(1) The New York Law Journal has an article on the assistance being provided by Refco's ex-CEO, Phillip R. Bennett, to the investors suing the company for securities fraud. The unusual cooperation came to light when plaintiffs' counsel submitted a letter to the court in conjunction with Bennett's criminal sentencing.
Quote of note: [Plaintiffs' counsel] said he would not mind a reduction, however slight, in Bennett's sentence because of his cooperation with shareholders' lawyers. 'It would be a helpful future precedent,' he said."
(2) Of course, cooperating with plaintiffs' counsel can go too far, as illustrated by the Milberg Weiss indictment. Point of Law has a post on the presentation of a new paper by Professor Michael Perino (author of the leading PSLRA treatise) finding that investors may have been damaged in cases where Milberg Weiss improperly compensated the lead plaintiff.
Quote of note: "These findings cast doubt on Milberg Weiss’ claim that paying kickbacks was a completely victimless crime. They are consistent with the hypothesis that Milberg Weiss asked for and got a greater share of the settlements in these cases than it otherwise would—a real economic harm to the class members who therefore would have had a lower net recovery."
The Cardinal Health securities class action is the case that keeps on giving, at least as far as this blog is concerned. Having previously posted about the lead plaintiff, discovery stay, motion to dismiss, settlement, and attorneys' fees decisions in the case, it seems appropriate to note the latest offering from the court.
In In re Cardinal Health, Inc. Sec. Litig., 2008 WL 1934162 (S.D. Ohio May 5, 2008), the court considered whether two of the several fees objectors should be paid for their efforts. Although lead counsel had requested 24% of the settlement (or $145 million), the court awarded only 18% of the settlement (or $108 million). Based on this $37 million savings, the two objectors requested that they, in turn, be paid between $3.7 million and $6.6 million. The court was not amused, finding that the objectors were making "outlandish fee requests in return for doing virtually nothing."
Holding: Motions for attorneys' fees denied.
Quote of note: "[C]lass actions also attract those in the legal profession who subsist primarily off of the skill and labor of, to say nothing of the risk borne by, more capable attorneys. These are the opportunistic objectors. Although they contribute nothing to the class, they object to the settlement, thereby obstructing payment to lead counsel or the class in the hope that lead plaintiff will pay them to go away. Unfortunately, the class-action kingdom has seen a Malthusian explosion of these opportunistic objectors, which now seem to accompany every major securities litigation. Such is the case here."
A few items of interest from around the web:
(1) The New York Law Journal (May 19 edition) has an article on the global reach of securities class actions. In particular, the article discusses (a) the developing standards for subject matter jurisdiction over claims by foreign investors in U.S. courts, and (b) the evolution of the class action device for securities claims in foreign jurisdictions.
(2) Securities Litigation Watch has a post on the Top 10 Corporate and Securities Articles of 2007, complete with links. The list includes a number of securities litigation related articles.
(3) NERA has issued a report on the settlement of options backdating class actions. The report concludes: "in the cases that have settled to date, the amounts paid to plaintiffs have been substantially lower than in comparable non-backdating class actions."
One of the concerns raised by Congress, as part of the PSLRA, was that the application of traditional joint and several liability in securities cases may be unfair, given the enormous potential damages. To combat this problem, the PSLRA replaced joint and several liability with a proportionate liability scheme for defendants who are not found to have knowingly violated the securities laws. An unanswered question, however, is whether this proportionate liability scheme also applies to defendants who are found to have controlling person liability. Section 20(a) of the '34 Act, which creates controlling person liability, specifically states that the controlling person shall be liable "jointly and severally with and to the same extent" as the primary violator.
In Laperriere v. Vesta Ins. Group, Inc., 2008 WL 1883482 (11th Cir. April 30, 2008), the Eleventh Circuit has held that the proportionate liability provisions of the PSLRA also apply to controlling persons. In the comprehensive decision, which discusses the relevant statutory provisions at length, the court found that both the plain language and legislative history suggest that Congress intended to include controlling persons.
Quote of Note: "We ought to avoid any interpretation of the statute that would treat controlling persons more harshly than the primary violator - that would put derivatively liable controlling persons on the hook for all damages, but let primary violators off the hook for any damages that their actions did not cause. That result would be contrary to common sense, to what the committee that drafted the PSLRA said it intended to do, and to what Congress actually did in the plain language of the PSLRA."
The long-running securities litigation related to Iridium World Communications, which attempted to create and market a global satellite phone system, has produced an interesting decision. In Freeland v. Iridium World Communications, 2008 WL 906388 (D.D.C. April 3, 2008), the court considered a summary judgment motion brought by Motorola, the former parent company of Iridium and the sole remaining defendant in the case. The decision was a sweeping victory for the plaintiffs, with at least two determinations of note.
