FacultyFaculty/Author Profile

Securities Litigation: Trial of the Civil Action or Arbitration


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LYLE ROBERTS: Great, thanks everybody. That was a pretty good mediation session. I saw John Young was there, he was in his shirtsleeves, I think, right? Maybe they're even rolled up? So he's clearly working hard to get that thing settled, but unsuccessful.

So we've still got this big gap, and we're going to assume that the second day mediation didn't work either. And now, we've got to start thinking about trial. And so, obviously, our summary judgment motion hasn't done the trick either, at this point. So it's time to start thinking about what would trial look like, how we're going to prepare for it. What are the things that both sides need to think about, in terms of their trial strategy? Understanding, of course, as Rich suggested, these cases don't go to trial that often. On the other hand, do they go to the courthouse steps sometimes? They certainly do that.

And so, a lot of what we're going to be talking about today is not, what will the opening argument look like, but more about, how both sides want to set it up so that the trial could potentially be effective. And so with that, if I can find a clicker somewhere, oh, there we go. I will flip it over to Jim Swanson, to start talking about trial planning.

Oh, and I'm sorry, I should have introduced. Jim Swanson, of course, down at the end, from Fishman Haygood, Nick Porritt, from Levi & Korsinsky, and Karin Demasi from Cravath.

JIM SWANSON: Thank you. A case like this, obviously, has got a good deal of complexity in it. So you need to be thinking about how you would want to set up a case for trial, from a very early stage of the proceedings. So, what I thought I would do is, go through the things that I would be thinking about, all the way through discovery, up until the trial, in the order that I would do them.

And, I think the very first thing that you have to be sure that you have for trial is that you've done your job in discovery, and that you have the documents that you're going to need to be able to prove that the defendant had knowledge that this particular system was not going to work. And so, I think you'd have to be very careful at the outset, to be sure that you had that situated. And some of the things I would think about doing would be, number one, when you're dealing with the EPA, and you're dealing with getting licenses like this, you're generally going to have consultants.

One of the things I think you'd want to do early is, subpoena the consultants' records. A lot of the consultants are going to have issued written reports that go to the company. Those reports are going to outline the concerns that they have about the licensing process. And I think you'd have a good chance of finding some material in there that would be valuable to you.

Obviously, getting the appropriate custodians, and the appropriate searches of the internal e-mails, is going to be critically important. I would think you would want to have a particular emphasis on the engineering group that was involved in working on this process. I think you could virtually count on there being e-mails in there, where people are going to be expressing their concerns. And you know, the tendency in e-mails is to express those concerns in sort of hyperbolic terms, as opposed to rational terms. So I think you're going to come up with some documents if you do that, that are going to be pretty valuable to you.

In addition, I think one of the things that you would look at is all of the publicly available records that there are going to be at the EPA. There are going to be materials that are going to outline the process. There's going to be documents that are submitted that explain the process. And all of that, I think, is going to yield you the universe of documents that you're going to want for trial.

Now then, when you're approaching trial, you want to think about the case, really in terms of what are your 10 best documents? Or what are your 20 best documents? You don't want it to be your 10,000 best documents. And you want those documents that you're going to use, to be seen by that jury time, and time, and time again, so that they understand them, and they can internalize them. The simplification process is very important in this case.

The next thing I would be thinking about is, what would be the order of witnesses, the order of presentation, at the trial? The way that I like to do cases like this, and I haven't tried a class case, but I have tried a number of securities cases, is that you typically would want your very first witness to be somebody you could sort of lay out the plaintiff's case, at a very high level. And that would have a good deal of credibility. A lot of the cases that I work on are cases where you either have maybe a hospital system, or a pension fund, and oftentimes you would be looking at, maybe, the chairman of the board. Because you'd prefer to have the person be somebody who wasn't involved in the investment decision, itself. So they're a little bit impervious to the cross-examination, but they can articulate why they believe that whatever the client you're representing was wronged in the case.

A lot of times, in Louisiana, the pension funds include the state's treasurer, who is a member of the board. And that would be somebody who, in the past, I've used to testify as the opening witness in a case, politically sophisticated, has a lot of experience in answering questions. You know, very, very good presence. That's the kind of witness you want to start out. The next layer of witnesses that I would call would be defendants, witnesses you'd go into calling them on cross-examination. And I think they would fall into two categories.

The first thing that you want in a case is to figure out a witness on the other side that is going to be a villainous character. Somebody that you can really convince the jury, I really don't like this person, and I really would like to rule against them. And that's where you're looking, if you're lucky, and you have a good case, maybe you can find somebody who's in the very senior levels of management, that would fit that bill. Somebody that's arrogant, somebody who isn't going to listen to being prepared, that's going to get angry, and is going to create something that the jurors are going to react negatively to.

The second kind of witness that I think you want, would be the engineer-level people, who are going to want to take the company's position. But if you developed your discovery properly, you can force them to basically agree with the elements of your case. And that period of the trial, which I would think you'd want, in a trial like this, often would be a two-week trial, you want a couple days of that, in a row. Where you've got witnesses that you're having to pull the stuff out of, they're trying to fight, but they're not that good at fighting, you can't do it. And that, sort of sets up the momentum you have.

The other thing you need to think about on witnesses is, who is your last witness going to be? Because, one thing about trials is that, inevitably, things go wrong in trials. And that goes for both sides. And things are unexpected. You want to have a rock-solid person who's going to be your very last witness, so when you turn over the case to the defense, the jury is thinking, OK, these guys have done their job, I understand what they're trying to do. You do not want your end witness to be a disastrous witness. A case like this, it might be that a person that you'd look at for that might be the consultant that would have advised the pension fund, about their investments. Maybe that person would be somebody who had the level of sophistication to be able to do this.

