Former United States District Judge Phillips sent me his response (which can be found here) to the email I sent to Mr. Phillips concerning his Declaration Concerning Approval Of Settlement in the Citigroup case (which email of mine can be found in this entry).
I. Selling shareholders keeping windfall gains; failure of recovery
Mr. Phillips' response would seem to indicate that the class action lawsuit got started without any information about the extent to which selling shareholders obtained windfall gains from selling at artificially inflated prices (corresponding to losses experienced by purchasers who paid artificially inflated prices) and the extent to which such selling shareholders have the windfall gains in their pockets and will keep the gains untouched by the class action lawsuit (i.e, without any information about the extent to which the class action lawsuit would make recovery of the windfall gains).
Theoretically, if all the shareholders who were shareholders at the start of the artificially inflated period sold all their shares during the artificially inflated period, the selling shareholders would walk away with 100% of their windfall gains, and 100% of the losses experienced by the purchasers that correspond to the windfall gains would, in substance, be left with such purchasers, and the class action lawsuit would make no recovery of any of the windfall gains. This scenario is not likely to have happened, and the actual extent to which selling shareholders with windfall gains walk away with and keep the windfall gains will be less than 100%.
Not only does it seem, as stated, that the class action lawsuit was commenced with virtually no information about the percentage of windfall gains that selling shareholders will walk away with, it further seems that this information will never be obtained in the case, whether the case went to a jury verdict or whether the case is settled as the parties are trying to do (i.e., the class action lawsuit gets disposed of with no one ever knowing the percent of windfall gains that selling shareholders walked away with and are not recovered, and the percent of windfall gains of which there is effectively no recovery).
Further, it would seem that the structure of the litigation and settlement tends toward minimizing the effective recovery from selling shareholders who obtained windfall gains. All current shareholders in substance contribute to the settlement fund in proportion to their current holdings, and it is this contribution that allows for potential recovery of windfall gains of selling shareholders. To illustrate how this structure tends towards minimizing the effective recovery from shareholders obtaining windfall gains (and do not walk away with them completely), consider hypothetical shareholders A, B and C, who each owned 100 shares at the start of the artificially inflated period. Say shareholder A sold 90 shares at the peak price during the artificially inflated period, shareholder B sold 90 shares at a much lower price during the artificially inflated period, and shareholder C held his 100 shares throughout the artificially inflated period. None of A, B and C have losses from transactions during the artificially inflated period and so cannot share in the settlement amount. Shareholders A and B, who had, respectively, a large windfall gain and a much smaller windfall gain, will in substance make equal pro rata contributions to the settlement fund based on their 10 share ownership, and A will retain a much larger amount of windfall gain, and B a smaller amount of windfall gain. Shareholder C, who had neither a windfall gain nor a loss from the alleged wrongdoing, will make a pro rata contribution to the settlement fund based on a 100 share ownership (i.e., a much larger contribution than A or B).
Thus, to summarize, the class action lawsuits get started with, and will get disposed of, with virtually no information about how much recovery of windfall gains is effectively made from selling shareholders, the structure of the litigation tends to minimize the effective recovery of windfall gains, and, to the extent there is not effective recovery of windfall gains, the litigation is only reallocating losses in substance (e.g., a purchaser who had a greater loss because the purchaser bought at a higher artificially inflated price gets a part of his loss reallocated to a purchaser who had a lesser loss because the second purchaser bought at a lower artificially inflated price).
Mr. Phillips' response declines to indicate whether the parties made any argument to him about the foregoing, his Declaration to the Court makes no discussion about the foregoing, and his response does not indicate that he weighed any of the foregoing in the balance in reaching his conclusions about the settlement.
Not being expressly informed about the foregoing by Mr. Phillips' declaration, maybe Judge Stein will discern the foregoing, maybe not. If Judge Stein discerns the foregoing, he ought to at least indicate in any order approving the settlement that he has discerned the same and has taken the same into account.
II, Confusion about deterrence
It would seem that there is major confusion about deterrence.
Mr. Phillips' response says he has not been presented with any law or precedent where the reasonableness of a settlement such as the Citigroup settlement is related to the potential effect it might have on other possible wrongdoers.
