Corel Corp., the Canadian software company that manufactures WordPerfect, has agreed to pay $7 million to settle a securities class action based on allegedly misleading statements it made in 1999 and 2000 concerning its entry into the Linux market. The case is pending in the E.D. of Pa.
According to an article in the Legal Intelligencer (via law.com - free registr. required), the plaintiffs' damages expert had estimated losses of about $46.3 million based on the alleged fraud. The article discusses in some detail the plaintiffs' justifications to the court for accepting a 15% recovery, including Corel's poor financial position, the defendants' argument that the investors had not suffered any damages, and the relatively small amount of D&O insurance that would be available after a trial. Plaintiffs also alleged that the Corel's defense lawyers had threatened to seek the protection of the Canadian bankruptcy court if plaintiffs managed to obtain a judgment.
Oxford Health Plans Inc. has been in a dispute with its excess insurance carriers over their contribution to the company's March 2003 settlement of a securities class action for $225 million. According to an article on the Dow Jones Newswires (suscrip. required), the company has agreed in principle to settle $17.9 million of its claims against the insurers for a total of about $14.3 million, which will be reflected in its third-quarter earnings. An additional claim for $23.9 million against one insurance carrier is still outstanding.
Computer Associates International Inc. (NYSE: CA) has announced that it will issue up to 5.7 million shares to obtain a global settlement of the securities class actions, ERISA class actions, and derivative litigation pending against the company. (There may be a cash component to the settlement, however, depending on the share price of the stock at the time of distribution.) The cases are based on how Computer Associates, which makes software from corporate mainframe computers, recognized revenue and awarded executive compensation. In anticipation of the settlement, the company plans to take a pre-tax charge of approximately $144 million in the current quarter.
Quote of note: According to an Associated Press article, lead counsel for the plaintiffs stated "that getting stock today, if the company has a good future, has a better upside for our clients than waiting three, four, or five years to resolve the case."
Less than many other circuit courts have required, is the answer from the U.S. Court of Appeals for the Tenth Circuit in Adams v. Kinder-Morgan, Inc., 2003 WL 21906117 (10th Cir. August 11, 2003). Pursuant to the PSLRA, plaintiffs attempting to plead securities fraud based on information and belief (as opposed to personal knowledge) must "state with particularity all facts" supporting their belief that the specified statements were misleading. Courts have routinely grappled with the meaning of the words "all facts."
The Second Circuit, in Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000), concluded that interpreting the text literally would lead to absurd results, including requiring dismissal "where the complaint pled facts fully sufficient to support a convincing inference if any known facts were omitted." The Second Circuit tempered its holding, however, by finding that it is not enough for plaintiffs to baldly allege facts in support of their allegations, they must provide "documentary evidence and/or a sufficient general description of the personal sources of the plaintiffs' beliefs." (The Fifth Circuit has also adopted this approach, while the First and Ninth Circuits have required detailed source information.)
In Adams, the Tenth Circuit agreed with the Second Circuit that "all facts" should not be interpreted literally, but declined to impose a requirement that plaintiffs state the source of their facts. Noting that the PSLRA did not "purport to move up the trial to the pleadings stage" and does not mention the pleading of sources, the court held that it will "apply a common-sense, case-by-case approach in determining whether a plaintiff has alleged securities fraud with the particularity required by [the PSLRA] without adding a per se judicial requirement that the source of facts must always be alleged to support substantive allegations of fraud in an information and belief complaint." The court did note, however, that in the absence of source information, the facts in the complaint "will usually have to be particularly detailed, numerous, plausible, or objectively verifiable by the defendant before they will support a reasonable belief that the defendant's statements were false or misleading."
Holding: Reversed in part (dismissal based on a lack of particularity, and other grounds, as to all defendants), affirmed in part (dismissal based on insufficient scienter allegations and lack of control as to one defendant).
Quote of note: "While the PSLRA certainly heightened pleading standards for securities fraud lawsuits, we believe that if Congress had intended in securities fraud lawsuits to abolish the concept of notice pleading that underlies the Federal Rules of Civil Procedure, Congress would have done so explicitly."
