Category Archives: All The News That’s Fit To Blog

In 2003, KPMG settled the claims against it in the Rite Aid securities litigation for $125 million. As reported in The 10b-5 Daily, a class member objected to the payment of 25% of that sum (i.e., $31 million) in attorneys’ fees. The district court approved the settlement terms despite the objection and an appeal followed.

According to an article (via law.com – free regist. req’d) in the Legal Intelligencer, the U.S. Court of Appeals for the Third Circuit has held that the district court should reconsider its fee award. The district court correctly applied the percentage-of-recovery approach, but erred in its application of a lodestar ‘crosscheck’ by focusing only on the hourly rates for the top lawyers handling the case, making the fee award appear more reasonable. The court found: “Had the hourly rates been properly blended, taking into account the approximate hourly billing rates of the partners and associates who worked on the case, the multiplier would have been a higher figure, alerting the trial court to reconsider the propriety of its fee award.”

It is important to note, however, that the court also rejected the argument that courts should be required to apply a sliding scale and reduce the percentage of a settlement going to attorneys’ fees based on the size of the fund. The opinion can be found here.

Whether and how to apply the fraud-on-the-market theory (i.e., reliance by investors on an alleged misrepresentation is presumed if the company’s shares were traded on an efficient market) to research analyst statements continues to be controversial.

In DeMarco v. Lehman Brothers, 222 F.R.D. 243 (S.D.N.Y. 2004), a case alleging that a Lehman analyst made buy recommendations for RealNetworks, Inc. stock while secretly holding negative views of the stock, Judge Rakoff denied the motion for class certification based on the plaintiffs’ inability to provide sufficient evidence that the fraud-on-the-market theory was applicable. The court noted that there is a “qualitative difference” between a statement of fact from an issuer and a statement of opinion by a research analyst. In particular, a “well-developed efficient market can reasonably be presumed to translate the former into an effect on price, whereas no such presumption attaches to the latter.” As a result, the court held that the fraud-on-the-market doctrine can apply to a case based on research analyst statements “only where the plaintiff can make a prima facie showing that the analyst’s statements materially impacted the market price in a reasonably quantifiable respect.”

Another district judge in the S.D.N.Y., however, has disagreed with that standard and granted class certification in a similar case. In DeMarco v. Robertson Stephens, 2005 WL 12033 (S.D.N.Y. Jan. 20, 2005), Judge Lynch addressed a case alleging that a Robertson Stephens’ analyst and certain corporate officers maintained a buy rating on Corvis Corp. stock while privately selling their own holdings. (An earlier post on the case can be found here). In determining whether the fraud-on-the-market theory could be applicable, the court “decline[d] to adopt a higher standard at class certification for plaintiffs alleging securities fraud by research analysts and their employers.” The court found that “by presenting a mix of market activity evidence, logical arguments, and statistical studies of the influence of at least some analyst statements, plaintiffs have made ‘some showing’ of their ability to make a common legal and factual presentation on reliance to an eventual factfinder.”

The Second Circuit has come close to deciding this issue before, only to be thwarted by a settlement. It may get another chance.

Addition: The New York Law Journal has an article (via law.com – free regist. req’d) on the decision.

Securities Litigation Watch has an interesting post on the recent series of suits by mutual fund investors alleging that the funds failed to collect as much as $2 billion in securities class action settlement payouts to which the investors were entitled.

The U.S. Senate is set to pass the Class Action Fairness Act. The legislation applies some of the reform concepts in the PSLRA and SLUSA to all class actions. Notably, class actions meeting certain jurisdictional criteria would have to be heard in federal court. Reuters reports that the Senate floor debate may take place the week of Feb. 7.

At the same time, proponents of U.S. class action reform are urging France not to permit these types of suits. Jacques Chirac, France’s president, announced earlier this year that he had asked his government to propose legislation allowing collective suits against companies. An article in today’s Financial Times discusses comments made by the president of the U.S. Chamber of Commerce on a trip to Paris, where he warned France that U.S.-style class actions “would damage the economy and shift money from ‘good companies to lawyers.'”

