Bristol-Myers Squibb Co. (NYSE - BMY), a global pharmaceutical company headquartered in New York, has announced the preliminary settlement of the securities class action pending against the company in the S.D.N.Y. The case, originally filed in 2002, alleges violations of federal securities laws in connection with the Company’s investment in and relationship with ImClone Systems, Inc. and issues related to wholesaler inventory and sales incentives, the establishment of reserves, and accounting for certain asset and other sales.
Although the district court dismissed the case with prejudice last March, plaintiffs were pursuing an appeal. The settlement is for $300 million and will be charged against Bristol-Myers' litigation reserves. There has been significant media coverage of the settlement, including this Associated Press article.
Addition: The Wall Street Journal has an article (subscrip. req'd) discussing the settlement and the current securities litigation environment. The article notes that "it's not often a defendant agrees to pay nine figures to resolve a case that had been thrown out of court."
FirstEnergy Corp. (NYSE - FE), a public utility holding company headquartered in Akron, Ohio, has announced the preliminary settlement of the securities class action (and related state and federal derivative suits) pending against the company in the N.D. of Ohio. The suits "alleged violations of federal securities laws and related state laws in connection with events related to FirstEnergy, including the extended outage at the Davis-Besse Nuclear Power Station; the August 14, 2003, regional power outage; and financial restatements related to changed accounting treatments for transition assets being recovered in Ohio."
The settlement is for $89.9 million and is subject to court approval. FirstEnergy's insurance carriers will pay $71.92 million "based on a contractual pre-allocation."
This week's edition of The National Law Journal has a feature article (via law.com - subscrip. req'd) on securities litigation and the increasing competition amongst the plaintiffs' law firms. The article focuses on the importance to these firms of developing strong relationships with institutional investor clients who can act as lead plaintiffs.
Quote of note: "Because a firm's success depends not only on the viability of its case but also on the breadth of the client, how institutional investors choose their lawyers to pursue securities matters has become increasingly 'political,' said Joseph A. Grundfest, a securities law professor at Stanford Law School."
The Associated Press has an article on requiring corporate governance reforms as part of the settlement of shareholder litigation. The author reviews some recent settlements that included reforms (Broadcom and Applied Micro Circuits) and argues "these settlements help debunk arguments against further governance reform for all public companies." (The 10b-5 Daily most recently posted about this issue here.)
Quote of note: "Only four of the 63 settlements reached in class-action shareholder suits so far in 2004 have produced governance reforms, according to Bruce Carton, executive director of securities class-action services for Institutional Shareholder Services, an adviser to major money managers. But while hardly an avalanche of reform, the recent activity does stand out compared with the prior two years, when only five of 346 settlements produced governance changes."
Addition: An astute reader notes that the above statistics almost certainly understate the number of shareholder cases that have resulted in corporate governance reforms because corporate governance reforms are often implemented as part of the settlement of a related derivative suit, rather than in the settlement of the securities class action.
While the U.S. Court of Appeals for the Eleventh Circuit continues to consider whether the new statute of limitations in the Sarbanes-Oxley Act of 2002 revives time-barred claims, the district court split on the issue remains unresolved. Two recent decisions from the S.D.N.Y., in prominent cases, come to different conclusions.
In In re Worldcom, Inc. Sec. Litig., 2004 WL 1435356 (S.D.N.Y. June 28, 2004), Judge Cote found that "there is no explicit language in the statute" that would operate to revive time-barred claims and lengthening the statute of limitations in this manner "would affect the substantive rights of the defendants by depriving them of a defense on which they were entitled to rely." Accordingly, the court held that "Sarbanes-Oxley does not revive previously time-barred private securities fraud claims" and dismissed certain claims in the case that had expired in June 2002 (a month before Sarbanes-Oxley was passed).
In In re AOL Time Warner, Inc. Sec. and "ERISA" Litig., 2004 WL 992991 (S.D.N.Y. May 5, 2004), Judge Kram went in another direction. In that case, the first class action was filed on July 18, 2002 (two weeks before Sarbanes-Oxley was passed). The court held that the plaintiffs' otherwise time-barred claims would have been revived if the plaintiffs had filed after the passage of Sarbanes-Oxley. Although "in most cases, class actions or otherwise, the date of the first filing is the operative one for statute of limitations purposes," the court decided that the filing date of the consolidated complaint, September 16, 2002, should be the operative date in the instant case. As a result, the longer statute of limitations in Sarbanes-Oxley applied and the otherwise time-barred claims could proceed. The court justified this rather extraordinary decision by arguing that any other result would punish the plaintiffs for filing too early and lead to a mass opt-out from the class.
