A column (via law.com) in the May 18 edition of the New York Law Journal discusses the post-Dura case law on loss causation and what it means for corporate disclosures. The author, Professor John Coffee, speculates that companies may be tempted "to write press releases in a code that discloses consequences, but not causes" so as to avoid creating a direct connection between the revealing of a misrepresentation and a stock price decline. Note that some of the judicial decisions discussed in the column previously have been summmarized on The 10b-5 Daily, including the D.E. & J. Limited Partnership and Cornerstone Propane cases.
Quote of note: "In any event, one prediction seems particularly likely: the old-fashioned corrective press release may gradually give way to a series of more nuanced communications, often made through third parties, that hint at a problem and intend that the market recognize the problem slowly and incrementally."
Options backdating is the new new thing in corporate scandals, with speculation that there may be a need for a federal taskforce to oversee all of the various U.S. Attorney offices that have issued subpoenas to companies on this issue. To date, shareholder litigation over these alleged practices appears to be limited to derivative suits (see, for example, this announcement from earlier this week). In a Forbes column posted this morning, however, former SEC Chairman Harvey Pitt notes that any improper conduct may "require a [financial] restatement, with class action litigation in the offing."
Addition: D&O Diary points out that a few securities class actions related to options backdating have already been filed. See this post.
Regular readers know that it has been the practice of The 10b-5 Daily not to post about the legal troubles of Milberg Weiss - a subject matter that is arguably outside of the scope of this blog. A number of excellent legal blogs cover white collar crime issues and have extensively posted about the recent criminal indictment of the firm (see, e.g., the WSJ Law Blog and White Collar Crime Prof Blog).
That said, the indictment of one of the leading securities class action plaintiff firms in the country will inevitably have ripple effects on this area of the law. Especially given that Milberg Weiss is, according to ISS's Securities Class Action Services (SCAS), lead or co-lead counsel in 95 active shareholder suits. Accordingly, The 10b-5 Daily will post relevant articles discussing the effect of the indictment on pending or previous securities class actions.
A recent roundup includes articles from The American Lawyer and The Recorder (via law.com) discussing Milberg Weiss' ability to continue as lead counsel in current cases and an article from Reuters suggesting that it is unlikely that companies who have settled with Milberg Weiss in cases cited in the indictment will bring legal actions to recover the funds.
Sears, Roebuck and Co., a wholly owned subsidiary of Sears Holdings Corporation (Nasdaq: SHLD), has announced the preliminary settlement of the securities class action pending against the company in the N.D. of Illinois. The case was originally filed in 2002 and alleges that Sears made misrepresentations concerning its credit card business. The settlement is for $215 million. The company is paying $85 million and expects the rest of the funds to come from insurance proceeds. For an analysis of the motion to dismiss decision in the case, see this post.
The Dura decision by the Supreme Court left little doubt that in-and-out traders (i.e., investors who both bought and sold their shares during the class period) will have difficulty establishing the existence of loss causation. At least one court has confirmed this reading of the case in the context of class certification proceedings. In In re Cornerstone Propane Partners, L.P. Sec. Litig., 2006 WL 1180267 (N.D. Cal. May 3, 2006), the court found that "plaintiffs who sold their stock before July 21, 2001, when the first corrective disclosure occurred, did not suffer any loss causally related to the defendants' alleged misrepresentations." Accordingly, the court excluded these plaintiffs from the definition of the class.
It is important to note that other courts, even pre-Dura, have come to a similar conclusion in the context of evaluating potential lead plaintiffs (see, for example, this post). Moreover, while the decision is interesting, removing in-and-out traders from the class is unlikely to have much of a practical effect on a securities class action other than reducing, by some amount, the potential damages.
Addition: There is a press release from defense counsel in the Cornerstone case noting that the decision "appears to be the first of its kind."
Addition: A reader points out that a post-Dura class certification decision issued earlier this year in the Eastern District of Virginia reaches the opposite result. See In re BearingPoint, Inc. Sec. Litig., 232 F.R.D. 534 (E.D.Va. 2006) ("In sum, because in-and-out traders may conceivably prove loss causation, they are appropriately counted as members of the proposed class.") Thanks to Andrew Brown for the cite.
(1) Securities Litigation Watch has posted the SCAS 50, which "lists the top 50 plaintiffs' law firms ranked by the total dollar amount of final securities class action settlements occurring in 2005 in which the law firm served as lead or co-lead counsel." At the top of the list, by a considerable margin, are Bernstein Litowitz Berger & Grossmann and Barrack, Rodos & Bacine.
(2) Lies, Damn Lies, & Forward-Looking Statements has a post on the emerging practice of law firms and their clients "putting out press releases in advance of the deadline for filing a lead plaintiff motion, often indicating their intention to file a lead plaintiff motion."
Whether selling company stock under a Rule 10b5-1 trading plan can help shield corporate executives from securities fraud liability is an open question. Although some courts have considered the existence of a trading plan in finding that an executive's stock sales did not create a strong inference of scienter (i.e., fraudulent intent), a recent decision goes the other way. In In re Cardinal Health Inc. Sec. Litig., 2006 WL 932017 (S.D. Ohio April 12, 2006), the court held that it was "premature" to evaluate the impact of a trading plan at the motion to dismiss stage because it is an affirmative defense to insider trading allegations.
The content of the disclosure that led to a stock price decline is an important part of post-Dura loss causation analyses. One particular fact pattern that has proven difficult for defendants is when a company announces a SEC investigation without specifying exactly what conduct is under investigation.
In In re Bradley Pharmaceuticals, Inc. Sec. Litig., 2006 WL 740793 (D.N.J. March 23, 2006), the company disclosed that the SEC was conducting an informal inquiry and had asked for information "with respect to revenue recognition and capitalization of certain payments." The stock price fell 26%. A subsequent announcement by the company revealed that it would have to restate its financial results for an earlier quarter due to improper revenue recognition on a particular transaction. The stock price went up slightly.
In their motion to dismiss, the defendants argued that the plaintiffs had failed to allege a loss following a "corrective disclosure" because the original press release was "simply a disclosure of a non-specific SEC inquiry" and did not say anything about the particular transaction at issue. The court disagreed, finding that the revelation of the truth "occurred through a series of disclosing events" and that by the time the company announced its restatement "the market had already incorporated that the previously released financial statements could not be relied upon."
Holding: Motion to dismiss denied.
Addition: For a similar holding, see Brumbaugh v. Wave Systems Corp., 2006 WL 52751 (D. Mass. 2006).
(1) The average settlement value, excluding the Enron and WorldCom settlements, increased dramatically to $71.1 million in 2005. (Note that there is a significant discrepancy between PwC and NERA on this point, with NERA reporting a much lower number.)
(2) The number of filings was down significantly last year (from 203 cases to 168 cases), but PwC finds that a "seesaw pattern has occurred somewhat regularly during the period from 1996 through 2005, and it is likely that 2005's drop in filings of private securities litigation cases is only a respite."
(3) For the first time since 1996, the number of cases alleging accounting violations dropped below 50%. PwC suggests that two factors may be at work: (a) improved internal accounting and financial reporting controls; and (b) the continued growth of "product-efficacy" cases, especially against pharmaceutical and healthcare companies, which made up 10% of all cases in 2005.
(4) The study finds little correlation between financial restatements and filings, noting that "many restatements do not result in significant stock-price drops." (For more on this topic, see this recent post.)