Monthly Archives: March 2005

March 11, 2005 · 7:32 pm

Promoting Institutional Investors

Under the PSLRA, the lead plaintiff in a securities class action is presumptively the party with the largest financial interest in the relief sought by the class (i.e., the movant who alleges the most potential damages). The presumption may be rebutted, however, by a showing that this party will not fairly and adequately protect the interests of the class or is subject to unique defenses not applicable to other class members. In creating this provision, Congress sought to encourage the participation of institutional investors as lead plaintiffs.

An open question is to what extent this legislative history, as opposed to the plain language of the “largest financial interest” presumption, should influence a court in its selection of a lead plaintiff. To put it another way, what happens when the mechanism created by Congress does not result in the preferred outcome? In two recent cases, courts appear to have been swayed heavily by Congressional intent.

In Malasky v. IAC/Interactive Corp., 2004 WL 2980085 (S.D.N.Y. Dec. 21, 2004), the court found that an individual investor had the largest financial stake in the case and was otherwise qualified to act as lead plaintiff. Nevertheless, the court held that because the individual investor was “not an institutional investor,” he would be paired with an institutional investor as co-lead plaintiff.

Taking this analysis even a step further, in In re Cardinal Health, Inc. Sec. Litig., 2005 WL 238073 (S.D.Ohio Jan. 26, 2005), the court rejected an institutional investor, at least in part, because it was not a pension fund. Based on a statement in the House Conference Report on the PSLRA, the court found that the “PSLRA prefers pension funds.”

There has already been one appellate decision, on a writ of mandamus, holding that “a straightforward application of the [PSLRA lead plaintiff] statutory scheme . . . provides no occasion for comparing plaintiffs with each other on any basis other than their financial stake in the case.” See In re Cavanaugh, 306 F.3d 726 (9th Cir. 2002). More appellate courts may be asked to take up this issue in the future.

Leave a comment

Filed under Lead Plaintiff/Lead Counsel

March 11, 2005 · 7:00 pm

$4 Billion And Counting

Three more banks have agreed to a preliminary settlement of the claims brought against them as part of the WorldCom securities class action pending in the S.D.N.Y. Deutsche Bank AG, WestLB AG, and Caboto Holding SIM Spa will pay a total of $437.5 million based on their roles as underwriters for WorldCom bond offerings.

Bloomberg reports that the premium over the formula used to establish Citigroup’s settlement continues to rise as the case gets closer to trial. The current group of settling banks are paying a 13%-17.5% premium.

Taken together, the WorldCom securities class action settlements now total just under $4 billion.

Leave a comment

Filed under Settlement, WorldCom

March 9, 2005 · 8:13 pm

Four More WorldCom Banks Settle

Four more banks have agreed to a preliminary settlement of the claims brought against them as part of the WorldCom securities class action pending in the S.D.N.Y. ABN Amro, Mitsubishi Securities International, BNP Paribas Securities, and Mizuho International, who are accused of failing to engage in proper due diligence while acting as underwriters for WorldCom bond offerings, will pay a total of $428.4 million.

These are the latest in a string of settlements by defendant banks just prior to trial. While the earlier settlements were all calculated using a formula pioneered by Citigroup’s settlement, Bloomberg reports that this group of banks is paying a 5%-13% premium.

Leave a comment

Filed under Settlement, WorldCom

March 9, 2005 · 7:51 pm

More Biotech Woes

The Los Angeles Times has an article today on how disclosure issues can trigger shareholder litigation and SEC actions. The article focuses on the recent difficulties faced by many biotech companies. (The 10b-5 Daily has posted frequently on this topic.)

Quote of note: “Public demands that companies scale back secrecy have escalated since recent corporate scandals, and the SEC has supported more meaningful disclosure for public companies. Yet the pressures may raise particular issues in biotechnology because of the importance of test results and the profound effect that new products may have on the bottom line.”

Leave a comment

Filed under All The News That's Fit To Blog

March 7, 2005 · 9:17 pm

Fifth Circuit Rejects “Statistical” Tracing

Section 11 of the ’33 Act creates civil liability for misstatements in a registration statement. The class of persons who can sue under the statute, however, is limited to those who purchased shares issued pursuant to the registration statement in question. To have standing, an investor must have either acquired his shares in the offering or, if he purchased them in the aftermarket, be able to “trace” them back to the offering. As a general matter, the later introduction of non-offering shares into the market (e.g., via the sale of shares by insiders) generally defeats the ability of subsequent investors to trace their shares back to the offering because the intermingling of the shares makes it virtually impossible to establish that the purchased shares are offering shares.

