The securities class action against Gaming Lottery Corp., pending in the S.D.N.Y. since 1996, has been preliminarily settled for $1 million (or about 7 cents per damaged share before the deduction of litigation expenses). Plaintiffs allege that the company engaged in misrepresentations concerning its acquisition and operation of Special Manufacturing Inc. In the spirit of the holiday season, the notice of proposed settlement states that plaintiffs' counsel have declined to apply for any attorneys' fees.
Quote of note: "Plaintiffs' Counsel are NOT applying for any attorneys' fees. Plaintiffs' Counsel do intend to request the Court to approve a payment to Plaintiffs' Counsel of $90,000 for reimbursement of expenses incurred in connection with the prosecution of this Action, which is less than 23% of the over $400,000 of expenses actually incurred."
After two years of debate, the South Korean legislature has finally passed a bill establishing a private securities class action system. The Korea Times reports, however, that the bill contains phase-in and standing requirements that may limit its effectiveness. (The 10b-5 Daily has posted frequently about the debate over this legislation, most recently here.)
Initially (commencing in Jan. 2005), suits will be limited to companies with assets of more than 2 trillion won ($1.67 billion). Only about 80 of the 1500 publicly-traded South Korean companies meet this benchmark. Smaller companies can be sued starting in July 2007. Also, a suit will only be permissible if more than 50 shareholders, owning at least 0.01% of the outstanding shares of the company, agree to bring the case.
Quote of note: "Civic organizations described the revised bill as a 'toothless tiger,' pointing out it completely blocks the possibility for suits against big business conglomerates. For example, they said, shareholders might need to amass stocks worth more than 7 billion won to meet the 0.01 percent requirement in a file against Samsung Electronics."
Two weeks ago, the D. of N.J. approved the settlement of the Lucent Technologies, Inc. securities litigation for over $600 million, the third-largest securities settlement ever. The settlement calls for claimants to receive $315 million in stock; $24 million in the stock of Lucent spin-off Avaya Inc.; $148 million in cash from the Lucent's directors-and-officers insurance; and 200 million warrants. Now comes the battle over attorneys fees.
Co-lead counsel for the main securities class action on behalf of Lucent's common shareholders (there are four other cases on behalf of other classes of investors that are also being settled) are asking for 17% of the $517 million those investors will be awarded: about $88 million. They also seek $3.5 million in expenses for the case, which was litigated for almost four years.
The New Jersey Law Journal has a lengthy article (via law.com - free regist. req'd) exploring the arguments for and against this fee award. The objectors suggest that the fees are excessive compared with the payout to investors, which amounts to no more than 15 cents a share. Plaintiffs' counsel, however, notes that the warrants may make the value of the settlement increase dramatically if Lucent's stock price rises (thereby lowering the percentage of the recovery going to attorneys fees). To bolster their fee request, plaintiffs' counsel retained Columbia Law School Professor John Coffee to submit a supporting certification to the court.
Quote of note: "Typical was T. Tucker Hobgood, who bought 100 shares at $74 a week before it dove to the mid-50s, at which point he bought another 50 shares. All told, Lucent dropped from almost $80 in 1999 to 55 cents by the fall of 2002 after disclosures of inflated revenue reports and accounting shenanigans. 'I'll get $15, with the plaintiffs' lawyers making about $4.50 off me and getting reimbursed another $1.50. Not to unduly hammer only one side of the equation. The company I still own part of paid untold sums to its lawyers to grind the plaintiffs under their feet,' Hobgood wrote to [District Judge] Pisano. 'I lost virtually my entire investment of $10,000. There is nothing fair about this process or this settlement to me. It is a complete waste of time to recover less than one-fifth of one percent of a loss,' he continued."