(1) Forward-Looking Statements - A continuing analytical problem for courts is how to interpret the PSLRA's safe harbor for forward-looking statements. One issue is whether the first prong of the safe harbor, which states that a defendant shall not be liable with respect to any forward-looking statement if it is accompanied by "meaningful cautionary statements," insulates the defendant from liability for false statements made with actual knowledge of their falsity. Courts have sometimes balked at applying the safe harbor in this manner, even though there is no state of mind limitation in the first prong and the second prong creates an alternative actual knowledge requirement for liability.
The Iridium court's conclusion: the cautionary statements at issue could not be "meaningful" if Iridium and Motorola knew their statements to be false and misleading at the time they were made. As The 10b-5 Daily has pointed out before, however, this approach simply does not comport with the plain language of the statute. Again, Congress did not impose a state of mind limitation in the first prong of the safe harbor, instead leaving that examination for the second prong. It is hard to justify collapsing the two prongs into a single "actual knowledge" test on the basis of "statutory interpretation." Adding insult to injury, the Iridium decision relies heavily on a recent law review article in support of its decision. Not mentioned in the decision, but surely noted by the defendant, is that the article's author is a staff attorney with the SEC's Division of Enforcement.
(2) Expert Report On Loss Causation - In several recent decisions, courts have declined to consider expert reports on loss causation due to methodological concerns. The Iridium court, however, rejected Motorola's motion to exclude damages testimony. Although Motorola complained that the plaintiffs' expert simply assumed that certain disclosures corrected prior misrepresentations and did not consider other information already known to the market, the court held that these were factual issues that went "to weight, not admissibility" and could be resolved by the jury.
Holding: Motion for summary judgment denied (except as to certain bondholder claims).
The application of the Stoneridge decision is likely to develop slowly, as relatively few cases raise the issue of scheme liability. That said, the early returns look positive for defendants. In In re DVI Inc. Sec. Litig., 2008 WL 1900384 (E.D. Pa. April 28, 2008), the plaintiffs alleged that the company's law firm "initiated and masterminded a 'workaround' that allowed DVI to fraudulently misstate . . . that its internal controls were adequate." In evaluating class certification, the court found that under Stoneridge the proposed class could not show reliance on the law firm's deceptive acts. The law firm had neither "made any public misstatements that affected the market for DVI securities" nor "owed [any] duty of disclosure to DVI's investors."
Holding: Class certification granted, except as to the claims against DVI's law firm.
Converium Holding AG, a Zurich-based international reinsurer acquired by SCOR in August 2007, has announced the preliminary settlement of the securities class action pending against the company in the Southern District of New York (S.D.N.Y.). The case, originally filed in October 2004, stems from allegations that executives at Converium artificially inflated the price of Converium’s stock by failing to disclose to the public certain deficiencies in the company’s loss reserves. The case in the S.D.N.Y. is limited to U.S. invesotrs. Converium has agreed to settle those claims, as well any claims by non-U.S. investors, for an aggregate amount of $114.5 million (74 million EUR). The claims by non-U.S. investors will be settled in a court proceeding in the Netherlands, apparently following in the footsteps of a similar settlement entered into by Royal Dutch Shell last year.
Parmalat S.p.A., a producer and distributor of dairy products and fruit-based beverages based in Milan, Italy, has announced the preliminary settlement of the securities class action pending against the company in the S.D. of New York. The case, originally filed in January 2004, stems from allegations that Parmalat and its bankers, lawyers, and auditors engaged in a massive and complex scheme to overstate Parmalat's assets and profits for more than a decade. Under the terms of the settlement, Parmalat will issue to class members 10.5 million shares of stock, valued at approximately $37 million at the current market price.
House Republican leaders John Boehner (R-OH) and Lamar Smith (R-TX) have asked the House Judiciary Committee to hold a hearing on the payment of kickbacks to lead plaintiffs in securities class actions. The press release and letter to the Chairman of the House Judiciary Committee can be found here. The WSJ Law Blog has a post on the topic and the ABA Journal has an article with related news links.
Establishing loss causation for the purpose of class certification or summary judgment is becoming a significant hurdle for plaintiffs. On the heels of the Flowserve and Omnicom decisions comes another defense victory.
In Fener v. Belo Corp., 2008 WL 876967 (N.D. Tex. April 2, 2008), the corrective disclosure made by the company attributed a decline in newspaper circulation to three separate sources. Only one of the sources, however, was related to the alleged fraudulent conduct. Based on Fifth Circuit precedent, the court held that it was the plaintiffs' burden to prove that it was more probable than not that this portion of the disclosure, and not the other unrelated negative statements, caused a significant amount of the stock price decline. The plaintiffs' expert failed to present empirical evidence sufficient to meet this burden. (The 10b-5 Daily previously posted about the initial motion to dismiss decision in the case.)
Holding: Class certification denied.
Quote of note: "[The] event study tends to establish that the market reacted to the bundle of August 5 news pieces with an August 6 stock price drop of 5.47%. Crucially, however, the study fails to target the corrective disclosure at issue."