The use (and sometimes abuse) of confidential witnesses in securities cases is a contentious issue. Prior to full discovery, what remedy does the defendant have if a confidential witness was misquoted in the complaint? One possibility, recently approved by the Second Circuit, is to allow the witness to be deposed prior to the filing of a motion to dismiss. A recent decision from the D. of Minn. suggests another possible tactic, although the defendants were ultimately unsuccessful.
In Minneapolis Firefighters Relief Assoc. v. Medtronic, Inc., 2011 WL 6962826 (D. Minn. Dec. 12, 2011), the court considered the issue of class certification prior to the completion of discovery. In opposition to certification, the defendants argued that the plaintiffs could not adequately represent the class "because of alleged misrepresentations counsel made in the Amended Complaint regarding the testimony of the confidential witnesses." The defendants presented the court with declarations from thirteen of the fifteen confidential witnesses cited in the complaint. In their declarations, the witnesses took issue with how they were quoted, ranging from complaints about the plaintiffs' interpretation of their statements to an assertion by one witness that the statements attributed to him were "fabrications."
The court found that "the inquiry Defendants urge the Court to undertake - whether Plaintiffs misrepresented what the confidential witnesses said - is premature." In particular, the court noted that "[c]ounsel-drafted declarations are not a substitute for deposition testimony" and it declined to come to any conclusion about the conduct of plaintiffs' counsel until discovery was complete. The court therefore found that the plaintiffs were adequate class representatives and granted class certification.
The findings for 2011 include:
(1) Cornerstone finds that there were 188 filings (compared with 176 filings in 2010), while NERA finds that there were 232 filings (compared with 241 filings in 2010). (For some insight on why NERA has a larger total, see footnote 2 of the NERA report, which discusses its counting methodology. Also, NERA's report came out in December, requiring it to use a projected number for December's total filings.) Both reports agree that cases against listed Chinese companies and M&A cases have driven a significant portion of the filing activity. Meanwhile, credit crisis cases have dwindled (Cornerstone - 3 filings; NERA - 11 filings).
(2) Cornerstone has an interesting new analysis on the probability of a securities class action advancing through different stages of litigation. The analysis, using filings from 1996 to 2011, finds that prior to the filing of a motion to dismiss, 9% of cases were voluntarily dismissed and 16% were settled. Of the remaining 75% of cases, 32% were dismissed, 35% were settled, and 8% reached a ruling on summary judgment or beyond. The report also breaks down these numbers by circuit and year.
(3) NERA provides some settlement statistics and finds that, even excluding large settlement outliers, there was a substantial decline in average settlement values -- from $40 million in 2010 to $31 million in 2011. The median settlement value was $8.7 million, which was less than the 2010 all-time median settlement value of $11 million, but still the third highest on record.
A few months ago, this blog noted an unusual lead plaintiff decision. A S.D.N.Y. court dismissed the lead plaintiff from a securities class action brought against Smith Barney Fund Management and Citigroup Global Markets because, after six years of litigation, it was revealed that the entity had not actually purchased the securities at issue. So what happened to the case?
All is revealed in the court's most recent order (In re Smith Barney Transfer Agent Litig., 2011 WL 6318988 (S.D.N.Y. Dec. 15, 2011)), along with some new twists and turns. The court decided to reopen the lead plaintiff selection process. The applicants included a new proposed lead plaintiff group associated with the former lead counsel for the case, as well as one of the unsucessful lead plaintiff applicants from back in 2005. As a group, the applicants associated with the former lead counsel had the largest financial interest in the relief sought. The court found, however, that "[p]laintiffs who moved for lead plaintiff appointment within sixty days of the original notice are entitled to priority over plaintiffs who only moved within sixty days of the order dismissing the prior lead plaintiff." Accordingly, the court selected the original applicant to handle the case.
Quote of note: "In appointing new lead counsel, this Court is mindful that [former lead counsel] served . . . for over six years. But it is investors - and not their lawyers - who are the focus under the PSLRA. And the Court would not have been confronted with this situation if [former lead counsel] had investigated their client's holdings in 2005. In any event, this Court has every confidence that [former lead counsel] will provide ample assistance to new lead counsel consistent with their professional responsibilities to their clients and their obligations as officers of the Court."
Does the fact that an individual defendant's stock trading took place pursuant to a pre-determined Rule 10b5-1 trading plan undermine any inference that the trades were "suspicious"? Courts continue to grapple with this issue in evaluating the existence of scienter (i.e., fraudulent intent) in securities fraud cases.
(1) In In re Novatel Wireless Sec. Litig,, 2011 WL 5873113 (S.D. Cal. Nov. 23, 2011), the court reviewed insider trading claims brought as a part of a securities class action. Defendants argued that several of the challenged trades were inactionable because they had been made pursuant to Rule 10b5-1 trading plans. The court noted, however, that "each defendant entered new or amended 10b5-1 plans . . . that contained accelerator clauses that called for immediate sales." Because the "improper use of 10b5-1 trading is evidence of scienter," the court found that a genuine issue of material fact precluded summary judgment on the insider trading claims.
(2) In The Mannkind Sec. Actions, 2011 WL 6327089 (C.D. Cal. Dec. 16, 2011), the court evaluated whether the plaintiffs had adequately pled motive based on a "suspicious" stock sale by one of the individual defendants. The defendant pointed out that the sale was only 10.5% of his holdings and "was made pursuant to a pre-determined 10b5-1 trading plan, and was identical to another 10b5-1 trading sale made 11 months earlier." The court concluded that the timing of the sale "appears suspicious." The plaintiffs' failure to rebut the contention that the sale had been made pursuant to a Rule 10b5-1 trading plan, however, meant that the sale could not "provide support for Plaintiffs' pleading of scienter."