Each year the president of the United States provides the nation with a “State of the Union” address that provides an update on the status of our country. Given the many recent developments, industry reports and high-profile cases that have resulted in a flurry of discussion concerning the health, status and future of securities class action litigation, I offer this State of the Union for securities litigation:

It’s about the same as it’s been for the last 10 years.

At least that’s how I see it, despite some curious media pronouncements this year about the supposed demise (or at least the supposed decline) of securities litigation.

Already in 2006, Stanford University/Cornerstone Research, NERA Economic Consulting, and PricewaterhouseCoopers have published interesting studies presenting securities litigation statistics and analysis of possible trends. These studies, combined with notable events such as the high-profile settlements in the Enron case, as well as the criminal indictment of powerhouse plaintiffs’ law firm Milberg Weiss Bershad & Schulman, have provided the press and pundits with numerous opportunities to opine on where securities litigation is headed.

The January 2006 Stanford/Cornerstone report got the ball rolling when it showed that in 2005, new case filings dropped 17%, (from 213 new cases in 2004 to 175). Articles in The Wall Street Journal and New York Times covered the release of this report by describing the “steep drop” or “sharp decline” in securities class actions in 2005, and pondered the possible causes, from the success of Sarbanes-Oxley to the end of the dot-com line of cases.

In fact, however, there was no “steep drop” or “sharp decline” in cases in 2005. Viewed in context, the 2005 decline of 37 cases (17%) simply does not appear to be historically significant. To the contrary, it is directly in line with the pattern of the last 9 years. Looking at the fluctuation of the number of cases filed through the years as shown in the same Stanford/Cornerstone report, this becomes quite clear. A chart copied from that report (see below) shows that since 1997, the number of securities class action filings has gone up and down in a narrow range with amazing consistency: up a bit every even year, down a bit every odd year.

The NERA Economic Consulting study, which was published in April 2006, similarly found that the number of federal filings in 2005 declined to its lowest point since 1997. It concluded, however, that “it is far too early to conclude that there is a downward trend.” The study’s statistical testing confirmed what a glance at the chart above also shows—that “the 2005 dip is not statistically different from either the post-PSLRA average or from a longer-term trend.” Interestingly, NERA also clarified that almost all of the difference between the 2004 and 2005 totals was accounted for by an unexplained drop in filings in the Ninth Circuit, and it concluded that the most likely explanation for the drop in 2005 was simply random year-to-year variation.

The NERA study contained another statistic, however, that generated its own measure of confusion. The study noted that “dismissal rates have doubled since PSLRA” became effective in 1996, stating that “dismissals accounted for only 19.4% of dispositions for cases filed between 1991 and 1995. More recently, for cases filed between 1998 and 2003, dismissals have accounted for 40.3% of dispositions.” The report explained, though, that “there is no indication that dismissal rates have continued to rise after an initial adjustment to the tougher pleading requirements of PSLRA.” In other words, nothing has changed in terms of dismissal rates since approximately 1998.

Notwithstanding that fact, a newsletter called “Agenda” wrote in late May 2006 that securities class actions have begun to “dry up,” citing both the lower number of cases in 2005 and the increase in the number of securities class actions that have been dismissed in recent years. Indeed, more than 40% of the securities class actions filed between 1998 and 2003 were dismissed, according to a study issued last month by NERA Economic Consulting. That's more than double the number of cases filed in the four-year period from 1991 to 1995 that were dismissed.

Again, viewed in context, neither the number of cases in 2005 nor the NERA dismissal statistics support the argument that securities class actions have recently “dried up” in any meaningful way—the number of cases is roughly what it has been since 1997 and the dismissal rate is, according to NERA, the same as it has been since 1998.

Other recent events that, while noteworthy, do not seem to signal any dramatic change in the securities litigation landscape include the Enron settlement and the indictment of law firm Milberg Weiss. While the approval of the Enron settlement in May prompted some to assume that the settlement symbolized the end of the line for big securities settlements, this does not appear to be the case. Indeed, the ISS Settlement Pipeline, which measures the sum of all pending or tentatively announced settlements for which the claim deadline has not passed, currently stands at a massive $14.9 billion and includes significant cases such as Nortel Networks ($2.7 billion), Royal Ahold ($1.1 billion), and the IPO Securities Litigation (currently $1 billion and possibly much more). Indeed, including SEC settlements, there are currently 20 settlements in the pipeline valued at over $100 million.

With respect to Milberg Weiss, it seems clearer by the day that even if the firm’s practice is diminished or destroyed altogether by the indictment, there will not be a significant impact on securities class actions generally. There are far too many competent plaintiffs’ law firms out there that will gladly fill any void that may be created. It also appears that to the extent Milberg Weiss is losing any lawyers, it is because these lawyers are being recruited away by competitors, where they will promptly resume their securities class action practices.

One thing that has changed markedly in the securities class action world is the size of settlements. The recent PwC 2005 Securities Litigation Study showed that the average settlement of a securities class action soared to $71.1 million in 2005, a 156% increase from the $27.8 million average in 2004. Notably, these numbers exclude the mega-settlements in the historic WorldCom and Enron cases.

As PwC notes, the reasons for this surge likely include the success of plaintiffs in involving third parties such as investment banks, accountants, and law firms as defendants in these cases, as well as the huge “theoretical economic damages” present in cases involving companies with large market capitalizations and huge stock drops. Other reasons may include the impact of large pension funds serving as lead plaintiffs, and the phenomenon that each new high dollar settlement sets the bar a bit higher, encouraging plaintiffs to demand more money in settlements (and arguably contributing to a recent surge in the number of trials occurring in securities class action cases).

In short, the State of Securities Litigation in 2005 looked a lot like it did in 2004 … and 2003 … and 2002… and so on. Just with bigger numbers.

Thursday, June 15, 2006

Weil, Gotshal & Manges' "2005 Securities Litigation Survey"

Load up the printer with 133 sheets of paper and print yourself a copy of Weil, Gotshal & Manges' 2005 Securities Litigation Survey.  The Survey provides an excellent and quite thorough review of recent securities litigation decisions, broken down by topic and circuit, and should be quite helpful to lawyers practicing in this area.

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Wednesday, June 14, 2006

Litigation About Litigation, Part II

It seemed the "litigation about litigation" trend that I thought I spotted and posted about last summer had run out of steam ... but wait!  What's this?  Justin Scheck of the The Recorder writes in this article that "a group of plaintiffs lawyers is being sued in L.A. federal court for breaching their fiduciary duty -- to a company whose board they were suing."

The article notes that the new case

grows out of long-running securities litigation against Tenet Healthcare, and the competing state and federal derivative suits against the Tenet board of directors that were filed on its heels.

Lawyers from the Arkansas plaintiff firm Cauley, Bowman, Carney & Williams filed a derivative suit in federal court around the same time a separate group of plaintiffs filed parallel state court claims.

That, Cauley lawyers argue, let Tenet's board, and its lawyers with Skadden, Arps, Slate, Meagher & Flom, engage in what plaintiffs lawyers call a reverse auction: a situation in which a defendant facing competing suits chooses to settle with the plaintiff asking for the smallest recovery, killing the costlier parallel claims.

In a complaint filed late last month in L.A. federal court, Cauley partner Joseph (Hank) Bates III says that after spending two years litigating derivative claims in federal court -- and even having detailed settlement talks -- Tenet decided the federal plaintiff's demands were too high, and turned to the state plaintiff, who quickly settled the case.

That deal jettisoned the federal suit, and resulted in $5 million in attorney fees for the plaintiffs firms Faruqi & Faruqi and Robbins Umeda & Fink.

This left the Cauley lawyers irate.

And these "irate" Cauley lawyers reportedly then sued the plaintiffs' lawyers that settled the state case.  So add this case to the pile of "litigation about litigation" cases we started collecting last summer.