My letter to the Court requests the Court to be clear on this matter and that, if the Court approves the settlement and attorneys fees, the Court's order should expressly state that, under the law, either the amount of any recovery to which the plaintiffs are entitled is entirely independent of any deterrent purpose or deterrent effect of the litigation (i.e, if there was a jury trial, the jury would be instructed that it should give no consideration to whether the litigation serves to deter others), and that the reasonableness of the settlement (and the appropriateness and reasonableness of attorneys fees) are to be evaluated and judged independently of the deterrent purpose or effect (or lack of deterrent purpose or effect) of the settlement, or else that such is not the case and a deterrence purpose or effect is relevant to recovery and any settlement and attorneys fees that are approved..
My letter to the Court pointeed out how the lead plaintiffs and their attorneys in the Bank of America case touted in their press release the deterrence effect of the Bank of America class action and settlement.
Furthermore, in Bank of America, the plaintiffs specifically seek corporate governance changes and they assert this as part justification for their settlement agreement and fees.
In considering the deterrence question, the Court ought to reflect on the extent to which deterrence is considered a justification in civil actions brought by the SEC and other regulatory agencies and make a determination either that deterrence should be considered a factor in private civil litigation or not.
The settlements and attorneys fees in these cases amount to hundreds of millions, and billions, of dollars, and it does not seem unreasonable to think the Court should be clear about how it is considering deterrence as relevant or not relevant to the litigation and the settlements and attorneys fees.
III. Email communications
A. Judge oriented organizations
To: firstname.lastname@example.org, email@example.com, firstname.lastname@example.org
Sent: 4/11/2013 7:32:09 A.M. Central Daylight Time
Subj: Citizens importuning judges with citizen concerns
To: ABA Justice Center
Federal Judges Association
American Judicature Society
I have been endeavoring to communicate to your respective judge oriented organizations concerns that I have about class action lawsuits, with a view to such concerns receiving reactions from your organizations and getting passed on within your organizations.
I am wrapping up my work with three similar securities class action lawsuits that claim a failure of banks to make proper disclosures of information, which led to "artificially inflated" stock prices for a period of time and to purchasers of stock experiencing losses from having paid the "artificially inflated" prices.
The problem with these cases is that selling shareholders who sold at the "artificially inflated" prices get windfall gains that they are able to walk away with and keep in their pockets, the class action lawsuits seem to disregard that there is a failure of recovery of those windfall gains, and they merely undertake to reallocate losses among the purchasers and also other shareholders who experienced no gain or loss.
I think the work I have done establishes that the parties and the experts in the cases have failed to give recognition to the foregoing, and they failed to present the same to the Court. It is unclear the extent to which the judges in the cases have given or will give recognition to the same.
Further, I think my work establishes that there is significant confusion in the minds of the parties and the experts about whether any deterrence purpose or effect of the lawsuits has any relevance to the amount plaintiffs are entitled to recover or to the fairness and appropriateness of a settlement and amount of attorneys fees. It is unclear whether the judges in the case are also confused about this.
The particulars of my work can be accessed by starting at this latest entry in my blog, which discusses a certain Declaration Regarding Approval of Settlement, which was submitted by Former United States District Judge Layn R. Phillips to the Court in the Citigroup case pending in the Southern District of New York. That entry will give links to other entries in my blog that should provide full information about what I have done in the three cases in question in order to try to bring my citizen's concerns to the attention of the judges in the cases.
Hundreds of millions and billions of dollars of settlements and attorneys fees are involved in these three cases alone. Citizens and investors generally, I think, are entitled to see cases like these disposed of with greater clarity and understanding by the parties, the experts, and the judges, than seems to be happening. I hope your respective judge oriented organizations will review this work of mine and determine whether I have voiced concerns that are deserving of attention by your organizations, your members, and others who look to your organizations for information and guidance about matters such as this.
