Does the PSLRA require courts to find the attorneys' fees agreed upon by the lead plaintiff presumptively reasonable? In In re Nortel Networks Corp. Sec. Litig., 2008 WL 3840916 (2d Cir. Aug. 19, 2008), the lead counsel made this argument on appeal after the district court reduced its fee request from the negotiated 8.5% of the settlement amount to 3% of the settlement amount. The Second Circuit found that the lead counsel had waived the argument, which was based on Third Circuit precedent, by failing to raise it before the district court. The appellate court nevertheless made it clear that while district courts should give "serious consideration" to negotiated fee arrangements, "the only PSLRA provision related to attorneys' fees places an obligation on district courts to ensure independently that fees are reasonable." As for the 3% fee award (resulting in a 2.04 lodestar multiplier), the appellate court found that it was "toward the lower end of reasonable fee awards," but the district court had not abused its discretion in setting the award at that level.
Holding: Fee award affirmed.
A couple of columns on securities litigation topics:
Quote of note: "The LaPerriere decision provides the basis for an even further shift in favor of control person defendants. Under LaPerriere, control person defendants inevitably will avoid joint and several liability for the entirety of plaintiffs' damages and may even be held responsible for a lesser amount of damages than that attributed by the fact finder to the persons they control."
(2) Legal Times (Aug. 27 edition) has a column on the litigation surrounding auction rate securities. The authors conclude that the pending securities class actions may be rendered moot by regulatory settlements designed to fully compensate injured investors.
Quote of note: "The most interesting legal aspect of these settlements and buyback programs may be their debilitating impact on the numerous class actions and other private suits filed since the market seized up. Most problematic for any private suit, including putative class actions, is the inability to prove damages -- a central element of any private action. If all auction dealers ultimately agree to implement their own buyback programs for customers, then all those potential plaintiffs will have no remaining damages."
When and how plaintiffs must disclose the identities of their confidential witnesses as part of the discovery process continues to be fought over in the courts. In In re Marsh & McLennan Companies, Inc. Sec. Litig., 2008 WL 2941215 (S.D.N.Y. July 30, 2008), the plaintiffs argued that the identities of their confidential witnesses were protected by the work product doctrine and there was also a need to avoid any risk of retaliation by Marsh against its former employees.
The court held that confidential witness information enjoys limited, if any, work-product protection. Even assuming that the information was privileged, the Marsh defendants would have been forced to exhaust their depositions to ascertain the identities and, accordingly, had established a substantial justification for disclosure. Moreover, the threat of retaliation identified by the plaintiffs was more properly the basis for a protective order and required specific factual support.
Holding: Ordered disclosure of confidential witness information, including identities and any documents provided to the plaintiffs. The court also authorized limited discovery as to certain investigations pending against the proposed class representatives.
Two recent decisions from the U.S. Court of Appeals for the Ninth Circuit demonstrate that a fair amount of judicial discretion goes into determining whether the inference of loss causation created by a complaint's factual allegations is either "unreasonable" or "facially plausible."
(1) In Metzler Investment GMBH v. Corinthian Colleges, Inc., 2008 WL 2853402 (9th Cir. July 25, 2008), the court examined whether a news story and a press release that lead to stock price declines could "be reasonably read to reveal widespread financial aid manipulation by Corinthian." The court found that the news story only discussed a Department of Education investigation into improper financial aid practices at one of Corinthian's schools and, therefore, could not have revealed the supposed fraud. As for the later press release, the plaintiffs alleged that the announcement of higher than anticipated student attrition was understood by the market as the company's "euphemism for an admission that they had enrolled students who should not have been signed up at all, resulting in a 45% stock price drop." The court was unwilling to credit this inference, holding that although the corrective disclosure does not have to be an admission of fraud, "that does not allow a plaintiff to plead loss causation through 'euphemism.'"
Holding: Dismissal affirmed.
Quote of note: "So long as there is a drop in a stock's price, a plaintiff will always be able to contend that the market 'understood' a defendant's statement precipitating a loss as a coded message revealing the fraud. Enabling a plaintiff to proceed on such a theory would effectively resurrect what Dura discredited - that loss causation is established through an allegation that a stock was purchased at an inflated price. Loss causation requires more."