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Tuesday, September 6, 2005

Don't Mess With Judge Walton

The PSLRA Nugget flags the interesting securities litigation opinion from Judge Reggie B. Walton of the U.S. District Court for the District of D.C. (Burman v. Phoenix Worldwide Industries, August 30, 2005). The opinion is interesting not for any securities-related reason but rather because of Judge Walton's Footnote 1, in which he expresses his displeasure for the type of condescending and simply unnecessary "argument" that is all-too-common in litigation today:

....Based upon the papers thus far submitted to this Court, it is clear that this is a highly contentious litigation. Despite the apparent animosity between the parties, counsel are reminded that they are expected to treat each other, and every other individual involved in this litigation, with "dignity, respect and civility, both in court and in out-of-court conference, meeting and discovery proceedings." Judge Walton's General Order and Guidelines for Civil Cases at 1, available at http:// www.dcd.uscourts.gov/rbw-general-civil-order.pdf. This includes civility in the papers submitted to this Court. The papers submitted by the defendants do not demonstrate the dignity and respect the Court expects of litigants appearing before it. See, e.g., Def.'s Reply at 7 ("Defendants agree that a review of the Amended Complaint is a 'painstaking' endeavor."); 18 ("If Plaintiffs do not appear to understand their own claims, how can Defendants?"); 29 ("Defendants are not obligated to teach Plaintiffs how to properly plead their complaint. However, we will give Plaintiffs a clue."). Such condescending invectives do nothing to advance a party's position. As members of the Bar, counsel surely know how to vigorously advance their respective party's position without being disrespectful or mean spirited. The Court will look with disfavor on any further circumstances that warrant such a reminder, and if warranted, will take appropriate action to sanction such behavior.

Amen to that. I'm sure the timing is coincidental, but check out the article cited in this August 31, 2005 post by Evan Schaeffer on this very point. Schaeffer writes:

Step #3 Adopt the Right Tone

It's at this point that many veer wildly off course.

Tone can be defined as the underlying attitude we take towards our opponent and our opponent's arguments. This attitude isn't explicitly spelled out, but shows through the fabric of our legal arguments.

Tone comes in all varieties—objective, respectful, or professional on the one hand; condescending, self-righteous, or bitter on the other.

Too often we pull out all our guns and attack, either rudely mocking the arguments of opposing counsel, or even worse, rudely mocking opposing counsel.

This approach seems to add an extra oomph to the force of our legal argument.

Yet all too often, what actually happens is that we alienate the reader—that is, the court. An angry, defiant tone just doesn't add a lot. Ever met someone whose response to every difficult situation is a sarcastic retort? Amusing for a few minutes, but then listeners get bored or disgusted, and want to leave the room.

Remember: The judge already knows you disagree with your opponent's position.

Begin by rationally stating why you disagree. An objective, reasonable tone is usually the most persuasive.

So kudos to Judge Walton for attempting to preserve civility in his courtroom and for reinforcing that angry sarcasm is almost never a persuasive or appropriate tone for legal argument.

By the way, this is the same Judge Walton who earlier in August was written up in this Washington Post article for single-handedly stopping an assault he witnessed in a DC traffic circle while driving his family to the airport. The 56-year-old judge reportedly wrestled another man's attacker to the ground and subdued him until the police came.  Police spokesman Kenny Bryson was quoted in the article as saying "God bless Judge Walton. I surely wouldn't want to mess with him. He's really to be commended for jumping in."

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Thursday, June 23, 2005

Should In-House Counsel's VP Title Cause Waiver of Privilege?, Part II

Corporate Counsel has this article updating the train wreck that we posted about back in June 2004, i.e., the excruciating scenario still playing out in Jasmine Networks v. Marvell Semiconductor.  As we stated back in June,

The case stems from the following lawyer-nightmare scenario, which I think blows right by the Seventh Circle of Document Review Hell in terms of sheer lawyer anguish: Three Marvell employees--Marvell's general counsel; its VP of engineering, and in-house patent attorney--gathered to call a person at Jasmine, a company with which Marvell was negotiating to purchase some technology. Using a speakerphone, the three left a message on the Jasmine employee's voicemail. However, after leaving the initial message, they failed to hang up the speakerphone, and proceeded to have a conversation that also was recorded on the voicemail.

To put the inadvertently left message in context, Marvell and Jasmine had entered into a nondisclosure agreement that protected the secrecy of Jasmine's trade secrets and employee information. To that end, Marvell was given an opportunity to look at the trade secret information, but not to remove it. Patent disclosures, among the most important of Jasmine's intellectual property, could be reviewed but not copied. Enough was to be shown Marvell to demonstrate the value without disclosing the secret. As summarized by the California Court of Appeals (Sixth District), the contents of the inadvertent voicemail "demonstrate[d] the theft of Jasmine's trade secret, the potential consequences and the planned cover up." 

Ouch. 

According to the article, the California Supreme Court has now agreed to review the case, and Marvell and Jasmine are currently preparing their briefs.  The key legal issue appears to be that the lower appeals court held that because the general counsel also held the title of vice president and was an officer of the company, the fact that Marvell did not intend to waive the privilege through the inadvertent disclosure was immaterial.  Groups like the Association of Corporate Counsel are concerned (and have submitted this amicus curiae letter), and argue that the opinion, "if left standing, means that an in-house lawyer who is providing legal services, but who does so with a corporate title (such as 'vice president') attached to his business card, can inadvertently waive the privilege, contrary to the rule for all other attorneys."

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Monday, May 16, 2005

The Morgan Stanley Email Fiasco

The WSJ has this very timely article in today's edition breaking down the three-ring-circus that was Morgan Stanley's effort to collect and produce responsive emails to Ronald Perelman in Perelman's high-profile lawsuit against MS. 

The WSJ article has a very detailed account of MS' travails, which reportedly included repeated discovery of additional backup tapes that might include responsive emails.  At one point MS "unearthed 1,423 computer-backup tapes in a closet in a Brooklyn office building."   Later, MS found 129 more tapes sitting on a metal shelf in one of its midtown Manhattan offices.

MS encountered plenty of other problems that the article lays out in detail.  The WSJ article notes that ultimately, the judge became so dissatisfied with MS' response that she ruled that its actions were in "bad faith" and that the jury could simply assume the MS helped defraud Perleman:

...Judge Maass issued a partial default judgment against Morgan Stanley, essentially handing an automatic loss to the Wall Street firm, because "the [discovery] abuses have continued unabated." The judge said she would instruct the jury to assume that the firm had helped defraud Mr. Perelman.

"The prejudice to [Mr. Perelman's side] from these failings cannot be cured," she wrote. "The judicial system cannot function this way."

Judge Maass stopped short of granting the default judgment in full. She ruled Mr. Perelman must prove he lost money on the transaction and that he relied on information provided by Morgan Stanley or Sunbeam in making his investment.

When the trial opened in early April, Judge Maass read the nine-person jury a lengthy statement, saying, in part: "Morgan Stanley participated in a scheme to mislead [Coleman] and others and cover up the massive fraud at Sunbeam until Morgan Stanley and Sunbeam could close the purchase of Coleman."

Not surprisingly, the jury appears to have found the judge's instruction pretty persuasive:  Bloomberg reports that this afternoon, a Florida state jury awarded Perelman $604.3 million in compensatory damages on his claims that Morgan Stanley defrauded him as part of the 1998 sale of his controlling stake in Coleman Co. to Sunbeam Corp.  Next the jury must decide whether to award punitive damages.

MS issued a statement this afternoon vowing to appeal:

"The verdict, while disappointing, is not surprising, given the unprecedented and highly prejudicial rulings imposed by the trial judge," the company said in a statement. "Morgan Stanley was not permitted to defend itself on the merits. As a result, the jury heard allegations, instead of true facts, and Morgan Stanley was denied a fair trial. Far from being part of the Sunbeam fraud, Morgan Stanley was a victim of that fraud, losing $300 million when Sunbeam collapsed, one of the many true facts that the jury was not allowed to hear."

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Wednesday, April 13, 2005

Kerkorian-DaimlerChrysler Update VII: Charities Receive Total Consciousness

Our eyes were moist as we read this article from the Las Vegas Sun.  According to Kerkorian's attorney, if Kerkorian had prevailed in his billion-dollar claim against DaimlerChrysler, he planned to give the money to charity.  His defeat, however, apparently means that the charities, like Kerkorian, will receive only total consciousness as a result of the case.

