Enron Trial, Day 2
The Houston Chronicle's "Enron: TrialWatch" blog continues to crank out the updates. And it took me two full days, but I finally realized that the Chronicle actually has a second blog written by six attorneys focused on the Enron trial strategy called "Enron: Legal Commentary".
Both blogs are actively covering the trial but as the TrialWatch blog correctly points out, "the trick, of course, will be to sustain this over the length of the trial, which promises to last months."
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Welcome to "The Quant"
University of Maryland Law Professor Richard Booth has leaped into the blogosphere with his new blog, The Quant. His blog is "about the intersections of law, business, finance, economics, and statistics" and looks like it will include some interesting securities litigation material. And no, I'm not just saying this because (a) I was once Prof. Booth's student at Maryland Law School and (b) I later had the somewhat odd experience of taking his deposition as the opposing party's expert witness in a securities class action (true story).
His maiden post, entitled "The End of the Securities Fraud Class Action as We Know It" is a summary of a November 2005 article he published that argues that securities fraud actions should all be treated as derivative actions, and should be dismissed unless insiders have enjoyed gains from trading during the fraud. The full article can be downloaded here.
Good luck and have fun, Prof. Booth!
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Ebbers Appeal Heard by 2nd Circuit
Brooke Masters of the Washington Post has this interesting article about former WorldCom CEO Bernie Ebbers' appeal of his fraud conviction and 25-year sentence to the Second Circuit. The article notes that Ebbers has "made the government's decision not to grant three former top WorldCom executives immunity from prosecution the centerpiece of their appeal." Without such immunity, all three witnesses refused to testify in Ebbers' defense, even though they had reportedly given statements to the FBI that may have supported Ebbers' contention that he was lied to by former CFO Scott Sullivan.
Most interesting was the following account of a question posed directly by the Court to one of the prosecutors. Explaining why immunity was refused,
Assistant U.S. Attorney William F. Johnson countered that Beaumont and the other two executives "still remain potential defendants" and that their testimony would not have cleared Ebbers.
But Johnson squirmed when U.S. Circuit Judge Jose A. Cabranes asked whether the government had done any new work investigating the three WorldCom executives since the start of Ebbers's trial in early 2005. After a long pause -- remarked upon by the judge -- Johnson said no. "We're not actively investigating," he said, but later he added, "There was certainly no manipulation effort here to keep the witnesses from testifying."
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January 30, 2006 |
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Enron Trial, Day 1
Day 1 of the criminal trials of former Enron executives Kenneth Lay and Jeff Skilling began today with jury selection--12 jurors and four alternates must be selected. The Houston Chronicle has this ongoing "Enron: TrialWatch" that is blogging the trial in near real-time.
The limited seating at the trial has apparently created a hot ticket--the Chronicle reports that to get its seat, the Chronicle had people wait outside in line starting at 5 a.m., and one wire service hired people to wait in line beginning at 6:30 p.m. the night before.
I predict that it will be quite a bit easier to get a seat once the parties' experts have droned on for weeks on the nuances of FASB and GAAP.
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January 25, 2006 |
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Payback Time
U.S. News has this article entitled "It's Payback Time" about the challenges facing investors who wish to recover in securities class action settlements. Referring to the massive, upcoming Enron settlement, the article quotes yours truly, as follows:
And there's still plenty of time to gather records to apply for some of the $7 billion set aside to repay Enron investors. That fund hasn't even started accepting applications yet. But get started soon, because collecting from the funds will take more effort than many investors spent deciding to buy the highflying stocks in the first place. Investors with mutual funds, even those in 401(k)'s or individual retirement accounts, should call their fund managers and remind them to collect what they are owed, says Bruce Carton, who runs an Institutional Shareholder Services division that helps firms get reimbursed.
In 2006, it is hard to believe that any mutual fund would still be leaving settlement money on the table (likely harming its own NAV in the process). But with recent studies showing that as many as 70% of institutions fail to file such claims, that is almost certainly the case.
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January 24, 2006 |
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New Wave of Securities Class Action Lawsuits on the Way?