The big news today is the announcement of a proposed $300 million settlement in the securities class action against DaimlerChrysler AG. The suit alleges that Daimler-Benz AG misrepresented the acquisition of Chrysler as a "merger of equals" to avoid paying Chrysler shareholders a takeover premium for their shares. (The 10b-5 Daily has posted a few times about the case - see here and here.)
A separate suit brought by billionaire financier Kirk Kerkorian, who was Chrysler's largest single shareholder at the time of the merger, is unaffected by the settlement because Kerkorian will opt out of the class. Kerkorian's case is set for a December trial in the D. of Del.
Bloomberg appears to have the most comprehensive article on the settlement (at least as of this posting). The State Board of Adminstration of Florida, a teacher's and workers' pension fund that acted as one of the lead plaintiffs in the case, has issued a press release.
Quote of note (Bloomberg): "The offer, before any opt-outs, is worth about 43 cents a share, minus attorneys' fees. With Kerkorian opting out, the remaining shareholders would each receive about 47 cents per share, minus attorneys' fees. If approved, the settlement would be one of the largest ever in a securities fraud case, according to Bloomberg data. The agreement is tied for ninth place among the largest recoveries in shareholder class-action suits in history, the data shows."
Quote of note II (Bloomberg): "Han Tjan, a spokesman for the Stuttgart, Germany-based automaker, said the company has insurance to cover $220 million of the settlement. DaimlerChrysler officials say the class-action claims by investors other than Kerkorian presented the 'major risk' in the case. 'Now we'll concentrate on the suit with Tracinda [Kerkorian's holding company],' company spokesman Hartmut Schick said."
Harvey Greenfield was a plaintiffs' securities class action lawyer who passed away in 2002. A proud alumnus of Harvard Law School, Greenfield indicated to people that he planned to leave the bulk of his $35 million estate to the school. But a year after Greenfield's death, his will cannot be located and there is an ongoing battle between Harvard and his sole living heir over who will receive the money. The August 20, 2003 edition of the New York Law Journal contains an article (via law.com - free registration required) discussing Greenfield (including his famously abrasive dealings with other lawyers) and the legal contest over his estate.
PricewaterhouseCoopers LLP has issued a study on private securities litigation trends in 2002 and the first part of 2003. Notable findings for the period from January 1, 2003 to July 31, 2003 include:
(1) 60 securities class actions were settled with a total settlement value of $1.5 billion ($25.1 million average).
(2) The total number of securities class action filings in 2003 is on track to be approximately 190 (down from 217 in 2002).
(3) The number of securities class actions involving health services and pharmaceutical companies is rising, while the number of cases against telecommunications and utlilities companies has dropped dramatically.
Quote of note (from the related press release): "In 2002, approximately one out of every five shareholder class actions involved either a Department of Justice investigation, or a federal indictment, conviction or guilty plea/conviction, a 200 percent increase over 2001, and a 290 percent increase over the average for the years 1996 through 2000."
The August 18, 2003 edition of the Legal Times has an article (via law.com - free subscrip. required) on the previously announced breakup of Milberg Weiss Bershad Hynes & Lerach, widely recognized as the leading plaintiffs' securities class action firm. (The 10b-5 Daily posted extensively on this development back in June, starting with this post.) The front page story by Andrew Longstreth (of The American Lawyer) takes a comprehensive look at the issues that may have led to the split.
The Associated Press reports today that the New York State Comptroller has released a report claiming that corporate scandals have cost New York nearly $13 billion over the last two years in reduced economic performance, tax revenues, and pension fund value. The article also notes that New York's pension fund is the lead plaintiff in several securities class actions.
According to the Recorder (via law.com), a prominent securities class action plaintiffs' attorney stated at a recent ABA seminar that "he has been offered 50 percent of any judgment that comes directly from the pocketbooks of individual directors and officers." Moreover, his institutional clients are committed to defending this type of fee arrangement in court.
Note, however, that this is not really a new revelation. An article in the January 2003 issue of the Corporate Legal Times (only available online via Westlaw or LexisNexis) discussed the use of premium fee arrangements to target the personal assets of alleged corporate wrongdoers under the sub-headline "Institutional Investors Place a Bounty on Directors and Officers." Just something else to keep corporate executives up at night.
