In an unusual case, two plaintiff firms have been the subject of a suit alleging that they engaged in legal malpractice in their handling of a securities class action. The securities class action was brought against Bennett Funding Group ("BFG") and settled in 1998 for a total of $139 million. Although no objections were raised to the settlement, members of the class later brought a malpractice class action against the plaintiff firms alleging that BFG's auditor, Arthur Andersen, should have been named as a defendant.
The district court dismissed the malpractice claims. This week, in Achtman v. Kirby McInerney & Squire, LLP, 2006 WL 2720643 (2d Cir. Sept. 25, 2006), the US. Court of Appeals for the Second Circuit affirmed the dismissal, finding that the plaintiff firms' decision not to sue Arthur Andersen was reasonable as a matter of law. The New York Law Journal (subscrip. req'd) has an article on the decision.
Quote of note: "[Counsel for the plaintiff firms] said yesterday he appreciated the irony of two class action firms being sued in a class action. 'They're usually accused of suing every deep pocket in sight,' he said. 'Here they're exercising restraint and they get sued for it.'"
The U.S. Court of Appeals for the Fourth Circuit has issued its first post-Dura decision on loss causation. In Glaser v. Enzo Biochem, Inc., 2006 WL 2692848 (4th Cir. Sept. 21, 2006), the court examined whether the plaintiffs had adequately alleged a Virginia common law fraud claim related to the sale of securities. (The federal securities claims had previously been dismissed on statute of limitations grounds.)
The court found that it "is only after the fraudulent conduct is disclosed to the investing public, followed by a drop in the value of the stock, that the . . . investor has suffered a 'loss' that is actionable after the Supreme Court's decision in Dura." Because the complaint appeared to concede that the plaintiffs had sold their shares before the "alleged truth about Enzo's science" was "publicly revealed," any losses they suffered "must have been the result of market factors or other factors, not the revelation of the alleged truth."
Whether plaintiffs who combine nonfraud and fraud securities claims in the same complaint are subject to the particularity pleading requirement of Fed. R. of Civ. P. 9(b) has been an open issue. Although claims under Section 11 and Section 12(a)(2) of the Securities Act of 1933 do not require the plaintiff to establish fraudulent intent, a number of federal circuits (2nd, 3rd, 5th, 7th, and 9th - with only the 8th disagreeing) have held that these claims must be plead with particularity if they "sound in fraud" based on the existence of a related securities fraud claim.
The U.S. Court of Appeals for the Eleventh Circuit has joined the majority position this week. In Jacobson v. First Horizon Pharm. Corp., 2006 WL 2661652 (11th Cir. Sept. 18, 2006), the court found that a Section 11 or Section 12(a) claim "must be pled with particularity when the facts underlying the misrepresentation at stake in the claim are said to be part of a fraud claim, as alleged elsewhere in the complaint."
The court also addressed whether the complaint was improperly dismissed pursuant to Fed. R. Civ. P. 12(b)(6) on the basis that it was a "shotgun pleading" that did not clearly link its alleged facts to the causes of action. Interestingly, the district court had granted the dismissal and conditioned any amendment of the complaint "on the [plaintiffs'] payment of the defendants' costs and fees associated with the motion to dismiss." On appeal, the court avoided that issue by holding that instead of dismissing the complaint, the district court should have sua sponte ordered a repleading for a more definitive statement of the claim pursuant to Fed. R. Civ. P. 12(e).
Quote of note: "It is not enough to claim that alternative pleading saves the nonfraud claims from making an allegation of fraud because the risk to the defendant's reputation is not protected. It would strain credulity to claim that Rule 9(b) should not apply in this allegation: The defendant is a no good defrauder, but, even if he is not, the plaintiff can still recover based on the simple untruth of the otherwise fraudulent statement."
McLeodUSA, Inc., an Iowa-based integrated voice and data services company, has announced the preliminary settlement of the securities class action pending against the company in the N.D. of Iowa. The case was originally filed in January 2002 and alleges that the company issued a series of materially false and misleading statements about its ability to fund and build a national network, as well as other business initiatives. The settlement is for $30 million.
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.
In an opinion issued this week - Margolies v. Deason, 2006 WL 259788 (5th Cir. Sept. 11, 2006) - the Fifth Circuit has joined the clear majority of federal appellate courts (including the Second, Third, Fourth, Seventh, and Eighth Circuits) in holding that the new statute of limitations should not be applied retroactively. The Eleventh Circuit remains the only dissenter (see this post).
