The Rocky Mountain News has an article on the $50 million settlement of the shareholder class action related to the merger of Qwest Communications and U.S. West. The Association of U.S. West Retirees challenged the proposed $15 million attorneys' fees award (30% of the settlement), arguing that the case and settlement stunk "like a three-day-old unrefrigerated dead fish." The district court judge, however, rejected the challenge. At the hearing, the court noted that there "weren't any other lawyers in the United States that took the gamble that these people did - not one other law firm anywhere."
Corporate Counsel has a short article (via law.com - free regist. req'd) on the incentives some institutional investors are offering their counsel to obtain direct recoveries from individual defendants.
Quote of note: "Christopher Waddell, general counsel of the California State Teachers' Retirement System, said that he uses both bounty and sliding-scale fees in order to 'incentivize' his outside counsel to go after personal assets. CalSTRS, the nation's third-largest public pension fund, has promised its lawyers a 2.5 percent bounty, plus an undisclosed fee, in a pending suit against the former directors of WorldCom."
As reported in The 10b-5 Daily back in November 2003, Telxon agreed to settle the securities class action pending against it in the N.D. of Ohio for $37 million. The company had also brought a separate, but related, suit against PricewaterhouseCoopers (its former auditors) alleging that it had been improperly audited. Telxon had agreed to pay to the shareholder class, under certain circumstances, up to $3 million of the proceeds of that suit.
The other shoe has finally fallen. Telxon announced yesterday that PwC will pay $18 million to settle the separate suit. As promised, $3 million of the proceeds will go to the shareholder class.
The Securities Litigation Uniform Standards Act of 1998 ("SLUSA") preempts certain class actions based upon state law that allege a misrepresentation in connection with the purchase or sale of nationally traded securities. 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.
Earlier this year, the U.S. Court of Appeals for the Seventh Circuit held in the Putnam Funds cases that the "in connection with" language in SLUSA merely "ensures that the fraud occurs in securities transactions rather than some other activity." Accordingly, plaintiffs could not avoid SLUSA by limiting their proposed class to investors in the funds who merely held their shares, rather than purchased or sold them, during the class period.
The Seventh Circuit has now confirmed that holding under slightly different factual circumstances. In Disher v. Citigroup Global Markets Inc., 2005 WL 1962942 (7th Cir. Aug. 17, 2005), the court found that a class action suit brought in state court on behalf of customers of Salomon Smith Barney alleging that they were mislead by false stock ratings was subject to preemption. The proposed class definition "of all SSB customers who retained certain securities in reliance on SSB's misrepresentations is no more narrowly drawn than the class definitions discussed in [the Putnam Funds decision]." Accordingly, the court ordered that the case be dismissed.
Holding: Reversed and remanded with instructions to vacate the remand order and dismiss the claims.
The Associated Press has a column deploring the tax deductibility of securities class action settlements.
Quote of note: "For some companies, federal and state tax deductions will amount to as much as 40 cents on every dollar they pay to settle investors' claims. And given all the major settlements announced this year from the likes of Time Warner Inc., Citigroup Inc., JPMorgan Chase & Co. and many others, that quickly adds up."
The Star-Ledger (New Jersey) reports that a court in the D.N.J. is allowing parts of the securities class action pending against Bristol-Myers Squibb to proceed. The case relates to the FDA's rejection, in April 2000, of a high blood pressure drug developed by the company. Although on Tuesday the court dismissed Bristol's chief executive from the case and significantly narrowed the claims, the remaining claims could go to trial as early as this winter.
Quote of note: "In response to the judge's action, Bristol and the lead plaintiff, Long View Collective Investment Fund, both claimed victory and vowed to go to trial. Pretrial discovery, which has taken four years, has generated nearly 4 million pages of documents and sworn statements from 44 witnesses and 23 experts, according to court papers."
The New York Law Journal has an overview (via law.com - free regist. req'd) of recent Delaware court decisions addressing the rights of corporate directors and officers to indemnification and the advancement of attorneys' fees and litigation expenses.
The content of the disclosure that led to a stock price drop continues to be the focal point of post-Dura loss causation analyses. In Sekuk Global Enterprises v. KVH Industries, Inc., 2005 WL 1924202 (D.R.I. Aug. 11, 2005), the plaintiffs claimed that the company engaged in improper accounting practices related to the sales of a key product. The plaintiffs' alleged losses occurred after the company issued a press release announcing reduced quarterly revenue based on lower than expected sales.
In their motion to dismiss, the defendants argued that "the press release and the resulting drop in the price of KVH common stock fails to establish loss caustion because the press release does not attribute the declining revenue to the sales of the [key product]." The court found, however, that the key product was a possible contributor to the lower than expected sales, even if it was not expressly discussed in the press release. Accordingly, the plaintiffs adequately plead loss causation.
Holding: Motion to dismiss denied (except for the claims based on a limited number of inactionable statements).
The Globe and Mail reports that investors are planning to bring a securities class action against the Canadian Imperial Bank of Commerce ("CIBC"). The proposed basis for the suit is noteworthy: the bank allegedly misled its investors over the cost of its settlement of the claims brought against it in the Enron securities class action. While CIBC had set aside a $300 million reserve for the settlement, it eventually settled two weeks ago for $2.4 billion.
Quote of note: "The precise size of the class action against CIBC has not been determined, but it will likely seek damages equivalent to the amount of the Enron settlement, which has helped to erase approximately $3.3-billion (Canadian) of CIBC's market value in the past two weeks, the source said."
