A few years ago, Senior Judge Milton Shadur of the N.D. of Ill. issued a lead plaintiff decision in the Comdisco securities litigation. See In re Comdisco Sec. Litig., 150 F. Supp. 2d 943 (N.D. Ill. 2001). The decision disqualified the Pennsylvania State Employees' Retirement Systems ("PASERS") from serving as lead plaintiff despite the fact that PASERS had the most claimed losses of any of the movants. The court reasoned:
It turns out that when the Class Period of January 25 through October 3, 2000 (which is the proper referent) is focused upon, PASERS' claim that it suffered some $2.4 million in losses in connection with its investment in Comdisco common stock is only a mirage created by PASERS' adoption of a FIFO (first-in-first-out) approach to its dealings in the stock. In fact PASERS was an active trader during the Class Period, with 15 separate sales that more than matched its purchases during that time frame: Its Class Period purchases of Comdisco common stock aggregated 213,800 shares, while its sales during the same period totaled 218,400 shares. And when those transactions are properly matched, rather than by the impermissible application of a FIFO methodology (which by definition brings into play PASERS' pre-Class-Period holdings as the purported measure of its claimed loss), PASERS' Class Period sales at inflated prices caused it to derive unwitting benefits rather than true losses from the alleged securities fraud--so much so that [another movant] demonstrates that PACERS derived a net gain of almost $300,000 (rather than any net loss at all) from its purchases and sales during the Class Period.
In essence, the court applied a "last-in, first out" (LIFO) methodology in examining PASERS' trades and determined that PASERS did not have any cognizable losses based on the alleged fraud.
A member of the plaintiffs' bar subsequently wrote an analysis of the case entitled Fee-Fi-Fo-Fum: Why The Rejection Of FIFO Is . . . Not Smart, 2 Class Action Litig. Report (BNA) 786 (2001). The article concluded that Judge Shadur's decision to use LIFO to determine PASERS' losses had the effect of improperly comparing green apples (pre-class-period shares) with red apples (class-period shares) because it brought "into play the sale of pre-class-period holdings." In the author's view, "it is only the inflated purchases that are relevant, because only those shares relate to the fraud."
Apparently, plaintiffs' counsel in the Comdisco case (which is still pending) recently brought the article to Judge Shadur's attention. The judge was not amused. In an unusual memorandum opinion issued this week, Judge Shadur decided to clarify his earlier statements on the topic. See In re Comdisco Sec. Litig., 2004 U.S. Dist. LEXIS 7230 (N.D. Ill. April 26, 2004). The court noted that "one possible consequence of working with apples may be the production of applesauce -- as Webster's Third New Int'l Dictionary (unabridged) 104 defines that product: 'an insincere expression of opinion: an assertion that is patently absurd and usu. phrased in exaggerated terms: BUNK, BALONEY (I know applesauce when I hear it -- Ring Lardner).'" The court found that this was the case here, because any real-world analysis of losses required the use of LIFO.
"Simply put, the article's attempted criticism of the use of LIFO in determining the identity of the 'most adequate plaintiff' under the [PSLRA] impermissibly ignores the obvious fact that with every securities class action having to identify a class period, the focal point of the inquiry must begin (for standing purposes and otherwise) with purchases or sales -- or both -- during that class period. And in turn that focus calls for a primary concentration on class period transactions, with is consistent with LIFO rather than FIFO treatment. Regrettably the cited article, like the source from which it drew its Fee-Fi-Fo-Fum title, is no better than a fairy tale."
Astute readers will note that this debate is closely related to the larger debate over what is necessary to adequately plead loss causation in securities class actions. (See this post for an overview.)
Addition: Both decisions referenced in this post can be found at this website under case number 1 01-CV-2110.
The Rocky Mountain News has an article on the mutual fund trading practices cases. (The 10b-5 Daily recently posted about the opening hearing in the cases, which have been consolidated in the D. of Md.) The article quotes an expert speculating that the settlements of the cases could total $1 billion.
Quote of note: "'It's hard to figure what a judge may grant in compensation, and that leaves a pretty dark cloud over the entire industry,' [a Morningstar equity analyst] said. 'What will happen in the class-action lawsuits is going to be a problem for any company involved in market timing and late trading.'"
The lead plaintiff/lead counsel controversy in the Terayon securities litigation in the N.D. of Cal. continues to receive press coverage. (The 10b-5 Daily has posted about the the case here and here.) The May 3 edition of Fortune has a column on Judge Patel's order and subsequent developments.
