Credit Suisse Group and Banca Nazionale del Lavoro SpA are the first two defendants to settle in the ongoing Parmalat securities litigation in the S.D.N.Y. It was announced last week that the two banks agreed to pay $50 million (evenly divided) and make corporate governance changes. The case alleges a massive scheme by Parmalat and its bankers, lawyers, and auditors to overstate assets and profits for more than a decade. The 10b-5 Daily has posted frequently about the scheme liability decision in the case (for the latest post see here).
The Halliburton securities litigation is back in the news, two years after the S.D. of Tex. rejected a proposed settlement of the case. Forbes has an article on a motion by the Archdiocese of Milwaukee Supporting Fund, which is acting as lead plaintiff in the case, to replace Lerach Coughlin and Scott + Scott as lead counsel.
There has been plenty of news related to the Paulson Committee and its potential securities litigation recommendations over the past two weeks.
(1) John Thain, the head of the New York Stock Exchange, called class action suits "a tax on all companies and ultimately consumers" and expressed support for the Paulson Committee's potential tort reform recommendations. Thanks to Werner Kranenburg for the link to the Financial Times article (via MSN).
(2) Professor John Coffee used his New York Law Journal column (Nov. 16 - subscrip. req'd) to clarify that he did not recommend to the Paulson Committee (as had been reported) that the SEC dis-imply a private right of action under Rule 10b-5. Instead, his more modest proposal is that the SEC "adopt an exemptive rule under § 36 of the Securities Exchange Act of 1934 that would shield a non-trading public corporation from liability for monetary damages under Rule 10b-5." In other words, plaintiffs would have to look to corporate officers and agents (e.g., auditors and underwriters) for their securities fraud recovery. Securities Litigation Watch has a post.
(3) Finally, Treasury Secretary Paulson gave a speech on Monday arguing that excessive regulation and burdensome litigation were prompting companies to choose to list their stock on foreign exchanges rather that U.S. exchanges. According to the New York Times report, Paulson "did not speak about some proposals expected to be made by the two business groups to limit shareholder lawsuits," but did suggest that he was sympathetic to limiting auditor liability.
In a decision issued earlier this year in the Qwest securities litigation, the U.S. Court of Appeals for the Tenth Circuit declined to adopt the selective waiver doctrine. Specifically, the court found that Qwest could not withhold documents from the plaintiffs on the grounds of attorney-client privilege or the work-product doctrine if those documents were previously produced to the SEC. On Monday, the U.S. Supreme Court denied cert in the case.
The Denver Business Journal has an article on the decision. Most of the defendants have settled (including Qwest), but the case is continuing against two former officers. The 10b-5 Daily has posted frequently about the settlement - for the latest post, click here.
Will stock buyback programs provide the next basis for securities litigation? They are certainly the topic of the day. CFO Magazine has a feature article discussing whether insiders should be permitted to sell shares while a stock buyback program is in effect. Meanwhile, the New York Times has a column (subscrip. req'd) speculating that some stock buyback programs may be used to increase executive bonus payouts that are contingent on an increase in earnings per share. Thanks to Mike Gumport for the link to the CFO Magazine article.
Quote of note (CFO Magazine): "This June, Audit Integrity, a Los Angeles–based accounting and governance analysis firm, sent a note to clients identifying 16 companies with market capitalizations of at least $100 million that it considers at high risk for fraudulent behavior, including USANA, because the companies have high levels of both stock buybacks and insider selling. Meanwhile, [a prominent plaintiffs' attorney] is putting the finishing touches on a lawsuit he plans to file against 'one of the most high-profile companies in the United States,' along with its CEO, over issues relating to its buyback programs."
Martha Stewart Living Omnimedia, Inc. (NYSE: MSO), a New York-based media company, has announced the preliminary settlement of the securities class action pending against the company in the S.D.N.Y. The case was originally filed in 2002 and alleges that founder Martha Stewart and other company officers made false and misleading statements about Stewart's sale of ImClone shares in December 2001, which resulted in an inflated stock price. (The 10b-5 Daily has commented on this case in a series of posts entitled "The Martha Stewart Watch," the most recent of which can be found here.) The proposed settlement is for $30 million, of which $15 million will be paid by the company, $10 million will be paid by the company's insurers, and $5 million will be paid by Stewart herself.
The plaintiffs' bar must have been amazed when they opened the Wall Street Journal last week to find Senator Charles Schumer (D - N.Y.) suggesting that something needs to be done about frivolous securities class actions. In an op-ed (subscrip. req'd) written with Mayor Michael Bloomberg, Senator Schumer discusses ways to help New York's financial services industry. Notably, the authors state that the litigation environment for corporations must be improved. Reuters has an article on all of this recent interest in securities litigation reform.
Quote of note (WSJ op-ed): "The total value of securities class-action lawsuits in the U.S. has skyrocketed in recent years, to $9.6 billion in 2005 from $150 million in 1997. The U.K. and other nations have laws that far more effectively discourage frivolous suits. It may be time to revisit the best way to reduce frivolous lawsuits without eliminating meritorious ones."
There has been much more on the Committee on Capital Markets Regulation (a.k.a. the Paulson Committee) and its potential litigation recommendations in the Wall Street Journal this week.
(1) An op-ed (subscrip. req'd) in Monday's edition, written by two Committee members, discussed the Committee's concerns and goals.
Quote of note: "In addition to regulation and accounting standards, the liability system can also affect the competitiveness of U.S. markets. Firms are sometimes confronted with circumstances in litigation, including securities class-action suits, where even a small probability of loss, given the size of claims, could result in bankruptcy. Consequently, companies often must agree to large settlements that result in reduced value for shareholders rather than pursuing a successful outcome on the merits of its case."
(2) An article (subscrip. req'd) in Wednesday's edition discussed the desire of accounting firms to limit the potential liability for their audit work and the Committee's possible recommendations on this issue.
Quote of note: "Recognizing, though, that auditor liability overhaul might be a tough sell on Capitol Hill, the committee may suggest that the U.S. Securities and Exchange Commission come up with a solution, Mr. Scott said. 'The SEC could modify their own rules regarding liability,' he added. One idea under study: Allowing accounting firms to negotiate liability caps with clients, a practice now barred to preserve auditors' independence."
Krispy Kreme Doughnuts, Inc. (NYSE: KKD), a North Carolina-based retailer and wholesaler of doughnuts (including the famous Hot Original Glazed doughnut), has announced the preliminary settlement of the securities class action (and related derivative cases) pending against the company in the M.D. of North Carolina. The case was originally filed in 2004 and alleges various accounting misrepresentations.
The proposed class action settlement is for $75 million, of which $34,967,000 will be paid by the company's insurers, $4,000,000 will be paid by the company's auditor, and $35,853,000 will be derived from common stock and warrants to purchase common stock to be issued by the company. Two of Krispy Kreme's former officers will contribute $100,000 each. The parties apparently were unable to come to an agreement, however, with a third former officer - the company's fomer Chairman and CEO - and the settlement expressly preserves any claims against him that "may be asserted by the Company in the derivative action for contribution to the securities class action settlement or otherwise under applicable law."