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Issues and Strategies for Representing Individual Defendants in Securities Class Actions

Adam Christopher Trigg

Issues and Strategies for Representing Individual Defendants in Securities Class Actions
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Class actions alleging violations of the federal securities laws continue to be filed at record levels. Typically, these cases name as defendants the company, its officers, and members of its board of directors. While one firm can often represent all of the defendants, individual defendants often need or choose to have separate representation, particularly when the individual defendant is a former officer or director of the defendant company. This article discusses several issues that regularly occur when separately representing individual defendants in securities class actions and strategies for handling them.

Working with Company Counsel/Joint Defense Agreement

When representing an individual defendant, it is vital to quickly establish a good working relationship with the counsel that is representing the defendant company (and usually the current corporate executives). Sometimes that relationship is already in place, such as when it was the company counsel who referred the individual defendant. Regardless, it is important to quickly establish a working relationship with company counsel (and counsel for other individual defendants, if any) and create a cooperative litigation strategy.

The first step in this cooperation is to enter into a joint defense agreement (JDA). A JDA allows for open communication between defense counsel and their clients while maintaining attorney-client privilege. JDAs can be oral or written. The format chosen depends on the situation and counsel’s determination of the likelihood that the defendants’ interests will diverge. Regardless of the format, counsel should enter the JDA immediately to begin cooperating in the defense of the company and the individual defendant. Of course, the JDA should usually include any other separately represented individual defendants. (For further information on JDAs, see Rachel L. Partain, “Protecting Yourself and Your Client in a Joint Defense Arrangement,” ABA Section of Taxation NewsQuarterly (Winter 2012), or Thomas G. Pasternak & R. David Donoghue, “Making Joint Defense Agreements Work,” Litigation (Summer 2008).)

Generally, the company’s and the individual defendant’s interests will be fairly closely aligned. After all, if the individual defendant is found liable under the securities laws, the company will be as well.

Indemnification and Insurance

Counsel for individual defendants also play an important role in ensuring that their defense costs are paid by the defendant company or its directors’ and officers’ (D&O) liability insurance carrier (or both). Defendants named in securities class actions usually have entered into indemnification agreements with the defendant company that requires the advancement of defense costs, and the company usually has a D&O policy covering such costs. It is important that counsel for an individual defendant ensure that the individual defendant’s indemnification demand is timely made to the company and that the insurance claim is timely tendered to the carrier. Counsel should ensure that the individual defendant’s fees and costs are covered by the carrier by regularly updating the carrier on the particular work being done for the individual defendant, as well as following all of the carrier’s billing guidelines.

Occasionally, an individual defendant may not be covered by an insurance policy or mandatory indemnification by the company. Nevertheless, counsel for the individual defendant should explore the possibility of the company covering some or all of their defense costs as it will likely be in the company’s best interest to ensure that the individual defendant is adequately represented to protect the company against liability. Such a situation may call for counsel for the individual defendant to take the role of a “shadow counsel” in which counsel monitors the case and advises the individual defendant but does not make a formal appearance.

Fact Gathering and Document Sharing

Counsel for an individual defendant in a securities class action, as in any litigation, must quickly develop an understanding of the facts underlying the litigation. This, of course, is done by interviewing the individual defendant, reading the complaint, and analyzing the company’s Securities and Exchange Commission (SEC) filings and public statements regarding the issues raised in the complaint.

However, an individual defendant who is a former employee or director of the company will often have minimal access to nonpublic company documents. Indeed, an individual defendant may have even less access to internal company documents and information than even the plaintiff’s counsel, who may be working with former employees and confidential witnesses. This can put the individual defendant and his or her counsel at a decided disadvantage from the outset.

To overcome this dearth of information, cooperation with company counsel again is key. While company defendants and their counsel will never simply provide access to all of the relevant documents to the individual defendant and his or her counsel, there are several ways to gain access to documents to aid in the defense of the individual defendant. Often the company will provide access to those documents that the individual defendant previously had access to, i.e., emails from the individual defendant’s corporate email account. These will be the most important documents for understanding the individual defendant’s role in the underlying issues and eventually in preparing the individual defendant for deposition.

There are always other important documents the individual defendant may not have been privy to but nevertheless are important to understanding the full context of the factual issues and will be important for at least the individual defendant’s counsel to see. In this case, the individual defendant’s counsel should work with company counsel to access those documents and incorporate them into the defense strategy for the individual defendant.