Following the Dura decision by the Supreme Court, lower courts continue to grapple with what constitutes a sufficient pleading of loss causation. In In re Cree, Inc. Sec. Litig., 2005 WL 1847004 (M.D.N.C. Aug. 2, 2005), Cree's stock price dropped after its former CEO filed an individual lawsuit generally alleging that the company had engaged in securities fraud. The court found: (a) the individual lawsuit "did not disclose anything about transactions with five of the six companies Plaintiffs now claim were the subject of numerous misstatements and omissions;" and (b) as to the one transaction it did address, the complaint "merely attribute[d] an improper purpose to the previously disclosed facts." In the absence of the disclosure of new facts, the court found that the transaction could not be the "proximate cause of the complained-of loss."
Holding: Dismissed with prejudice. (The court also adopted the rigorous First Circuit standard for evaluating confidential witness statements and held that the plaintiffs failed to plead falsity with sufficient particularity.)
Quote of note: "It is doubtful that a general averment of fraud with no specific factual allegations could be deemed a 'disclosure' for purposes of determining whether some act or omission, previously concealed by a false representation, caused, upon revelation, a shareholder's loss. While it is clear that a disclosure need not conform to any prescribed format, in must nevertheless satisfy at least a minimum standard of content. A disclosure must reveal new facts; a bald assertion of fraud is not sufficient."
Disclosure: The author of The 10b-5 Daily represents the defendants in the Cree securities litigation.
The Economist (August 11 edition) has an article discussing the rise in the value of securities class action settlements.
Quote of note: "America's new Class Action Fairness Act seeks to curb frivolous class-action lawsuits against companies in areas such as product liability and labour law, mainly by redirecting more of them to federal courts and so denying lawyers scope to “forum-shop” among biddable state courts. But before companies declare victory, they should reflect that the law of unintended consequences can sometimes be stronger than the law itself. The Private Securities Litigation Reform Act of 1995 was meant to curb frivolous class-action suits within the field of securities law. But in forcing class-action lawyers to raise their game, it has contributed to a new era of big lawsuits and even bigger settlements."
The National Law Journal has a feature story on the recent increase in securities class action trials. The article suggests two possible reasons for the change: (1) an increase in the size of settlements, thus increasing the willingness of defendants to risk a trial; and (2) greater sophistication in how attorneys prepare for trial (e.g., using mock trials to hone their arguments).
Quote of note: "Ron Miller, an economist at NERA Economic Consulting in New York, suspects that the cases with bigger market losses are more likely to go to trial because of the cost-benefit analysis. Trials are expensive, and a small case is not worth anyone spending all that time or money in court. 'My suspicion is that there have been so few of these trials that a few people have gotten the same idea at the same time; it is time to test the waters,' he said."
The U.S. Court of Appeals for the Fourth Circuit has decided to publish its opinion in the PEC Solutions securities class action. As discussed in this post from last March, the opinion is the first post-PSLRA decision by the Fourth Circuit to address the common scienter allegations of insider stock sales and violations of generally accepted accounting principles ("GAAP").
Disclosure: The author of The 10b-5 Daily argued the case before the appellate court on behalf of the defendants.
Everything a CEO does can effect his company's public disclosures. Regular readers will recall the case of the company that was forced to restate its CEO's resume. A similar type of case was decided earlier this year.
In In re Ariba, Inc. Sec. Litig., 2005 WL 608278 (N.D. Cal. March 16, 2005), the company failed to disclose that its outgoing CEO had personally, out of his own funds, paid another officer $10 million (plus $1.2 million in travel benefits and expenses) to assume the CEO position. Ariba was eventually forced to restate its financial statements to record the payments as capital contributions. In the resulting securities class action, the plaintiffs alleged that the payments were made to "create the false impression that Ariba was doing better than it was" and that "confidence in Ariba's management would have eroded completely" had it been disclosed that the new CEO had only agreed to accept the position after receiving the payments.
The court found that the plaintiffs had failed to adequately plead that the defendants acted with a fraudulent intent (i.e., scienter). The complaint relied heavily on statements from a confidential witness identified as an "executive assistant," the existence of GAAP violations, and the individual defendants' positions at the company. The court held that these allegations did not "constitute the strong circumstantial evidence of deliberately reckless or conscious misconduct with respect to each omission required for Plaintiff to overcome Moving Defendants' motion to dismiss."
Holding: Dismissed with prejudice.
Time Warner Inc. (NYSE: TWX), the world's largest media company, has announced the preliminary settlement of the securities class action pending against the company in the S.D.N.Y. The suit alleges that AOL inflated its revenue between January 1999 and August 2002 as part of a scheme to gain approval for its merger with Time Warner. Reuters reports that the settlement is for $2.4 billion.
Addition: Co-defendant Ernst & Young has agreed to settle the claims against it for $100 million.
Canadian Imperial Bank of Commmerce ("CIBC") (TSX: CM, NYSE: BCM) has agreed to 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 suit alleges that CIBC helped Enron inflate its revenues by hiding debt.
Bloomberg reports that the settlement is for $2.4 billion, which is more than the Enron-related settlements entered into by JPMorgan Chase or Citigroup and equivalent to 22% of CIBC's book value. The settlements in the Enron case have reached a total of approximately $7 billion.
Reliant Energy, Inc. (NYSE: RRI), a Houston-based energy provider, has announced the preliminary settlement of the securities class action pending against the company in the S.D. of Tex. The case alleges that from 1999 to 2001 the company engaged in "round trip" energy deals to inflate its revenues and trading volume. The settlement is for $68 million, of which $61.5 million will be paid for by Reliant's insurance carriers. In addition, co-defendant Deloitte & Touche will make a settlement payment of $7 million.