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Monday, April 11, 2005

Kerkorian-DaimlerChrysler Update VI: Kerkorian Receives Total Consciousness

Caddyshack (1980)

Carl Spackler: So I jump ship in Hong Kong and make my way over to Tibet, and I get on as a looper at a course over in the Himalayas. A looper, you know, a caddy, a looper, a jock. So, I tell them I'm a pro jock, and who do you think they give me? The Dalai Lama, himself. Twelfth son of the Lama. The flowing robes, the grace, bald... striking. So, I'm on the first tee with him. I give him the driver. He hauls off and whacks one - big hitter, the Lama - long, into a ten-thousand foot crevasse, right at the base of this glacier. Do you know what the Lama says? Gunga galunga... gunga, gunga-galunga. So we finish the eighteenth and he's gonna stiff me. And I say, "Hey, Lama, hey, how about a little something, you know, for the effort, you know." And he says, "Oh, uh, there won't be any money, but when you die, on your deathbed, you will receive total consciousness." So I got that goin' for me, which is nice.

Back in 2003-2004, we followed the Kerkorian-DaimlerChrysler lawsuit for months, from the Seventh Circle of Document Review Hell to the post-trial festivities.  Then, for over a year, we waited in vain by the Business Wire to learn the Court's ruling.  Finally giving in to the reality that "a watched Business Wire never boils," we reluctantly agreed to leave our post momentarily for needed medical attention, and awoke from general anesthesia to learn that it was all over:  the AP reports that on Thursday, Judge Farnan ruled in DaimlerChrysler's favor, rejecting Kerkorian's $1 billion claim that DaimlerChrysler falsely labeled it's combination with Chrysler Corp. as a "merger of equals."

An attorney for Kerkorian reportedly acknowledged that Kerkorian's company Tracinda was "clearly disappointed" with the judgment, but added that "we are pleased that other DaimlerChrysler shareholders who followed Tracinda's lead and filed lawsuits based on our exact claims and key discovery were successful in reaching a settlement with DaimlerChrysler."  In other words, "total consciousness" for Kerkorian.

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Tuesday, 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.

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Wednesday, February 25, 2004

Martha Stewart Goes All In

As they say in No Limit Texas Hold 'em poker, Martha Stewart and her attorneys are going "all in" on their bet that the government has failed to prove its case against her. According to numerous reports such as this one in the New York Daily News, Stewart will not testify and will put on only one defense witness and a handful of documents later today. Her lawyer, Robert Morvillo, estimates her defense will take about 15 minutes, or as the Daily News's Greg Smith puts it in his article, "the same amount of time the diva recommends letting a German Chocolate Inside-Out Cake cool after baking."

In another article in the Washington Post, former federal prosecutor Jacob S. Frenkel summed up the situation well by stating that "the defense lawyers will be heroes if their clients are acquitted and will be second-guessed for a long time if their clients are convicted."

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Thursday, February 12, 2004

Kerkorian-DaimlerChrysler Update V: Trial Concludes, Post-Trial Festivities Begin

Two and a half months after it started on December 1, 2003, the trial in the case filed by Tracinda Corp. against DaimlerChrysler finally came to an end yesterday in the U.S. District Court for the District of Delaware. The trial itself only consumed 13 days in court, but dragged on for several months because of a 7 week stay that resulted from the late production of certain documents (last discussed here).

Sarah A. Webster of The Detroit Free Press has this detailed article summarizing the conclusion of the trial and where the case may go from here. Some highlights from the article:

--The parties have collectively spent over $50 million litigating this case.

--U.S. District Judge Joseph J. Farnan Jr., who will decide the case in lieu of a jury, requested closing briefs instead of closing arguments. Both sides said they expect to submit briefs in about 90 days. Judge Farnan's decision is not expected until at least May 2004, after which an appeal by the losing party is likely.

--Daniel Fischel, a professor at the University of Chicago law school, testified as an expert witness on behalf of DaimlerChrysler that "this merger was a godsend for Chrysler and its shareholders.... I believe damages are zero." Fischel testified that he himself accumulated at least $800,000 in bills for his work in the case.

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Tuesday, January 27, 2004

WorldCom Bankruptcy Examiner Issues Third and Final Report

The law firm Kirkpatrick & Lockhart LLP, counsel to the Examiner in the WorldCom bankruptcy proceedings, filed its Third and Final Report [NOTE: Large (542 page) PDF file] with the U.S. Bankruptcy Court for the Southern District of New York today. K&L's First Interim Report filed November 4, 2002 and Second Interim Report filed on June 9, 2003 also are available.

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Wednesday, January 21, 2004

"What About the High Blood Pressure," Part III

Since August 2003 we've been following the plight of one Anthony Amodio and his unusual case against Citigroup (last discussed here) alleging the Florida tort of "outrage," which appears to be a variation of intentional infliction of emotional distress. According to the original article in the Miami Herald, "Anthony Amodio's lawsuit against the nation's largest bank alleges that he is penniless and has heart problems because he was advised to keep his 23,820 shares of WorldCom stock, amid claims that the share price would climb to $150, even when it was valued in April 2002 at only $7." The article noted that Amodio now allegedly suffers from high blood pressure, anxiety attacks and mental and physical stress that make it impossible for him to return to work, and his lawsuit reportedly asks for the $2 million lost, plus interest, attorney fees and unspecified damages for pain and suffering. In support of his claims, Amodio sought to depose former WorldCom Chief Executive Bernard Ebbers, Citigroup Chairman Sanford Weill and its former telecom analyst, Jack Grubman.

A few weeks later, an article in the Miami Daily Business Review stated that after being told that at least one prominent securities defense attorney found the claim laughable, Amodio'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."

So, where do things stand? Has Amodio laughed last? Not yet. To the contrary, the docket sheet indicates that Citigroup has pretty effectively tied Amodio's case up in knots by (1) removing the case to federal court; (2) moving to compel arbitration; and (3) opposing his motion to amend the complaint. Moreover, the docket entry for October 29, 2003, indicates that Amodio's deposition notices optimistically scheduling the depositions of Ebbers, Weill and Grubman for Nov. 4, 5 and 6, 2003 were "cancelled." Undaunted, on November 4, 2003, Amodio caused a summons to be issued for Scott Sullivan. By all accounts, however, Mr. Sullivan is quite busy at this time and will not likely be meeting with Amodio any time soon.

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Thursday, January 15, 2004

SDNY Dismisses Complaint Alleging Retaliatory Withdrawal of Analyst Coverage

On January 9, 2004, Judge Duffy of the SDNY dismissed Antigenics Inc.'s complaint (Case No. 03 Civ. 0971(RCC)) against U.S. Bancorp Piper Jaffray ("Piper Jaffray"), an unusual case alleging retaliatory withdrawal of research analyst coverage by Piper Jaffray. Antigenics alleged that after it declined to use Piper Jaffray as lead underwriter on its secondary offering (because Piper Jaffray said it could not complete the offering in the desired time frame), Piper Jaffray threatened to, and then did, drop their analyst coverage of Antigenics and stopped making a market in Antigenics stock. The Complaint alleged that Piper Jaffray employees stated on multiple occasions that such a course of action was necessary to "teach their clients a lesson" or to "send a message to other clients."

According to the Complaint, Piper Jaffray subsequently released a public statement stating: "Research Coverage Discontinued. We are discontinuing coverage of Antigenics, Inc. [ ] Our last published rating was Strong Buy." No reason for the discontinuation was stated in the press release.

Antigenics claimed that Piper Jaffray's conduct "caused certain investors--some of whom were contacted by Piper Jaffray directly--to cancel orders making up nearly 25% of the offering; that this cancellation caused a decline in the price of the offering; and that an option which permitted an increase in the number of shares to be offered was not exercised because of the damage done to the market by Piper Jaffray."

Antigenics sued Piper Jaffray for, among other things, violation of Section 10(b) of the Exchange Act, alleging that "the cessation of analyst coverage of Antigenics by Piper Jaffray without disclosing their illicit intentions manipulated the interest in the offering and the market price of the stock." The Court rejected this claim, however. First, the Court found that Piper Jaffray's ""Research Coverage Discontinued..." statement was not a material misstatement, as it was "literally accurate and remains so in both its context and presentation. As such, it is improbable, if not impossible, that this statement would mislead investors."