Quote of note: "Accordingly, Judge Patel is probably still months away from deciding what to do next. Her options include kicking the firm off the case, fining it, or deciding that it did nothing wrong after all, and allowing it to continue as co-lead counsel."
For readers interested in the practices and policies of The 10b-5 Daily, a Frequently Asked Questions section has been added.
The Economist has an interesting article (subscrip. req'd) on the recent court decisions in the research analyst cases. For non-subscribers, the article can be found in the Finance & Economics section of the April 24 edition.
Quote of note: "So far, Merrill Lynch seems to have hit the jackpot. All the litigation against it has been consolidated in New York under Milton Pollack, a federal judge who believes that there is no case to answer. Others have been less lucky: Lehman Brothers suffered a nasty setback last month when another federal judge in the same judicial district in lower Manhattan, Jed Rakoff, allowed litigation against it to proceed. These are, of course, early days; but because the stakes are so high, defendants on the end of adverse rulings are under great pressure to settle. It may well be that none of the civil cases lasts long enough to be decided by a jury."
Disclosure: The author of The 10b-5 Daily is quoted in the article.
Section 20(a) of the '34 Act creates a cause of action against defendants alleged to have been "control persons" of those who engaged in securities fraud. In the absence of a scienter pleading requirement for control person liability (a disputed question in the Second Circuit - see this post), all plaintiffs need to show at the pleading stage is: (a) there was a primary violation by a controlled person; and (b) control of the primary violator by the defendant. An unresolved issue is what is necessary to adequately plead the element of control if both the primary violator and the defendant are corporations.
In Schnall v. Annuity and Life Re (Holdings), Ltd., 2004 WL 515150 (D. Conn. March 9, 2004), the court's answer was: not too much. XL Capital Ltd. had founded Annuity and Life Re (Holdings), Ltd. ("ANR"), the primary corporate defendant in the case, and two of XL Capital's officers/directors served as ANR directors. In addition, during the class period XL Capital owned between 11% and 12.9% of ANR's common stock. Based on these facts, the court found "it may reasonably be inferred that defendant XL Capital was in a position to influence and direct the activities of ANR" and therefore the plaintiffs' Section 20(a) claim against XL Capital could go forward.
Holding: Motion to dismiss denied.
Electro Scientific Industries, Inc. (Nasdaq: ESIO), a Portland-based manufacturing equipment supplier, has announced the settlement of the securities class action (and a related derivative suit) pending against the company in the D. of Oregon. The suit, originally filed in March 2003, is based on misrepresentations related to the company's restatment of its financials for the 2002 fiscal year and two subsequent quarters. The settlement is for $9.25 million, of which approximately $3.8 million will be paid by ESI and approximately $5.45 million will be paid by its insurance carrier.
How can a court determine what amount of attorneys' fees is "just right"? DPL, Inc. and their former accountants, PricewaterhouseCooopers, settled the securities class action against them in the S.D. of Ohio (as well as related state court derivative actions) for $145.5 million. (See this post on the announcement of the preliminary settlement.) The class action portion of the settlement was $110 million and plaintiffs' counsel requested that the court award them 35%, or $38.5 million, in attorney's fees and costs.
In a decision issued last month (but only recently appearing online), the court rejected this fees request after members of the class objected. See In re DPL, Inc. Sec. Litig., 2004 WL 473472 (S.D. Ohio March 8, 2004). The court found that plaintiffs' counsel had achieved an "outstanding" result in the case. According to an affidavit of an economist submitted by plaintiffs' counsel, $110 million represented "between about 62% and 145% of the losses suffered by the members of the class." The court also noted that "a review of the Defendants' motions seeking dismissal of the litigation, motions which were not ruled upon due to the settlement, reveals that it is by no means certain that the claims of the Plaintiffs and the class they represent would have survived rulings on such." Under these circumstances, the court found that the percentage of fund method for calculating the attorneys' fees, with its emphasis on rewarding good results, was more appropriate than the lodestar method (which is based on the number of hours reasonably expended, at a reasonable hourly rate, adjusted by a multiplier).
When it came to the actual percentage to award, however, the court balked at 35%. The court determined that plaintiffs' counsel had done relatively little work to obtain the settlement (primarily briefing the motion to dismiss) and that "an attorney compensated at the hourly rate of $350, an overly generous rate for this part of the world, would have to work 110,000 hours to generate such a fee." The court then concluded that a reasonable award was 20% of the common fund, or $22 million. Notably, the court offered no rationale for selecting 20% as the right amount, as compared to 19%, 21%, or any other percentage below what was requested.
