The stakes for institutional investors that fail to file claims in securities class action settlements just got much higher.

During the week of January 10, 2005, over 40 mutual fund managers were reportedly sued by shareholders of those funds in class action lawsuits alleging that the funds failed to collect as much as $2 billion in settlement payouts to which the funds’ shareholders were entitled. The lawsuits allege that the funds’ failure to claim this money during the three-year class period dating back to January 2002 was a breach of fiduciary duty, was negligent, and in violation of the Investment Company Act of 1940. The lawsuits seek compensatory damages for all of the money that the funds allegedly left on the table, as well as punitive damages and the forfeiture of all commissions and fees paid by fund shareholders.

Several of the funds named as defendants promptly responded that they did, in fact, file claims in settlements in which they were eligible to recover, and that the claims against them are without merit. Many of the defendants, however, are likely to have no such defense—recent academic studies have indicated that as many as two-thirds of institutional investors do not file claims in securities class action settlements, resulting in an estimated $1 billion in unclaimed settlement proceeds per year. Unclaimed funds typically are distributed on a pro rata basis to those investors who do file claims in a particular settlement, providing them with an additional measure of recovery that they otherwise would not have received.

Key Issues
The lawsuits against these mutual funds will likely turn on several key legal and factual issues. As a threshold matter, the court will need to decide whether mutual funds have a legal obligation to file claims in settlements under any of the theories advanced by the plaintiffs: (1) a fiduciary duty to do so, arising under either common law or the Investment Company Act; or (2) a common law duty of care requiring them to do so (a “negligence” standard). The plaintiffs allege in one of the lawsuits that

an investor pools her money with other investors in a mutual fund and entrusts complete control and dominion over her investments to the directors and advisors of the mutual fund. As a result of this relationship of special trust, directors and advisors of mutual funds owe a fiduciary duty directly to each individual in the fund….

The plaintiffs conclude that “Defendants’ failure to protect the interests of the Fund investors by recovering monies owed them is a breach” of that fiduciary duty.

Although the existence of a mutual fund’s duty to file claims does not yet appear to have been addressed by any court, it is well established that officers and directors of corporations owe a duty to shareholders to protect the company’s assets. Several commentators have opined that it is not a big step to conclude that just as a mutual fund must assure the safety of the securities in its portfolio, it also must assure that material amounts of money owed to the fund that can be claimed in securities class action settlements are not left unclaimed. Whether the courts agree with this conclusion will be critical, as will be the determination of whether a failure to file claims is, in and of itself, negligent conduct.

Key factual issues in these cases will include whether the funds were eligible to participate in settlements during the class period and, if so, whether they filed claims in such settlements. The lawsuits do not appear to include specific allegations concerning these facts, presumably because detailed information on fund holdings and claims filed by a fund is not publicly available. Rather, the lawsuits allege that (1) the fund in question typically owned billions of dollars in stocks; (2) during the class period there were hundreds of securities class action settlements, and the fund was eligible to participate in a “significant number” of these cases; (3) if the fund had filed claims in a particular settlement, the proceeds would have increased the total assets and immediately impacted the fund’s Net Asset Value; and (4) “upon information and belief, the Defendants failed to submit Proof of Claim forms in these cases and thereby forfeited Plaintiffs’ rightful share of the recovery obtained in the securities class actions.”

It is unclear upon what “information and belief” the plaintiffs base their conclusion that a particular fund failed to file claims in a particular case, but the allegations noted above suggest that this conclusion is based on the fund’s Net Asset Value (NAV) not rising following the distribution of proceeds in a class action settlement. It is correct that any settlement proceeds from a class action relating to a fund’s portfolio security belong to the fund, the receipt of which will have the effect of increasing the value of the portfolio and enhancing the portfolio’s performance. If this is the plaintiffs’ theory then there appear to be at least some holes in this logic. First, proceeds have not yet been distributed in many of the securities class action settlements listed in the lawsuits. Second, there may well be situations where although the proceeds from the settlement increase a fund’s NAV, external negative forces such as a drop in the market or other securities in the portfolio offset any gain in the fund’s NAV resulting from the receipt of the settlement proceeds. Third, proceeds from a settlement may in some cases simply be too small to impact the NAV.

