Courtesy of West LegalEdcenter's Wall Street Lawyer - Securities in the Electronic Age . Subscribe now for timely insight, analysis, commentary, and practical advice on the securities issues that you and your clients confront every day.
Jacob H. Zamansky may be an anomaly among securities arbitration litigators, at least those representing the plaintiffs' side--he is, simply put, an optimist. Not just about his own role and future prospects in the industry--which have over a 30-year career been mostly positive--but he is optimistic about the prospects of plaintiffs successfully bring securities litigation against companies and management for fraud, about class actions and even about how the Supreme Court might decide future cases in favor of the plaintiffs' side.
Zamansky, who has previously worked as a federal prosecutor for the Federal Trade Commission and at Skadden, Arps, Slate, Meagher & Flom, operates his own firm, Zamansky & Associates, out of an office in lower Manhattan. He has come by his optimism naturally, taking on Wall Street financial institutions for the last 15 years and notching some notable wins. He quickly developed a reputation for fierceness and tenacity in dealing with the corporate defense attorneys across the table from him--so fierce, in fact, he earned the nickname "Jaws", because of, according to one client, "his ability to devour the competition."
Zamansky spoke to Wall Street Lawyer recently about the state of securities litigation, the track-record of regulators, the lack of fraud charges coming out the financial crisis and, of course, where all his optimism comes from.
Wall Street Lawyer: You didn't start out on the plaintiffs' side did you?
Zamansky: No, I've been practicing in the securities industry for more than 30 years, but I began by representing broker-dealers and the boiler rooms on Long Island--that's how I learned the business. I then switched sides in 1998, and began representing investors. Not long after, I began looking into the Wall Street research scandal--that was the first big issue I dove into.
Those cases involved Wall Street research analysts like Merrill Lynch's Henry Blodget and Salomon Brothers' Jack Grubman who, during the Internet stock boom of the late-1990s, were accused of publicly praising, but privately disparaging tech and Internet stocks their firms were either taking public or were clients of the investment banking side of the firm.
That's right, and the details of the Henry Blodget case and others shocked Wall Street and eventually led to changes in practices of research analysts who had been found to be giving tainted or skewed advice to investors, primarily to further the financial interests of their firm's investment banking arm. Our firm filed a securities arbitration case against Blodget and Merrill Lynch in March 2001--this one case revealed the ills of that part of the business--and it was settled just a few months later.
The New York Attorney General at that time, Eliot Spitzer, contacted us after we brought the case against Blodget. We gave him our playbook, and he took it from there. Spitzer was able to forge that big global settlement, a $1.4 billion global settlement, with the Wall Street banks over their research practices.
That case put me on the map as the go-to guy for investors who had suffered losses in the "tech wreck." These investors had been put into bad stocks that the Wall Street banks knew were bad and were going to blow up. For about the next six years after the Blodget case, that is primarily what we did. In 2008, that changed and we started leading the charge against other large banks for their role in the most recent financial crisis. For example, we've gone after UBS for their continued sale of Lehman Brothers' structured products to their customers long after UBS was aware of risk of a Lehman default. We've won the first two of those cases against UBS. Also, we've brought class action cases representing investors in Ponzi schemes, and gone after the financial institutions that were aiding these Ponzi schemes.
What is the current state of securities litigation, in your view? You often hear of the pendulum swinging between the corporate defense side and the plaintiffs' side. Where is that pendulum now?
I really think it's not as dark as some folks have said. Plaintiffs have scored some significant victories over the past couple of years, with large settlements of class actions and a number of decisions by federal courts refusing to dismiss cases in which defendants argue that the financial crisis--not their own misconduct--caused investors' losses.
So in those cases, it seems clear that plaintiffs have been effective in holding wrongdoers accountable. That said, there will always be courts that find a way to protect big business from the consequences of their recklessness. But if you look at some of the settlements plaintiffs have gained in cases stemming from the financial crisis--Bank of America paid $600 million to settle on Countrywide, Merrill and Lehman settled, and now Citigroup is settling. Plaintiffs have done very well in all these cases.
And all of these cases involved egregious misrepresentations to investors about the banks' balance sheets and quality of the assets the bank held. Most investors had no idea these companies were leveraged 40-to-1, and much of their assets were in fact toxic mortgages that were worth a fraction of what was on the books. Instead, investors thought they were buying a solid bank, instead it was--like many people have said--just a house of cards.
In these cases, plaintiffs have done well because on their faces, these cases were found to be plausible. Plaintiffs were able to demonstrate that plausibility, and many judges found--even by the heightened Supreme Court standards in securities litigation actions--that these cases could go forward. That's what has made the difference.
Let's talk about those heightened standards--How has the plaintiff bar dealt with recent Supreme Court decisions like Stoneridge1 or Morrison2 that have made it more difficult to bring securities litigation against companies, especially for fraud?
