The May 2003 issue of Federal Lawyer (not available online) contains a column by James Fazio entitled "The Motive and Opportunity Test for Pleading Scienter under the Federal Securities Laws: Where Is It Now?" Mr. Fazio, an assistant U.S. attorney in the S.D. of Cal., examines whether motive and opportunity allegations are sufficient to establish a strong inference that the defendants acted with fraudulent intent (i.e., scienter), as required by the PSLRA, and concludes that there is a dispute among the circuits on this question.
Quote of note: "In short, the Second and Third Circuits appear to be the only two circuits in which allegations of motive and opportunity may be sufficient in themselves to show scienter. By contrast, the Ninth Circuit is the only circuit to have expressly rejected it. In the vast majority of circuits in between, there appears to be a trend against categorizing facts for purposes of analyzing whether those facts show scienter and in favor of determining whether the complaint in its entirety raises a strong inference of scienter, regardless of whether any alleged facts fall within any formalistic category, such as motive and opportunity."
Halliburton Company (NYSE: HAL), a Houston-based energy services company formerly run by Vice President Cheney, announced this morning that it has reached a memorandum of understanding to settle the pending securities class action and derivative suits against the company. The cases are based on Halliburton's accounting for revenues associated with unapproved claims and change orders on construction projects. Halliburton did not disclose the financial terms of the settlement, but said the amount was insignificant. CBS Marketwatch has an article.
Addition: Reuters is now reporting that the settlement is for $6 million.
In Cantrell v. Cal-Micro, Inc. (9th Cir. May 28, 2003), the Ninth Circuit addressed whether a corporate officer who is personally liable for corporate fraud can discharge such a debt in bankruptcy. The panel held that the directors or officers of a California corporation are not fiduciaries within the meaning of the federal bankruptcy code. As a result, the judgment against Cantrell, for breach of his fiduciary duties, was dischargeable in bankruptcy. The Recorder has an article on the opinion and its potential impact on collecting judgments.
Note, however, that the Ninth Circuit’s ruling should not affect the ability of plaintiffs to collect judgments based on securities fraud claims. Section 803 of the Sarbanes-Oxley Act has amended the federal bankruptcy code to make judgments and settlements that result from a violation of federal and state securities laws (or common law securities fraud) non-dischargeable.
Commtouch Software, Ltd., an Israeli anti-spam software maker, has announced the settlement of a securities class action against the company. The case was filed in the N .D. of California in 2001. The settlement consists of a payment of $15 million to members of the class, which will be fully funded by the company's directors and officers insurance.
The result of the joint status conference on the Enron bankruptcy and securities class action cases is court-ordered mediation. According to the Houston Chronicle and the Washington Post, U.S. District Judge Kevin T. Duffy of the S.D. of New York has agreed to serve as the mediator for Enron and its creditors, a group of financial institutions, and the shareholder and employee plaintiffs in the putative class actions. The order signed by the courts creates a mediation representative for each of the three categories of parties.
Quote of note (Washington Post): "The financial firms represent the most important potential source of recovery for shareholders, lawyers said. 'It may be that at the end of the day, the banks may decide to throw money at this to make it go away,' said Aaron R. Cahn, an attorney for a group of Enron creditors. 'A lot of that depends on realistic expectations of the merits of the case against the banks.'"
Quote of note (Houston Chronicle): Some people speculated that "the judges may have gathered lawyers from around the country for the mediation announcement because just being in the room, with around 100 attorneys buzzing around, made clear how unwieldy the Enron civil and bankruptcy proceedings will be."
The Wall Street Journal (subscription required) has an article on Enron's push for a global litigation settlement. Enron has sought bankruptcy court approval to hire an attorney to pursue claims against its bankers, many of whom are co-defendants in the Enron securities class action. Not surprisingly, lead counsel for the securities class action is concerned that Enron is attempting to divert money away from injured investors. There is a joint status conference on the bankruptcy and securities class action cases today.
Quote of note: "Lawyers who are involved in the bankruptcy case view Mr. Cooper's [Enron's CEO] intiative as an effort to take control of the settlement process, and to attempt to stake a claim to a portion of any settlement money that Enron shareholders can wring out of the banks. Hiring a Texas litigator to represent Enron, these people say, coud help on that front."