Quote of note: "[Professor Coffee] listed the 22 largest fee awards for class actions, which showed that 17 were above the 17 percent being sought in the Lucent case, with only five falling below that figure. However, most of those cases that garnered more than 17 percent were significantly smaller than the Lucent payout. Five of the class actions produced fees amounting to 30 percent, but those settlements ranged from $104 million to $185 million. The closest settlement in size to Lucent's, the $687 million in the Washington Public Power Supply Systems case in 1990, resulted in a fee award of just 7.3 percent. Moreover, the $457 million settlement in this year's Waste Management Inc. class action generated a fee amounting to only 7.9 percent. Another so-called megafund class action, brought against Bankamerica Corp., led to a $490 million settlement along with a fee of 18 percent for lead counsel."
The future is now for Milberg Weiss, which has been in the process of splitting into two separate firms for the past six months. (For the latest on the split, see this recent post.) Milberg's New York and San Diego offices are about to face off over lead plaintiff/lead counsel status in the securities class actions filed against the NYSE specialist trading firms.
As reported in The Recorder (via law.com - free regist. req'd), in October Milberg's New York office filed suit on behalf of Generic Trading of Philadelphia against the specialist trading firms, while last Tuesday Milberg's San Diego office filed suit on behalf of CalPERS against the same firms and added the NYSE as a defendant. (The 10b-5 Daily has posted about the CalPERS suit.) A spokesman for CalPERS stated that the timing of the state's suit was intended to meet the 60-day deadline for moving for lead plaintiff status triggered by the original suit. Both Generic Trading and CalPERS have filed motions to be appointed lead plaintiff -- putting the two Milberg offices into an adversarial position even before the split is official.
Quote of note: "There are signs that the divorce has been completed in spirit, if not on paper. East Coast and West Coast partners are already competing for clients, said a lawyer who did not wish to be named. Also, the New York office recently filed a securities fraud class action in San Francisco, leaving any mention of the firm's San Francisco office off their filings."
The mandatory discovery stay in the PSLRA is often the subject of contention in securities class actions. 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."
A minor district court split has developed over whether this provision allows for the discovery, prior to a decision on a motion to dismiss, of documents that have been produced to governmental entities. Compare, e.g., In re Enron Corp. Securities, Derivative & ERISA Litig., 2002 WL 31845114 (S.D. Tex. Aug. 16, 2002) (permitting partial lifting of discovery stay for documents made available to government entities because burden would be slight and the documents had already been made available outside of securities case) with In re Vivendi Universal, S.A. Sec. Litig., 2003 WL 21035383 (S.D.N.Y. May 6, 2003) (statute does not create exception for documents previously produced to governmental agencies and plaintiffs failed to establish the need to preserve evidence or undue prejudice). The 10b-5 Daily has previously posted about the Vivendi decision.
The N.D. of Alabama has now weighed in on the issue. In In re HealthSouth Securities Litigation, CV-03-BE-1500-S (N.D. Ala. Dec. 8, 2003), relevant documents had been produced to Congress and to the parties in a derivative lawsuit filed against HealthSouth in Delaware state court. Plaintiffs argued that "adherence to the two exceptions enumerated in the [PSLRA's mandatory discovery stay] would create absurd results in a case like this one of admitted securities fraud and where a discovery stay would not effectuate Congress' goals in enacting the statute." The court, however, found that allowing plaintiffs to use documents produced to Congress "is not only inconsistent with the statute's plain language, but creates an absurd result in direct contravention of Congress' intent to protect defendants from the possibility that documents produced to governmental entities may by used by the plaintiffs in formulating a complaint or in opposing a motion to dismiss."
Holding: Motion to partially lift discovery stay denied.
Thanks to Matt Herrington for pointing The 10b-5 Daily to this decision.
The National Law Journal has an article (via law.com - free subscrip. req'd) on the status of the previously announced breakup of Milberg Weiss, widely recognized as the leading plaintiffs' securities class action firm, into two separate law firms. (See this post for background information on the split.)
Quote of note: "According to attorneys inside the firm as well as attorneys who have left, Milberg Weiss had hoped to finalize the restructuring by the end of 2003, with an outside date of February. 'We are 85 percent of the way through,' a lawyer close to the negotiations said. 'We just need more time to reconcile the accounting, and we are now looking at March.'"
