A Win for Nonsettling Defendants Facing Securities Act Claims

February 20, 2015

Nonsettling defendants that faced Securities Act claims were protected from disproportionate liability following a partial settlement.

On February 3, Judge William H. Orrick of the U.S. District Court for the Northern District of California issued an important decision in Rieckborn v. Velti PLC.[1] The court’s decision holds that, in the event of a partial settlement of claims under the Securities Act of 1933 (the Securities Act), nonsettling defendants are entitled to receive a judgment reduction equal to the proportionate liability of the settling defendants. Consequently, plaintiffs cannot enter into modest settlements with financially weaker—although potentially more culpable—defendants while still retaining the right to pursue the balance of their damages from the remaining defendants. Rieckborn is a significant precedent that protects the previously unsettled rights of nonsettling defendants in the event of a partial settlement under the Securities Act.

Law Governing Judgment Reduction in Partial Settlements

To encourage settlement and promote finality, courts that approve partial settlements in securities cases will often also approve a bar against contribution claims brought against the settling defendants (referred to as a “bar order”). Under the federal common law, courts that issued bar orders simultaneously provided nonsettling defendants with a judgment reduction that offset their liability based on the settling defendants’ proportion of fault. This reduction was meant to protect a nonsettling defendant from paying more than its fair share of any damages.

The enactment of the Private Securities Litigation Reform Act (PSLRA) explicitly codified a similar principle for claims brought under the Securities Exchange Act of 1934 (the Exchange Act). Under the PSLRA, a nonsettling defendant is entitled to a judgment reduction equal to the greater of either (a) the proportionate liability of the settling defendants, such that nonsettling defendants pay only the percentage of the total amount of damages for which the fact finder ultimately finds them responsible, or (b) the amount of the settlement itself (referred to as a “pro tanto” reduction).[2]

The PSLRA, however, did not make the foregoing judgment reduction available to all claims under the Securities Act. To the contrary, the PSLRA protected nonsettling defendants only from assuming the proportionate liability attributable to settling outside director defendants under section 11 of the Securities Act. The PSLRA was silent as to the impact of a partial settlement on the liability attributable to other defendants under either section 11 or 12 of the Securities Act.

Extending PSLRA Judgment Reduction

In Rieckborn, the court addressed the issue left open by the language of the PSLRA: Whether nonsettling defendants are entitled to proportionate fault reduction following partial settlements of any Securities Act claim, where the settling defendants are not only outside directors facing claims under section 11, but rather other kinds of defendants facing Securities Act claims, including section 11 and 12 claims.

The plaintiffs in the case brought a class action under, among other things, sections 11 and 12 of the Securities Act. The plaintiffs named as defendants an issuer, Velti plc (Velti), its officers and directors (collectively, the Velti Defendants), and its underwriters and auditors. The Velti Defendants entered into a partial settlement agreement that allowed them to pay only a small portion of the total alleged damages. The plaintiffs argued that the nonsettling defendants—the underwriters and auditors—should remain responsible for the entire amount of any ultimate liability, offset only by the dollar value of the partial settlement. They relied on the PSLRA’s failure to explicitly extend judgment reduction to cover the liability of anyone other than outside directors sued under section 11 of the Securities Act.[3]

The court rejected the plaintiffs’ position. Acknowledging the lack of controlling authority, the court reasoned that “fairness dictate[d]” that the nonsettling defendants must be provided with a reduction in any judgment equal to the greater of the dollar value of the partial settlementor the amount of the settling defendants’ proportionate liability.[4] This formulation ensures that nonsettling defendants pay no more than they would have if all the defendants had gone to trial. Moreover, “[g]iven that the settling plaintiff’s level of control over the settlement outcome is, in most cases, exponentially greater than the nonsettling defendant,” the court found it was appropriate to place the risk of bad settlements on the plaintiffs—who may choose whether or not to settle.[5]


Rieckborn will protect nonsettling defendants with “deep pockets” from unfair settlements in which plaintiffs allow more culpable defendants to avoid paying their share of damages because of their weaker financial position. The decision will also dramatically change settlement dynamics. Plaintiffs will find it far more difficult to pressure defendants into paying large sums in settlement for fear that their refusal to settle will cause them to bear a disproportionate share of liability when more culpable parties agree to settle. Thus, the burden will fall on plaintiffs to construct settlements predicated on fairer assessments of relative fault.


Morgan Lewis represents the underwriters in Rieckborn—Jefferies LLC, RBC Capital Markets LLC, Needham & Company LLC, and Canaccord Genuity Inc. If you have any questions or would like more information on the issues discussed in this LawFlash, please contact the following Morgan Lewis lawyer:


[1]. No. 13-cv-03889, 2015 WL 468329 (N.D. Cal. Feb. 3, 2015).

[2]See 15 U.S.C. § 78uā€‘4(f)(7)(B)(i)–(ii).

[3]. The plaintiffs ultimately conceded that as to settling outside director defendants sued under section 11, the PSLRA’s express language allowed the nonsettling defendants to receive a judgment reduction based on the greater of the outside director defendants’ pro tantosettlement contribution and the outside director defendants’ proportionate liability.

[4]Rieckborn, 2015 WL 468329, at *1. 

[5]Rieckborn, 2015 WL 468329, at *19.