Pediatrix Medical Group, Inc. (NYSE: PDX) announced yesterday that the plaintiffs have voluntarily dismissed, without prejudice, the securities class actions currently pending against the company in the S.D. of Fla.
Pediatrix is a Fort Lauderdale-based provider of maternal-fetal and newborn physician services. The suits were brought following Pediatrix's June 24 announcement that a U.S. attorney's office is conducting an investigation into the company's nationwide Medicaid billing practices. In 2002, Pediatrix settled an earlier securities class action, also based on allegedly fraudulent billing practices, for $12 million.
Judge Pollack of the S.D.N.Y. has dismissed, with prejudice, an additional eight class actions against Merrill Lynch alleging the brokerage committed securities fraud by publishing overly optimistic research reports. The companies discussed in the relevant reports include eToys Inc., Homestore.com, and Pets.com Inc. The decision follows the reasoning laid down in Judge Pollack's earlier ruling on two related cases a few months ago. The court focuses on the plaintiffs' inability to adequately plead loss causation because of the absence of an alleged connection between the analyst reports and the companies' financial troubles or the collapse of the overall market. As has become expected, Judge Pollack also manages to provide some colorful turns of phrase.
As of July, there were 27 similar consolidated class actions, each involving a different company's stock, pending in the S.D.N.Y. It appears likely that none will survive the motion to dismiss stage. The Associated Press has a story on the new decision and the Securities Litigation Watch has this post.
Quote of note: Loss causation - "The burst of the bubble and the attendant market chaos are not chargeable to the defendants and represent intervening causes for which defendants are not responsible in the sequence of responsible causation."
Quote of note II: Statute of limitations - On the issue of whether plaintiffs were on inquiry notice of their fraud claims, thus triggering the statute of limitations, the court concludes that "[t]he plethora of public information would have required even a blind, deaf, or indifferent investor to take notice of the purported alleged 'fraud.'"
Quote of note III: Scienter - "Often lost in the enormous muddle of securities litigation is this most basic of facts: not every knowing misrepresentation creates a legal cause of action under the securities laws. The requisite state of mind, or scienter, in an action under Section 10(b) and Rule 10b-5, that the plaintiff must allege is a purpose to harm by intentionally deceiving, manipulating or defrauding."
The Wall Street Journal has an article (subscription required) in today's edition on the record numbers of mutual-fund investors bringing arbitrations against their brokers. The article discusses the recent mutual fund trading scandal but concludes: "Individual investors aren't likely to bring arbitration claims related to the explosive allegations involving rapid-fire trading from New York Attorney General Eliot Spitzer. That's because the damage to any one investor is relatively small, and it's hard to blame your broker for fund-company practices. Instead, these allegations are more likely to provide fodder for class-action lawsuits." (The WSJ should catch up with current events, the class action suits are already here and more are being brought every day.) The article goes on, however, to describe some of the other mutual-fund practices being investigated by the regulators that may lead to even more individual, and perhaps class action, claims.
The Delaware Law Weekly has an article (via law.com - free regist. required) on the D. of Del.'s recent grant of class certification in the Tyson Foods. Inc. case. The plaintiffs, a group of hedge funds who were seeking to arbitrage a merger between Tyson and IBP, Inc., allege that on March 29, 2001, Tyson falsely stated that it was backing out of the merger with IBP due to a government investigation into accounting discrepancies at one of IBP's units. (The 10b-5 Daily has previously posted about the class certification decision.)
The article offers a thorough overview of the numerous cases that have been brought as a result of the IBP acquisition. Interestingly, the genesis of the securities class action appears to be some of the findings in the Delaware Chancery Court's order directing Tyson to perform on its contract and complete the merger.