Readers unfamiliar with securities class action litigation may wonder about The 10b-5 Daily's focus on motions to dismiss and settlements. Simply put, that's where the action is in this area of the law. If a securities class action is not dismissed, it is usually settled. Which is why, in part, Congress chose to heighten the pleading standards for securities litigation when it enacted the Private Securities Litigation Reform Act.
In Johnson v. Tellabs, Inc., 2003 WL 21183390, (N.D. Ill. May 19, 2003), the court addressed the viability of group pleading following the passage of the PSLRA. Tellabs is one of the numerous securities class actions that arose out of the severe downturn in the telecommunications industry in 2001 and 2002. The court granted defendants' motion to dismiss on multiple grounds. Of particular interest, however, is the court's discussion of group pleading.
The "group pleading" doctrine creates the presumption that senior executives of a company may be held liable for misrepresentations or omissions contained in the public statements made by the company (e.g., press releases, SEC filings, etc.). Courts are divided (including a clear split within the N.D. of Ill.) over whether a plaintiff's ability to plead in this manner has survived the enactment of the PSLRA. The Tellabs court strongly suggested that it has not.
First, the court held that even if the group pleading doctrine continues to be viable in "some form," plaintiffs must allege facts "relating to an individual defendant's duties or legal obligations that create a presumption that the company's statement was somehow caused by or attributable to an individual defendant." Merely alleging an individual defendant's title is not enough. Second, the court concluded that group pleading can never be used to establish scienter, because the PSLRA expressly requires that scienter be plead with particularity as to each defendant.
Holding: Motion to dismiss granted, with leave to replead.
Over Memorial Day weekend, the Los Angeles Times ran a critical two-part story on Cisco Systems Inc. The first article focused on Cisco's loans to financially-troubled customers. The second article focused on Cisco's acquisitions of companies backed by Sequoia Capital. The author noted that last month Judge Ware of the N.D. of Cal. refused to dismiss the consolidated securities class action against the company, its auditor, and top executives.
Quote of note (first article): "Ware wrote that the allegations contained in the 198-page complaint, including a claim that Cisco artificially inflated its revenue through its lending operation, were 'sufficient to support a strong inference' of wrongdoing. His ruling clears the way for investor attorneys, who are seeking billions of dollars in damages, to collect internal documents and conduct sworn interviews with Chief Executive John Chambers and other executives."
PricewaterhouseCoopers has agreed to pay the SEC $1 million to settle a case brought by the agency. The SEC alleged that the accounting firm destroyed and altered documents after learning of a securities class action suit against one of its clients.
In Bond Opportunity Fund v. Unilab Corp., 2003 WL 21058251 (S.D.N.Y. May 9, 2003), the court addressed the issue of inquiry notice and the statute of limitations. The statute of limitations for Section 14(a) claims (misleading statements in proxies) is one year from discovery or three years from the occurrence that gives rise to the action, whichever is less (Sarbanes-Oxley arguably has not changed this standard because Section 14(a) does not “sound in fraud”). The Second Circuit has stated that discovery of the claim occurs when the plaintiff “obtains actual knowledge of the facts giving rise to the action or notice of the facts, which in the exercise of reasonable diligence, would have led to actual knowledge.” In other words, inquiry notice is sufficient to trigger the statue of limitations.
If the court determines that inquiry notice existed and the plaintiffs concede they engaged in no investigation, dismissing the claim based on the statute of limitations is straightforward. More difficult is the case where the plaintiffs claim that they did engage in an investigation after being put on inquiry notice, but were unable to obtain sufficient facts to bring the claim until more than a year later.
In Unilab, plaintiffs claimed that BT Alex.Brown aided and abetted in the alleged Section 14(a) violation committed by the company. Plaintiffs argued “that because they began to make inquiry immediately upon issuance of the proxy, in late October/early November 1999, knowledge of BT Alex.Brown’s role should not be imputed until they actually learned all the facts in November 2000 [less than a year before BT Alex Brown was added to the case in September 2001].” The court disagreed. Noting that BT Alex.Brown’s role as a key player in the transaction was disclosed in the proxy statement, the court found it “incomprehensible how Plaintiffs can claim that they were not sufficiently aware of BT Alex.Brown’s involvement in this transaction to name it as a defendant in this action prior to its deposition in November 2000.”
