Rolling the Dice in a Class Action ... and Winning

Almost all class actions alleging securities fraud settle into a familiar pattern: Plaintiffs' lawyers fight among themselves over who will be "lead plaintiff" and control the case.

There follows lots of wrangling before a judge—motions to dismiss, motions to certify the class and the like.

Then, rather than shell out millions in legal fees and roll the dice with a jury, the defendant company settles.

Plaintiffs' lawyers proceed to seek millions in fees, and the Wall Street Journal publishes an editorial dripping with disgust about the plaintiffs' bar.

Well, a class action against JDS Uniphase, a telecommunications company whose stock lost 99 percent of its value when the dot-com bubble burst in 2001, actually went to trial. Before a jury. And the jurors returned a verdict!

That has happened just five times since Congress sought to discourage class-action securities-fraud lawsuits by passing the Private Securities Litigation Reform Act of 1995.

Perhaps most remarkably of all, the jury in Oakland, California, returned a verdict yesterday in favor of the corporation and four of its former executives. It exonerated them all of allegations of securities fraud and insider trading.

The jurors—four women and five men—deliberated for two days. The plaintiffs had cited 24 "materially false or misleading" statements, allegedly made to pump up stock price, as the four executives meanwhile dumped more than $350 million worth of stock before the it plummeted in 2001.

Why did JDS go to trial? Because it had no other choice, according to Jordan Eth of Morrison & Foerster, who with MoFo's James P. Bennett represented the company, its former C.E.O., ex-C.F.O. and former C.O.O. at the trial.

The plaintiffs "were asking for every penny that everyone had," Eth said. "This was a bet-the-company and bet-your-financial-existence case."

The total tab, according to the plaintiffs' damages expert, came to $20 billion. "It's a big number," Eth said.

So, basically, too much was at stake.

Why do so few of these cases go to trial?

"A lot is at stake, that's why," Eth said. "Companies get in these binds. Often, there is insurance. It's 'Gee, let's work this out, let's move forward.' Juries are often underestimated. There's an awful lot of populism around, and people worry. There are people who think, 'Well, if someone made a lot of money, they must have done something wrong.'"

Does he recommend that more companies roll the dice and head toward trial? "What this proves is that you can have a company that loses $90 billion or $100 billion in market cap, where people sold stock, and the fact of those two things should not of itself terrify people about the prospects of winning," Eth said. "Obviously, every case has to be looked at on its own facts, but you can win a bet-the-company case in front of a jury in Oakland, California."

Each of the former executives testified. The jury answered "no" in the verdict form asking them whether each of the 24 statements were materially false or misleading. They answered "no" to every question.

Then they concluded: "The jury finds unanimously in favor of the defense on all counts. No financial damages awarded."

by Karen Donovan