In the last few days, securities class actions have been filed against Walt Disney Company (NYSE: DIS) alleging that the company failed to disclose that Comcast Corp. had approached it with a merger offer. The putative class consists of Disney shareholders who sold their shares from Feb. 9 to Feb. 10 - a mere two-day class period.
This has caused The 10b-5 Daily to wonder: what is the shortest class period that has ever been proposed in a securities class action? Readers are encouraged to submit candidates to the10b5daily-at-hotmail-dot-com (please indicate whether you would like to be credited for your efforts).
Quote of note: "[N]obody seriously proposes entirely eliminating either tort or class action litigation, just reforming them. My point here, however, is that even if tort and class action litigation were eliminated, much enforcement activity would remain unaffected."
In McKesson HBOC, Inc. v. Superior Court of San Francisco County, 2004 WL 318616 (Cal. Ct. App. Feb. 20, 2004), the California Court of Appeal has held that providing an audit committee investigatory report and interview memoranda to the Securities and Exchange Commission and the Department of Justice constitutes a waiver of attorney-client privilege and attorney work product protection under California law.
Quote of note: "We see no real alignment of interests between the government and persons or entities under investigation for securities law violations. Even if we credit McKessonís claim that it was interested in rooting out the source of the accounting improprieties, we still find the situation here is not qualitatively different than a defendant sharing privileged material with one plaintiff, but not another. Though McKesson and amicus curiae advance policy arguments for allowing sharing of privileged materials with the government, no one suggests that a defendant facing multiple plaintiffs should be able to disclose privileged materials to one plaintiff without waiving the attorney-client privilege as to the other plaintiffs."
Corp Law Blog has a comprehensive and interesting post on the decision, including links to related materials. Note that the proposed legislation preserving the attorney-client privilege and work product protection for documents shared with the SEC referred to in the post - The Securities Fraud Deterrence and Investor Restitution Act - is still pending in Congress. Although the SEC has come out in favor of the bill, its progress has been stalled because of the provisions affecting state securities regulators. (See this post in The 10b-5 Daily.)
Addition: No sooner said, then done. On Wednesday, the House Financial Services Committee approved the Securities Fraud Deterrence and Investor Restitution Act by a voice vote. The provision concerning document sharing with the SEC remains in the bill; the provision limiting the power of state securities regulators has been dropped. The new version of the bill, with amendments, can be found here.
The answer: The court that will host the numerous federal class actions that have been brought over mutual fund trading practices. The question: What is the District of Maryland?
The Judicial Panel on Multidistrict Litigation held a hearing last month on motions for centralization in cases involving the following fund groups: Janus, Strong, Bank One, Bank of America, Putnam, and Alliance Capital. (See this post in The 10b-5 Daily.) Most of the plaintiffs wanted the cases in the S.D.N.Y., while the funds appeared to favor their local federal districts. The Panel had a different idea.
In an order issued on February 20, 2003, the Panel decided that the D. of Md. will hear the cases. Three judges have been assigned: Judge J. Frederick Motz (D. Md.), Judge Andre M. Davis (D. Md.), and Judge Frederick P. Stamp (N.D. W.Va.). The Panel noted that "no district stands out as the geographic focal point for this nationwide litigation," leading them to choose "a transferee district with the capacity and experience to steer this litigation on a prudent course."
Thanks to Securities Litigation Watch for the link.
Addition: Judge Motz has sent out a letter to counsel discussing organizational issues. Of particular note, the D. of Md. is establishing an area on its website (www.mdd.uscourts.gov - click on "MDLs" on the left-hand side) for the mutual fund litigation.
As reported in The 10b-5 Daily, Cutter & Buck, Inc. entered into a settlement of the securities class action against the company last June. The settlement was for $4 million, plus an additional $3 million to come from any recovery of funds from its ongoing suit against Genesis Insurance over the recission of its D&O policy.
That part of the recovery is looking unlikely. U.S. District Judge Marsha Pechman of the W.D. of Wash. recently rejected Cutter & Buck's attempt reinstate the policy. According to an article in the Seattle Times, the court found "Genesis was within its rights to rescind the policy because Cutter & Buck 'made material misrepresentations with an intent to deceive.'"