Holding: Securities claims against BT Alex.Brown dismissed as time-barred. The opinion also addressed other claims not discussed in this summary.
Quote of note: “A minimal or lackadaisical investigation will not serve to extend the statute of limitations until the plaintiff actually learns facts that could have been discovered much earlier had a diligent investigation taken place.”
The Newark Star-Ledger reports in yesterday's edition that the court has approved the settlement in the securities class action against Party City Corp. The case was filed in the U.S.D.C. of New Jersey in 1998, dismissed in 2001, scheduled to be heard on appeal to the Third Circuit in 2002, before finally settling prior to the appellate hearing for $3.8 million.
Quote of note: "Attorneys estimated the settlement works out to about 33 cents a share for members of the class, before deducting attorneys' fees."
Let no one say that The 10b-5 Daily avoids hot topics in favor of long dissertations on statutory construction (see post below). The Southern District of New York has denied the motion to dismiss in the securities class action against Martha Stewart Living Omnimedia Inc.
In Alkow v. TXU Corp., 2003 WL 21056750 (N.D. Tex. May 8, 2003), the court addressed a conflict in the provisions of the '33 Act. Stay with me, because this gets a little tricky. Private actions under the '33 Act may be brought in federal or state court. The Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), however, was designed to prohibit the bringing of securities class actions in state court and provides for their removal to federal court. In doing so, however, SLUSA specifically limits itself to class actions "based upon the statutory or common law of any State." The drafters were focused on plaintiffs who wanted to avoid the heightened pleading standards of the PSLRA by bringing the equivalent of Rule 10b-5 claims (for which federal courts have exclusive jurisdiction) in state court under state law. All of which leaves the question addressed in Alkow: can plaintiffs bring a class action pursuant to the '33 Act in state court?
The N.D. of Texas doesn't think so. The court noted that the jurisdiction section of the '33 Act "prohibits removal of cases 'arising under' the 1933 Act, '[e]xcept as provided in section 77p(c).'" Section 77p is the SLUSA section. As a result, the court held, it is clear that Congress intended to prevent the filing of class actions pursuant to the '33 Act in state court, despite the specific reference to state law in SLUSA. Moreover, any other result would create a loophole in SLUSA. Still there? Hello?
Holding: Motions to remand denied.
Quote of note: "In short, Congress intended SLUSA to prevent the exact maneuver used by the Alkows here. If sec. 77p(c) does not permit removal of claims arising under the 1933 Act, then SLUSA did not counteract the shift in cases to state courts that Congress determined had frustrated the intent of PSLRA."
An article in today's Wall Street Journal (subscription required), reports that Judge Scheindlin (S.D.N.Y.) has ordered UBS Warburg, despite the brokerage firm's concern about excessive cost, to pay for the retrieval of certain e-mails relating to an employment discrimination case. The authors speculate that the ruling will be cited in future investor class action suits to justify requiring Wall Street firms to pay for extensive e-mail discovery. Although the article specifically mentions the IPO allocation cases, it inexplicably fails to note that these cases are, in fact, before Judge Scheindlin.
Quote of note: "The judge set out a new standard for determining when a defendant must produce e-mails that includes such factors as 'the importance of the issue at stake in the litigation' and how much the retrieval will cost 'compared to the amount in controversy.'"
An AP article in yesterday's Bergen Record discusses the growing role of New Jersey's state pension funds in bringing securities class actions. The article reports that the funds lost $22 billion in the stock market downturn as of last year.
Quote of note: "Peter C. Harvey [the state's acting attorney general] told The Associated Press that the state is also the lead plaintiff in at least four of the eight cases, a legal distinction that gives New Jersey lawyers power to determine everything from what motions will be filed to how much should settle the cases. Most of the suits will likely be settled, he said."
Addition: One of Harvey's predecessors as N.J. Attorney General, John Degnan, is the Vice Chairman of the Chubb Corporation. Degnan has been calling on the insurance industry to form a group to provide legal services, information, and advocacy for companies facing securities litigation. The Chubb web site contains this press release from last February; a more recent op-ed from Degnan along the same lines appeared in the May 12, 2003 edition of Business Insurance (subscription required).