Holding: Sustaining in part and overruling in part the application for attorneys' fees.
Service Corp. Int'l (NYSE: SRV), a Houston-based funeral and cemetary company, has announced the preliminary settlement of the securities class action pending against the company in the S.D. of Tex. The suit, originally filed in January 1999, alleges that the company made misrepresentations concerning its prearranged funeral business and other financial matters. The settlement is for $65 million, with $30 million of the payment being provided by the company's insurance carriers.
Last Friday, the SEC filed an amicus brief in support of the plaintiffs in the WorldCom securities class action. Two of the defendants, Salomon Smith Barney and its former telecommunications analyst, Jack Grubman, have appealed the district court's grant of class certification to the United States Court of Appeals for the Second Circuit. (The district court's decision is discussed in this post.) At issue is whether the district court properly determined that the fraud on the market theory was applicable to analysts.
The New York Times has an article on the SEC's brief. The district court held that it "comports with both common sense and probability" to find that Grubman's analyst reports affected the price of WorldCom securities and therefore to presume that WorldCom investors relied on those statements pursuant to the fraud on the market theory. The SEC reportedly supports this holding. The Second Circuit is scheduled to hear oral argument in the case on May 10.
Quote of note: "There is no reason to believe that Mr. Grubman's opinions, which relied on WorldCom's disclosures, had any distinct price impact 'over and above the price consequences of WorldCom's massive ongoing fraud,' Citigroup's [the parent company of SSB] lawyers said in their brief. As such, each investor should have to prove that he was harmed by Mr. Grubman and Salomon in individual cases, not as a class action. But lawyers at the S.E.C. countered that economic studies showed that analysts' reports affect securities prices and that their very purpose was to provide information upon which investors base their decisions."
Infonet Services Corp. (NYSE: IN), a California-based provider of managed network communications services, has announced the preliminary settlement of the securities class action pending against the company in the C.D. of Cal. The case, originally filed in December 2001, alleges that the company made misrepresentations as part of an initial public offering of Class B common stock. The settlement is for $18 million ($13 million from insurance coverage and $5 million from the company).
Under the fraud on the market theory, reliance by investors on an alleged misrepresentation is presumed if the company's shares were traded on an efficient market. The investors are not entitled to the presumption, however, if they are unable to show that the misrepresentation actually affected the market price of the stock.
The U.S. Court of Appeals for the Fifth Circuit issued an opinion this week, Greenberg v. Crossroads Systems, Inc., No. 03-50311 (5th Cir. April 14, 2004), discussing the fraud on the market theory in a case where the plaintiffs failed to establish that the defendants' falsely positive statements had increased the company's stock price. Under these circumstances, the determinations of reliance and loss causation essentially merged, with the court holding that the plaintiffs were only entitled to a presumption of reliance for the falsely positive statements that they could connect to the subsequent decline in the company's stock price when the "truth" was revealed.
Holding: Affirming in part and vacating in part the district court's grant of summary judgment.
Quote of note: "We are satisfied that plaintiffs cannot trigger the presumption of reliance by simply offering evidence of any decrease in price following the release of negative information. Such evidence does not raise an inference that the stock’s price was actually affected by an earlier release of positive information. To raise an inference through a decline in stock price that an earlier false, positive statement actually affected a stock’s price, the plaintiffs must show that the false statement causing the increase was related to the statement causing the decrease. Without such a showing there is no basis for presuming reliance by the plaintiffs."
Thanks to David O'Brien for the link.
Here's a good law school exam question -- does a finding of liability under Rule 10b-5 in a private securities case require a reward of damages? The U.S. Court of Appeals for the Fourth Circuit submitted an essay answer today in the form of an opinion in Miller v. Asensio & Co., Inc., No. 03-1225 (4th Cir. April 14, 2004).
Asensio was a short seller that publicized negative statements about Chromatics Color Sciences Int., Inc. ("CCSI"), a company in which it had a significant short sell interest. Stockholders of CCSI sued Asensio alleging that the statements were material misrepresentations, "which Asensio initiated to defraud the market for its benefit, and which caused their CCSI stock to decline in value resulting in substantial losses to them." After a trial, the jury returned a verdict finding Asensio liable, but awarding $0.00 in damages. On appeal, the stockholders argued that the finding of liability required the award of damages in some amount.