Now, the thing that you're going to do early on in this process, and you're going to want to do multiple times, is you want to figure out what the jury is going to think about the case. And, in order to do that, you'd need to do some kind of focus-group testing. And typically, we would do focus-group testing three times, probably. The very first time that you would do the focus-group testing, the way we would often do it is, we would go to a temporary employment agency, and get them to bring 20 people over, for a day or two. And hopefully, you would have some of the witnesses, hopefully, that you're going to call live in the case. You would run through an examination of them. Maybe you would do it by videotape, maybe you would do it in person.

You'd also like to have the video depositions that you have of the important defense witnesses. And you would run through that to get a sense of what the jury thinks about those particular witnesses, and how they're going to do, and whether they like them, and whether they don't like them. And you can get a lot of insight from that.

In order to do the focus groups properly, you have to have somebody in your firm, or in the group that you're working with, who is going to take the defense side of the case. And they need to be motivated and really do a good job at that, otherwise, the process is just not going to be enlightening. And that process, is a process that helps you understand, how you're going to present your case; what kind of presentation materials that you would use to present your case; what your opening statement is going to look like; what you can expect the defense opening statement to look like, so you can anticipate what the problems are. But that process is a very valuable process.

First time, maybe you're not thinking so much about trying to figure out who the jurors are that you want. Maybe you're not thinking demographics, so much. And maybe you reserve that for the second, and third time, where you're going to get maybe a jury consultant to come in and do that analysis. That's not something that I would be comfortable doing in-house. But that's something you're going to need to do, later on in the process.

LYLE ROBERTS: So let me ask you about that, because I imagine, I'm curious, hopefully some other people are curious about it, as well. So then, in the securities cases you've tried, is there some kind of common theme about what kind of juror you're looking for?

JIM SWANSON: Well, you know, I think that if you're a plaintiff, I mean this is a very, very gross generalization, in our state, I'm in Louisiana, I've tried cases different places, what you really would like is an urban jury, and a lot of times, you'd like younger females on the jury. You know, for a case like this. I think that would be, sort of, a common demographic. But you'd have to test the individual case, and it might depend somewhat on who the witnesses are. You know, in particular, who is going to be the villainous character that you're going to want to be the focus of the jury on the defendant? And what do the different groups, how do they react to that person?

LYLE ROBERTS: When you say about the villainous character, so in a case like ours, with Blue Sky, are you thinking CEO, hopefully? That would be your ideal villainous--

JIM SWANSON: That would be the ultimate. Yeah, the CEO would be the best. And CEOs come in all different varieties, and a lot of them are very politically astute. And they're very good at convincing people, and so maybe that's who you would hope it would be. But maybe it isn't that person. But you also run into companies where the CEO is a person that is a very strong-willed person, that doesn't like to listen, that is very busy and doesn't focus. That's the villainous character you're really looking for.

LYLE ROBERTS: So maybe we can turn to these trial tools. Take us through that a little bit?

JIM SWANSON: Well, one of the things that we would do from the very beginning is, you'd have a very detailed order of proof. You'd have the elements of your case, and then you would you'd fill in which witness and which exhibit is going to prove everything. So you have a good, master checklist of what you need for trial. And that's something that you would develop very early in the discovery, and you would keep updating as you go through.

The other thing that I think is very valuable in these cases, is the use of a corporate deposition. A couple different reasons for that. The very first corporate deposition that you would generally want to take, would be one where you're asking them to basically explain the discovery responses that you have, so that you can understand what they did and what they haven't done in terms of generating the documents that you need.

And in particular, in these securities cases, you want to find out who are the current employees and who are the ex-employees. And you really want to focus your attention on the ex-employees, because what's going to happen is that the ex-employees are not going to be able to be prepared as easily by the Lyle's of the world. And oftentimes, the ex-employees are going to have their own lawyers. They're going to be a little bit skittish about really turning the witnesses over to the firm that's representing the company. And that, I've found in the cases, really, really helps you out, in terms of being able to get what you want out of those witnesses.

The other thing you're going to want from the 1442 deposition is to create a very detailed 1442 notice that is asking for the underlying facts of what happened, in terms of what you learned about this process not working. What the company learned, and when they learned it. And you want that, not because you think you're going to end up with a bunch of admissions that are really going to prove your case, but you want to set them up on a company basis, with the company's party line, on the case. You want to do that fairly early, and then you can use the witnesses that you're going to depose after that, to contradict and prove that what the defendant's story is, is not a credible story.

So, the other great thing about the 1442 deposition, is that you can play it at trial, it's just a thing that you have. You've got some ability to edit it, in terms of removing things from it, and you're just going to play it. And the defense, there's not much they can do with it. They're not going to get to redirect the witness at that point in time. So it can be a very, very effective thing. But you have to be thinking, very carefully, about how you do it, so that you can use it that way. And it's got to be very focused, and very precise.

I think we can cover some of these other things. I think I've probably used more than enough of my time.

LYLE ROBERTS: All right, so we'll turn it over to Nick, and get a little bit more on, maybe the issues specifically to a securities class action, that will face the plaintiffs.

NICK PORRITT: Thanks Lyle, thanks Jim. Yeah, I mean, everything Jim said, pretty much applies also with trying class actions. But there are a few specific problems that arise, or challenges that are presented, from a plaintiff's perspective, when it comes to securities class actions. The first being, the first point that Jim raised, which is that you want to start off with a nice, persuasive, knowledgeable, sophisticated, hopefully sympathetic witness. As a class-action plaintiff, you may not have that person. Maybe you have an institution as the class representative, in which case they may be able to get someone who is similar to what Jim described.