For more on the potential recission of D&O policies (including some material on the Cutter & Buck suit), AIG/National Union has a recent briefing paper on its website that includes the topic.
Last September, The 10b-5 Daily reported that the State of Connecticut, which is acting as the lead plaintiff in a securities class action pending against JDS Uniphase Corp. in the N.D. of Cal., had taken out a newspaper advertisement urging JDS Uniphase employees to disclose what they know about the alleged fraud.
The media campaign apparently has been a success. Counsel for the State of Connecticut announced yesterday that they have anonymously received an internal e-mail written by a JDS Uniphase employee indicating there was a significant disparity between public projections and the business reality the company faced in mid-2000. The press release, which is entitled "JDS Former Employees, Please, Tell Us What You Know," asserts that "dozens of other former employees" have come forward. Interestingly, the law firm also has posted the e-mail in question (with redactions) on its website.
The Canadian Press has an article on the announcement.
Addition: The Toronto Globe and Mail has more on the story, including that the e-mail allegedly appeared at the counsel's office, pre-redacted, in a brown envelope with the name and address written in ransom-note-style cutout letters.
If the judge ain't happy, ain't nobody happy. Proving that axiom correct, Judge Vaughn Walker of the N.D. of Cal. issued a fairly amazing order last week in the Copper Mountain securities litigation, expressing displeasure with both plaintiffs and the 9th Circuit over the lead plaintiff/lead counsel selection process in that case.
The PSLRA provides that the "presumptively most adequate lead plaintiff" in a securities class action is the movant who "has the largest financial interest in the relief sought by the class" and "otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure." To summarize the process, the judge's task is to determine which plaintiff has the largest financial interest, evaluate whether that plaintiff meets the adequacy and typicality tests of Rule 23(a), and, if that plaintiff meets the requirements, declare that plaintiff the presumptive lead plaintiff (a presumption that may then be rebutted by other plaintiffs). The court must also approve the lead plaintiff's choice of counsel.
Three years ago, Judge Walker determined that he would not name the lead plaintiff movant in the Copper Mountain case with the largest financial interest as lead plaintiff because that candidate, known as the CMI Group, failed to demonstrate that it was an adequate lead plaintiff. Judge Walker based his decision on the CMI Group's failure to negotiate a "competitive" fee arrangement with proposed lead counsel and named a different movant as lead plaintiff. See In re Quintus Sec. Litig., 201 F.R.D. 475 (N.D. Cal. 2001) and In re Quintus Sec. Litig., 148 F. Supp. 2d 967 (N.D. Cal. 2001).
The CMI Group petitioned the Ninth Circuit for a writ of mandamus. In In re Cavanaugh, 306 F.3d 726 (9th Cir. 2002), the court overruled Judge Walker's decision. The panel, in an opinion written by Judge Alex Kozinski, found that the lower court had failed to follow the statutory language of the PSLRA in appointing the lead plaintiff. In particular, the court found that "a straightforward application of the statutory scheme . . . provides no occasion for comparing plaintiffs with each other on any basis other than their financial stake in the case." Moreover, the lead plaintiff process "is not a beauty contest" and information about fee arrangements "is relevant only to determine whether the presumptive lead plaintiff's choice of counsel is so irrational, or so tainted by self-dealing or conflict of interest, as to cast genuine or serious doubt on that plaintiff's willingness or ability to perform the functions of lead plaintiff." Accordingly, the Ninth Circuit vacated the lower court's order and instructed the lower court to proceed with the CMI Group as the presumptive lead plaintiff.
On remand, however, the CMI Group apparently decided to no longer seek lead plaintiff status (or, as Judge Walker puts it, "vanished - fled the scene - gone south - maybe vaporized"). In his order, Judge Walker compares the situation to a "heroic prince" turning into a "frog" and is incredulous over the course of events:
"By vindicating their 'right' to be the presumptive lead plaintiffs through the extraordinary remedy of mandamus (and establishing circuit precedent of no little value to their lawyers), the CMI group might seem to possess a tenacity and determination seldom seen on the battlegrounds of federal litigation. But what might seem apparently is not. Could there have been some motivation other than vindicating the interests of defrauded investors behind the mandamus proceedings? Could it be that the Ninth Circuit panel, perceiving the black letter of the PSLRA, was actually reading a fairy tale?"