B. Ethics and compliance community
To: KDarcy@theecoa.org, email@example.com, firstname.lastname@example.org
Sent: 4/12/2013 7:24:55 A.M. Central Daylight Time
Subj: Report of case work to ethics and compliance community
To: Ethics & Compliance Officer Association
Ethics Resource Center
Society of Corporate Compliance and Ethics
Dear Mr. Darcy, Dr. Harned, and Mr. Snell,
I am wrapping up my work on the three private class action lawsuits that I have told you about, and I wish to pass on to you what that work establishes that has bearing on the ethics and compliance mission of your three organizations.
I think quite a bit has been revealed by the exercise I went through with Former United States District Judge Layn R. Phillips, who was the "expert" attending to the submission of the settlement to the Court in the Citigroup case.
From the perspective of the ethics and compliance community, there is either great confusion or much games playing going on about whether these hundreds of millions and billions of dollars of settlements and attorneys fees are supposed to have anything to do with deterring corporate wrongdoing. This is especially highlighted in the Citigroup and Bank of America lawsuits by their failure to make a recovery for the persons harmed by the wrongdoing. For more discussion, I refer you to this latest entry in my blog.
In my view, these three class action lawsuits are among perhaps hundreds every year that absorb huge amounts of corporate resources and that undermine the advancement of ethics and compliance. I have detailed my explication of that for you ad nauseum in previous communications, and this email is not to give any repetition of that.
I just want to show you the confusion (or games playing) about deterring corporate wrongdoing that exists in the realm of private class action lawsuits and hope your organizations will come to view this as significantly as I do.
C. State attorneys general, securities regulators
To: email@example.com, ConstitutentAffairs@ago.state.al.us, firstname.lastname@example.org, email@example.com, firstname.lastname@example.org, email@example.com, firstname.lastname@example.org
Sent: 4/13/2013 6:38:05 A.M. Central Daylight Time
Subj: State attorneys general; securities regulators; RSA
To: Alabama Attorney General
Alabama Securities Commission
National Association of Attorneys General
North American Securities Administrators Association
Retirement Systems of Alabama
I am wrapping up my work on the three private class action lawsuits I have told you about. See my entry Commentary on response of Former Judge Phillips.
I think the work I have done is work the Alabama Attorney General and the Alabama Securities Commission should be doing on behalf of the citizens and investors in Alabama. I think state attorneys general and securities regulators in other states should be doing similarly on behalf of their citizens and investors.
In 2008, the Retirement Systems of Alabama sent me this reply when I raised this subject with the RSA then. What the RSA said in 2008 is similar to what the lead plaintiff pension funds in the Bank of America case said in their press release about the settlement they achieved.
I have spent the past couple of months trying to point out that selling shareholders are walking away with windfall gains that correspond to losses experienced by purchasers, and the litigation fails in making recovery of the windfall gains and only reallocates losses, which losses get increased by attorneys fees. No one I have contacted has contradicted me on this or even responded to the effect, "yes, you are right, there is basically no recovery of the windfall gains and there is only reallocation of losses, and such and such are the reasons this should be done."
Regarding deterrence purpose or effect, I consider that a very important matter and have done extensive communicating and asking questions about that. Just about everyone I have contacted has punted on the issue. Former Judge Phillips, in his Declaration in the Citigroup case, indicates that a deterrence purpose or effect of such litigation is irrelevant to the amount plaintiffs are entitled to recover or to the amount of any settlement and attorneys fees that the Court approves. If that is the case, the judge should say so, but there seems to be only confusion or, worse, games playing going on, relative to deterrence purpose and effect. It seems very legitimate for a citizen and investor such as myself to want answers here.
I will continue with my work after the three cases in question are over. I hope your offices and organizations have found my communications enlightening and even helpful.
To: email@example.com, firstname.lastname@example.org, email@example.com, Cox@law.duke.edu, firstname.lastname@example.org, email@example.com
Sent: 4/13/2013 7:35:44 A.M. Central Daylight Time
Subj: I did the best I could in Citigroup, Bank of America and Morgan Keegan cases
I did the best I could, in the above three cases I have been writing to you about, to try to get the Court, the parties, the lawyers, and Former United States District Judge Layn R. Phillips to focus on and address that selling shareholders are walking away with windfall gains that correspond to losses experienced by purchasers, and the litigation (in Citigroup and Bank of America) fails in making recovery of the windfall gains and only reallocates losses, which losses get increased by attorneys fees. For more information, see my entry Commentary on response of Former Judge Phillips.
