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Winning the Damages Battle After Losing the Liability War

Securities class actions that reach verdict are rare, but these rare events provide valuable insights for negotiating the roughly half of all cases that result in settlement.[1] This article describes techniques for minimizing class damages following a judgment for plaintiffs, focusing upon two recent trial victories by plaintiffs, namely In re Vivendi Universal Securities Litigation[2] and Jaffe Pension Plan v. Household International Inc.,[3] as well as my experience defending an issuer with a final, nonappealable verdict in its post-judgment claims process, which resulted in a settlement and the vacating of the fraud judgment.[4]

Two categories of challenge remain following a nonappealable securities class judgment for plaintiffs: (1) rebutting the presumption of reliance that the U.S. Supreme Court adopted in Basic Inc. v. Levinson, 485 U.S. 224 (1988) as to individual class members[5] by focusing upon large institutional claimants; and (2) limiting "allowed claims" through setoffs pursuant to § 28(a)’s requirement limiting plaintiffs to "actual damages,"[6] and the Private Securities Litigation Reform Act’s damages provision, which essentially limits plaintiffs to nominal losses.[7]

As to the first category, the Supreme Court’s recent decision in Halliburton Co. v. Erica P. John Fund Inc. (Halliburton II), 134 S. Ct. 2398 (2014), makes it harder to argue that sophisticated claimants should not benefit from Basic’s presumption of reliance on the "integrity" of the market price. As to the second, some interesting facts emerge after studying defense challenges to the claims process: one is that the well of potentially available setoffs can be quite deep, and is probably underestimated in most settlement negotiations;[8] another is that the application of these offsets varies significantly between settlements and verdicts, and among settlements themselves, with attendant implications for opt-out behavior. Finally, there are some factors that are unknowable ex ante — i.e., the number of damaged shares and class participation rates — that introduce uncertainty into the final equation. That uncertainty can be used to facilitate a settlement even in the face of a nonappealable final judgment.

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