Legal

When the short-seller Muddy Waters exposed (alleged) fraud at Sino-Forest last summer, Canadian plaintiffs' firms rubbed their hands in glee. Canada has become something of a plaintiffs' paradise for securities litigation, especially in contrast to the United States. Canadian lawyers fired up class actions on behalf of investors who lost billions when Sino-Forest crashed, while U.S. firms sat around and dreamed of what might have been in the days before Morrison v. National Australia Bank.

But you know the old bromide: Adversity is the mother of invention. And no one is more inventive than U.S. plaintiffs' lawyers. Witness a new complaint filed Friday in Manhattan federal court (courtesy of Courthouse News) by Cohen Milstein Sellers & Toll. Cohen Milstein represents a putative class of Sino-Forest debt and equity investors suing the company, its bond offering underwriters Credit Suisse and Bank of America, and its auditor, Ernst & Young. But rather than assert claims under federal securities laws, Cohen Milstein is suing for New York state and common-law fraud, unjust enrichment, and breach of fiduciary duty -- which may not be susceptible to Morrison defenses. (I told you last week about a test of Morrison's impact on state-law claims that's now before the U.S. Court of Appeals for the Second Circuit.)

Cohen Milstein partner Steven Toll told me this isn't the first time the firm has brought state and common-law claims for investors in order to get around Morrison's bar on the extraterritorial application of federal laws; the firm has followed the same path in a couple Madoff feeder-fund suits. He also pointed out that to withstand Morrison, the Sino-Forest suit is carefully crafted to assert claims only on behalf of U.S. bondholders and shareholders who purchased Sino-Forest shares on the U.S. OTC; it's not for anyone who bought shares on the Toronto stock exchange. Toll said that "a not unreasonable" percentage of Sino-Forest shares traded on the OTC. (He contrasted Sino-Forest with Olympus, which had a tiny float in American Depository Receipts.)

There are, of course, other reasons for securities class-action firms to assert state and common-law claims. They can avoid the procedural strictures of the Private Securities Litigation Reform Act and the heightened pleading standards for securities fraud. Moreover, Cohen Milstein couldn't assert federal securities-law claims against the Sino-Forest bond underwriters since the bonds weren't registered with the Securities and Exchange Commission, Toll said.

He's nevertheless confident the bond claims have an adequate connection to New York through private placement documents that refer to New York in discussion venue and forums. "We don't know yet what the fact will show," Toll said. "But there's a lot of stuff about the U.S. and New York."

Cohen Milstein has been one of the firms pioneering the use of Dutch "collective actions" on behalf of foreign investors with securities claims. It's going to be interesting to see which tack proves more effective: going hyperlocal with state-law claims, or going abroad.

(Reporting by Alison Frankel)