Still, it is indisputable that funds often are entitled to receive hundreds of thousands—if not millions—of dollars in a single securities class action settlement, and the absence of any rise in a fund’s NAV in certain cases may demonstrate that the fund did not file claims in such a case. The true facts concerning a fund’s eligibility and claims filing are out there, of course, and can be easily determined by plaintiffs if they are able to obtain discovery (relevant documents and testimony) from the fund through the litigation process. The big question is whether an “NAV-based” allegation that a fund failed to file claims can withstand an immediate motion to dismiss the case filed by that fund seeking to have some or all of the lawsuit thrown out of court prior to any discovery.

Conclusion
Although some institutional investors are diligently filing claims in securities class action settlements, as many as two-thirds of institutional investors continue to leave billions of dollars on the table by failing to complete the basic tasks of monitoring and filing claims in such settlements. These tasks can easily be accomplished by engaging a claims filing service or by an institution training and committing its own internal resources. The recent barrage of lawsuits against mutual funds for their alleged failure to file claims should serve as a real wake-up call to any institution that is still leaving settlement money on the table.

January 21, 2005

A Wink and a Nod and a Lawsuit

Don't you hate it when your wife ignores your specific "entreaties" that she not share inside information about your publicly-traded company with her brother, and gets herself sued by the SEC?

On January 13, 2005, the SEC filed this lawsuit against Patricia B. Rocklage, the wife of Scott M. Rocklage, Cubist Pharmaceuticals, Inc.'s former Chairman and CEO, and also against William M. Beaver, Patricia Rocklage's brother (the brother's best friend and neighbor also was sued).

In its complaint, the SEC alleges that

on December 31, 2001, Scott Rocklage informed Patricia B. Rocklage of the negative results of a clinical trial involving one of Cubist's most important products, Cidecin. The complaint also alleges that, unbeknownst to her husband, Ms. Rocklage had a pre-existing understanding with her brother whereby she would give him "a wink and a nod" if she ever became aware of any bad news about Cubist that might affect its stock price. According to the complaint, shortly after learning about the trial results, Ms. Rocklage told her husband that she intended to signal Beaver to sell his Cubist stock. The complaint states that Scott Rocklage urged his wife not to take this action. The complaint asserts that, notwithstanding her husband's entreaties, by no later than the morning of January 2, 2002, Ms. Rocklage provided "a wink and a nod" to Beaver, who, at approximately 10 a.m. that day, sold all 5,583 shares of Cubist stock that he owned or controlled. The complaint further contends that, after receiving the signal from his sister, Beaver tipped his best friend and neighbor, Jones, who proceeded to sell all 7,500 shares of Cubist stock that he owned on the morning of January 3, 2002. Following the post market close announcement of the trial results on January 16, 2002, Cubist's stock price dropped by 46%, from a closing price of $31.75 that day to a closing price of $17.02 on January 17, 2002. By selling when they did, Beaver and Jones avoided losses of $99,527 and $133,222, respectively.

Permalink | Comments (0) | TrackBacks (0) | Print Article

Back To Top

January 18, 2005

One Way to (Temporarily) Get $6.5 Million

The $300 million Oxford Health Plans settlement was recently disbursed, and $6.5 million of it reportedly went out via a check payable to one Richard Lagerveld.  The address to which this check was sent?  Neil Good Day Center, the San Diego homeless shelter where Mr. Lagerveld picked it up.

According to the San Diego Union-Tribune, Lagerveld filled out a claim form in the Oxford Health Plans settlement purporting to be an investor who owned $145 million of Oxford stock in a health plan, and provided the claims administrator with bogus brokerage statements from a defunct investment firm in support of his claim.