Second, the Court found that an omission of material information had not been pleaded:

Antigenics has not shown that Piper Jaffray was under an obligation to explain the reasons why they dropped analyst coverage. Although Antigenics argues that the defendants breached "contractual" and "fiduciary" duties, they fail to provide any foundation as to how such duties were established. Without such a duty, Piper Jaffray was in no different a position than any other firm providing analyst coverage. Moreover, even if such a "contractual" or "fiduciary" relationship existed, these allegations would still not constitute a claim under 10b-5. The damage alleged does not arise from "manipulative or deceptive" conduct but rather from some additional duty placed on the defendants. Since the plaintiff has insufficiently pleaded securities fraud under Rule 10b-5, the claim is dismissed. (Citations omitted).

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Monday, January 12, 2004

Looking Ahead: What's in Store for 2004

The following article appeared in the January 2004 edition of ISS's SCAS Alert:

Looking Ahead: What's in Store for 2004
By Bruce Carton, Executive Director

2003 was a particularly interesting year in the world of securities litigation and enforcement, with many notable events and trends: the ever-growing mutual fund scandal, which has already spawned criminal, SEC, and private litigation; the research analyst cases, which resulted in huge SEC settlements and, more recently, court dismissals of private litigation; the initial billion-dollar settlement in the initial public offering securities litigation; the developing trends of "institutional opt-outs" and settlements demanding corporate governance reforms; and much more.

ISS's Securities Class Action Services has analyzed these developments in 2003 for our clients. Here's what we see on the horizon for 2004:

Kerkorian-DaimlerChrysler Trial. As a general rule, billion-dollar securities fraud cases simply do not make it to trial. But somehow this one has -- all the way to trial in federal court in Delaware. Billionaire Kirk Kerkorian alleges that the union of Daimler-Benz and Chrysler was not the "merger of equals" it was said to be. Several days into the trial, which began in December 2003, Kerkorian announced after being cross-examined by DaimlerChrysler's lawyers that the dispute had grown "personal" and that he would never settle. On Dec. 16, the trial took another bizarre turn when the court indefinitely suspended the proceedings while it tried to get to the bottom of a mid-trial production by DaimlerChrysler to Kerkorian of 61 pages of documents that his lawyers said were critically important. DaimlerChrysler's lawyers said the failure to produce the documents was inadvertent. The trial is expected to resume in January.

Resolution of the WorldCom Civil Matters. WorldCom's massive $750 million settlement with the SEC should be finalized and distributed to investors next year. That hardly closes the book on the civil side of the WorldCom saga, however. Still outstanding are the securities class actions filed in federal court in New York and the related individual actions filed by many "opt-out" plaintiffs against the company, its executives, investment banks, and others. The losses in these cases are staggering. To the extent a settlement or judgment can be obtained in 2004, it will likely be of historic proportions.

Criminal Trials for Top Corporate Executives. Many have complained about the lack of criminal prosecutions of high-profile executives following the corporate scandals of the past few years. That should end in 2004, with criminal trials already slated for Tyco's Dennis Kozlowki, HealthSouth's Richard Scrushy, Martha Stewart Living Omnimedia's Martha Stewart, Adelphia Communications Corp.'s John Rigas, Enron's Andrew Fastow, and WorldCom's Scott Sullivan.

Sarbanes-Oxley Act Enforcement. The case against Richard Scrushy, scheduled for trial in 2004, is reportedly the first criminal prosecution under the Sarbanes-Oxley Act (SOX). Expect to see much more SOX enforcement in 2004, as prosecutors and the SEC start to line up "false certification" cases. The SEC also will likely begin enforcement of other provisions of SOX as long-looming SOX deadlines arrive in 2004. These include new strict requirements for corporate audit committees and for management disclosures concerning internal controls over financial reporting.

CalPERS vs. NYSE. On Dec. 16, 2003, the California Public Employees Retirement System (CalPERS) launched a putative class action alleging that fraudulent trading practices by the New York Stock Exchange (NYSE) and seven specialist trading firms had cost it millions of dollars in recent years. Everything about the case is massive: the potential class is every investor who purchased or sold shares of publicly traded companies listed on the NYSE over the five-year period between Oct. 17, 1998, and Oct. 15, 2003; CalPERS, with $154 billion in assets, is the 800-pound gorilla of pension funds; CalPERS' chosen counsel, Milberg Weiss Bershad Hynes & Lerach LLP, is itself an undisputed heavyweight in the class-action bar, and there is no doubt that the NYSE will respond with comparable legal firepower. It should be fascinating to watch this case unfold in 2004.

2004 already looks like it will be an interesting, eventful year in the securities litigation and enforcement arena, and Securities Class Action Services will be there to follow it. We thank all of our clients for a terrific 2003 and wish you a prosperous New Year.

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Friday, January 2, 2004

SDNY Rules Wells Submissions Discoverable in Civil Litigation

In an Order dated December 24, 2003, Judge Scheindlin of the SDNY ordered the Underwriter Defendants in the IPO Securities Litigation to produce their Wells submissions (submitted years ago to the SEC in connection with the SEC's investigation into IPO allocation and IPO commission practices) to plaintiffs on or before January 20, 2004. The Underwriters argued that the Wells submissions were settlement materials, discovery of which required a "particularized showing of relevance that Plaintiffs cannot satisfy." The Court disagreed, finding that

Offers of settlement, however, are not intrinsically part of Wells submissions, which were intended to be "memoranda to the SEC presenting arguments why an enforcement proceeding should not be brought." To the extent that a respondent may make a settlement offer, that offer is typically clearly identified and thus easily severable from the remainder of the submission. In short, Wells submissions are not in themselves settlement material, although they may sometimes contain offers of settlement. (Citations omitted)

The Court held that "Wells submissions, regardless of whether they contain settlement materials under Rule 408, are discoverable so long as they (1) are admissible, because they are relevant to a claim or defense, or (2) will reasonably lead to the discovery of admissible evidence." The Court then concluded that here,

plaintiffs point out--and the Court's in camera review confirms--that the Wells submissions are relevant to: "(i) how the defendants allocated IPO shares; (ii) the participation of senior management in the allocation practices; (iii) the awareness of senior management with respect to those practices and what, if anything, defendants' compliance personnel did in response to such knowledge; and (iv) the [alleged] unlawful quid pro quo extracted by the defendants in return for IPO allocations."

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Tuesday, December 23, 2003

Kerkorian-DaimlerChrysler Update III: The Seventh Circle of Document Review Hell

The New York Times has this article offering an account of Monday's special hearing in the Kerkorian-DaimlerChrysler trial to determine why certain supposedly "explosive" documents were not produced by DaimlerChrysler until midway through the trial. According to the article,

During the proceedings Monday, Skadden lawyers had to take the stand as witnesses, carefully skirting questions that could possibly lead them to weaken the privilege that protects confidences that their client had shared. They tried to explain how it was that the notes were not turned over to the other side during the evidence-gathering stage of the trial, called discovery.

Skadden lawyers were in the awkward position of answering questions put to them by their colleagues, who tried to make clear that the failure to provide the notes was an innocent mistake, and not one made by the law firm.

The article states that Kerkorian's lawyers posed aggressive questions, "with meticulous and painstaking attention to detail," in an effort to show that it was unlikely that such documents were inadvertently left out. Skadden insisted that the failure to produce the documents was an innocent mistake, however, and one Skadden partner reportedly "attributed some blame to companies responsible for photocopying documents from DaimlerChrysler."

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.

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Fourth Circuit Finally Addresses PSLRA Scienter Standards

Yesterday, the Fourth Circuit issued its opinion in Ottmann v. Hanger Orthopedic Group, Inc. (4th Cir, Dec. 22, 2003), in which it finally addressed lingering questions concerning its interpretation of the standards for scienter under the PSLRA. A copy of the opinion is available here.

The Court first stated that although every circuit that has considered the issue has held that scienter may be established by a showing of recklessness (citing cases from the 2nd, 3rd, 5th, 6th, 7th, 8th, 10th and 11th Circuits), neither the Fourth Circuit nor the Supreme Court had addressed this particular question. The Court noted that previously, in Phillips v. LCI Int'l, Inc., 190 F.3d 609, 620 (4th Cir.1999), it had noted only that scienter "may perhaps be shown by recklessness." The Court concluded that it "agree[d] with our sister circuits that a securities fraud plaintiff may allege scienter by pleading not only intentional misconduct, but also recklessness."