Again, it depends on how you are looking at the cases. If you look in the area of third-party liability, that is where the plaintiffs have been hurt by the courts. You can look at decisions like Janus3 & Stoneridge and the whole area of aiding and abetting, and see that plaintiffs have not done well holding anyone other than the speaker to standards of fraud.
The Supreme Court seems quite inhospitable to expanding liability beyond the primary actor, but in truth, none of these frauds could have flourished without these gatekeepers--the investment banks, the rating agencies and the accounting firms. Despite that, any attempts to widen that net have not been successful and that net then has shrunken back.
Compared this to the Enron era, where that company's accounting firm Arthur Anderson, was found to be actively involved and liable for Enron's fraud. But now, you have cases in which, for example, Bernie Madoff and other Ponzi schemers use a reputable bank as cover or to funnel investors' assets to their scheme, but courts have been very restrictive in expanding liability and the cases against these third-party agents have been tossed out.
And this is where it breaks down--Is the actor a primary or secondary actor? And, if it's a secondary actor, it is very difficult to assign liability to them.
Of course, beyond the courts, there is a political element to all this. Congress has acted on different occasions to limit the number of lawsuits being brought against companies, especially for securities fraud.
Exactly. Look at the PSLRA [the Private Securities Litigation Reform Act of 1995] and the SLUSA [the Securities Litigation Uniform Standards Act of 1998], both of those pieces of legislation raised the bar for plaintiffs in a direct effort to limit investors' ability to bring suit against company management. Worse yet, since both of those laws have been enacted, federal courts at all levels have been expanding on those restrictions beyond what was intended by Congress.
I mean, the PSLRA raised the pleading standard bar and limited discovery, and also allowed the courts to appoint lead plaintiffs and approve the selection of lead counsel, and that has led to a narrowing of the number of lead counsels that bring these suits forward. Really, you see just a handful, like Robbins Geller [Robbins, Geller Rudman & Dowd LLP] and Labaton [Labaton Sucharow LLP] bringing these suits forward today.
More significant, at least in terms of battles to fight is the impact of SLUSA on cases brought in state courts and also state law claims in federal courts--it is still one area where plaintiffs are fighting in the trenches. Even though the statute was intended to target a very specific perceived problem--strike suits against start-up issuers every time their stock dropped--it has been misapplied by some courts to prevent certain cases alleging state-law claims such as negligence, breach of contract or breach of fiduciary duty from going forward as class actions.
Our firm and others have had some great wins in this area, but there have also been decisions that stray far from the original intent of the statute, and so we continue to try and refocus courts on its correct application.
Refocus the courts?
Yes, there have been some very inconsistent results in the courts regarding how SLUSA is applied. For example, we've tried to bring cases in state court against custodians involved the Bernie Madoff scandal, citing their contract with investors and alleging they were negligent in carrying out their duties. But in some cases the courts have told us that SLUSA bars the claim in state courts because no actual securities were ever purchased--which, of course, was at the heart of the fraud. Other courts have allowed these cases to go forward. It's inconsistent, and this is where I think the Supreme Court might eventually have to address the scope of SLUSA. The Court might need to determine the ultimate reach of SLUSA, and determine if plaintiffs can bring securities fraud cases in state court at all.
Let me give you two recent examples in which the courts have inconsistently interpreted the scope of SLUSA to covered securities claims, focusing in on the definitions of "covered securities" and "in connection with."
Recently the [U.S. Court of Appeals for the] Ninth Circuit, in Freeman Investments LP v. Pacific Life Insurance Co.,4 held that claims for breach of contract and breach of the duty of good faith and fair dealing are not precluded by SLUSA from being brought as class actions. The Circuit Court made the following key observation, which could be applied to a broad array of cases currently facing a SLUSA challenge:
Just as plaintiffs cannot avoid SLUSA through crafty pleading, defendants may not recast contract claims as fraud claims by arguing that they ‘really' involve deception or misrepresentation.
In 2011, we served as lead counsel in the Grund v. Principal Financial5 case in which Judge [Robert W.] Sweet denied a motion to dismiss on the basis of SLUSA, holding that SLUSA did not preempt plaintiffs' state-law claims. That court wrote:
The [Complaint] alleges that Defendants violated state and federal law by breach of fiduciary duty, ordinary and gross negligence, and unjust enrichment. . . . No claim is made of misrepresentation or omission or the employment of a single manipulative or deceptive device in connection with the purchase or sale of a single covered security.
And the decision went on to caution that "courts should be wary of a defendant's attempts to recast the plaintiff's complaint as a securities lawsuit in order to have it preempted by SLUSA."
Do you think the Supreme Court will actually take up the SLUSA issue?