The claims administrator ultimately figured out that there was a problem, and alerted the FBI.  According to the article,

FBI agents arrested Lagerveld Dec. 16 at a La Jolla stock brokerage where he had an account. "We do not believe he was really homeless," FBI spokeswoman Jan Caldwell said. "He may or may not be. He was very clean."

The article states that last week a judge ordered Lagerveld held until he is sent to Long Island to face charges that he stole the funds.

Permalink | Comments (0) | TrackBacks (1) | Print Article

Back To Top

Class Actions Filed Against Mutual Funds That Allegedly Left Shareholder Money on the Table

The Rocky Mountain News reports today that a barrage of shareholder lawsuits was filed last week against mutual fund companies that allegedly failed to collect millions of dollars in securities class action settlement payouts to which the funds were entitled.

The article states that more than 40 such cases were brought against mutual fund operators last week, and that the cases charge money managers with neglecting their fiduciary duty to investors.   The companies sued reportedly include Janus, Dreyfus, and MassMutual.

The article also includes some interesting information from Randall Thomas, a professor of law and business at Vanderbilt University Law School who was the co-author of an eye-opening article in 2002 entitled "Leaving Money on the Table: Do Institutional Investors Fail to File Claims in Securities Class Actions?"  The article states that Thomas also is

co-author of a just-completed study that examined 118 class-action security settlements. It found that less than a third of institutional investors file claims.  Thomas said the average recovery for the institutional investor would have been $75,000 to $100,000 per claim. (Emphasis added).

The Neuberger Berman Family of Funds appears to be among the reported 40 cases filed last week.  This complaint filed January 12 in the Southern District of New York indicates that plaintiffs are pursing claims in these cases for breach of fiduciary duty, negligence, and violations of the Investment Company Act.

Permalink | Comments (0) | TrackBacks (0) | Print Article

Back To Top

January 12, 2005

Notes from the Dura Pharmaceuticals Supreme Court Argument

Kudos to Wilson Sonsini's Lyle Roberts, who also publishes the excellent The 10b-5 Daily blog, for blogging today's Supreme Court argument in the important Dura Pharmaceuticals v. Broudo case concerning loss causation.  He states: "Predicting how the Supreme Court will rule based on oral argument is a tricky business. That said, the Court appeared likely to reject the 9th Circuit's price inflation theory of loss causation."  All of Mr. Roberts' thoughts and insights are available here.

Permalink | Comments (0) | TrackBacks (0) | Print Article

Back To Top

McKesson Case Settles for $960 Millon--Fifth Largest Ever

McKesson Corp. announced today that it has settled the consolidated securities class actions against it for $960 million.  When finalized, this settlement will shoot all the way to #5 on the SCAS "Top 100" list of the largest securities class action settlements of all-time.

Permalink | Comments (0) | TrackBacks (1) | Print Article

Back To Top

Playing Catch-Up

So many "blog-worthy" topics, so little time.  In the interest of clearing out some of my "To-Blog" list, I offer these quick takes on the following:

