American Italian Pasta Company (PINKSHEETS: AIPC), a Missouri-based producer of dry pasta, has announced the preliminary settlement of the securities class action pending against the company in the W.D. of Missouri. The case, originally filed in August 2005, stems from allegations that AIPC failed to disclose materially adverse facts in its financial statements.
The settlement covers the securities class action claims against AIPC (but not related derivative claims) and has a total value of $25 million. Of that total value, the company's insurers will pay $11 million in cash and the company will issue $14 million in common shares.
This month has seen two noteworthy decisions from the U.S. Court of Appeals for the Seventh Circuit.
(1) In Sutton v. Bernard, 2007 WL 2963940 (7th Cir. Oct. 12, 2007), the court addressed an appeal by the lead counsel in a securities class action brought against Marchfirst, Inc. Following the settlement of the case, the district court rejected the lead counsel's fees request, reducing it from 28% of the gross settlement amount to 15% or $2,605,000. On appeal, the court held that the district court had improperly failed to take into account "the market price for legal services" in making its determination, instead focusing only on the results achieved in the case.
Quote of note: "The trouble we have with the district court's methodology is that the fee determination began and ended with the amount actually recovered for the class; the court did not consult the market for legal services for guidance in what constituted, as an abstract matter, a 'reasonable percentage.'"
(2) In Asher v. Baxter Int'l Inc., 2007 WL 3010617 (7th Cir. Oct. 17, 2007), the court considered another appeal in a case that had previously generated a well-known decision on the PSLRA's safe harbor for forward-looking statements. This time the court addressed whether, pursuant to Fed. R. Civ. P. 23(f), a plaintiff is entitled to appeal subsequent denials of class certification if it does not appeal the first denial within the 10-day statutory period. The court found that the "time limit would not be worth anything if it restarted with each new motion" and declined to allow the appeal. The opinion also contains interesting dicta on the representative plaintiff selection process in the case.
Quote of note: "The district court deemed both the Alaska and the Fayetteville funds inadequate because their investments are much smaller than those of other mutual or pension funds. One can't help thinking that the unwillingness of any substantial shareholder to step forward as a representative suggests that the suit may not be in investors' interest. To the district judge, the fact that two modestly sized pools with modest stakes in Baxter had been recruited by the lawyers already trying to represent a plaintiff class implied that they would be subservient to counsel."
There was talk about an increase in the number of securities class action trials back in 2005, but the trend never went anywhere. Not surprisingly, therefore, the start of the trial in the JDS Uniphase case has generated a fair amount of media attention. The case has an interesting history, including the lead plaintiff taking out a newspaper advertisement urging JDS Uniphase employees to disclose what they know about the alleged fraud.
Addition: RiskMetrics Group has put together a handy summary of post-PSLRA securities class action trials (via WSJ Law Blog).
There has been an interesting development in the long-running Coca-Cola securities class action. According to media reports, the defense has sought denial of class certification based on alleged misconduct by lead counsel for the plaintiffs (Coughlin Stoia and Chitwood Harley) relating to payments to witnesses. Coca-Cola asserts that these are the "same sort of tactics" that the former lead attorney on the case has admitted to as part of a recent criminal plea agreement. Coverage can be found in the Wall Street Journal, the Fulton County Daily Report, and Reuters.
Mercury Interactive Corp., a California-based software company acquired by Hewlett-Packard Co. in 2006, agreed earlier this week to the preliminary settlement of the securities class action pending against the company in the N.D. of California. The case was originally filed in 2005 and alleges that executives at the company backdated stock options and made false or misleading statements concerning Mercury Interactive's financial results.
A few items of interest:
(1) The D & O Diary has a post examining recent securities class action decisions involving foreign investors. One type of litigation that is receiving a lot of attention is "foreign cubed" cases (defined as an action brought in the U.S. against a foreign issuer, on behalf of a class that includes not only investors who purchased the securities in question on a U.S. securities exchange, but also foreign investors who purchased the securities on a foreign securities exchange).
(2) Securities Litigation Watch has a post on a recent Ninth Circuit case setting out the standard for determining when an investor is on inquiry notice of his securities fraud claim for purposes of the running of the statute of limitations. The case is Betz v. Trainer Wortham & Co., Inc., 2007 WL 2874369 (9th Cir. Oct. 4, 2007).
(3) Two new papers on determining securities fraud damages have been published: Inflation and Damages in a Post-Dura World (David Tabak - NERA) and The Loss Causation Requirement for Rule 10b-5 Causes-of-Action: The Implication of Dura Pharmaceuticals v. Broudo (Allen Ferrell - Harvard; Atanu Saha - Alix Partners).