The Fourth Circuit disagreed (after noting that the issue was one of first impression). Courts "often refer to the fact of proximately caused damage and the amount of proximately caused damage as involving separate, although related, inquiries." To establish Rule 10b-5 liability, a plaintiff only has to prove that the defendant’s misrepresentation was a "substantial cause of the loss" by showing a "direct or proximate relationship between the loss and the mispresentation." Accordingly, a jury could find that "(1) the plaintiff proved the defendant's fraud constituted a substantial cause of plaintiff's loss and so find the defendant liable but (2) the plaintiff failed to provide a method to discern, by just and reasonable inference, the amount of plaintiff's loss solely caused by defendant's fraud, and so refuse to award the plaintiff any damages."
Applying these principles to the case in hand, the Fourth Circuit found that "the evidence at trial provided the jurors with a sound basis on which to reach the result they did."
Quote of note: "In the vast majority of cases, a finding of the fact of proximately caused loss will result in the award of some amount of damages. However, it would seem contrary to Congress' mandate that a plaintiff prove that the defendant 'caused the loss,' 15 U.S.C. § 78u4(b)(4), and that no plaintiff 'shall recover . . . a total amount in excess of his actual damages on account of the act complained of,' 15 U.S.C. § 78bb(a), to direct a jury that it must award damages, even if faced, as here, with a record from which it cannot do so."
The Singing Machine Co. (AMEX: SMD), a Florida-based maker of consumer-oriented karaoke machines, has announced the preliminary settlement of the securities class action (and a related derivative suit) pending against the company in the S.D. of Fla. The suit, originally filed in July 2003, is based on alleged misrepresentations related to Singing Machine's restatement of its 2001 and 2002 financials.
The settlement is for a combination of 400,000 shares of common stock and a cash payment of $1.275 million ($800,000 from the company and $475,000 from its former auditor). Singing Machine also is obligated to make certain corporate governance changes, including expanding its board to six members with independent directors comprising at least 2/3 of the total board seats.
The New York Law Journal has an article (via law.com - NYLJ subscrip. req'd) on the tendency of law firms to settle litigation brought against them. The article discusses Simpson Thacher & Bartlett's decision to pay $19.5 million as part of the Global Crossing securities class action settlement. Simpson Thacher was not a named defendant in the case, but had been accused of engaging in an incomplete investigation into certain accounting issues.
Quote of note: "A plaintiff's lawyer who asked to remain unnamed because he is suing a different law firm in a separate class action said the charges against Simpson Thacher were 'mushier' than those brought against other firms in securities actions. It is not clear that Global Crossing's drop in share price stemmed directly from Simpson's alleged mishandling of the Olofson investigation, he explained. More typically, lawyers sued are those who helped prepare disclosure statements to the Securities and Exchange Commission and the investing public."
The Copper Mountain securities litigation in the N.D. of Cal. is a font of notable decisions. As reported in The 10b-5 Daily, Judge Vaughn Walker issued a fairly amazing order in February expressing displeasure with both plaintiffs and the 9th Circuit over the lead plaintiff/lead counsel selection process in the case. After questioning whether the mandamus proceeding initiated by one of the lead plaintiff candidates was a "fairy tale" when the successful appellant decided not to pursue the position, the court ended up reappointing the original lead plaintiff.
With the lead plaintiff issue finally settled (after three years), the court was able to turn to the motion to dismiss. Last week, in In re Copper Mountain Sec. Litig., 2004 WL 725204 (N.D. Cal. March 30, 2004), the court granted the motion. The decision's opening paragraphs present an interesting overview of the particularity requirement in fraud on the market cases (especially for defendants):
It is well-known that the Private Securities Litigation Reform Act (PSLRA) and FRCP 9(b) impose a particularity requirement in the allegation of securities fraud. This is especially important in the case of a complaint alleging open market fraud or fraud on the market, such as the complaint at bar.
The starting point for the particularity analysis is not the allegedly false or misleading statements of the defendants, but the truth that emerges from the market. An open market trades on different points of view of an issuer's prospects. If all investors thought the same things, there would be no trading except that prompted by the need of investors to re-balance their portfolios among investment alternatives (i.e., cash versus bonds, stocks versus cash, etc). What matters in an open market case is the total mix of information in the market and whether that mix has been altered in some significant way to create a very widely, indeed essentially universal, but wrong view of the value of the security at issue. It is the "truth" that reveals the "error" of the market. The disclosure of this "truth" avulsively changes the price of the security. But disclosure of a market "error" does not make out a case of "fraud on the market." Starting with the "truth," the complaint must allege facts to show that the previously settled but false investor expectations can be laid at the feet of defendants. This may seem simple, although it is not easy to do. A complaint satisfying the particularity requirement does not require rococo factual detail, but it does require specifics. So a plaintiff seeking to allege open market securities fraud does well to begin the analysis with the "truth," stack it up against what preceded it and then see if acts, omissions or statements of defendants can plausibly be said to be responsible for the "truth" not emerging earlier when plaintiffs traded their securities.