But you may have an individual who may not be a particularly sophisticated individual, and they may know next to nothing about the actual underlying merits of the case. They knew they bought their stock, but they may not have a lot more to do than that. So they may present a very sympathetic profile, in a sense that, they're personal circumstances are. They're a nice person, and they've lost a lot of money. They've the typical, you know, the archetypal grandad and grand-mom, and tennis shoes in Florida, have invested their life savings in a Blue Sky Inc., and have now lost all that money. That may tug on the heartstrings of the jury, but doesn't get you very far, in terms of proving your case.

And the fact is, you're not going to have many of your witnesses that you control, that can talk to a lot of the details of the case. All the employees are going to be controlled by the company, the defendants. The EPA consultants, which almost certainly exists, and I agree with Jim, they could be a valuable source of evidence, nonetheless they are to all intents and purposes, controlled by Blue Sky. The confidential witnesses you found out, and you're investigating the complaint that we talked about in the second panel today, that will have been deposed as part of the discovery, by Lyle and his other defense.

So to the extent that they've survived that scrutiny, and some of them just fall over completely when they actually get into discovery, and actually have to turn up for deposition to get asked about what they know, they're available. And you control them. But you really have a much more limited ability to control the record as it goes in. You have to do a lot, as Jim explained, through cross-examination, through adverse witnesses. And when you have a technical case, we have a high burden of proof to prove fraud, intentional or deliberately reckless wrongdoing, that's just very difficult to do.

So you need a very solid, you need to really do your work in discovery. You need to have your solid evidentiary documentary background, with your key documents to show it. And, the other thing that's key, what you do need to have are really good experts, which we also talked about earlier today. And those are witnesses that you can control. And so, one thing to consider at the jury trial, sometimes your first witness will be your expert, which is somewhat unusual. But they do have the ability to present the whole story. And in fact, if you have two experts, you may start with an expert, and end with an expert. And that way, you get to really book-end, make sure you follow with two strong witnesses, who know how to testify, who are sophisticated.

So here, in this fact pattern, in Blue Sky, not only would you have a damages expert, which you've talked about. You would obviously have an expert, I think, on the technical side of things, the technology, just to explain it to the jury. And you might have two of those. One, maybe, to do with the technology. Or maybe to do with how the industry, you may have an EPA expert, separate from the consultants attained by the company. And those are two ways in which you could present the story. So that's always, sort of, the overarching challenge faced by a plaintiff, in a securities class action is, you must present a compelling story, but you have limited means of which you control, to present it.

The second thing is, what Jim has already alluded to, which is that you must simplify the case. These cases are very complicated. This case is complicated. Multiple misrepresentations of a long-class period. You've got a very technical area dealing with energy generation and EPA regulations, which are very complex. And to stop the jury from going to sleep, you've got to present that in a very compelling way. And that does require your imagination.

You spend all your time, often drilling down in discovery, into very detailed areas. And, it often might not be worth presenting to the jury. And you have to realize, you get very attached to work, as you work on it for years and years in discovery, when you get to trial, often it's all about shedding material.

And this is where the focus groups that Jim talked about, is just imperative. You may have multiple theories here. Is the theory here, the greedy CEO who's trying to max out his 10b5-1 plan trading practices by deliberately misleading the market? Is the plan here just hopeful thinking, pie in the sky thinking? We desperately need this new technology to work, and we really hope it does, so we're going to ignore the red flags. Is that the theory? Is the theory here, just gross, gross negligence that rises to recklessness, that you really just weren't paying attention at all?

Any one of those theories may have been presented by the evidence, and--

LYLE ROBERTS: --but I'm guessing you like that last theory the least. That theory is not going to be very compelling to even our young, female, urban jurors, probably, right?

NICK PORRITT: I don't think so. No, but when you are in the early stages of the case, and the motion to dismiss level, and the summary judgment, the two most critical. As a plaintiff, you get the burden. You need a theory, but you can present somewhat alternative theories, to some degree. You get the inference that, yes, that is the case. If it's suggested that the CEO had a motive, you'll get the implication that here's a motive. Now, when you get to jury trial, you have to show that he has the motive, and that he or she acted on it, which is a much, more, higher burden.

And so, this is where you go into these focus groups, and you can try out a few different theories. And you do, either through focus groups, or you do mock juries, which is that you'll have like a mini trial, which you'll sit for. We did one we sat for almost half a day, we did it over several days. But each day, we did a separate trial with videotape excerpts, with video transcripts, and we presented all arguments to jurors. And then they went off and deliberated, while we sat behind a mirror, where they couldn't see us like listen to them deliberate. Which was truly terrifying. Because this was a case that we've lived with, and so we knew, and getting people fresh, hearing it for the first time, suddenly all these theories that you believed in, were like, oh yeah, that's obviously the case, that this person acted this way. No one was buying it. You know, we sat there watching 20 people say, oh he absolutely didn't believe that.

So, that can help you change how you want to present things. And you try it out over multiple days, and you try on different hats, you might try on different theories, and you see which one takes. And that's how you refine your case. But all that takes a lot of work, and it's very expensive, and takes a lot of effort to really think about it.

JIM SWANSON: One thing that's kind of interesting though, is when you run those focus groups, oftentimes we'll break them into three juries. You'll have three juries that heard the same exact thing. And you will get three very, very different outcomes, which tells you that it's a lot to do with who you get, individually, on those juries.

LYLE ROBERTS: Is there a question?

AUDIENCE: How do you get around the confidentiality stip, in order to present to focus groups?

