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Changing Times For Securities Litigators

Publication Date: 
June 18, 2007
The National Law Journal
Vesna Jaksic

The National Law Journal quotes Professor Joseph Grundfest in an article about securities litigation:

The class action securities fraud litigation business will continue to shrink and law firms need to respond by shifting resources, said Joseph Grundfest, a former U.S. Securities and Exchange commissioner and nationally recognized expert on securities litigation.

"We're going to have to find other things to do with our time, and I think that's something to be celebrated," said Grundfest, the W.A. Franke Professor of Law and Business at Stanford Law School.

Grundfest compared the trend to doctors finding a cure for disease, which is a positive development but leads to fewer patients.

But the news is not all bad for securities lawyers. There is great need for economic experts in the legal field, Grundfest said. Law firms need to shift their resources from defending clients charged with securities fraud to areas such as companies' internal investigations, which continue to be a strong business, he said.

Grundfest, co-director of the Arthur and Toni Rembe Rock Center on Corporate Governance at Stanford and founder of the Stanford Securities Class Action Clearinghouse, spoke on June 13 during a breakfast event entitled "The Times They Are A-Changin" at The Yale Club of New York City. The event was sponsored by Cornerstone Research, which provides attorneys with consulting and expert testimony in complex commercial litigation. Grundfest has worked with Cornerstone for about 10 years.

While the number of securities fraud filings had been averaging about 200 annually, that number will probably be closer to 100 to 120 from now on, Grundfest said. There are several reasons for the trend, including there simply being less fraud, he said.

Law firms need to shift their resources from defending clients charged with securities fraud to areas such as companies' internal investigations, which continue to be a strong business, Grundfest said.

Company officials are aware that the chances of fraud detection are higher now, as are material penalties for individuals, as opposed to just companies, Grundfest said.


Grundfest, who spoke for nearly two hours in front of a crowd of more than 150 people, discussed a pending U.S. Supreme Court case that could have major implications in the securities field. Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc., 06-0043.

Grundfest is representing the defendants in the case, which poses the question of "scheme liability" and whether third parties, including bankers, lawyers and accountants, can be sued for playing a role in another company's alleged fraud.

Grundfest said he does not believe scheme liability exists as a concept of primary liability, and that Congress has twice rejected pleas to extend primary liability to cover "substantial assistance."

"Scheme liability, in my view, is a bunch of fancy words trying to persuade courts to do what Congress has refused to do on the two occasions it has already been asked to do this," Grundfest said.

Grundfest also discussed the issue of defining loss in securities fraud cases, which recently came up in U.S. v. Olis, H-03-217 (S.D. Texas). Jamie Olis, a former Dynegy Ltd. executive, was sentenced to 24 years in prison on securities fraud and conspiracy charges. Grundfest filed a 46-page brief attacking the prosecutors' method of loss calculation, helping reduce Olis' sentence to six years.

Grundfest said the practice of calculating loss in fraud cases is more refined in civil than criminal cases, even though the latter could determine how many years one serves in prison.

"The legal system is not invested very well at all in getting to an economically rational measure of loss, and that's a problem," he said.

Grundfest said he took Olis' case pro bono because he feels it's a part of his social responsibility as a lawyer to ensure justice is done.

"This is as close to a death penalty case as a securities lawyer is ever going to do," he said.