The Court also addressed the role of "motive and opportunity" in establishing the required "strong inference" of scienter. The Court held that:

We agree that a flexible, case-specific analysis is appropriate in examining scienter pleadings. Both the absence of any statutory language addressing particular methods of pleading and the inconclusive legislative history regarding the adoption of Second Circuit pleading standards indicate that Congress ultimately chose not to specify particular types of facts that would or would not show a strong inference of scienter. We therefore conclude that courts should not restrict their scienter inquiry by focusing on specific categories of facts, such as those relating to motive and opportunity, but instead should examine all of the allegations in each case to determine whether they collectively establish a strong inference of scienter. And, while particular facts demonstrating a motive and opportunity to commit fraud (or lack of such facts) may be relevant to the scienter inquiry, the weight accorded to those facts should depend on the circumstances of each case.

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Tuesday, December 16, 2003

Kerkorian-DaimlerChrysler Update II ... and a Question

More details on today's craziness in the Kerkorian-DaimlerChrysler trial are emerging. According to this Reuters article, Judge Farnan has now indefinitely suspended the trial while the special master rules on why evidence that is "potentially favorable" to Kerkorian was only made available at the last minute. The hearing will be held next Monday at 8:30 a.m. EST. The article states that according to Michael Schell, a Daimler attorney, the trial is unlikely to resume until sometime next year.

According to the article, Kerkorian's lead attorney, Terry Christensen, said the newly-produced evidence put the testimony of all previous witnesses in a different light: "We have just gone through two years of active discovery and two weeks of trial, your honor," Christensen told Farnan. "These notes were sitting there in Auburn Hills (Chrysler's headquarters) the whole time with a road map to what went on and a road map to what they actually were trying to accomplish." Christensen also reportedly stated that he had never known of a case in which potentially pivotal evidence was produced at such a late stage.

The documents at issue are reportedly 61 pages of documents, including some unidentified handwritten notes, that came from former Chrysler Chief Financial Officer Gary Valade. The article states that the documents were presented by Valade to a DaimlerChrysler attorney on Monday during a flight from Detroit to Wilmington, and subsequently given to Kerkorian attorneys at about 11:40 p.m. EST on Monday.

According to this updated AP article, a DaimlerChrysler attorney told the judge that it appeared the notes were overlooked in the huge volume of documents company attorneys provided to Kerkorian's lawyers, and that Valade was not at fault.

Today's developments raise several interesting questions, including the following: Assuming these documents prove to be the "favorable," "pivotal," "road map" suggested in the articles above, what effect, if any, will this have on the separate class action against DaimlerChrysler, recently settled for $300 million and awaiting final approval by Judge Kent A. Jordan, also of the U.S. District Court for the District of Delaware?

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Kerkorian-DaimlerChrysler Update: Kerkorian Seeks Default Judgment Because of Discovery Violations

The Kerkorian-DaimlerChrysler trial reportedly took a bizarre turn today as lawyers for Kerkorian asked the Court to award him a default judgment after attorneys for DaimlerChrysler turned over documents favorable to Kerkorian at the last minute. According this article from the AP,

Kerkorian attorney Terry Christensen told Judge Joseph Farnan Jr. that they had received 61 pages of handwritten notes from a former Chrysler executive about midnight Monday that seem support Kerkorian's claim that he was duped into believing the deal between Daimler-Benz and Chrysler was a merger of equals.

***

Christensen said the defendants had more than two years to turn over the documents, which refer to negotiations between Daimler-Benz and Chrysler.

Christensen highlighted passages in the notes which included phrases such as ``sell out for profit,'' ``why didn't we buy?'' and ``senior management sold out'' that appear to support Kerkorian's case, although it was unclear who wrote those passages.

``We are shocked,'' Christensen said. ``None of us have ever seen this before ... These defendants have defaulted on their obligation to the court.''

Judge Farnan reportedly ordered a recess to review and consider the documents, and stated that "I don't think anybody would disagree that this is a serious issue....I'm having a hard time right now knowing what the documents might reveal.'' The judge also reportedly ordered that a special master for the court will hold a hearing to determine "how we got in this mess," although it is unclear when the special master will hold the hearing or how long it will take.

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Monday, December 8, 2003

Martha Stewart's Lawyers Win Battle to Depose SEC Staff But May Lose War

In the civil litigation related to Martha Stewart's alleged insider trading, Stewart's attorneys have been pressing to take the depositions of two SEC lawyers who reportedly conducted investigative interviews with former Merrill Lynch broker Peter Bacanovic and his assistant, Douglas Faneuil, about Stewart's sale of ImClone stock a day before the company announced bad news.

According to this article in the Dow Jones Business News, the SEC sought relief from the Court that would have permitted its staff to ignore the subpoenas for deposition testimony. The SEC argued that its rules bar employees from testifying about confidential matters without authorization, and that the Commission was withholding such permission. The SEC argued that this decision was "neither arbitrary nor capricious." The SEC also argued that the staff attorneys involved would be trying the SEC's case against Stewart, and compelling these attorneys to testify could interfere with their trial preparations and give Stewart's lawyers insight into their thinking and strategies.

The Washington Post reports that on December 5, Judge Sprizzo of the SDNY ruled against the SEC, finding that the two SEC attorneys had no legal right to ignore subpoenas from Stewart's defense team and were required to appear for depositions. According to an article in Newsday, the Court stated that "nobody has a right not to appear ... even the president of the United States can't resist a subpoena."

The AP reports that Judge Sprizzo acknowledged that the SEC lawyers could assert claims of government privilege in response to individual questions from Stewart's lawyers, but cautioned the SEC that he may not permit an across the board assertion of privilege. "I'm saying your agency ought to get smart," he told an SEC lawyer. "Your agency ought to abide by the civil rules instead of making these blunderbuss assertions."

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Monday, December 1, 2003

FBW vs. E&Y: GAAP Violations Alone Do Not Establish Scienter

In Ferris, Baker Watts, Inc. v. Ernst & Young, LLP, No. Civ.03-3339RHK/AJB (D. Minn., Nov. 24, 2003), the U.S. District Court for the District of Minnesota dismissed with prejudice FBW's claim that E&Y violated Section 10(b) as the result of certain misrepresentations in its 2001 audit opinion for MJK Clearing, a now-bankrupt securities broker-dealer. A copy of the opinion is available here. FBW alleged that in reliance on E&Y's audit, it sent (and lost) $20 million of cash collateral to MJK in exchange for certain "manipulated--and essentially worthless--securities."

FBW alleged that among other things, it reviewed and relied upon E&Y's statement that it had reviewed the financial statements in accordance with customary audit procedures. In fact, FBW alleged, E&Y violated numerous accounting and auditing principles, which indicated "such pervasive indifference to GAAP and GAAS requirements, and such egregious violations, that they cumulatively amount to circumstantial evidence establishing a strong inference of scienter."

The Court disagreed, stating flatly that

FBW is wrong. As the Eighth Circuit has stated, "Allegations of GAAP violations are insufficient, standing alone, to raise an inference of scienter. Only where these allegations are coupled with evidence of corresponding fraudulent intent [or recklessness] might they be sufficient."; While FBW cites authority--all outside of the Eighth Circuit--for the proposition that particularly egregious or widespread GAAP and GAAS violations might be sufficient to generate an inference of scienter, the Eighth Circuit has held squarely to the contrary.

The reason for this rule is clear. GAAP are "far from being a canonical set of rules that will ensure identical accounting treatment of identical transactions. [GAAP], rather, tolerate a range of 'reasonable' treatments, leaving the choice among alternatives to management." To allow a strong inference of scienter on the basis of GAAP and GAAS violations alone would--almost by definition--"countenance pleading fraud by hindsight." This the Court cannot do. (Citations omitted).

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Tuesday, November 25, 2003

Ready to Rumble in Delaware

It is on in the U.S. District Court for the District of Delaware, where the lawsuit filed by Kirk Kerkorian's Tracinda Corp. against DaimlerChrysler AG is just days away from its December 1 trial date. In November 2000, Chrysler shareholders, including Kerkorian, sued DaimlerChrysler claiming that they were misled into approving the 1998 deal that was portrayed as a merger between two equals. The lawsuits claimed that in reality, Daimler-Benz acquired Chrysler. The damages sought by Tracinda alone are reportedly as much as $2 billion.