Quote of note: "The parties ultimately argued their cases before Vice Chancellor Leo E. Strine Jr., who, on June 15, 2001, ordered specific performance of the merger agreement. Strine determined that Tyson tried to back out of the merger due to buyer's remorse and not the SEC's inquiries into IBP's subsidiary. In an opinion dated June 18, 2001, Strine said Tyson wished it had paid less for IBP, particularly in view of both companies' poor performances in 2001. Strine also called into question Tyson's claims that it had relied on misleading information about the SEC inquiries, and thereby was inappropriately induced into the merger. Less than 10 days after the Delaware Chancery Court ordered specific performance of the companies' agreement, Robinson's opinion states that the first of several class actions was filed in the matter in the Delaware District Court."
Class certification in the WorldCom securities class action has been granted for all purchasers of the company's stock from April 29, 1999 to June 25, 2002. In a 91-page ruling, District Judge Cote of the S.D.N.Y. rejected numerous arguments by the defendants against class certification, including an argument by Salomon Smith Barney ("SSB") and its telecommunications analyst, Jack Grubman, that a Rule 10b-5 claim "cannot apply to expressions of opinion by a research analyst since it is not probable or likely that such opinions would affect the market price for WorldCom securities."
The SSB defendants appear to have relied on Judge Pollack's decision in the Merrill Lynch research analyst cases in making their reliance/loss causation arguments. In that decision (referred to as the Merrill Lynch III opinion by Judge Cote), Judge Pollack found that because there was no alleged connection between the Merrill Lynch analyst reports and the companies' financial troubles or the collapse of the overall market, the plaintiffs failed to meet their pleading burden. (The 10b-5 Daily has previously discussed Judge Pollack's ruling at length.)
According to Judge Cote, however, the SSB defendants "neglect to mention that . . . the Merrill Lynch III opinion distinguishes between the analyst report allegations in the WorldCom Securities Litigation and the inadequate allegations in the Merrill Lynch III complaint." In particular, Judge Pollack had noted that the WorldCom plaintiffs "alleged that the analyst, among other things, was aware of and concealed the alleged accounting irregularities that directly led to the losses incurred by plaintiffs." Under these circumstances, Judge Cote evidently did not find the SSB defendants' reliance on the Merrill Lynch decision persuasive.
Quote of note: "Nothing in the defendants' briefs addressed why Grubman was paid approximately $20 million a year in compensation by SSB to be its telecommunications analyst if his analyst reports were irrelevant to the market."
Addition: According to a Reuters report, the lead plaintiff in the case, the New York State Common Retirement Fund, has asked the judge to set the case for trial in October 2004.
As The 10b-5 Daily has discussed in numerous posts over the past few months, the recent trend in securities fraud cases is for employees who lost retirement savings as a result of their investment in company stock to file an ERISA class action against the company that parallels the pending securities class action on behalf of all investors. In the ERISA class action, the employees allege the company and its officers violated their fiduciary duties under ERISA by making false statements that induced employees to invest in the stock at artificially inflated prices. One of the problems with these cases, commentators have noted, is that they allow plaintiffs to make an end run around the procedural safeguards of the PSLRA. Because they are brought under ERISA, rather than the federal securities laws, plaintiffs can obtain early discovery and seek to force a quick settlement.
The AOL Time Warner litigation may provide some comfort for defendants on this issue, especially if they are able to obtain consolidation of the pre-trial proceedings in the cases. The Judicial Panel on Multidistrict Litigation consolidated the AOL Time Warner ERISA and securities class actions last December, "in order to eliminate duplicative discovery, prevent inconsistent pretrial rulings (especially with respect to questions of class certification), and conserve the resources of the parties, their counsel and the judiciary." In re AOL Time Warner, Inc. Sec. Litig., 235 F. Supp. 2d 1380 (J.P.M.L. 2002). The consolidated action is being heard before Judge Kram in the S.D.N.Y.
