In a week filled with large settlements, Lehman Brothers Holdings, Inc. (NYSE: LEH) has announced the preliminary settlement of the '33 Act claims (misrepresentations in a registration statement) brought against it as part of the Enron securities class action in the S.D. of Tex. The settlement is for $222.5 million and follows on the heels of a similar, albeit smaller, settlement by Bank of America.
Elan Corp. (NYSE: ELN), an Ireland-based pharmaceutical company, 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 that Elan engaged in accounting violations. The settlement is for $75 million, with $35 million to be paid by the company and $40 million by its insurance carrier.
Addition: An interesting sidenote - Elan is the parent company of Dura Pharmaceuticals, the defendant in the loss causation case currently before the U.S. Supreme Court.
The AT&T securities class action went to trial, but there will be no jury verdict. AT&T (NYSE: T), a N.J.-based telecommunications company, announced today that after three weeks of trial proceedings it is settling the case for $100 million, or about 4% of the damages being sought by the plaintiffs. The company also said that "it intends to seek reimbursement from its insurers for the amounts to be paid."
In Central Bank, the U.S. Supreme Court held that private action under Rule 10b-5 can only be brought against persons who are primary violators and not against those who aid and abet a primary violator. How to tell the difference between a primary violator and an aider and abettor, however, has been the subject of much debate.
The SEC has filed an amicus brief in the Homestore securities litigation currently pending before the U.S. Court of Appeals for the Ninth Circuit that urges the court to adopt a broad test for determining who is a "primary violator." The lower court dismissed the claims against three companies - AOL Time Warner, Cendant, and L90 (as well as a few of their executives) - that were Homestore's business partners in transactions whose alleged purpose was to inflate Homestore's revenues. The lower court reasoned that these business partners could not be primary violators because they did not have a special relationship with Homestore (e.g., accountant or attorney).
The plaintiffs appealed these dismissals. In support of the plaintiffs, the SEC argues that Central Bank did not create a "special relationship" test for a primary violator and that engaging in a transaction whose purpose was to create a false appearance of revenues constitutes a deceptive act that can support primary liability.
Quote of note: "The Commission urges the following test for determining when a person's conduct as part of a scheme to defraud constitutes a primary violation: Any person who directly or indirectly engages in a manipulative or deceptive act as part of a scheme to defraud can be a primary violator of Section 10(b) and Rule 10b-5; any person who provides assistance to other participants in a scheme but does not himself engage in a manipulative or deceptive act can only be an aider and abettor."
The "collective scienter" theory is beginning to gain a foothold in securities litigation caselaw, even if courts are not expressly acknowledging the nature of their holdings. As a general matter, whether a defendant corporation has acted with scienter (i.e., fraudulent intent) is determined by looking "to the state of mind of the individual corporate official or officials who make or issue the statement . . . rather than generally to the collective knowledge of all the corporation's officers and employees acquired in the course of their employment." Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353 (5th Cir. 2004). Another way of putting this is that courts recognize corporations only act through their officers and directors, and, therefore, can only be held liable for fraud if one or more of those individuals can be held liable for fraud. A steady trickle of decisions, however, appears to be rejecting this principle in favor of a collective scienter theory.
The U.S. Court of Appeals for the Sixth Circuit recently affirmed the dismissal of a securities class action against Ford based on statements relating to faulty tires, but the manufacturer of those tires has not been as fortunate. In City of Monroe Employees Retirement System v. Bridgestone Corp., No. 03-5505 (6th Cir. 2004), the court found that some of the statements made by Bridgestone and its wholly-owned subsidiary, Firestone, were actionable. On the issue of scienter, the court examined the state of mind of the corporate entities separately from the state of mind of the sole individual defendant (Firestone's CEO). The court concluded that scienter was adequately plead against Bridgestone and Firestone, even though it failed to identify any individual officers or directors who acted with scienter. Moreover, the court rejected the scienter allegations against Firestone's CEO and affirmed the dismissal of the claims against him. Leading to the inevitable question: if an officer makes the statement and a janitor knows the statement is false, has the corporation acted with fraudulent intent?
Holding: Affirmed in part and reversed in part.
The number of foreign companies listed on U.S. stock exchanges has grown over the past few years, with a significant amount of the increase coming from China. About 70 mainland Chinese companies are now listed in the U.S. and, inevitably, these companies have begun to feel the sting of securities class action litigation.
An article in today's China Daily discusses the regulatory difficulties faced by U.S.-listed Chinese companies and notes the recent SEC investigation and securities class action suit brought against the China Life insurance company over accounting irregularities. Judging by this line in the article, however, foreign understanding of the regulatory/litigation environment in the U.S. remains imperfect: "What seems most worrisome to management is that under the Sarbanes-Oxley Act, even restatement of accounts can trigger a class action by shareholders."
In a three-way matchup that will have the securities litigation bar watching, the Recorder reports (free regist. req'd) that the recently split law firms of Milberg Weiss and Lerach Coughlin are battling it out for the lead plaintiff/lead counsel position in the securities class actions filed against Chiron, a flu vaccine manufacturer, in the N.D. of Cal. Who will preside over this battle? None other than Chief Judge Vaughn Walker.
Judge Walker recently got into a highly-publicized disagreement with Milberg Weiss (when the two firms were still together) over the lead plaintiff contest in the Copper Mountain litigation. After the proposed lead plaintiff represented by Milberg Weiss decided not to fill that role (despite having won a 9th Circuit appeal on the issue), Judge Walker compared him to a "heroic prince" who turned into a "frog." Stay tuned.
There are two recent articles in the Wall Street Journal (subscrip. req'd) related to the Tyco International securities litigation (last posted about here).