The PSLRA created a safe harbor for forward-looking statements to encourage companies to provide investors with information about future plans and prospects. Under the first prong of the safe harbor, a defendant is not liable with respect to any forward-looking statement if it is identified as forward-looking and is accompanied by "meaningful cautionary statements" that alert investors to the factors that could cause actual results to differ.
In the case of oral forward-looking statements, the PSLRA specifically provides that the meaningful cautionary statements can be incorporated by reference in a readily available written document. The statute is silent, however, about whether this is also true for written forward-looking statements. Surprisingly, only a few courts have addressed this issue.
In In re Blockbuster Inc., Sec. Litig., 2004 WL 884308 (N.D. Tex. April 24, 2004), the court noted that the PSLRA's safe harbor is based on the judicially-created bespeaks caution doctrine, which provides that statements must be analyzed in context. The court therefore concluded that "as long as the reference is clear and explicit so that the referenced cautionary language can fairly be viewed as part of the 'context' surrounding the written forward-looking statement, the PSLRA safe harbor for written forward-looking statements can be satisfied by meaningful cautionary language that is incorporated by reference." The court found that its holding was supported by the "illogic" of allowing incorporation by reference for oral statements, where the location of the cautionary statements is likely to be misheard or forgotten, but not allowing it for easily followed written statements.
Holding: Motion to dismiss granted.
Last year, The 10b-5 Daily posted about the unusual legal battle over the estate of Harvey Greenfield. Greenfield was a well-known plaintiffs' securities class action lawyer who passed away in 2002. Although Greenfield had told people that he planned to leave the bulk of his estate (valued at $35 million) to Harvard Law School, a will could not be located after his death. Harvard filed a claim against the estate. The New York Law Journal reports today that a settlement has been reached between Harvard and Greenfield's sole living heir to fund a securities law professorship in Greenfield's name with about $2.8 million.
Matria Healthcare has announced the dismissal of the securities class action pending against the company in the N.D. of Ga. The court's opinion addresses the issue of whether in-and-out traders (i.e., investors who both bought and sold their shares during the class period) can be effective lead plaintiffs.
Only one person filed suit against Matria on a class action basis and he was subsequently named lead plaintiff. The proposed class period extended from October 24, 2000 to June 25, 2002, when the company disclosed problems with its information technology capabilities, but the lead plaintiff had sold all of his Matria shares on February 6, 2002.
In its opinion (Barr v. Matria Healthcare, Inc., 2004 WL 1551566 (N.D. Ga. July 7, 2004)), the court found that it was "undisputed that the Plaintiff sold his stock in response to an adverse market reaction to the Defendants' January 30, 2002 press release." The January 30 press release, however, made no mention of Matria's information technology problems. As a result, the court found that the lead plaintiff could not demonstrate loss causation because the relevant misrepresentations "were not disclosed until well after the Plaintiff had sold his stock at the still artificially inflated price."
Holding: Motion to dismiss granted with prejudice (also on other grounds).
The Motley Fool website has an interesting, non-lawyer commentary on the large number of securities class actions that have been filed in the biotech industry over the past few years. The author engages in an informal survey of 100 mid-cap ($100 million to $2 billion) biotech companies and finds that 31, or nearly one-third, are currently facing suits. (The 10b-5 Daily has previously posted about the statistics for biotech cases filed in 2003.)
Quote of note: "Drug development is a high-risk business model, where investigational products frequently fail. Approximately 30% of drugs in phase 3 trials will never gain approval, and roughly 20% of drugs filed for approval with the FDA will get turned down. That's a pretty high failure rate."
Quote of note II: "This non-legal advice from a non-lawyer is to stick to the facts of the clinical data and avoid giving opinions on how good the drug is. Don't say something like 'potential to be best in class' or 'revolutionize the treatment of this disease.' Such careless comments will be a nightmare if the drug hits a snag. You can bet that the lawyers will be looking for them, too."
Whether and how to apply the fraud-on-the-market theory (i.e., reliance by investors on an alleged misrepresentation is presumed if the company's shares were traded on an efficient market) to research analyst statements is a controversial issue. It was the subject of a recent appeal by Citigroup in the WorldCom litigation, but the appeal was mooted by the settlement of the case just before the scheduled oral argument.