The court has recently ruled on whether a discovery stay should be applied to the consolidated action, despite the fact that the PSLRA mandatory discovery stay does not apply to ERISA cases. In re AOL Time Warner, Inc. Sec. and "ERISA" Litig., 2003 WL 22227945 (Sept. 26, 2003 S.D.N.Y.). Judge Kram found that "the ERISA plaintiffs are seeking very broad discovery, a significant portion of which concerns issues common to the Securities Action." Not only was the burden on defendants high, but "if the Securities Action does survive the Motion to Dismiss, the entire discovery process will likely have to be repeated." The court rejected the ERISA plaintiffs' argument that they would suffer prejudice as a result of the stay, noting that there were no time-sensitive claims at issue, and found that the creation of a protective wall between the ERISA plaintiffs and the securities plaintiffs would be untenable. As a result, the court concluded that "a stay of all non-ERISA-specific discovery is efficient, non-prejudicial, and best comports with the purposes of the PSLRA."
Holding: Motion for limited stay of discovery granted.
Quote of note: "If plaintiffs in a securities case could, by tacking ERISA claims onto underlying Securities actions, obtain discovery to which they would otherwise not be entitled under the PSLRA, then the PSLRA's mandatory stay provision would, as a practical matter, never apply. Congress could not possibly have intended for the PSLRA to be so easily marginalized."
The American Lawyer looks at the future of securities class actions (from the plaintiffs' perspective) in its Fall 2003 special edition on litigation. [Unfortunately, the website currently does not have the article posted.] The article focuses on the lead plaintiff provisions of the Private Securities Litigation Reform Act of 1995 ("PSLRA") and discusses, in depth, the growing role of public pension funds in assuming the leadership of large suits. A number of issues are touched upon, including the effectiveness of the PSLRA, how plaintiffs' firms attract public pension fund clients, and the statistical trends in this area of the law. Simply put, it's a must-read article.
Quote of note: "Some thought that major mutual funds would consistently serve as lead plaintiff. The haven't. And some thought that the number of class actions would steadily decline. Wrong again. But eight years after [the PSLRA's] passage, the act is making good on its promise to involve institutions. Instead of professional institutional investors, however, its primarily public pension funds that are serving as lead plaintiffs in megaclass actions."
Quote of note II: "What will be the effect of the Sarbanes-Oxley Act of 2002 and the myriad regulatory corporate governance changes? Will they stifle corporate fraud or will the new causes of action spawn more suits? The early indicators don't suggest much change in any direction. A recent study by NERA Consulting shows little uptick since the blow-up of Enron and the passage of Sarbanes-Oxley. No increase. No decrease. Just a steady stream of suits."
Senate Democrats have successfully blocked a floor vote on the Class Action Fairness Act, which almost certainly would have been approved. Proponents of the bill only managed to muster 59 votes in favor of invoking cloture -- a one-vote loss. The Associated Press reports that the bill is likely dead for the year. (The 10b-5 Daily has been following the progress of the Class Action Fairness Act through Congress - see posts here, here, and here.)
Addition: Here is the roll call vote.
The October 2003 edition of ISS's Securities Class Actions Services Alert, contains a useful summary of the recent settlements containing corporate governance reforms. The 10b-5 Daily has previously posted about this developing trend.
As discussed previously in The 10b-5 Daily, the Class Action Fairness Act applies some of the reform concepts from securities law (the PSLRA and SLUSA) to all class actions. Notably, class actions meeting certain jurisdictional criteria would have to be heard in federal court.
Quote of note: "But most of the 48 Senate Democrats oppose the legislation to place all national class action lawsuits into the federal system, enough to filibuster if necessary, Democratic leaders say."
Quote of note II: "Under both the House and Senate versions of the bill, class-action lawsuits in which the primary defendant and more than one-third of the plaintiffs are from the same state would still be heard in state court. But if less than one-third of the plaintiffs are from the same state as the primary defendant, the case would go to federal court. Also, at least $5 million would have to be at stake for a class-action lawsuit to be heard in federal court. The House version would apply to all lawsuits, including ones being argued in court now, but the Senate version is not retroactive. It also would apply only to class action lawsuits and not to similar actions, including lawsuits consolidated into one case or state attorney general actions."