In Krim v. pcOrder.com, 2005 WL 469618 (5th Cir. March 1, 2005), the plaintiffs tried a statistical approach to solving the problem of aftermarket standing for Section 11 claims. Although the plaintiffs conceded that they could not demonstrate that their shares were issued pursuant to the registration statement, they asserted the existence of standing based on expert testimony indicating that given the number of shares they owned and the percentage of offering stock in the market, the probability that they owned at least one share of offering stock was nearly 100%. The court rejected this statistical tracing theory, finding that “Congress conferred standing on those who actually purchased the tainted stock, not on the whole class of those who possibly purchased tainted shares – or, to put it another way, are at risk of having purchased tainted shares.”

Holding: Dismissal affirmed.

Quote of note: “The fallacy of Appellants position is demonstrated with the following analogy. Taking a United States resident at random, there is a 99.83% chance that she will be from somewhere other than Wyoming. Does this high statistical likelihood alone, assuming for whatever reason there is no other information available, mean that she can avail herself of diversity jurisdiction in a suit against a Wyoming resident? Surely not.”

Leave a comment

Filed under Appellate Monitor

March 4, 2005 · 4:31 pm

Bank Of America Settles WorldCom-Related Claims

On the eve of trial (set to begin on March 17), Bank of America (NYSE: BAC) has announced the preliminary settlement of the claims brought against it as part of the WorldCom securities class action pending in the S.D.N.Y. Bank of America is accused of failing to engage in proper due diligence while acting as an underwriter for WorldCom bond offerings. The settlement is for $460.5 million and was calculated, according to press reports, using the same formula applied by Citigroup in reaching its earlier settlement in the case.

The settlement has received wide-spread media attention, including articles in today’s New York Times and Washington Post.

Quote of note (New York Times): “A lawyer involved in the case said that a half-dozen smaller banks had expressed an interest in settling with the New York fund [which acts as lead plaintiff in the case]. This person said that the fund was likely to insist that at least some of the remaining banks pay a premium over the formula used by Citigroup and Bank of America in their settlements. J. P. Morgan Chase is perhaps the most vulnerable of the remaining defendants because it sold a large portion of the bonds offered by WorldCom in 2000 and 2001.”

Addition: The settlements by defendant banks in the WorldCom case are now coming fast and furious. Today it was announced that Lehman Brothers Holdings, Inc., UBS AG, Goldman Sachs Group, Inc., and Credit Suisse Group have agreed to pay a combined $100.3 million to settle the claims against them. These settlements are also based on the Citigroup formula. Bloomberg has a report.

Leave a comment

Filed under Settlement, WorldCom

March 2, 2005 · 7:30 pm

Cornerstone Releases Report On Settlements

Cornerstone Research has released an updated report on post-Reform Act settlements of securities class actions through December 2004. The findings include:

(1) The value of securities class action settlements in 2004 was a record $5.5 billion (the previous record was $4.5 billion in 2000). Even excluding Citigroup’s $2.6 billion settlement of WorldCom-related claims, the year-to-year increase was substantial.

(2) For cases settled in 2004 (as compared to 2003), there was a 40% increase in the length of the class period and larger market capitalization losses. Cornerstone attributes this development to the fact that many cases settling in 2004 were originally filed during the bear market that began in 2000.

(3) Despite the increase in overall settlement values, more than 65% of all settlements in 2004 were for less than $10 million and approximately 80% were for less than $30 million.

Cornerstone’s press release on the study can be found here.

Leave a comment

Filed under Lies, Damn Lies, And Statistics

March 2, 2005 · 6:57 pm

Citigroup Settles Global Crossing-Related Claims

Continuing to fulfill its pledge to “put the entire era behind us,” Citigroup, Inc. (NYSE: C) has announced a preliminary settlement of the claims brought against it as part of the Global Crossing securities class action pending in the S.D.N.Y. According to a Reuters report, the company acted as one of Global Crossing’s bankers and was accused “of issuing inflated research reports and failing to disclose conflicts of interest.” The settlement is for $75 million (pre-tax), with two-thirds of the settlement scheduled to go to investors in underwritten public offerings of Global Crossing securities and one-third to other Global Crossing investors.

Leave a comment

Filed under Settlement