LYLE ROBERTS: Let me rephrase, so the question is, how do you get around the confidentiality stipulation in the case, to present to focus groups?

NICK PORRITT: That's a very good question. The case we did it with, we didn't have a confidentiality stip. So that was easy in that case. I don't know, Jim in cases you've had, where you've had a confidentiality order in place, that you had to deal with that?

JIM SWANSON: Yes, and I mean typically, you would fashion the confidentiality stipulations such that you would get each juror to sign their own confidentiality stipulation, to try to protect the confidentiality of the thing. And you can get them so the two will dovetail with each other, if you're thinking about that early on, when the stipulation's first issued.

KARIN DEMASI: Usually, protective orders in these kinds of cases, include the ability to do this kind of research. Both sides want the ability to do that. Obviously on the defense side, most of the confidential information is ours, so it is easier, because we don't have the same, typically, issue as presenting the other side's information. But that's usually resolved in the course of having a protective order, and you can have people sign confidentiality.

The other thing to remember is, these cases, ultimately, are going to be tried in a public court. So by the time you get to a lot of the detailed jury exercise, while there is a lot that's covered by a confidentiality stip, there's also been a lot of motions, and sometimes efforts, to make public a lot of what was already in the record. Which is ultimately going to happen anyway.

NICK PORRITT: And at this stage, you're probably four or five years after the actual events in question, often. And so, even if it was covered, and you hadn't anticipated it, you would just modify. I mean, it's hard for a corporate defendant to get up there and stand up and say, the e-mails that we sent five years ago are so essential, and reveal such corporate secrets that they cannot be revealed to this focus group. So, you just kind of work around it.

I'll just very quickly, because we've got a lot to cover, I'll quickly talk about the other two things I have on my slide, here. Just the management of these cases at trial, at a jury trial, is just very complex. One thing you certainly would do, I think Jim would agree, you definitely want to watch a jury trial take place in that courtroom, with the same judge, just to see how he or she likes to manage his courtroom. And get a sense of how it works. But, just the logistics, the show and tell, the management of exhibits, how technologically advanced is the courtroom? Do they want all the exhibits in electronically?

And most jury rooms, in the federal system, most have the ability to handle exhibits, electronically. So everything is scanned in, and it comes up on the screen. I don't really like that. I think that's very flashy, and that looks nice, but there's something about handling a paper document, sometimes, that you really don't want the jury to miss. You want the jury to, hand the exhibit to them, they can look at it, rather than looking at it on the screen.

But there's also questions like the phases of the trial. Often they'll be phased into liability at first, and then damages, and then you may have mini-trials, where individual claimants have to come forth to prove the damages. How that is going to be managed has to be thought out ahead of time.

And what the verdict form would look like. Under the PSLRA, the defendant is entitled to an interrogatory from the jury, as to the state of mind for each individual defendant, as to each mis-representation. When you have a long class period like this, lots of misrepresentations, maybe multiple defendants, that ends up being a very clumsy verdict form. How are you going to present that in a way that's actually clear, they can follow? And there may be other things you want including the verdict form.

So in the Vivendi trial, for instance, the jury came up with the actual price inflation for every single trading day of the class period, 400 trading days in the class period. They came up with an actual dollar amount. A dollar amount that bore no resemblance, whatsoever, to the expert testimony from either plaintiffs or the defendants, as far as I can tell, they just averaged out the two, which has no basis in financial theory. But that's what the jury came up with. So, that jury form, I think, was something like 74-pages long, or something insane.

So these sort of issues, you need to be thinking about these, and there's not a lot of guidance out there. There haven't been a lot of 10b5 jury trials. And, you know, the judge is going to be looking, it's not like they can pull a manual out of the manual of complex litigation, and have it all laid out for you. You've got to come up with solutions, and the judge is going to be looking for practical solutions. And this is where you really need to work with defendants, as well. At this point, it's in no one's interest to have a very difficult process. Everyone, we need to get this through, now a jury trial, OK we're going have to get through this. How are we going to present it in a way that's going to be practical?

JIM SWANSON: And one of the things that's really kind of interesting is, how much the procedures in the courts vary from court to court. On things like, how do you select a jury? To what extent do you get to conduct a fulsome voir dire? How are you going to strike the jurors? How did the judge want you to impeach the witness? There's a procedure. Every judge has his own idea of how he wants that done. The timing for openings. Does he want you to stay at the podium and be very formal and rigid? Or is he going to let you go do different things? Those are things that vary from court to court, and really, I would emphasize, that it's very important that you understand that, beforehand. And watching the trial, probably is the best way to do it.

LYLE ROBERTS: Let's turn to Karin to tell us how, we've heard a lot about how the plaintiffs are going to set up their case, how are you going to gum up the works?

KARIN DEMASI: Yeah, I feel better prepared, but a little intimidated by all that's coming at me.

So, unlike the plaintiffs, who have a chance throughout discovery and throughout the case, to make their case over and over again. The defense do not get a lot of chances to tell their story, and that's a pro and a con. It can be a con, because at least clients that I've worked with, feel very frustrated over the course of a case. Where they say, we never get our stuff out. We get complaints, and we get these discovery letters, and people want to educate the judge. And it's a pro because you really can be very flexible until you get to trial. But by the time you get to trial, you really need to be telling your story.

And, at the firm I'm at, when we have trial teams who go off, we give them a t-shirt that says, "keep it simple." And that is because these are jury trials, they are incredibly complicated subject matter. But when you get to trial, you need to pick your themes, you need to know your story, and you need to keep it really, really simple. And I've heard before, the statistic that 90% of what happens in discovery never makes it into a courtroom. And so, it's great to be prepared. It's great to go through all the things that you absolutely need to go through for trial planning, but by the time you get there, the most important rule, I think, is to be as simple as you possibly can telling the story of what happened, why it happened, and who are your witnesses. Who is Blue Sky?