• Jan. 12, 2005:  The Washington Post reported today that the tentative settlement reached with 10 WorldCom directors is under fire from the remaining defendants (16 banks).  The article states that the banks delivered a letter on Monday to U.S. District Judge Denise L. Cote arguing that "the settlement with the former directors was inappropriate because, among other reasons, it was reached too close to the scheduled trial date, could leave the remaining defendants to shoulder too much liability and could be scuttled by the insurance companies, which under certain circumstances could back out of the agreement. "
• Jan. 11, 2005:  As discussed in this article from Bloomberg, U.S. Attorney Paul McNulty of the Eastern District of Virginia announced the indictment of 4 PurchasePro.com executives and 2 AOL executives in connection with an alleged scheme to boost PurchasePro's reported sales by forging and back-dating contracts and providing false documents to company auditor Arthur Andersen LLP.  A total of 6 former AOL execs are reportedly under scrutiny by prosecutors.  For an amazing account of AOL's role in this and other alleged shenanigans, I highly recommend Alec Klein's "Stealing Time: Steve Case, Jerry Levin, and the Collapse of AOL Time Warner."
• Jan. 11, 2005:  Interesting article in Bloomberg about how the lawyers and Hollywood celebrities involved in the two-month trial in Georgetown, Delaware involving Walt Disney/Michael Ovitz's $140 million severance are entering the final week of a trial that has "tested their ability to cope with life outside Hollywood and New York."  For instance, the article notes that "With no dry-cleaning services at the hotel where they are staying 21 miles away in Rehoboth Beach, the lawyers representing Ovitz were forced to 'ship clothes for two months,' said Mark Epstein, a partner at Los Angeles' Munger, Tolles & Olsen."
• Jan. 7, 2005:  Following closely on the heels of the WorldCom director settlement, the University of California, lead plaintiff for investors in the Enron securities litigation, announced that many of Enron's former directors had agreed back in October 2004 to a settlement in which they would collectively pay more than $13 million in personal contributions.  This was part of a larger settlement with these directors totaling $168 million, with $155 million of this amount coming from insurance proceeds.
• Dec. 23, 2004:  Adelphia Communications stated in its Form 10-K that it had "offered $300,000,000 in value to settle the SEC Civil Action and to resolve the DoJ's ongoing investigation of the Company, of which $125,000,000 would be funded from potential proceeds from litigation by or on behalf of Adelphia."  The company added that "The staff of the SEC has told our advisors that its asserted claims for disgorgement and civil penalties under various legal theories could amount to billions of dollars."

Permalink | Comments (0) | TrackBacks (0) | Print Article

Back To Top

January 10, 2005

"Buy-Write-Sell"

The SEC brought a settled enforcement action today against former CBS Marketwatch.com columnist and co-founder Thom Calandra for allegedly making over $400,000 through a practice known as "scalping," or, as the SEC put it, "Buy-Write-Sell."

According to the SEC's press release and complaint, Calandra profited by repeatedly "buying shares of thinly-traded, small-cap companies, writing highly favorable newsletter profiles recommending the companies to his newsletter subscribers, and then selling the majority of his shares when the increased demand generated by his favorable columns drove up the stock price."  Calandra allegedly scalped over 20 different securities from March to December 2003.

The SEC alleged that Calandra's conduct violated Section 10(b) of the Exchange Act because:

By knowingly encouraging purchases of thinly-traded, small-cap securities with an intent to gain personally, Calandra assumed a duty to his TCR readers to disclose fully his stock ownership and his intent to sell when the market price in those stocks rose. Defendant breached that duty when he repeatedly failed to disclose his intent to sell over 100 times in 23 different securities, from March to December 2003.

Permalink | Comments (1) | TrackBacks (0) | Print Article

Back To Top

January 6, 2005

10 Former WorldCom Directors Agree to Personally Pay Millions in Settlement

Although the $2.575 billion settlement finalized late last year with Citigroup in the In re: WorldCom Securities Litigation was of historic proportions, the tentative $54 million settlement reached January 5 with 10 former members of WorldCom’s board may have far greater repercussions.

In its amended complaint in the massive securities class action attacking the financial fraud at WorldCom, lead plaintiff New York State Common Retirement Fund alleged that WorldCom’s board of directors had been “utterly derelict in carrying out its most basic functions,” provided “no internal checks and balances on WorldCom management,” and was “completely beholden to management.”  For the 10 settling former members of WorldCom’s board, the trial on those charges set for February 28, 2004, will no longer occur following their agreement to pay $54 million collectively, including $18 million out of their own pockets, to settle the case.  Two former members of the board have not settled.  The settlement agreement is subject to the approval of the federal court handling the case.

Although $54 million is not itself an extraordinary amount in the context of the hundreds of billions of dollars lost in the WorldCom case, the fact that $18 million will be paid by the directors themselves is a watershed event in the securities class action world.  It is virtually unheard of for directors to be personally responsible in class action settlements, as such settlements are routinely covered by the company’s D&O insurance.  In a highly unusual move, however, the New York State Common Retirement Fund reportedly insisted from the beginning of negotiations that there would be no settlement with the WorldCom directors without their agreement to personally pay a significant portion of the proceeds.  Indeed, the $18 million dollars reportedly will come in varying amounts from the directors, with each individual payment accounting for a full 20 percent of that director’s aggregate net worth excluding their primary residences and retirement accounts.