Generally, open market fraud complaints fail to satisfy the required pleading standard in one of several different ways. Most often plaintiffs cannot identify a false statement of defendant that might account for causing a security issue's price to be distorted. Even if a statement that turns out to be false can be identified, it is usually so laden with cautionary language as to be unactionable as a practical matter. In the more common omissions case, plaintiff may be unable to find a ground upon which to allege that defendant knew the omitted fact or had a duty to disclose it. This complaint illustrates these various shortcomings.
Holding: Motion to dismiss granted (with limited leave to amend).
As a general matter, allegations in an amended complaint relate back to the date of the original filing if they arise out of the same operative facts. What exactly constitutes the operative facts, of course, can be the subject of debate.
In In re American Express Co. Sec. Litig., 2004 WL 632750 (S.D.N.Y. March 31, 2004), the court found that the plaintiffs were on inquiry notice of their claims concerning Amex's alleged misrepresentations about its investments in high-yield securities as of July 18, 2001. Although the original complaint was filed in a timely manner (i.e., within a year), the amended complaint was not filed until December 10, 2002, and contained new allegations about improper valuation methods, GAAP violations, and a lack of adequate risk controls. The court found that these allegations did not sufficiently relate back to the original complaint, even though they all generally concerned Amex's investments in high-yield securities, and were therefore time-barred.
Holding: Motion to dismiss granted.
Quote of note: "The initial complaint simply avers that defendants did not disclose management's failure to 'fully comprehend' the risks associated with Amex's high-yield holdings. The Amended Complaint, on the other hand, claims that 'the procedures for valuing and evaluating AEFA's holdings made it impossible to monitor and guage risks accurately, and no such risk analysis was taking place.' These allegations are therefore distinct from those in the intitial complaint, as they involve different 'operative facts.'"
Thanks to Adam Savett for sending this case in.
The Associated Press reports that the securities class action pending against Bristol-Myers Squibb Co. (NYSE: BMY) in the S.D.N.Y. has been dismissed with prejudice. The case alleged that Bristol-Myers and certain of its officers had made misrepresentations concerning the company's accounting practices and its investment in ImClone Systems.
The 10b-5 Daily has previously posted about the remarkable lead plaintiff/lead counsel order in the Terayon Communications securities class action pending in the N.D. of Cal.
In Judge Patel's order, she removed Capital Partners and one of its employees as lead plaintiffs and wondered "whether counsel for plaintiffs actively participated in or provided advice to plaintiffs regarding their scheme to cause a fall in Terayon’s stock price." The court found "it is probable that there is a conflict not only between lead plaintiffs and the class but also between lead counsel and the remainder of the class." Lead counsel was asked to provide a written response to a number of questions and defendants were given leave to take further discovery on the issue.
The written response has been submitted in a March 24 filing by lead counsel. According to an article (via law.com - free regist. req'd) in The Recorder, lead counsel argued "that some of the contentions advanced by defendants are manifestly wrong, and led the court to express concern that this action might be the product of improper conduct, when in fact there was no improper conduct." Lead counsel also provided the court with information about its communications with Cardinal and denied that it had extended the class period to hide Cardinal's short position in Terayon's stock.
Quote of note: "The firm also asked to have another hearing before Patel to further defend its actions in [the case]. Patel has yet to decide if she'll schedule another hearing."
Addition: The lead counsel's filing can be found here.
The "group pleading" doctrine creates the presumption that the senior officers of a company are collectively responsible for misrepresentations or omissions contained in public statements made by the company (e.g., press releases, SEC filings). District courts are divided over whether a plaintiff's ability to plead in this manner has survived the enactment of the PSLRA with its heightened pleading standards for securities fraud.
Last week, the U.S. Court of Appeals for the Fifth Circuit made a strong statement against the use of group pleading. In Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 2004 WL 626721 (5th Cir. March 31, 2004), the court held that group pleading "cannot withstand the PSLRA's specific requirement that the untrue statements be set forth with particularity as to 'the defendant' and that scienter be pleaded with regard to 'each act or omission sufficient to give rise to a strong inference that the defendant acted with the required state of mind.'" As a result of the PSLRA's repeated references to "the defendant," the court found that Congress intended plaintiffs to inform each defendant of his or her particular role in the alleged fraud.
