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

The Associated Press reports that the Class Action Fairness Act will not be voted on in the U.S. Senate this legislative year, becoming the “victim of election-year skirmishing between the two parties.” Proponents of the bill were unable to get enough votes to invoke cloture today after Senate Majority Bill Frist (R.-Tenn.) refused to allow consideration of various unrelated amendments.

To what extent are individual stock trading plans (entered into pursuant to SEC Rule 10b5-1) helpful in defending against private securities fraud claims? At least one court, the N.D. of Cal. in the Monterey Pasta case, has suggested that the use of a stock trading plan may allow a defendant to negate any inference of fraudulent intent based on his stock sales because the sales were pre-scheduled. As more company executives implement these plans, the issue is likely to gather steam.

The author of The 10b-5 Daily, along with one of his colleagues, has an article on the topic – “Individual Trading Plans Can Help Defend Securities Fraud Claims” – in the most recent edition of Compliance Week (July 7).

The U.S. Senate finally is debating the Class Action Fairness Act , but its passage may be derailed by unrelated amendments. The Associated Press and Reuters have reports on today’s action.

Quote of note (Associated Press): “Democrats are demanding a vote on raising the minimum wage from the $5.15 an hour to $7 over the next few years. They also want a vote on fighting global warming and on extending an assault weapon ban that is to expire this year. Hawaii’s two Democratic senators are pushing legislation that would recognize native Hawaiians as a governing entity. Republican Sen. Larry Craig of Idaho, with Sen. Edward Kennedy, D-Mass., are trying to add a proposal that would give temporary legal status to undocumented farm workers.”

In securities litigation, the wheels of justice can move slow. The Associated Press has an article on the securities class action against Cabletron Systems, Inc. in the D. of N.H. The complaint was originally filed in 1997 and alleges that Cabletron artificially inflated its stock price by overstating sales and failing to disclose problems with its products.
In a remarkable series of events, the case was dismissed in 1998 with leave to amend, reassigned several times after the original judge passed away, dismissed again in 2001, reinstated by the 1st Circuit in 2002 (in a well-known opinion), and has since been bogged down in discovery and procedural disagreements. In the interim, Cabletron has gone out of business.
Quote of note: “The two sides are currently waiting for a judge to settle procedural disagreements. Cabletron�s lawyers want to know the identity of the shareholders� anonymous sources. . . . The shareholders want permission to question under oath several of Cabletron�s top executives, a group that hasn�t been identified but is expected to include [Craig] Benson [a former Cabletron officer and the current governor of New Hampshire].”

There is a growing district court split over whether plaintiffs can bring a securities class action pursuant to the Securities Act of 1933 (“’33 Act”) in state court. As a general matter, claims under the ’33 Act may be brought in federal or state court.

Securities class actions, however, are subject to a number of special rules. The Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) is designed to prohibit the bringing of securities class actions in state court and provides for their removal to federal court. SLUSA only applies to class actions “based upon the statutory or common law of any State.” The drafters were focused on plaintiffs who wanted to avoid the heightened pleading standards of the PSLRA by bringing the equivalent of Rule 10b-5 claims (for which federal courts have exclusive jurisdiction) in state court under state law.

In In re Tyco Int’l, Ltd. Multidistrict Litig., 2004 WL 1403009 (D.N.H. June 21, 2004), the court addressed motions to remand to state court seven of the 47 cases that had been consolidated for pretrial proceedings. The seven cases are all based exclusively on the ’33 Act. The court found that although SLUSA would prohibit the bringing of a securities class action in state court alleging both ’33 Act claims and state law claims, it does not, as a matter of statutory construction, apply to securities class actions based exclusively on the ’33 Act.

Holding: Motions to remand granted.

Quote of note: “SLUSA’s legislative history supports the view that Congress attempted to prevent plaintiffs from circumventing the PSLRA by ‘enact[ing] national standards for securities class action lawsuits involving nationally traded securities,’ rather than by making federal courts the exclusive forum for Securities Act class actions alleging fraud.”

For every commentator who believes that Congress has gone too far in passing corporate reforms, there is another who believes that Congress needs to take immediate additional action. In this column from CBS MarketWatch, the author argues that the PSLRA should be overhauled to make it easier for investors to bring suit and new reforms should be passed to address the failings of lawyers, accountants, and Wall Street firms to prevent fraud.

Quote of note: “The real problem is the lack of ‘vicarious liability,’ whereby institutional gatekeepers are held accountable for misdeeds as much as the organizations from which they supposedly protect the public.”

The shakeup in the plaintiffs’ securities bar continues with today’s announcement that Lerach Coughlin Stoia & Robbins will combine with Geller Rudman. The merger will expand Lerach Coughlin’s presence on the east coast, adding offices in New York and Florida.

As of August 1, 2004, the combined firm will be known as Lerach Coughlin Stoia Geller Rudman & Robbins LLP and will have approximately 140 lawyers. Both firms are the products of recent splits.

As predicted, Senate Majority Leader Bill Frist has been forced to table the Class Action Fairness Act until after the completion of the 2005 Department of Defense authorization bill. The Hill has this report.

Quote of note: “With several of the class-action bill’s co-sponsors opposing the cloture vote, Frist probably lacked the votes yesterday to limit debate on the defense bill. Frist said he remains committed to bringing the class-action bill to the floor and said he would move ‘immediately’ to it after the defense bill was complete.”

Regular readers of The 10b-5 Daily know that the past year has seen a series of notable court opinions on the pleading of loss causation (the requirement that a plaintiff demonstrate that the economic harm it suffered occurred as a result of the alleged securities fraud). Is loss causation becoming a significant barrier to bringing a securities fraud claim?

The author of The 10b-5 Daily, Lyle Roberts (Wilson, Sonsini, Goodrich & Rosati), will be chairing a PLI teleseminar on this topic on Wednesday, June 9 at 1 p.m. ET. The panelists are Alfred Lechner (Morgan Lewis & Bockius – former U.S. District Judge) and Sherrie Savett (Berger & Montague). The program will also be webcast and CLE credit is available.

NERA Economic Consulting has published an interesting working paper entitled “Loss Causation and Damages in Shareholder Class Actions: When It Takes Two Steps To Tango.” The author, Dr. David Tabak, discusses the circuit court split between courts that believe plaintiffs must demonstrate a causal connection between the alleged misrepresentations and a subsequent decline in the stock price to adequately plead loss causation (e.g., Emergent Capital Investment Management, LLC v. Stonepath Group, Inc., 343 F.3d 189 (2d Cir. 2003)) and courts that believe plaintiffs merely need to demonstrate that the alleged misrepresentations artificially inflated the stock price (e.g., Broudo v. Dura Pharmaceuticals, Inc., 339 F.3d 933 (9th Cir. 2003)).

Dr. Tabak finds that “if plaintiffs have to plead either only a purchase inflation or only a later price decline, some investors will ‘successfully’ plead loss causation without having suffered a loss.” Accordingly, there is a logical argument that plaintiffs should have to plead both a purchase inflation and a later price decline related to the fraud to survive a motion to dismiss. The article also discusses how the different loss causation pleading requirements impact the calculation of damages.