In terms of telling your story, you need to figure out who's going to tell that story. Just like from the plaintiff's perspective, they figure out who's going to be their first witness. One of the first things that we think about is, who is the face of the company? This can't be a faceless company. Happens to have a really nice name, this one, Blue Sky, I like that. But there has to be a face. And so you want to pick a face. Sometimes that face is a defendant. Sometimes you have a terrific defendant, who has responsibility that is commensurate with wanting to be a face the company, that has the kind of experience, and has the kind of documents that would make this person OK to be the face of the company.

Sometimes it's completely different. So I've had cases where the CEO is not involved in the underlying facts, but where you have a CEO who is going to get up and say, we're Blue Sky, this is what we do, this is how we affect the world. This is the positive change we bring, this is our business. This is what we do every single day. Before you ever get to the defendant and the witnesses. But it's very important to pick that face of the company, it should be somebody that's in court every day, who is introduced in opening, who is there that the jury can connect with. As the person that takes away the faceless entity.

The defendants, the individual defendants, as Jim and Nick both pointed out, are generally in the defendant's control. And that is a benefit to the defendants, and it's a benefit we use. So sometimes, almost all the time, the plaintiffs have to bring their case in through our witnesses. Sometimes our witnesses end up going in the plaintiff's case. And when that happens, you have to give a lot of thought to whether you want your witness to take the stand a second time in your own case, or you'd rather bring your entire case in during the plaintiff's case.

And I've had lots of pretrial motions that revolve around, what happens when Nick or Jim wants to call my head of technology relating to solar energy, and wants to question them on the stand. Is my questioning limited to their scope? Or do I get to bring in our story in their case? And that's an important, strategic consideration to think about. Obviously, again, with pros and cons on either side.

But the thing that's most important, whether it's in the plaintiff's case or whether it's in the defendant's case, is that these individuals are people, they're not documents. And so, more often than not, what happens from our perspective in the plaintiff's case is, that there is email, after email, after email, with unfortunate thing, after unfortunate thing, after unfortunate thing. And it is one of the things that we do when we do focus groups, as we try to be very faithful to just how terrible a client's documents can be. And to line them up in a chronology, without all the context that a defendant might want to have, so that we present a really, villainous, to use your word, portrayal of the kind of plaintiff's case that could be brought.

And so, on the defense side, when we're getting ready for trial, we think about, how do we personalize this? How do we provide context without seeming defensive? How do we make the defendant's people, and not just documents? And that's really important to do.

At the same time, I have this a little bit later, you really do have to deal with whatever the bad facts are, whatever the bad documents are, you can't hide from it. You can't look defensive. You can't ignore it. You can't have them tell one story, and be a ship passing in the night, saying something completely different. You have to take it head on, and explain, this is what I said, I was really frustrated, this is why I said that. This is what I meant when I said, the solar energy data came out terribly, right? I mean, this is what I meant, this is what I was talking about. Here's four other e-mails that show that, that they didn't show you.

And so, it's important to take those things on, and to think about it. And having the very person who authored it, if they can do it credibly, get up and talk about that, is really, really compelling. We also, like the plaintiffs, use expert to provide context. And sometimes, it can be very useful to have, particularly, an industry expert, be one of your first witnesses, to give context for what is the solar energy industry. Again, what does it bring to people's everyday lives? What does Blue Sky do? And frankly, how does their stock price work? How do they bring value into the company? What is everybody doing day-to-day? You might also, in this kind of case, have an EPA expert. How does the EPA regulatory framework work? Again, at a level that regular people, and not regular people who are lawyers, but everyday regular people.

I have a partner who usually tries his openings out on his mother, who is a 98-year-old woman, who sits there, and responds, and says, this makes sense to me, this doesn't. So you need to find somebody to listen to what you're trying to convey, and make sure that it makes sense, and that it hangs together. But sometimes an expert can be really good at doing that, and putting facts into context.

The other strategic issue is about calling plaintiffs. So, it's interesting to me to hear you both say that you usually look for a plaintiff to call, because in the trials that I've done, and in the class actions that we've had, we've always wanted the plaintiffs to testify. And faced resistance on that, in part because they often are, you know, regular people, who can be sympathetic. That's hard for the defendants, good for the plaintiffs, but who don't necessarily know the claims. And that's understandable, and they're not required to, but it makes them really easy to cross.

The other types of plaintiffs that we really like to put on the stand, and tend to have a fight about, are institutional investors. Those are people who are sophisticated. They know what they're doing. They're investing in the stock market. They know it's a gamble. They know stocks go up, stocks go down, they know that heading into it, they have lots, and lots, and lots of information, from lots, and lots, and lots of analysts. Those types of plaintiffs can be really helpful to have on the stand, to drive home, these are people who are making money, who understand, sometimes you win, sometimes you lose, that's what the stock market is.

And having plaintiffs on the stand, and having institutional investors in particular, can really drive home, one of the things that I think from the defendant's perspective, we want to make sure doesn't get lost, and that is that this is all about money. It's a case about money. It's not a case about getting hurt, even in mass tort cases that turn into class actions, they're not about the victims. They're not about people who got hurt. They're not about what happens when a solar energy panel broke. They're not about the underlying action, it's about money. It's about people investing money, and not getting back as much as they wanted.

And so there's a lot you can do on the defense side, in terms of showing stock trends, in terms of showing what's happened in the energy industry, generally, that you can do thematically, not only with your damages witnesses, which we will get to in a second, but thematically, to remind your jurors that this is a case about money, and people who want money.