(BTW, the headline on this post refers to New Jersey's tourist mantra - made famous in a series of tv ads by former Gov. Tom Kean.)
Business Week Online has an analysis of the Hanover Compressor settlement and its possible impact on future securities class action settlements.
Quote of note: "Richard Bennett, a corporate-governance consultant in Portland, Me., agrees. 'Hanover Compressor may not be a household name, but it's completely unprecedented to have a publicly traded company acknowledge that board members ought to be accountable to their shareholders,' he says. 'I think you're definitely going to see more [groundbreaking corporate-governance settlements] because shareholders are demanding it.'"
The PSLRA provides that "all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss, unless the court finds upon the motion of any party that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party." Seven years after the passage of the PSLRA, the parameters for the exception to the discovery stay are still being established.
In In re Vivendi Universal, S.A., Sec. Litig., 2003 WL 21035383 (S.D.N.Y. May 6, 2003), plaintiffs moved for the discovery of documents already produced by the defendants to the DOJ, SEC, and two French regulatory agencies. Plaintiffs argued that a "partial lift on the stay of discovery is necessary because defendants are liquidating certain subsidiaries or affiliates of the Vivendi corporation, and there is a risk that documents may be lost with the transfer of control over portions of defendants' business." Based on defendants' representations that (1) documents would not be destroyed and (2) they had retained copies of any documents previously produced to investigators, the court held that there was no basis for concluding that evidence needed to be preserved or that plaintiffs had shown "exceptional circumstances" warranting the lifting of the stay.
Holding: Motion to lift the stay on discovery denied.
Quote of note: "Although the Second Circuit has yet to make any pronouncement, district courts here and elsewhere have construed 'undue prejudice' to mean 'improper or unfair treatment amounting to something less than irreparable harm.'"
The House Judiciary Committee is scheduled to hold a hearing today on the Class Action Fairness Act of 2003, which would apply some of the reform concepts in the PSLRA and the Securities Litigation Uniform Standards Act to all class actions. Click here for the full text of the House bill.
Addition: On May 21, the House Judiciary Committee approved the bill by a vote of 20-14.
The big news today is the securities class action settlement by Hanover Compressor Co., a natural gas compression services company based in Houston, Texas. In addition to compensating investors with a combination of cash, stock, and debt (worth around $80 million according to press reports), Hanover agreed to a series of corporate governance reforms above and beyond anything required by Sarbanes-Oxley or other federal securities laws. Notably, Hanover will: (1) change its outside auditing firm every five years; (2) ensure that two-thirds of its board consists of independent directors; and (3) canvass shareholders holding more than 1% of the company's stock for a list of nominees for two new independent director positions on its board.
The settlement still has to be approved by the U.S. District Court for the Southern District of Texas. Milberg Weiss is lead plaintiffs' counsel and has issued a press release. Numerous wire services and newspapers have run articles, including Reuters, USA Today, and the Houston Chronicle.
The May 12 issue of Business Week provides advice on bringing a claim against your broker for touting technology stocks. The article notes that the analyst fraud settlement will provide valuable evidence for the related class actions that have been brought against the major brokerage firms. Addition: On the other hand, the experts quoted in a related Reuters article do not think legal action based on this evidence will result in much of a recovery.
An article in today's Washington Post discusses the accounting fraud at U.S. Foodservice, the Columbia, MD subsidiary of Royal Ahold NV, and notes that 34 securities class actions have been filed. A hearing has been scheduled for May 29 in Santa Fe, N.M. to determine where the cases should be consolidated.
Only one recent case to report on, but it is fairly interesting:
In re Allied Capital Corp. Sec. Litig., 2003 WL 19641843 (S.D.N.Y. April 25, 2003) involved allegations that Allied Capital's "flawed valuation policy" caused it to overvalue its investments in nine companies and materially misstate those values in its public filings. An outside hedge manager publicly questioned Allied's valuation practices, resulting in a stock price decline from $25.99 to $23.20. Within a week, however, the stock had regained most of that loss.
