In Roberts v. Dean Witter Reynolds Inc., 2003 WL 1936116 (M.D. Fla. March 31, 2003), the court found that the legislative history of the Sarbanes-Oxley Act of 2002, which extended the statute of limitations for federal securities fraud claims to the earlier of two years after the discovery of the facts constituting the violation or five years after such violation, revealed Congress's intent to revive claims that had already expired as of the date of the legislation's enactment (July 30, 2002). The court, however, primarily relied on floor statements made by a single senator and a few sentences in a congressional analysis of the legislation in reaching this conclusion. It also certified an interlocutory appeal.
The Fulton County Daily Report has coverage of the oral argument in Roberts before the U.S. Court of Appeals for the 11th Circuit. The panel apparently expressed skepticism about the lower court decision, including Chief Judge Edmonson's comment that to establish Congress meant to revive time-barred claims: "You're going to have to show me something with neon light and underlined by Congress." The 11th Circuit will be the first federal court of appeals to rule on this issue.
Quote of note: "[Visiting 9th Circuit Senior Judge] Farris later chimed in that Congress knows how to use the word 'revive,' suggesting that if Congress had wanted Sarbanes-Oxley to be able to revive previously expired claims, it could have done so. 'They didn't,' Farris added."
The 10b-5 Daily has previously posted about the recent district court decisions (including Roberts) addressing the retroactivity of the new statute of limitations.
The Boca Raton News offers a roundup of Milberg Weiss' securities class actions, especially those filed in Florida, in this Sunday feature article.
DPL, Inc. (NYSE: DPL), the parent company of Dayton Power and Light Co., and their former accountants, PricewaterhouseCooopers, have obtained preliminary court approval for the settlement of the securities class action pending against them in the S.D. of Ohio (as well as related state court derivative actions). The class action was originally filed in July 2002.
The settlement is for $145.5 million. The announced source of funds is as follows: 1) $70 million from DPL; 2) $70 million from DPL's liability insurers; and 3) $5.5 million from PWC. According to an Associated Press article, plaintiffs' counsel may receive up to $50.9 million in fees. Final arguments on the settlement will be heard December 22.
The New York Law Journal has an article (via law.com - free registration req.) on Judge Cote's opinion & order in the WorldCom solicitation dispute. (The 10b-5 Daily has previously posted about the court's decision and the underlying dispute.)
Aon Corp. (NYSE: AOC), a Chicago-based insurance holding company, has announced a preliminary settlement of the securities class action pending against the company in the N.D. of Ill. (a separate derivative action filed in state court is also included in the settlement). According to a report in the Chicago Tribune, the case was "filed after Aon announced disappointing earnings in the second quarter of 2002" and alleges that Aon had "released inaccurate information about the corporation's performance" prior to that announcement.
The settlement, which is subject to court approval, is for $7.25 million. Aon is also required to enact certain corporate governance reforms.
Quote of note: "Aon paid a relatively small amount to settle the cases and make them go away, said D. Cameron Findlay, Aon executive vice president and general counsel. 'While we thought these lawsuits were absolutely meritless, we settled for a nominal amount that reflects the nuisance value,' he said."
As previously reported in The 10b-5 Daily, Milberg Weiss and Bernstein Litowitz are in the midst of a dispute over the recruitment of individual bondholders to bring securities fraud claims against WorldCom and related parties. Bernstein Litowitz, who represents the lead plaintiff in the main investor action against WorldCom, has complained in a series of submissions to the court that Milberg Weiss provided "misleading solicitations'' to WorldCom bondholders suggesting that they would not obtain a fair share of any settlement obtained in the main investor action and should bring their own individual actions.
Yesterday, District Judge Cote issued an opinion & order concerning this matter. The court found that Milberg Weiss has engaged in an "active campaign" to encourage pension funds to file individual actions and is running the individual actions as "a de facto class action." Moreover, the firm's communications have resulted in "some confusion and misunderstanding of the options available to putative class members."
The court ordered that a separate notice (in addition to the normal class certification notice) be sent to each plaintiff who has filed an individual action, with the initial draft to be written by Bernstein Litowitz. The requests for relief made by Bernstein Litowitz in its November 4 submission to the court were denied, but leave was granted for the firm to bring a formal motion on the subject.
Class certification has been granted in the Interpublic Group ("IPG") securities class action pending in the S.D.N.Y. The case is the result of a restatement IPG announced in August 2002 for the five years from 1997 to 2001, which corrected inter-company charges that had been wrongly declared as income for the European offices of one of IPG's agencies. The only dispute on class certification was the length of the class period, which the court resolved in favor of the plaintiffs (the court's order can be found here).