Thank you very much for receiving my email communications about these cases.
To: [BEQ contributor list]
Sent: 4/13/2013 10:46:41 A.M. Central Daylight Time
Subj: Fwd: Update to BEQ authors re deterrence in Citigroup and Bank of America cases
I am wrapping up my work on the Citigroup and Bank of America cases. See my entry Commentary on response of Former Judge Phillips. I am sorry I have not heard from any of you evidencing an interest in this subject. I will keep on trucking.
E. Defense lawyer, corporate counsel, ABA class action committee
To: firstname.lastname@example.org, email@example.com, firstname.lastname@example.org, email@example.com, firstname.lastname@example.org
Sent: 4/14/2013 8:29:23 A.M. Central Daylight Time
Subj: For defense lawyers, corporate counsel, and CADS
To: Defense Research Institute
Association of Corporate Counsel
ABA Class Action & Derivative Suits Committee
I am wrapping up my work on the Citigroup, Bank of America and Regions Morgan Keegan class action lawsuits I have previously written you about.
I pass along the following to the DRI, the ACC, and the CADS for what it is worth relative to the defense of these lawsuits and their defects.
I think what is most noteworthy from the perspective of your groups is the seeming failure or inability of the defendants to make argument that, in Citigroup and Bank of America, there is no, or virtually no, recovery being made on behalf of the plaintiff class ,and there is basically only reallocation of losses. Also, there is a failure or inability to grapple with a faux deterrent purpose or effect of the lawsuits, and that falsity could be availed of to resist the lawsuits.
For more information, see my entry Commentary on response of Former Judge Phillips.
To: Education@nacdonline.org, Resources@nacdonline.org
Sent: 4/14/2013 8:57:06 A.M. Central Daylight Time
Subj: Fwd: To NACD: Directors and business ethics
Dear Ms. Gruss and Ms. Meyer,
I am following up on the below email I sent to you in September 2011.
During the past couple of months I have undertaken a fair amount of work relative to three securities class action lawsuits involving Citigroup, Bank of America and Regions Morgan Keegan. Full information on my work can be found starting at this blog entry of mine Commentary on response of Former Judge Phillips, and following links to other entries
I think both of the two main points of my work should be important from the perspective of the National Association of Corporate Directors.
First is the seeming failure or inability of the defendants to make argument that, in Citigroup and Bank of America, there is no, or virtually no, recovery being made on behalf of the plaintiff class ,and there is basically only reallocation of losses.
Second is the failure or inability of the Court, the parties, and the experts to grapple with a faux deterrent purpose or effect of the lawsuits.
If the NACD would like to discuss anything with me about this, I would be more than happy to oblige.
To: email@example.com, firstname.lastname@example.org, MoriartyB@darden.virginia.edu
Sent: 4/14/2013 10:01:34 A.M. Central Daylight Time
Subj: Wrap up on Citigroup, Bank of America, and Regions Morgan Keegan
To: United States Chamber of Commerce
Institute for Legal Reform
Business Roundtable Institute for Corporate Ethics
Dear Ms. Conrad, Ms. Rickard, and Mr. Moriarty,
I am wrapping up the work I have undertaken relative to the three private securities class action lawsuits involving Citigroup, Bank of America and Regions Morgan Keegan that I have previously communicated to you about. (My wrap up is digested at my blog entry Commentary on response of Former Judge Phillips.)
Your organizations have the perspective of corporate management, and, in wrapping up, I wish to state again to you the two main points, which I think should have importance from the management viewpoint.
First is the seeming failure or inability of the defendants to make argument that, in Citigroup and Bank of America, there is no, or virtually no, recovery being made on behalf of the plaintiff class, and there is basically only reallocation of losses.
Second is the failure or inability of the Court, the parties, and the experts to grapple with a faux deterrent purpose or effect of the lawsuits.
Thank you for receiving my communications about these cases.