The 10b-5 Daily does not normally post about the initial filing of a securities class action (or that's all it would have time to do), but sometimes an exception is warranted. The Associated Press reports that the California Public Employees Retirement System (CalPERS) has brought a class action suit against the New York Stock Exchange and seven specialist trading firms (who make a market in NYSE stock assigned to them by matching buyers and sellers). The suit alleges that the specialists failed "to fill outstanding buy-and-sell orders at the best prices and routinely and unnecessarily intervened in trades, earning fees for themselves and the exchange at the expense of investors" and that "stock exchange officials hid the extent of the practices from investors."
CalPERS has issued a press release and posted the complaint on its website. The complaint alleges violations of Sections 10(b) and 20(a) of the Exchange Act and breach of fiduciary duty against all of the defendants and violation of Section 6(b) of the Exchange Act against the NYSE. CalPERS appears to rely heavily on information from a November 3, 2003 Wall Street Journal article discussing a confidential SEC report about NYSE trading practices and exchange oversight.
Quote of note (Associated Press): "'We're convinced, and we will seek to prove in court, that the New York Stock Exchange not only knew of these rampant problems, and knew they existed, but also perpetuated them,' [Sean Harrigan, President of CalPERS] said. Officials said they decided to sue, rather than rely on the U.S. Securities and Exchange Commission, which is conducting its own investigation into floor-trading, because the SEC has not done its job."
Addition: The Recorder has an article (via law.com - free regist. req'd) discussing CalPERS decision to hire Milberg Weiss to bring the suit.
Reuters reports that Lucent Technologies, Inc. (NYSE: LU) has received final court approval for the roughly $600 million settlement of the securities litigation pending against the company in the D. of N.J. The settlement was originally announced last March and is one of the largest ever.
The South Korean legislature is still debating over legislation that would permit investors to bring securities class actions. The Korea Times reports that conservative lawmakers are seeking to limit the scope of the planned class action system to companies with more than 2 trillion won in assets (i.e., very large companies). Opponents argue that most of companies investigated for stock price manipulation and accounting fraud, based on a sample from 1998 to 2001, do not meet this test.
The 10b-5 Daily has been following this story intently (see posts here and here for details on the legislative proposals). Not surprisingly, South Korea appears interested in learning from the U.S. experience with securities class actions -- the Korea Times describes a a public hearing hosted by the Korea Development Institute (KDI) that included a discussion of the pros and cons of a U.S.-style system.
Quote of note: "The system entails considerable cost, so it is imperative for South Korea to consider its economic reality before taking this step, [Professor Stephen Choi of U. of Cal., Berkeley] added. However, Choi said though there were problems related to class action suits, the experience of the U.S. following the passage of its Private Securities Litigation Reform Act in 1995 offered some reference for reform measures that could be carried out here."
The solicitation dispute in the WorldCom case pending in the S.D.N.Y. has a new development. As previously reported in The 10b-5 Daily, the WorldCom court has found that Milberg Weiss engaged in an "active campaign" to encourage pension funds to file individual actions related to the main securities class action against WorldCom and is running the individual actions as "a de facto class action." Moreover, the firm's communications resulted in "some confusion and misunderstanding of the options available to putative class members."
As a result of this determination, on November 17 the court ordered that a curative notice be sent to all investors who have filed individual WorldCom actions. Since that ruling, the court also has dismissed a Securities Act claim (based on a 1998 bond offering) brought by an individual investor because it was time-barred under the applicable statute of limitations. (The 10b-5 Daily has posted a summary of the decision in the State of Alaska Dept. of Revenue v. Ebbers case.)
The curative notice has been signed by the court and can be found here. The notice discusses: (1) the court's findings concerning Milberg Weiss's solicitation of individual investors; (2) the potential negative impact on individual actions of the State of Alaska decision (in addition to the statute of limitations decision concerning the 1998 bond offering, the court made other rulings that might discourage the bringing of individual actions); and (3) some of the additional burdens and costs that could result from bringing an individual action.
