In this article for New York Law Journal, Kirkland attorneys Rachel Fritzler, Lindsey Weiss Harris, Jeffrey Goldfine and Tracy Lin outline five strategies that securities defendants can employ to win before trial, set up appellate opportunities and obtain settlement leverage.
It is a truism in sports that the best defense is a good offense, but it may also be true in securities litigation. Too often, once a securities class action proceeds past the motion to dismiss phase, defense strategy is guided by a single assumption: The case will settle before trial. Thus, defense counsel largely sit back and litigate passively, biding their time until mediation. But aggressively trying securities class actions as if they will proceed to trial has many strategic advantages, including obtaining more favorable settlements. Below are five strategies securities defendants can employ to win before trial, set up appellate opportunities, and obtain settlement leverage.
First, while securities defendants usually seek a longer discovery schedule, in some instances expeditious discovery can be to defendants’ benefit. For example, in some cases defendants can leverage their informational advantage to drive discovery. By thoroughly investigating plaintiffs’ claims as early as possible, defense counsel can learn the facts of the case and the scope of evidence early on in the litigation. This allows them to identify key people and documents, formulate their strategy and defenses, and map out a discovery plan to obtain the evidence they need to succeed at summary judgment or trial.
In some cases, rather than letting plaintiffs drive discovery, defendants may want to proactively propose a search protocol and anchor negotiations around their tailored, yet reasonable, proposal for custodians, search terms, and date ranges, shifting the onus to plaintiffs to explain why discovery should be broader. Additionally, producing documents early and regularly creates a record of reasonableness and responsiveness in case of later discovery disputes. Lastly, as discussed below, aggressively pursuing affirmative discovery from plaintiffs, their representatives, and third parties can put plaintiffs themselves on the defensive, decreasing their ability to waste time and resources on unreasonable demands or unnecessary disputes.
Depose Third Parties
Second, defendants should look for opportunities to depose third parties with information contradictory to plaintiffs’ claims. For example, institutional plaintiff investors in securities class actions often rely on investment advisors for their stock trades, and courts “imput[e] an investment adviser’s knowledge to institutional plaintiffs.” Villella v. Chem. & Mining Co. of Chile, 2018 WL 2958361, at *5 & n.4 (S.D.N.Y. June 13, 2018). Deposing investment advisors can uncover critical facts that undercut plaintiffs’ claims, including that the advisors relied on their own research and strategies when investing in the securities, and therefore that they invested without relying on the alleged misrepresentations, see, e.g., In re Vivendi Universal S.A. Sec. Litig., 183 F. Supp. 3d 458, 466 (S.D.N.Y. 2016), or that the advisors knew the information that was purportedly concealed, undermining plaintiffs’ allegations of misrepresentations or omissions.
Plaintiffs also often quote confidential witnesses in their complaints, only to backpedal after winning a motion to dismiss and propose agreements not to rely on confidential witnesses going forward if defendants agree not to depose them. In some cases these agreements can be tempting, but often deposing confidential witnesses elicits testimony undermining the statements attributed to them. Confidential witnesses may also expose plaintiffs’ improper or unethical investigative practices, which can undermine their credibility with the court and prove invaluable in resolving the litigation.
Challenge Price Impact
Third, where appropriate, defendants should consider challenging price impact at class certification. While many securities litigators consider class certification to be a foregone conclusion, the Supreme Court’s recent decision in Goldman Sachs Group v. Arkansas Teacher Retirement System, 141 S. Ct. 1951 (2021), held that courts should consider all price impact evidence at class certification, regardless of any overlap with merits issues, opening the door for defendants to litigate more aggressively than ever at class certification.