Despite all of the fanfare leading up to the oral argument in the Stoneridge (a.k.a. Charter Communications) case on scheme liability, the aftermath has been quite subdued. That may be because the post-argument consensus (at least in the blogosphere) is that the plaintiff investors have no chance of obtaining a reversal. On exactly what basis the court will decide against them, however, is still the subject of debate. Summaries and predictions can be found at BusinessAssociationsBlog, Legal Pad, Securities Law Prof Blog, Business Law Prof Blog, Ideoblog, and The Race to the Bottom.
(1) Justice Scalia noted that private actions pursuant to Rule 10b-5 are a judicial creation. He then wondered why they could not also be judicially limited.
"If it's our creation, couldn't we sensibly limit it so that, for example, schemes can be attacked by the SEC, but schemes do not form the basis for private attorney generals' actions? You need actual conveyance of a misrepresentation to the injured party." (p. 5)
(2) Chief Justice Roberts, on the other hand, appeared inclined to defer to Congress given its active legislating in the area of securities litigation.
"My suggestion is that we should get out of the business of expanding [Rule 10b-5 liability], because Congress has taken over and is legislating in the area in the way they weren't back when we implied the right of action under 10(b)." (p. 7)
(3) Justice Kennedy expressed concern over the potentially broad scope of liability under a scheme theory (while painting an unflattering portrait of the corporate world).
"[T]here are any number of kickbacks and mismanagements and petty frauds that go on in business, and business people know that any publicly held company's shares are going to be affected by its profits, so I see no limitation to your - to your proposal ." (p. 18)
(4) Justice Ginsburg wondered whether scheme liability occupied a middle ground between aiding and abetting, which is a claim that can only be brought by the SEC, and a primary violation by the company.
"That's if they are aiders and abettors, which is what Congress covered. And I again go back to, is there another category or is everyone - either Charter, the person whose stock is at stake, the company whose stock is at stake and everyone else is an aider?" (p. 35)
(5) Justice Souter alluded to the public controversy over the Solicitor General's amicus brief by asking the government "whether the SEC has publicly taken a position" on the question of whether there was a violation of Rule 10b-5. Counsel for the government outlined the course of events, but noted that there has not been "any official SEC Commission statement." (pp. 49-50)
(6) Chief Justice Roberts and Justice Ginsburg expressed skepticism over whether the issue of reliance, which the government focused on, was addressed by the appellate court. Counsel for the government replied that "it's not as complete a discussion of the reliance issue as we would have thought appropriate if we had been writing the opinion, but it certainly does touch on the question and we think it's wholly presented." (pp. 56-7)
Early reports from today's Supreme Court oral argument in the Stoneridge case suggest that the court is unlikely to side with the plaintiff investors and adopt a broad definition of "scheme liability." First-hand accounts can be found at SCOTUSBlog and the WSJ Law Blog. (Also worth reading is today's coverage of the case in the Wall Street Journal, including an op-ed by SEC Commissioner Paul Atkins.)
Quote of note (SCOTUSBlog): "'Congress has kind of taken over for us . . . They picked up the ball and are running with it . . . My suggestion is that we should get out of the business of expanding [the key securities fraud section]; Congress has taken over,' the Chief Justice told New York attorney Stanley M. Grossman."
(1) The Wall Street Journal had two items in its weekend edition, including a "Hot Topic" breakout of the case and an editorial (subscrip. req'd) urging the court to reject the position advocated by the investor plaintiffs.
(3) CNBC has a point/counterpoint with two prominent securities litigators from its "Power Lunch" program.
A number of media outlets have chosen to run articles on the Stoneridge (a.k.a. Charter Communications) case today in anticipation of next week's argument. Articles can be found in the Washington Post, Wall Street Journal , Reuters, and MarketWatch.
Quote of note (Washington Post): "Joseph A. Grundfest, a Stanford University law professor who supports businesses in the case, said the SEC and the Justice Department already have the power to sue third parties for their involvement in a fraud scheme. He noted that Congress repeatedly has rejected attempts to expand the rights of investors to sue. 'There's a question of real principle here: Which decisions should be made by the courts, and which should be made by Congress?' Grundfest said."
For those readers who would like to get a preview of the Stoneridge (a.k.a. Charter Communications) argument in the U.S. Supreme Court next week, there are two notable events being held this Friday.
(2) The Center for Business Law & Regulation at Case Western Reserve University has a half-day conference on the case taking place on campus in Cleveland, Ohio. There also will be a live webcast. Details can be found here.