Several twists in the last few weeks have created the highest-stakes game of chicken in recent memory:

In August 2003, DaimlerChrysler announced a $300 million settlement of the securities class action lawsuit. Tracinda, however, did not settle its case. At the time of the settlement, DaimlerChrysler stated that "[a]lthough DaimlerChrysler believes that the class action is completely without merit, the company has agreed to a settlement, since a local jury could have reached a different conclusion."

The AP reported that on November 7, 2003, the federal court in Delaware granted DaimlerChrysler's motion requesting that the court, not a jury, hear Tracinda's case against the company, which also presumably eliminated any "local jury" settlement rationale.

Finally, the AP reported that on November 21, 2003, the federal court in Delaware denied DaimlerChrysler's motion for summary judgment, setting the stage for the December 1 trial.

Both sides claim to be ready to go, and the Financial Times reports that both Jürgen Schrempp (the head of DaimlerChrysler) and Kerkorian are planning to testify.

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Monday, November 24, 2003

More on Trading Plans/Restrictions and Motions to Dismiss: Monterey Pasta Co. and Rayovac Corp.

Finally obtained a copy of the entire Order in Wietschner v. Monterey Pasta Co., No. C 03-0632 (N.D. Cal. Nov. 4, 2003), a case recently dismissed without prejudice and discussed here previously. In that case, the Court found fact that the individual defendants' stock sales were not sufficiently unusual or suspicious to raise a strong inference of scienter, and observed that defendants "sold shares under individual SEC Rule 10b5-1 trading plans, which allows corporate insiders to set a schedule by which to sell shares over a twelve to fifteen month period. This could raise an inference that the sales were pre-scheduled and not suspicious."

Having now reviewed the Order, however, it is clear that my assumption--that the defendants were successful in getting the Court to consider a 10b5-1 trading plan that was outside the pleadings to demonstrate that certain trading was not suspicious--was incorrect. In fact, plaintiffs actually alleged in the complaint itself that the defendants sold shares under individual 10b5-1 trading plans. Thus, the Court did not need to rule on whether it could consider a trading plan that was outside the pleadings in deciding the motion to dismiss. The Order is available here.

Another recent decision in the Rayovac Corp. securities litigation (W.D. Wis., Oct. 17, 2003)(available here), however, indicates that a court may consider the existence of a contract restricting defendants' ability to sell their stock in deciding a motion to dismiss. In Rayovac, plaintiffs alleged that certain stock sales by defendants gave rise to a strong inference of scienter. Plaintiffs alleged that these sales were suspicious because the defendants had not sold any stock in a two year period prior to the sales. Defendants countered that no such inference could be drawn because, among other things, a contract specifically restricted their ability to sell stock in that two year period. Defendants attached a copy of the contract to their motion to dismiss, and argued that the court could consider the agreement even though it was not part of the pleadings because it was "publicly available" on the SEC's website and was filed as an exhibit to numerous reports Rayovac filed with the SEC. Plaintiffs disagreed, arguing that the court's consideration of the agreement was "limited to determining what it says rather than to prove the truth of its contents."

The Court stated that

Generally, a court cannot consider documents outside the pleadings in deciding a motion to dismiss; such documents do not become fair game unless they are attached to or at least referred to the complaint. However, there is an exception to this rule: a court may consider "documents contained in the public record" without converting the motion into one for summary judgment. Plaintiffs are correct that I may not rely on the contents of the contract to resolve a factual dispute. However, I may take judicial notice of the contract's existence and its terms.

(Citations omitted).

After taking judicial notice of the contract's "existence and terms" (but not its content??), the Court concluded that it "agreed with defendants that the contract undermines plaintiffs' allegations regarding defendants' intent to deceive."

If there is a lesson in Rayovac for 10b5-1 trading plans, it may well be that such plans should be filed in some form with the SEC so that their "existence and terms" also can be considered at the motion to dismiss stage.

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Friday, November 21, 2003

Sound, Fury Start to Fade in Oklahoma

Oklahoma made quite a splash and created serious potential problems for federal prosecutors in the SDNY when it jumped into the WorldCom case with its own criminal case filed under the Oklahoma Securities Act. Among those problems, discussed here in detail, was the possibility of damaged witnesses, i.e., the possibility of Oklahoma bringing common witnesses to testify before its own grand jury and at hearings and trial in advance of the federal trials. After failing to coordinate its case with the SDNY (Oklahoma's AG Drew Edmonson reportedly wrote to the SDNY prior to taking action but never received a response), the AP reports that Edmonson ultimately did make an agreement with U.S. Attorney James Comey of the SDNY not to call any witnesses in Oklahoma's case against Ebbers until those witnesses had testified in former WorldCom CFO Scott Sullivan's federal trial scheduled for February 1, 2004.

According to the AP article, this agreement was put to the test this week when an Oklahoma judge refused to postpone the preliminary hearing in Ebbers' case, now scheduled for December 1, 2003, until after the Sullivan trial. To honor his agreement, Edmonson was forced to drop his case against Ebbers, although he vowed to refile the charges next year prior to the limitations deadline of March 31, 2004.

The AP reported on November 13, 2003 that the same Oklahoma judge also rejected requests of attorneys for both sides to reschedule Mr. Sullivan preliminary hearing in Oklahoma. This hearing is set for Jan. 26-28, the week before Sullivan's federal trial. Thus, the same issue of common witnesses needing to testify in Oklahoma prior to the federal trial lurks in the Sullivan case, too.

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Tuesday, November 4, 2003

Playing the Akron Card

Apparently as a modification to an earlier Notice of Pendency filed in connection with a securities class action against Akron-based The Goodyear Tire and Rubber Co., "Akronite Neil Rothstein" and his law firm issued this release on November 2, 2003. According to a section of the release beginning "Scott + Scott partner Neil Rothstein of Akron remembers," "[o]nly somebody who grew up here can really appreciate the needs of all."

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Thursday, October 30, 2003

Judge Pollack Dismisses 8 More Analyst Cases Against Merrill Lynch With Prejudice

On October 29, 2003, Judge Pollack of the S.D.N.Y. dismissed 8 more "analyst" cases against Merrill Lynch with prejudice. The cases related to research reports on eToys, Homestore.com, iVillage, Lifeminders, LookSmart, Openwave Systems, Pets.com, and Quokka Sports. The Court's Order, available here, expressed exasperation with plaintiffs' effort to reargue issues that the Court said it had "already decided not just once, but four times" in motions to dismiss and for reconsideration, including a June 2003 ruling discussed here.

In short, the Court found:

1. "[T]he harm suffered by the plaintiffs was not caused by any alleged fraud of the defendants; rather, it was caused by the direct intervention of the crash of the internet bubble in the market for which the defendants were not responsible."

2. Plaintiffs failed to adequately plead the existence of a connection between the losses they incurred and the alleged fraud on the market, or that their losses were a foreseeable consequence of the defendants' activity.

3. Under either a one year or two year (assuming, arguendo, that Sarbanes-Oxley Section 804 applied) statute of limitations, plaintiffs' claims were barred. The Court found that more than two years prior to the commencement of any of the 8 cases, "[t]he plethora of public information would have required even a blind, deaf, or indifferent investor to take notice of the purported alleged 'fraud.'" (emphasis in original).

4. Not every knowing misrepresentation creates a legal cause of action under the securities laws. The requisite state of mind under Section 10(b) and Rule 10b-5 that the plaintiff must allege is "a purpose to harm by intentionally deceiving, manipulating or defrauding." The Court rejected plaintiffs' argument that the Complaints need not allege a purpose to harm investors.

The Court added that plaintiffs had "failed to allege facts which could give rise to any inference, let alone a strong one, of an intent on the part of the defendants to defraud them." Plaintiffs' allegations that defendants had sought to attract investment banking business from companies for which they issued reports and that defendant Blodget had sought to increase his bonus compensation were insufficient as a matter of law because "[a]ll firms in the securities industry want to increase profits and all individuals are assumed to desire to increase their compensation."

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Friday, October 24, 2003

Recent Case Roundup: PerkinElmer, Global TeleSystems, Intervoice-Brite

Quick takes on some recent securities litigation decisions:

1. In re: PerkinElmer, Inc. Securities Litigation (D. Mass. September 30, 2003)--Motion to Dismiss Denied by Judge O'Toole

Lots of great fodder for plaintiffs' counsel in this case.