Nick--

LYLE ROBERTS: Karin, let me ask you, you mentioned that you can have difficulty getting those people on the stand. Why is that?

KARIN DEMASI: So the argument that I've heard from plaintiffs before is that they're just not relevant. They don't actually make out any of the elements of the claims, of the five elements of a securities case. They don't necessarily have knowledge. They shouldn't be put on the stand, and they don't have any knowledge about the underlying bad acts. And so, we at least, in a number of cases, have had a hard time being able to call plaintiffs, ourselves. We usually take the depositions, understanding that these people, many of whom are outside the jurisdiction, and especially if they're absent class members, who you happen to get discovery of, which is a whole different area, in terms of discovery.

But we usually take our depositions of those people, expecting to play them. And you really need to think about, what is your direct, or technically, cross-examination of that plaintiff, so that you're lining things up, in a linear way, that can just be played to a jury. Because it can be hard to get plaintiffs to bring people live, for all the reasons that you've mentioned.

NICK PORRITT: Yeah, I would just say, it depends on the plaintiff, obviously, it is very case specific. But I would just be always inclined, generally, to present a plaintiff. I just think you just have a much more difficult, you're going to stand in front of the jury and say, I want a verdict of $500 million against these defendants, on behalf of the plaintiff, who doesn't even show up? I mean, that just strikes me as a very difficult argument to make. So, I mean, I wouldn't want to be making that argument. I mean, it seems to me, I don't know what the circumstances of the individual cases you're talking about, I'm sure the plaintiff's counsel had good reasons not to present that particular, and you know, maybe it's because they're sick. Maybe they can't travel, maybe they're unwilling to travel.

KARIN DEMASI: Well, they're class actions. Their argument is there's a presumption of reliance, you don't need to prove reliance. You rebut the presumption of reliance, but typically, in a second phase, and so they're really not relevant to whether there was a wrongdoing.

NICK PORRITT: I get the argument, honestly, from a practical point of view, I would want to have the, unless you think they really are going to be horrible, or present some real harm to your case, in some way, shape, or form. I think you'd want them on there. You would hope the judge is not going to let, you know, a big, mean Cravath lawyer, just like tear into a poor, individual plaintiff, or make her look bad.

KARIN DEMASI: I'm the young female on the jury.

[LAUGHTER]

JIM SWANSON: I think what you need is, if you're going to call somebody, he or she needs to be somebody who can stand up to the examination, and they have to understand the case in some considerable detail, to do that. But in an institutional case, I can think of several examples where, in a case where I represented a hospital group, I'd have the chairman, and he was a former vice chairman of one of the investment banks we were suing. That was the perfect kind of witness to have, because he could put it into context, and he had the credibility to be able to say, look, I was in this business. I know how business should be done. People have to tell the truth in this business.

KARIN DEMASI: Mm-hm.

LYLE ROBERTS: I mean, it seems like, conversely, that the easier plaintiff witness to get in front, would be the institutional investor, because they do know something. And also that's the one the defendants would want, right? Because the little old lady with the sneakers from Florida, probably isn't all that helpful to you, right? But the institutional investor, who can, as you say, make that story of, yeah, I'm sophisticated, I understand how the market works. And use him to convey that to the jury, seems like it be useful.

KARIN DEMASI: Yeah, look. The institutional investors in the Vivendi trial, for instance, were very useful witnesses. And in subsequent trials, where you do end up after there is the class case, you go into subsequent cases of rebutting the presumption of reliance, which is plaintiff by plaintiff, because you can rebut it, with respect to anyone's individual damages. You end up having those mini trials on it, and if you followed the Vivendi trial, there were a few trials that were after that, that were on this very point with the institutional investors. So those are better. I don't think they're as sympathetic, and they're easier, I think, to cross, sometimes. Because you don't want to beat up on the firemen and the teachers, and they're trying to get their pension. And it's sad when people lose money in the stock market. Those are harder.

And then, the only thing I'll say on this is, preserving your record for appeal. These cases change, as you see from Vivendi, and I'll talk about Household in a second. They change so much on appeal, so even the Vivendi case, which was multibillion dollar verdict, end up being in the tens of millions, by the time the appeals were done. Household went up on appeal, had a different result, but also was much less than it would have seemed. And so, with all of these issues, you need to make sure, in the course of the trial's defendant, that you really preserve every issue for appeal. Because, if your client is committed to trying it, and committed to go through that second phase, the appeal issues will be extremely beneficial to you down the road.

LYLE ROBERTS: Great, talk a little bit about damages?

KARIN DEMASI: Yeah, let's just talk about damages. So, damages are one of the big reasons why these cases try, so rarely. The burden of proving economic loss is difficult, it's on the plaintiff. But this is a very complicated area, it's boring as a general matter, I mean there are the facts, but then when you get to the economic analyses of how stock prices move, and what's in the stock, what's in the stock price movement and what's outside the stock price movement, what models you run. And there's two trader, and there's one trader, and there's back-casting, and there's all kinds of different theories, where even somebody who's very steeped in it, your eyes can just glaze over. And so, it's a complicated area, it's hard to present simply, it's probably not appropriate to present simply, and so as you're getting to trial, I think both sides struggle with that. And the uncertainty around what happens with damages is one of the things that makes it very difficult. And that's true for plaintiffs, for defendants, for judges, and for juries, for every constituent, I think.

