Regular readers of The 10b-5 Daily know that the past year has seen a series of notable court opinions on the pleading of loss causation (the requirement that a plaintiff demonstrate that the economic harm it suffered occurred as a result of the alleged securities fraud). Is loss causation becoming a significant barrier to bringing a securities fraud claim?
The author of The 10b-5 Daily, Lyle Roberts (Wilson, Sonsini, Goodrich & Rosati), will be chairing a PLI teleseminar on this topic on Wednesday, June 9 at 1 p.m. ET. The panelists are Alfred Lechner (Morgan Lewis & Bockius - former U.S. District Judge) and Sherrie Savett (Berger & Montague). The program will also be webcast and CLE credit is available. Click here to register.
NERA Economic Consulting has published an interesting working paper entitled "Loss Causation and Damages in Shareholder Class Actions: When It Takes Two Steps To Tango." The author, Dr. David Tabak, discusses the circuit court split (see this post) between courts that believe plaintiffs must demonstrate a causal connection between the alleged misrepresentations and a subsequent decline in the stock price to adequately plead loss causation (e.g., Emergent Capital Investment Management, LLC v. Stonepath Group, Inc., 343 F.3d 189 (2d Cir. 2003)) and courts that believe plaintiffs merely need to demonstrate that the alleged misrepresentations artificially inflated the stock price (e.g., Broudo v. Dura Pharmaceuticals, Inc., 339 F.3d 933 (9th Cir. 2003)).
Dr. Tabak finds that "if plaintiffs have to plead either only a purchase inflation or only a later price decline, some investors will 'successfully' plead loss causation without having suffered a loss." Accordingly, there is a logical argument that plaintiffs should have to plead both a purchase inflation and a later price decline related to the fraud to survive a motion to dismiss. The article also discusses how the different loss causation pleading requirements impact the calculation of damages.
The Class Action Fairness Act applies some of the reform concepts in the PSLRA and SLUSA to all class actions. Notably, class actions meeting certain jurisdictional criteria would have to be heard in federal court. It is believed that Republicans have enough votes in the Senate to pass the bill (see this post), but Reuters reports that there is a disagreement over when it will reach the floor. The House passed its own version of the legislation almost a year ago.
Quote of note: "Republicans seeking curbs on what they call runaway litigation against business want to start debating the class action measure on June 1, when Senate Majority Leader Bill Frist has scheduled a vote on a motion to bring up the bill. . . . But Democratic aides predict Frist will not be able to get the 60 votes he needs to bring up the bill next Tuesday, because of the desire to resume debate on defense."
In the wake of Raytheon's settlement of the securities class action pending against the company in the D. of Mass. for $410 million in cash and securities, its co-defendant and former auditor, PricewaterhouseCoopers LLP, also has decided to avoid a trial. The Boston Globe has a lengthy article on PwC's agreement to pay $50 million to settle its portion of the suit, which alleged that the auditor helped Raytheon hide cost overruns. Taken together, the Raytheon settlements are the fifth-largest ever in a securities class action.
Quote of note: "The settlement allows Raytheon and PwC to put the dark days of 1999 behind them. But the biggest winners in the case may be the jurors who faced the prospect of sifting through complex and highly technical evidence for six weeks or longer. Instead, just after the jury was led in yesterday morning, Judge Saris disclosed the settlement before lightheartedly admonishing the jurors: 'Don't look so happy!'"
In the typical securities class action, the plaintiffs allege the defendant company made material misrepresentations that inflated the value of the company's stock. But what if the alleged misrepresentations also inflated the value of another company's stock? Do the purchasers of the second company's stock have standing to sue the first company?
The U.S. Court of Appeals for the Second Circuit thinks this is stretching the boundaries of Rule 10b-5 too far. In Ontario Public Service Employees Union Pension Trust Fund v. Nortel Networks Corp., 2004 WL 1110496 (2d Cir. May 19, 2004), the court addressed whether purchasers of JDS Uniphase stock, which was in the process of selling its laser business to Nortel during the class period, had standing to sue Nortel for alleged misstatements about Nortel's business prospects that inflated the stock prices of both companies. Based on Supreme Court precedent, the court found that the purchaser-seller requirement for Rule 10b-5 liability limits standing to those who have dealt in the security to which the misrepresentation relates. (The court left open the question, however, of whether a potential merger between two companies, which would create a more direct relationship between the companies' stock prices, might require a different outcome.)