Here, plaintiffs alleged that defendants' statements spotlighting the successes of their "Optoelectronics unit" and new x-ray panels were fraudulent because they failed to disclose that the x-ray panels were often defective, and further because the company's reported revenues improperly included income from sales of the defective panels, even though many of those sales were later reversed as the result of returns.

The Court found that the plaintiffs had sufficiently alleged that the statements could be material despite the "mere fact" that the x-ray panels only accounted for a small portion of PerkinElmer's net profits in the second and third quarters of 2001. The Court stated that materiality requires an assessment of qualitative and quantitative factors, so that even quantitatively small amounts can still present a materially misleading picture of a company's health. The Court added that "this is particularly true here where it is alleged that the company chose to feature the x-ray panels in several of its press releases during the relevant period."

In addition, the Court found that an inference of scienter was also supported by the allegation that two individual defendants both sold substantial blocks of stock during the class period. Although the defendants "sought to introduce additional facts" to diminish this inference by showing that these stock sales were part of a consistent and regular pattern of stock sales by the two, the Court stated that "these factual issues, however, cannot be resolved on a motion to dismiss and must be left for resolution at trial, or if appropriate, on a motion for summary judgment."

2. Abbad v. Amman (S.D.N.Y Sept. 30, 2003) [Global TeleSystems, Inc. litigation]--Motion to Dismiss Granted by Judge Preska

Judge Preska: "The instant case fits squarely into the legion of cases wherein investor plaintiffs, disappointed in the outcome of their investment, conclude that somewhere, sometime in the past, a plan was hatched without their knowledge and that subsequent events and statements were all fraudulent attempts to keep the plaintiffs from uncovering the secret plan."

3. Barrie v. Intervoice-Brite (N.D. Texas, Dallas Division, Sept. 15, 2003)--Motion to Dismiss Granted by Judge Kinkeade

Here, the complaint alleged that 21 different statements violated § 10(b). The Court found that each failed to state a claim, as follows:

11 statements made by analysts--No "entanglement" because plaintiffs "do not make the necessary connection between a specific statement made by a control person of the defendant and the subsequent publishing of that statement by the third party analyst."

5 statements "from conference calls, press releases, or other communications from multiple parties"--not actionable because plaintiffs fail to identify the individual who made the statement.

5 remaining statements--not actionable because while plaintiffs identify the speaker, they fail to specifically plead why the statements were false when made.

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Friday, October 17, 2003

Enterasys Settlement: More Governance Reforms

Yesterday, Enterasys Networks Inc. (NYSE: ETS) announced an agreement to settle the securities class actions filed against it in the U.S. District Court for the District of New Hampshire. Enterasys agreed to pay approximately $17.4 million in cash and to distribute shares of common stock with a value of $33.0 million.

The settlement also continues a recent trend, previously discussed here, of including corporate governance reforms in settlements. A separate press release by the law firm Berman DeValerio Pease Tabacco Burt & Pucillo indicates that the settlement includes the following key corporate governance provisions:

-- Shareholders will be able to vote on a proposal, submitted by LACERA and supported by Enterasys, to declassify the board of directors. If approved, board members would be elected to one-year terms at each annual meeting, instead of the three-year, staggered terms they now serve.

-- Shareholders owning at least 5 percent of Enterasys stock for a minimum of two years may submit to Enterasys' nominating committee up to two candidates each year for election to the board of directors. If the nominating committee rejects the nominations, it must explain its reasoning in the annual proxy report.

-- The proxy statement must include a description of factors that determine the CEO's compensation and place the executive's salary in the context of comparable companies.

-- At least two-thirds of the board must be independent.

-- All executive vice presidents and the chief financial officer must report at least once a year to the independent members of the board, who may question them about the company without the presence of the CEO.

-- No board member shall serve as a director of more than three other public companies.

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Go Right at Kozlowski Hall, then Left at Scrushy Field

The Chicago Tribune has this interesting article about an unusual consequence of corporate and securities scandals--what do you do when you've named prominent buildings and playing fields after high-profile securities fraud defendants?

Seton Hall, which only recently "quietly removed" the name of Robert E. Brennan, the former head of now-defunct First Jersey Securities, who was convicted of bankruptcy fraud and money laundering in 2001, from its gymnasium, now must decide what to do about "Kozlowski Hall." Kozlowski Hall is named after Dennis Kozlowski, the former Tyco International Ltd. chairman and chief executive who is accused, along with another executive, of stealing $600 million from the company. Kozlowski Hall houses the university's W. Paul Stillman School of Business.

Meanwhile, over at University of Alabama, the baseball team plays its games at Scrushy-Striplin Field. Scrushy-Striplin Field is named after Richard Scrushy, the former CEO of HealthSouth Corp. who is under fire and faces charges for his role in an alleged $2.5 billion fraud at that company.

University of Missouri has its own dilemma: the Kenneth L. Lay Chair in Economics, named for alumnus Kenneth L. Lay, former chief executive of Enron Corp.

Finally, there is Arthur Andersen Hall, which the esteemed Kellogg School of Management calls home.

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Thursday, October 16, 2003

October 2003 SCAS Alert Available

The October 2003 edition of the Securities Class Action Services Alert is available here.

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Friday, October 3, 2003

94% Settlement Rate in D. Colorado

A recent review of securities class action data in the SCAS database for cases filed since 1996 produced some interesting findings. The data for the U.S. District Court for the District of Colorado was particularly notable. SCAS data indicates that for cases filed since 1996 where there has been a final resolution of the case via settlement or dismissal, 16 out of 17 cases were settled (94%), the highest percentage of any court with 5 or more resolved cases during that time. Just one case (the Kinder-Morgan case) was dismissed in its entirety.

Settled cases included Boston Chicken, Hallwood Energy Corp., New Era of Networks, Inc. (sued and settled twice), Ribozyme Pharmaceuticals, Smallworldwide PLC, Vari-L Co., Einstein/Noah Bagel Corp., Coeur D'Alene Mines Corp., Evolving Systems Inc., J.D. Edwards & Co., Laser Technology Inc., North Face, The Samsonite Corp., and TCC Industries.

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What is the Contingency Risk in Securities Class Actions?

In a September 29, 2003 Order issued in In re: Independent Energy Holdings PLC, Judge Scheindlin of the U.S. District Court for the Southern District of New York knocked the attorneys' fees requested in the settlement from 25% down to 20%. In doing so, the Court suggested that the contingency risk asserted by plaintiffs' counsel as part of the justification for fees is "often inflated." Indeed, the Court noted that in Goldberger v. Integrated Resources, Inc., 209 F.3d 43 (2d Cir. 2000), the Second Circuit found that

"At least one empirical study has concluded that 'there appears to be no appreciable risk of non-recovery' in securities class actions, because 'virtually all cases are settled.' Janet Cooper Alexander, Do the Merits Matter? A Study of Settlements in Securities Class Actions, 43 Stan. L.Rev. 497, 578 (1991). Anecdotal evidence tends to confirm this conclusion. Indeed, Mr. Weiss and his partner William S. Lerach of the Milberg firm have stated that losses in these cases are 'few and far between,' and that they achieve 'a significant settlement although not always a big legal fee, in 90% of the cases we file.' In re Quantum Health Resources, Inc. Sec. Litig., 962 F.Supp. 1254, 1258 (C.D.Cal.1997)."

The Court also cited figures from one objector to the settlement that "93% of all securities actions settle." The dates on the the study and case cited above for the proposition of "no appreciable risk"--1991 and 1997--lead me to question whether this statement still true today, i.e., following the passage of the PSLRA.

The more recent data that I have seen suggests that this risk assessment is too low. A June 2003 report from the economic consulting firm NERA found that 80% of federal securities class action lawsuits end in settlement. Moreover, our SCAS data indicates that for federal securities class actions filed since 1996 that have been resolved (disposed of by either settlement or dismissal), only approximately two-thirds of such cases have ended in settlement, with one-third dismissed.

So the contingency risk in securities class actions does not appear to be nearly as "inflated" as the Second Circuit seems to have concluded.

