The Changing Securities Litigation Landscape and the Importance of Portfolio Monitoring The Louisiana Association of Pu

1. The Changing Securities Litigation Landscape and the Importance of Portfolio MonitoringThe Louisiana Association of Public Employees' Retirement Systems 2010 Louisiana Public Retirement SeminarSeptember 21, 2010 

2. The Framework of Shareholder Litigation The Securities Litigation Landscape: Current Trends in Shareholder Litigation Institutional Investor Activism: The Latest Institutional Investor Response to Corporate Misconduct The Louisiana Experience in Securities Litigation Nontraditional and Complex Securities: Increasing Investment and Litigation in Nontraditional Investments Opt-Out Litigation: Institutional Investors Weigh Their Options Troublesome Case Law National Australia Bank: The Supreme Court Limits Foreign Recoveries Portfolio Monitoring: Protecting Your Assets with Superior Information 2

3. I. The Legal Framework of Shareholder Litigation 3

4. The Legal Framework of Shareholder Litigation 4 The federal securities laws and regulations rest on a single bedrock principle – materially false or misleading disclosures damage the capital markets and thus give rise to a private right of action The Securities Act of 1933 Section 11 and Section 12: Non-fraud claims arising from materially false or misleading registration statements or prospectuses The Securities Exchange Act of 1934 Section 10 and Rule 10b-5: Securities fraud claims arising from any materially false or misleading public statements Section 14 Proxy Claims: Materially misleading false or misleading proxy statements used to obtain shareholder votes The 33 and 34 Acts form the basis of Class or Individual (“Opt-Out”) Litigation

5. 5 “This Court has long recognized that meritorious private actions to enforce federal antifraud securities laws are an essential supplement to criminal prosecutions and civil enforcement actions brought, respectively, by the Department of Justice and the Securities and Exchange Commission.” -Tellabs, Ltd. V. Makor Issues & Rights, Ltd., 551 U.S. 308, 113 (2007)

6. Corporate Governance Litigation – Breaches of Fiduciary Duty Derivative Litigation – Stepping into the shoes of the corporation M&A Litigation – Enforcing fiduciary duty in the transactional context 6 The Legal Framework of Shareholder Litigation (cont.)

7. 7 “[S]omething stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the 'disintegrating erosion' of particular exceptions. Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd.“ -Chief Judge (later Justice) Benjamin N. Cardozo, in Meinhard v. Salmon, 249 N.Y. 458, 464 (1928)

8. II. The Securities Litigation Landscape: Current Trends in Shareholder Litigation 8

9. i. Institutional Investor Activism Litigation by institutional investors is a credible means to protect shareholder value by addressing and deterring corporate misconduct. 9

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11. Institutional Investors as Securities Litigants Have Been Successful Since the passage of the Private Securities Litigation Reform Act (PSLRA) in 1995, which promoted the participation of institutional investors as lead plaintiffs in shareholder class actions, over $63 billion have been recovered on behalf of investors through securities litigation. 11

12. Accounting Fraud was the Basis of the First Big Wave of Securities Litigation Under the PSLRA A decade ago, the most significant instances of corporate misconduct generally involved accounting fraud or other financial manipulation – i.e., “cooking the books” to hide debt, enhance the appearance of financial performance, inflate the company’s balance sheet, etc. WorldCom ($6.15 billion) Enron ($7.24 billion) Global Crossing ($447.8 million) Tyco ($3.2 billion) Although these cases were serious frauds, and of unparalleled scale at the time, in general the damage caused by these scandals was purely financial in nature 12

13. Today we see this… The Gulf Oil Disaster Dangerous drilling practices by BP and other public companies causes severe harm to Louisiana and the Gulf Coast region 13

14. And this… The Subprime Crisis Wall Street facilitates irresponsible mortgage lending, harming communities across the United States and precipitating the global financial crisis 14

15. And this… Massey’s Unsafe Mining Safety violations led to the deaths of 29 miners 15

16. 16 These images  – and others like them – arise from the behavior of public companies that you all own.