The 10b-5 Daily has previously discussed (in a post entitled "The Perfect Storm"), the court's May 2003 denial of the motion to dismiss in this case.
Symbol Technologies (NYSE: SBL) has announced that its wholly-owned subsidiary, Telxon Corp., has entered into a preliminary settlement of the securities class action pending against the company in the N.D. of Ohio. The case was originally filed in 1998, prior to Symbol's acquisition of Telxon, and alleges that the company and certain former officers engaged in improper revenue recognition practices and hid adverse business and financial conditions. Telxon's motion to dismiss was denied in September 2000.
The settlement, which is subject to court approval, is for $37 million. Telxon's insurers are expected to pay $12 million of this sum. The company has brought a separate, but related, suit against its former auditors and has "agreed to pay to the class, under certain circumstances, up to $3 million of the proceeds of that lawsuit."
The Sarbanes-Oxley Act of 2002 extends the statute of limitations for federal securities fraud to the earlier of two years after the discovery of the facts constituting the violation or five years after such violation. Although the legislation clearly provides that it "shall apply to all proceedings addressed by this section that are commenced on or after the date of enactment of this Act [July 30, 2002]," left unresolved is whether Congress intended to revive claims that had already expired under the earlier one year/three years statute of limitations.
Courts are beginning to address this issue, with mixed results. In Roberts v. Dean Witter Reynolds Inc., 2003 WL 1936116 (M.D. Fla. March 31, 2003), the district court found that Sarbanes-Oxley revived already time-barred claims because the legislative history demonstrates that Congress intended to achieve that result. The court, however, primarily relied on floor statements made by a single senator and a few sentences in a congressional analysis of the legislation in reaching this conclusion. Perhaps as a result, it certified an interlocutory appeal on the question that is currently pending before the U.S. Court of Appeals for the 11th Circuit.
In the meantime, two other district courts have issued contrary opinions. In Glaser v. Enzo Biochem, Inc., 2003 WL 21960613 (E.D. Va. July 16, 2003), the court concluded that "Congress did not unambiguously provide that the [new] limitations period would apply retroactively." Last week, in In re Enterprise Mortgage Acceptance Co., LLC Sec. Litig. , 03 Civ. 3752 (S.D.N.Y. Nov. 5, 2003), the court held: (a) "there is no clear language in the statute stating that it applies retroactively or that it operates to revive time-barred claims;" (b) the statute expressly disavows that it is creating any new rights of action; and (c) the legislative history examined by the Roberts court does not support a finding that Congress intended to revive time-barred claims.
Addition: The opinion is now available on Westlaw - In re Enterprise Mortgage Acceptance Co., LLC Sec. Litig., 2003 WL 22955925 (S.D.N.Y. Nov. 5, 2003).
The summer of loss causation cases has turned into the fall of loss causation articles examining those decisions.
A column in the October 24, 2003 edition of the New York Law Journal focuses on the decisions in Broudo (9th Cir.) and Merrill Lynch (S.D.N.Y.), The authors conclude that the "fraud on the market theory should not be expanded to enable plaintiffs to establish both transaction and loss causation." (For The 10b-5 Daily's take on Broudo and Merrill Lynch - see here and here.)
Quote of note: '[I]f the fraud on the market theory can serve double duty in this way, then the distinction between these two forms of causation will have collapsed. This is inappropriate. The PSLRA expressly codifies loss causation as a separate, free-standing element of a Section 10(b) claim."
Not to be outdone, the November 6, 2003 edition of the New Jersey Law Journal has its own article (via law.com - free registration req.) on loss causation. The article discusses the recent Emergent Capital (2d Cir.) decision and finds that the Second Circuit "has now plainly ruled that purchase-time price inflation is not enough and the plaintiff must in all cases plead a causal link between the complained-of omissions and the economic loss that was ultimately suffered." (For The 10b-5 Daily's take on Emergent Capital - see here.)
Quote of note: "In many cases, it may be that the same omission or misrepresentation that allegedly caused price inflation at the time of the transaction in fact also caused a subsequent decline in the securities' market value when the misrepresentation becomes apparent or the undisclosed problem wreaks injury. But the lesson of Emergent Capital (and Semerenko in the 3rd Circuit) is that such a causal link cannot be presumed; it must be pleaded and proved."
The San Franciso Chronicle has a fascinating article on the Terayon Communication Systems, Inc. (Nasdaq: TERN) securities class action pending in the N.D. of Cal. Terayon is a Santa Clara-based maker of cable modem equipment. The case, originally filed in April 2000, is based on allegedly misleading statements made by the company in connection with its ability to obtain certification for its technology.