From the defendant's perspective, it is another place to remind the jury that this is a case that's really about money. It's not about all these other wrongs. And it's not about how sad it is for the teachers. It's really about, again, a gamble in the stock price. Damages analyses are generally presented by PhD economists who you could sit in a room with and read reports, and it would take you a long time, it would take me a long time to really understand them. When we're doing that work, and when we're doing the depositions, we are deep, deep, deep in the models. And by the time you get to trial, you really need to decide how best to present it, usually through demonstratives.

One of the things you're doing as a defendant, is you're taking the stock price drop that's being claimed by the plaintiffs, and you're trying to pull out other stock price movements that are non-fraud related. And trying to explain to the jury that it can't possibly be that if the entire energy sector went down by 20%, that that's a 20% that the plaintiffs ought to be able to recover. And so, you have to find ways in which to present those models. And it can be done, as I said, in phases.

One of the other real difficulties, at least from the defense side, and I'd be interested in plaintiff's perspective on this, is that damages in securities cases are done on a per-share basis. There are usually motions in limine around whether aggregate damages, the billion dollar number, can be sought, so that the jury understands that the plaintiffs receive billions of dollars. But more likely, and probably right under the law, or at least more typical under current law, is that it is per-share damages, on a daily basis.

The jury is meant to go through from the first day the class period to the last day of the class period. I think it's about a year, in this fact pattern. And for every single one of those 365 days, talk about the stock price movement, connect it to the corrective disclosures, and you never quite get behind the reason. Another curiosity of the Vivendi verdict form, is if you go through the day-by-day stock price inflation that the jury ultimately found, they zero out September 11th, from 2001. It's in the middle, and they basically decided that once the twin towers got hit, the inflation must have gone to zero. And so they zero it all out for a bunch of days, and then they bring it right back up. And there's no actual logic behind that, it just made sense to them. Because the market was closed, and why would it be inflated? And in any event, so if you can go through and see just how complicated it is.

There's very sparse case law on the issue of damages, in part because these cases don't get to that phase. There's a lot at other stages of the case, but damages is not one. There is a very recent, if you're interested in this issue, 2015 case, out of the Seventh Circuit called Household, which is one of the cases that went through trial. It ended up having a very thoughtful, as it turns out, pro-plaintiff, Seventh Circuit decision on the leakage method of developing damages, of back-casting, of the appropriateness of these types of models.

And it is thoughtful. It's not one, I think, that was welcomed by the defense bar, just because it's difficult, and a lot of things, that from an economic perspective, that defendants use to push out, are really kind of wrap their arms around by the Seventh Circuit in that decision. But, it gives a lot of thought to all of these various issues. It's really important to read on either side of the V, in terms of what happens with damages. And so, I would recommend that case to you.

NICK PORRITT: Yeah, the plaintiff's expert in that case, was actually someone who usually testifies for the defense. I think it was Dan--

KARIN DEMASI: Dan Fischel?

NICK PORRITT: Dan Fischel.

KARIN DEMASI: He does both plaintiffs and defendants. And again, it's another one where there's a whole phase after Household. And just to give you a sense of how long these cases go, the Household trial happened from, I think, March to May of 2009. The Household decision in the Seventh Circuit, is in 2015. We're still talking about whether the damages methodology was appropriate. And in the middle of that, was a whole discovery phase, including interrogatories to each class member about whether they relied on the alleged, well not alleged because the jury found, whether they relied on the false statements in connection with making their purchase. And for the plaintiffs, they said, no. Which turns out a lot of people say, I didn't rely on that. They just take them right out of the class, and move on to the people who say that yes. So, it's interesting.

LYLE ROBERTS: Karin, maybe it's worth just spending a minute, though, to explain why it is that it's only at the end, that we're actually looking at the issue of reliance.

KARIN DEMASI: Well, so there is a presumption of reliance. Is that what you are saying? In class actions, there is a presumption of reliance under Supreme Court law, that was recently just reaffirmed, where shareholders are presumed, investors are presumed to have relied on the stock price. And presumed to have relied on the information that is baked into the stock price, for purposes of making their purchases. And so that's not something, if you have the presumption of reliance, that has to be affirmatively proven, once you have an expert that gets up and says, stock market's efficient, the class is certified, you get the presumption of reliance. You don't have to prove that as part of the affirmative case. But if there is a verdict, the defendants get to come back and rebut that presumption of reliance. It's rebuttable, and so you can go plaintiff by plaintiff, to demonstrate that in making your purchase of that stock on that day, you didn't rely on any of these misstatements. And if that's true, that you didn't rely, any absence of an element the case will knock out the claim.

So you go, literally class member by class member, and there is a claims process that can last for years. It's one of the reasons, I think, why settlements are so preferred. And there's lots of reasons on both sides why settlements are preferred in these kinds of cases. One of them is that a settlement will definitely bring more certainty, but it will often bring a greater pool, or close to greater pool, than if you went through a claims process, where many people can never come forward and show that they purchased the stock. Many people will end up answering in interrogatory saying, no I didn't rely. And many people will end up being subject to discovery, and an entire process on their own around their particular purchase, that may end up ensuring that they don't recover. So it's very, very, very complicated.

LYLE ROBERTS: But I think it's helpful. And one the reasons I ask the question, is to provide a little context around our panel right before us. Right? We're talking about mediation. We're talking about the model numbers, but it's kind of important to understand, that the model numbers are in the end of the day, just a model. You could have a claims process that could come up with a wildly different number, than the numbers we typically talk about, when the plaintiffs are valuing their case. And when we're talking mediation about what we should do.

And, look, part of that is why, even as we looked at the potential settlement of this case, part of that is why the settlement wasn't anything like what the model damages--

KARIN DEMASI: Right.