17. Why Securities Litigation? Corporate misconduct directly harms shareholder value: Short Term Companies’ stock prices are artificially inflated when the true costs, risks, and liabilities of their conduct are hidden from the public – but when disaster strikes and the true risks are revealed, the value of your investments suffers Long Term Corporate mismanagement, self-dealing, and other breaches of fiduciary duty diminish the value of your investments over time But the costs imposed on society by this misconduct are not measured in dollars and cents alone. Irresponsible behavior by public corporations harms us all – not just as investors and pension fund beneficiaries, but as citizens, as members of a community, as parents, as homeowners, and as consumers 17

18. 18 Shareholder Litigation is a Key Tool for Institutional Investors

19. 19 The Gulf Oil Disaster The Toyota Safety Scandal Massey’s Mine Safety Problem Irresponsible Subprime Lending Conflicts of Interest in Finance Case Studies

20. The Gulf Oil Disaster Sacrificing safety for short-term profit: The Gulf Oil Disaster caused by the Deepwater Horizon explosion and spill was preventable and resulted from numerous undisclosed violations of important safety regulations BP had a history of safety issues at its facilities – previous incidents in Texas and Alaska; from 2007 to 2010, BP was cited for over seven hundred “egregious willful” safety violations by OSHA Numerous other companies involved in the misconduct that caused this disaster The Gulf Oil Disaster destroyed shareholder value: BP: Over $200 billion loss of market capitalization Transocean: $16.5 billion loss of market capitalization Anadarko: $19 billion loss of market capitalization 20

21. The Gulf Oil Disaster (cont.) As public employee pension funds in Louisiana, LAPERS’ members know firsthand the damage to this community caused by Deepwater Horizon Oil spill: Multiple oil rig workers lost their lives $150 billion in annual sales from coastal Louisiana communities at risk Estimated loss of 15 jobs per day in Louisiana Fisheries at risk The Deepwater Horizon spill has led to multiple important shareholder lawsuits: Securities class actions on behalf of investors in the responsible companies Derivative/corporate governance lawsuits under the laws of the jurisdiction of incorporation LAMPERS is a plaintiff in the BP derivative suit 21

22. The Toyota Safety Scandal Toyota sold to consumers in the United States and around the world without disclosing serious safety concerns Over $10 billion in financial damages to Toyota investors when the safety issues were revealed Toyota vehicles built with faulty accelerator pedals – causing cars to accelerate unexpectedly, unable to be stopped Numerous auto accidents and fatalities potentially linked to these safety defects Over 8 million automobiles recalled Toyota failed to disclose numerous complaints by consumers about dangerous accelerators Several important shareholder lawsuits initiated in the wake of these revelations The Maryland State Retirement and Pension System serves as the Lead Plaintiff in the Toyota Securities Class Action; BLB&G represents this fund as Lead Counsel in this action 22

23. Massey’s Mine Safety Problem April 2010: Fire in Massey Energy’s Upper Big Branch Mine led to the death of 29 miners Numerous mine safety violations preceded the disaster and what is emerging is a willingness on the companies’ part to pay fines to regulators over more expensive compliance with safety regulations Similar to the BP situation, in that the absence of real regulatory enforcement mechanisms creates an incentive to take safety shortcuts and endanger the wellbeing of employees LAMPERS is a plaintiff in derivative litigation involving fiduciary breaches at Massey 23

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25. Irresponsible Subprime Lending (cont.) Communities across the United States hard hit – Louisiana continues to suffer: Nearly 20,000 home foreclosures projected in Louisiana for 2010 Over $2.5 billion in lost home equity wealth in Louisiana Subprime crisis has led to significant litigation by investors at all levels of mortgage finance: Numerous shareholder lawsuits against direct lenders: For example, New York State Teacher Retirement System serves as Lead Plaintiff in the securities class action on behalf of New Century, one of the most important subprime lenders in the United States; BLB&G serves as Lead Counsel in this action – settlement recently announced for $125 million Lawsuits against Wall Street banks that financed subprime lending by others: For example, LAMPERS and Louisiana Sheriffs jointly represent investors in litigation arising from hundreds of millions of dollars worth of investment in bonds issued by Citigroup and Merrill Lynch Lawsuits against issuers of complex mortgage-backed securities: For example, the City of New Orleans Employees’ Retirement System is the Lead Plaintiff in litigation against Wells Fargo arising from the issuance of “mortgage pass through certificates” 25

26. Conflicts of Interest in Finance Investors are faced with increasingly unethical behavior by financial institutions that advise and guide them Financial institutions sometimes wear many hats – e.g., providing financial advice to investors, trading for their own account, preferences for certain client relationships over others – these roles are not always consistent Which hat do your advisors wear when assisting you? Where do their loyalties lie? The Goldman Sachs scandal is one of the most prominent examples of conflicted loyalties by a financial advisor: Goldman Sachs presented complex securities to some clients as good investments, while knowing internally that the investments were destined to fail Goldman Sachs shorted the investments they were touting to their clients Evidence indicates that Goldman Sachs preferred certain clients over others, and that pension funds were regarded, by some at Goldman, as especially good targets for offloading failing investments from its own books 26

27. ii. The Louisiana Experience in Securities Litigation Louisiana funds have historically been active in prosecuting corporate misconduct through shareholder litigation. 27

