The former CEO of WorldCom is forfeiting most of his assets in settlement of the securities class action claims against him. The Associated Press reports that Bernard Ebbers, who was convicted in March of criminal fraud, "will pay $5 million up front and place the rest of his assets in a trust that will be sold off for an estimated $25 million to $40 million." These sums will be added to the more than $6 billion paid by former WorldCom investment banks in settlement of the suit.
In an interesting opinion released yesterday in the Parmalat securities class action, Judge Kaplan (S.D.N.Y.) addresses some important topics.
(1) Parmalat's primary auditors were the Italian affiliates of two multinational accounting firms - Grant Thornton and Deloitte & Touche. The court found that the plaintiffs sufficiently alleged an agency relationship between the global umbrella organizations, Grant Thornton International ("GTI") and Deloitte Touche Tohmatsu ("DTT"), and their Italian member firms so as to allow the claims against the global entities to go forward.
(2) GTI and DTT argued that the plaintiffs had failed to adequately plead loss causation "because they do not allege that any misrepresentation by them was the proximate cause of the decline in the value of the price of Parmalat securities or that a corrective disclosure about their prior misrepresentations caused the company's collapse." The court disagreed, holding that under Second Circuit precedent the plaintiffs' allegations that the risks concealed by Parmalat and its auditors caused the decline in investor value were sufficient.
(3) 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. There is a split within the Second Circuit over whether a plaintiff must allege culpable participation to state a legally sufficient claim under this provision. The court found that allegations of culpable participation are not necessary.
(4) The defendants evidently also moved to dismiss the 368-page complaint as failing to comply with F.R.C.P. 8 ("short and plain statement" of the claim). The court noted that it was in "substantial sympathy" with this position: "The requirement of pleading fraud with particularity does not justify a complaint longer than some of the greatest works of literature." Nevertheless, the court declined to dismiss the complaint on this basis.
Broadcom Corp. (Nasdaq: BRCM), a California-based fabless semiconductor company, has announced the preliminary settlement of the securities class action pending against the company in the C.D. of Cal. The case was originally filed in 2001 and alleges that Broadcom improperly accounted for warrants given to customers who bought certain amounts of the company's products. The settlement is for $150 million. Broadcom "expects that approximately $40 million of that amount will be paid by its insurance carriers."
The Wall Street Journal has extensive coverage (subscrip. req'd) this week of an unusual turn of events in the class action pending against KPMG in the D. of Ark. The case was filed by the law firm of Bernstein Litowitz and alleges fraud in connection with the sale of certain tax shelters. In a recent motion, Bernstein Litowitz claims that another plaintiffs' firm, Milberg Weiss, is "colluding" with KPMG to put together a new suit with a "pre-packaged settlement ... presumably on terms less favorable to the class."
The motion describes the situation as a "reverse auction," with KPMG attempting to negotiate a weak settlement that will preclude other settlements. Bernstein Litowitz is seeking to halt any settlement negotitations, be designated interim class counsel, and prevent Milberg Weiss from filing its own suit. In today's follow-up article, the paper reports that Bernstein Litowitz apparently has obtained confirmation that the talks between KPMG and Milberg Weiss are ongoing.
The PSLRA states that securities class action plaintiffs, within 20 days of filing a complaint, "shall cause to be published, in a widely circulated national business-oriented publication or wire service, a notice advising members of the purported plaintiff class." After the publication of this notice, it is not uncommon for other plaintiffs' firms (who have not filed complaints) to publish similar notices in the hopes of attracting a client who can be put forward as a lead plaintiff candidate. The initial plaintiffs' firms do not usually react to this practice in public, but that may be changing. In a recent case, the firms who filed the first complaint have issued a press release "cautioning investors" about these notices and stating that because they conducted an investigation prior to filing the complaint "they are in a superior position to answer questions about the claims alleged." A link to the press release can be found here.
Some miscellaneous items that have been piling up in The 10b-5 Daily's mailbox and around the web:
1) There is an interesting commentary, entitled "The Incoherent Jurisprudence of the PLSRA Discovery Stay," in the May 18, 2005 issue of the Andrews Securities Litigation and Regulation Reporter (Westlaw cite: 11 No. 1 ANSLRR 2). The author (Jesse Weiss) examines the applicability of the stay where: (a) defendants have produced documents to government agencies; (b) plaintiffs have brought state law claims in addition to federal securities fraud claims; or (c) there are parallel proceedings in state or federal court.
(2) Securities Litigation Watch tries to track down the elusive answer to the following question: exactly how many securities class actions have gone to trial since the passage of the PSLRA? (As The 10b-5 Daily recently noted, everyone has a different number.)
In the wake of the billion dollar settlements in the Enron and WorldCom cases, it is easy to forget that a hundred million dollar settlement used to be considered very significant. CVS Corp. (NYSE: CVS), the country's largest pharmacy chain, recently announced the preliminary settlement of the securities class action pending against the company in the D. of Mass. The case, originally filed in 2001, was scheduled to go to trial last month. The plaintiffs alleged that CVS failed to properly account for marked down items.
