The 10b-5 Daily

Converium Settles

Converium Holding AG, a Zurich-based international reinsurer acquired by SCOR in August 2007, has announced the preliminary settlement of the securities class action pending against the company in the Southern District of New York (S.D.N.Y.). The case, originally filed in October 2004, stems from allegations that executives at Converium artificially inflated the price of Converium’s stock by failing to disclose to the public certain deficiencies in the company’s loss reserves. The case in the S.D.N.Y. is limited to U.S. invesotrs. Converium has agreed to settle those claims, as well any claims by non-U.S. investors, for an aggregate amount of $114.5 million (74 million EUR). The claims by non-U.S. investors will be settled in a court proceeding in the Netherlands, apparently following in the footsteps of a similar settlement entered into by Royal Dutch Shell last year.

Parmalat Settles

Parmalat S.p.A., a producer and distributor of dairy products and fruit-based beverages based in Milan, Italy, has announced the preliminary settlement of the securities class action pending against the company in the S.D. of New York. The case, originally filed in January 2004, stems from allegations that Parmalat and its bankers, lawyers, and auditors engaged in a massive and complex scheme to overstate Parmalat's assets and profits for more than a decade. Under the terms of the settlement, Parmalat will issue to class members 10.5 million shares of stock, valued at approximately $37 million at the current market price.

The 10b-5 Daily has frequently posted about the Parmalat case, especially on the issue of scheme liability. But it all started with a post in 2004 entitled "You're No Martha."

A Little Something For The Effort

House Republican leaders John Boehner (R-OH) and Lamar Smith (R-TX) have asked the House Judiciary Committee to hold a hearing on the payment of kickbacks to lead plaintiffs in securities class actions. The press release and letter to the Chairman of the House Judiciary Committee can be found here. The WSJ Law Blog has a post on the topic and the ABA Journal has an article with related news links.

The Wheat From The Chaff

Establishing loss causation for the purpose of class certification or summary judgment is becoming a significant hurdle for plaintiffs. On the heels of the Flowserve and Omnicom decisions comes another defense victory.

In Fener v. Belo Corp., 2008 WL 876967 (N.D. Tex. April 2, 2008), the corrective disclosure made by the company attributed a decline in newspaper circulation to three separate sources. Only one of the sources, however, was related to the alleged fraudulent conduct. Based on Fifth Circuit precedent, the court held that it was the plaintiffs' burden to prove that it was more probable than not that this portion of the disclosure, and not the other unrelated negative statements, caused a significant amount of the stock price decline. The plaintiffs' expert failed to present empirical evidence sufficient to meet this burden. (The 10b-5 Daily previously posted about the initial motion to dismiss decision in the case.)

Holding: Class certification denied.

Quote of note: "[The] event study tends to establish that the market reacted to the bundle of August 5 news pieces with an August 6 stock price drop of 5.47%. Crucially, however, the study fails to target the corrective disclosure at issue."

No Reason To Make A Federal Case Out Of It

How do you know when a judge does not think much of your case? When the quips start flying around in her decision.

In City of Brockton Retirement System v. The Shaw Group Inc., 2008 WL 833943 (S.D.N.Y. March 18, 2008), District Judge Colleen McMahon addressed a securities class action brought after The Shaw Group was forced to restate its 2Q 2006 financials. In particular, the restatement resulted from two accounting errors: (a) an arithmetic error related to the computation of percent complete on one contract; and (b) a failure to account properly for a minority interest in a variable interest entity. The court dismissed the case based on the plaintiffs' failure to adequately plead a strong inference of scienter (i.e., fraudulent intent) and made its overall feelings about the claims quite clear. Here are some of the more quotable lines:

(1) "Calling the failure to catch [the simple arithmetic error] a 'failure of accounting controls' makes it sound sinister, but it does not change the fundamental nature of the 'failure' - somebody forgot to check his/her work. This is not sinister at all. Mistakes like this happen a lot in the third grade, and sometimes they happen in public companies, too. There is no reason to make a federal case out of it."

(2) "It may not be prudent as a business matter to have an accounting department that has a hard time keeping up with new information technology, but it is not a violation of the federal securities laws to do so."

(3) "So none of the matters cited by plaintiffs admits of an inference of fraud. Plaintiffs argue, however, that zero plus zero plus zero plus zero plus zero adds up to something. In this, its arithmetic is as faulty as Shaw Group's was."

Thanks to an alert reader for sending in the decision.