Holding: Affirming lower court's dismissal.
Quote of note: "Stockholders do not have standing to sue under Section 10(b) and Rule 10b-5 when the company whose stock they purchased is negatively impacted by the material misstatement of another company, whose stock they do not purchase."
In settling a case, timing is important. Citigroup's settlement of the WorldCom litigation for $2.65 billion was the subject of a handshake agreement as of Thursday, May 6. According to press reports, Citigroup told analysts that the timing was influenced by the Second Circuit argument in the case scheduled for the following Monday.
At issue in that appeal was whether the district court had properly granted class certification for the claims against Citigroup based on analyst statements about WorldCom's securities. The district court had applied the fraud-on-the-market doctrine (i.e., reliance by investors on an alleged misrepresentation is presumed if the company's shares were traded on an efficient market) to help establish that common issues predominated over individual ones for the class members. Citigroup argued on appeal that the fraud-on-the-market doctrine could not be applied to claims based on analyst statements. Meanwhile, the SEC submitted an amicus brief to the court opposing Citigroup's position. Citigroup, in discussing its decision to settle the case before the appeal was heard, stated "to have the SEC come out against that obviously worsened the odds against us." But, with the benefit of hindsight, were the odds better than they appeared?
Although the Second Circuit had agreed to hear Citigroup's appeal, as of May 6 (the date of the handshake agreement) it had not issued an opinion explaining its ruling. That would come the next day, May 7, and the opinion certainly suggested that Citigroup's arguments would be considered carefully.
In Hevesi v. Citigroup Inc., 2004 WL 1008439 (2d Cir. May 7, 2004), the court explained that it had agreed to hear the appeal because the certification order "implicates a legal question about which there is a compelling need for immediate resolution." The question was "whether a district court may certify a class in a suit against a research analyst and his employer, based on the fraud-on-the-market doctrine, without a finding that the analyst's opinions affected the market prices of the relevant securities." In discussing its decision to address that question, the court expressed skepticism about the lower court's ruling. Among other indications that it might be favorably disposed to Citigroup's position, the court: (1) discussed a Seventh Circuit case in which the court had declined to apply the fraud-on-the-market doctrine on class certification; (2) noted that "the application of the fraud-on-the-market doctrine to opinions expressed by research analysts would extend the potentially coercive effect of securities class actions to a new group of corporate and individual defendants - namely, to research analysts and their employers;" and (3) cited a prominent Columbia Law School professor on the point that analyst opinions should be treated differently from issuer statements.
If that were not enough, just five days later the Fourth Circuit issued an opinion establishing that a district court must make a factual finding that the fraud-on-the-market doctrine is applicable before it can be used to support class certification. In Gariety v. Grant Thornton, LLP, 2004 WL 1066331 (4th Cir. May 12, 2004), the court addressed whether a district court could accept "at face value the plaintiffs' allegations that the reliance element of their fraud claims could be presumed under a 'fraud-on-the-market' theory." At issue was whether the relevant securities had been traded on an efficient market (one of the requirements for the application of the theory). The court concluded that because "the district court concededly failed to look beyond the pleadings and conduct a rigorous analysis of whether Keystone's shares traded in an efficient market, we must remand the case to permit the district court to conduct the analysis and make the findings required by Rule 23(b)(3)."
While there are undoubtedly many other factors that go into a settlement (especially one of this magnitude), would the Citigroup settlement have looked different just a week later based on these judicial developments? Maybe not, but it's interesting to speculate.
The Associated Press has an article discussing whether the market should expect another set of corporate scandals in the future. Although human nature is unlikely to change, the article reviews the legal environment and concludes "[i]n sheer numbers, the legal activity of recent years - both government action and investor litigation - should be enough to give any would-be wrongdoer some immediate cause for pause."
Quote of note: "'I don't think there's a clear connection' between legal risks and improper behavior, said Bruce Carton, executive director for Securities Class Action Services at ISS. 'When the misdeeds are going on, people aren't thinking years down the road, 'Will this cost me in a class action suit?' My sense is that (the legal risk) generally won't deter the bad guys, but it may spur the bad guys' employers to put safeguards in place that may catch or deter somebody down the line.'"