The Boston Business Journal has this article related to the recent Stanford/Cornerstone report, as well as SLW's recent posts about the subject. The article states that:
The number of securities class action lawsuits filed in the United States fell off last year, but experts say it's not time for companies to relax yet because a rising number of corporate restatements could harbinger a new wave of such suits.
Quoting yours truly, the article adds:
But rising earnings restatements foreshadow future lawsuits, said Bruce Carton, vice president of securities class action services at Institutional Shareholder Services Inc. of Rockville, Md.
"The fact that you're getting a flurry of restatement of 2005, if it hasn't already led to lawsuits, probably will in the future," Carton said.
***
"SOX fuels restatements, which fuels lawsuits," Carton said.
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January 23, 2006 |
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A Safe Bet
As discussed here by the WSJ Law Blog and in the underlying story in The Economist, an astounding number of institutional investors continue to fail to file claims in securities class action settlements--up to 70% according to one academic study. The Law Blog observes that "the Economist amusingly suggests this could lead to a new wave of class actions" against the institutional investors that are failing to collect this money.
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January 19, 2006 |
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Where Corporate Scandals are Good for Business
Newsday has a rare article about one of the key components of class action settlements: the claims administrator. The article begins by noting that
At Melville-based GCG Inc. [formerly called Garden City Group], corporate scandals can be good business.
The company is one of the largest administrators of class-action lawsuits, with about half of its business coming from securities litigation, said GCG president David Isaac.
Indeed, according to the SCAS database, as of the beginning of the 4th quarter of 2005, GCG had served as a claims administrator in no fewer than five of the top ten securities class actions since the passage of the Reform Act (WorldCom, Enron, Lucent, Dynegy and Global Crossing).
The article states that although GCG hasn't released financial figures for 2005, 2004 revenue was $86.4 million in 2004, a 15.9 percent jump from 2003.
The article also adds that according to the Administrative Office of the U.S. Courts, the number of class action lawsuits filed in federal courts reached 2,693 in 2004. As there were approximately 213 separate federal securities class actions filed in 2004, this means that at least 8% of all class actions filed were securities cases. However, most of these 213 securities actions saw multiple and sometimes dozens of securities class action complaints filed, which were later consolidated into one case. It is unclear whether these "multiple lawsuit" cases are counted separately or as one case by the Administrative Office.
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The "Let the Good Times Roll" Blog
Interesting new blogs continue to pop up almost daily lately. My most recent discovery is Let the Good Times Roll, by "evangelist, entrepreneur, investment banker, and venture capitalist" (not to mention author) Guy Kawasaki.
I particularly like his definition of "blogger":
"Blogger. n. Someone with nothing to say writing for someone with nothing to do."
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January 17, 2006 |
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Welcoming "Truth on the Market" to the Blogosphere
A promising new business law blog went live today called "Truth on the Market." TOTM will "provide commentary on law, business, economics and more," including securities litigation.
The blog is written by six "young turk" professors who "teach and write in the business law area, broadly defined." They boldly add that
"We are aware of recent statements that blogging should be avoided by junior faculty. We are all junior faculty here and thus obviously disagree."
I like them already. Good luck, Truth on the Market.
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January 13, 2006 |
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The Vagaries of the Insider Trading Laws
Back in August 2004, commenting on the Martha Stewart developments, I wrote an article (republished in this post) on the "Elusive Law of Insider Trading" that stated:
Although we may feel that we will know insider trading when we see it, case after case shows that this simply is not so. Indeed, after reviewing the exact same set of facts, federal prosecutors elected not to charge Ms. Stewart with the crime of insider trading while the Securities and Exchange Commission (SEC) came to the opposite conclusion and filed a civil lawsuit against her alleging insider trading.
***
It can be argued that the continued vagueness of the insider trading laws serves the useful purpose of deterring all trading based on nonpublic information, whether it is technically "legal" or not. While vague laws may have that desired effect, a fairer and more direct use of the law to achieve society's goals in this area would be for Congress to identify what is legal insider trading and what is not, and to articulate the distinction in a coherent statute.