The Private Securities Litigation Reform Act of 1995 requires plaintiffs alleging securities fraud to plead a “strong inference” of scienter (i.e., fraudulent intent) on the part of the defendants to survive a motion to dismiss. Exactly how to apply this standard, however, has been the subject of constant litigation. Recent notable judicial decisions have addressed, among other topics, what is necessary to adequately plead the scienter of a corporate defendant, the use of control person liability, and the role of insider stock sales in establishing a motive to commit fraud.

The author of The 10b-5 Daily, Lyle Roberts (Wilson Sonsini Goodrich & Rosati), will be chairing a Practising Law Institute telephone briefing on this topic on Thursday, January 20 at 1 p.m. ET. The panelists are Sam Rudman (Lerach Coughlin Stoia Geller Rudman & Robbins) and Bruce Carton (Executive Director, Securites Class Action Services, Institutional Shareholder Services). CLE credit is available. Click here to register.

More from the international front, as France joins the list of countries that may implement a class action system. The Financial Times reports that President Jacques Chirac has asked his government to propose laws that would permit “collective actions against abusive practices that have been observed in certain markets.” Thanks to Adam Savett for the link.

The Baltimore Business Journal reports that Deloitte & Touche, along with a few other corporate and individual defendants, has been dismissed from the Royal Ahold N.V. securities litigation pending in the D. of Md. The case stems from the Dutch retailer’s $1.1 billion earnings restatement last year. Deloitte & Touche served as the auditors for Royal Ahold and its U.S. subsidiaries.

Disclosure: The author of The 10b-5 Daily is quoted in the article.

Continuing The 10b-5 Daily’s international theme, the Toronto Globe and Mail has a feature article on recent amendments to the Ontario Securities Act that are expected to generate “a wave of shareholder class action lawsuits.” Until now, Canadian investors who purchase shares in the secondary market have been limited to common law fraud claims, which require a showing of individual reliance. The recent amendments will create a presumption of reliance (i.e., the fraud-on-the-market theory) and will allow investors to “sue for two types of misconduct: a misrepresentation made in disclosure documents or public oral statements; and a failure to make timely disclosure of a material change.”

The article notes that some commentators are concerned the amendments will create an incentive to bring U.S.-style strike suits, but there will be certain safeguards in the new laws that do not exist here. Notably, a company’s liability will “be limited to either 5 percent of its market capitalization or $1 million, whichever is greater.” There will also be penalty limits for individuals.

Quote of note: “The legislation also is notable for the broad scope of potential defendants it will expose to liability. Not only does it pertain to the company and its directors and officers, but also to investment fund managers, spokespersons, experts (such as accountants, lawyers, financial analysts, engineers and geologists) and so-called influential persons (such as stock promoters or a majority shareholders with a significant influence on the company).”

It is international week at The 10b-5 Daily, with two more articles discussing the exporting of American-style class action litigation (including securities fraud cases). The New York Law Journal (via law.com – free regist. req’d) has a piece on pending legislation in the Netherlands that will allow for settlements that bind all members of a class who do not opt out. The author notes that the expansion of class actions in Europe is taking place at the same time that U.S. corporations are attempting to limit their use here. While over at Forbes, there is a profile of U.S. lawyers who are pursuing mass tort actions abroad.

Quote of note (New York Law Journal): Marc Gottridge of Lovells “does not foresee a sea change in the balance of class actions, despite the pending legislation in the Netherlands and elsewhere. ‘Even if foreign countries adopted the same procedures’ used in American courts, ‘the U.S. would still be an attractive forum in many cases’ for institutional investors based in Europe, he said. That is because of the U.S. system’s wide-reaching discovery, jury trials and the potential for immense punitive damage awards.”