I think they eventually could see that it would be important to settle these inconsistencies in the lower courts. If you read the legislative intent of SLUSA, it is narrow, but courts are too expansive on this; and I think there is a fight over this coming within the next year or so. Eventually, the Supreme Court might have to decide it.
EDITOR'S NOTE: Shortly before presstime, the Supreme Court agreed to hear a SLUSA case, Chadbourne & Parke LLP v. Willis of Colorado Inc.
Speaking of the High Court, I'm sure you're keeping an eye on the Amgen6 case. What are you expecting out of the Court's Amgen ruling? How big of an impact could that have?
The Supreme Court heard arguments on Amgen in November. [Biotech company] Amgen was sued in a class action over misrepresentations concerning two drugs, with plaintiffs alleging that the eventual revelation of the truth tanked the company's stock price. Amgen argued that the truth regarding their drugs had filtered into the marketplace through FDA [U.S. Food & Drug Administration] releases and analyst reports, and that the final FDA action could not have had a material impact on the stock price.
The issue for the Court to decide is, must a plaintiff prove the misrepresentations were material at the class certification stage? District courts and the Ninth Circuit ruled in favor of plaintiffs, but there is a real chance the Supreme Court could reverse, given its recent precedent, including in such instances at the Wal-Mart case,7 which many commentators read to require a plaintiff to prove materiality at the class certification stage.
A second issue for the Court to sort out is whether, if plaintiffs present evidence of materiality, defendants should have the opportunity to rebut that evidence. The Court could rule plaintiffs must demonstrate materiality but prevent defendants from rebutting. Or it could take the Third Circuit's approach and not require plaintiffs to demonstrate materiality, but allow defendants to rebut the presumption that the misrepresentation was material. There is a split in the circuits on this question, with the Second Circuit requiring plaintiffs to demonstrate materiality--in order to gain the benefit of the fraud-on-the-market presumption--and giving defendants an opportunity to rebut. The Supreme Court likely took the Amgen case to have the opportunity to resolve the circuit court split.
Still, given the Supreme Court's track record on decisions like Stoneridge, Janus and others, is it hard to be optimistic?
That's true--there have not been a lot of good rulings for plaintiffs and investors coming out of this Supreme Court. At the class certification stage, investors certainly don't have much power in the way of merits discovery, so then why would they have to prove intent and materiality at that point in the proceedings?
And this has allowed the defense bar to maneuver procedurally to get cases thrown out. I mean, over the past few years and especially with Wall Street financial institutions, we've seen so much fraud, and now some judges rightfully have been outraged. In the past, I think banks used to have a presumption of propriety, and now I'm not sure they do anymore.
And now you're seeing a few of these cases go to trial, and some have even gotten to the discovery phase. I think it's a sign that the defense has gone too far and some judges are pushing back. I hope the Court's Amgen decision doesn't change that. I think it would be a huge mistake for the Supreme Court to say that investors have to prove their case at a procedural level--it would almost be a political statement to business, saying, "We'll protect you."
Hopefully, the Court will be even-handed--the pendulum has swung too far for too long in favor of the corporate defense side. And I am hopefully optimistic that the Supreme Court will not restrict investors' rights further--I think things will swing back to plaintiffs' side.
A plaintiffs' attorney once described to me the concept of investor protection as a three-legged stool, with regulators, boards of directors and the plaintiffs' bar being those three legs and each needing the other two to stay standing. Do you think that analogy is still apt, and how strong do you see that stool now?
I agree with the comparison, but let's look at those legs, weakest to strongest, shall we?
First, look at the obvious weakest link--the regulators, in the case of the securities industry that is primarily FINRA [the Financial Industry Regulatory Authority] and the SEC [U.S. Securities and Exchange Commission]. You have to go no further than what Judge [Jed S.] Rakoff said about the SEC's settlement attempt with Bank of America over the Merrill Lynch issue. He said it was "half-baked justice." He chastised the SEC, basically saying that if the agency's purpose was to protect investors, it was not doing its job.
And unfortunately, I don't think [former SEC Chair Mary] Schapiro was a vigorous regulator--and that's what the Commission desperately needs. Without vigorous leadership, the SEC has become--for years now--just a revolving door as attorneys put in some time with the SEC and then cash out by leaving for one of the big corporate defense firms on Wall Street. We've all seen it get worse and worse It's not a budgetary situation, rather it's this problem of the revolving door. Companies and their attorneys know, for example, that if they drag out a SEC complaint or procedure long enough, it will eventually be settled for peanuts as many of the SEC attorneys involved move on to other things.
