Category Archives: IPO Allocation Cases

The Curtain Closes

It has been a long journey for the IPO allocation cases, but it looks like the end is in sight. The parties have filed a global settlement agreement (issuers and underwriters) with the court. The settlement amount is $586 million, a sharp decline from the amounts being considered prior to the Second Circuit’s decision to deny class certification in some representative cases.

Could this be the final post on the IPO allocation cases (6 years and 17 posts later)? Don’t despair – there’s always the possibility of an attorneys fees dispute. Counsel for the plaintiffs is requesting $195.3 million in fees on top of $56 million in expenses. The WSJ Law Blog and Bloomberg have reports.

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Potential IPO Allocation Cases Settlement

The Wall Street Journal reports that there may be a settlement in the IPO allocation cases. Although it is not entirely clear from the press coverage, it appears that the parties are contemplating a global settlement (including issuers and underwriters) for less than $700 million. A settlement at this level would be a significant drop from the amounts being considered prior to the Second Circuit’s decision to deny class certification in some representative cases. Additional coverage can be found in the AmLaw Daily and Bloomberg.

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It’s All Class Certs Nowadays

While The 10b-5 Daily was on break last week, there were interesting developments in two of the biggest ongoing securities litigations.

(1) On Friday, the U.S. Court of Appeals declined to reconsider its class certification decision in the IPO allocation cases.

Quote of note (ruling): “The Petitioners, having sought a broad class, are essentially complaining that we failed to narrow their class definition to an extent that might have satisfied Rule 23 requirements. Whatever authority we might have had to undertake that task, we did not think it appropriate to provide legal advice to experienced class-action litigators.”

(2) Meanwhile, the plaintiffs in the Enron securities class action are attempting to appeal the denial of class certification by the U.S. Court of Appeals for the Fifth Circuit related to their claims against Enron’s banks. A cert petition (via WSJ) was filed with the U.S. Supreme Court on Thursday. Among other things, the petition argues that the case is a “suitable companion” to the Charter Communications case the Court will hear next term. The media coverage includes articles by the Associated Press and Houston Chronicle.

Quote of note (cert petition): “This case is especially significant because it involves the alleged misconduct of banks – major actors in our nation’s financial markets and the banks that Central Bank identified as secondary actors who nonetheless ‘may be potentially liable as primary violators under Rule 10b-5 in any complex securities fraud [where] there are likely to be multiple violators.'”

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The Class Certification Hurdle

In an opinion issued in the IPO allocation cases, the Second Circuit has held that in evaluating a motion for class certification under Federal Rule of Civil Procedure 23, district judges must receive and review enough evidence to be satisfied that each requirement of Rule 23 is met, even if there is some overlap between class certification and the merits of a case. The court cautioned that while district judges must reach a full “determination” (but not a finding) regarding fulfillment of the class certification requirements, they should avoid reviewing any aspects of case merits that are unrelated to those requirements. The decision brings the Second Circuit’s jurisprudence on class certification into line with the majority of federal appellate courts (including the Fourth, Fifth, Seventh, Eighth and Eleventh Circuits).

More importantly (at least for securities litigators), the court went on to decide whether class certification could be granted in the representative IPO allocation cases at issue. The Second Circuit held that, under the new, stronger standard, the plaintiffs were unable to satisfy the predominance of common questions over individual questions requirement for a Rule 23(b)(3) class action. Accordingly, the court vacated the district court’s order granting class certifications and remanded the case for further proceedings.

Although the court’s class certification analysis is short, it contains two interesting holdings.

Reliance: The court held that the “fraud on the market” presumption could not be applied because the market for IPO shares cannot be efficient under any circumstances. Interestingly, the court cited the Sixth Circuit’s decision in Freeman v. Laventhol & Horwath, 915 F.2d 193, 199 (6th Cir. 1990) in support of this position, even though Freeman is a case about newly traded municipal bonds, not securities traded on a national exchange. The court went on to find that an efficient market cannot be established, for example, because during the 25-day “quiet period” analysts cannot report publicly concerning securities in an IPO and a “significant number of reports by securities analysts” is a “characteristic of an efficient market.” Finally, the court reiterated its skepticism (also found in an earlier Second Circuit decision related to the WorldCom securities litigation) that the fraud on the market presumption can be applied in cases based on anything other than statements by an issuer or its agents.