The lead plaintiff (or one of them) in the case is Cardinal Investment Co. According to the article, court records reveal that Cardinal was a massive short seller of Terayon stock (hundreds of thousands of shares) and in early 2000 began a campaign to flood the market with negative information about the company. The campaign included phone calls to the certification entity, starting Internet chat room rumours, letters to the SEC, and contacts with financial reporters. At the same time, Cardinal apparently hedged its short position by purchasing 6000 shares of Terayon stock.
On April 11, 2000, the same day as a Terayon earnings conference call during which the company's executives were sharply criticized by short sellers using phony names, an investor plaintiff signed a sworn statement authorizing the filing of a complaint that "repeated almost verbatim the accusations contained in Cardinal's letters to the SEC." It was not until the next day, however, that the price of Terayon's stock dropped significantly. The highly detailed complaint was filed on April 13. Cardinal also brought a suit and later successfully moved to act as a lead plaintiff in the case based on the losses in its hedge position.
The motion to dismiss in the case was denied by District Judge Patel in early 2002. Discovery, however, has apparently revealed Cardinal's role in the company's downfall. Terayon has asked Judge Patel to remove Cardinal as a lead plaintiff.
Quote of note: "On Sept. 8, during a hearing on Terayon's request, Patel sounded receptive to the company's arguments, noting that Cardinal's partners 'were doing just about everything they could to make sure the (stock) price went down.' But her sharpest comments concerned the puzzling events that led to Cardinal's lawsuit. 'I think it's utterly amazing,' she told the opposing attorneys, 'that we have this lengthy complaint, and with all of these excruciating details, and the stock just drops the day before.' It 'raises some very serious questions.'"
The court has approved the proposed $7 million settlement in the securities class action against Corel Corp., the Candian company that manufactures WordPerfect.
As posted in The 10b-5 Daily last August, plaintiffs offered a number of justifications to the court for the relatively low settlement amount (about 15% of the alleged damages), including Corel's poor financial position and the defendants' threat to seek refuge in Canadian bankruptcy court in the event of a judgment against them. Judge Brody of the E.D. of Pa. appears to have accepted these arguments. (See this article in The Legal Intelligencer (available via law.com - free registration req.)).
Quote of note: "'Throughout this litigation, defendants have maintained that if judgment is entered against them, they will seek the protection of the Canadian bankruptcy court. If this were to occur, there would be a significant question regarding whether or not Corel's insurance policies would still be available to fund a judgment for plaintiffs,' Brody wrote."
Addition: Judge Brody's opinion approving the settlement can be found here. (Thanks to Adam Savett for the link.)
The SEC has created an affirmative defense to allegations that a person engaged in insider trading while in possession of material nonpublic information. Rule 10b5-1, put into place in 2000, establishes that a person's purchase or sale of securities is not "on the basis of" material nonpublic information if, before becoming aware of the information, the person enters into a binding contract, instruction, or trading plan (as defined in the rule) covering the securities transaction at issue. To take advantage of this potential affirmative defense, many executives have been implementing trading plans for their sales of company stock.
Insider trading, of course, is often used by plaintiffs in securities class actions to create an inference of scienter (i.e., fraudulent intent). The plaintiffs allege that the individual corporate defendants profited from the alleged fraud by selling their company stock at an artificially inflated price. Since the implementation of Rule 10b5-1, however, it has been an open question whether this inference can be refuted by the fact that the trading was done pursuant to a previously established trading plan. A partial answer may be found in the decision in Wietschner v. Monterey Pasta Co., No. C 03-0632 (N.D. Cal. Nov. 4, 2003) (will add Westlaw cite and link when available).
In Wietschner, the court held that the individual defendants' stock sales were not sufficiently unusual or suspicious to raise a strong inference of scienter. In addition to evaluating the size and timing of the transactions, the court noted: "Plaintiffs state that both Defendants sold shares under individual SEC Rule 10b5-1 trading plans, which allows corporate insiders to set a schedule by which to sell shares over a twelve to fifteen month period. This could raise an inference that the sales were pre-scheduled and not suspicious."
Holding: Motion to dismiss granted.
Addition: The opinion is now available on Westlaw - Weitschner v. Monterey Pasta Company, 2003 WL 22889372 (N.D. Cal. Nov. 4, 2003).
Those who believe that courts, in the post-Enron environment, should be more willing to temper the heightened pleading requirements of the PSLRA will be encouraged by a recent decision from the N.D. of Ill.