Medi-Hut Co., Inc., a New Jersey pharmaceutical and medical device maker, has announced the settlement of the securities class action filed against it in the D. of N.J. The suit was based on alleged accounting fraud. If approved by the court, the settlement will pay investors $400,000 in cash and 861,990 shares of stock (currently trading at about 15 cents a share).
Addition: The August 20, 2003 edition of the Newark Star-Ledger has an article on Medi-Hut and the settlement.
There is little doubt that Judge Pollack's decision in the Merrill Lynch research class actions is destined to be widely cited by securities litigation defendants -- it certainly has caused attorneys to give more consideration to loss causation as a defense. Exhibit A: Qwest Communications International, Inc.
The Rocky Mountain News reported over the weekend that Qwest has filed a motion to dismiss the securities class action against the company citing the Merrill Lynch decision and arguing that plaintiffs have not adequately alleged that the supposed misconduct, rather than a general market decline, caused their losses. Predictably (especially if you regularly read The 10b-5 Daily), plaintiffs have responded that the Merrill Lynch case isn't relevant, in part, because none of the plaintiffs in that case bought their stock from Merrill Lynch. The Qwest suit is before the U.S. District Court for the District of Colorado.
Quote of note: "In its court brief, Qwest cited the Merrill Lynch decision this summer. The class-action claim was dismissed, Qwest said, because the plaintiffs didn't adequately prove that the conduct of the analysts, rather than a general market decline, caused their losses. Qwest attorneys argue that Qwest's stock price too 'generally rose and fell' in a pattern corresponding to the broader Nasdaq telecommunications index."
The McKesson HBOC securities fraud cases have generated a number of interesting legal developments over the years. The cases are based on the 1999 merger between McKesson and HBO & Co. After the merger was closed, McKesson announced that HBOC had improperly recorded certain software sales as revenues and that HBOC's financial results would have to be restated. Several securities class actions were filed and the New York State Common Retirement Fund was eventually selected as the lead plaintiff.
In January 2001, McKesson filed a complaint and compulsory counterclaim against the Fund and former HBOC shareholders who exchanged more than 20,000 shares of HBOC stock for McKesson stock. The theory was that the investors were unjustly enriched by trading inflated HBOC shares for properly-valued McKesson shares. The district court dismissed the claim.
On Wednesday, the U.S. Court of Appeals for the Ninth Circuit weighed in on the case, holding that McKesson cannot sue its own investors on an unjust enrichment theory. First, the court held that an equitable remedy for McKesson was unnecessary given that there are legal remedies available to the company for the same alleged wrong. "McKesson has potential legal claims against any number of parties who, unlike the former shareholders, actually played a substantial role in the decision to enter the Merger Agreement; the former HBOC shareholders are not the only targets for recovery." Second, the court declined to pierce the corporate veil to create liability for HBOC's shareholders, noting that "there is no allegation that the HBOC shareholders exercised - or even had the ability to exercise - domination or control over HBOC." Finally, the court concluded that the expansion of liability to the shareholders, who were unaware of the risk that they could be personally liable for corporate acts, would be unjust.
Veritas, an Atlanta corporation that provides securities litigation data and services, has released some of the results from its review of class action activity from April 1, 2003 to June 30, 2003. Notable findings include:
(1) 59 securities class actions were filed during the second quarter of 2003, a slight decline from the 65 securities class actions filed during the first quarter of 2003.
(2) Milberg Weiss was bumped out of its historically commanding position for lead counsel appointments by Schiffrin & Barroway, who garnered 27% of lead counsel appointments in the second quarter (Milberg came in second with 23% of the appointments).
(3) Milberg Weiss continued to dominate the settlement arena, with 30% of the settlements that were approved in the second quarter for a total of 68% of the total funds recovered.
The Milwaukee Business Journal reports that the securities class action against Alliant Energy, filed in the U.S. District Court for the Western District of Wisconsin, has been dismissed without prejudice. The case was based on Alliant's alleged misrepresentations concerning its expected financial performance.
Homestore Inc. has agreed to pay $63.6 million in cash ($13 million) and stock (20 millon shares) to settle the pending securities class action against the company. The Associated Press reports that the settlement terms include corportate governance reforms.
Quote of note: "As part of the settlement, Homestore agreed to adopt corporate governance reforms within 30 days of the final approval. The company agreed to two-year board terms, the appointment of a new shareholder-appointed director and minimum stock ownership requirements for directors. The company also agreed to not use future stock options for director compensation."