Cases like this one brought and settled yesterday by the SEC against Thomas Bucknum, the former General Counsel of publicly traded Biogen Idec Inc., only reinforce my belief that the law of insider trading is in many instances elusive, if not unknowable. A short recap of the facts of the Bucknum case (borrowed from this post today by the WSJ Law Blog) is as follows:
- Bucknum called his broker at 8:45 a.m. and placed an order to exercise options to purchase 87,900 shares and then sell them. [Note: It also appears to be a critical fact that "the broker understood from that conversation that Bucknum wanted to sell the shares at a price of $68 per share or better."]
- Because Bucknum was an officer of the Biogen, his brokers needed to get clearance from the company in order before executing Bucknum’s order.
- Around noon, Bucknum learned that a patient taking Tysabri had been diagnosed with fatal brain disease and that another patient may have contracted the illness.
- About 1:30 p.m., Bucknum called his broker’s associate, who told him he had received clearance from Biogen, and Bucknum told him to sell the stock. [Note: The associate also told Bucknum the stock was trading "near $68."]
- The shares were sold around 2:00 p.m. for a $1.9 million profit
- Ten days later, Biogen and its partner Elan said they were pulling the drug; shares fell 43%.
So to be clear: Before becoming aware of the bad news, Bucknum had, according to the SEC's complaint, instructed his broker to sell the stock in his account at a price of $68 or better. This would seem to fall squarely under Rule 10b5-1, which states that
a person's purchase or sale is not "on the basis of" material nonpublic information if the person making the purchase or sale demonstrates that:
As far as I can tell, the twist here--and Bucknum's downfall--is that at the time of the 1:30 p.m. call, the stock was not trading at at a price of $68 or better. Rather, after Bucknum was told it was "near $68," he then re-instructed the broker to sell the shares at that lower market price (which turned out to be $67.12). I suppose this means that his initial instruction to sell the stock cannot be used to protect him from charges of later trading on the basis of material nonpublic information because that initial instruction could not be carried out due to a market price below $68.
The bottom line appears to be that had the price of Biogen stock been about a buck higher on that fateful day, or had Bucknum initially placed a market order to sell the shares as opposed to a limit order, Bucknum's trades would have been legal under Rule 10b5-1. But really, who knows what the SEC would do in such a case? Even if the facts were as just described and Rule 10b5-1 did technically apply, would anyone trying to obey the law have the certainty to go through with that trade? As I said with respect to Martha Stewart, the effect of this ambiguity is to deter all trading based on nonpublic information, whether it is technically "legal" or not.
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January 12, 2006 |
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High-Level SEC Vacancies Continue to Grow
Anyone want to work at the SEC?
The SEC announced yesterday that Alan Beller, Director of the Division of Corporate Finance since 2002, will leave the Commission to return to the private sector. The SEC stated that Beller will remain at the Commission until February 2006 to assist with ongoing and transition matters.
Beller's departure means that as of next month, three of the SEC's four divisions will be without a permanent director. As discussed here back on October 12, the divisions of Market Regulation and Investment Management have each had vacancies at the very top of their organizations for months. Two months later, these positions remain vacant, as do all of the other SEC and PCAOB positions (head of PCAOB, District Administrators in various cities, etc.) noted in the earlier post.
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January 6, 2006 |
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The Ocean Comes In, the Ocean Goes Out
I received a very kind call from Prof. Joseph Grundfest of Stanford clarifying that with respect to the Stanford/Cornerstone report discussed here, his comment that the "pig may have moved through the python" was related to the report's finding that total market capitalization losses and "dollar disclosure losses" decreased significantly from 2004. He believes that this is the real significance of the report, not the fact that the number of cases filed ticked down somewhat in 2005. As discussed in detail in my earlier post, I agree that not much, if anything, can be read into the decline in the number of cases filed in 2005. So too, apparently, does Bill Lerach, who is quoted in this article on the report as saying that:
"I don't think you can draw any conclusions,'' said William Lerach, the lead attorney in the Enron case and one of the nation's top securities fraud lawyers. "The ocean comes in, the ocean goes out. It doesn't feel any different to me.''
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January 5, 2006 |
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2005: The Year in Review
Here are my picks for some of the best, worst, and oddest securities litigation-related events in 2005:
Best Settlement: Enron--A record $7.144 billion (and more than $700 million in attorneys’ fees) thus far, and counting. Enough said.
