Senior District Judge Milton Shadur has a colorful history when it comes to applying the PSLRA's lead plaintiff/lead counsel provisions. It just got a bit more colorful with his decision in Gorham v. General Growth Properties, Inc., 2009 WL 661303 (N.D. Ill. March 16, 2009).
In selecting a lead plaintiff in General Growth, the court was forced to choose between two individual investors, neither of whom had moved for lead plaintiff status within the requisite 60 days after publication of notice of the case. Investor A filed a complaint within the 60-day period, had a small loss, and entered into a high-cost fee arrangement with proposed lead counsel. Investor B only filed a complaint after the 60-day period, had a larger loss, and entered into a low-cost fee arrangment with proposed lead counsel. In pressing its application, Investor A argued that he was - in Judge Shadur's phrasing - "the only crap game in town" because Investor B had not even filed a complaint within the first 60 days.
Judge Shadur found, however, that "any presumption that [Investor A] is the 'most adequate plaintiff' has been fully rebutted by the inferiority of his chosen counsel's proposal for the fees to be charged to the class members out of any recovery." Accordingly, the court appointed Investor B as lead plaintiff and his chosen counsel as lead counsel.
Quote of note: "This Court flatly rejects the prospect of having such a tiny wisp of a tail-[Investor A] with his minimal investment in General Growth-wag the very large dog of the plaintiff class. What [Investor A] has to lose in terms of his in-pocket recovery, if the class is successful in the litigation and if his own counsel's formulation were to apply rather than the far more client-favorable formulation proffered by [Investor B's counsel], is in the range of a few hundred dollars, while what the class would stand to lose under the [Investor A]-sponsored formula would be measured in millions of dollars."
Under the "true financial condition" theory, a plaintiff can adequately allege loss causation by citing a corrective disclosure that reveals the company's true financial results and condition, even if the disclosure does not directly reveal any alleged misrepresentations. Although the theory has been applied by some courts at the motion to dismiss stage (most notably by the 9th Circuit in its Daou decision), it has failed to gain wide acceptance. Courts have been particularly skeptical at the proof stage of a case, where the plaintiff bears the burden of producing evidence demonstrating a link between a corrective disclosure, public awareness of a misrepresentation, and a drop in the company's stock price (see, e.g., the Flowserve decision from the N.D. of Tex.)
In In re Retek Inc. Sec. Litig., 2009 WL 928483 (D. Minn. March 31, 2009), the court considered and rejected the true financial condition theory on a summary judgment motion. Noting that even the plaintiffs' expert witness "concedes that until the original complaint was filed, there was no disclosure such that the market became aware that Retek had committed improper or fraudulent practices regarding those four ventures," the court found that there was insufficient evidence demonstrating that the disclosures about Retek's financial condition revealed the truth about the alleged misrepresentations to the public.
Holding: Defendants' motions for summary judgment granted.
Addition: Note that yesterday the U.S. Supreme Court denied cert in the Gilead case, foregoing an opportunity to bring some clarity to the issue of what is necessary to adequately plead loss causation. SCOTUSBlog has links to all of the cert papers.
The U.S. Court of Appeals for the Fifth Circuit has offered some guidance on how to analyze allegations of loss causation. In Lormand v. US Unwired, Inc., 2009 WL 941505 (5th Cir. April 9, 2009), the plaintiffs alleged that the truth about the fraud "leaked" to the market in a series of partial disclosures and led to stock price declines.
The Fifth Circuit made two holdings of note.
(1) In contrast to some other courts (including a recent Ninth Circuit decision), the court found that under Supreme Court precedent loss causation is only subject to a notice pleading requirement. In the court's lengthy formulation, a plaintiff must allege either a "facially 'plausible' causal relationship between the fraudulent statements or omissions and plaintiff's economic loss, including allegations of a material misrepresentation or omission, followed by the leaking out of relevant or related truth about the fraud that caused a significant part of the depreciations of the stock and plaintiff's loss" (citing Dura) or "enough facts to give rise to a reasonable hope or expectation that discovery will reveal evidence of the foregoing elements of loss causation" (citing Twombley).
(2) The disclosures that constitute the leaking out of the truth about the fraud may come from third parties.
Applying these legal standards, the Fifth Circuit held the plaintiffs had alleged, at least as to some of their claims, both a "plausible nexus" between the fraud and the cited disclosures and enough factual allegations to raise a reasonable expectation that discovery would reveal evidence of loss causation.
Holding: Affirmed in part, reversed in part, and remanded.
A plaintiff can rely on an anonymous source to plead securities fraud, but can he rely on someone else's anonymous source? In Vladimir v. Bioenvision Inc., 2009 WL 857552 (S.D.N.Y. March 31, 2009), the plaintiffs alleged that Bioenvision had entered into a merger agreement as of January 2007, but failed to disclose it to the market. The factual basis for the allegation was a state employment action brought by a former Bioenvision officer. In his complaint, the former officer alleged that he had "been informed” that the merger was agreed to at a January 2007 “secret” meeting. The court found that the plaintiffs in the securities class action could not rely upon allegations from the former officer's anonymous source to satisfy their pleading obligations.