The Salt Lake Tribune reports today that the U.S. Court of Appeals for the Tenth Circuit has partially reversed the earlier dismissal of a securities class action against Novell. The appellate court held that claims alleging that Novell and certain of its officers "created a fictional 'in transit' category and improperly recorded shipments to OEMs (or original equipment manufacturers, companies that incorporated Novell products into retail computers, or acted as resellers) as sales revenue" could proceed. The suit is based on conduct that allegedly occurred in 1996 and 1997. The decision can be found here.
First Union National Bank has agreed to settle the securities class action suit against the company, based on its alleged participation in a securities fraud commited by Cyprus Funds, for $5 million. According to an article in the Sun-Sentinel, the settlement was reached after two days of testimony in a federal jury trial in Fort Lauderdale.
Quote of note: "Legal experts say the case against First Union was unusual because it resulted in a jury trial. While 'third parties' such as banks or law firms sometimes are sued in connection with securities fraud cases, usually such matters are settled out of court or dropped."
The recent unpublished order granting Intel Corp.'s motion to dismiss the securities class action against the company has been posted by The Securities Law Beacon. (The 10b-5 Daily has previously noted the decision.)
Reuters reports that Judge Pollack of the S.D.N.Y. has declined to reconsider his ruling, or allow the plaintiffs to file an amended complaint, in the Merrill Lynch research class actions he recently dismissed. (The 10b-5 Daily has posted extensively about the original decision, starting here.)
Quote of note: "Pollack said on Tuesday that the plaintiffs had done 'nothing to change the unalterable, judicially-noticeable facts relating to the widespread public dissemination, years prior to the filing of the cases at bar, of information regarding analyst conflicts of interest and the service of investment banking business.'"
The state of Ohio, on behalf of its pension funds, continues to supplement pending securities class actions with its own individual suits. Over the weekend, the Washington Post reported that Ohio has both individually sued Freddie Mac and certain former officers for securities fraud and filed a motion asking that it be named lead plaintiff in the securities class action. The state currently has individual suits pending against AOL Time Warner (discussed in The 10b-5 Daily here), Enron, and WorldCom and is the lead plaintiff in a securities class action against Global Crossing.
Quote of note: "'I don't mean be excessively litigious, but I think in terms of what we've seen, we need to see more corporate accountability,' [Ohio Attorney General Jim Petro] said."
SuperGen, Inc. (NASDAQ: SUPG) has announced the voluntary dismissal of the securities class action against the pharmaceutical company. The suit, originally filed in April in the U.S. District Court for the Northern District of California, alleged that the company sold shares while failing to disclose material information about one of its drugs.
It has been a big summer for loss causation cases. A clear split in authority has developed between courts that believe plaintiffs must demonstrate a causal connection between the misrepresentations and a subsequent decline in the stock price (Semerenko v. Cendant Corp., 223 F.3d 165 (3d Cir. 2000); Robbins v. Koger Props, Inc., 116 F.3d 1441 (11th Cir. 1997)) and courts that believe plaintiffs merely need to allege that the misrepresentations artificially inflated the stock price (Gebhardt v. ConAgra Foods, Inc., 335 F.3d 824 (8th Cir. 2003)). (The 10b-5 Daily discussed the ConAgra decision here.)
In Broudo v. Dura Pharmaceuticals, 2003 WL 21789028 (9th Cir. Aug. 5, 2003), the Ninth Circuit clarified that it will not require plaintiffs to establish a causal connection between the misrepresentations and a decline in the stock price: loss causation "merely requires pleading that the price at the time of purchase was overstated and sufficient identification of the cause." The facts of the case, however, underline the problems with this reasoning. Broudo is a securities class action on behalf of investors who purchased Dura stock between April 15, 1997 and February 24, 1998. The defendants allegedly made misleading statements during that time period about, among other things, the clinical trials necessary to obtain new drug approval from the FDA for Dura's Albuterol Spiros delivery device for asthma medication. On February 24, 1998, Dura revealed that it expected lower-than-forecast 1998 revenues and 1998 earnings per share, but did not make any disclosures about its Albuterol Spiros delivery system. The February 24 announcement caused Dura's stock price to decline by 47%. It was not until November 1998, nearly nine months after the end of the class period, that Dura announced the FDA had "found the Albuterol Spiros device not approvable due to electro-mechanical reliability issues and chemistry, manufacturing, and control concerns." The district court found that the plaintiffs had failed to properly plead loss causation for his claims based on misleading statements concerning the Albuterol Spiros device because the complaint did "not contain any allegations that the FDA's non-approval [of the Albuterol Spiros device] had any relationship to the February price drop."
