled 28 – more than twice as many as Bernstein Litowitz and 12 more than any other leading class action firm. Robbins Geller’s average settlement was about $49 million, less than any firm in the top 10 except Milberg. Both models work, or you wouldn’t always see Bernstein Litowitz and Robbins Geller at the top of the ISS rankings, but the firms are the yin and yang of securities class action litigation.
Securities class action lawyers have short attention spans. It was only last week, after all, that JPMorgan Chase and its $2 billion (and counting) loss on its credit default swap hedge was the topic of the moment. Plaintiffs’ lawyers and their institutional clients were figuring out whether they bought the bank’s shares in the one-month period between CEO Jamie Dimon telling analysts that the hedge was a “tempest in a teapot” and Dimon disclosing the initial $2 billion loss. But after an initial flurry of filings and press releases about the JPMorgan case, this week has brought no additional complaints against the bank – even as the impact of JPMorgan’s hedge ripples through credit markets and regulatory debate.
If Paul Ceglia — the onetime wood pellet salesman from upstate New York who hired Mark Zuckerberg as a computer programmer before Zuckerberg founded Facebook — thought he’d wring a quick settlement out of his claim to own a piece of Facebook by virtue of a two-page contract Zuckerberg signed in 2003, boy did he think wrong. Facebook’s long-awaited motion to dismiss, finally filed Monday in federal court in Buffalo, asserts that Ceglia was out for an easy score based on a doctored version of the 2003 contract. But it’s not easy to put one over on Zuckerberg or his lawyers at Gibson, Dunn & Crutcher. Facebook’s 74-page dismissal motion is a virtual compendium of the tiny mistakes (alleged) frausters can make and the ways determined defendants can find them out.
On Thursday, the Buffalo federal court judge overseeing Paul Ceglia’s claim to own half of Facebook — by virtue of a 2003 contract he claims CEO Mark Zuckerberg signed as a Harvard undergraduate — is expected to enter an order directing Ceglia to return from Ireland to produce crucial undisclosed computer evidence, and to answer Facebook’s withering questions about the authenticity of the contract and his own failures to comply with previous court directives.