• An enhanced standard of pleading, under which plaintiffs, to bring a securities fraudcase, must allege with particularity facts giving rise to a strong inference of fraud• A mandatory stay of discovery while a motion to dismiss a complaint is pending• A lead plaintiff provision creating a presumption that <strong>the</strong> “most adequate plaintiff”is <strong>the</strong> one with <strong>the</strong> largest financial interest• A proportionate liability rule to replace joint and several liability, except withrespect to defendants found to have knowingly violated <strong>the</strong> securities lawsCongress subsequently enacted <strong>the</strong> Securities Litigation Uniform Standards Act of1998, <strong>the</strong> principal effects of which were to prohibit plaintiffs from prosecutingsecurities fraud class actions in state court and to prohibit plaintiffs from pursuingstate law claims as part of securities fraud class actions in federal court.The U.S. Supreme Court has issued several important decisions that fur<strong>the</strong>r define<strong>the</strong> high pleading standards imposed on plaintiffs in securities fraud lawsuits under<strong>the</strong> 1934 Act.In addition to shareholders, directors owe duties to <strong>the</strong>ir institution that maybe enforced by <strong>the</strong> institution directly or by shareholders on behalf of <strong>the</strong>institution – derivatively.17Financial institutions guide
Claims by or on behalf of<strong>the</strong> institutionClaims by <strong>the</strong> institutionAn institution may bring a direct action against current or, more often, former directorsand officers for breaching duties to <strong>the</strong> institution or its shareholders. The institution’sboard of directors generally has <strong>the</strong> power to determine whe<strong>the</strong>r or not such a lawsuitshould be filed against <strong>the</strong> institution’s directors and officers and, if it is filed, controlsall strategic decisions regarding <strong>the</strong> litigation. When an institution is insolvent orbankrupt, an entity that “stands in <strong>the</strong> shoes” of <strong>the</strong> institution, like a trustee, receiver,liquidator, or <strong>the</strong> FDIC, may also initiate a claim directly against current or formerdirectors or officers of <strong>the</strong> institution. The plaintiffs in those cases will often allegethat <strong>the</strong> directors and officers fraudulently transferred or misappropriated funds, orengaged in gross mismanagement, causing <strong>the</strong> institution’s insolvency or bankruptcy.Derivative claimsA derivative action may be brought by one or more shareholders on behalf andfor <strong>the</strong> benefit of <strong>the</strong> institution to recover for losses or damages suffered by <strong>the</strong>institution. If a harm or loss is suffered directly by <strong>the</strong> institution, <strong>the</strong>reby reducing<strong>the</strong> value of its assets, shareholders are usually required to bring a derivative lawsuit,ra<strong>the</strong>r than a direct lawsuit.Derivative lawsuits are frequently brought against incumbent directors who, becauseof <strong>the</strong>ir own self-interest, elect not to authorize such an action by <strong>the</strong> institutionagainst <strong>the</strong>mselves or o<strong>the</strong>r directors. Recovery in a derivative lawsuit is paid to <strong>the</strong>institution, not to <strong>the</strong> shareholders who brought <strong>the</strong> action, although <strong>the</strong> fees andexpenses of <strong>the</strong> shareholders’ attorneys are usually paid if a favorable settlement orjudgment is obtained.Because a derivative action is brought on behalf of <strong>the</strong> corporation and becausedirectors are normally entitled to deference in <strong>the</strong>ir corporate decisions (including <strong>the</strong>decision whe<strong>the</strong>r to pursue legal action), a shareholder seeking to bring a derivativeclaim usually must first ei<strong>the</strong>r demand that <strong>the</strong> board authorize <strong>the</strong> company toprosecute <strong>the</strong> claim directly or demonstrate <strong>the</strong> futility of making such a demand. 37In <strong>the</strong> face of a derivative lawsuit, directors will often appoint a special litigationcommittee comprised of disinterested directors to independently evaluate whe<strong>the</strong>rpursuing <strong>the</strong> proposed litigation is in <strong>the</strong> best interests of <strong>the</strong> corporation. Generally,if <strong>the</strong> committee is independent in both its investigation and conclusions, a court willdefer to <strong>the</strong> committee’s decisions whe<strong>the</strong>r continuing or terminating <strong>the</strong> litigation isin <strong>the</strong> best interest of <strong>the</strong> corporation.37 Kamen v. Kemper Fin. Servs., Inc., 500 U.S.90 (1991); Levner v. Saud, 903 F. Supp. 452(S.D.N.Y. 1994), aff’d, 61 F.3d 8 (2d Cir. 1995).When <strong>the</strong> FDIC has taken control of a depository institution, FIRREA vests in <strong>the</strong>FDIC all rights and powers of a shareholder of <strong>the</strong> institution to bring a derivativeaction. Accordingly, in such instances, <strong>the</strong> FDIC has <strong>the</strong> right, power and privilege todemand corporate action or sue directors when action is not o<strong>the</strong>rwise forthcoming.18Financial institutions guide