While sharing these documents can be simple, commonly there are thousands of emails of the individual client and hundreds of additional relevant documents to consider. In this case, the company counsel can work with its vendor that is assisting with document collection and review to allow counsel for the individual defendant to have access to the document database in such a way that counsel accesses only certain documents while still allowing for typical search and tagging capability.

Motion to Dismiss

The motion to dismiss is a key moment in any securities class action. It can also be an opportunity to make unique arguments on behalf of an individual defendant. While it often makes sense for the individual defendant to simply join the company’s motion to dismiss (for example, in the case of a former director named as a defendant simply due to signing a financial statement that is alleged to be misleading), there are circumstances that allow for the individual defendant’s counsel to make arguments that are particular to the individual defendant and that could result in an early dismissal from the action.

It is sometimes possible to convince the plaintiffs’ counsel to voluntarily dismiss certain individual defendants from the action if they are not necessary in the litigation. For example, if your client is a former outside director who is included as a defendant only because he or she is one of several executives and directors who signed an SEC filing that is alleged to be misleading, it could be possible to convince the plaintiffs’ counsel that the individual defendant is not necessary and that keeping him or her in the case will only serve to further exhaust the limits of the D&O policy. If the plaintiffs’ counsel agrees, this can result in a stipulation to voluntarily dismiss the individual defendant without prejudice to naming him or her as a defendant in the future and with a tolling agreement to avoid the statute of limitations from running. This strategy can be particularly useful in actions under section 11 of the Securities Act of 1933. (See Robinson v. Audience, No. 1-12-cv-232227 (Cal. Super. Ct., Santa Clara Cty. 2013)).

For class actions alleging securities fraud under section 10(b) of the Securities Exchange Act of 1934, the Private Securities Litigation Reform Act of 1995 (PSLRA) provides additional opportunities to make unique arguments on behalf of an individual defendant in a motion to dismiss. The PSLRA’s heightened pleading standards require plaintiffs to plead fraud with specificity for each defendant. While company counsel will usually take the lead on drafting a motion to dismiss that addresses arguments that cover all of the defendants generally—such as arguments regarding the alleged falsity or materiality of statements made in SEC filings and whether the complaint adequately alleges loss causation—individual defendants may have unique arguments that need to be explicitly made on their behalf. These arguments can be made either in a separate motion to dismiss or in a separate section in the company’s motion to dismiss. While there are many possible arguments that could be made on behalf of individual defendants depending on the circumstances, there are two areas that commonly warrant separate arguments for individual defendants.

First, individual defendants can often argue that they cannot legally be held responsible for certain of the allegedly misleading statements in the complaint. Class action complaints often allege several false statements, including statements made in SEC filings that an individual defendant may not have signed or statements made by particular executives outside of SEC filings, such as statements on earnings calls or at investor conferences. Under the Supreme Court precedent in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), only the speaker with ultimate authority over a statement can be held liable for it. While liability extends to all signatories of an allegedly false SEC filing, it may not extend to the board of directors or other executives if there are actionable statements that they did not make, sign, or approve. If the complaint includes such statements, it may be appropriate to argue separately that your client should be dismissed even if the court determines that some of the statements by others are actionable. This can be done either as an insert into a collective motion to dismiss or in a separate motion to dismiss on behalf of the individual defendant that joins in the company’s motion but also lays out the unique arguments for the individual defendant. (See, e.g., In re Yahoo Sec. Litig., No. 3:11-cv-02732-CRB (N.D. Cal. 2012)).

Second, the PSLRA requires the complaint to “state with particularity facts giving rise to a strong inference” that each defendant acted with scienter. 15 U.S.C. § 78u-4(b)(2). Plaintiffs often attempt to plead scienter by relying on statements from confidential witnesses alleging that defendants were aware of certain information contradicting the allegedly misleading public statements or that defendants made suspicious stock sales during the class period. However, such allegations often apply only to particular defendants. When that is the case, counsel for individual defendants should ensure that separate arguments are made on their behalf to persuade the court that the plaintiffs have not sufficiently pled scienter as to those individual defendants and they therefore should be dismissed from the action.

These are only a few of the common examples of arguments that may be made on behalf of an individual defendant on a motion to dismiss. Of course, counsel for an individual defendant should analyze the complaint closely for additional arguments that could be made to extract the individual defendant from the case early on.


Representing individual defendants in securities class actions requires critical thought and analysis to identify areas where counsel can make an impact in the defense of individual defendants. Counsel should anticipate and address the issues discussed above to provide the most effective and efficient representation.