Particularly coming on the heels of the SEC’s recent proclamations that the penalties it imposes must be paid by individual wrongdoers rather than their employer or insurance company, this settlement with members of the WorldCom board will likely have a jarring effect on anyone serving, or considering serving, on the board of a public company.  Never before has it been so apparent that the consequences of failing in your duties as a board member may well include a significant loss of your own personal wealth.  In the WorldCom case, for instance, directors who were compensated approximately $35,000 per year are now responsible, due to their alleged failings, for the payment of millions of dollars.

We expect that this most recent development in the WorldCom case will serve as an important deterrent to fraud for officers and directors who run public companies.  It has been a common and long-standing complaint that class action settlements paid solely by public companies and/or their insurers do little to deter the individuals who actually commit such fraud.  We hope that the emerging prospect of multi-million dollar hits to individuals’ bank accounts will be enough to give would-be fraudsters pause.  We also hope, however, that worthy directors will not look at this settlement and conclude that service on a board of directors simply is not worth the risk.

Permalink | Comments (1) | TrackBacks (2) | Print Article

Back To Top

January 4, 2005

2004: The Year in Review

Here are my picks for some of the best, worst and oddest securities litigation-related events in 2004:

Best Settlement: The historic settlement in the WorldCom/Citigroup case, which resulted in a massive settlement fund of $2.575 billion. This is the second-largest settlement of all time, behind only the $2.85 billion settlement in 2000 by Cendant Corp. The stakes will be even higher in the upcoming trial of the non-settling defendants in the WorldCom case, which is set to begin Feb. 28.

Best Friend of the Plaintiffs' Securities Class Action Bar: New York Attorney General Eliot Spitzer, whose activism has helped fuel private securities litigation in recent years, spurred yet another huge wave of securities class actions in the fourth quarter of 2004 through his investigation of, and litigation against, insurance brokers and companies. And it now appears that Mr. Spitzer's work may help plaintiffs' law firms on the expense side of their business, as well. In December, his office announced that it was investigating whether improper behavior by insurance companies has been a factor in the rising cost of malpractice insurance for lawyers, and reportedly began interviewing class action attorneys about their particular problems getting insurance.

Best Comeback: After having their securities class action against Bristol-Myers Squibb Co. thrown out by a federal judge in April 2004, shareholders appealed to the Second U.S. Circuit Court of Appeals. Even before any ruling came from the appeals court, the investors were able to strike a $300 million settlement agreement, one of the 20 largest of all time.

Best Last Laugh: Back in 2003, a 71-year-old West Palm Beach retiree who lost $2 million when MCI and WorldCom stock plummeted, took the novel legal approach of suing Citigroup for his pain and suffering (which allegedly included high blood pressure, anxiety attacks, and mental and physical stress) under the Florida tort of "outrage." Told that at least one prominent securities defense attorney found the claim laughable, plaintiff's attorney Ted Babbitt countered, "We'll see who laughs last . . . it only takes a finding by one judge to make this cause of action available to millions of shareholders." In September, a state circuit judge denied a motion to dismiss the suit, a ruling that Mr. Babbitt's firm says has put the case "on a road to a Florida state jury trial and potential punitive damages."

Worst Holiday Season: Martha Stewart, who spent the holidays as an inmate in the minimum-security women's prison in Alderson, West Virginia (a.k.a. "Camp Cupcake"). Runner-up for worst holiday season goes to all counsel involved in the high-profile criminal prosecution of Richard Scrushy, former CEO of HealthSouth, who is scheduled to go to trial on Jan. 5.