Also not surprisingly, Judge Walker appears to believe that the CMI Group's decision vindicates his earlier order. Noting that "Cavanaugh would seem to establish that the largest stakeholder's selection of counsel must be approved unless that selection is either mad or crooked," the court finds that the opinion converts the PSLRA into "a straightjacket against judicial measures to ensure that [securities class actions] genuinely benefit investors, not lawyers." In the absence of the CMI Group, Judge Walker ends up simply reappointing the earlier lead plaintiff to the position. "The moral of the story," the court concludes, "will be left to you, dear readers."
The Recorder has an article (via law.com - free regist. req'd) on the case in today's edition. Judge Walker's order is not yet available online.
Addition: The opinion is now on Westlaw - In re Copper Mountain Sec. Litig., 2004 WL 369859 (N.D. Cal. Feb. 10, 2004).
Alliterative coincidence? Here are today's announced settlements:
InterCept, Inc. (Nasdaq: ICPT), an Atlanta-based technology provider for financial institutions and merchants, has announced the preliminary settlement of the securities class action pending against the company in the N.D. of Ga. The case, originally filed in 2003, alleges that InterCept made misleading statements concerning the significance of the adult entertainment portion of the companyís merchant services business and the impact of new Visa regulations. The settlement, which is subject to court approval, is for $5.3 million. InterCept will pay $3.95 million and its insurance carrier will pay $1.35 million.
InfoSpace, Inc. (Nasdaq: INSP), a Bellevue-based Internet services company, has announced the preliminary settlement of the securities class action pending against the company in the W.D. of Wash. The case, originally filed in 2001, alleges that InfoSpace made misleading statements concerning its business and prospects. The settlement, which has received preliminary approval from the court but is still subject to final approval, is for $34.3 million. The entire amount will be paid by the company's insurance carriers.
The Wall Street Journal has an article (subscrip. req.) about the costs to companies (and their shareholders and insurers) of defending executives from fraud charges. The article discusses a Delaware court ruling last October holding that Rite-Aid must continue to advance the defense fees of its former CFO, despite the fact that he has plead guilty to criminal fraud charges, because there has not yet been a "final disposition" (i.e., sentencing) in the case.
Quote of note: "A company's average cost of defending against shareholder suits last year was $2.2 million, according to Tillinghast-Towers Perrin. 'These costs are likely to climb much higher, due to a lot of claims for more than a billion dollars each that haven't been settled,' says James Swanke, an executive at the actuarial consulting firm. Though companies can recoup some defense costs through directors-and-liability insurance, it is rare to collect legal fees already advanced to former officers who have been convicted or pleaded guilty."
Quote of note II: "Seeking to stop payouts to wrongdoers, insurers now want new insurance policies to be written differently than in the past. Instead of making fee payments pending a 'final disposition' in a court case, insurers are suggesting that corporate policies call for payments pending a 'final determination' of a fraud allegation. The upshot: A third-party arbitrator would decide whether an accused individual has committed fraud, rather than waiting for courts to rule."
According to a Reuters report, plaintiffs' counsel in the securities class action pending against Parmalat SpA in the S.D.N.Y. has sought a court order preventing the destruction of documents by the company and its advisors. District Judge Lewis Kaplan was apparently unimpressed with the request. Noting that destruction of documents is a criminal offense and any order would be redundant, the judge suggested at a hearing on Friday that the request for an order was done mainly for the benefit of the media. "If anyone wants to file papers on this, God bless them," Judge Kaplan said. "But don't waste my time."
Quote of note: In response to plaintiffs' counsel's description of the Parmalat case as "unusually high-profile," Judge Kaplan responded - "Not by the standards of this district. There is nobody named Martha in this case."
