“It is highly unlikelyI would say economically unfeasiblefor these practices to have gone on withoutan economic agreement” among the securities underwriters, he said.

Melvyn Weiss of Milberg, Weiss, Bershad, Hynes & Lerach in New York said, the two parallel tracks of cases will force the courts to deal with the discovery issue quicklysince theres a stay in securities cases and not the antitrust cases.

Complicating the picture, however, are investigations by the U.S. Securities and Exchange Commission and the U.S. Attorneys office, according to Richard Zabel, a partner with Akin, Gump, Strauss, Hauer & Feld.

The SEC and the U.S. Attorney are the “invisible gorilla[s] in the corner,” said Mr. Zabel, who was a federal prosecutor in New York for eight years. Interviews by the U.S. Attorneys office and testimony before the SEC are not matters that are open to the public. But the important decisions that the two enforcement bodies are making “obviously have a tremendous impact on any civil securities litigation,” he said.

Nicki Locker, a defense attorney for Wilson, Sonsini, Goodrich & Rosati in Palo Alto, Calif., had some good news for D&O insurers regarding SEC activities. Noting that the SEC had interviewed executives of issuers that her firm represents, she said: “If you actually listen to their questions,…it appears that they believe that the issuers were the victims of any alleged misconduct by the underwriters.”

“I think they believe the issuersleft too much money on the table,” she said, explaining the SECs view that if certain customers were willing to pay extra money in the form of excessive commissions to get allocations in an IPO, then they may have been willing to pay higher offering prices.

While the SEC may not have designs on making issuers the targets of enforcement actions, attorneys admit theyll face difficult challenges defending the issuers in court. In particular, they point to the fact that many securities cases were filed under Section 11 of the Securities Exchange Act of 1933.

“For the issuer, its largely a no-fault statute,” Greg Markel, an attorney for Brobeck, Phleger & Harrison in New York, explained, noting that Section 11 holds that issuing companies are strictly liable as long as there is any material misrepresentation or omission in a registration statement.

Individual directors and officers can offer a due diligence defense under the 33 Act, Kevin LaCroix, president of Genesis Professional Liability Managers of Beachwood, Ohio, told National Underwriter. He explained that an individual director or officer, who did his or her homework and believed all the statements were true, cannot be held liable.

But such a defense is not available to the issuing company, Mr. LaCroix said.

“In my opinion, these cases will test the whole notion of having a strict liability standard for companies,” he continued. “There is something wrong at a deep intuitive level in holding companies liable for not disclosing information that they could have never known. Laddering schemes can work only if investment banks and investors are the only ones that know about it.”

Joseph Monteleone, vice president of Hartford Financial Products in New York, said that cases filed under Section 10-b-5 of the 1934 Act have the potential to result in greater damages for issuers and directors and officers than Section 11 claims, if alleged wrongs are proven. But proving wrongs will be hard for plaintiffs, he pointed out, since evidence of intentional fraud or misrepresentation must be presented.

At the PLUS meeting, Mr. Weiss said that he was willing to “backburner” claims against issuers and Ds and Os for a while, and to delay “hunting for 10-b-5″ facts against both groups, saving D&O insurers defense cost dollars in the bargain.

But Mr. Monteleone and defense lawyers dismissed his remarks, noting that hurdles caused by the Private Securities Litigation Reform Act had likely prompted his offer.

Mr. Monteleone said the biggest hurdle looming in front of plaintiffs bar is the issue of loss causation.

“Even if some of the allegations can be proven, is that what caused the decline” of stock prices? Or was it just the “bursting of the NASDAQ bubble?” he said.

The concept of loss causation “is something the defense bar is very excited about,” said Ms. Locker.

Many of the companies were dot-com companies that “didnt do so well,” she said, pointing to a collapse in technology stocks (starting in Spring 2000) and to company-specific events (like restructurings) “that we would say caused the stock decline rather than the supposed wrongs.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 12, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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