Most Creative Securities Fraud: A very close race this year, but the winner is the “Fraudulent Wrong Number Stock Tip.” In May 2005, the Securities and Exchange Commission announced that it had filed a case against two “voice-mail broadcasters” for broadcasting hundreds of thousands of fraudulent “wrong number” stock tip messages. The messages were left on telephone voice-mail recording machines throughout the country, and were designed to make each recipient believe a caller named “Debbie” had dialed the number by mistake when calling a friend to pass along a hot stock tip. The SEC stated that the scheme was convincing enough to temporarily drive up the touted companies’ combined market capitalization by approximately $179 million. You can listen to this bogus message here.
Runner-Up: The Estonian firm that allegedly became a client of Business Wire for the sole purpose of gaining access to Business Wire's secure client website. The SEC says that the firm then surreptitiously utilized a “spider” software program to gain unauthorized access to confidential information contained in upcoming nonpublic press releases of other Business Wire clients, including news about mergers, earnings, and regulatory actions. The SEC alleges that the defendants used this information to make at least $7.8 million in illegal trading profits.
Best Securities Litigation Article: “Breaking the Banks,” by Andrew Longstreth of The American Lawyer, which provides a fascinating look at the personalities, strategies, and turning points that led to the $6.1 billion settlement in the WorldCom securities class action.
Best Securities Litigation Article Title: “Kill Bill, Volume 2,” by John Ryan of Lawdragon, an article about the ongoing federal investigation of Bill Lerach and his law firm. Ryan also cracks that “Kill Bill, Volume 1” came in 1995, “when Congress passed what was dubbed the ‘Get Lerach Act,’ aimed at stopping the prolific filing of suits by Milberg Weiss and its star attorney."
Best New Technology Trend: RSS feeds from prosecutors, law firms and others in the securities litigation world that want their information to reach as many people as possible and that are willing to engage in the minimal effort necessary to make that happen. SEC, are you next? Please?
Most Unexpected Comeback: In March 2005, old-school SEC defendant Peter Brant, who was famously convicted of felony securities fraud for insider trading in 1984 (in connection with the R. Foster Winans/“Wall Street Journal” case), got acquainted with this millennium’s SEC when he was sued by the SEC for securities fraud in an unrelated matter.
Most Annoying Comeback: The return of “buried notice,” the practice of burying the notice to class members of a new case required under the Private Securities Litigation Reform Act by publishing it in a place that it is unlikely to be seen by most class members (i.e., someplace other than a national wire such as Business Wire). I thought that this scourge had been killed off last year, but it gained new life in January 2005 when a federal court ruled that publishing notice in a hard copy of the Investor’s Business Daily was sufficient.
Worst Collision of Acronyms: Two very different “SECs”--each having its own commissioner, officials, and investigations--collided in December 2005 when the U.S. Securities and Exchange Commission filed a civil action against a Southeastern Conference basketball official alleging a fraudulent investment scheme. The announcement of the case by the (regulatory) SEC’s commission and officials led to a prompt statement by the (athletic) SEC’s commissioner that the (athletic) SEC official had resigned.
Most Outrageous Case: A Florida investor who lost money in WorldCom stock sued Nasdaq because, he alleged, "advertisements by Nasdaq influenced his decision to purchase more than $600,000 of stock in WorldCom.” The investor says he took Nasdaq's newspaper, TV and Internet marketing as its stamp of approval for companies, including WorldCom, mentioned in the ads. The case currently is pending in federal court in Florida.
Most Staggering Judgment Against an Individual: In August 2005, former Cendant Corp. vice chairman E. Kirk Shelton was ordered to personally pay more than $3.27 billion to Cendant for his role in an accounting scandal, including an initial payment of $15 million and monthly payments of $2,000 per month once he is out of prison. At that pace he will be approximately 135,685 years old when the debt is paid off.
Best Escape From Jury Duty/Worst Physical Coordination: In April 2005, Juror No. 2 in the retrial of former Tyco International executives Dennis Kozlowski and Mark Swartz was dismissed from the case after she fell in a subway station on the way to the courthouse. Again. The judge noted that a day of testimony in the trial already had been lost when that same juror previously fell in the snow.