Knowledge: For both Rule 10b-5 and Section 11 claims, plaintiffs must show that they traded without knowing that the stock price was affected by the alleged false or misleading statements. The Court held that lack of knowledge could not be established in the IPO allocation cases because many of the investors were fully aware of the alleged fraudulent scheme (due in large part to the unusual facts of the case). Thus, the court held that the plaintiffs were unable to fulfill the predominance requirement because lack of knowledge was not common throughout the class.

Reports on the decision and its potential impact on the proposed settlement by the issuer defendants can be found in the American LawyerWall Street Journal (subscrip. req’d), and WSJ Law Blog. There is also a Bloomberg article on dissension among the plaintiffs’ firms handling the litigation.

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Tip Of The Iceberg?

Over the weekend, the Wall Street Journal had an article (via wsj.com – subscrip. req’d) on the IPO allocation cases. The article discusses the potential impact of the proposed JPMorgan settlement on the overall recovery for investors.

Quote of note: “After J.P. Morgan Chase & Co. agreed in recent days to pay $425 million to settle its part of the civil charges, estimates of the potential amounts that investors could get back have jumped and could reach several billions of dollars, plaintiffs’ lawyers say. That could make the case among the biggest brought against major Wall Street firms related to a series of scandals earlier this decade, including the collapse of companies such as Enron and WorldCom. Some plaintiffs’ lawyers say they now expect a higher recovery for investors partly because the amount that J.P. Morgan — the first of the banks to settle the case — agreed to pay is surprisingly large, given that the IPOs the company led accounted for less than 10% of the total damages calculated by the plaintiffs.”

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JPMorgan Settles IPO Allocation Claims

JPMorgan Chase & Co. (NYSE: JPM) has entered into a settlement of the claims against the company in the IPO allocation cases. The settlement is for $425 million. JPMorgan is the first underwriter defendant to settle.

Two notes:

(a) There is already plenty of speculation that JPMorgan’s decision to settle early is the result of the fact that it was forced to pay a significant premium when it was the last major bank to settle in the WorldCom case.

(b) Based on the size of this settlement and the fact that there are still 54 underwriter defendants, it appears unlikely that the issuer defendants (who entered into a conditional settlement nearly three years ago) will have to make any payments.

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Upside Surprises

Judge Scheindlin (S.D.N.Y.) has issued two loss causation decisions in an offshoot of the IPO allocation cases.

In the case in question, the plaintiffs alleged a scheme by an investment bank and several issuers to systematically set the issuers’ announced earnings forecasts below internal forecasts. When earnings consistently beat the announced forecasts, the resulting excitement in the market allegedly drove the issuers’ stock prices up. According to the complaint, the scheme was ultimately revealed to the market through a series of announcements disclosing that earnings were below expectations or warning that future earnings would not meet expectations. These announcements allegedly ended “the fraudulently induced expectation of continuing upside surprises.”

In re Initial Public Offering Sec. Litig., No. MDL 1554 (SAS), 2005 WL 1162445 (S.D.N.Y. May 13, 2005), the court responded to a motion for reconsideration of an earlier dismissal of the claims by rejecting the plaintiffs’ reliance on the announcements because they were not “corrective disclosures.” The court explained that “[t]o allege loss causation, plaintiffs must allege that, at some point, the concealed scheme was disclosed to the market.” None of the disclosures relied on by the plaintiffs, however, implied that there had been a fraudulent scheme.

In response to a second motion for reconsideration, Judge Scheindlin issued another decision. In In re Initial Public Offering Sec. Litig., 2005 WL 1529659 (S.D.N.Y. June 28, 2005), the court noted that the Supreme Court’s Dura opinion “did not disturb Second Circuit precedent regarding loss causation.” After a lengthy discussion of how to reconcile this sometimes contradictory Second Circuit precedent, the court again found that loss causation had not been adequately plead.

The June 28 decision is the subject of a New York Law Journal article (via law.com – free regist. req’d).

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