Addition: The controversy is evidently causing some of the individual investors to rethink their strategy. According to a Dow Jones Newswires article (subscrip. required) from late last week, the Asbestos Workers Local 12 Annuity fund has instructed Milberg Weiss to voluntarily dismiss its individual suit and is requesting that the court not prevent the fund from joining the main class action.
Quote of note (Dow Jones): "[District Judge] Cote has not yet been called on to formally decide whether funds that want to opt back into the class would be permitted to recover through the class action, lawyers involved in the case said. In the notice being sent to individual action plaintiffs, Cote said that defendants in the case have contended that even if claims are dismissed without prejudice, such investors shouldn't be allowed to recover funds under established legal doctrine."
Maxim Pharmaceuticals, Inc. (Nasdaq: MAXM) has announced the dismissal, with prejudice, of the securities class action pending against the company in the S.D. of Cal. The plaintiffs had alleged that Maxim made false and misleading statements in 1999 and 2000 concerning the efficacy and clinical trial results of a cancer drug it was developing. The court had already dismissed two earlier complaints and based this dismissal on the failure to adequately plead scienter. The Securities Litigation Watch has a post on the case and has linked to the court's order.
Many courts have declined to appoint a group of unrelated investors as the lead plaintiff in a securities class action, concluding that a group of this nature will be unable to effectively direct the litigation as envisioned by the PSLRA. See, e.g., In re Milestone Scientific Sec. Litig., 183 F.R.D. 404 (D.N.J. 1998) ("Where multiple lead plaintiffs have divergent interests, the leadership of the class may be divided, and rendered factious."). If it did not agree with this reasoning before, the U.S. Court of Appeals for the Eighth Circuit probably does now.
In In re BankAmerica Corp. Sec. Litig., 2003 WL 22844301 (8th Cir. Dec. 2, 2003), the court addressed what weight a district court must give to "a fraction of a fractured lead plaintiff group" that objected to the settlement terms agreed to by lead counsel. The plaintiffs alleged losses caused by misrepresentations and omissions surrounding the 1998 merger of NationsBank and BankAmerica to form Bank of America. After the consolidation of numerous actions, the district court appointed a seven-member lead plaintiff group to represent the NationsBank classes and a six-member lead plaintiff group to represent the BankAmerica classes. According to the appellate court, "[n]o members of the lead plaintiff groups were institutional investors nor did they have relationships with one another prior to this litigation."
Shortly before trial, there was a mediation that led to the signing of a memorandum of understanding with the defendants for a $490 million global settlement of all claims. Three members of the NationsBank lead plaintiff group objected to the settlement. In particular, "[t]hey alleged that class counsel instructed them to leave the mediation because it was futile, but that class counsel remained and reached the proposed global settlement for an amount far below that which they had authorized." The district court found that the PSLRA is silent on what to do under these circumstances. In the absence of legislative guidance, it held a fairness hearing and determined to approve the settlement despite the objections.
On appeal, the Eight Circuit noted that while the PSLRA "is explicit on the lead plaintiff's authority to select and retain counsel, it is silent on the other responsibilities and rights that lead plaintiffs have to control, direct, and manage class action securities litigation." It certainly does not address whether a group of lead plaintiffs have to agree on a proposed settlement before it can be reviewed and approved by the district court. In any event, the appellate court limited itself to the narrower question of "what weight a district court must give to objections from a fraction of a fractured lead plaintiff group" and held that the district court did not abuse its discretion under Fed.R.Civ.P. 23 in approving the settlement despite the objections.
Holding: Judgment of district court is affirmed.
Quote of note: "We leave for another day a determination of how much control over litigation the [PSLRA] confers on a singular lead plaintiff or unified lead plead plaintiff group."
