Lessons from the First Year: The Emerging Impact of Sarbanes-Oxley PLUS th Annual International Conference Lisa Klein Wager Morgan, Lewis & Bockius LLP Stephen Radin Weil, Gotshal & Manges John F. McCarrick Duane Morris, LLP Vinita M. Juneja, Ph.D. National Economic Research Associates Robert Wallner Milberg Weiss Bershad Hynes & Lerach LLP

2 Topics n Overview of Relevant Sarbanes-Oxley Provisions n Impact on Class Action Litigation n Impact on Derivative Litigation n Strategic and D&O Coverage Implications

3 Overview of the New World Under Sarbanes-Oxley n Signed into law on July 30, 2002 n Response to rapidly spreading Enronitis Virus – and the Sergeant Shultz defense n Designed to restore investor confidence by: –improving corporate disclosures –increasing personal accountability of officers –expanding the role of the audit committee/outside directors –improving independence and reliability of outside auditors –addressing analyst conflict of interest concerns n Broad ranging set of reforms –some immediately effective –some mandating SEC rule-making n Only one piece of a sea change

4 Key Provisions Impacting Litigation n More detailed MD&A n Principal officer certifications –of disclosure controls and procedures –of fair presentation n Code of ethics disclosures

5 Key Provisions Impacting Litigation n Current event disclosures –enhanced and expedited 8-K filing –expedited disclosures of discretionary insider sales n Pro forma financials

6 Key Provisions Impacting Litigation n Greater Audit Committee Responsibilities n Prohibition on personal loans to D&O’s –implication for advancement of defense costs n Principal officers must disgorge profits/bonuses during periods subsequently restated n Expanded statute of limitations –lesser of 2 years from discovery/5 years from event

7 Key Provisions Impacting Litigation n Whistleblower protections n Attorney conduct rules

8 Key Provisions Impacting Litigation n New/Enhanced Criminal Offenses –Destruction of documents –Fraudulently Misleading an Auditor note warning for lawyers, non-audit accounting firm personnel, and bankers in Final Rule Release n Additional Increased Penalties Under ERISA –separate program this afternoon n New Private Right of Action for Retaliation by Whistleblowers –mock mediation this afternoon

9 Impact on Federal Litigation n Are more cases being filed?

PLUS th Annual International Conference November 10, 2003 Lessons From the First Year: The Emerging Impact of Sarbanes-Oxley Vinita M. Juneja, Ph.D. Senior Vice President

Heard on the Street Filings are on the rise? Huge settlements are the norm? Settlements are bigger than they used to be?

Heard on the Street Filings are on the rise? Huge settlements are the norm? Settlements are bigger than they used to be?

Federal filings seem to be on the rise, * Through late June, * 123 Federal Filings by Year

* Federal Filings by Year …but, that includes laddering and analyst cases * Through late June, Analyst CasesLaddering CasesStandard Filings

Filings Vary by Circuit 2002 Filings by Circuit 1 st 2 nd 3 rd 4 th 5 th 6 th 10 th 11 th th 9 th 8 th

What Is Your Likelihood of Being Sued? Annual Probability of Facing a Securities Class Action Lawsuit %1.9% 2.3% 40% Increase 0.5% 1.0% 1.5% 2.0% 2.5% 0.0%

Disposition Dismissal 19% Lawsuit Filed

Dismissals Have Slowed Post Sarbanes-Oxley Two Year Dismissal Rate Year Filed 0% 5% 10% 15% 20%

Dismissal Rates Vary by Circuit 1 st 2 nd 3 rd 4 th 5 th 6 th 10 th 11 th 7 th 9 th 8 th Two Year Dismissal Rate 0% 10% 15% 20% 25% 30% 5% 11% 7%

20 Impact on Federal Litigation n Are more outside directors being sued?

21 Impact on Federal Litigation n What has been the impact of the expanded statute of limitations? –Are time-barred claims revived?

22 Expanded Statute of Limitations n [A] private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws, as defined in section 3(a)(47) of the [Exchange Act], may be brought not later than the earlier of (1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation.

23 Retroactivity n The limitations period…shall apply to all proceedings addressed by this section that are commenced on or after the date of enactment of the Act.

24 Impact on Federal Litigation n What has been the impact of the expanded statute of limitations? –Is the statute of limitations changed for section 11 claims?

25 Expanded Statute of Limitations n [A] private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws, as defined in section 3(a)(47) of the [Exchange Act], may be brought not later than the earlier of (1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation.

26 Impact on Federal Litigation n Will litigation be more protracted? –What has been the impact of the Principal Officer Certifications? –What has been the impact of the new MD&A requirements? Creation of a duty? –What has been the impact of the real time disclosure requirements? –Has there been more record-keeping and note taking? To what end? n Continuing complications of PSLRA lead plaintiff procedures

27 Impact on Federal Litigation n Is settlement more expensive?

Disposition Dismissal 19% Settlement 80% Lawsuit Filed Judgment 1%

Heard on the Street Filings are on the rise? Huge settlements are the norm? Settlements are bigger than they used to be?