Best Wisdom by a Securities Regulator: Faced with prolonged bickering and jockeying for the one commissioner’s office (other than his own) that overlooked the Capitol in the SEC’s new D.C. headquarters, then Chairman William Donaldson decided that, in fairness, no one should have it. He turned it into a conference room instead.
Best Cross-Examination Question in a Losing Cause: Asked of prosecution witness and former WorldCom CFO Scott Sullivan at the trial of former CEO Bernie Ebbers:
Q: "You were a member of the board. You had been named CFO of the year. You had cashed in some $30 million in [stock] options, and you felt you had no choice but to interpret Mr. Ebbers's words 'we have to hit the numbers' as a command to go out and commit accounting fraud?"
A: "Yes, that is my testimony."
Ebbers was ultimately convicted of securities fraud and sentenced to 25 years in prison.
And finally… the 2005 Total Consciousness Award (given to those whose “victories” are rewarded not with money or anything of value but rather with, in the words of Caddyshack’s Carl Spackler, “total consciousness” on their deathbed): To Arthur Andersen, which in May 2005 prevailed when the Supreme Court reversed the accounting firm’s 2002 criminal conviction on charges of obstruction of justice in connection with the collapse of Enron. Unfortunately, this reversal came just a tad late to help AA, as the original conviction almost immediately led AA to go out of business and all of its 28,000 employees to lose their jobs. But AA does now have a Supreme Court opinion suitable for framing. And total consciousness. And the 2005 Total Consciousness Award. Which is nice.
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January 4, 2006 |
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Revisiting the Seventh Circle of Lawyer Hell
Way back in December 2003 I posted about the Seventh Circle of Document Review Hell in the context of a nasty discovery dispute in the Kerkorian-DaimlerChrysler trial:
Can it get much worse for the poor souls who were forced to testify about the failure to produce these documents? Is this not the Seventh Circle of Document Review Hell? I suggest the Circles run something like this:
Circle 1. Reviewing corporate M&A documents for litigation. Period.
Circle 2. Reviewing millions of corporate M&A documents for litigation, over a long period of time.
Circle 3. Reviewing millions of corporate M&A documents for litigation, over a long period of time, for a multi-billion dollar case where a momentary lapse in concentration or judgment can have high dollar repercussions and be highly "career limiting."
Circle 4. Same as Circle 3, but also, against staggering odds, the multi-billion dollar case goes to trial and receives international attention.
Circle 5. Same as Circle 4, but also learning in the middle of trial that 60+ pages of "explosive" documents were not produced by your side.
Circle 6. Same as Circle 5, but also learning that the Court has actually suspended the multi-billion dollar trial to hold a special adversarial hearing to determine exactly why the documents were not produced.and finally...
Circle 7. Same as Circle 6, but also learning that you must take the stand to explain, and be aggressively cross-examined on, why the documents were not produced.
Well, if it isn't in the Seventh Circle it's darn close when, as reported earlier today, you are an associate in a big law firm and after working on an acquisition and discussing it in confidence with your live-in boyfriend, you see your boyfriend's name "on a list of individuals who had traded in the stock which had been sent from the NASD as part of its routine market surveillance operations."
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WSJ's Law Blog: Good Stuff
Take a look at what is happening today with the WSJ's new Law Blog. This is exciting stuff and presents a model that should be eye-opening to people in both the mainstream media as well as the blog world.
This morning, blogs and news outlets reported on an interesting insider trading prosecution against a former securities trader who bought stock after learning confidential information about a planned corporate acquisition from his live-in girlfriend, an attorney at a major New York law firm who was working on the transaction. According to this SEC Litigation Release,
[O]n or before July 1, 2004, [Lee] Edelman learned about the acquisition negotiations while living with his girlfriend, an associate at a prominent New York law firm retained by Applied Materials. Edelman was present while the attorney, working in their apartment, reviewed deal documents and discussed the transaction on the phone with colleagues. Edelman used this information to secretly begin acquiring Metron shares beginning on July 1, 2004. Several days later, Edelman’s girlfriend directly told him that she was working on an acquisition of Metron, but cautioned him that he could not use the information for any purpose. Edelman agreed not to misuse the information. Unbeknownst to his girlfriend and despite their agreement, Edelman continued acquiring Metron shares.
