May 14 (Bloomberg) -- Mississippi’s pension system, the 65th largest in the U.S., has emerged as one of the nation’s most aggressive institutional litigants against companies it says committed securities fraud.
The Public Employees’ Retirement System of Mississippi is involved in at least 21 active federal securities-fraud class actions. It’s a lead plaintiff, either on its own or as part of an investor group, in at least 11 of them, including its May 12 appointment to co-manage litigation against Satyam Computer Services Ltd., the software-services provider at the center of India’s biggest corporate fraud inquiry.
“It certainly is at the high end of public pension fund participation,” said Michael Perino, a securities-law professor at St. John’s University School of Law.
The lead plaintiff in a class action manages the case, including approval of any settlement. It can push for corporate- governance changes at the targeted company.
“You have control of the litigation, and you’re going to make sure you not only protect your retirement system and the employees, but also other states and other retirement systems,” Mississippi Attorney General Jim Hood said in a phone interview. Hood’s office oversees the state’s lawsuits.
Under Hood, a Democrat elected in 2003 with support from trial lawyers, Mississippi has become a leader in the field, though Hood denies he’s doing the bidding of the plaintiffs’ bar.
Lead Plaintiff
The Satyam litigation in New York federal court is the third this month in which Mississippi PERS was appointed a lead plaintiff. Among institutional investors, Mississippi PERS was the most frequent lead plaintiff last year, with three cases, either on its own or as part of an investor group.
Teachers’ Retirement System of Louisiana was the most frequent lead plaintiff from 2000 to 2008, with 18 cases, according to Stanford Law School’s Securities Class Action Clearinghouse and Michael Klausner, a Stanford law professor. Mississippi PERS is now the second-most frequent, with 14.
Since 2005, Louisiana’s lead-plaintiff activity has fallen off while Mississippi PERS’s has risen.
Mississippi PERS, based in Jackson, ranked as the 65th largest U.S. pension fund or sponsor, with $18.8 billion, as of Sept. 30, according to Pensions & Investments magazine. The largest pension system is California Public Employees Retirement System, with $214.6 billion.
Under U.S. securities law, the person or entity with the largest financial interest is typically chosen to lead a class action, and so is often an institutional investor.
Legal Fees
The lead plaintiff’s attorneys usually get the majority of the legal fees of a settlement or court victory. The lawyers only get paid if they win back money for their clients. Typically, contingency lawyers take a third of any recovery. Institutional investors, including Mississippi PERS, push for lower fees, allowing more money for injured shareholders.
For example, Mississippi’s standard contract calls for the law firm to receive -- if a settlement is reached after fact- finding is completed and before a trial is started -- 20 percent of up to $25 million, another 18 percent for any amount between $25 million and $75 million, and so on, with the percentage decreasing as the recovery amount increases.
Last year, New York-based Bernstein Litowitz Berger & Grossmann LLP, which represents Mississippi PERS in Satyam and other cases, had a median settlement of 6 percent of estimated damages in securities class actions, according to Cornerstone Research. That was the highest figure for the most-active plaintiffs firms.
‘Terrific Guardian’
“I view them as a terrific guardian of integrity in the capital markets,” Sean Coffey, a Bernstein Litowitz partner, said of Mississippi PERS. “They are folks who talk the talk and walk the walk, and they’re very active.”
Of six completed cases for which the pension system served as a lead plaintiff, four of the companies settled and two won dismissals. The rest haven’t been resolved.
Delphi Corp., the Troy, Michigan-based car-parts maker, settled for $333.4 million; Mills Corp., the Chevy Chase, Maryland-based real-estate investment trust, for $165 million; Scor Holding (Switzerland) AG, the Zurich-based reinsurer, for $114.6 million; and Sonus Networks Inc., the Westford, Massachusetts-based maker of software used for Internet-based phone calls, for $9.5 million.
The Mills settlement hasn’t yet been approved by the judge.
Aggressive Stance
The Satyam case illustrates the aggressive stance Mississippi, with a population of 2.94 million, can take in litigation. Since Jan. 7, when Satyam Chairman Ramalinga Raju revealed an accounting fraud and resigned, investors in the company’s American depositary receipts filed at least a dozen securities-fraud lawsuits in the U.S.