Gemstar-TV Guide Int., Inc. (Nasdaq: GMST), a media technology company based in Los Angeles, has announced the preliminary settlement of the securities class action pending against the company in the C.D. of Cal. The suit is based on alleged misrepresentations made in connection with Gemstarís accounting for certain transactions that were subsequently restated between November 2002 and March 2003. The settlement does not include the individual defendants in the class action or the related derivative cases that have been brought against the company.
The settlement, which is subject to court approval, is for $67.5 million, which will be paid in cash and stock. Gemstar will pay an aggregate of $42.5 million in cash to the class in a combination of direct payments and, interestingly, payments which may be made through the SEC. In addition, the company will issue 4,105,090 shares of common stock which was valued at $6.09 per share on the date the agreement was reached, or $25 million in the aggregate (this stock issuance is subject to possible adjustments related to share price). Gemstar will also assign to the plaintiffs certain of its claims against its former auditors, KPMG.
Reuters reports that Lucent Technologies, Inc. (NYSE: LU) is suing its fiduciary insurance carriers in the wake of its recent $600 million settlement of the securities litigation against the company, including a consolidated securities class action in the D. of N.J., and related ERISA, bondholder, derivative, and other state securities cases. (The settlement included $517 million for the securities class action, making it the second largest settlement of a securities class action in U.S. history.)
According to Lucent's most recent Form 10-Q, it is continuing "to pursue partial recovery of the settlement amount from our fiduciary insurance carriers under certain insurance policies that provide coverage up to $70 million. We have filed a lawsuit against them to recover these amounts. The charge for the settlement will be revised in future quarters if we are able to recover a portion of the settlement from our fiduciary insurance carriers . . . ." The Reuters article states that Lucent has declined to name the insurance carriers that have been sued or where the suit was filed.
(1) Although three of the six largest securities class action settlements of all time were in 2003 (Lucent, DiamlerChrysler, and Oxford Health Plans), the average settlement amount fell 15% to $19.8 million as compared to last year. Two-thirds of all settlements in 2003 were for less than $10 million.
(2) There were 210 securities class action filings in 2003. This is consistent, excluding laddering and analyst cases, with the post-PSLRA average of 212 filings a year.
(3) Over a five-year period, the average public corporation faces a 9% probability that it will face at least one securities class action suit.
(4) Following the passage of Sarbanes-Oxley in 2002, there have been one-third fewer dismissals of securities class actions. According to NERA, the "lower rate of dismissal suggests that either cases are proceeding more slowly or that judges are being more generous at the margins in evaluating the merits of cases."
Securities class actions are frequently brought against biotechnology companies, often based on alleged misrepresentations related to the new-drug approval process. As previously reported in The 10b-5 Daily, the Food and Drug Administration ("FDA") and the Securities and Exchange Commission ("SEC") have been in talks on how to coordinate on these disclosure issues.
Last week, the two agencies announced a series of new initiatives, including:
(1) A centralized procedure adopted by the FDA for referring to the SEC staff possible instances of securities laws violations by public companies regulated by the FDA.
(2) Identification of contacts in each of the FDA's main organizational components (known as Centers) to serve as points of contact for the SEC and its staff to use in requesting information from FDA. These individuals would be responsible for assuring that such requests are handled promptly and thoroughly.
(3) The continued sharing of non-public information by the FDA with the SEC, consistent with FDAís current practice, and a commitment to endeavor to take steps to further expedite this process.
According to an article in the Boston Globe on the announcement, "some in Congress questioned whether the FDA and SEC were cooperating quickly enough. But in an interview yesterday, Representative James C. Greenwood, a Pennsylvania Republican whose committee oversees the FDA, said he was 'very impressed and encouraged' by the new steps." The FDA apparently does not plan to change its procedures on what information will be made public as part of the new-drug approval process.
Similar to the Merrill Lynch cases, a securities class action was filed against First Union in May 2001 accusing the financial services company of inflating the price of Ask Jeeves stock by issuing "strong buy" recommendations while acting under an undisclosed conflict of interest. In LaGrasta v. First Union Securities, 2004 WL 178937 (11th Cir. Jan. 30, 2004), the U.S. Court of Appeals for the 11th Circuit reversed the lower court's decision to dismiss the case based based on the statute of limitations. The lower court had found that the sharp decline in the price of Ask Jeeves stock in April 2000, even though First Union was continuing to make "strong buy" recommendations, was sufficient to put the plaintiffs on inquiry notice of fraud, thus making the filing of their complaint more than a year later untimely.