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29. $200 Million Settlement Pending in WellCare Securities Class Action WellCare is a Florida-based private manager of Medicaid insurance plans Medicaid Fraud: Wellcare artificially inflated its income by recognizing millions of dollars that the Company had misappropriated from Medicaid Over 200 armed federal and state agents raided Wellcare’s headquarters Sudden “resignation” of senior officers Employee guilty plea to Medicaid fraud $200 million settlement announced on August 9, 2010 $87.5 million in cash $112.5 million in bonds Class members entitled to additional compensation in case of certain change of control The Teachers' Retirement System of Louisiana, along with Public School Teachers Pension & Retirement Fund of Chicago, Policemen's Annuity and Benefit Fund of Chicago, the New Mexico State Investment Council, and the Public Employees Retirement Association of New Mexico, served as Lead Plaintiffs in this case Although this settlement is subject to court approval, it stands to be the 6th largest sum ever recovered by a Louisiana pension fund serving as a Lead Plaintiff 29

30. Outstanding Corporate Governance Litigation by Louisiana Funds UnitedHealth Group, Inc. Shareholder Derivative Litigation: Plaintiffs included: Louisiana Sheriffs' Pension & Relief Fund Louisiana Municipal Police Employees' Retirement System St. Paul Teachers' Retirement Fund Association Public Employees' Retirement System of Mississippi Jacksonville Police & Fire Pension Fund Fire & Police Pension Association of Colorado Largest stock-option backdating case – over $1 billion in backdated grants to senior executives The litigation settled for approximately $920 million for the benefit of the company as a result of these executive compensation abuses – the largest derivative recovery in history Significant governance reforms put in place BY the settlement 30

31. Outstanding Corporate Governance Litigation by Louisiana Funds Caremark Takeover Litigation: Led by the Louisiana Municipal Police Employees' Retirement System Litigation arose from the takeover of Caremark by CVS Fiduciary breach claims regarding the unfair price and process underlying the proposed transaction, as well as inadequate disclosure to shareholders The litigation helped increase the offer price by over $3 billion Landmark decision from the Delaware Court of Chancery criticizing the defendants’ fiduciary conduct 31

32. iii. Nontraditional and Complex Securities The Financial Crisis brought to light some of the dangers of increasing investment in complex or nontraditional investments Institutional investors have suffered hundreds of billions of dollars in losses from structured investments – e.g., CDOs, mortgage pass through certificates, complex derivatives or debt securities, etc. The financial crisis negatively impacted numerous bonds and other fixed income investments – the risk of insolvency created by subprime fallout hurt normally “safe” fixed income investments Unlike common stock lawsuits, litigation arising from nontraditional securities can be highly complex and is, therefore, often neglected 32

33. Citigroup and Merrill Lynch Bonds Litigation Citigroup and Merrill Lynch were each the subject of major securities class actions arising principally from fraudulent disclosures related to their subprime exposure The lead plaintiffs and counsel in these actions failed to identify and pursue claims potentially worth hundreds of millions of dollars arising from investments in multiple bonds and similar fixed income securities issued by Citigroup and Merrill Lynch – even though the statute of limitations on these claims was about to expire, forever extinguishing these claims Through portfolio monitoring, Counsel can identify these claims before the limitations period runs 33

34. Citigroup and Merrill Lynch Bonds Litigation (cont.) LAMPERS and Louisiana Sheriffs, like many pension funds, had each invested in bonds issued by both Citigroup and Merrill Lynch and retained Counsel to file and preserve these claims on behalf of all similarly situated investors. The Merrill Lynch bond action was settled for $150 million for the class The Court in the Citigroup bond action recently sustained the bond claims, which are proceeding to discovery All the sums returned to investors through these litigations would have been totally lost, but for the actions of LAMPERS and Louisiana Sheriffs 34

35. Wells Fargo Mortgage Pass Through Certificate Litigation What is a Mortgage Pass Through Certificate? A structured security representing an interest in an underlying pool of mortgages – cash flows from underlying mortgages “pass through” to the holder’s certificates Similar to a CDO Case arises from false and misleading statements in offering documents concerning the credit quality of the underlying mortgages Investors seek damages caused by the overvaluation of these securities City of New Orleans Employees’ Retirement System and Louisiana Sheriffs are Lead Plaintiffs Defendants in the action include Wells Fargo and certain subsidiaries, investment bank underwriters, and rating agencies (S&P, Moody’s, and Fitch) 35

36. iv. Opt-Out Litigation Institutional investors are increasingly considering their options with respect to “opting out” of securities class action settlements In an Opt-Out action, investors give up their right to participate in the proceeds of a securities class action, but gain the ability to pursue their own recovery – possibly obtaining superior results Not all cases make good Opt-Outs, but under the appropriate circumstances, opting out of a litigation can yield a premium and may be the wise financial, and thus, fiduciary decision 36