In a feature article this past weekend, the Washington Post addressed the issue of investor restitution for securities fraud. The article discusses some of the recent enormous settlements with regulators (e.g. the $1.4 billion settlement with the New York Attorney General over biased research reports) and concludes that the "problems with investor restitution are simple -- there is never enough money to go around -- and complicated -- it can be difficult to determine who should get what little money there is." The article also touches on another difficult problem, how to reconcile the SEC's new powers to collect settlement funds for allocation to investors with private securities litigation. (See this post in The 10b-5 Daily from last June.)
Quote of note: "The SEC is asking Congress for the power to seize more assets from wrongdoers who otherwise might shelter them under the protection of state bankruptcy laws and for the ability to hire outside law firms to help it collect payments. A House bill [the Securities Fraud Deterrence and Investor Restitution Act] that would give the SEC that authority is pending before the Judiciary Committee. Former SEC staffer [Mercer E.] Bullard said the public shouldn't demand that the agency invest a substantial portion of its resources into collecting penalties from wrongdoers. He said that is a task better suited to plaintiff lawyers."
The Citigroup settlement may have gotten all of the headlines, but last week was bookended by two other significant settlements.
i2 Technologies, Inc. (OTC: ITWO), a Dallas-based provider of closed-loop supply chain management solutions, announced on Monday the preliminary settlement of the securities class actions (and related derivative lawsuits) pending against the company in the N.D. of Tex. The original suit, first filed in March 2001, alleges that the company made false and misleading statements concerning the characteristics and implementation of certain software products. A second set of class actions were filed starting in April 2003 relating to the company's 2003 financial restatement.
The settlement is for $84.85 million ($43 million from the company's insurance carriers and $41.85 million from the company). Interestingly, i2 also announced that to help fund its portion of the settlement, "the company has entered into definitive agreements providing for the issuance and sale by i2 of $22 million of common stock to certain individual defendants in the lawsuits."
Raytheon Company (NYSE: RTN), a Massachusetts-based leading defense contractor, announced on Thursday the preliminary settlement of the securities class action pending against the company in the D. of Mass. The suit, originally filed in 1999 and about to go to trial, alleges that Raytheon made false and misleading statements concerning its financial performance.
The settlement is valued at $410 million (a cash payment of $210 million and warrants for Raytheon stock with a stipulated value of $200 million). Although Raytheon apparently has yet to reach an agreement with its insurance carriers, the company stated that it "expects to receive insurance proceeds of $75 million in connection with the settlement."
Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse have released a report on federal securities class action filings in 2003. The findings include:
(1) Securities class actions (not including IPO allocation, analyst research, or mutual fund trading practices cases) declined by 22% between 2002 and 2003, falling from 225 to 175 filings.
(2) Companies sued in 2003 lost more than $540 billion in market capitalization, down from $1.9 trillion in 2002.
(3) There were fewer huge cases. In 2003, there were 14 filings in which the defendant companies lost more than $10 billion in market capitalization. In 2002, there were 40 filings with this type of market capitalization loss.
(4) The top three circuits in number of filings in 2003 were the Second Circuit (37 filings), the Ninth Circuit (34 filings), and the Eleventh Circuit (21 filings).
(5) Insider trading by corporate defendants was alleged in 33% of the 2003 filings (as compared to 26% in 2002).
(6) Auditors and underwriters were named as defendants in a very small percentage of all filings both in 2002 and 2003.
The joint press release announcing the report can be found here.
The 11th Circuit (Florida, Georgia, Alabama) is a tough place to bring a successful securities class action. That appears to be the conclusion of a Miami Daily Business Review feature article (via law.com - regist. req'd) on the topic. The article notes that a recent NERA report (see this post) found that 10 percent of the securities class actions filed in the 11th Circuit since the passage of the PSLRA have been dismissed within two years - tied for second place among all circuits. The article also profiles some prominent cases.
Quote of note: A plaintiffs' attorney in Florida contended "that the 11th Circuit's standard for inferring intent to defraud -- as set out in the 11th Circuit's 1999 decision Bryant v. Avado -- has 'heightened the pleading requirements beyond the intent of Congress. Motive and opportunity and damages are not enough [in the 11th Circuit],' [the plaintiffs' attorney] said. 'What do you have to have? Pictures? You almost need an insider to get to discovery.'"