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Friday, September 26, 2003

Duke Energy Case Dismissed With Prejudice

Reconfirming a summary Order dated December 30, 2002, Judge Rakoff of the SDNY dismissed with prejudice the complaint in In re: Duke Energy Securities Litigation, No. 02 CIV. 3960(JSR), on September 17, 2003. Among other things, the Court found that the alleged "inflation of $217 million in the company's revenues for the relevant period amounts to about 0.3% of Duke Energy's total revenues for that period--an immaterial percentage as a matter of law." The Court further found that the fact that the company's share price fell after the slight overstatement was announced "cannot cure the immateriality of an overstatement as small as the one here at issue."

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Kmart: Squeezing In One Last Loss Causation Case this Summer

The Kmart case decided September 19, 2003 quietly slid another loss causation case under the wire for this Summer. As Lyle Roberts of the 10b-5 Daily began observing in August, this has been the Summer of Loss Causation.

Citing the recent Merrill Lynch case, among others, the Court held that

...Plaintiffs here have not alleged in their Complaint the requisite "causal nexus" between the alleged misrepresentations of the Defendants and the economic harm they suffered as a direct result of the alleged fraud. Rather, Plaintiffs take the position that to allege loss causation, a plaintiff need only show that he or she purchased a stock at a price that was artificially inflated by Defendants' misrepresentations. Such an allegation satisfies only the "transaction causation" prong of the causation requirement. As discussed above, a majority of the other Circuits (and the Sixth Circuit in unpublished decisions) have expressly held that this is not sufficient to allege loss causation under Section 10(b) and Rule 10b-5. (citations omitted).

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Monday, September 22, 2003

The Impact of SOX

An article this weekend in the Minnesota Star Tribune takes a look at what impact, after 14 months, the Sarbanes-Oxley Act is having on the capital markets, and at what price. The article notes that a recent study by the law firm Foley & Lardner estimates that "the average cost of maintaining public status on an annual basis could rise to a $2 million premium over private company status" and suggests that U.S. companies may be forced to explore foreign capital markets for their public financing needs.

The article also predicts that rather than make investors any safer, SOX will "create the possibility of a veritable tsunami of private litigation. This is in addition to the high tide of litigation that is currently brought forth on a regular basis by either private or public parties for alleged securities and related offenses."

Presumably, after the Kmart opinion, this tsunami will not be filed in the Eastern District of Michigan.

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Kmart Litigation Dismissed; Court Cites "Virtually Unreachable" Standard for Plaintiffs

The Detroit News reports that nothwithstanding a finding of evidence "supporting a strong inference" of an intention to commit fraud on the part of both Kmart's former CEO and president, a federal judge in the U.S. District Court for the Eastern District of Michigan has dismissed a shareholder lawsuit that charged five former Kmart executives and the company's accounting firm with misleading investors before Kmart declared bankruptcy. The article reports that Judge Gerald Rosen's opinion states that he dismissed the lawsuit "strictly on technical legal grounds" and that he believes Congress may have set "a virtually unreachable" standard for securities fraud lawsuits.

Securities Litigation Watch will attempt to obtain and post a copy of the Court's opinion. Can anyone out there provide a copy?

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Monday, September 15, 2003

Spiegel Report Made Public; Faults Company, KPMG

This article from the AP states that the report of an independent examiner probing the events leading to Spiegel Inc.'s bankruptcy, which is expected to become publicly available today, has concluded that the company's decision makers in Germany refused to allow the company to file its 2001 annual report with the SEC because they felt that a "going-concern" opinion from KPMG could cause suppliers to refuse to extend credit for merchandise and lead to a bankruptcy filing.

The AP also states that the report concludes that as Spiegel allegedly violated securities regulations by failing to file its annual report and by failing to disclose KPMG's own going concern opinion, "KPMG did not make a report to Spiegel's board, did not resign and did not report the matter to the SEC."

The article states that while KPMG has reportedly said that it went along with Spiegel's decision not to file its 2001 annual report based on Spiegel's consultation with an outside law firm, the report finds that "there is no indication KPMG bothered to have any discussion" with the law firm on this matter.

According to this litigation release from the SEC, it obtained an Order on September 11, 2003 providing that the report be made available to the public and posted today on the official website for the U.S. District Court for the Northern District of Illinois.

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Tuesday, September 9, 2003

MCI, Key Creditors Reach Agreement

The AP reports that WorldCom reached a deal early today with certain key objectors to its plan of reorganization, which should faciliate its emergence from bankruptcy. The AP reports that under the agreement, one group of creditors that was slated to be repaid 36 cents on the dollar for their claims will now receive about 52 cents on the dollar, and a second group of bondholders that was to receive nothing will now be paid 44.5 cents on the dollar.

MCI's counsel reportedly told the court that WorldCom is close to reaching an accord with another class of dissenting creditors and continues to pursue discussions with other groups objecting to the current plan.

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Friday, September 5, 2003

New Case Data: Emerson Radio Corp. (D. N.J.) ... Beginning of the SARS Cases?

A new securities class action has been filed against Emerson Radio Corp. in the U.S. District Court for the District of New Jersey. A copy of the Complaint, filed by Lite DePalma Greenberg & Rivas; Cauley Geller Bowman & Rudman; Ademi & O'Reilly; and Schiffrin & Barroway is available here. Among other things, the Complaint has a "SARS" angle to it--alleging Emerson misrepresented and omitted to state that since at least March 2003, the outbreak of severe acute respiratory syndrome in Asia was dramatically reducing Emerson's product demand and supply.

Of the 66 securities class actions filed in the District of New Jersey since the passage of the Reform Act, 14 (21%) were dismissed , 29 (44%) were settled in whole or in part, and 23 (35%) remain active. (SOURCE: Securities Class Action Services data).

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Thursday, September 4, 2003

Plaintiffs Go 0 for 5: Foundry Networks Case Dismissed, This Time With Prejudice (N.D. Cal.)

Foundry Networks (Nasdaq: FDRY) announced yesterday that the U.S. District Court for the Northern District of California has dismissed the Fifth Amended Complaint in the securities class action filed against it and certain of its directors and officers in January 2001. The dismissal is without leave to amend. A copy of Judge Maxine Chesney's Order dismissing the case is available here. Thank you to Shirli Fabbri Weiss of Gray Cary in San Diego, counsel for Foundry Networks, for providing Securities Litigation Watch with the Order.

Although plaintiffs alleged numerous new facts in the new Fourth and Fifth Amended Complaints (which were ruled on together in the Order), including alleged details about internal reports and complaints from Foundry sales personnel, the Court found that plaintiffs had, at most, alleged facts giving rise to a "reasonable inference" (rather than the required "strong inference") that defendants knew the challenged statements were false when made.

With respect to the one new alleged false statement included in the Fifth Amended Complaint--that Foundry management allegedly reiterated to Lehman Brothers that its business remained "on track"-- the Court found that such a statement was "too general, too vague, and too 'soft' to be considered material."

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Tuesday, September 2, 2003

"What About the High Blood Pressure," Part II

Law.com has this article from the Miami Daily Business Review discussing the unsual case against Citigroup (previously noted here) alleging the Florida tort of "outrage," which appears to be a variation of intentional infliction of emotional distress. The case seeks to hold Citigroup liable for, among other things, the plaintiff's alleged pain and suffering from losing $2 million when WorldCom stock plummeted.

The article states that after being 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."

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Friday, August 15, 2003

Forget the Stock Price, What About the High Blood Pressure?

The Miami Herald reports that a 71-year-old West Palm Beach retiree who lost $2 million when MCI and WorldCom stock plummeted is taking a novel legal approach: suing Citigroup for his pain and suffering under the Florida tort of "outrage." According to the Herald, "Anthony Amodio's lawsuit against the nation's largest bank alleges that he is penniless and has heart problems because he was advised to keep his 23,820 shares of WorldCom stock, amid claims that the share price would climb to $150, even when it was valued in April 2002 at only $7."

Amodio seeks to depose former WorldCom Chief Executive Bernard Ebbers, Citigroup Chairman Sanford Weill and its former telecom analyst, Jack Grubman. ''They've gotten away with it, so far,'' his attorney, Ted Babbitt, added. ``But this is going to be the key that opens the door.''

Amodio now allegedly suffers from high blood pressure, anxiety attacks and mental and physical stress that make it impossible for him to return to work. His lawsuit reportedly asks for the $2 million lost, plus interest, attorney fees and unspecified damages for pain and suffering.

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