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

The recruitment of foreign institutional investors to act as lead plaintiffs in U.S. securities class actions is a well-established practice. An interesting look into how these clients are obtained can be found in a breach of contract action recently filed by a plaintiffs’ firm against the lawyers it hired as “independent contractors” to develop international clients.

The agreement between the parties, which is an exhibit to the answer and counterclaim, stated that the lawyers would receive monthly compensation and 10% of any fees the plaintiffs’ firm earned in cases where a client obtained by the lawyers acted as lead plaintiff (with a deduction for the monthly compensation). The action arose when the lawyers decided to terminate the agreement after a few months and become associated with a different plaintiffs’ firm.

A few items of interest from around the web.

(1) Professor Michael Perino’s paper finding that investors may have been damaged in cases where Milberg Weiss improperly compensated the lead plaintiff has some critics. Ideoblog has a comment and response with the author (here and here).

(2) Forbes has an article on “collusive settlements” in securities litigation.

(3) Bruce Carton, the founder of Securities Litigation Watch, is back with a new blog on securities litigation and enforcement. Readers of The 10b-5 Daily will want to add Unusual Activity to their favorites list.

The Wall Street Journal had an article in yesterday’s edition on the JDS Uniphase securities class action trial. The article discusses how the inability to reach a settlement forced the company to risk bankruptcy by taking its chances with a jury.

Quote of note: “Marty Kaplan, JDS’s chairman, says the nine-member JDS board had its ‘hawks,’ who wanted to push to trial, and others who preferred to settle. But he says the plaintiffs’ demands far exceeded even the largest settlement the board considered, meaning there was no ‘serious debate’ about whether to go to trial.”

(1) The New York Law Journal has an article on the assistance being provided by Refco’s ex-CEO, Phillip R. Bennett, to the investors suing the company for securities fraud. The unusual cooperation came to light when plaintiffs’ counsel submitted a letter to the court in conjunction with Bennett’s criminal sentencing.

Quote of note: [Plaintiffs’ counsel] said he would not mind a reduction, however slight, in Bennett’s sentence because of his cooperation with shareholders’ lawyers. ‘It would be a helpful future precedent,’ he said.”

(2) Of course, cooperating with plaintiffs’ counsel can go too far, as illustrated by the Milberg Weiss indictment. Point of Law has a post on the presentation of a new paper by Professor Michael Perino (author of the leading PSLRA treatise) finding that investors may have been damaged in cases where Milberg Weiss improperly compensated the lead plaintiff.

Quote of note: “These findings cast doubt on Milberg Weiss’ claim that paying kickbacks was a completely victimless crime. They are consistent with the hypothesis that Milberg Weiss asked for and got a greater share of the settlements in these cases than it otherwise would—a real economic harm to the class members who therefore would have had a lower net recovery.”

A few items of interest from around the web:

(1) The New York Law Journal (May 19 edition) has an article on the global reach of securities class actions. In particular, the article discusses (a) the developing standards for subject matter jurisdiction over claims by foreign investors in U.S. courts, and (b) the evolution of the class action device for securities claims in foreign jurisdictions.

(2) Securities Litigation Watch has a post on the Top 10 Corporate and Securities Articles of 2007, complete with links. The list includes a number of securities litigation related articles.

(3) NERA has issued a report on the settlement of options backdating class actions. The report concludes: “in the cases that have settled to date, the amounts paid to plaintiffs have been substantially lower than in comparable non-backdating class actions.”

House Republican leaders John Boehner (R-OH) and Lamar Smith (R-TX) have asked the House Judiciary Committee to hold a hearing on the payment of kickbacks to lead plaintiffs in securities class actions. The press release and letter to the Chairman of the House Judiciary Committee can be found here. The WSJ Law Blog has a post on the topic and the ABA Journal has an article with related news links.

Establishing loss causation for the purpose of class certification or summary judgment is becoming a significant hurdle for plaintiffs. On the heels of the Flowserve and Omnicom decisions comes another defense victory.