The Wall Street Journal has an article (subscrip. req'd) on the lead plaintiff hearing held last week in the mutual fund trading practices cases. (The 10b-5 Daily has posted about the cases frequently, most recently on speculation that the settlements could total $1 billion.)
Quote of note: "'Nobody should expect to get rich off this case,' said U.S. District Judge J. Frederick Motz in early April. 'If there is any recovery, the great bulk of the recovery should go to those who were injured, not to their lawyers, particularly in light of the fact that so much of the underlying investigative work has already been done by public authorities,' he added. 'Any of you who have expressed an interest as being appointed as plaintiffs' counsel are forewarned that we mean what we say. You may wish to reconsider your request for appointment in light of this observation.' The admonishment did little good. Six dozen lawyers showed up at last week's hearing to angle for a lead counsel spot."
Quote of note II: "Legislation passed by Congress in 1995 and affirmed in court rulings dictate that plaintiffs with the largest financial stake in a case should get lead-plaintiff status, which usually makes their lawyers lead counsel. But it isn't always clear which investor suffered most, especially when there are different ways of showing harm. In the mutual-fund cases, lawyers presented myriad formulas to make their clients look like the biggest losers."
(1) Of the 96 settlements in 2003, almost 85% were for less than $20 million. Five cases settled for more than $100 million.
(2) 20% of post-Reform Act settlements have involved Section 11 or 12(a)(2) claims and median settlements as a percentage of "estimated damages" are significantly higher for these cases.
(3) Approximately 30% of post-Reform Act settlements have involved institutions serving as lead plaintiffs (as compared to approximately 15% before the Reform Act). After controlling for various factors, the report finds that settlement amounts are higher in these cases.
(4) Less than 15% of post-Reform Act cases have been accompanied by the filing of a derivative action.
Cornerstone's press release can be found here. The company also announced that its report on securities class action filings for 2003 (done jointly with Stanford Law School's Securities Class Action Clearinghouse) will be released shortly.
Addition: The New York Law Journal (via law.com - regist. req'd) has an article on the report.
There is extensive press coverage today of Citigroup's $2.65 billion settlement in the WorldCom case. Some highlights:
Additional Settlements - The Wall Street Journal (subscrip. req'd) reports that the lead plaintiff has given the other defendant banks in the WorldCom litigation 45 days to settle under the same formula used by Citigroup. If the banks agree, they would pay about $2.8 billion to bond investors.
Allocation - The Associated Press reports that, according to the lead plaintiff in the case, Citibank's payment will be allocated with $1.45 billion to bondholders and $1.2 billion to shareholders.
Attorneys' Fees - The Wall Street Journal (subscrip. req'd) and the London Evening Standard report that the complex attorneys' fees arrangement in the case may result in fees of around $140 million for the plaintiffs' firms handling the litigation.
Citigroup Inc. (NYSE: C) has announced a settlement of the claims against the company in the WorldCom litigation. Citigroup will make a payment of $2.65 billion, or $1.64 billion after tax, to be allocated between class period purchasers of WorldCom stock and WorldCom bonds. According to the press release, the path to settlement became easier last Thursday when New York State Comptroller Alan Hevesi, who oversees the lead plaintiff in the case, agreed to face-to-face discussions. Citigroup also announced that after settling the WorldCom claims it will have a "litigation reserve" of $6.7 billion on a pre-tax basis to address other legal matters, including the Enron securities class action.
Quote of note (Bloomberg): "Chief Executive Officer Charles Prince said Citigroup faced claims seeking $54 billion in the WorldCom lawsuit. 'We made a $1.64 billion insurance policy to avoid a roll of the dice in front of a jury,' Prince said on a conference call with investors. 'We want to put the entire era behind us.'"
Quote of note II (Bloomberg): "Saudi Prince Alwaleed bin Talal, Citigroup's largest individual shareholder, said Prince and Citigroup Chairman Sanford Weill called him this morning and he told them 'I'm backing them all the way. If this was to go to court it would be so big, God help us,' Alwaleed said. 'The trend in the U.S. and New York is against corrupt practices. Look at Martha Stewart.'"
