A study by Deloitte & Touche and a law firm has found that companies who have reported internal control weaknesses related to financial reporting have not been disproportionately hit with securities litigation. WebCPA has an article on the study, which found that only 6 percent of the nearly 300 companies analyzed were served with a class action securities complaint related to the disclosed deficiencies. It is not clear from the article, however, whether the study considered the impact of stock price movements related to the disclosures. The release of the study comes as companies prepare to meet the internal control disclosure deadlines of Sarbanes-Oxley Section 404.
Quote of note: "The disclosures in the study ranged from simple and significant deficiencies, to reportable conditions and material weaknesses. Material weaknesses represented 52 percent of the disclosures."
Continuing The 10b-5 Daily's international theme, the Toronto Globe and Mail has a feature article on recent amendments to the Ontario Securities Act that are expected to generate "a wave of shareholder class action lawsuits." Until now, Canadian investors who purchase shares in the secondary market have been limited to common law fraud claims, which require a showing of individual reliance. The recent amendments will create a presumption of reliance (i.e., the fraud-on-the-market theory) and will allow investors to "sue for two types of misconduct: a misrepresentation made in disclosure documents or public oral statements; and a failure to make timely disclosure of a material change."
The article notes that some commentators are concerned the amendments will create an incentive to bring U.S.-style strike suits, but there will be certain safeguards in the new laws that do not exist here. Notably, a company's liability will "be limited to either 5 percent of its market capitalization or $1 million, whichever is greater." There will also be penalty limits for individuals.
Quote of note: "The legislation also is notable for the broad scope of potential defendants it will expose to liability. Not only does it pertain to the company and its directors and officers, but also to investment fund managers, spokespersons, experts (such as accountants, lawyers, financial analysts, engineers and geologists) and so-called influential persons (such as stock promoters or a majority shareholders with a significant influence on the company)."
PNC Financial Services Group (NYSE: PNC), a Pittsburgh-based diversified financial services organization, has announced the preliminary settlement of the securities class action pending against the company in the W.D. of Pa. The case arises out of transactions between PNC and AIG Financial Products in 2001 that allegedly helped PNC hide losses through the transfer of underperforming loans. The settlement is for $30 million, to be paid by PNC's insurers. AIG Financial Products will contribute an additional $4 million to settle any potential claims brought against it by the plaintiffs.
Last week, Judge Denise Cote of the S.D.N.Y. denied most of the summary judgment motion brought by the underwriter defendants, including Bank of America Corp. and J.P. Morgan Chase & Co., in the WorldCom securities litigation. The banks had underwritten bond offerings made by WorldCom in 2000 and 2001. The Associated Press has a report on the lengthy decision, which can be found here.
The U.S. Court of Appeals for the Third Circuit has issued an interesting decision on the tolling of the statute of limitations for class claims. In Yang v. Odom, No. 03-2951 (3rd Cir. Dec. 15, 2004), the court found that "where class certification has been denied solely on the basis of the lead plaintiffs' deficiencies as class representatives, and not because of the suitability of the claims for class treatment," the statute of limitations is tolled for subsequent class claims from the commencement of the earlier case until there is a final adverse determination of the earlier class claims. As a result of this holding, the plaintiffs will be able to proceed with their securities class action brought in the D. of N.J. even though a "substantively identical" securities class action brought in the N.D. of Ga. had previously had been denied class certification. (Note that there appears to be a circuit split on this issue that is discussed in the opinion.)
Quote of note: "Drawing the line arbitrarily to allow tolling to apply to individual claims but not to class claims would deny many plaintiffs with small, potentially meritorious claims the opportunity for redress simply because they were unlucky enough to rely upon an inappropriate lead plaintiff. For many, this would be the end result, while others would file duplicative protective actions in order to preserve their rights lest the class representative be found deficient under [F.R.C.P.] 23."
Thanks to Adam Savett for sending in the case.
Addition: The Legal Intelligencer has an article (via law.com - free regist. req'd) on the decision.
It is international week at The 10b-5 Daily, with two more articles discussing the exporting of American-style class action litigation (including securities fraud cases). The New York Law Journal (via law.com - free regist. req'd) has a piece on pending legislation in the Netherlands that will allow for settlements that bind all members of a class who do not opt out. The author notes that the expansion of class actions in Europe is taking place at the same time that U.S. corporations are attempting to limit their use here. While over at Forbes, there is a profile of U.S. lawyers who are pursuing mass tort actions abroad.
Quote of note (New York Law Journal): Marc Gottridge of Lovells "does not foresee a sea change in the balance of class actions, despite the pending legislation in the Netherlands and elsewhere. 'Even if foreign countries adopted the same procedures' used in American courts, 'the U.S. would still be an attractive forum in many cases' for institutional investors based in Europe, he said. That is because of the U.S. system's wide-reaching discovery, jury trials and the potential for immense punitive damage awards."
Long-time readers of The 10b-5 Daily know that this blog has been interested in South Korea's efforts to establish a private securities class action system. As the deadline approaches for the new legislation to go into effect, financial regulators continue to weigh the costs and benefits. In this article from the Korea Times, the governor of the Financial Supervisory Service (FSS) notes that securities class actions can be misused and discusses the prevalence of these suits in the U.S. Another article from the same paper, however, quotes a FSS official as stating: "Itís fair to say the imminent class action lawsuit has also kept companies from cooking their books."