37. What Makes a Good Opt-Out? Every case is different and there are many factors impacting the analysis: Leadership Matters Who are the lead plaintiff and counsel in the class action? Do they have a history of successful results in securities litigation? Does the trading activity of the lead plaintiff indicate a potential bias in favor of certain claims over others? Does class counsel have a reputation for maximizing recoveries in litigation? Settlement Size and Terms If known, what is the value of the settlement? Is your fund’s share of the settlement adequate, or is there a likelihood of a superior recovery through a separate action? Is a proposed plan of allocation of class settlement proceeds unfavorable when taking your fund’s trading pattern into consideration? Overall Damages Is the defendant company’s overall liability large enough to potentially bankrupt the company? If so, the class action may not have the leverage to insist on a fair recovery, because it would destroy the company. In contrast, what is the extent of your fund’s individual damages? Can they be recovered separately, without rendering the company insolvent? 37

38. What Makes a Good Opt-Out? Unique Claims Are there valuable claims only available on an individual (i.e., non-class) basis? For example, fraud claims under state law may only be available in an Opt-Out situation. Are any such claims available against third parties? Such state law claims may, for example, allow you to sue a wider range of defendants than in the federal securities class action. Does the availability of any such claims merit pursuing a separate action? 38

39. III. Troublesome Recent Case Law 39

40. i. National Australia Bank – Limitations on Foreign Recoveries Morrison v. National Australia Bank, Ltd. 130 S. Ct. 2869 (2010) U.S. Supreme Court decision impacts the ability of investors to initiate securities lawsuits when they purchase securities outside the United States Although the full implications of the decision will be worked out by lower courts, it appears that, under this decision, U.S. investors cannot sue a Company in connection with securities purchases on stock exchanges outside the United States 40

41. Why National Australia Bank is a Problem for Institutional Investors In our increasingly global economy, numerous foreign corporations are part of the everyday fabric of United States commerce and raise capital freely on multiple global markets British Petroleum and Toyota are examples where many U.S. pension funds purchased shares on foreign exchanges National Australia Bank will reduce or eliminate a corporation’s potential liability for damages to investors – even if the investors are United States funds and even if the fraudulent conduct took place within the United States For example, in Toyota, investors suffered damages of over $10 billion globally based on revelations about the safety recall, but less than $500 million of these damages arose from purchases on United States Exchanges. 41

42. So Until (or Unless) Congress Acts… …investors generally must purchase on United States exchanges to participate in securities litigation in United States courts. 42

43. IV. Portfolio Monitoring: Protecting Your Assets with Superior Information 43

44. Portfolio monitoring is designed to ensure that you have complete information concerning all your rights and opportunities related to litigation, in order to assist you in the discharge of your fiduciary functions Portfolio monitoring arms you with the information you need to collect what is rightfully yours Portfolio monitoring involves constant monitoring of your investment activities and an ongoing analysis of market events and information to determine the impact on your fund This analysis is then provided to you to enable you to make informed fiduciary decisions 44 Portfolio Monitoring

45. Portfolio Monitoring Helps Address All Four Emerging Trends Discussed Above: Opportunities for Activism: Portfolio monitoring legal services help you identify the best cases for your fund to pursue corporate governance reforms or to otherwise seek to correct corporate misbehavior Nontraditional Securities: Portfolio monitoring services are essential to making sure that you are aware of all of your opportunities to recover assets lost through increasingly common investment in complex securities Opt-Out Litigation: Portfolio monitoring services are necessary to help you understand and analyze the relative merits of opting out or protecting your interests as part of a securities class action International Ramifications: Portfolio monitoring services will help you understand the implications of the National Australia Bank decision in an increasingly global investment marketplace and help you assess the impact on your investments and litigation rights 45 Portfolio Monitoring

46. Looking to the Future Mergers & Acquisitions (“M&A”) litigation appears likely to increase in the coming period M&A cases generally arise from proposed corporate transactions that treat minority public shareholders unfairly or otherwise violate the fiduciary duties of corporate insiders The likely coming increase in M&A activity will be fueled by numerous factors: Very low interest rates Low stock price valuations Many companies have developed large cash “war chests” during the downturn August 2010 alone saw a major uptick in M&A activity, with over $200 billion in corporate takeovers announced In such an environment, it is expected that numerous transactions will be the subject of meritorious litigation to advance the interests of public shareholders Portfolio monitoring services closely follow developments in the field of M&A and help identify the best opportunities to advance shareholder interests 46

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