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

The lead plaintiff/lead counsel controversy in the Terayon securities litigation in the N.D. of Cal. continues to receive press coverage. The May 3 edition of Fortune has a column on Judge Patel’s order and subsequent developments.

Quote of note: “Accordingly, Judge Patel is probably still months away from deciding what to do next. Her options include kicking the firm off the case, fining it, or deciding that it did nothing wrong after all, and allowing it to continue as co-lead counsel.”

The Economist has an interesting article (subscrip. req’d) on the recent court decisions in the research analyst cases. For non-subscribers, the article can be found in the Finance & Economics section of the April 24 edition.

Quote of note: “So far, Merrill Lynch seems to have hit the jackpot. All the litigation against it has been consolidated in New York under Milton Pollack, a federal judge who believes that there is no case to answer. Others have been less lucky: Lehman Brothers suffered a nasty setback last month when another federal judge in the same judicial district in lower Manhattan, Jed Rakoff, allowed litigation against it to proceed. These are, of course, early days; but because the stakes are so high, defendants on the end of adverse rulings are under great pressure to settle. It may well be that none of the civil cases lasts long enough to be decided by a jury.”

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

The New York Law Journal has an article (via law.com – NYLJ subscrip. req’d) on the tendency of law firms to settle litigation brought against them. The article discusses Simpson Thacher & Bartlett’s decision to pay $19.5 million as part of the Global Crossing securities class action settlement. Simpson Thacher was not a named defendant in the case, but had been accused of engaging in an incomplete investigation into certain accounting issues.

Quote of note: “A plaintiff’s lawyer who asked to remain unnamed because he is suing a different law firm in a separate class action said the charges against Simpson Thacher were ‘mushier’ than those brought against other firms in securities actions. It is not clear that Global Crossing’s drop in share price stemmed directly from Simpson’s alleged mishandling of the Olofson investigation, he explained. More typically, lawyers sued are those who helped prepare disclosure statements to the Securities and Exchange Commission and the investing public.”

In February, the Judicial Panel on Multidistrict Litigation transfered the mutual fund trading practices cases to the D. of Md. The Associated Press has an article on today’s opening hearing before the court, where the assigned judges dealt with scheduling issues.

Quote of note I: “[District Judge] Motz began by underscoring the importance of the case to investors nationwide. He warned the lawyers, which made up most of the 200 people inside the courtroom here, that the bulk of any money recovered would go to investors who lost money — not them. ‘No one should expect to get rich off of this case,’ Motz warned the lawyers.”

Quote of note II: “[District Judge] Blake set what she hoped would be a ‘reasonably fast schedule’ for the case. She gave attorneys two weeks to negotiate who will be the lead attorneys in the huge multidistrict case. If the attorneys can’t agree, the court will decide after a May 3 hearing.”

The Wall Street Journal has an op-ed (subscrip. req.) in today’s edition by Craig Barrett, the CEO of Intel, arguing that the main beneficiary of a proposed Financial Accounting Standards Board (“FASB”) rule requiring companies to expense broad-based employee stock options will be the securities plaintiffs’ bar. The problem is that there is no “model that can value options with any degree of accuracy.” Companies will therefore have to make choices about how to value their options that can have a substantial impact on reported earnings. “The result,” Barrett concludes, “may be a field day for trial lawyers and class action lawsuits.”

Quote of note: “Two Columbia University economists, Charles Calomiris and Glenn Hubbard (who served as chairman of President Bush’s Council of Economic Advisors from 2001 to 2003), have extensively documented the uncertainty surrounding attempts to quantify options expenses. The Black-Scholes model and its cousin, the binomial method, can be wildly inaccurate. FASB knows this and is, therefore, unlikely to require any single means of calculation. It’s all up to corporate financial officers and their auditors, none of whom have a reliable method to account for options. It’s the blind leading the blind leading the blind.”

Addition: FASB has issued an “Exposure Draft” and background materials for their proposed new standards for expensing options.

In the wake of recent corporate scandals, directors-and-officers insurance carriers have sought to rescind policies that were allegedly purchased on the basis of misrepresentations. Not surprisingly, this has led to insurance coverage litigation. (The 10b-5 Daily has recently posted about the Cutter & Buck and Rite-Aid cases.)

The Wall Street Journal has an article (subscrip. req’d) on a recent decision by Judge Baylson of the E.D. of Pa. holding that Aegis Bermuda must pay the defense costs for several directors and officers involved in litigation, including a securities class action, over the collapse of Adelphia Communications. Although Adelphia is in bankruptcy proceedings, temporarily preventing Aegis Bermuda from taking legal action to rescind its policy, the court reportedly held that the insurer would have to continue paying legal fees until a judgment permitting recission was obtained.

Quote of note: “‘Insurance carriers do not function as courts of law,’ U.S. District Judge Michael M. Baylson wrote. ‘If a carrier wants the unilateral right to refuse a payment called for in the policy, the policy should clearly state that right. This policy does not do so.'”

Addition: The decision is available on Westlaw – Associated Electric & Gas Insurance Services, Ltd. v. Rigas, 2004 WL 540451 (E.D. Pa. March 17, 2004).

The Associated Press reports that Qwest Communications Intl., Inc. is “setting aside a reserve of at least $100 million to cover potential liability from stockholder lawsuits and federal investigations.” The announcement was made as part of the company’s recent Form 10-K filing, in which Qwest did not specify the exact amount of the reserve, but stated “it is probable that all but $100 million of the recorded reserve will be recoverable out of a portion of the insurance proceeds, but the use and allocation of these proceeds has yet to be resolved between us and individual insureds.”

There seems little doubt that any settlement of the securities class action pending against Qwest in the D. of Colo. is likely to be for a significant sum.

Everybody’s talking about the Martha Stewart criminal case, but The 10b-5 Daily is primarily interested in the effect it will have on the securities class action pending against Martha Stewart Living Omnimedia, Inc. and certain individual defendants in the S.D.N.Y.

While some experts believe that the dismissal of the criminal securities fraud claim against Ms. Stewart will make it more difficult to prevail in the class action, lead counsel for the shareholders held a conference call today affirming that they would press ahead.

Quote of note (from the Crain’s article on the conference call): “[Lead counsel] said his civil case remains viable because the burden of proof is lower than in the just-completed criminal proceeding. In civil cases, securities fraud can be demonstrated by a ‘preponderance of evidence.’ In criminal cases, fraud charges must be proven beyond a reasonable doubt.”