The 10b-5 Daily has argued that the Second Circuit, in its opinion granting Citigroup's request for interlocutory appeal, appeared favorably disposed to finding that the fraud-on-the-market theory was not generally applicable to research analyst statements. Judge Rakoff of the S.D.N.Y. apparently agrees with this reading of the opinion.
In DeMarco v. Lehman Brothers, 2004 WL 1506242 (S.D.N.Y. July 6, 2004), a case alleging that a Lehman analyst made buy recommendations for RealNetworks, Inc. stock while secretly holding negative views of the stock, the court has denied the motion for class certification. The court noted that there is a "qualitative difference" between a statement of fact from an issuer and a statement of opinion by a research analyst. In particular, a "well-developed efficient market can reasonably be presumed to translate the former into an effect on price, whereas no such presumption attaches to the latter." As a result, the court held that the fraud-on-the-market doctrine can apply to a case based on research analyst statements "only where the plaintiff can make a prima facie showing that the analyst's statements materially impacted the market price in a reasonably quantifiable respect."
The plaintiffs relied on Lehman Brothers' promotional materials touting its analyst's abilities and influence and an expert report (largely based on general studies of the effect of analyst recommendations on stock prices) in arguing that the analyst's statements inflated the market price for RealNetworks' stock. The court found that this evidence was insufficient to "warrant invocation of the fraud-on-the-market presumption."
Holding: Motion for class certification denied.
Quote of note: "[A] statement of opinion emanating from a research analyst is far more subjective and far less certain, and often appears in tandem with conflicting opinions from other analysts as well as new statements from the issuer. As a result, no automatic impact on the price of a security can be presumed and instead must be proven and measured before the statement can be said to have 'defrauded the market' in any material way that is not simply speculative."
The New York Law Journal has an article (via law.com - free regist. req'd) on the decision. Thanks to Adam Savett for sending in a copy of Judge Rakoff's opinion.
The parties in the mutual fund trading practices cases, which have been consolidated in the D. of Md., are in settlement negotiations. The Wall Street Journal has an interesting article (subscrip. required) exploring the ramifications of the mutual funds' agreement to pay $2.5 billion to settle with the SEC and state regulators. Almost all of these funds will go to mutual fund investors (in part because of the Sarbanes-Oxley provisions allowing the SEC to distribute penalties it obtains to injured investors), which is likely to reduce any settlement in the private lawsuits. (The 10b-5 Daily has posted about the cases frequently, most recently about the lead plaintiff contest.)
Quote of note: "Attorneys for the mutual-fund companies have cited the settlement agreements in their defense, which by some measures total more than the alleged damages. The 'plaintiffs are tilling a plowed field,' lawyers for Janus wrote in a court filing."
Quote of note II: "The plaintiffs' attorneys are likely to contend in amended complaints due later this month that the fund companies need to prove that they are fully compensating investors for the harm done by the trading. Some of the lawsuits are seeking the return of fund-management fees on the theory that the managers violated their fiduciary duty to investors, an issue not directly addressed by the SEC settlements."
The New York Times had a long feature article in its Sunday edition on the breakup of Milberg Weiss Bershad Hynes & Lerach, widely recognized as the leading plaintiffs' securities class action firm. The article discusses a number of topics, including the history of Milberg Weiss, the PSLRA, and the recent corporate scandals.
The Financial Times has an article on the U.S. Supreme Court's decision to grant cert in the Dura Pharmaceuticals case and address the issue of loss causation. The article also discusses the potential impact on the research analyst cases.
Quote of note: "The Supreme Court is not expected to rule on the Dura case until 2005; an appeal in the Merrill Lynch case is due to begin in New York next month, although some lawyers believe that ruling may be put off until after the Supreme Court acts."
Disclosure: The author of The 10b-5 Daily is quoted in the article.
Last year, there was a great deal of concern over the rising costs of directors and officers ("D&O") insurance. According to an article in the Silicon Valley/San Jose Business Journal (via MSNBC), however, the pendulum has swung the other way. Rates began declining in April of this year and "now many companies are saving between 18 percent and 50 percent." The article attributes most of the decline to rate competition caused by new underwriters entering the market. (Thanks to the Securities Law Beacon for the link.)