The 9th Circuit reversed. The court did not address the logical inconsistency of the plaintiffs' argument that statements revealed to be misleading in November caused them to suffer losses the previous February. Instead, the court found that it was unnecessary for the plaintiffs to plead "that a disclosure and subsequent drop in the market price of the stock have actually occurred, because the injury occurs at the time of the transaction."
The decision improperly conflates transaction causation and loss causation. Plaintiffs may have purchased on the basis of the alleged misrepresentations, but any loss requires the stock they purchased to decline in value. The practical problems created by the Broudo opinion are significant. As noted by Judge Pollack in the Merrill Lynch cases, "allowing plaintiffs in a fraud on the market case to satisfy loss causation simply by alleging that a misrepresentation caused the price to be artificially inflated without having to allege any link between the conduct and the decline in price would undoubtedly lead to speculative claims and procedural intractibility." Moreover, the PSLRA expressly states that plaintiffs have the burden of establishing that their losses were caused by the defendants' acts or omissions. How can plaintiffs' claims be plead with particularity if they do not connect the alleged fraudulent conduct to any loss?
Holding: Reversed and remanded with leave to amend.
The Financial Times has a story on the dispute between the lead plaintiffs in the Halliburton securities class action. As previously noted in The 10b-5 Daily, Halliburton Company announced at the end of May that it had agreed to a $6 million settlement.
In a remarkable development, however, Scott + Scott (which represents one of the four lead plaintiffs) has refused to sign onto the settlement and is attempting to have Schiffrin & Barroway removed as lead counsel in the case. Scott + Scott claims that Schiffrin "did not convene a single meeting of the lead plaintiffs, refused to give other firms evidence it had investigated the charges, and then settled the case for $6m, even though some have estimated the damages as high as $6.8bn." There is also some controversy over why Vice President Dick Cheney, the CEO of Halliburton during some of the class period, was not named as a defendant.
The court has scheduled a hearing for August 25.
The Eire Times News is running an interesting series of articles on the financial fraud at Rent-Way, Inc. (NYSE: RWY), one of the nation's largest rent-to-own retailers. The articles detail both the fraud, which was first revealed in Oct. 2000, and the legal consequences for the company and its officers. The first article in the series can be found here (links to subsequent installments are at the bottom of the page).
Looking for some fun beach reading this summer? Stay away from these articles! But if you want some interesting examinations of securities class action law, here are a few of the latest offerings.
1) The Santa Clara Law Review has an empirical study entitled "Securities Class Action Settlements" by Mukesh Bajaj, Sumon Mazumdar, and Atulya Sarin (43 Santa Clara L. Rev. 1001 (2003)). The authors studied 1203 federal case filings and 92 state court filings, spanning from 1988 to 1999, to draw conclusions about dismissal and settlement trends.
Quote of note: Among other conclusions, the authors found: (a) "The settlement process, as well as the rate of dismissals, has declined since the passage of the PSLRA;" (b) "Quick settlements generally involve relatively small settlement amounts;" (c) "Mean and median settlements have increased in the post-PSLRA period;" and (d) "Cases naming accounting firms as co-defendants, while relatively rare, involve average and median settlements that are greater than the sample as a whole." Many of these results are similar to those in the recent NERA study (discussed in The 10b-5 Daily here).
2) The ALI-ABA has published an article entitled "Central Bank is Alive and Well: Defense Strategies for Defeating 'Scheme To Defraud' Allegations in Private Securities Litigation" by Brian Pastuszenski, Christopher Robertson, and Jason Frank (SHO83 ALI-ABA 439 (May 8-9, 2003)). The authors focus on plaintiffs' recent attempts to use the holding in SEC v. Zandford, 535 U.S. 813 (2002), where the Supreme Court found a broker liable for engaging in a "scheme to defraud" under Rule 10b-5 when he misappropriated funds from a customer's account, to avoid the prohibition on "aiding and abetting" liability found in the Court's earlier holding in Central Bank. Recent district court decisions (notably in the Enron case) "have allowed claims to proceed against secondary actors who were not alleged to have made any actual misstatements relied on by plaintiffs, but instead were alleged only to have participated in certain transactions underlying the alleged misstatements."
