Securities Fraud Archives - Columbia Law Review

Introduction In January 2018, the parties in a long-running U.S. securities fraud class suit surrounding the Brazilian company Petrobras and its alleged role in Brazilian government corruption decided to settle.[footnote]See Kevin LaCroix, Petrobras Settles U.S. Securities Suit Based on Corruption-Related Allegations for $2.95 Billion, D&O Diary (Jan. 3, 2018), https://www.dandodiary.com/2018/01/articles/securities-litigation/petrobras-settles-u-s-securities-suit-based-corruption-related-allegations-2-95-billion [https://perma.cc/YX8G-N2QS] [hereinafter LaCroix, Petrobras Settles].[/footnote] And what a settlement it was. Defendants agreed to pay $2.95 billion, making this the fifth-largest securities class settlement ever.[footnote]Id.[/footnote] This $2.95 billion seems to have gone a long way. In contrast with any class that could have been certified for trial, the settlement class included not only individuals who purchased their Petrobras securities in the United States or on a U.S. exchange but also “all persons who purchased Petrobras Securities in” any transaction “that cleared or settled through” a certain system through which many other trades settle and clear.[footnote]See In re Petrobras Sec. Litig., 317 F. Supp. 3d 858, 865 (S.D.N.Y. 2018). This system is the Depository Trust Company’s (DTC) book-entry system. See id. These DTC-only claimants could not have joined a litigation class since their securities fraud claims would have been barred by the Supreme Court’s decision in Morrison v. National Australia Bank, 561 U.S. 247 (2010). See In re Petrobras Sec. Litig., 150 F. Supp. 3d 337, 341–43 (S.D.N.Y. 2015).[/footnote] Given the record-setting award and the large number of people entitled to share in it, one might wonder if this outcome is too good to be true. It likely is—not because it’s not true, but because it may not be all that “good.” As this Note explains, the fact that class counsel expanded the settlement class to include claimants outside the bounds of any trial-certifiable class indicates that counsel may have bargained away the strong claims of some class members for below their fair value in order to allow the defendants to purchase increased preclusion.[footnote]Any member of the settlement class, if the settlement is respected, will be barred from subsequently raising any claim that relates to the events that form the basis of the settlement, regardless of where or under what law those claims could be raised. See infra notes 163–168 and accompanying text. Unless otherwise indicated, in this Note the term “preclusion” refers to what is commonly called “claim preclusion”—that is, the inability of an individual to subsequently raise certain claims after the conclusion of a judicial proceeding. See David L. Shapiro, Civil Procedure: Preclusion in Civil Actions 32 (2001).[/footnote] This Note explores the practice of modern courts to enter these kinds of “global” settlements in settlement-only class-certified actions.[footnote]Except in the opening paragraph of section I.A or when otherwise specified, this Note uses the term “class” or “class action” to refer to groups of individuals and law suits contemplated by Rule 23(b)(3) of the Federal Rules of Civil Procedure—namely, a group of people seeking a common remedy to their individual claims for a money judgment. See Fed. R. Civ. P. 23(b)(3).[/footnote] Specifically, this Note examines and critiques the emerging trend of broadly defining the settlement class to include individuals who do not have any colorable claim that they could litigate in front of the settling court, individuals this Note calls “claimless claimants.” This practice, this Note argues, produces a two-pronged injury—one for class members with colorable claims in the settling court and another for class members who lack colorable claims in the settling court but have a valuable claim that they could raise in a different court. Having entered into a class settlement, defendants get the significant benefit of ensuring that res judicata will prevent all class members from subsequently raising any claims released in the settlement in any forum.[footnote]See infra section I.D.3.[/footnote] In fact, defendants, ex ante, are likely willing to increase the potential settlement amount in order to procure the maximum preclusion possible, including preclusion of ostensibly claimless claimants.[footnote]See infra section II.A.2; infra note 143 and accompanying text.[/footnote] Defendants’ willingness to pay this “preclusion premium” likely incentivizes class counsel to settle a class action with the largest class possible and extract the maximum preclusion premium from defendants.[footnote]See infra section II.A.2.[/footnote] This incentive can lead class counsel to settle with a broad class even when they could have certified a more narrowly defined class for trial and thereby increased the value of that narrower class’s members’ claims.[footnote]See infra notes 142–146 and accompanying text.[/footnote] In this scenario, class counsel increase the size of their loot while individuals who could have joined the narrower class find their claims settled prematurely and their individual awards diluted and shared with other, claimless claimants.[footnote]See infra notes 142–146 and accompanying text.[/footnote] Moreover, these “global” settlements threaten to unduly deprive some claimless claimants of lucrative claims they could raise in other courts,[footnote]See infra section II.B.2.[/footnote] especially since the opt-out right afforded to absent class members does not, in practice, protect them from becoming bound by a judgment that is not in their best interest.[footnote]See infra note 100 and accompanying text.[/footnote] These global settlements release all claims that any class member might have that relate to the subject matter of the settlement, regardless of whether or not those claims could have been raised in the settling court.[footnote]See, e.g, infra notes 163–164, 180 and accompanying text.[/footnote] Therefore, individuals with valuable claims in other jurisdictions, but no colorable claim in the settling court, must content themselves with a settlement award based off different, perhaps less valuable, claims.[footnote]See infra section II.B.2.[/footnote] Also, these individuals may encounter more difficulty collecting the settlement payment than they would have if they litigated or settled a similar suit elsewhere.[footnote]See infra notes 194–195 and accompanying text.[/footnote] All this suggests that class members in these global settlements do not receive the adequate representation required by due process[footnote]See Hansberry v. Lee, 311 U.S. 32, 40–46 (1940) (holding that due process requires that absent class members receive adequate representation).[/footnote] and the class action rule.[footnote]See Fed. R. Civ. P. 23(a)(4) (listing as a prerequisite for class certification that “the representative parties will fairly and adequately protect the interests of the class”); Fed. R. Civ. P. 23(e)(2)(D) (directing courts to consider whether “the proposal treats class members equitably relative to each other” before approving a class settlement).[/footnote] To illustrate these problems, this Note closely analyzes two class action settlements that courts have approved in the last decade. Having demonstrated the extent of these issues, this Note suggests ways to reduce the pernicious effects of these settlements. Courts can better protect class members by fully allowing absent class members to collaterally attack the adequacy of representation in class settlements of this sort;[footnote]See infra section III.A.[/footnote] by demanding class members with claims of different values be separated into subclasses, each represented by separate counsel;[footnote]See infra section III.B.[/footnote] or by forcing class counsel to share the preclusion premium with class members with viable or stronger claims.[footnote]See infra section III.C.[/footnote] These measures, though, may fall short, as class settlements that include claimless claimants present other problems that perhaps no strategy can resolve.[footnote]See infra Part IV.[/footnote] This Note proceeds as follows. Part I describes the legal background of the main legal concepts at play in this Note: preclusion, adequate representation, and personal jurisdiction in class actions. Part II details some issues that can arise in class settlements and then illustrates how recent developments have significantly exacerbated these issues. Part III suggests ways in which courts and parties can attempt to solve or avert the problems described in Part II. Finally, Part IV identifies additional concerns raised by the class settlements described in Part II and concludes that courts can only avoid these issues by refusing to approve these settlements.