Securities class actions are often settled for a fraction of the potential damages. As a result, plaintiffs' counsel can find themselves in the strange position of having to argue against the strength of their own case to justify a proposed settlement.
Although the DaimlerChrysler AG settlement is for $300 million, the Associated Press reports that plaintiffs' counsel worked hard to convince the judge at the settlement hearing that plaintiffs' case had "potentially fatal flaws." 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.
Quote of note: "'The biggest problem for us was that the Chrysler division post-merger performance was horrific,' the lawyer said. His comments were meant to convince the judge that the settlement was a nice result for a case that carried considerable risk."
The Securities Litigation Watch has an interesting article (from the December 2003 edition of ISS's SCAS Alert) on the recent trend of insitutional investors opting out of high-profile securities class actions.
Quote of note: "Does an institutional opt-out in favor of an individual state court action really provide institutions with these and other advantages? While there are theoretical arguments in support of individual actions, the advantages sought by institutions often do not materialize in practice. Indeed, both plaintiffs' counsel and defense counsel at the recent Institutional Investor Forum in New York agreed that individual state court actions make sense only in rare instances."
Although the PSLRA was supposed to stop the race to the courthouse in securities class action litigation by creating a formal lead plaintiff selection process, anecdotal evidence suggests that plaintiffs' firms continue to believe there is an advantage to being the first filer. The Denver Post examines how it is that Invesco Funds Group was sued almost immediately following the announcement of an investigation by the New York Attorney General into the organization's trading practices.
The Associated Press has an interesting article on the bankruptcy examiner report in the Enron case. The report is sharply critical of Enron's banks and auditors, who are alleged to have assisted the company in its fraudulent transactions. The bankruptcy examiner, Neal Batson, has made some controversial requests of the court including that he and his team be protected from having to produce documents or be questioned by third parties.
Quote of note: "Batson, in his lengthy final report, blamed top company executives as well as former directors, accountants, attorneys and some large investment banks for the energy trading firm's financial collapse. Plaintiffs in class-action lawsuits want Batson to be available for subpoena because he could potentially be an important witness as a result of his reports."
Interpublic Group (NYSE: IPG), a New York holding company for advertising agencies, has announced the preliminary settlement of the securities class action pending against the company in the S.D.N.Y. The case is the result of a restatement IPG did 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 settlement, which still must be approved by the court, is for $115 million in cash and stock ($20 million cash; $95 million stock at $14.50 a share). According to the announcement, the "parties have also agreed that, should the price of Interpublic common stock drop below $8.70 per share prior to final approval of the settlement, Interpublic will issue at its sole discretion either additional stock or cash so that the consideration for the stock portion of the settlement will have a total value of $57 million."
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 and (in a post entitled "The Perfect Storm Moves On" ) the court's recent grant of class certification.
AdAge.Com also has an article on the settlement announcement.
SkillSoft, PLC, (Nasdaq: SKIL) a New Hampshire-based business and IT training software maker, has announced a preliminary settlement of the securities class action pending against the company in the N.D. of Cal. The case was originally filed in 1998 and the plaintiffs allege that SkillSoft misrepresented its financial condition and prospects in connection with its merger with ForeFront. The settlement is for $32 million, with $16 million being covered by insurance.
The Nashua Telegraph has an article on the settlement, which notes that there is another, more recent, securities class action pending against the company in the D. of N.H.
Amdocs, Ltd. (NYSE: DOX), a St. Louis-based supplier of billing and customer relationship management software to the telecommunications industry, has announced the dismissal, with prejudice, of the securities class action pending against the company in the E.D. of Missouri. Plaintiffs had alleged that "Amdocs and the individual defendants had made false or misleading statements about Amdocs’ business and future prospects during a putative class period between July 18, 2000 and June 20, 2002."
The WorldCom securities litigation continues to generate judicial decisions at an impressive rate. The past ten days have turned up two opinions addressing the application of the statute of limitations for securities fraud to various claims.
