Today's edition of the New Jersey Law Journal has an interesting article (subscrip. req'd) on an appellate decision upholding an attorneys' fees award. In In re AT&T Corp. Sec. Litig., 2006 WL 2021033 (3d Cir. July 20, 2006), the Third Circuit found that the upward sliding fee scale (i.e., the fee percentage increased as the size of the settlement increased) agreed to by the lead plaintiff was permissible. Notably, the total fee of $21.25 million was only 1.28 times the lodestar calculation of the reasonable attorney hours expended times their hourly rates. (An earlier post on the AT&T settlement can be found here.)
Quote of note: "St. John's University Law Professor Michael Perino says, 'It is a matter of dispute among academics as to whether an upward sliding scale or a downward sliding scale creates the best set of incentives for plaintiffs. Downward is more common.'"
Disclosure: The author of The 10b-5 Daily is quoted in the article.
Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse have released an interim report on federal securities class action filings in 2006. The findings include:
(1) The number of filings in the first half of 2006 is at the lowest level for any six-month period in the last ten years. There have been 61 filings to date, which would annualize to 123 filings (as compared to a post-PSLRA average of 194 per year).
(2) The filings that have been made in 2006 are associated with significantly lower market capitalization losses as compared to 2005 and historical averages.
(3) Options backdating suits have not contributed significantly to the number of filings, with most of the litigation activity in that area focused on derivative actions. (Securities Litigation Watch is keeping a running total on the number of options backdating securities class actions, which currently stands at eleven.)
Because few securities fraud cases go to trial, courts rarely have had to address the proportionate liability scheme created by the PSLRA. In a nutshell, the PLSRA provides for proportionate liability unless the trier of fact finds that the defendant "knowingly" violated the applicable securities laws. If a defendant is only found to have engaged in a reckless violation, the trier of a fact must make "findings with respect to each covered person and each of the other persons claimed by any of the parties to have caused or contributed to the loss incurred by plaintiff" to determine the proportionate liability of the defendant in question.
In a recent decision in the Enron securities class action - In re Enron Corp. Sec., Derivative & "ERISA" Litigation, 2006 WL 1851383 (S.D. Tex. July 5, 2006) - the court found that the failure of Congress to explain or limit the clause "each of the other persons claimed by any of the parties to have caused or contributed to the loss" has the potential to wreak havoc on a trial. The "other persons" could include "non-parties to the suit, defendants that have settled, defendants that have been dismissed, and indeed even the plaintiffs." Based on the vagueness of the statute, "defendants most likely will attempt to designate any person or entity that might conceivably have any responsibility for the plaintiffs' loss." Moreover, the statute does not specify what "caused" or "contributed to" means and does not establish who has the burden of proof as to the responsibility of these "other persons."
To address these issues, the court established some significant threshold requirements for implementing the proportionate liability scheme:
(1) Any party designating a non-party as potentially responsible for the plaintiffs' loss shall "bear the burden of proof demonstrating that the non-party violated the federal securities statutes."
(2) If the trier of fact determines that a defendant did not violate the securities laws, there cannot be any allocation of fault to that person.
(3) All parties who wish to claim that a non-party, settling party, or dismissed party is responsible for any or all of the plaintiffs' losses must file, prior to trial, "the name of such person or entity and provide a statement of the factual basis for claiming that fault should be allocated" to that person or entity. Moreover, the designating person must "demonstrate in that factual statement that the non-party could have been sued by plaintiffs, i.e., that the claims against it could have met requirements of the PSLRA, but was bypassed or dismissed."
(1) Scheme liability continues to be the topic of the moment, with a New York Law Journal column (posted July 20 - subscrip. req'd) declaring Parmalat to be the best S.D.N.Y. securities litigation decision of the past year. The column, by Professor John Coffee, also discusses the recent Ninth Circuit opinion on the scope of scheme liability (a summary of that decision can be found here).
Quote of note: "[T]he new "scheme to defraud" case law could significantly extend the private reach of Rule 10b-5 against persons who only a year ago appeared immune as mere aiders and abettors. One can agree or disagree about the desirability of this result, but the Parmalat decision is carried off with style and authority."
(2) The National Law Journal has an article (posted July 20 - subscrip. req'd) on the recent Congressional hearing for a proposed securities litigation reform bill. The article focuses on the issue of whether it is appropriate to auction off the role of lead counsel in securities class actions.
Quote of note: "Judge Walker testified recently before the House of Representatives subcommittee on capital markets that not only should Bill H.R. 5491 allow judges the option of competitive bidding as a means of selecting lead counsel, but also that competition among law firms should be more intense. 'If anything, this provision should be made even stronger by providing that the court shall not permit a securities class action to proceed unless and until the lead plaintiff has demonstrated that the lead plaintiff has evaluated competing proposals for representation of the class,' Judge Walker said in prepared testimony. "
The PSLRA's Safe Harbor for forward-looking statements is designed to encourage companies to provide investors with information about future plans and prospects by limiting their potential liability for these statements. Under the first prong of the Safe Harbor, a defendant is not liable with respect to any forward-looking statement if it is identified as forward-looking and is accompanied by "meaningful cautionary statements" that alert investors to the factors that could cause actual results to differ.