Mississippi PERS pushed to be a lead plaintiff despite having bought Satyam’s common stock in India rather than ADRs in the U.S. The Hyderabad-based company and a group of individual investors opposed Mississippi PERS for that reason. The pension system says it lost $12.7 million on the investment.
In another case filed in December, Mississippi PERS accused Morgan Stanley of misleading investors about so-called pass- through certificates that entitle holders to income from pools of mortgage loans or mortgage-backed securities.
U.S. District Judge Mariana R. Pfaelzer in Santa Ana, California, in March criticized Mississippi PERS for filing the case in California state court, and sent it to federal court in New York, where Morgan Stanley is based. The complaint alleges violations of federal securities law.
State juries tend to be more generous than federal juries; 17 of the top 25 U.S. jury verdicts were in state court, according to data compiled by Bloomberg. Nine of the top 10 subprime lenders were based in California, according to a study by Washington-based Center for Public Integrity.
‘Forum Shopping’
Morgan Stanley called Mississippi PERS’s strategy “improper forum shopping.” The pension system said state court was proper because most of the loans underlying the securities were made in California.
In April, Mississippi PERS won lead status over Michigan- based Iron Workers Local No. 25 Pension Fund in other pass- through litigation against Merrill Lynch & Co. and J.P. Morgan & Co. At an April 1 hearing, George Neville, a special assistant attorney general in Mississippi, testified that the state allows 12 law firms to monitor its investments at no charge and advise on whether it should initiate or join a securities-fraud suit if the price of a particular security drops.
12 Monitoring Firms
Neville said the practice is common among securities law firms.
“We play one off against the other,” Neville testified about the 12 firms. “We contact other monitoring firms to determine what their take is on that case. They know they may not get it, and so sometimes they say, well, it’s a really good case, sometimes they tell us it’s a dog, and that helps drive our decision making.”
“We’ve retained some of the best securities firms out there,” said Hood, the attorney general. “Whichever recognizes our losses first and makes contact with us, by e-mail usually, they get it.”
The Wall Street Journal editorial board criticized Hood for receiving campaign contributions from law firms that represent the state in securities cases, including Bernstein Litowitz; Radnor, Pennsylvania-based Barroway Topaz Kessler Meltzer & Check LLP; and New York-based Wolf Popper LLP.
Competitive Bidding
On March 30, a bill died in the Mississippi legislature that would have required the attorney general to hold competitive bidding to hire law firms to represent the state.
“To the extent a law firm develops a relationship with a pension fund or AG of a state, and their political contributions result in them getting a contract to sue on behalf of the state, we think that’s a problem,” said Bryan Quigley, a spokesman for the U.S. Chamber Institute for Legal Reform in Washington.
The institute, an arm of the U.S. Chamber of Commerce, has created a Mississippi Campaign for Legal Reform.
“There’s definitely political mileage to be gained from leading these cases,” said Perino of St. John’s University.
Hood said he had to take political contributions from the law firms; corporations won’t give him money because he sues them. He said he was outspent in both his elections by opponents backed by corporate money.
“Who’s going to contribute to a prosecutor who goes after them for wrongdoing?” he said. “The Chamber has been very successful in switching it to something salacious like pay to play.”
‘Duty to Recover’
“If Mississippi public employees have lost money, I have a duty to recover it -- it’s that simple,” Hood said. “The office of the attorney general has evolved, or devolved, into it because of failure of the SEC to police our markets,” he said, referring to the U.S. Securities and Exchange Commission.
The two other cases in which Mississippi PERS was appointed lead plaintiff this month are against Royal Bank of Scotland Group Plc, over several securities offerings, and Goldman Sachs Group Inc., over pass-through certificates.
Hood said Mississippi PERS will likely get involved in more securities cases.
“I’m sure that we will probably end up in more cases because of the economic meltdown, as more fraud is discovered,” he said.
The Satyam case is In re Satyam Computer Services Ltd. Securities Litigation, 09-md-2027, U.S. District Court, Southern District of New York (Manhattan).
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