According to a Reuters article, the CFO of Royal Ahold has told a Dutch newspaper that the U.S. securities class actions brought against the company in the aftermath of its recent accounting scandal could "'last long, even 10 years is possible.'" Complicating the situation, Royal Ahold's D&O insurance carrier has served the company with a court summons in an attempt "to terminate the Directors, Officers and Corporate Liability policy of $100 million for Ahold's U.S. Foodservice subsidiary where much of the profit overstatements took place in 2002." (The 10b-5 Daily has posted about this case before, most recently concerning the court's discovery decision issued last March.)
TALX, Corp. (Nasdaq: TALX), a St. Louis-based business process outsourcer of payroll data-centric services, has announced the preliminary settlement of the securities class action pending against the company in the E.D. of Mo. The case, originally filed in December 2001, alleges that TALX made misleading statements that did not properly account for certain software and inventory, did not reflect certain write-offs, and did not accurately disclose certain business prospects. The settlement is for $5.75 million and will be paid by TALX's insurance carriers.
The Washington Post reports that Judge Shirley Wohl Kram has denied most of the motion to dismiss in the AOL Time Warner securities class action pending in the S.D.N.Y. The complaint alleges that the defendants, both before and after the 2001 merger of AOL and Time Warner, improperly inflated results through 'round-trip' deals that in effect overpaid other companies for goods, services, or equity in exchange for advertising revenue. In 2002, AOL Time Warner restated $190 million in revenue.
Judge Kram threw out some of the plaintiffs' claims, including those against former AOL chairman Steve Case and various bondholder claims, but found that the allegations in the complaint "established sufficient circumstantial evidence of misbehavior or recklessness for the case to move forward" against the company and various current and former officials. (The 10b-5 Daily has posted frequently about the case, most recently about a discovery decision issued by the court last October.)
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). The U.S. Court of Appeals for the Fifth Circuit has recently held, in the first circuit court decision to address the issue, that the group pleading doctrine was abolished by the enactment of the PSLRA's heightened pleading standards.
That decision is beginning to have an impact outside of the Fifth Circuit. In In re Cross Media Marketing Corp. Sec. Litig. 2004 WL 842350 (S.D.N.Y. April 20, 2004), the court found that the PSLRA's "use of the singular 'defendant' counsels against group pleading in actions arising in securities fraud cases since the enactment of the [statute]." The court cited the Fifth Circuit decision and held that group pleading could not be used to establish that the individual defendants made misrepresentations or acted with scienter (i.e., fradulent intent).
Holding: Motion to dismiss granted with leave to replead.
Quote of note (Reuters): "[T]he two firms agreed on a structure in which lawyers already working on a case would continue to work on it, even if that meant having attorneys from both firms on a case. A committee has been set up to deal with any spats."
ISS's Securities Class Action Services ("SCAS") has issued a list of the top 50 plaintiffs' law firms ranked by the total dollar amount of final securities class action settlements occurring in 2003 in which the law firms served as lead or co-lead counsel.
Not to be outdone, Cauley Geller Bowman & Rudman, another well-known plaintiffs' securities class action firm, also has announced a split. Cauley Bowman Carney & Williams PLLC is based in Little Rock and Geller Rudman PLLC is based in New York. Each new firm has around 15 attorneys.
Addition: The official press release was issued on May 6.
Initially announced last June, the breakup of Milberg Weiss Bershad Hynes & Lerach, widely recognized as the leading plaintiffs' securities class action firm, is finally complete. With little fanfare, the firm has split as of May 1 into Milberg Weiss Bershad & Schulman LLP (headquartered in New York) and Lerach Coughlin Stoia & Robbins LLP (headquartered in San Diego).
Although the split generally follows geographical lines, it will not stay that way for long. An article in today's Financial Times states that one of the name partners of Lerach Coughlin sees "the new firm growing to more than 150 lawyers by the end of the year and opening new offices in New York, Florida, Philadelphia and Washington, DC." Indeed, the websites already show both firms as having offices in Los Angeles and Washington, D.C. (but only Lerach Coughlin has attorneys listed in those locations).
Addition: The new firms have issued a joint statement. Of course, they also have separate thoughts on the matter (click here for Milberg Weiss' press release; click here for Lerach Coughlin's press release).