Huge Settlements Are Rare Percent of settlements over $100 Million After Enron 4.4% 1996-Enron (October 2001) 3.4%

Most Settlements in Jan – Late June 2003 Were Under $25 Million Number of Claims < $ 2$2 -$5$5-$10> $100$10-$25$25-$50$50-$75$75-$ Settlement Amount in Millions

Heard on the Street Filings are on the rise? Huge settlements are the norm? Settlements are bigger than they used to be?

Average Settlements Have Been Rising Since Enron the average settlement has been $24.6 mm. * 2000 Average Settlement Excludes Cendant * $0 $10 $20 $30 $40 $50 $60 $70 $80 $ Average Settlement ($Millions)

Investor Losses Have Also Been Rising $0 $150 $300 $450 $600 $750 $900 $1,050 $1,200 $1, Average Investor Loss (Millions)

But Investor Losses Have Been Rising Even More Rapidly Average Settlement ($Millions) $0 $10 $20 $30 $40 $50 $60 $70 $80 $ Average Investor Loss (Millions) $0 $150 $300 $450 $600 $750 $900 $1,050 $1,200 $1,350 * 2000 Average Settlement Excludes Cendant

There Is Good News for Companies Expected Settlement for a Case with Investor Losses of $600 M $0 $4 $8 $12 $16 $2 $6 $10 $ Expected Settlement $ 2002 Expected Settlement $

What Determines Settlement Values? Investor Losses Types of Plaintiffs Included –Debt holders => 70%+ –Preferred shareholders => 60%+ –Option holders => 30%+ –Institutional lead plaintiff => almost 20%

What Determines Settlement Values? Investor Losses Types of Plaintiffs Included Types of Allegations –Accounting fraud => 10%+ –Admitted accounting irregularities => 20%+ –Restatements => almost 30% –Accounting codefendants => 40%+ –Section 11 claim => almost 30%

What Determines Settlement Values? Investor Losses Types of Plaintiffs Included Types of Allegations Market Capitalization of Firm Whether the Issuer Is Bankrupt When the Case Settles

Cases Are Taking Longer Percentage of Filings Disposed Within 5 Years 0% 20% 40% 60% 80% 100% 1991– –2002

One Impact of SOX on Directors’ & Officers’ 10b-5 Liabilities… Statute of limitations on securities fraud: Two years after discovery; Five years after violation DefensesLiability RisksProvision Extends class period and increases damage volume Effect on damage volume will be relatively small

Settlements and the Expanded Statute of Limitations in Sarbanes-Oxley The average settlement would have increased by 9%. The median settlement would have increased by 6%. The range of settlement increase was from 0% to 33%. Sample: 15 post-PSLRA cases in which the 3-year statute of limitations may have constrained the class period Analysis: Compute expected settlement with the actual class period and a hypothetical 5-year class period Results:

43 Anticipated Impact of SOA on Federal Class Action Litigation n Still to come –interpretation of terms –availability of private right of action where not explicit –will certifications of disclosure controls facilitate particularized scienter pleading? –Will certification of content coupled with expanded MD&A facilitate omission pleading? –Will discovery be complicated by an increase in note-taking/record- keeping? –Will the new criminal penalties for attempting audit influence/document destruction raise settlement pressure and costs?

44 Anticipated Impact of SOA on Federal Class Action Litigation n Is there an increase in requests for individual separate counsel or for separate counsel for D&O’s and issuer –implications of attorney conduct rules for “issuer’s” counsel –SEC emphasis on full cooperation

45 Impact on Derivative Litigation n Are we seeing more? –New rules versus new/evolving expectations –Warnings from Delaware judges in articles and speeches –Recent Delaware Supreme Court cases –Use of the Act and Exchange Listing Rules –Due Care versus Good Faith –Disney –Oversight “Caremark” claims –Section 220 Books and Records Actions

Settle for More Than $0 31% Dismissed 28% Non-cash settlement 39% Trial Plaintiffs Win 0.6% Trial Defense Wins 0.4% Disposition of Derivative Suits

Millions of Dollars Pay-Outs of Derivative Suits 1977 to the Present

Millions of Dollars Median $0 Pay-Outs of Derivative Suits 1977 to the Present

Millions of Dollars Pay-Outs of Derivative Suits 1977 to the Present Mean $3 Million

50 Strategic and D&O Coverage Implications n D&O underwriting environment n Litigation defense strategies n Settlement strategies

Where to Learn More About NERA For more information on NERA’s Securities Practice, please contact: Vinita M. Juneja Senior Vice President New York, NY For more information on NERA’s services and capabilities, please visit our global website:

Lessons from the First Year: The Emerging Impact of Sarbanes-Oxley PLUS th Annual International Conference © Lisa Klein Wager (o) (c)