Monthly Archives: June 2003

The securities class action news today is all about Tyco International, Ltd.

First, Reuters reports that the shareholder plaintiffs in the class action against Tyco in the D. of N.H. are alleging that “the conglomerate falsified financial reports and inflated pre-tax profits by more than $6 billion between December 1999 and June 2002.” That is considerably more than the $2 billion in accounting-related problems that Tyco has disclosed. Interestingly, it is being reported as a new allegation that appears in the plaintiffs’ opposition to Tyco’s motion to dismiss (contrary to the normal assumption that the motion to dismiss briefing is based only on the factual allegations in the complaint).

Second, the Associated Press reports that Merrill Lynch & Co. and a former analyst are being sued by Tyco’s shareholders in a separate class action alleging that the analyst “wrote and publicly issued research reports on Tyco claiming to be independent, when in fact he regularly sent drafts of his reports to Tyco’s investor relations department for review.”

A subcomittee of the House Financial Services Committee is holding a hearing today on the Securities Fraud Deterrence and Investor Restitution Act. Stephen Cutler, the SEC’s Division of Enforcement Director, is among those scheduled to testify.

The Atlanta Journal-Constitution has an article in today’s edition reporting that an amended complaint has been filed in a securities class action against the Coca-Cola Company. The suit was originally brought in October 2000 in the N.D. of Ga. and alleges that Coca-Cola forced several of its major bottlers to buy excess beverage concentrate to boost the company’s revenues. The court dismissed part of the case last year.

The Washington Post reports today that a federal grand jury has indicted Martha Stewart and her broker on conspiracy, obstruction of justice, and false statement charges stemming from a federal investigation of alleged insider trading in ImClone Systems stock. Meanwhile, the securities class action against Ms. Stewart and her company, Martha Stewart Living Omnimedia, Inc., continues.

Quote of note: “Disgruntled shareholders have alleged in class-action lawsuits that Stewart violated securities laws by failing to disclose she was under investigation when she sold 3 million shares in a prearranged sale to a company run by another board member on Jan. 8, 2002.”

The 10b-5 Daily spans the globe to bring you the latest in securities litigation news. The JoongAng Daily has an interesting article on the political battle in South Korea over whether to permit investors to bring securities class actions against corporations. The current compromise is to allow class actions to be brought against any publicly-traded company, but to delay implementation of the new system until 2004.

Quote of note: “The business community fears that the impact of class-action suits would be devastating. Even though the class-action system would not be applied retroactively, tricky bookkeeping has been a long-established practice here. Indeed, even Shin Jong-ik, a senior official at the Federation of Korean Businesses, recently estimated that between half and 70 percent of Korean firms have been involved in accounting fraud.”

Today’s edition of The Daily Journal (subscription required) has a column by Thomas Klein, a Wilson Sonsini partner, entitled “Shareholders Who Keep Stock Have State Remedy.” The column discusses the recent decision by a divided California Supreme Court in Small v. Fritz Cos. Inc., (Cal. April 7, 2003), in which the court ruled that a stockholder who held his stock, rather than purchased or sold his stock, in reliance on misrepresentations may bring suit for common-law fraud or negligent misrepresentation under California law. To adequately plead these claims, however, the stockholder must (a) plead with particularity; and (b) demonstrate actual reliance on the alleged misrepresentations (the “fraud-on-the-market” theory cannot be used). Note that the actual reliance requirement would appear to make it all but impossible for a plaintiff to bring a class action on behalf of holders.

Quote of note (from the opinion): “In a holder’s action a plaintiff must allege specific reliance on the defendants’ representations: for example, that if the plaintiff had read a truthful account of the corporation’s financial status the plaintiff would have sold the stock, how many shares the plaintiff would have sold, and when the sale would have taken place. The plaintiff must allege actions, as distinguished from unspoken and unrecorded thoughts and decisions, that would indicate that the plaintiff actually relied on the misrepresentations.”