There will be no new posts on The 10b-5 Daily until after March 31.
Under the fraud-on-the-market theory, reliance by investors on an alleged misrepresentation is presumed if the company's shares were traded on an efficient market. Investors are not entitled to the presumption, however, if they are unable to show that the misrepresentation actually affected the market price of the stock. Class certification continues to be an intense battleground on the application of the fraud-on-the-market theory, as evidenced by two recent decisions.
(1) In In re Fannie Mae Sec. Litig., 247 F.R.D. 32 (D.D.C. 2008), the court considered whether it was appropriate to apply the fraud-on-the-market presumption to investors who purchased Fannie Mae stock after the company's Dec. 2004 announcement that it would engage in a large financial restatement. The plaintiffs argued that additional information about the alleged fraud was released over the next ten months and the class period should extend to Sep. 2005. The court disagreed and held that the Dec. 2004 announcement "severed the link between the alleged misrepresentations and the stock price" and later investors could not "claim a reasonable reliance on Fannie Mae's financial statements." Accordingly, the court found that the class period ended in Dec. 2004.
(2) In In re Credit Suisse First Boston Corp. (Lantronix Inc.) Analyst Sec. Litig., 2008 WL 512779 (S.D.N.Y. Feb. 26, 2008), the court considered whether a series of allegedly false analyst statements about Lantronix affected the market price of the company's stock. The court declined to decide whether the fraud-on-the-market presumption could ever apply to research analyst statements, noting that the issue is currently before the Second Circuit in the In re Salomon Analyst Metromedia Litig. case (see this post for more background). Nevertheless, the court decertified the class based on the plaintiffs' failure to adequately demonstrate that the analyst statements had: (a) increased Lantronix's stock price when issued; (b) had an effect throughout the class period; or (c) negatively impacted Lantronix's stock price when their falsity was revealed to the market.
The March 17, 2008 edition of the National Law Journal has a pair of columns on the impact of the Supreme Court's recent securities litigation decisions.
(1) In Stoneridge Alters Legal Landscape (subscrip. req'd), the authors recap the decision and argue that the Court's rejection of "scheme liability" has "profoundly changed" the potential securities fraud exposure of third parties.
Quote of note: "The holding in Stoneridge indicates that all or most of that $7 billion [in Enron-related settlements] probably did not have to be paid, because the banks, even if they acted with full knowledge that they were engaged in a scheme with Enron, had no liability to the investing public under the anti-fraud provisions of the federal securities laws. Note that while the settling banks in Enron paid approximately $7 billion, there remained a number of banks that declined to settle, and that would have faced massive exposure had Stoneridge been decided differently."
Quote of note: "Of 102 reported decisions reviewed applying Tellabs, 64 reflect dismissals (albeit some with leave to amend). On its face, this (unscientific) survey reflects a dismissal rate higher than historical norms."
A few items from around the web.
(1) RiskMetrics has released its annual SCAS 50 report of the top 50 plaintiffs' law firms ranked by the total dollar amount of final securities class action settlements occurring in 2007 in which the law firm served as lead or co-lead counsel.
(3) Amanda Rose, an incoming Vanderbilt law professor, has issued an interesting working paper on securities class actions. Rose argues that the overdeterrence threat of securities class actions could be mitigated if "policymakers adopt an oversight approach to securities litigation reform by, for example, granting the SEC the ability to screen which Rule 10b-5 class actions may be filed, and against whom."
United Rentals, Inc. (NYSE: URI), a Connecticut-based equipment rental company, has announced the preliminary settlement of the securities class action pending against it in the D. of Conn. The case, originally filed following the August 2004 disclosure of a SEC inquiry, stems from allegations that the company manipulated the company's publicly-released financial data through improper accounting practices. The settlement is for $27.5 million and is contingent upon United Rentals and its insurers finalizing agreements on the portion of the settlement to be funded by the insurers.
A couple of notable recent decisions:
(1) In In re Cardinal Health Inc. Sec. Litig., 528 F. Supp. 2d 752 (S.D. Ohio 2007), the court considered a requested attorney fee award of $145 million (24% of the $600 million settlement). The court found that the absence of an ex-ante fee arrangement between the lead plaintiff group and lead counsel required it to "undertake an independent analysis to determine reasonable attorneys' fees." The court ultimately awarded an 18% fee award, with a high lodestar multiplier of 6, based on the "excellent recovery, considerable effort and time, and high quality of lawyering."
Quote of note: "[T]his court would . . . recommend that courts, in addition to the established requirements, look favorably on the presence of an ex-ante fee arrangement in its [sic] decision to approve lead plaintiff and lead counsel. Alternatively, Congress could amend the PSLRA to mandate lead plaintiffs to enter into a fee arrangement with lead counsel before the court formally approves lead counsel. Under this approach, sophisticated parties would be encouraged to negotiate fee arrangements without the bias of hindsight, and they could reach presumptively reasonable results that the court can review."
(2) In In re Pfizer, Inc. Sec. Litig., 2008 WL 540120 (S.D.N.Y. Feb. 28, 2008), the court considered whether an anonymous blog post could provide reliable factual allegations. The plaintiffs asserted that the blogger was actually a former Pfizer officer. The court found that there was insufficient information about the blogger's identity and, even accepting that he had been employed at Pfizer, it was unclear whether the blogger "would have been likely to know the relevant facts."
Quote of note: The blogger's "allegation does not claim to be based on personal knowledge and lacks detail that might suggest personal knowledge. For example, the blog post does not describe when, how, on what basis, by whom, or to whom the alleged warning was communicated."
Royal Dutch Shell p.l.c. (NYSE: RDS/A) has taken another step toward resolving the investor claims related to the company's 2004 recategorization of certain proved oil and gas reserves. After reaching a proposed settlement with non-U.S. shareholders last year for approximately $350 million, the company announced today that it has entered into an agreement in principle with U.S. shareholders. The U.S. class would receive a base settlement amount of approximately $83 million (based on proportions previously established in the proposed non-U.S. settlement), with an additional payment of $35 million to be divided proportionally between the U.S. class and the participants in the proposed non-U.S. settlement.
R&G Financial Corp. (PINKSHEETS: RGFC), a financial holding company based in San Juan, Puerto Rico that provides banking, mortgage banking, and insurance services, has announced the preliminary settlement of the securities class action (and a related derivative suit) pending against the company in the S.D. of New York. The case, originally filed in April 2005, stems from allegations that R&G Financial failed to disclose and misrepresented adverse facts in its financial statements, lacked adequate internal controls, and engaged in financial accounting practices that caused its net income and financial results to be materially overstated. The settlement is for $39 million, with R&G Financial contributing approximately $29 million, and the company’s insurers and certain individual defendants contributing approximately $11 million.