(2)In In re Gilead Sciences Sec. Litig., 2008 WL 3271039 (9th Cir. Aug. 11, 2008), the court examined whether loss causation was adequately plead where the market was alerted to the company's off-label marketing efforts by an FDA warning letter in August 2003 (no decline in stock price), but the alleged financial impact to the company of the FDA warning letter was not announced until October 2003 (12% decline in stock price). The lower court found that it was unreasonable to infer that the August 2003 revelation caused a stock price decline nearly three months later and that the October 2003 announcement of a slowing increase in demand for the relevant product was too speculative a basis for finding loss causation. On appeal, the court held that "a limited temporal gap between the time a misrepresentation is publicly revealed and the subsequent decline in stock value does not render a plaintiff's theory of loss causation per se implausible." Moreover, the warning letter's effect on product demand may not have been understood by the market until the October 2003 announcement.
Holding: Dismissal reversed.
Quote of note: "It is true that the court need not accept as true conclusory allegations, nor make unwarranted deductions or unreasonable inferences. But so long as the plaintiff alleges facts to support a theory that is not facially implausible, the court's skepticism is best reserved for later stages of the proceedings when the plaintiff's case can be rejected on evidentiary grounds."
The New York Law Journal has a column (Aug. 13 - subscrip. req'd) on the "Extraterritorial Application of U.S. Securities Laws." The authors focus on the recent Astrazeneca decision in the S.D.N.Y., where the court dismissed the action as to foreign purchasers on foreign exchanges based on a lack of subject matter jurisdiction.
Quote of note: "Determining U.S. subject matter jurisdiction over complex transnational securities fraud cases will always need to be governed by flexible and fact- specific analyses. However, for purposes of greater judicial uniformity as well as a greater degree of certainty in the international business community about the parameters of U.S. jurisdiction, the district courts should have better guidance than deciding cases 'on very fine distinctions' with the ultimate decision based upon a court's 'impression' of whether subject matter jurisdiction exists."
The Shaw Group is on a roll. Following the recent dismissal of the securities class action against the company in the S.D.N.Y., it has obtained an unusual victory in an earlier, unrelated securities class action filed in the D. of La. As noted in The 10b-5 Daily nearly two years ago, the D. of La. court denied Shaw's motion to dismiss in the case, but certified its denial for appeal. The court found that "reasonable minds might disagree on the issue of whether the Plaintiffs have satisfied their pleading burden under the heightened standards for securities claims." Apparently so.
In Indiana Electrical Workers' Pension Trust Fund IBEW v. Shaw Group, Inc., 2008 WL 2894793 (5th Cir. July 29, 2008), the court held that the plaintiffs had failed to allege a strong inference of scienter. Interestingly, the court agreed with the Seventh Circuit that "[f]ollowing Tellabs, courts must discount allegations from confidential sources." In the absence of any financial restatement, the court found that the complaint's circumstantial allegations of scienter (based largely on confidential sources) were insufficient and there were plausible, non-fraudulent explanations for the officer stock sales during the class period.
Holding: Reversed and remanded with instructions to dismiss.
General Motors, Corp. (NYSE: GM), a Michigan-based automaker, has announced the preliminary settlement of the securities class action pending against the company in the E.D. of Michigan. The case, originally filed in September 2005, stems from allegations that General Motors issued a series of false and misleading statements regarding the company's financial status.
The settlement is for $303 million, of which Deloitte & Touche, General Motor's outside auditor, will pay $26 million. Reuters has an article on the settlement and a press release issued by plaintiffs' counsel can be found here.
As it turns out, the defense is on a winning streak in securities class action trials. Although the jury verdicts in the recent JDS Uniphase (for defendants) and Apollo Group (for plaintiffs) trials were split, the Apollo Group defendants achieved a post-trial victory yesterday when the court ruled that the plaintiffs had failed to prove loss causation.
The Apollo Group case was based on the company's failure to disclose the existence of a government report finding that its wholly-owned subsidiary, the University of Phoenix, had violated Department of Education regulations. In its decision overturning the jury verdict, the court found that the two analyst reports relied upon by the plaintiffs as "corrective disclosures" that led to a stock price decline "did not provide any new, fraud-revealing analysis." The analyst reports merely repeated information about the government report already known to the market or provided information about the University of Phoenix that was factually wrong (and therefore could not have been corrective).
Monster Worldwide, Inc. (NASDAQ: MNST), a New York-based online employment solutions company, has announced the preliminary settlement of the securities class action pending against it in the S.D.N.Y. The case, originally filed in March 2007, stems from allegations that Monster Worldwide and certain of its former executives failed to adhere to the company's stated options granting practices, resulting in the issuance of false and misleading financial statements.
The settlement is for $47.5 million, including a $550,000 payment from Monster's former Chief Executive Officer. The National Law Journal has an article on the settlement, which notes the recent decision in the case rejecting one of the proposed class representatives. Additional coverage can be found at Securities Litigation Watch, including a useful presentation tracking all of the options backdating class actions.