The U.S. News & World Report has an article in its Oct. 27 edition stating that investors have yet to see much of a return from the various Wall Street suits and settlements. The article discusses the research analyst cases (Judge Pollack is dismissing them), the WorldCom and Enron cases (hard to collect), and the IPO allocation cases (a guaranteed payment of $1 billion, but it may take a while to resolve the claims against the investment banks). The author also notes the potential connection between Judge Schendlin's recent attorneys' fees decision and the IPO allocation cases (perhaps he reads The 10b-5 Daily -- see this post from a few weeks ago).
Quote of note: "In June, insurers for the 309 companies [named in the IPO allocation cases] agreed to pay up to $1 billion to compensate investors--establishing a minimum recovery fund--depending on how much money Weiss wrestles from the investment banks. 'It's in the banks' interest to drag it out, to raise the cost to the other side,' says one executive in the case. Still, he and others predict Weiss could ultimately settle with the Wall Street firms for $3 billion to $5 billion--partly because the iconoclastic Pollack isn't handling the case."
The Rocky Mountain News has an article on Qwest Communications Int., Inc. (NYSE: Q) and the completion of its $2.5 billion financial restatement. The 10b-5 Daily has been following the securities class action filed against Qwest in the D. of Colo. with interest. As part of yesterday's Form 10-K filing, the company disclosed that "lead counsel for the plaintiffs has indicated that plaintiffs will seek damages in the billions of dollars." Qwest has moved to dismiss the fourth amended complaint in the case and that motion is currently pending before the court.
Enterasys Networks, Inc. (NYSE: ETS), a Massachusetts-based business network service provider, has announced a settlement in the securities class action against the company pending in the D. of N.H. The proposed settlement is for $50.4 million ($17.4 million in cash and $33 million in shares) and is subject to approval by the court. The settlement also covers related derivative actions against the company that have been brought in New Hampshire and Delaware state court.
Enterasys has been the subject of two securities class actions in the past five years. The current settlement is for the case brought in 2002, following a financial restatement, alleging that the company improperly recognized revenue in violation of GAAP. An earlier securities class action against the company filed in the D. of N.H. in 1998 was dismissed with prejudice by the district court, but the decision was reversed by the U.S. Court of Appeals for the First Circuit in this opinion. According to Enterasys' most recent quarterly SEC filing, the 1998 case is still pending.
A column in today's National Post discusses the potentially enormous costs of the mutual fund trading scandal, including the expense of defending against "the inevitable wave of class-action lawsuits." The author notes that Bank of America, which is one of the known targets of the New York Attorney General's investigation, has announced the creation of a $100 million fund for direct costs and the increase of its litigation reserves by $75 million.
THQ, Inc. (Nasdaq: THQI) has announced the settlement of its arbitration dispute with National Union, the company's directors' and officers' insurance carrier, over the coverage due for the settlement of a class action lawsuit filed against THQ in February 2000. According to the press release, "National Union had previously contributed $5.0 million to the class action settlement, but had disputed its obligation to pay the balance of $5.0 million under THQ's total of $10.0 million in directors' and officers' insurance coverage." As part of the settlement, THQ will receive a $4 million payment and "additional considerations" from National Union.
Paradyne Networks, Inc. (Nasdaq: PDYN), a Florida-based provider of high-speed network access solutions for broadband voice, data and video, has announced the settlement of the securities class action pending against the company in the M.D. of Fla. The proposed settlement is for $3 million, to be funded by Paradyne's insurance, and is subject to approval by the court.
The plaintiffs have alleged that Paradyne and certain of its officers and directors fraudulently inflated the price of the company's stock from September 1999 to September 2000 by making false and misleading representations about the company's practice of managing and reporting its inventory. The court denied the defendants' motion to dismiss in April 2002.