The court found that plaintiffs had failed to adequately plead that defendants made fraudulent or misleading statements because: (1) "plaintiffs have not sufficiently pled that Allied's valuation policies resulted in its overvaluing of some investments;" and (2) "plaintiffs do not allege that Allied followed different valuation policies than those that it described in its public filings, or that Allied concealed any relevant information about the companies in which it invested."
More interestingly, the court determined that the alleged misstatements were immaterial. (According to 2d Cir. precedent, for a court to determine on a motion to dismiss that the alleged misstatement or omission is immaterial it must be "so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of [its] importance.") The court gave three reasons for its ruling.
First, the investments in the nine companies represented just over 10% of Allied's portfolio. Given that Allied's public disclosures clearly stated that the valuation process was inexact, "no reasonable investor could consider the fact that a small proportion of Allied's holdings might have values that were debatable (which is all the Complaint alleges) to be material."
Second, the stock price declined less than 10%, and then quickly rebounded, negating any inference of materiality.
Finally, "any number of factors unrelated to the alleged overstatements could have contributed to the decline in price on May 16," including the statements from the hedge fund manager, which might be untrue.
Holding: Motion to dismiss granted.
Quote of note: "In addition, the stock price's recovery, in the face of a general decline in the market, negates any inference of materiality, because it indicates that investors quickly determined that the 'new' information was not material to their investment decisions." Does that mean that a quick recovery in the stock price will always lead to the conclusion that the alleged misstatements are immaterial?
Congressman Bart Stupak (D., Mich.) is leading the charge in Congress to rescind the PSLRA and also would like to reintroduce the concept of aiding and abetting liability for private Rule 10b-5 litigation (after its rejection under current law by the U.S. Supreme Court in the Central Bank case). Stupak cites the Enron scandal as the motivating factor behind the bill. His proposed legislation deserves a serious review and I will try to provide one later.
Quote of note: "My bill, the 'Shareholder and Employee Rights Restoration Act of 2002,' was introduced to strip away the shield that PSLRA and SLUSA placed around companies and their advisors and accountants."
There is an interesting article in the April 24, 2003, issue of the New York Law Journal on Milberg Weiss Bershad Hynes & Lerach, the leading plaintiffs' securities class action firm. According to a recent study, last year Milberg Weiss participated as lead counsel in more than 60% of the securities class actions filed.
Quote of note: "By taking aim at some classic Milberg Weiss practices, the PSLRA inadvertently benefited the larger plaintiffs' firms, they say. The result has been a much more concentrated securities plaintiffs' bar dominated by big firms. As the bar's 800-pound gorilla, Milberg Weiss benefited most of all."
1. Who writes The 10b-5 Daily?
Lyle Roberts is the author of The 10b-5 Daily. The rest of the time, I am a partner with Cooley LLP in the firm's Washington, D.C. office. My practice consists of defending public corporations and their officers in class actions, derivative actions, merger and acquisition litigation, and SEC enforcement actions. I also counsel clients with respect to securities regulatory issues.
I am a graduate of The Johns Hopkins University (B.A., M.A.) and the University of Chicago Law School (J.D.). Following law school, I clerked on the U.S. Court of Appeals for the Fourth Circuit for Judge Donald S. Russell. I have been widely published on securities law topics, with articles in The New York Law Journal, Legal Times, Insights, Compliance Week, Legal Backgrounder (The Washington Legal Foundation), and the University of Chicago Law Review, and quoted in various media reports. I am a frequent moderator/panelist for Practicing Law Institute ("PLI") programs on securities litigation, including PLI's How To Handle A Securities Case.
2. How long has The 10b-5 Daily been in existence?
The first post was in May 2003 at a predecessor website. In August 2003, The 10b-5 Daily moved to its present location at www.the10b-5daily.com. The website is hosted by Hosting Matters and created on Movable Type software.
3. Why is it called The 10b-5 Daily?
Rule 10b-5 is a rule promulgated by the Securities and Exchange Commission ("SEC") pursuant to Section 10(b) of the Securities Exchange Act of 1934. It prohibits, among other things, the making of misleading statements or omissions of material fact in connection with the purchase or sale of any security. It is the leading statutory basis for private securities fraud claims.
