The battle to win the hearts and minds of the American people (or at least the SEC) on the issue of scheme liability, which is currently before the U.S. Supreme Court in the Stoneridge (a.k.a. Charter Communications) case, shows no signs of slowing down. This week has seen three publications of note:
(1) In its Tuesday edition, the Wall Street Journal had a feature article (subscrip. req'd) on the pressure being put on the SEC to side with the plaintiff investors.
Quote of note: "[A plaintiffs attorney] won the support of aspiring Democratic presidential candidate and former plaintiffs lawyer John Edwards, who said: 'I urge the SEC to fulfill its historic mission of protecting investors. Silence, or even worse, siding with fraud participants, would be a betrayal of that mission.'"
(2) The Wall Street Journal also has an op-ed (subscrip. req'd) in today's edition urging the SEC to support the defendant corporations.
Quote of note: "Unfortunately, we cannot be certain why the Supreme Court has taken the case, or if it will do the right thing. While Chief Justice John Roberts and Justice Stephen Breyer have spoken of the need for judicial modesty, both have recused themselves from the case. All the more reason for Treasury and the SEC to stand firm and ask the solicitor general to urge the Supreme Court to keep liability circumscribed."
(3) Finally, the Legal Times has an op-ed, written by attorneys who represent investors in a scheme liability case against Enron's banks, urging the Supreme Court to adopt a broad interpretation of the relevant statutes.
Quote of note: "At bottom, Section 10(b) and Rule 10b-5 have long proscribed any scheme or artifice to defraud, as well as any conduct that operates as a fraud on investors. Enron's banks worked hand-in-hand with Enron to design and implement sham transactions with the sole purpose of hiding debt and generating fake revenue. If that's not participating in a scheme to defraud, what else can we call it?"
Bloomberg has a feature article discussing the recent criticisms of the SEC's investor protection efforts. Of particular note for readers of this blog, the article states that Chris Cox, Chairman of the SEC, has denied that the SEC is considering a proposal or rule to allow corporations to mandate arbitration of shareholder claims. (Just last month, the Wall Street Journal reported that the SEC was exploring this proposal.)
The American Lawyer has an article on the possible emergence of U.S.-style securities class actions in Europe. The article notes, based on numbers from the recent issued PwC 2006 Securities Litigation Study, that the number of filings against European companies in U.S. courts has actually fallen over the past few years. On the other hand, more European countries are adopting some form of group litigation.
Some interesting tidbits from around the web on the Stoneridge (a.k.a. Charter Communications) case on scheme liability set to be heard by the U.S. Supreme Court next term.
Whether, and on which side, the SEC will participate in the case has been a hot issue. SCOTUSblog reports that there are two dates to keep in mind: (1) amicus briefs urging the Supreme Court to hear a similar Enron-related case on scheme liability (maybe in tandem or consolidated with Stoneridge) are due on June 1; and (2) amicus briefs in support of the investor plaintiffs in Stoneridge are due on June 11.
Meanwhile, Point of Law speculates that Justice Alito may be the swing vote in the Stoneridge case. Justices Breyer and Roberts are recused because of stockholdings, leaving seven justices to consider the case.
The recent string of notable settlements (see here and here) reached its crescendo yesterday. Tyco International Ltd. (NYSE: TYC), a diversified global company, has announced the preliminary settlement of the securities class action pending against the company in the D. of N.H. The case was filed in 2003 and alleges an enormous accounting fraud scheme (which has led to related criminal law convictions for individual Tyco officers).
The settlement is for $2.975 billion and is being heralded as the largest payout ever by a single corporate defendant in a securities fraud lawsuit. As part of the settlement, Tyco has agreed to assign its related claims against PricewaterhouseCoopers, its former auditor, to the plaintiffs. Press coverage can be found in the Associated Press, the New York Times, and Business Week.
(1) Since 1999, international institutional investors have sought to serve as lead plaintiffs 182 times in 98 different cases.
(2) The international institutional investors that filed lead plaintiff motions were from 17 different countries. Germany, Canada, and Israel were the countries with the largest number of movants.
Cardinal Health, Inc. (NYSE: CAH), an Ohio-based healthcare company, has announced the preliminary settlement of the securities class action pending against the company in the S.D. of Ohio. The case was filed in 2004 and alleges that the company made false or misleading statements concerning its financial results.
The settlement is for $600 million, but is still subject to approval by the lead plaintiffs. MarketWatch has an article on the settlement. (The 10b-5 Daily has previously posted about the lead plaintiff, discovery stay, and motion to dismiss decisions in the case.)
Priceline.com, Inc. (Nasdaq: PCLN), a Connecticut-based online travel service, has announced the preliminary settlement of the securities class action pending against the company in the D. of Conn. The case was originally filed in 2000 and alleges that the company misrepresented its financial condition. Discovery in the case was scheduled to have been completed by the end of this year. The settlement is for $80 million, with $30 million being paid by the company's insurance carriers.
There are two prongs to the PSLRA's safe harbor for forward-looking statements. First, a defendant shall not be 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. Second, a defendant shall not be liable with respect to any forward-looking statement, even in the absence of meaningful cautionary statements, if the plaintiff cannot establish that the statement was made with "actual knowledge" that it was false or misleading.
Although the two prongs are written in the alternative, courts frequently have rebelled against the plain language of the statute because it appears to provide defendants with a "license to defraud" investors about a company's future prospects so long as the statement is accompanied by meaningful cautionary language.
In a decision issued this week, In re Nash Finch Co. Sec. Litig., 2007 WL 1266658 (D.Minn. May 1, 2007), the court noted that the Eighth Circuit had not yet addressed the question of "whether allegations of actual knowledge defeat the safe harbor when cautionary language is present." The defendants argued that their knowledge of the truth or falsity of the forward-looking statements was irrelevant under the first prong of the safe harbor. The court held, however, that "cautionary language can not be 'meaningful' when defendants know that the potential risks they have identified have in fact already occurred, and that the positive statements they are making are false." (For a similar holding from the C.D. of Cal., see this post.)
Doral Financial Corp. (NYSE: DRL), a Puerto Rico-based financial services company, has announced the preliminary settlement of the securities class action pending against the company in the S.D.N.Y. The case was filed in 2005 and alleges that Doral improperly accounted for its derivative portfolio of interest-only strips.
The settlement is for $130 million, consisting of payments from Doral ($95 million), its insurers ($34 million), and one or more individual defendants ($1 million). Doral also agreed to certain corporate governance changes. Because of Doral's precarious financial situation, the settlement is contingent on the company's ability to obtain outside funding for its business. The Associated Press has an article.