LYLE ROBERTS: --would predict, right? Because there is an understanding that, at the end of the day, might look quite different, if you actually ever went all the way through, and went through a claims process.

KARIN DEMASI: The other thing is the damages, which are done, as I said before, on a per-share basis, from a defendant's perspective, I mean you could have like $1.00 inflation. And if you have enough purchases, or a long enough class period, the jury can intend to give a small amount of damages, and wind up with an enormous amount. Which is something the plaintiffs use, in the course of talking about mediation and numbers. But again, if you can get through this whole claims process, the numbers vary wildly.

NICK PORRITT: I mean, I would say, in our jury trial, we ended up with a $35 million verdict. But with a very conclusive verdict form, frankly. And I would say, on the counts, we got the $35 million, and the jury had no idea they were awarding us $35 million.

KARIN DEMASI: Exactly.

NICK PORRITT: So, even if that was the judgment that ultimately got entered. So, and what we talked about, the claims process, I mean that's one of the risks you end up in. There's two risks, really, at trial, from between the phase we were at mediation, where we've got experts, models, about what plaintiff-style damages might look like, and so on. Versus what you might end up after a trial, on this very lengthy claims process. One, you don't know what the jury is going to award. It could go way up, it could go way down.

And then secondly, you don't know what the participation rate is going to be in the claims process. And I think in both Household and in Vivendi, it ended up being less than 20%?

KARIN DEMASI: Yes.

NICK PORRITT: 20%?

KARIN DEMASI: Yes.

NICK PORRITT: So, you know, that means of that $500 million, you're already down to $100 million. Straight up. Assuming you can prove all of those elements. So, that's the reason why, you may read these, you may receive these claims forms in the mail, and think, huh, implied damages are $500 million, and you're only getting 5% of that? That doesn't seem so great. Well really, these are the reasons why getting that common fund, that 5% or 10% of the $500 million claimed, is a good result, and a fair result, for the class. And why the courts rightly approve them.

LYLE ROBERTS: Great, so let's, and we have just a few minutes left, turn to Jim, who was going to tell us a little bit about, one of the things we often say we're going to cover, but never quite get to, is arbitrations. And we certainly wanted Jim to talk a little bit about that, as well.

NICK PORRITT: And if I can just give a quick intro as to why this is important?

LYLE ROBERTS: Yeah, absolutely.

NICK PORRITT: Which is that, I mean, I think you're seeing increasingly at the Supreme Court, seems like every year there's another pro-arbitration opinion, coming out of Supreme Court. And I think it's an area, that up until now, I mean, Lyle and I've been doing this for well over 20 years, and haven't had to deal with arbitrations very much, it would be fair to say. But I think it's an area that we may have to see a lot more of, because with this so-called Federal Arbitration Act, now being enshrined just below the Constitution, in importance. And pretty much, everything being interpreted in a very pro-arbitration way, there are already movements of people to un-include arbitration provisions in say, registration statements and prospectuses for IPOs.

And the SEC so far, is squashing that, but who knows where the SEC may ultimately end up? Also, one reason why they haven't been used much, is because class actions, traditionally, are not used in arbitrations. But there's talk amongst some of the arbitration panels, of allowing at least smaller class action, or collective actions, to go forward in arbitration. So, I think it's an area, on both plaintiffs and defendants side, we have to start learning up on in the securities field. Anyway, I just wanted to say that, before--

JIM SWANSON: Yeah, there's not a lot of time to cover this. But one thing that I think people who don't do FINRA arbitrations don't know, that's a very important point, is that any customer of a FINRA entity, can arbitrate any dispute that they have with that entity. Even if there is no arbitration agreement. So that means that if you're in a dispute where you've got a big securities bank on the other side of it, and you're a customer of that bank, you can arbitrate that dispute with them.

Arbitration, you know, I think a lot of plaintiff lawyers would say, well, wouldn't you much prefer to be in a jury case, rather than an arbitration? The answer to that is, I think, no, you'd rather be in an arbitration, for the following reasons. Number one, no motions to dismiss. There are very, very limited motions that can be brought, and in general, they are not motions that would be the typical motions that you would face in a class action securities case.

Second reason is that you're going to get to the end of your case, if you start your arbitration, they're going to let you finish it. And so, you're going to get to present your case. You are going to get discovery before you have to face the defense arguments. And so you will know what the facts are before you have to argue your motion to dismiss. They're not going to be able to say, well, you can't tell us that it was Mr. Smith, not Mr. Jones, who did this particular thing wrong. Or Mr. Smith had scienter for this reason, you're going to know all of that, by the time you're in your hearing. And then when you win the case or lose it, that's the end of it. There are very, very, very narrow grounds on which you can challenge an arbitration award.

It's sort of, some of the peculiarities of it are number one, you need to really do a lot of research on who. Most arbitrators are picked by rank-and-strike process. And so, you need to do very careful background checks on all the arbitrators, you can generally find stuff on the internet that will outline their positions on different things, and you have to do a very, very careful job of picking those arbitrators.

You generally don't get depositions in FINRA arbitrations, unless you agree to them. Which, I actually think, is a big advantage. But some people would say, well, how do you know what the people are going to say? You kind of have to be able to find that, from the documents that you've got.

And the other thing is, you're going to end up with hearings that are discontinuous, which is a very difficult thing to deal with. You'll get an arbitration that will go for three days, and then there'll be three months where there's no arbitration, and you'll do two more days. And you might have a week, another three months down the line. So it's kind of difficult to make sure that everybody remembers what is going on, and what happened, in the last session. So.

LYLE ROBERTS: Great, any questions we have here? All right, we will wrap up this panel. And thanks very much.

[APPLAUSE]

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