Rule 15(a) of the Federal Rules of Civil Procedure provides that leave to amend a complaint "should be freely given when justice so requires." The PSLRA, on the other hand, states "[i]n any private action arising under this chapter, the court shall, on the motion of any defendant, dismiss the complaint if the [pleading] requirements . . . are not met." It is a tension-packed clash leading to the inevitable question: how many bites at the apple are too many in a securities class action?
The U.S. Court of Appeals for the Sixth Circuit does not give an exact answer in Miller v. Champion Enterprises, Inc., 2003 WL 22298649 (6th Cir. Oct. 8, 2003), but it does conclude that repeated amendments should not be permitted. In Miller, the plaintiffs moved for leave to file a second amended complaint (the fourth complaint in the action) after their first amended complaint was dismissed for failure to meet the PSLRA's pleading requirements. The district court denied the motion for two reasons: (1) the PSLRA was designed to prevent strike suits and "could not achieve this purpose if plaintiffs were allowed to amend and amend until they got it right;" and (2) the proposed amended complaint was futile because it did not correct the earlier pleading deficiencies.
In affirming the decision, the Sixth Circuit states that the "district court also correctly held that allowing repeated filing of amended complaints would frustrate the purpose of the PSLRA." The appellate court expressly rejects the argument that courts should be lenient in allowing amendments to pleadings in securities fraud cases because plaintiffs do not have discovery available to them.
Holding: Dismissal affirmed.
Quote of note: "In light of [the PSLRA's heightened pleading] requirements, we think it is correct to interpret the PSLRA as restricting the ability of plaintiffs to amend their complaint, and thus as limiting the scope of Rule 15(a) of the Federal Rules of Civil Procedure."
An interesting twist on the normal securities class action. The Associated Press reports that Judge Robinson of the D. of Del. has granted class action status to a suit against Tyson Foods, Inc. (NYSE: TSN) alleging securities fraud in connection with Tyson's 2001 acquisition of beef-packing giant IBP Inc.
The plaintiffs, a group of hedge funds who were seeking to arbitrage the merger, allege that on March 29, 2001, Tyson falsely stated that it was backing out of the merger with IBP due to a government investigation into accounting discrepancies at one of IBP's units. As a result, Tyson artificially deflated the price of IBP's stock. Tyson eventually completed the acquisition in September 2001. The plaintiffs seek to represent all IBP shareholders who bought on or before March 29, 2001, and then sold their shares following Tyson's announcement.
Quote of note: "In her 20-page opinion, Robinson said Tyson had contended the lead plaintiffs' sophistication 'cuts against a finding that a class action is a superior forum' for resolving such claims. But she said that argument conflicts with Congress' intent. 'Federal securities laws do not protect investors any differently, and certainly no less, simply because they engage in more complicated investment strategies,' she wrote."
Although The 10b-5 Daily has not been following all of the twists and turns of the Martha Stewart case, it has perked up when the topic is the securities class action against Martha Stewart Living Omnimedia Inc. and certain individual defendants in the S.D.N.Y. (see this post on the court's decision to deny the motion to dismiss).
The New York Law Journal has an interesting article (via law.com - free registration required) on the U.S. Attorney's attempt to block discovery in the case because "allowing the prompt depositions of 15 people in the civil securities fraud cases would give Stewart's criminal defense lawyers an unfair preview of the obstruction of justice case, set to go to trial in January." Judge Sprizzo rejected this request, citing the apparent weakness of the government's case and the fact that the government had already, in his view, previewed its arguments in the press.
Quote of note: "A stay had already been granted for Stewart in the civil case, Seymour [head of the Criminal Division of the Southern District U.S. Attorney's Office] said, and she was merely requesting a 'limited' stay on the depositions of about four and a half months. Sprizzo, who served five years as an Assistant U.S. Attorney in the Southern District in the 1960s, said he had 'seen a lot more serious obstruction cases.' 'This is not the strongest obstruction case I have ever seen,' he said. 'Just going by your own U.S. attorney's comments on it. This is not John Gotti.'"