All of the blogs and newspapers that I saw pretty much reported the facts above and moved on (although the San Francisco Chronicle threw in the juicy tidbit that shortly after after he betrayed his girlfriend's trust the boyfriend dumped her, to boot)! There was no indication in the earlier reporting as to which law firm was involved nor the circumstances behind the discovery of the trading.
But now into the fray comes the Law Blog. Presumably leveraging the resources of WSJ reporters or at least the WSJ name, the Law Blog threw this post on the fire earlier today:
Weil Gotshal confirmed to us that it represented Applied Materials in that deal and that the unnamed lawyer in the government’s complaint was an associate at their firm. In a prepared statement, a Weil spokesperson said, “Our former associate brought this matter to our attention when she saw Mr. Edelman’s name on a list of individuals who had traded in the stock which had been sent from the NASD as part of its routine market surveillance operations. The Firm and the associate then immediately brought this matter to the attention of the Securities & Exchange Commission.”
In short, the Law Blog model seems to be pretty powerful and the Law Blog apparently has a nice scoop in Day 3 of its existence.
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Thoughts on the Stanford/Cornerstone Report
Stanford University Law School and Cornerstone Research released their Securities Class Action Case Filings report yesterday which showed that the overall number of federal securities class actions filed in 2005 decreased more than 17%, falling from 213 filings to 176. The press release announcing the report includes a great quote from Stanford's Joseph Grundfest, who helps explain the drop by stating that "The pig may have moved through the python." Prof. Grundfest adds that "Two factors are likely responsible for the decline. First, lawsuits arising from the dramatic boom and bust of U.S. equities in the late 1990s and early 2000s are now largely behind us. Second, improved governance in the wake of the Enron and WorldCom frauds may have reduced the actual incidence of fraud." I'll preface this by simply admitting up front that Prof. Grundfest has forgotten more about securities law and securities litigation than I will ever know, but let me play devil's advocate a bit on whether the decline noted in the report is (a) significant, or (b) due to those factors. First, I would suggest that the 2005 decline of 37 cases (17%) does not appear to be historically significant. To the contrary, it appears to be directly in line with the pattern of the last 9 years. Look at the chart on page 3 of the report ("CAF Index -- Number of Class Action Filings"): It shows that since 1997, the number of securities class action filings has gone up and down in a narrow range with pretty amazing consistency: up a bit every even year, down a bit every odd year. Looking at the declines in the odd years, they have been as follows: 1999: down 34 cases (14%) 2001: down 37 cases (17%) 2003: down 45 cases (19%) 2005: down 37 cases (17%) Draw your own conclusion on whether 2005's decline is significant in some way, but I'm personally not seeing any pig through any python. To the contrary, I'm seeing a very consistent number of cases year over year (around 195 plus or minus 15%), which may simply reflect, in the words of MoFo's Jordan Eth, "the speed of Bill Lerach's printing press." Second, while we would all like to hope that improved corporate governance arrived last year in the wake of Enron and WorldCom and reduced the number of filings, it is not at all clear to me that this is the case. Indeed, today I read in this New York Times article that Earnings restatements, for instance, reached a high in 2005, more than 50 percent higher than the previous year. The restatements often involved plain accounting issues, like when to recognize earnings or properly calculate interest accruals. About a quarter of the restatements were related to the failure by companies to follow accounting rules issued more than 30 years ago on how to account for leases. But the numbers suggest that there is more work to be done. Through the end of October, there were 1,031 restatements, compared with 650 for all of 2004 and only 270 in 2001, the year Enron collapsed, according to figures compiled by Glass, Lewis. Turner said he expected the total number to reach about 1,200 restatements for all of 2005. The article adds that this increasing number may be due in part to "the greater vigilance of auditors and the new requirements by the Sarbanes-Oxley Act, which has prompted more than 1,250 companies to report by the end of October that they had material weaknesses in their internal controls, out of a total of around 15,000 public companies." Statistics like these about restatements--which inevitably lead to securities class actions--lead me to conclude that the "false financials" cases are from from being out of the system, and that the corporate governance measures that followed Enron and WorldCom may lead to an increase rather than a decrease in securities class actions over the next few years.
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