Quote of note: "Successfully arguing a motion to dismiss based on Central Bank, however, requires articulating clearly the difference between (a) a 'misstatement' case in which plaintiffs complain about the purchase of stock at inflated prices as a result of allegedly false and misleading statements and (b) a case that alleges other forms of 'deception' that caused plaintiffs harm . . . In the typical class action case, only the defendant who actually made the offending statements themselves has any potential liability after Central Bank." (A discussion of another recent article on this general topic, with a different viewpoint, can be found in The 10b-5 Daily here.)
3) The same ALI-ABA "course of study" has an article on "Anonymous Informants: How Identifiable Must They Be Under The PSLRA" by Peter Saparoff and Justin Kudler (SH083 ALI-ABA 479 (May 8-9 2003)). The authors survey the recent case law on this contentious issue.
Quote of note: "The trend in the case law now has solidified around providing a description of the informant, but not necessarily his or her name, in a complaint alleging violations of the federal securities laws that was pleaded under the PSLRA."
FTD, Inc. (Nasdaq: FTDI) has sent itself a bunch of flowers with the announcement that it is settling the securities class action against the company for $10.7 million in stock. The case was related to the company's 2002 FTD.com merger.
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." With the passage of SLUSA, Congress attempted to strengthen the discovery stay by granting the power to federal court judges to quash discovery in state court actions if discovery in the state case conflicted with an order of the federal court.
In Newby v. Enron Corp., 2003 WL 21658666 (5th Cir. July 30, 2003), the underlying lawsuit was a state court action in Texas (Bullock), filed on behalf of thirteen individuals, against many of the same defendants as in the Enron federal securities class action litigation (Newby). The plaintiffs received permission from the state court to commence discovery, even though there was no dispute "that the discovery sought in Bullock would have fallen squarely within the discovery that may eventually take place in Newby if the plaintiffs survive a motion to dismiss." The defendants requested emergency injunctive relief from the U.S. District Judge presiding over the Newby case to stay discovery in the Bullock case. Pursuant to SLUSA, the discovery was enjoined until a ruling on the motion to dismiss in the Newby case. The Bullock plaintiffs appealed.
In Newby, the Fifth Circuit addressed whether the power granted to federal court judges to quash state court actions is only limited to state court actions brought on behalf of a class of investors. The plain language in SLUSA would appear to suggest otherwise, "a court may stay discovery in any private action in a State court . . . ." Appellants argued, however, that (1) the PSLRA and SLUSA were enacted to combat abuses in class action securities cases; and (2) other provisions of SLUSA refer specifically to state court class actions and control over the more general terminology in the operative provision.
Not surprisingly, the Fifth Circuit decided to stick with the plain language of the statute. "The title of [the SLUSA provision] reflects its purpose: to prevent the 'circumvention of stay of discovery' provided for in [the PSLRA]. The provision in [SLUSA] allows the federal court presiding over an action subject to the automatic stay of discovery to order a similar stay in a state court action. On its face [the SLUSA provision] applies to 'any private action in a State court.' The action stayed by the district court is plainly within the scope of this clause."
Holding: Stay of discovery affirmed (the panel also upheld additional injunctive relief granted by the district court).
Fortune magazine has a short, often funny, and very effective interview with former SEC commissioner Joseph Grundfest. Among other things, Grundfest has a two-word explanation for the recent spate of corporate scandals: Winona Ryder. (Thanks to the Securities Law Beacon for the link.)
Quote of note:
Interviewer: "You've argued historically the class-action system has compensated investors - but hasn't deterred future misbehavior. Why?"
Grundfest: "I'm not suggesting that it has no deterrent effect. It's just weak compared with the criminal and the SEC enforcement mechanisms. The reason is that only 0.5% of the settlements in the 15 largest settlements came out of the pockets of the wrongdoer."