In addition to the human toll, the Covid-19 pandemic will bring with it a flurry of litigation and listed companies will be among the chief targets of securities class actions by shareholder-investors.
Guidance revisions will be scrutinized by injured shareholders. Now is the time to bring in strong legal teams who are equipped to tackle the complexities that come with crisis-era litigation.
Crises like the pandemic tend to make shareholder class actions a trickier proposition. Some companies entered the pandemic in March with appropriate guidance and asset valuations; others began with optimistic (generally over-stated) projections and mispriced (generally inflated) asset valuations.
Companies have since lowered their projections, guidance and asset valuations—many firms have blamed these adjustments on Covid-19, and often rightly so, but in some cases the pandemic has been used as a subterfuge for correcting previously inflated guidance and valuations.
The popular aphorism attributed to Warren Buffet suggests that “you only find out who has been swimming naked when the tide goes out.” But in truth, shareholders often find it difficult to discern, pre-discovery, whether the revisions were due to the onset of the pandemic, or whether the pandemic exposed or exacerbated a pre-existing problem.
Litigious investors might argue, rightly or wrongly, that the pandemic only partly explains the revisions and they may seek to recoup any losses associated with investments made at inflated levels.
Hiring Strong Litigators, Industry Experts
Having been engaged as a litigation strategist alongside legal teams (and their testifying experts) on dozens of cases related to the 2007-2008 financial crisis, I can tell you first-hand—and this may come as no surprise—that there was a wide disparity in outcomes, much of which can be directly attributed to the strengths (or weaknesses) of the litigation teams.
Complex litigation often brings with it complex and novel challenges, and the full picture is often unknown to the legal teams.
Strong legal teams have a healthy appreciation for the unknowns, so important in battling crisis-era litigation. They spend time upfront investigating the issues and engage with experts early to educate themselves on some of the complexities before them: the relevant corporate environments or financial markets. They pick their battles, hold their cards tight and do not overplay their hand; and they use the discovery process judiciously to eke out the information they need to complete their picture and build out their story. On the back of early and thorough preparation, they seldom find themselves in a situation in which they have failed to request the necessary documents in discovery, allege crucial claims, or raise necessary defenses.
Many of the hastily-constructed cases were dismissed at early dispositive motions following the financial crisis. Elsewhere, arguments made were often emotive rather than analytically sound, leaving experts unable to fill the void, stretching to provide the evidence necessary to support lofty claims. Meanwhile, better-prepared legal teams achieved handsome settlements, often several multiples of those settlements reached by their less-experienced counterparts.
When litigating pandemic-era cases, polished legal outfits will want to engage experienced industry experts, whether in a testifying or non-testifying capacity, to assist in explaining market conditions and market norms, expectations and best practices to the triers of fact.
Savvy financial market professionals can be similarly instrumental in pressing arguments of reliance at class certification, or in the building of reliable damages models or contesting their veracity. Reliance can sometimes be inferred upon a demonstration of market efficiency, but demonstrating that a market efficiently incorporated new information is no mean feat during an inherently volatile crisis. Even if one can demonstrate efficiency, the separating out of any misconduct-based damages in an event study demands a trained hand, given the muddying effect of the crisis itself on any real or supposed corrective disclosure.
It is not always immediately clear to the untrained eye whether damages were the result of misconduct or the significant change in financial or economic conditions. This line is often fine in crisis-era litigation, which creates a need for litigants to seek out high-quality representation.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Gene Phillips is a litigation strategist at PF2 in Los Angeles. He works with law firms in a strategic consulting capacity, assisting in overseeing technical discovery in complex litigation matters, including the preparation of counsel’s scientific experts and other expert evidence.