In this press release on March 17, 2004, Lucent preannounced a $25 million settlement with the SEC stemming from "what the [SEC] staff considered Lucent's lack of cooperation during the investigation and certain actions taken by the company subsequent to the agreement in principle." The agreement referenced in the press release was an earlier settlement in principle with the SEC related to an accounting issue that had not required the payment of any penalty.

Shortly thereafter, we posted here that among the "certain actions" prompting the SEC's penalty appeared to be comments by Lucent's outside counsel stating that the issues with a particular transaction challenged by the SEC arose from a "failure of communication" and not an accounting fraud. This comment were made after Lucent's agreement in principle to settle its case with the SEC without admitting or denying the SEC's allegations. For more on this, see our article on respecting the No-Spin Zone.

Yesterday, the SEC finally brought its settled "noncooperation" lawsuit against Lucent and laid out in a separate press release the "certain actions" that prompted its $25 million penalty. In short, they include:

-- "incomplete" and untimely document production;
-- the comments from outside counsel described above, which according to the SEC "undermined both the spirit and letter of [Lucent's] agreement in principle with the staff"; and
-- expanding the scope of employees that could be indemnified against the consequences of the SEC's enforcement action without being required to do so by state law or corporate charter. The SEC's press release labeled such conduct "contrary to the public interest." An SEC official was later quoted in this article as saying that with respect to Lucent's offer to pick up the legal tab for employees who would not normally be covered by such benefits, "these people would basically be given a blank check to litigate with us, with no consequences."

The third element of Lucent's "lack of cooperation" should be a real eye-opener for public companies in similar situations. The SEC has been reiterating in speeches such as this one last month that

to enhance deterrence and accountability, the Commission recently has adopted a policy requiring settling parties to forgo any rights they may have to indemnification, reimbursement by insurers, or favorable tax treatment of penalties.

The Lucent case takes that a step further, revealing the SEC's apparent position that companies indemnifying employees that they are not required to indemnify are (a) outright failing to cooperate with the SEC, (b) acting contrary to the public interest, and (c) subject to stiff fines.

May 13, 2004

Blaming Atkins, Part III: And We Have a Winner

The flow of bad news from bakeries and doughnut makers had me wondering in February and again just last week when we might see the first Atkins-diet based securities class action. That question was answered on Thursday, May 12 in the form of this complaint against Krispy Kreme Doughnuts. According to the complaint, "unbeknownst to investors, Defendants failed to disclose that, as a result of the trend toward low-fat, low carbohydrate diets, such as the South Beach and Atkins diets, Krispy Kreme had been suffering from increasingly poor sales performance...."

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May 12, 2004

Roadtrip!

We're off to the ALI-ABA "Securities Litigation: Planning and Strategies" conference starting tomorrow in Boston. Will try to post here with the highlights.

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May 11, 2004

WorldCom/Citigroup Settlement Round-Up

There has been plenty to talk about following Citigroup's massive $2.65 billion settlement in the WorldCom securities litigation. This partial settlement (the case continues against numerous defendants) is by itself the second-largest securities class action settlement in history (trailing only the Cendant settlement). The Wall Street Journal had this article putting the case in perspective and featuring a chart with SCAS data on other large tentative settlements. The New York Times had this article analyzing the settlement in detail and noting recent claims by plaintiffs in the WorldCom case of

new materials discovered by the plaintiff relating to Mr. Grubman's analysis of WorldCom and the acknowledgment by high-level Citigroup officials of the conflicts inherent in providing accurate research to investors and generating rich investment banking revenue for the firm.

For example, in an April 12, 2004, brief submitted to the appeals court, lawyers for Mr. Hevesi noted that they had amassed "compelling evidence" demonstrating that Mr. Grubman had manipulated the underlying financial analyses he used to value WorldCom stock to justify his buy rating on it.

The brief also noted that the "most senior officers of Salomon" acknowledged privately that its investment bankers pressured its analysts to avoid negative ratings and that "providing accurate stock ratings conflicted with Salomon's paramount goals of securing investment banking business." Citigroup had never produced the materials supporting these claims to Richard Thornburgh, the examiner appointed by the bankruptcy court to investigate the WorldCom fraud, the brief stated.

The NYT article also featured an interesting chart that contrasted the $100 million in fees earned by Citigroup from WorldCom since 1996 with the $2.65 billion settlement.

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May 7, 2004

Blaming Atkins, Part II

We asked back in February, after General Mills warned that earnings would not be as strong as expected because of the effect of the "low-carb" craze on its bakery segment, when we might see the first Atkins-based securities class actions lawsuits. We're still waiting, as far as I know, but Reuters reports that Krispy Kreme Doughnuts cut its earnings forecast today by 10 percent because the popularity of low-carbohydrate diets has hurt demand.

According to the article from Reuters,

Krispy Kreme also said it would shut down or sell off operations of Montana Mills Bread Co., a gourmet bread and pastry chain it bought just last year for about $40 million, and it will curtail development of other concepts aside from its main Krispy Kreme operations.

"For several months, there has been increasing consumer interest in low-carbohydrate diets, which has adversely impacted several flour-based food categories, including bread, cereal and pasta," Chairman, President and Chief Executive Officer Scott Livengood said in a statement.