In Fener v. Belo Corp., 2008 WL 876967 (N.D. Tex. April 2, 2008), the corrective disclosure made by the company attributed a decline in newspaper circulation to three separate sources. Only one of the sources, however, was related to the alleged fraudulent conduct. Based on Fifth Circuit precedent, the court held that it was the plaintiffs’ burden to prove that it was more probable than not that this portion of the disclosure, and not the other unrelated negative statements, caused a significant amount of the stock price decline. The plaintiffs’ expert failed to present empirical evidence sufficient to meet this burden. (The 10b-5 Daily previously posted about the initial motion to dismiss decision in the case.)

Holding: Class certification denied.

Quote of note: “[The] event study tends to establish that the market reacted to the bundle of August 5 news pieces with an August 6 stock price drop of 5.47%. Crucially, however, the study fails to target the corrective disclosure at issue.”

There will be no new posts on The 10b-5 Daily until after March 31.

Under the fraud-on-the-market theory, reliance by investors on an alleged misrepresentation is presumed if the company’s shares were traded on an efficient market. Investors are not entitled to the presumption, however, if they are unable to show that the misrepresentation actually affected the market price of the stock. Class certification continues to be an intense battleground on the application of the fraud-on-the-market theory, as evidenced by two recent decisions.

(1) In In re Fannie Mae Sec. Litig., 247 F.R.D. 32 (D.D.C. 2008), the court considered whether it was appropriate to apply the fraud-on-the-market presumption to investors who purchased Fannie Mae stock after the company’s Dec. 2004 announcement that it would engage in a large financial restatement. The plaintiffs argued that additional information about the alleged fraud was released over the next ten months and the class period should extend to Sep. 2005. The court disagreed and held that the Dec. 2004 announcement “severed the link between the alleged misrepresentations and the stock price” and later investors could not “claim a reasonable reliance on Fannie Mae’s financial statements.” Accordingly, the court found that the class period ended in Dec. 2004.

(2) In In re Credit Suisse First Boston Corp. (Lantronix Inc.) Analyst Sec. Litig., 2008 WL 512779 (S.D.N.Y. Feb. 26, 2008), the court considered whether a series of allegedly false analyst statements about Lantronix affected the market price of the company’s stock. The court declined to decide whether the fraud-on-the-market presumption could ever apply to research analyst statements, noting that the issue is currently before the Second Circuit in the In re Salomon Analyst Metromedia Litig. case (see this post for more background). Nevertheless, the court decertified the class based on the plaintiffs’ failure to adequately demonstrate that the analyst statements had: (a) increased Lantronix’s stock price when issued; (b) had an effect throughout the class period; or (c) negatively impacted Lantronix’s stock price when their falsity was revealed to the market.

The March 17, 2008 edition of the National Law Journal has a pair of columns on the impact of the Supreme Court’s recent securities litigation decisions.

(1) In Stoneridge Alters Legal Landscape (subscrip. req’d), the authors recap the decision and argue that the Court’s rejection of “scheme liability” has “profoundly changed” the potential securities fraud exposure of third parties.

Quote of note: “The holding in Stoneridge indicates that all or most of that $7 billion [in Enron-related settlements] probably did not have to be paid, because the banks, even if they acted with full knowledge that they were engaged in a scheme with Enron, had no liability to the investing public under the anti-fraud provisions of the federal securities laws. Note that while the settling banks in Enron paid approximately $7 billion, there remained a number of banks that declined to settle, and that would have faced massive exposure had Stoneridge been decided differently.”

(2) In Courts Interpret Tellabs (subscrip. req’d), the authors examine the post-decision case law and conclude that courts are taking a “more stringent” approach to scienter pleading.

Quote of note: “Of 102 reported decisions reviewed applying Tellabs, 64 reflect dismissals (albeit some with leave to amend). On its face, this (unscientific) survey reflects a dismissal rate higher than historical norms.”