The Wall Street Journal had a curious editorial, entitled "The Milberg Effect," in yesterday's edition. The authors argue: (a) plaintiffs are projected to bring 57 fewer securities class actions in 2006 than in 2005 (based on a recent Cornerstone statistical report); (b) Milberg Weiss is projected to file 56 fewer securities class actions in 2006 than in 2005; and, therefore, (c) it is the Milberg Weiss criminal indictment, rather than "Sarbanes-Oxley or better corporate governance standards," that has led to the overall 2006 decline in filings. The conclusion of the editorial is that these numbers should "provide all the evidence Congress needs to conclude that the only real way to rein in America's runaway legal system is with tort reform that allows redress of genuine wrongs but limits the ability of lawyers to game the system."
Whatever the merits of additional tort reform, somebody should have checked with a securities litigation practitioner before deciding that this argument made sense. The Cornerstone report is referring to the number of companies that have been sued, not to the overall number of securities class action suits that have been brought. It is common for multiple securities class action suits (filed by different law firms on behalf of different investors) to be brought against a single company. These suits are later consolidated and counted, for purposes of statistical analysis, as a single filing or case. There may be a "Milberg Effect" on the number of securities class actions brought this year, especially if that firm's willingness to act as a first-filer means that in its absence some cases are never pursued, but it seems safe to conclude that it is nothing like the one-for-one ratio suggested by the WSJ editorial.
Addition: Securities Litigation Watch takes a whirl at breaking down the numbers (also see the comments section for a discussion about the potential first-filer impact).
The Securities Litigation Uniform Standards Act of 1998 ("SLUSA") pre-empts certain class actions based upon state law that allege a misrepresentation in connection with the purchase or sale of nationally traded securities. The "in connection with" requirement has been a continuous source of litigation and was the subject of the Dabit decision by the U.S. Supreme Court earlier this year.
Not to be outdone, the U.S. Court of Appeals for the Seventh Circuit has issued its own opinion discussing the scope of the "in connection with" requirement. In Gavin v. AT&T Corp., 2006 WL 2548238 (7th Cir. Sept. 6, 2006), the court addressed a class action arising out of the merger between MediaOne and AT&T in 2000. The terms of the merger entitled shareholders of MediaOne to obtain, in exchange for their MediaOne shares, a certain amount of AT&T stock plus cash and any accrued but unpaid dividends. After AT&T solicited MediaOne shareholders twice to make this exchange, it hired a shareholder communications company to "clean up" any MediaOne shareholders who had not yet responded. The letter from the shareholder communications company specified a fee of $7 per MediaOne share for the exchange service, without mentioning that MediaOne shareholders could still do the exchange at no cost through AT&T's exchange agent. The failure to mention the "no cost" option is the fraud charged in the complaint.
In an opinion by Judge Posner, the court was highly critical of the defendants' position that the case should be pre-empted by SLUSA because the alleged fraud was in connection with the purchase or sale of MediaOne stock. Noting that MediaOne's shareholders "became the beneficial owners of AT&T stock" when the merger was consummated, the court found that the alleged fraud "happened afterwards and had nothing more to do with the federal securities law than if [the shareholder communication company] had asked the MediaOne shareholders 'do you want your AT&T shares sent to you by regular mail or by courier?' and had charged an inflated fee for the courier service." Accordingly, the court reversed the pre-emption decision and instructed the district court to remand the case back to state court.
Quote of note: "Of course there is a literal sense in which anything that happens that would not have happened but for some prior event is connected to that event. In that sense the fraud of which the plaintiff complains is connected to the merger, without which there would not have been such a fraud against the plaintiff and her class. But in the same sense the fraud is connected to the Big Bang, without which there would never have been a MediaOne or even an AT&T."
The New York Times has an article on the proliferation of shareholder suits related to options backdating. The article discusses the difficulty in bringing a securities class action, as opposed to a derivative suit.
Quote of note: "The class-action suits that allowed lawyers to champion shareholder rights while earning millions in fees from the collapse of companies like Enron and WorldCom have not materialized, even though more than 80 companies are under investigation in the backdating of stock options. Even when it is clear that options grant dates were manipulated, it is less clear how to calculate damage to specific shareholders. And in many cases, the statute of limitations has expired."