The St. Louis Post-Dispatch ran a feature article in Saturday's edition that was sharply critical of securities class actions. Among other things, the author discusses the low rates of recovery for investors.
Quote of note: "Many institutional investors get involved in lawsuits as a last resort, but, some say, the suits are not by any means a panacea for wronged shareholders. 'If we are a long-term holder of a security, our real interest is in having the company turn around,' said Gary Findlay, executive director of the Missouri State Employees' Retirement System. 'If we sue the company, aren't we suing ourselves? They spend our money to defend themselves against us and buy insurance. ... Whatever comes out of that, comes out of my pocket.'"
Reuters reports that Judge Farnan of the D. of Del. has granted preliminary approval for the proposed $300 million settlement of 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 originally posted about the settlement in August.)
Securities Litigation Watch has a post on a decision by Judge Scheindlin of the S.D.N.Y. to reduce the proposed attorneys' fees in the Independent Energy Holdings case from 25% to 20% of the recovery. The court evidently "suggested that the contingency risk asserted by plaintiffs' counsel as part of the justification for fees is 'often inflated.'"
It is difficult to figure out the best methodology for measuring contingency risk. Judge Scheindlin appears to have cited overall settlement rates for securities class actions, but that statistic does not provide much information about the contingency risk faced by a plaintiffs' firm in the particular case before the court. (Securities Litigation Watch also notes that the overall settlement rates used in the decision appear to be out-of-date.)
In any event, Judge Scheindlin's willingness to reduce the requested attorneys' fees in a securities class action settlement may be a source of concern for the plaintiffs' bar. The judge presides over the IPO allocation cases, where the investors are already guaranteed a recovery of at least $1 billion. (See this post in The 10b-5 Daily.)
When a court grants a motion to dismiss a securitites class action based on the failure to meet the heightened pleading standards of the PSLRA, the plaintiffs often seek to file an amended complaint addressing the identified deficiences. At least one court has found, however, that plaintiffs cannot take a wait-and-see-what-happens approach if they are aware of additional facts.
In In re Stone & Webster, Inc. Sec. Litig., 217 F.R.D. 96 (D. Mass. 2003), the court addressed whether to grant a motion for leave to file a second consolidated and amended complaint after dismissing most of the claims in the case because they were not plead with the required specificity. The plaintiffs premised their motion "on the theory that the facts that would allegedly remedy the pleading defects identified in the [court's] order were 'newly discovered,' [but] conceded at the scheduling conference that much of this information was in fact available to them during the pendency of the motions to dismiss." The court found that the plaintiffs' failure to provide these additional facts while the court considered the motion to dismiss was "precisely the sort of 'undue delay' that should result in a denial of leave to amend."
Holding: Motion for leave to amend denied.
Quote of note: "The fact that the plaintiffs chose to oppose the motions to dismiss on the grounds that their complaint was, in their view, sufficiently pleaded, rather than providing the additional information known to them during the necessarily lengthy period during which the motions to dismiss were being considered, smacks of gamesmanship bordering on bad faith."
The Associated Press reports that Judge Melinda Harmon of the S.D. of Tex. has denied the motions to dismiss by Enron and Kenneth Lay in the ERISA class action brought by participants in the company's retirement plan. In its 329-page order, however, the court did dismiss some of the other defendants (banks and Merrill Lynch).
There have been a wave of class actions alleging that companies and their officers violated their fiduciary duties under ERISA by making false statements that induced employees to invest in company stock at artificially inflated prices. (See this post in The 10b-5 Daily discussing how these suits parallel securities class actions.) The Enron suit is complicated by allegations that Enron executives sold off company stock while workers were locked out of their 401(k) accounts and the company's stock price plummeted.