Basic v. Levinson, 485 U.S. 224 (1988), established a presumption of reliance based on the fraud-on-the-market theory, which presented challenges to defendants seeking to preclude certification. Basic presumes that, where a material misrepresentation is publicly disclosed in an efficient market, purchasers of the stock relied on the misrepresentation because publicly available information is reflected in the market price. Id. at 247. Once plaintiffs establish this presumption, defendants may rebut the presumption by introducing evidence, such as event study analysis showing no statistically significant price decline following an alleged corrective disclosure, which “severs the link” between the alleged misrepresentation and the market price paid or received by plaintiffs, id. at 248. Class members must then individually prove reliance on defendants’ alleged misrepresentations, precluding class treatment. See Halliburton Co. v. Erica P. John Fund, 573 U.S. 258, 267-68, 281-82 (2014).
Prior to Goldman, many courts rejected price impact evidence to the extent it overlapped with merits issues like materiality or loss causation. Goldman clarified that defendants can use evidence that also demonstrates major defects in plaintiffs’ cases because courts “must take into account all record evidence relevant to price impact, regardless whether that evidence overlaps with materiality or any other merits issue.” Goldman, 141 S. Ct. at 1961. Thus, in some cases Defendants can essentially preview major defects in plaintiffs’ cases, to the extent they overlap with price impact, at class certification rather than many months later at summary judgment.
Goldman also requires courts considering price impact to compare “the contents of the misrepresentations and the corrective disclosure” because a mismatch indicates less likelihood “that the specific disclosures actually corrected the generic misrepresentation,” meaning less reason to infer front-end price impact from the back-end price drop. Id.
Defendants challenging price impact should also consider seeking sur-replies where appropriate. Because defendants bear the burden of persuasion on price impact at class certification, defendants’ submission of price impact evidence and arguments is in effect the opening evidence and briefing on that issue. Thus, if plaintiffs (1) address price impact for the first time in their reply brief in support of class certification, or (2) seek to offer new expert opinions regarding price impact in their expert’s rebuttal report, then defendants may want to seek the last word on this issue. Indeed, courts often grant defendants leave to file sur-reply briefing and supporting expert reports on price impact. See, e.g., In re Grupo Televisa Sec. Litig., No. 1:18-cv-01979 (S.D.N.Y. March 10, 2020, May 27, 2020) (Dkt. Nos. 103, 128-1, 128-2) (granting sur-reply briefing and supporting expert reports); In re EQT Corp. Sec. Litig., No. 2:19-cv-00754-RJC (W.D. Pa. July 7, 2021) (granting sur-reply briefing).
Fourth, where appropriate, defendants should challenge plaintiffs’ expert witnesses with Daubert motions. Even when they do not result in exclusion, Daubert can be a powerful tool to demonstrate significant errors or fatal defects in plaintiffs’ case. For example, at the class certification stage, Daubert briefing can demonstrate that plaintiffs’ expert utilized improper methodology to opine on price impact, which might also undermine the expert’s forthcoming loss causation methodology. And if defendants expose plaintiffs’ expert’s flaws early in the case, plaintiffs may also find it challenging to use the same expert on the merits. Thus, Daubert motions can also create settlement leverage by previewing defects in plaintiffs’ case not only to courts, but to plaintiffs and their counsel.
Prepare Witnesses for Trial
Finally, there is no better settlement leverage than being trial-ready when the other side is not. Regardless of how the case is ultimately resolved, defense counsel should prepare every witness with an eye towards trial. If counsel assumes settlement is inevitable, they may underestimate not only the risk of imprecise testimony elicited at depositions of unprepared witnesses, but also the demeanor of witnesses and how they appear on video (as deposition videos are often played for impeachment purposes at trial). For maximum negotiating leverage, defense counsel should ensure their witnesses are thoroughly prepared and present well during depositions. Deponents who are well-prepared and familiar with defense strategy can also serve to highlight deficiencies in plaintiffs’ case, which is useful at the class certification and summary judgment stages.
While the applicability of the above strategies will depend on the facts and circumstances of every case, defense counsel who aggressively litigate securities class actions to be trial-ready can catch plaintiffs off guard, gaining their clients multiple strategic advantages, including invaluable settlement leverage.