Biovail Extends Settlement To Canada

Biovail Corporation (NYSE: BVF and TSX: BVF), an Ontario-based specialty pharmaceutical company, has announced the tentative settlement of the securities class action pending against the company in Ontario Superior Court. The case, originally filed in September 2005, relies on the same factual basis as an earlier class action brought by U.S. plaintiffs and stems from allegations that Biovail made false financial projections.

The settlement agreement provides for the plaintiffs in the Canadian suit to share in the $138 million settlement already agreed upon in the U.S. securities class action. The 10b-5 Daily has posted previously on the settlement of the U.S. case and the company's attempt to sue short sellers of its stock. Press coverage of the Canadian settlement can be found in the The Globe and Mail.

Need The Details

The U.S. Court of Appeals for the First Circuit has previously held that the Tellabs decision lowered the pleading standard for scienter in its court. While that determination did not lead to a reversal of the dismissal in the ACA Financial case, the same cannot be said of a new First Circuit decision issued this week.

In Mississippi Public Employees' Retirement System v. Boston Scientific Corp., 2008 WL 1735390 (1st Cir. April 16, 2008), the court specifically noted that its application of Tellabs lead it to conclude that the district court, which "did not have the benefit" of the Supreme Court's opinion, had erroneously dismissed the complaint based on a failure to adequately plead scienter. The court based its holding on allegations suggesting that Boston Scientific may have known of the relevant manufacturing problem during the class period, the closeness in time between alleged misstatements by the company and an announced product recall, and stock sales by the individual defendants.

On the issue of insider trading, the court addressed the defendants' argument that many of the alleged insider stock sales were effectuated pursuant to Rule 10b5-1 trading plans and therefore could not have supplied a motive to engage in fraud. The court concluded, however, that there was insufficient evidence about the nature of the plans to credit this argument. (The author of The 10b-5 Daily has co-written an article on the potential use of Rule 10b5-1 trading plans in defending against securities class actions, including the importance of public disclosure of the nature of the plans. In addition, a discussion of other relevant cases can be found here.)

Quote of note: "It was the defendants' choice to move to dismiss the case on the pleadings without presenting evidence. As a result, there is no evidence of when the [Rule 10b5-1] trading plans went into effect, that such trading plans removed entirely from defendants' discretion the question of when sales would occur, or that they were unable to amend these trading plans."

Aim For The Heart

In its Tellabs decision, the U.S. Supreme Court created an "at least as compelling" standard for weighing competing inferences of scienter in securities fraud cases. The fact that a draw goes to the plaintiff was criticized by Justice Scalia in his concurrence, although he noted that his preferred "more plausible" standard would be unlikely to have much of a practical effect because "[h]ow often is it that inferences are precisely in equipoise?" Beware of rhetorical questions.

In In Re Paincare Holdings Sec. Litig., 2008 WL 348781 (M.D. Fla. Feb. 7, 2008), the court considered an amended complaint filed after a dismissal without prejudice. The magistrate judge (whose order was adopted by the court), found that scienter had been adequately plead because "the inference of scienter is equal to the inference of non-fraudulent intent." In support of its holding, the decision noted the sheer magnitude of the financial restatement, the company's ambitious acquisition strategy, and the company's alleged false rationalization for the financial restatement.

Quote of note: "To the extent the reason offered to the public [for the financial restatement] was not true, one can infer that the Company had a reason not to delve too deeply in presenting its mea culpa to the public. While fecklessness is not recklessness, when truly falling on your sword, you aim for the heart."

2007 PwC Securities Litigation Study

PricewaterhouseCoopers has released its annual review of securities class actions. The findings include:

(1) There were 163 filings in 2007, an increase of nearly 50% over the previous year. Subprime cases accounted for 37 of the filings.

(2) The number of filings associated with financial restatements was relatively small - 39 cases - suggesting that the "market reaction to restatements is declining."

(3) The number of filings with some form of SEC involvement (investigation or enforcement action) fell for the third year in a row to just 24 cases (approximately 15% of total).

(4) There was a sharp increase in the number of filings against foreign private issuers, with 27 cases in 2007 (compared to 14 cases in 2006).

Quote of note: "During hard times, the increased pressure to produce good financial results is more likely to lead to bad behavior, which in turn is likely to result in higher levels of shareholder litigation. If current speculation on the downward direction of the economy is to be believed, then private securities class actions will most likely trend upward over the next few years, above the recent average number of filings since Sarbanes-Oxley."