"This trend had little discernible effect on our business last year," Livengood said. "However, recent market data suggests consumer interest in reduced carbohydrate consumption has heightened significantly following the beginning of the year and has accelerated in the last two to three months."

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SCAS Webcast May 18: Understanding the Claims Administration Process

ISS's Securities Class Action Services will hold its next "webcast" on May 18, 2004. The webcast will offer a behind the scenes look at class action claims administration and claims filing from the perspective of The Garden City Group (GCG), one of the most prominent claims administrators in the securities class action area. The webcast is free and open to anyone who is interested. It will be led by Neil Zola, COO of GCG, and myself.

For further details, please see the invitation below or click here. Please join us!

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May 6, 2004

Pre-Cog Extraordinaire

I doubt if convicted felons (for securities fraud, no less) are eligible, but how about Barry Minkow for the SEC's Office of Risk Assessment? Details are sketchy, but according to this article by the AP, the SEC was able to file this lawsuit and shut down an alleged Ponzi scheme before even receiving a single investor complaint as the result of Minkow's efforts. According to the article, the SEC filed its lawsuit "after examining documents provided by Barry Minkow, a convicted felon turned anti-fraud investigator for the San Diego-based Fraud Discovery Institute."

You may recall Minkow--now Senior Pastor Barry Minkow--from his days as the wunderkind who turned his "ZZZZ Best Carpet Cleaning Company" run out of his family garage into a seemingly prosperous public company. In the words of Senior Pastor Barry's own webpage, however, "after milking highly educated investors out of millions of dollars, Barry's scam came to a sudden halt when he was arrested in 1987 at the age of 23 and sentenced to 25 years in the federal prison." Senior's Pastor Barry's website adds that:

After serving 8 years of his sentence with an unblemished record and with the recommendation of the sentencing judge, Barry was released into society. In the judge's own words, "Barry can do more for his victims out of prison than he can in prison.'"

I'll say! But wait--there's more! According to this article from The Desert Sun, this is not even the first Ponzi scheme that Minkow has uncovered. According to the article, the SEC filed this lawsuit to stop another alleged Ponzi scheme in February 2004 that was "first uncovered by Barry Minkow, a convicted felon turned anti-fraud investigator for San Diego-based Fraud Discovery Institute."

Is this not our first example of someone repeatedly able to meet the ORA's ambitious mission to, in the words of SEC Chairman Donaldson, "see over the hills and around the corners of problems that may be looming in the distance" and "head off major problems before they occur"??

Minkow for the ORA!

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May 5, 2004

SCAS Database Free Trial

On the heels of our introduction of the SCAS 50 report this week, we have received numerous inquiries about the SCAS Database. We are pleased to offer a free trial of the SCAS Database and email alert service to Securities Litigation Watch readers who respond this week. To request the free trial, kindly send an email to scas@issproxy.com with the word "TRIAL" in the subject line, along with the following contact information:

Name
Organization
Address
Phone

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May 3, 2004

Introducing the SCAS 50

The following first appeared in the May 2004 SCAS Alert:

Top Law Firms: Introducing the SCAS 50
By Bruce Carton, Executive Director

As part of this month's Securities Class Action Services Alert, we are pleased to debut our first annual "SCAS 50" report. The SCAS 50 lists the top 50 plaintiffs' law firms ranked by the total dollar amount of final securities class action settlements occurring in 2003 in which the law firm served as lead or co-lead counsel.

Topping our list for 2003 was securities class action heavyweight Milberg Weiss Bershad Hynes & Lerach, which served as lead or co-lead counsel in final settlements totaling $2.1 billion. In terms of total settlement dollars, Milberg Weiss more than doubled the impressive total of the #2 firm on our list, Bernstein Litowitz Berger & Grossman ($950 million), and it had a hand in an amazing two-thirds of all settlement dollars obtained in 2003.

Re-ranking the law firms comprising the SCAS 50 by categories other than total dollar amount also produced interesting results. For instance, ranking these law firms by highest average settlement amount produced a new group of top firms, led by Grant & Eisenhofer ($203 million average), Goodkind Labaton Rudoff & Sucharow ($183 million average), and Bernstein Litowitz Berger & Grossman ($105 million average), with Milberg Weiss falling out of the top 10.

With respect to the total number of final settlements, Milberg Weiss led with 65 settlements. This was more than four times greater than the number of settlements of the second-ranked firm in this category--Berger & Montague, which was lead or co-lead counsel in 14 settlements. Other law firms with at least 10 settlements in 2003 included Stull, Stull Brody (13), Weiss & Yourman (11), and Berman DeValerio Pease Tabacco Burt & Pucillo (11).

A printable copy of the SCAS 50, including details on our methodology, is available in PDF format here. An interactive version of the SCAS 50 that can be sorted by its various columns is available here. We intend to publish the SCAS 50 on an annual basis, and we welcome your feedback.

The Top 10 (click on graphic):

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Milberg Weiss Bershad Hynes & Lerach Split Becomes Official

As announced here, the long-discussed East-West split of Milberg Weiss Bershad Hynes & Lerach became official on May 1. Milberg Weiss Bershad Hynes & Lerach LLP is now known as Milberg Weiss Bershad & Schulman LLP, and has its main office in New York City. The former West Coast partners' new law partnership is known as Lerach Coughlin Stoia & Robbins LLP, and has its main office in San Diego, California.

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