4. What does The 10b-5 Daily cover?
The 10b-5 Daily is devoted to tracking news and events relating to securities class actions brought on behalf of investors against companies, with an emphasis on judicial developments. These cases typically allege that the company, through its officers and/or directors, made false or misleading statements to the market that artificially inflated the company's stock price. The class consists of investors who purchased the company's stock during the class period at the artificially inflated price.
Although the author of The 10b-5 Daily represents the defendants in these cases, the weblog is designed to be a general resource and cooperative effort. Many of The 10b-5 Daily's readers and contributors are attorneys who work in plaintiffs' firms.
5. Why does The 10b-5 Daily mostly discuss motions to dismiss and settlements?
Simply put, that's where the action is in this area of the law. If a securities class action is not dismissed, it is usually settled, in large part because of the enormous costs, and attendant risks, of bringing these cases to trial. Therefore, the motion to dismiss is often the key moment for a securities class action.
6. What is the Private Securities Litigation Reform Act?
The Private Securities Litigation Reform Act of 1995 ("PSLRA" - see the links in the right column of The 10b-5 Daily's main page) was enacted by Congress to deter abusive lawsuits and encourage the voluntary disclosure of information by corporate issuers. To that end, Congress established heightened pleading requirements for securities fraud, an automatic stay of discovery in securities fraud cases pending the resolution of a motion to dismiss, a system for selecting a lead plaintiff in a case brought as a class action, and a safe harbor from liability for forward-looking statements. Many of the cases profiled in The 10b-5 Daily discuss the application of this legislation.
7. Do you need to be a lawyer to understand the posts on The 10b-5 Daily?
Let's hope not. Most of the readers of The 10b-5 Daily are lawyers, but there are also a significant number of investors, corporate officers, insurance professionals, and others who visit regularly. The posts tend to assume a basic understanding of the law surrounding securities fraud. Much of that basic understanding, however, can be gleaned from this FAQ section and the materials linked in the right column of The 10b-5 Daily's main page.
8. Does The 10b-5 Daily summarize every aspect of the material it discusses?
The 10b-5 Daily is designed to act as a filter for items related to securities class action litigation. Readers should not assume that the summaries of articles, cases, legislation, or settlements are complete (or even particularly thorough in what they do cover). The focus here is on what the author of The 10b-5 Daily finds interesting, which may be entirely different from what another person who reads the same material would find interesting. See the "Legal Disclaimer" section in the right column of The 10b-5 Daily's main page for more on this topic.
9. Can I receive updates from The 10b-5 Daily via e-mail?
Yes. See this post .
10. What is The 10b-5 Daily's policy on information e-mailed to it?
Like many weblogs, The 10b-5 Daily has an opt-out for content, opt-in for recognition policy. Anything e-mailed to The 10b-5 Daily may be used on the site unless the sender affirmatively requests that the information be kept confidential. The 10b-5 Daily will only disclose the source of the information, however, if the sender affirmatively states that he/she will accept public recognition for the contribution.
11. Why are readers of The 10b-5 Daily unable to post comments?
A public discussion area must be constantly monitored to remove spam comments. The author of The 10b-5 Daily would rather spend his limited free time posting. That said, readers are strongly encouraged to send in comments, links, or any other information of interest to The 10b-5 Daily via e-mail at "the10b5daily at hotmail dot com." Many of the posts on The 10b-5 Daily are the result of reader-submitted materials.
12. Why do some posts on The 10b-5 Daily have a "disclosure" line?
The 10b-5 Daily discloses when its author has had direct involvement in the material being discussed (typically when he represents a party to the litigation or has been quoted in an article). The mere involvement of his law firm or any of its attorneys will normally not cause a disclosure line to be added to a post.
13. Can I use the material found on The 10b-5 Daily?
The 10b-5 Daily and the10b-5daily.com are trademarks belonging to Lyle Roberts. All original material appearing on The 10b-5 Daily is copyright 2003-2012 by Lyle Roberts. All rights reserved. Readers may quote, cite, or link to this copyrighted material, but credit must be given to the author, typically by referring to "The 10b-5 Daily" or "Lyle Roberts" and, if possible, including a link to the weblog or the post's specific URL. The author of The 10b-5 Daily reserves the right to rescind this permission at any time and for any reason.