The settlement is for $110 million and will be paid "primarily" by the company's insurance carriers. The Boston Globe had this report.
It was a busy week for news articles related to securities class actions. Here is a quick roundup:
(1) There were three noteworthy articles related to the Enron settlements. Forbes had a column on the potential attorneys' fees. The Associated Press discussed the pressure on the other bank defendants to settle. Finally, CNN/Money offered an overview of the settlement landscape.
(3) The June 2005 SCAS Alert contains an interesting survey of foreign legislative efforts to permit U.S.-style securities class actions.
In the first circuit court decision to apply the Supreme Court's holding in the Dura case, the Sixth Circuit has affirmed the dismissal of a securities class action based on the plaintiffs' failure to adequately plead loss causation. The case was brought against several former Kmart executives and PricewaterhouseCoopers. The plaintiffs alleged that the defendants misled Kmart's investors in 2000 and 2001 prior to the company's bankruptcy.
In D.E. & J. Limited Partnership v. Conaway, 2005 WL 1386448 (6th Cir. June 10, 2005) (unpublished), the Sixth Circuit found that the plaintiffs "did not plead that the alleged fraud became known to the market on any particular day, did not estimate the damages that the alleged fraud caused, and did not connect the alleged fraud with the ultimate disclosure or loss." In the end, the plaintiffs relied entirely on allegations that they had paid artificially inflated prices for their Kmart stock and that Kmart's stock price declined after the company announced its bankruptcy. The Sixth Circuit held that price inflation had been expressly rejected by the Supreme Court as an adequate basis for pleading loss causation. As for the bankruptcy filing, the plaintiffs "never alleged that Kmart's bankruptcy announcement disclosed any prior misrepresentations to the market."
Holding: Dismissal affirmed.
The dominos are beginning to fall. On the heels of Citibank's settlement, JPMorgan Chase & Co.(NYSE: JPM) has announced a preliminary settlement of the claims brought against it as part of the Enron securities class action pending in the S.D. of Texas. The settlement is for $2.2 billion, bringing the total settlements in the case to $4.7 billion and counting. The Washington Post has this article.
As previously noted in The 10b-5 Daily, securities class actions rarely go to trial - making trial verdicts big news. Thane International, Inc., a California-based direct marketing company, has announced a trial victory in a securities class action brought in the S.D. of Cal. and based on the company's 2002 acquisition of Reliant Interactive Media Corp. in a stock swap. Reliant shareholders alleged that Thane had promised it would list the combined company on the Nasdaq National Market, but failed to do so. According to the press release, only six securities class actions have made it all the way to a trial verdict since 1996 (note that different sources have different numbers, but everyone appears to agree that the total is less than ten).
Thanks to Dave Tabak for the link.
The National Law Journal has a review (via law.com - free regist. req'd) of the Second Circuit's major securities law cases over the past year. Click on the case name for The 10b-5 Daily's take on the featured decisions - Dabit, Rombach, and Enterprise Mortgage.
In another early settlement, Citigroup, Inc. (NYSE: C) has announced a preliminary settlement of the claims brought against it as part of the Enron securities class action pending in the S.D. of Texas. The settlement is for $2 billion and will be covered by the company's existing litigation reserves. Bloomberg has this report.
The nomination of Congressman Chris Cox as SEC chairman has come under criticism, with many opponents citing his sponsorship of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). Professor Stephen Bainbridge of UCLA Law School has an interesting post on whether the PSLRA has actually "weakened investor protections" and provides links to a number of empirical studies to the contrary.
The Sarbanes-Oxley Act of 2002 ("SOX") 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.
Two circuit courts (the 2nd and 7th) have declined to apply the new statute of limitations to revive time-barred claims. In the past week, the Eleventh and Eighth Circuits have also issued opinions addressing the question.
In its long-awaited decision in Tello v. Dean Witter Reynolds, Inc., 2005 WL 1279130 (11th Cir. June 1, 2005), the Eleventh Circuit held that it could not decide "the statutory-interpretation issue of whether previously time-barred claims are revived by the [SOX] statute of limitations" until the district court determined if the plaintiffs were on inquiry notice of their claims prior to the passage of the legislation.
In contrast, the Eight Circuit's opinion in In re ADC Telecommunications, Inc. Sec. Litig., 2005 WL 1322576 (8th Cir. June 6, 2005) simply follows the earlier appellate holdings in finding that SOX did not revive time-barred claims. The opinion (in a footnote) and concurrence clarify that the issue of the retroactivity of the new statute of limitations (i.e., its application to "causes of action that had already accrued at the time of the change in law") is separate from the issue of whether Congress intended to revive time-barred claims.
The Supreme Court's recent loss causation decision in the Dura case has been the subject of considerable commentary. The author of The 10b-5 Daily, along with one of his colleagues, has written an article on the topic - "Lower Courts Will Determine Impact of Supreme Court's Securities Fraud Ruling" - for the Washington Legal Foundation. A link to the article can be found here.