Best Line Written about the Martha Stewart Case: In February, Ms. Stewart's lawyers announced that she would not testify and would put on only one defense witness and a handful of documents. Her lawyers estimated that her defense would take about 15 minutes, or as Greg Smith of the New York Daily News put it, "the same amount of time the diva recommends letting a German Chocolate Inside-Out Cake cool after baking."

Harshest Opinion: The 69-page decision by Chief Administrative Law Judge Brenda P. Murray prohibiting Ernst & Young from taking on new audit clients for six months. In her decision, Judge Murray said "the evidence shows that [E&Y] has an utter disdain for the Commission's rules and regulations on auditor independence."

Most Eye-Opening New SEC Enforcement Trend: Huge penalties (tens of millions of dollars) against corporations for perceived non-cooperation during SEC investigations.

Most Eye-Opening New DOJ Prosecutorial Trend: The quasi-"deputization" of private counsel conducting internal investigations of alleged fraud at corporations. In April, several former executives at Computer Associates International were indicted for obstruction of justice based on statements made not to any government official but rather to the company's outside counsel, which was conducting an internal investigation of possible financial fraud.

Worst Headline: "SEC expected to keep watching out for investors," The Associated Press, Sunday, Dec. 12. Of course, this is only an "expectation."

Most Unexpected Reprieve: Gary Winnick, former chairman of Global Crossing. After a lengthy SEC investigation concerning the public disclosure of certain "swaps" of fiber-optic network capacity with other telecom companies, the SEC's Enforcement Division recommended that the SEC bring a case and impose a fine against Winnick. After Winnick reportedly agreed to settle by paying a fine of $1 million, the proposed case and settlement were presented to the SEC commissioners for approval. In a highly unusual occurrence, however, the SEC commissioners voted 3-2 to reject the SEC staff's recommendation, concluding that Winnick did not sign off on the disclosures at issue. As a result, Winnick was neither charged nor fined by the SEC.

Best Comic Relief: The SEC's job posting for an in-house psychologist to help "improve employee attitudes and satisfaction related to employee retention, job satisfaction, burnout, conflict and stress," which prompted an immediate barrage of one-liners. Among them, Bill McLucas (former director of the SEC's Division of Enforcement) reportedly joked, "Just one? They should get a couple." He also suggested that current Enforcement Director Stephen Cutler should get the first appointment once the psychologist came on board so that "he can take out his hostilities with that person instead of my clients." No word on whether the position was ever filled.

A Hearty Welcome to: Class action settlement notices written in plain English as required under the recent amendments to Federal Rule 23(c)(2). Rule 23(c), which now requires that settlement notices be written "in plain, easily understood language," has had a dramatic effect on the readability and usefulness of these important notices.

Good Riddance to: "Buried notice," the dubious practice of trying to avoid competition for the roles of lead plaintiff/lead counsel by publishing the required "notice" of newly filed cases not on a national business wire such as PR Newswire or Business Wire, but rather in places designed not to attract attention (such as in the back pages of a hard copy newspaper). Although the Private Securities Litigation Reform Act, which was enacted in the infancy of the Internet, technically permits notice to be published in any "business-oriented publication," the industry practice and standard is to provide notice via the business wires. Indeed, in March, a federal court in Baltimore ruled that even publishing notice in The New York Times is now insufficient under the PSLRA.

Permalink | Comments (1) | TrackBacks (1) | Print Article

Back To Top

January 1, 2005

The Streak Lives

Bill Miller, the manager of the Legg Mason Value Trust fund entered December 2004 with his incredible 13-year streak of outperforming the S&P 500 index in serious jeopardy. As this article from December 1, 2004 put it, Miller's record is the "mutual fund world's equivalent of Joe DiMaggio's 56-game hitting streak. Or the 74 consecutive victories for game show champ Ken Jennings."

After trailing the S&P 500 index virtually all year.  Miller's fund finally overtook it on Monday, December 27, 2004, and finished the year ahead once again (11.96% versus 10.98%).

Permalink | Comments (0) | TrackBacks (0) | Print Article

Back To Top