Insurance Securities Class Actions Rolling In....
According to the SCAS Database, in the two weeks since NY AG Eliot Spitzer filed his complaint against Marsh & McLennan Companies, Inc. and its subsidiary, Marsh Inc., seven companies have been named as defendants in insurance-related securities class actions. The companies are Marsh; AIG; The Hartford Financial Services Group; ACE; Met Life; AON; and Axis Capital Holdings, Ltd. Click on any of the links above for copies of complaints.
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October 26, 2004 |
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Update on the AT&T Trial.... $100 Million Settlement
Bloomberg reports that the AT&T securities class action, which for three weeks has been proceeding before a federal jury in Trenton, NJ, has settled for $100 million. In a press release, AT&T stated that "The lawsuit sought damages of approximately $2.4 billion for purchasers of AT&T common stock from December 6, 1999 to May 1, 2000. Under the settlement, AT&T has agreed to pay the class $100 million, about four percent of the amount being sought at trial."
In its own press release, lead plaintiff New Hampshire Retirement System stated that the settlement includes numerous governance reforms:
The corporate governance enhancements include, among other things, a requirement that a super-majority of its board directors be certified to be independent from management and other conflicts of interest; that the board's compensation, audit and governance and nominating committees be comprised solely of non-management members; that these monitoring committees be empowered with greater oversight responsibilities over company management, and authorized to retain their own legal and other advisors, independent of management, and reporting directly to the non-management directors.
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SEC Weighs in on "Primary Violators" of Section 10(b)
Compliance Week has this article summarizing the SEC's decision to file an amicus brief in the Homestore.com securities class action litigation (and quoting yours truly). The SEC's position is that where a third party such as AOL in the Homestore.com case "engages with the corporation in a transaction whose principal purpose and effect is to create a false appearance of revenues, intending to deceive investors in the corporation’s stock, it may be a primary violator." A copy of the SEC's brief is available here.
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October 22, 2004 |
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"Spitzer Prosecution Train" NOT in a Lull
Umm, so much for the "Spitzer Prosecution Train" being in a lull. You simply must read the complaint filed by NY AG Eliot Spitzer's office against Marsh & McLennan Companies, Inc. and its subsidiary, Marsh Inc. The effect of this case and those that may follow it will likely be dramatic, and the securities class action implications have already begun. The SCAS database shows that since October 15, the day after the complaint was filed, securities class actions have been filed against MetLife, ACE, The Hartford Financial Services Group, AIG and, of course, Marsh & McLennan. Expect many more.
In addition, in this October 17 article, New York times journalist Gretchen Morgenson offers the following analysis:
Another potentially big problem for the industry as a result of the suit may be future legal actions by customers. Insurance brokers act as negotiators when companies file claims. So, as one analyst explained, some insurance customers who have settled claims in recent years may wonder if these settlements were fair or if the brokers in charge of negotiating them were acting in their own interests.Many insurance claims are settled on the courthouse steps. For example, the majority of liability claims against corporate directors and officers never make it to court. "Now it makes economic sense for companies to go back and see if they've left money on the table in these settlements," the analyst said. As a result, lawsuits questioning the fairness of these settlements could mount.
We will be watching this entire situation with interest.
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Harsh Words, Part II
Turns out it can get harsher for AIG than last year's Harsh Words from the SEC concerning AIG's alleged role in enabling a public company called Brightpoint to commit securities fraud.
The WSJ reported today that
Federal prosecutors have told American International Group Inc. that it is the target of a grand-jury investigation into its sales of insurance policies that the government believes were aimed at helping companies improperly smooth their earnings.The target designation, disclosed by AIG yesterday, means the insurance and financial-services company could face criminal prosecution....
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By identifying the New York company as a "target," the Justice Department has served notice that it may indict AIG itself, not just individual AIG employees.
The article adds, ominously, that "In the history of the U.S. financial markets, no major financial-services firm has survived an indictment."
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Martha Stewart's Appeal
Ms. Stewart's trial-related website, MarthaTalks.com, includes a copy of the 87-page brief her lawyers filed on her behalf with the Second Circuit on October 20, 2004. The brief is very well-written and provides a clear explanation of Ms. Stewart's view of the world. For those without the time or energy to read the whole thing, the four-paragraph "Introduction" pasted below provides a nice summary of her arguments:
INTRODUCTION
Martha Stewart was never charged with insider trading. But a barrage of pretrial leaks and in-court accusations left the indelible impression that she was guilty of that offense. Tarring Stewart with an uncharged, highly inflammatory crime was fundamentally unfair; that unfairness was compounded by rulings that barred Stewart from responding to those charges and prevented the jury from understanding what was—and was not—properly before it. Governmental and juror misconduct further undermined the integrity of the proceedings.At bottom, Stewart’s trial turned on one question: Why did she sell the last small remnant of her holdings in ImClone Systems, Inc. (“ImClone”) on December 27, 2001? Stewart’s answer: A preexisting agreement with her broker that he would contact her, and she would decide whether to sell, if the price fell to $60 per share or below. If fully accepted, that explanation—corroborated by testimony from a pivotal witness, as well as a critical document—would have negated the Government’s theory of the case and established a firm basis for concluding that, if Stewart made any factual misstatements or material omissions during two interviews with government investigators, she did so because of honest error, faulty memory, or misunderstanding of the specific questions asked.