Holding: Motion to dismiss granted.
Quote of note: "Plaintiffs have not alleged anything at all about [the former officer's] alleged anonymous source, let alone describing him with any particularity whatsoever, and the Court is wholly unable to determine whether this source was in a position to know what he is alleged to have told [the former officer], or, in fact, whether or not this alleged anonymous source even exists. The Court therefore cannot credit any of these allegations that come from an alleged anonymous source of [the former officer's], which were adopted wholesale and relied upon by plaintiffs here to make serious charges of fraud."
A few interesting lead plaintiff/lead counsel decisions from the end of last year (and one article).
(1) In In re Adelphia Comm. Corp. Sec. & Derivative Lit., 2008 WL 4128702 (Sept. 3, 2008) a law firm that did not act as lead counsel in the case moved for a third of the aggregate fee award. The law firm argued that it had provided "an independent and substantial benefit" for the class by initiating and preserving the Section 11 and Section 12 claims that ultimately were asserted against two of Adelphia's underwriters. The court found no evidence, however, "that the use of those statutes, or their use against [the two underwriters], represents ground-breaking legal or factual analysis." The law firm was awarded the amount that had been allocated by lead counsel - $155,610, or the time the law firm had invested in the case, at its normal hourly rates, up until the appointment of lead plaintiffs and counsel.
(2) A lead plaintiff cannot receive a disproportionate share of any settlement, but it can seek reimbursement for its costs and expenses. In In re Enron Corp. Sec., Derivative & "ERISA" Lit., 2008 WL 4178144 (Sept. 8, 2008), the court considered whether to reimburse the lead plaintiff for $600,000 in costs and expenses. The lead plaintiff argued that because one of its in-house counsel devoted an estimated 30% of his time to the case, it was forced to employ outside co-counsel on a number of matters. Accordingly, the lead plaintiff sought its costs for the in-house counsel's time. Despite an objection that the lead plaintiff had failed to identify any "specific costs it was required to pay" because of its in-house counsel's work on the litigation, the court granted the request.
(3) In Kuriakose v. Fed. Home Loan Mort. Co., 2008 WL 4974839 (Nov. 24, 2008), the Treasurer of the State of North Carolina moved on behalf of the North Carolina Retirement Systems to act as lead plaintiff in the case. Unfortunately for him, the North Carolina State Attorney General filed an opposition "on the ground that the Treasurer lacks authority under North Carolina law either to seek NCRS's appointment as lead plaintiff or to retain counsel to represent NCRS in this litigation." The court found that it would not "be in the class's interest to have a lead plaintiff likely to become bogged down in state court litigation concerning its participation."
Is there a better way to deal with the selection and compensation of lead plaintiff and lead counsel in securities class actions? The author of The 10b-5 Daily offered a few thoughts on the issue in a Class Action Watch article (Oct. 2008 edition).
It has been a long journey for the IPO allocation cases, but it looks like the end is in sight. The parties have filed a global settlement agreement (issuers and underwriters) with the court. The settlement amount is $586 million, a sharp decline from the amounts being considered prior to the Second Circuit's decision to deny class certification in some representative cases.
Could this be the final post on the IPO allocation cases (6 years and 17 posts later)? Don't despair - there's always the possibility of an attorneys fees dispute. Counsel for the plaintiffs is requesting $195.3 million in fees on top of $56 million in expenses. The WSJ Law Blog and Bloomberg have reports.
PricewaterhouseCoopers has released its annual review of securities class actions. The findings include:
(1) A total of 210 securities class actions were filed in 2008, an increase of 29% over the previous year. For the first time, financial services topped the list of industries sued.
(2) The number of filings against foreign companies increased 33% to a total of 36 filings in 2008 (an all-time high).
(3) The number of filings with SEC or DOJ involvement remained relatively constant. In 2008, 36 filings had some form of SEC involvement and 21 filings has some form of DOJ involvement.
Quote of note: "Over the next year, three areas where companies will want to remain especially vigilant are institutional plaintiff activity (particularly activity related to public and union pension funds), internal controls accounting-related allegations, and FCPA enforcement."
A few interesting stories from the past week.
(1) From the "Where Are They Now" file, the parties in the Dura Pharmaceuticals securities class action have reached a $14 million settlement. The case included a 2005 U.S. Supreme Court decision on the pleading of loss causation. SecuritiesLaw360 has an article (subscrip. req'd) on the settlement.
(2) At the time of the Milberg Weiss indictment, there was some discussion about whether companies that had previously settled in cases brought by the law firm would bring actions to recover those funds. That has not really happened . . . until now. The American Lawyer has a report on a suit brought by Lakes Entertainment alleging that its 2000 settlement was the product of an improper damages estimate.
(3) One possible indicator of whether securities class actions filings will increase is whether plaintiffs firms are hiring more lawyers. According to an article in The Recorder, that appears to be happening, with an increase in lawyers switching from defense firms.