Now, as for corporate boards, I really think we're at an unfortunate time when they simply won't do anything--on board after board you see that. Look at the Hewlett-Packard situation in which it paid about $11 billion for Autonomy--where was the board on something like that?8
I remember before the Enron scandal, some boards, like Worldcom and a few others used to hold directors accountable. But now, in a post-Enron world you don't see very many commendable boards and even fewer activist board members.
So that just leaves the plaintiffs' bar as the only leg of the stool that does anything for investors. The plaintiffs' bar does keep its skin the game, and we only win when we are successful on behalf of investors. Really, we're the only game in town to protect investors.
Turning to regulators and their response to the financial crisis of a few years ago, the government has taken a lot of flak for how few of the players involved in the crisis have been held accountable for their actions--and that's especially true of the bigger Wall Street banks. Do you think that criticism is warranted?
I do. While there have been some cases brought forward, and the SEC and the Justice Department don't seem to be finished quite yet, their timidity has been a real disappointment to the people, like investors, who were counting on the government to police Wall Street. The result has been that private litigants have had to step into the breach to hold the banks accountable.
Worse yet, when regulators or prosecutors do act, they never go after the top executives at the big firms, instead they go after the low-hanging fruit--the employees of those firms. Look at their cases against the traders at Bear Stearns and Citigroup--a perfect example of going after the little guys. And what happens? Those cases fell apart after the employees say they were just following the orders of the top executives.
And where are those top guys now? Guys like John Thain of Merrill and Angelo Mozilo of Countrywide are probably on their yachts, and Jimmy Cayne from Bear Stearns is probably still playing bridge somewhere. And why? Because none of these people who were responsible for wrecking the economy were held accountable and because they barely paid anything personally. And Lehman Bros.? Regulators didn't even try.
And that is a huge problem because it feeds a perception on Wall Street that you'll never be held accountable, either civilly or criminally, for anything you do. And I have to explain to investors who lost everything why no one has been accountable.
Worse yet, when regulators try to bring a case, like against Bear Stearns, and they don't get good results, it makes them even more gun-shy. And that's a shame because these regulators have all the tools they need to make a difference--immense discovery and subpoena power, for example--but the government doesn't seem up to it. They aren't focused, they don't pick good cases, and they don't have the willpower to make a case stick.
Also, while we're on the subject of the SEC, there has been a big change-over in personnel as we begin Pres. Obama's second term. Since we're getting such a turn-over, what type of SEC Commissioner or Division Director would you like see at the SEC now?
To answer that, let's look at what the SEC is facing as it continues implementing the Dodd-Frank Act and other regulation. The SEC and other regulators have been met every step of the way by an army of bank lobbyists, and have struggled to write and implement an array of important rules that actually would have some teeth. What it needs is an Elizabeth Warren-type watchdog who isn't afraid to hold banks accountable for their wrongdoing. And it wouldn't hurt to see some bipartisan acknowledgment in Congress and the Senate that banks need to play by a clear and fair set of rules, like the rest of us, or suffer real consequences when they fall short.
You would think that the global financial crisis would have woken up some of the Washington lap dogs, but apparently the comfortable relationship between big Wall Street money and politicians is a tough habit to break.
It's enough to make someone downright pessimistic, wouldn't you say?
(Laughing) I still am trying to remain optimistic every day. One thing that helps me is that I feel I'm on the right side of things, and I'm making a living helping people.
Gregg Wirth is the Managing Editor of Wall Street Lawyer. Mr. Wirth is an award-winning investigative journalist with more than a decade of experience covering Wall Street, the economy, politics, crime and culture. Contact: Gregg@gwirth.com.
1. Stoneridge Investment Partners v. Scientific-Atlanta, 552 U.S. 148 (2008).
2. Morrison v. National Australia Bank, 561 U.S. ___ (2010).
3. Janus Capital Group, Inc. v. First Derivative Traders, No. 09-525 (2011).
4. Freeman Investments, LP v. Pacific Life Insurance Co., No. 09-55513; Court of Appeals, 9th Circuit, (Jan. 2, 2013.)
5. Grund et al. v. Principal Financial Group Inc. et al., case number 1:09-cv-08025, District Court for the Southern District of New York, (May 26, 2011.)
6. Amgen v. Connecticut Retirement Plans and Trust Funds, 660 F.3d 1170 (9th Cir. 2011), cert. granted, 80 U.S.L.W. 3519 (U.S. June 11, 2012) (No. 11-1085).
7. Wal-Mart Stores, Inc. v. Dukes, 564 U.S. ___, 131 S. Ct. 2541; June 20, 2011.
8. Hewlett-Packard originally purchased Autonomy in August 2011 for approximately $11 billion, a price estimated to be about 11-times the target's revenue. Later, HP revealed it had lost almost $9 billion on the purchase, and allegations of fraudulent accounting have surfaced in connections with the acquisition, spurring several lawsuits.