Litigation Kennel?

This post is from Rodman Ward of Skadden, Arps, Slate, Meagher & Flom LLP. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Vice Chancellor Lamb’s recent memorandum opinion in the Delaware Court of Chancery, In Re SS&C Technologies, Inc. Shareholders Litigation, adds an interesting twist to the “readily available plaintiff” question.

The SS&C opinion and order imposes sanctions on the plaintiffs and their counsel for filing, in bad faith, a motion to withdraw. The defendants contended, and the Court found, that the motion was filed in an effort to cover up the discovery record relating to the “litigation spawning purpose” of a web of partnerships alleged to have been formed to provide plaintiffs in derivative and class litigation against publicly traded companies.

In the recent and well known Lerach and Weiss cases, the lawyers had ensured a stable of potential representative plaintiffs by paying them about ten percent of the attorney’s fees awarded by the court. In SS&C, the defendants allege that the managing partner of one of the plaintiff partnerships manages “a web of small investment partnerships – for the sole purpose of bringing stockholder lawsuits through his attorney.” Each of the nine investment partnerships cited “owns only a few shares … in roughly 60 to 80 public companies.” That would amount to about 500-700 companies subject to suit. Although the managing partner denied that the partnerships served only to bring stockholder lawsuits, he admitted that they were “economically irrelevant to him.” He acknowledged that he had, himself, been a party in fourteen proceedings and had been involved in “bringing roughly 30 stockholder lawsuits on behalf of himself and many of … [the partnerships].” The partnerships are consistently represented by the same law firm.

The Court’s opinion is highly skeptical of the managing partner’s claims. He and his counsel were found to have made a number of statements in documents filed with the Court which, the Court wrote, “are easily susceptible to the inference that they were made to conceal the existence of this web of partnerships and their evident litigation spawning purpose.” (emphasis supplied) The defendants, for their part, characterized the entire operation as “a litigation kennel.”

To support its findings, the Court sets out an extensive series of misstatements, mischaracterizations, inconsistencies and misrepresentations which the plaintiffs described at argument as “honest mistakes.” Although the Court could not find, based on the “sparse record before it,” that the partnerships could never serve as representative plaintiffs, it nevertheless sanctioned the plaintiffs for bad faith and abuse of judicial process in filing a spurious motion to withdraw as counsel.

The full opinion can be found here.

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