The New York Law Journal has an article (via law.com - free regist. req'd) on whether the group pleading doctrine, which creates a presumption that a company's senior officers are collectively responsible for misrepresentations or omissions contained in public statements made by the company, is compatible with the heightened pleading standards of the PSLRA. The article discusses the Fifth Circuit's decision in the INSpire case from earlier this year. (For The 10b-5 Daily's summary of the decision click here.)
Crossroads Systems, Inc. (Nasdaq: CRDS), an Austin-based provider of storage networking solutions, has announced the preliminary settlement of the securities class action pending against the company in the W.D. of Tex. The suit was originally filed in 2001 and alleges that the company made misstatements about the capabilities of its router products and financial results. In a decision earlier this year, the U.S. Court of Appeals for the Fifth Circuit partially reversed a grant of summary judgment for the defendants. The settlement is for $4.35 million, with $3.35 million to be paid by Crossroads' insurance carriers.
The Sarbanes-Oxley Act of 2002 extends the statute of limitations for federal securities fraud to the earlier of two years after the discovery of the facts constituting the violation or five years after the violation. Although the legislation clearly provides that it "shall apply to all proceedings addressed by this section that are commenced on or after the date of enactment of this Act [July 30, 2002]," left unresolved is whether Congress intended to revive claims that had already expired under the earlier one year/three years statute of limitations.
A growing majority of district courts has held that these claims must be dismissed. The U.S. Court of Appeals for the Second Circuit agrees. In In re Enterprise Mortgage Acceptance Co., LLC, Sec. Litig., 2004 WL 2785776 (2nd Cir. Dec. 6, 2004), the court, which combined a number of cases presenting this issue into one decision, held that Congress did not clearly provide or intend for retroactive application of the new statute of limitations. Accordingly, the court declined to revive any previously time-barred claims. (Note that this issue is also currently before the Eleventh Circuit.)
Holding: Dismissals affirmed.
Addition: In reaching its decision, the Second Circuit took judicial notice of the amicus brief filed by the SEC in the AIG Asian Infrastructure case, which urged the court to hold that Sarbanes-Oxley revived previously time-barred claims. The court rejected the SEC's position and noted that the SEC was not entitled to any deference on the issue given that the new statute of limitations is only applicable to private actions, and not to SEC enforcement actions.
Two circuit court opinions were issued last week affirming dismissals based on the plaintiffs' failure to adequately plead that any false or misleading statements were made.
In the 8th Circuit case, In re Amdocs Ltd. Sec. Litig., 2004 WL 2735530 (8th Cir. Dec. 2, 2004), the court held that the "bespeaks caution" doctrine rendered Amdocs' statements about its customer demand immaterial as a matter of law because the statements were accompanied by warnings of market erosion.
In the 4th Circuit case, Nolte v. Capital One Financial Corp., 2004 WL 2749867 (4th Cir. Dec. 2, 2004), the court held that the plaintiffs had failed to adequately allege that Capital One's management did not believe its stated opinions about the sufficiency of the company's reserves and computer infrastructure. Moreover, the plaintiffs could not rely on a memorandum of understanding with federal regulators that required Capital One to make prospective changes to its business to establish that the company's past practices were deficient.
Insider stock sales are often used by plaintiffs to establish that the individual defendants had a motive to artificially inflate the company's stock price. As a general matter, however, courts have held that insider stock sales cannot create an inference of fraudulent intent if the defendants only sold a small percentage of their overall holdings.
In its recent decision in Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226 (9th Cir. 2004), the Ninth Circuit purported to discover an exception to the rule. Larry Ellison, the CEO of Oracle, was alleged to have sold only 2.1% of his holdings during the class period, but that amounted to almost $900 million in proceeds. The court held that "where, as here, stock sales result in a truly astronomical figure, less weight should be given to the fact that they may represent a small portion of the defendant's holdings." But is that a sensible exception?
The Delaware Court of Chancery, which addressed the exact same stock sales in its recent summary judgment decision in In re Oracle Corp. Derivative Litigation, C.A. No. 18751 (Del. Ch. Dec. 2, 2004), appears to disagree. The court found that "however wealthy Ellison is and however envious that may make some, the fact remains that Ellison sold only 2% of his Oracle holdings. Ellison remained the person with more equity at stake in Oracle than anyone anywhere. Plaintiffs continually emphasize the nearly $1 billion that he made on the sale, but ignore the roughly $18.9 billion in equity that he lost in the ensuing share price collapse." In other words, a billion dollars in stock sales may be significant for most people, but not necessarily for everyone.
Addition: The Delaware Court of Chancery's decision can be found here. Thanks to Adam Savett for the link.
The New York Law Journal has an article (via law.com - free regist. req'd) on the wave of securities class actions that have hit the biotech industry. (The 10b-5 Daily has previously posted about the relevant 2003 filing statistics.) The article discusses a recent law firm survey and profiles several prominent cases, including the litigation brought against ImClone Systems and Regeneron Pharmaceuticals.
Quote of note: "The biggest concern for a life science company involves its handling of news related to its prominent drug. In an industry that relies on investors to fork over millions to high-risk investments, life science companies position themselves to attract investment dollars. In such an industry, companies must navigate carefully."