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

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.”

The May 2003 issue of Federal Lawyer (not available online) contains a column by James Fazio entitled “The Motive and Opportunity Test for Pleading Scienter under the Federal Securities Laws: Where Is It Now?” Mr. Fazio, an assistant U.S. attorney in the S.D. of Cal., examines whether motive and opportunity allegations are sufficient to establish a strong inference that the defendants acted with fraudulent intent (i.e., scienter), as required by the PSLRA, and concludes that there is a dispute among the circuits on this question.

Quote of note: “In short, the Second and Third Circuits appear to be the only two circuits in which allegations of motive and opportunity may be sufficient in themselves to show scienter. By contrast, the Ninth Circuit is the only circuit to have expressly rejected it. In the vast majority of circuits in between, there appears to be a trend against categorizing facts for purposes of analyzing whether those facts show scienter and in favor of determining whether the complaint in its entirety raises a strong inference of scienter, regardless of whether any alleged facts fall within any formalistic category, such as motive and opportunity.”

PricewaterhouseCoopers has agreed to pay the SEC $1 million to settle a case brought by the agency. The SEC alleged that the accounting firm destroyed and altered documents after learning of a securities class action suit against one of its clients.

An AP article in yesterday’s Bergen Record discusses the growing role of New Jersey’s state pension funds in bringing securities class actions. The article reports that the funds lost $22 billion in the stock market downturn as of last year.

Quote of note: “Peter C. Harvey [the state’s acting attorney general] told The Associated Press that the state is also the lead plaintiff in at least four of the eight cases, a legal distinction that gives New Jersey lawyers power to determine everything from what motions will be filed to how much should settle the cases. Most of the suits will likely be settled, he said.”

Addition: One of Harvey’s predecessors as N.J. Attorney General, John Degnan, is the Vice Chairman of the Chubb Corporation. Degnan has been calling on the insurance industry to form a group to provide legal services, information, and advocacy for companies facing securities litigation. The Chubb web site contains this press release from last February; a more recent op-ed from Degnan along the same lines appeared in the May 12, 2003 edition of Business Insurance (subscription required).

(BTW, the headline on this post refers to New Jersey’s tourist mantra – made famous in a series of tv ads by former Gov. Tom Kean.)

The House Judiciary Committee is scheduled to hold a hearing today on the Class Action Fairness Act of 2003, which would apply some of the reform concepts in the PSLRA and the Securities Litigation Uniform Standards Act to all class actions.

Addition: On May 21, the House Judiciary Committee approved the bill by a vote of 20-14.

The May 12 issue of Business Week provides advice on bringing a claim against your broker for touting technology stocks. The article notes that the analyst fraud settlement will provide valuable evidence for the related class actions that have been brought against the major brokerage firms. Addition: On the other hand, the experts quoted in a related Reuters article do not think legal action based on this evidence will result in much of a recovery.

An article in today’s Washington Post discusses the accounting fraud at U.S. Foodservice, the Columbia, MD subsidiary of Royal Ahold NV, and notes that 34 securities class actions have been filed. A hearing has been scheduled for May 29 in Santa Fe, N.M. to determine where the cases should be consolidated.