Holding: Affirmed in part, reversed in part (the decision also contains an interesting, if relatively uncontroversial, discussion on determining scienter for a corporate defendant).
Quote of note: "[C]orporate officers may not be held responsible for unattributed corporate statements solely on the basis of their titles, even if their general day-to-day involvement in the corporation's affairs is pleaded. However, corporate documents that have no stated author or statements within documents not attributed to any individual may be charged to one or more corporate officers provided specific factual allegations link the individual to the statement at issue."
In February, the Judicial Panel on Multidistrict Litigation transfered the mutual fund trading practices cases to the D. of Md. (See this post in The 10b-5 Daily on the JPML's decision.) The Associated Press has an article on today's opening hearing before the court, where the assigned judges dealt with scheduling issues.
Quote of note I: "[District Judge] Motz began by underscoring the importance of the case to investors nationwide. He warned the lawyers, which made up most of the 200 people inside the courtroom here, that the bulk of any money recovered would go to investors who lost money -- not them. 'No one should expect to get rich off of this case,' Motz warned the lawyers."
Quote of note II: "[District Judge] Blake set what she hoped would be a 'reasonably fast schedule' for the case. She gave attorneys two weeks to negotiate who will be the lead attorneys in the huge multidistrict case. If the attorneys can't agree, the court will decide after a May 3 hearing."
The issue of loss causation is proving to be difficult for the S.D.N.Y. as it addresses the numerous research analyst cases. The general theme of the cases is straightforward: the defendants committed fraud by disseminating research reports that they knew to be overly optimistic. A key question, however, has been whether the subsequent decline in the company's stock price was caused by the research reports.
In the Merrill Lynch decision, the court found that there was no alleged connection between the research reports and the companies' financial troubles or the collapse of the overall market. (See this post.) In distinguishing that case, other S.D.N.Y. judges have pointed to additional facts linking the research reports to the alleged loss. In the Robertson Stephens decision, for example, the court noted that there was "evidence that disclosure of defendants' scheme caused a further decline in the price of [the] stock, even after the overall bubble had burst." (See this post.) While in the WorldCom decision, the plaintiffs had alleged that the analyst was aware of and concealed the accounting irregularities that led to the loss. (See this post.)
This week has seen the issuance of another research analyst decision from the S.D.N.Y., with what appears to be a new take on loss causation. In DeMarco v. Lehman Brothers, Inc., 2004 WL 602668 (S.D.N.Y. March 29, 2004), the plaintiffs allege that a Lehman analyst made buy recommendations for RealNetworks, Inc. stock during the class period (July 11, 2000 to July 18, 2001) while secretly holding negative views of the stock. In October 2000, the stock price declined, allegedly causing plaintiffs' losses. Investors did not discover that the Lehman analyst had misled them about his opinion on RealNetworks until the release of certain e-mails by the SEC in April 2003.
On the issue of loss causation the court made the following holding:
"[A]ssuming arguendo that plaintiffs must plead that their losses proximately resulted from the marketplace's reaction to the revelation of the truth that defendant's actionable statements concealed (as contrasted to independent market forces), the Complaint adequately alleges that in or around October 2000, the market was finally apprised of the negative information concerning RealNetworks that had earlier led [the Lehman analyst] to take a secretly negative view of the stock and that, as a result of these revelations, the stock declined, causing the losses on which plaintiff here sues."
The decision leaves a number of questions unanswered:
(1) Did the plaintiffs allege any facts demonstrating that the analyst knew about negative information that was not available to the market? (This factual scenario is suggested by the holding, but there is nothing in the decision to support it.)
(2) If the answer to Question 1 is no, what about the Merrill Lynch decision, which would appear to have reached the opposite conclusion on loss causation (but is not discussed by the court)?
(3) If the loss occurred in or around October 2000, how can the class period extend until July 18, 2001?
Things are getting interesting. Here's a final question: what is the Second Circuit going to say about all of this and when?
Holding: Motion to dismiss denied.
Addition: As to when the Second Circuit is going to deal with the issue of loss causation and the research analyst cases, a good guess is as part of the Merrill Lynch appeal. The scheduling order for the appeal states that briefing will be completed on May 24, with argument to be heard as early as the week of July 12. Thanks to Adam Savett for passing along this information.