Two separate constitutional violations, however, seriously undermined the cornerstone of Stewart’s defense. First, in contravention of the Confrontation Clause, the Government used out-of-court testimonial statements by Stewart’s codefendant that were never subject to cross-examination to undermine the one witness who provided independent corroboration of the $60 agreement. Second,
the Government’s efforts to discredit the one corroborating document were led by a high-ranking Secret Service official who even the prosecutors now admit lied on the stand.In the end, the jury found Stewart guilty of two instances of saying that she did “not recall” having discussed certain matters months previously, and for material false statements or material omissions in response to unrecorded and ambiguous questions about a minor transaction that has not itself been the basis of criminal charges. The process leading to conviction was tainted by: repeated allegations of an uncharged crime that were never rebutted or explained to the jury; the introduction of damaging testimony that was never subject to crossexamination; the use of false testimony condoned by senior Government officials; and, finally, the presence of an outspoken juror who apparently lied to be seated on the panel that judged Stewart a liar. Alone, each of these errors would warrant reversal. Together, they make an overwhelming case for setting aside this verdict.
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October 15, 2004 |
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Expanding the "No-Spin" Zone
In posts and articles such as these we have noted that the period immediately following an SEC investigation needs be treated as the "No-Spin Zone." That is, in the days following the conclusion of an SEC investigation or settlement, companies should be careful not to "spin" the resolution beyond its actual terms, or risk a harsh response from the SEC. The recent announcement by insurance company AIG concerning the SEC's view of certain press releases it issued is a reminder that the SEC also appears to consider the No-Spin Zone to include statements characterizing the SEC's investigation while it is ongoing.
According to this article by Reuters,
AIG already faces possible SEC civil charges and a Justice Department criminal investigation into whether one of its units helped Pittsburgh-based PNC Financial Services Group Inc. (NYSE:PNC - News) move $762 million of bad loans off its books, inflating profit by $155 million.AIG issued the press releases in question on Jan. 30, 2002 and Sept. 21 and Sept. 29 this year. The 2002 release concerned the PNC transactions, the Sept. 21 release said the SEC may file civil charges related to the transactions, and the Sept. 29 release announced a U.S. Justice Department probe.
AIG said in a statement on Monday the SEC believes it misled investors in the 2002 press release when it said it had not entered into other transactions using the PNC structure, when its AIG Financial Products Corp. unit arranged five similarly structured transactions for two insurers.
AIG said the SEC believes the Sept. 21 release should have said the original SEC civil probe concerned these transactions, and that the Sept. 29 release failed to paint a fair picture of the Justice Department probe. Justice is also concerned that the Sept. 29 release was misleading, AIG said.
The insurer said any contention that it made false or misleading statements lacks merit.
As noted in this article, AIG appears to be taking the position that its statements were not misleading because "unlike the PNC transactions, none of the [other 5] transactions had the primary purpose of moving troubled, volatile or underperforming assets off the balance sheet of the counterparty."
This article goes on to ask:
"What's even more troublesome is the additional charge that by denying civil liability AIG committed another breach of the Securities laws. Since when is saying "I did nothing wrong" an actionable tort?"
Cast in this light, the SEC's displeasure with AIG's press releases looks somewhat like the securities fraud charge leveled (and then dismissed) against Martha Stewart after she asserted her innocence. In any event, this situation is a reminder of the SEC's rapt attention to statements made by companies both during and after its investigations.
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October 14, 2004 |
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Halliburton Court Rejects Proposed Settlement
The following first appeared in the October 2004 SCAS Alert:
Halliburton Court Rejects Proposed Settlement
By Bruce Carton, Executive Director
On Sept. 9, a federal court in Dallas rejected the proposed $6 million settlement in the Halliburton Co. securities class action at the "fairness hearing" stage. The court's refusal to approve the Halliburton settlement serves as a reminder of the purpose and importance of the fairness hearing, as well as the key factors that the court will review and the pitfalls that proponents of a settlement must avoid to keep a settlement on track.
Under Rule 23(e) of the Federal Rules of Civil Procedure, a court may approve a class settlement only after finding that it is "fair, reasonable, and adequate." At a fairness hearing, plaintiffs in favor of the settlement have the burden of proving that the proposed settlement meets this standard, and the court has a fiduciary duty to the class to ensure that the interests of every member are adequately represented.