First, a court in the D. of N.H. has allowed most of the claims in the pending securities class action to go forward. Interestingly, however, it dismissed a related derivative action on the grounds that it was barred under Bermuda law (Tyco is registered in Bermuda).
Second, former Tyco CEO Dennis Kozlowski and CFO Mark Swartz have asked a New York state court to direct one of Tyco's "excess" insurance carriers to pay legal bills that they say have surpassed $25 million.
The 10b-5 Daily has been closely following the interesting events surrounding the Halliburton settlement (the most recent post can be found here). In the October 2004 edition of the SCAS Alert, Bruce Carton has a good summary of the court's recent decision to reject the proposed $6 million settlement in that case.
Reuters reports that the S.D.N.Y. court presiding over the IPO allocation cases has granted class certification in six "focus" cases that have been used to test the sufficiency of the overall allegations. The plaintiffs have sued underwriters in connection with over 300 initial public offerings. The cases generally allege that the defendants ramped up trading commissions in exchange for providing access to IPO shares and required investors allocated IPO shares to buy additional shares in the after-market to help push up the share price.
Quote of note: "U.S. District Judge Shira Scheindlin said that if she had rejected the class action request, the companies 'would have essentially defeated the claims without ever having been compelled to defend the suits on the merits. In their zeal to defeat the motion for class certification, defendants have launched such a broad attack that accepting their arguments would sound the death knell of securities class actions.'"
As the U.S. Supreme Court prepares to take on the issue of loss causation in securities fraud cases, the lower court split continues. In Swack v. Credit Suisse First Boston, 2004 WL 2203482 (D. Mass. Sept. 21, 2004), a case alleging that the defendants committed fraud by disseminating research reports that they knew to be overly optimistic, the court held that loss causation could be adequately plead even though the corrective disclosure did not lead to a stock price decline.
The court noted that "stock prices sometimes self-correct in advance of the final overt disclosure." In the case of a misleading analyst report, data that is inconsistent with the rating may lead the market to devalue the rating to the point that the corrective disclosure fails to move the stock price. As a result, the court found that it could not resolve the issue of loss causation on a motion to dismiss. (Note that the court's decision is similar to the Fogarazzo opinion from earlier this year, which is discussed here.)
Holding: Motion to dismiss denied.
The U.S. and Belgian affiliates of KPMG, Int'l have agreed to a preliminary settlement of the claims brought against them as part of the Lernout & Hauspie securities class action pending in the D. of Mass. (The 10b-5 Daily has previously posted about discovery issues in the case.) KPMG acted as the company's auditor.
The settlement is for $115 million. The New York Times reports the settlement "would be the second-largest ever paid by KPMG, after the $125 million resolution reached last year in connection with its role as auditor of Rite-Aid."
In an unusual development in the world of securities litigation, Telecomweb reports that the class action pending against AT&T in the D. of N.J. has gone to trial. Proceedings got under way yesterday in the case, in which the plaintiffs allege that AT&T engaged in fraud in connection with its initial public offering of AT&T Wireless in 2000. The court granted partial summary judgment to AT&T this past June, but allowed some claims to proceed.
The fraud-on-the-market theory states that reliance by investors on an alleged misrepresentation is presumed if the company's shares were traded on an efficient market. What is an efficient market? Courts have frequently interpreted the U.S. Supreme Court's decision in Basic v. Levinson (which adopted the fraud-on-the-market theory) as incorporating the economic definition of an "efficient market." That is to say, an efficient market is one in which the stock price rapidly reflects all publicly available information. See, e.g., Gariety v. Grant Thornton, LLP, 368 F.3d 356, 367 (4th Cir. 2004).
At least one court, however, has taken a hard look at the Basic decision and disagrees. In In re Polymedica Corp. Sec. Litig., 2004 WL 1977530 (D. Mass. Sept. 7, 2004), the court found that an efficient market is simply one in which "'market professionals generally consider most publicly announced material statements about companies, thereby affecting stock market prices.'" As a result, the court declined to consider the defendants' argument (asserted as part of an opposition to class certification) that the fraud-on-the-market theory could not be applied because the market price of Polymedica stock did not fully and rapidly reflect public information.
Holding: Class certification granted (after excluding short sellers from the proposed class).
Quote of note: "When legal precedent is available, I follow it, not economic or academic literature. And though the First Circuit has not issued an opinion on the matter, Supreme Court precedent exists. Furthermore, it is plain in Basic that the Court did not want to adopt the 'economic' or 'academic' definition of efficient market."
A growing number of plaintiffs' firms have forensic accountants on their permanent staff. An article (via law.com - free regist. req'd) in The Recorder discusses this trend and the importance of forensic accounting in formulating securities class action complaints that can survive a motion to dismiss.
Quote of note: "[Andy] Rudolph said the wave of corporate scandals led by Enron Corp. has cast his work in a new light. 'I used to go to seminars and give speeches and almost get booed' by other accountants and company CFOs, Rudolph said. 'The pendulum has swung. Now people want to hear about fraud.' He also gets a different reaction at social events when he tells people he's a forensic accountant. 'Is it like CSI?' people ask."
The federal district court split over whether SLUSA bars the bringing of a securities class action alleging '33 Act claims in state court continues. In Zia v. Medical Staffing Network, Inc., 2004 WL 2093505 (S.D. Fla. Sept. 16, 2004), the court held that SLUSA only permits the removal to federal court of securities class actions based on state law. Accordingly, the case was remanded. (For a discussion of a contrary opinion from the N.D. of Tex., see this post.) The decision notes, however, that the issue is currently before the U.S. Court of Appeals for the Eleventh Circuit in another case - ATC Enter., Inc. v. Williams - and oral argument was set to occur in September.