On appeal, the 11th Circuit held that a stock price decline is insufficient to create inquiry notice of fraud. The court laid out five reasons: (1) stock price fluctuations are always possible; (2) Ask Jeeves stock was highly volatile; (3) the stock price decline may have resulted from reasons other than fraud; (4) the investors may have been looking for a speculative investment and therefore expected large fluctuations; and (5) the investors are suing First Union, not Ask Jeeves, so a stock price drop would not necessarily have alerted them to First Union's misconduct. The court also rejected First Union's argument that its disclosure of the possibility of a conflict in its analyst reports was sufficient to put investors on notice of the possibility of fraud. Based on the record, the court found that the most it could conclude as a matter of law was that the plaintiffs were on inquiry notice as of June 2000 (less than a year before the complaint was filed) when a Smart Money article expressly disclosed that First Union was in the running to be selected as the underwriter for Ask Jeeves' secondary stock offering.
Holding: Dismissal on statute of limitations ground reversed. Case remanded for district court to consider loss causation argument.
Quote of note: "[T]he district court's orders [in the Merrill Lynch cases finding the claims in those cases time-barred] were based only partially on the dramatic decline in the price of the shares. In fact, most of the discussion on inquiry notice by the district court concerns the newspaper articles about the conflict of interest and similar information in the public domain. We view the Merrill Lynch orders as consistent with our own conclusion that, on the face of the complaint, the publication of the Smart Money article exposing the conflict of interest of First Union and Ms. Trabuco was the event which put the La Grastas on inquiry notice."
Securities Litigation Watch has an article from the February 2004 SCAS Alert that takes a look at "the good, the bad and the ugly" settlements from last year. Bruce Carton notes that large settlements, in terms of overall dollars, do not necessarily translate into large recoveries for the investors.
Titan Pharmaceuticals, Inc. (Amex: TTP) has announced that the plaintiffs in the derivative and securities class action litigation brought against the Company have voluntarily dismissed their claims without prejudice. The securities class actions, intitially filed in the N.D. of Cal. last November, had alleged that Titan made false statements regarding the development of a new drug for treating schizophrenia.
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." Based on the legislative history, Congress was concerned about the high costs associated with discovery and the possibility that defendants would be forced into early settlements to avoid these costs.
An open question, however, is whether the discovery stay should be applied to related federal cases that do not allege securities law claims. In In re AOL Time Warner, Inc. Sec. and "ERISA" Litig., 2003 WL 22227945 (S.D.N.Y. Sept. 26, 2003), the court stayed all non-ERISA specific discovery. The court found: "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 10b-5 Daily has previously posted about the case.)
The court in In re FirstEnergy Shareholder Derivative Lit., 2004 WL 161330 (N.D. Ohio Jan. 26, 2004) has recently disagreed with this approach (the opinion cites the AOL decision, but does not discuss it). Derivative and securities class action cases have been brought against FirstEnergy based on the same course of conduct. The defendants argued that discovery in the derivative case should be stayed pending a decision on the motion to dismiss in the securities class action, noting that the discovery could be used to assist the securities class action plaintiffs. The court found that the PSLRA is silent on the issue of staying discovery in derivative cases and it refused to "read in this silence Congress's intent to prevent discovery in non-securities fraud cases simply because the cases share facts in common with securities fraud cases." The court also declined to grant a protective order under Fed. R. Civ. Proc. 26(c).
Holding: Motion for stay of discovery denied.
Quote of note: The FirstEnergy court also found that permitting discovery to go forward would not frustrate the PSLRA's goals because "an exchange [between the derivative and securities class action plaintiffs] of information, otherwise discoverable in this derivative action, facilitates the purpose of Fed. R. Civ. Proc. 1." This appears difficult to reconcile with the PSLRA's legislative history and the holding in AOL.