In the case of oral forward-looking statements, the PSLRA specifically provides that the meaningful cautionary statements can be incorporated by reference in a readily available written document. The statute is silent, however, about whether this is also true for written forward-looking statements. A surprisingly small number of courts have addressed this issue, but the trend appears to be in favor of finding that a company's incorporation by reference is sufficient.
In Yellen v. Hake, 2006 WL 1881205 (S.D. Iowa July 7, 2006), the court addressed a securities class action brought against Maytag Corp. The court found that "[w]hile the Safe Harbor provision does not explicitly provide for incorporation by reference for written forward-looking statements" it is implicit in Congress' direction that courts consider "all information and documents relevant to a determination of whether a defendant has given adequate warnings." Accordingly, the court agreed to consider warnings contained in Maytag's 2004 Annual Report that were incorporated by reference in the press release and investor presentations that allegedly contained false or misleading forward-looking statements.
DHB Industries, Inc. (OTC Pink Sheets - DHBT), a Florida-based manufacturer of body armour, has announced the preliminary settlement of the securities class action (and related derivative suit) pending against the company in the E.D.N.Y. The case was originally filed in September 2005 and alleges that the company failed to disclose that its body armor products were defective and did not meet the standards of its customers.
The settlement is for $34.9 million in cash, plus 3,184,713 shares of DHB common stock. The company's insurers will pay $12.9 million. In an unusual settlement provision, DHB stated that its CEO (who apparently is being forced out) "will help fund the payments to be made by the Company by exercising 3 million warrants held by him at an elevated exercise price." Moreover, the company apparently "has the option to put to [its CEO], approximately 3 million shares of common stock to finance the remaining portion of the cash settlement."
Newsday has an article on the settlement.
A quick catch-up on interesting items from the past few days.
(1) On Friday, the New York Times had an article on securities plaintiff firms. The article discusses the stock option backdating cases and speculates about which firm is ready to "assume Milberg's mantle."
(2) Point of Law has some follow-up on the congressional hearing for H.R. 5491, a securities litigation reform bill. A discussion of the legislation can be found here. A reader also points out that in addition to the testimony at the hearing, the AFL-CIO and the Consumer Federation of America apparently submitted statements opposing the bill.
(3) Lies, Damn Lies, & Forward-Looking Statements has a long post (which is full of relevant links) on the efforts being made by securities plaintiff firms to attract foreign institutional investors as clients.
Whether secondary actors who did not prepare or substantially participate in preparing corporate financial misstatements can still be held liable for them under Rule 10b-5 as scheme participants is a hot topic in the courts. In Simpson v. AOL Time Warner, Inc., 2006 WL 1791042 (9th Cir. June 30, 2006), the U.S. Court of Appeals for the Ninth Circuit has issued an opinion in the Homestore securities litigation that addresses the issue. (A discussion of the lower court decision and SEC amicus brief on appeal can be found here.)
In Simpson, the court held that "to be liable as a primary violator of Sec. 10(b) for participation in a 'scheme to defraud,' the defendant must have engaged in conduct that had the principal purpose and effect of creating a false appearance of fact in furtherance of the scheme." It is not sufficient, the court concluded, "that a transaction in which a defendant was involved has a deceptive purpose and effect; the defendant's own conduct contributing to the transaction or overall scheme must have had a deceptive purpose and effect." The court rejected the defendants' argument that Sec. 10(b) liability is limited to those who make material misstatements or omissions, but ultimately found that the district court had correctly dismissed the claims against them.
Held: Dismissal affirmed.
Two columns on securities litigation that bookended the holiday:
(1) An op-ed in the June 26 edition of the Washington Post by Professor Richard Booth (U. of Maryland Law School) posits that diversified investing is the solution to the problem of securities fraud. Professor Booth concludes that all securities class actions should be replaced by derivative actions on behalf of the company.
Quote of note: "The cost of litigation operates as a tax on the returns of diversified investors that subsidizes undiversified investors. Even if undiversified investors have a legitimate gripe, the fact is that about two-thirds of all stock is held by diversified institutional investors, and much of the remainder is held by diversified nonprofit institutions. There is no justification for protecting undiversified investors at the expense of other investors when diversification is free for the taking."
(2) The July 5 edition of the New York Law Journal contains an article (subscrip. req'd) on two recent decisions from the S.D.N.Y. The decisions address when the Securities Litigation Uniform Standards Act of 1998 (SLUSA) does, or does not, pre-empt state class actions alleging misconduct in the securities industry.
Quote of note: "In sum, through differing outcomes, Felton and Paru appear to reinforce an emerging principle: if, at its core, the state securities class action depends on an allegation of misrepresentation or omission, SLUSA will preempt it, whatever legal theory the plaintiff may invoke; if it does not, SLUSA preemption will not lie."