1) In State of Alaska Dept. of Revenue v. Ebbers, 2003 WL 22738546 (S.D.N.Y. Nov. 21, 2003), one of the forty-seven individual actions brought on behalf of public pension funds, the court addressed whether the extended statute of limitations created by the Sarbanes-Oxley Act of 2002 is applicable to claims brought under Section 11 of the '33 Act. (Click here for a recent post on The 10b-5 Daily describing the new statute of limitations.)
Section 11 creates liability for false or misleading statements in registration statements. To avoid the heightened pleading standards for pleading fraud, the State of Alaska plaintiffs expressly disavowed that their claims were based on a theory of fraud, instead styling them as pure negligence or strict liability claims. By its terms, however, the extended Sarbanes-Oxley statute of limitations only applies to claims that involve "fraud, deceit, manipulation, or contrivance" in contravention of the "securities laws."
The court explained the results of the plaintiffs' Faustian bargain: "There are advantages to bringing solely strict liability and negligence claims: the pleading and proof thresholds are far lower than for claims asserting securities fraud, and liability is 'extensive.' One of the disadvantages of bringing negligence claims, however, is a more narrow window of time in which to sue. Because Section 13 [of the '33 Act] and not Section 804 [of Sarbanes-Oxley], applies to the Section 11 claim arising from the 1998 Offering, that claim expired in August 2001 and is time-barred."
Having found that the extended Sarbanes-Oxley statute of limitations did not apply, the court noted "it is unnecessary to consider whether the statute could be retroactively applied." It also made additional statute of limitations rulings on other claims in the case.
2) Statute of limitations arguments based on inquiry notice (i.e., plaintiffs were aware of the probability of fraud but failed to bring their claim in a timely manner) are often difficult for defendants because there is a fine, but distinct, line between arguing that plaintiffs were aware of the probability of fraud and conceding that a fraud was committed. In a different individual action in the Worldcom securities litigation, Public Employees Retirement System of Ohio v. Ebbers, No. 03 Civ. 338 (S.D.N.Y. November 25, 2003), the court addressed a statute of limitations defense raised by Salomon Smith Barney ("SSB") and its telecommunications analyst, Jack Grubman. (The 10b-5 Daily has posted previously about the defenses raised by the SSB defendants at the class certification for the main securities class action.)
The court found that the plaintiffs were not put on inquiry notice of the alleged fraud because the cited press reports were "simply too vauge" to support a conclusion that an illicit relationship between SSB and WorldCom was tainting Grubman's reports. In a rather unfair bit of piling on, however, the court also stated that it was "ironic" that the SSB defendants "now contend that the conflicts of interest that they have so vigorously argued are insufficient to sustain fraud allegations were sufficiently reported in the business press to put plaintiffs on notice of their fraud claims as early as 2000." No arguing in the alternative allowed?
The New York Law Journal has an article (via law.com - free regist. req.) on the Ohio decision.
The securities class action against Conseco, Inc. (NYSE: CNO) in the S.D. of Ind. had been stayed pending the completion of the company's bankruptcy. (See this earlier post about objections to the bankruptcy reorganization plan made by plaintiffs' counsel for the class action). The Indianapolis Star reports, however, that the case is now back on track and a consolidated complaint has been filed.
When The 10b-5 Daily last posted about the Class Action Fairness Act, it had been left for dead on the U.S. Senate floor - the victim of a Democrat-led filibuster. The Washington Times reports, however, that a compromise has been reached with a few Senate opponents that will revive the bill for a vote early next year.
Quote of note: "Three Democratic senators changed their stances after language was inserted they say better protects consumers while still reining in many frivolous lawsuits and preventing lawyers from "venue shopping" in search of sympathetic judges and juries that award the biggest settlements. Those supporters now include Democratic Sens. Charles E. Schumer of New York, Christopher J. Dodd of Connecticut and Mary L. Landrieu of Louisiana, all of whom opposed the bill last month."
The Senate Committee Report on the bill can be found here.