In In re Sears, Roebuck and Co. Sec. Litig., 2003 WL 22454021 (Oct. 24, 2003 N.D. Ill.) (thanks to Adam Savett for the link), the court addressed allegations that the defendants made misstatements "about the risk level of balances in accounts in Sears' credit card portfolio, the delinquencies in those accounts, and the amount of 'charge-offs' of unpaid accounts." The plaintiffs argued that they had established a strong inference of scienter (i.e., fraudulent intent) because the individual defendants were executive officers of Sears and therefore must have known the information that made the alleged misstatements false and misleading. The court agreed, holding: "Officers of a company can be assumed to know of facts 'critical to a business's core operations or to an important transaction that would affect a company's performance.'"
It is difficult to reconcile this decision with the PSLRA. The PSLRA requires plaintiffs to "state with particularity facts giving rise to a strong inference that the defendant acted with the required stated of mind." The mere pleading of a defendant's official corporate title and responsibilities would not appear to be sufficient.
Moreover, the case cited (and quoted!) by the court in support of this proposition, Stavros v. Exelon Corp., 266 F. Supp. 2d 833 (N.D. Ill. 2003) says no such thing. Stavros is a case based on allegedly false financial projections and merely notes, after a discussion of the need to plead scienter with particularity, that a "plaintiff might also plead that key officers knew of facts critical to a business's core operations or to an important transaction that would affect a company's performance." There is no suggestion that this knowledge can be assumed based on the officers' positions with the company. There are cases finding that this assumption is enough to establish a strong inference of scienter (although a significant majority of post-PSLRA cases appear to go the other way - see, e.g., In re Advanta Corp. Sec. Litig., 180 F. 3d 525, 539 (3rd. Cir. 1999)), but Stavros just does not happen to be one of them.
Holding: Motion to dismiss denied.
Quote of note: "Plaintiffs specifically allege that the positions held by each of the individual defendants during the class period gave them knowledge of the specific information in question. . . Logically, defendants in their positions would be expected to have knowledge of the facts regarding the credit card portfolio at the time they were making statements about the portfolio or signing off on SEC filings."
The number of foreign companies listed on U.S. stock exchanges has grown over the past few years. In 2002, there were over 1300 foreign registrants. With access to the U.S. capital markets, however, also comes the possibility of securities litigation brought by U.S. investors.
According to a study by PricewaterhouseCoopers, filings against foreign companies have been on the rise. In 2002, 22 foreign companies were names in securities class actions. This total is an increase of 47% over the 15 cases filed in 2001 and 29% higher than the previous record of 17 cases filed in 1998.
In a press release issued yesterday, PWC announced some additional findings, including:
1) Thus far in 2003, 13 foreign companies have been sued in securities class actions.
2) The average post-PSLRA settlement in cases against foreign companies is nearly $23 million.
3) More than 77% of the cases against foreign companies contained accounting allegations in 2002, and more than half of the 2003 cases contain accounting allegations.
Although the entire archives of The 10b-5 Daily can be found on this site, a reader has noted that some of the internal links in old posts were directed to the archives at www.the10b-5daily.blogspot.com (which return the reader back to this site after a short delay). These internal links have been adjusted to direct readers to the local archives.
The Associated Press reports that District Judge Pauley of the S.D.N.Y. has dismissed two class actions alleging price-fixing in connection with high-tech initial public offerings. The anti-trust cases, brought in 2001 against ten investment banks, addressed the same claims of stock price manipulation and commission kickbacks as in the related IPO allocation cases. The article states "Pauley ruled Monday that the charges made by investors in the suits are immune from antitrust law and fall to federal securities regulators to decide."
Addition: Judge Pauley's decision can be found here.
Two prominent plaintiffs' firms, Milberg Weiss and Bernstein Litowitz, are in the midst of a dispute over the recruitment of individual bondholders to bring securities fraud claims against WorldCom and related parties. Bernstein Litowitz represents the lead plaintiff in the main investor action against WorldCom, which has been brought on behalf of both common shareholders and bondholders in the S.D.N.Y.
In an October 29 letter to the court, Bernstein Litowitz complains that Milberg Weiss provided "misleading solicitations'' to WorldCom bondholders suggesting that they would not obtain a fair share of any settlement obtained in the main investor action and should bring their own individual actions. According to a Reuters article, Milberg Weiss "strongly denied the accusations, which will be aired at a hearing [today] in New York before U.S. District Judge Denise Cote." (As posted in The 10b-5 Daily, class certification was recently granted in the WorldCom case.)