Quote of note: "Those getting the biggest break are stable, middle-market public companies, between $500 million and $1 billion in market cap. This group was hit as hard as anyone when D&O rates started increasing in 2001. Until rates started easing earlier this year, some companies saw increases as high as 300 percent."
The Associated Press reports that the Class Action Fairness Act will not be voted on in the U.S. Senate this legislative year, becoming the "victim of election-year skirmishing between the two parties." Proponents of the bill were unable to get enough votes to invoke cloture today after Senate Majority Bill Frist (R.-Tenn.) refused to allow consideration of various unrelated amendments.
To what extent are individual stock trading plans (entered into pursuant to SEC Rule 10b5-1) helpful in defending against private securities fraud claims? At least one court, the N.D. of Cal. in the Monterey Pasta case, has suggested that the use of a stock trading plan may allow a defendant to negate any inference of fraudulent intent based on his stock sales because the sales were pre-scheduled. As more company executives implement these plans, the issue is likely to gather steam.
The author of The 10b-5 Daily, along with one of his colleagues, has an article on the topic - "Individual Trading Plans Can Help Defend Securities Fraud Claims" - in the most recent edition of Compliance Week (July 7). A link to the article can be found here.
The U.S. Senate finally is debating the Class Action Fairness Act (see this post), but its passage may be derailed by unrelated amendments. The Associated Press and Reuters have reports on today's action.
Quote of note (Associated Press): "Democrats are demanding a vote on raising the minimum wage from the $5.15 an hour to $7 over the next few years. They also want a vote on fighting global warming and on extending an assault weapon ban that is to expire this year. Hawaii's two Democratic senators are pushing legislation that would recognize native Hawaiians as a governing entity. Republican Sen. Larry Craig of Idaho, with Sen. Edward Kennedy, D-Mass., are trying to add a proposal that would give temporary legal status to undocumented farm workers."
Bank of America Corporation (NYSE:BAC) announced on Friday the preliminary settlement of the claims brought against the company as part of the Enron securities class action pending in the S.D. of Texas. Bank of America has agreed to pay $69 million. It is the second settlement in the Enron case, following the July 2002 settlement by Arthur Andersen's international entities.
Bank of America was sued under the Securities Act based on its role as an underwriter for certain Enron and Enron-related debt offerings. According to a press release from the University of California, the lead plaintiff in the case, Bank of America's payment will be more than 50% of its potential damage exposure.
The Second and Ninth Circuits previously have held that a district court's decision to remand a case that has been removed under the Securities Litigation Uniform Standards Act of 1998 ("SLUSA") is not appealable. In a decision issued this week, the Seventh Circuit has disagreed.
SLUSA generally prohibits the bringing of a securities class action based on state law in state court. The defendants are permitted to remove the case to federal district court for a determination on whether the case is preempted by the statute. If so, the district court must dismiss the case; if not, the district court must remand the case back to state court.
A remand based on a district court's decision that it does not have subject-matter jurisdiction over a case cannot be reviewed on appeal. In Kircher v. Putnam Funds Trust, 2004 WL 1470350 (7th Cir. June 29, 2004), however, the Seventh Circuit found that this general proposition is inapplicable to a case removed and remanded under SLUSA. The Supreme Court "has observed that a court lacks 'subject-matter jurisdiction' only when Congress has not authorized the federal judiciary to resolve the sort of issue presented by the case (or the Constitution forbids adjudication)." In contrast, SLUSA expressly authorized the district court to accept the removal of the Kircher case and "[o]nly after making the substantive decision that Congress authorized it to make [i.e., whether the case was preempted] did the district court remand." This means that the district court had "no adjudicatory competence to do more," the Seventh Circuit concluded, not that it lacked subject-matter jurisdiction. Accordingly, a SLUSA remand may be appealed.
Holding: Appeal will proceed to briefing and a decision on the merits.
Quote of note: "Both the second and ninth circuits were mesmerized by the word 'jurisdiction' and did not see the difference between a case that never should have been removed and a case properly removed and remanded only when the federal job is done."
Quote of note II: "Appellate consideration of what amounts to a venue dispute slows things down to little good end, for the state court is competent to address the merits. SLUSA means, however, that one specific substantive decision in securities litigation must be made by the federal rather than the state judiciary. Appellate review of decisions under [SLUSA] will promote accurate and consistent implementation of that statute, at little cost in delay beyond what the authorized removal itself creates."