In the Halliburton case, the court concluded that it had not been presented with sufficient evidence to reach an intelligent and informed opinion on the merits of the case and the wisdom of the proposed settlement. In its opinion, a copy of which is available on the Internet here, the court ruled that:
since the Court is not satisfied that the settlement proposed is fair, reasonable and adequate, and since the Court has concerns both about the manner in which the settlement was reached, and the terms of the proposed settlement, the Court will not approve it at this time.
The court provided several reasons for its concern:
--Perhaps most notably, the court stated that it was "dismayed" that lead counsel negotiated the settlement without the knowledge of all of the lead plaintiffs, which "deprived the class of the benefits of multiple Lead Plaintiffs." This appeared to be the court's most significant concern.
--The lead plaintiffs in favor of the settlement presented "virtually no evidence" other than conclusory declarations regarding the lawsuit's likelihood of success on the merits. In such situations, of course, plaintiffs are in the somewhat awkward position of arguing the weaknesses of their own case to support the amount offered in settlement.
--None of the pro-settlement plaintiffs appeared at the hearing to articulate their views on why the proposed settlement was advisable for the class. The court found that their absence ran counter to their fiduciary duty to the class either to appear or submit affidavits stating their position.
--Lead counsel offered no analysis of the likely recovery to class members under the settlement. The court's own efforts to determine the approximate recovery indicated a range between a low of $0.006 (six-tenths of one cent!) per share and a high of $0.12 per share.
--The record did not provide a damages estimate sufficient to permit the court to assess whether the proposed settlement was within an acceptable range.
These factors, plus others, led the court to take the rare step of disapproving the settlement. Perhaps to spur another quick settlement in the case, the court ordered the parties to engage in mediation by Nov. 1, and warned that if the case was not resolved by Dec. 3, the court "will consider whether the appointment of Lead Plaintiffs and Lead Counsel should be modified…."
The court's decision also presented an interesting issue for shareholders with claims in the Halliburton case: what was the remaining significance, if any, of the Sept. 27 claim deadline in the original settlement notice? Lawyers involved in the case stated that because the court had not formally extended that deadline, it was their view that the only "prudent" course of action was to proceed as if the original deadline was still in place.
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Update on the AT&T Trial? Anyone?
SLW is eager to learn about the status of the securities class action jury trial involving AT&T that The 10b-5 Daily alerted us to earlier this week. The docket in the case suggests that the trial remains underway, but we have yet to see any reporting on the case. A copy of the 154-page Consolidated Amended Complaint is available here.
Can anyone out there provide an update?
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Oh, That Barge Deal
NYSSCPA.org reports that "Enron barge-trial defendant William Fuhs had to explain repeatedly on cross examination Wednesday that he didn't recall much about the 1999 barge deal two and three years after it, but does remember details now."
Fuhs, a former Merrill Lynch banker, reportedly couldn't recall related documents or his involvement in the barge deal when he was interviewed by the SEC in 2002 and by the DOJ in 2003. Fuhs, however, told jurors that "his recall is so much better now because he's spent the time since his indictment going over tens of thousands of documents about the deal."
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October 12, 2004 |
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"Spitzer Prosecution Train" in a Lull?
The Baltimore Sun's Jay Hancock worries in this column that
The Eliot Spitzer prosecution train seems to have hit the law of diminishing returns. It has been more than a month since the New York lawman rocked Wall Street with a major settlement for financial chicanery.Lately he has bullied Maryland's Jos. A. Bank Clothiers Inc. for the way it sells $400 suits and issued press releases with these headlines: "Investigation Reveals Deplorable Plight of Restaurant Bathroom Attendants," "Wedding Photographer to Reimburse Jilted Clients" and "Poacher Pleads Guilty to Timber Theft."
But don't worry: an official in Spitzer's office who requested anonymity because of the sensitive nature of the potential prosecutions reportedly stated that "We do have more stuff coming."
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October 11, 2004 |
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The Sleeping Dog Dilemma, Part II
As discussed in this post from late last year, Holly Becker, a onetime analyst at Lehman Brothers, and her husband Michael Zimmerman, a trader at SAC Capital Advisors had been in "regulatory limbo" since mid-2002, when the SEC issued a "Wells call" notifying the two that it intended to bring an enforcement action against them. According to this article, the SEC was investigating a possible insider trading case revolving around whether Becker tipped Zimmerman to research reports she was preparing on several Internet stocks. The article states that the planned enforcement action was suddenly pulled from the SEC's calendar in 2003 after the impending charges were leaked to the news media. Since 2002, however, Zimmerman has reportedly remained at his trading post at SAC Capital with a cloud over his head, while Becker has been stuck on a leave of absence from her analyst post at Lehman.
Apparently, however, this limbo has finally come to an end, as this article reports that the SEC notified the couple on Thursday of last week that the case had been closed with no charges filed.
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