Two recent appellate decisions of interest:
(1) In Central Laborers’ Pension Fund v. Integrated Electrical Services, Inc., 2007 WL 2367776 (5th Cir. August 21, 2007), the court addressed the pleading of scienter under the Supreme Court’s recent Tellabs decision. Notably, the court found that (a) the confidential witness allegations lacked sufficient detail supporting their reliability (although the court stopped short of suggesting that the plaintiffs should provide the names of the witnesses), (b) the argument that the stock trading of one of the defendants was non-suspicious because he traded pursuant to a Rule 10b5-1 plan was “flawed” because the plan was put into effect during the class period, and (c) an inference of scienter cannot be drawn from a Sarbanes-Oxley certification unless the person signing the certification had reason to know or should have suspected that the financial statements contained misrepresentations. The court concluded that the “allegations read in toto do not permit a strong inference of scienter.”
(2) In Employers-Teamsters Local Nos. 175 & 505 Pension Trust Fund v. Anchor Capital Advisors, 2007 WL 2325079 (9th Cir. August 16, 2007), the court considered whether a lead plaintiff decision can be appealed following the dismissal of the underlying case. A group of public pension funds had unsuccessfully moved to serve as lead plaintiff. The lower court subsequently granted the defendants’ motion to dismiss the case. The appointed lead plaintiff declined to file an amended complaint and instead requested that the individual uncertified actions be dismissed with prejudice. The pension funds moved to appeal the earlier lead plaintiff decision, but the appellate court held that because the pension funds never filed their own complaint or intervened in the pending action, they were merely “potential class members in a potential class action suit” and had no standing to bring an appeal.
Institutional Shareholder Services has issued an interesting (and blessedly pithy) paper on the growing role of international investors in U.S. securities class actions. The highlights include:
(1) Since 1999, international institutional investors have sought to serve as lead plaintiffs 182 times in 98 different cases.
(2) The international institutional investors that filed lead plaintiff motions were from 17 different countries. Germany, Canada, and Israel were the countries with the largest number of movants.
In the post-Dura world, in-and-out traders (i.e., investors who both bought and sold their shares during the class period) continue to have difficulties pursuing securities fraud claims. Hard on the heels of the lead plaintiff decision in the Comverse case comes an opinion from the D. of Mass. declining to appoint an in-and-out trader as a class representative.
In In re Organogenesis Sec. Litig., 2007 WL 776425 (D. Mass. March 15, 2007), the court found that during the class period one of the proposed class representatives “sold almost six times as many shares as he purchased.” Under the last-in, first out (“LIFO”) methodology of assessing damages adopted by the court, these trades resulted in the investor making a profit on his trading during the class period and rendered him an unsuitable class representative. The court also rejected the other proposed class representative because the investor made his final stock purchase prior to the date one of the individual defendants joined the company and, therefore, lacked standing to proceed against that individual defendant. Finally, the court found that Milberg Weiss was not an adequate lead counsel based on: (a) the submission of erroneous stock certifications on behalf of one of the proposed class representatives; (b) the possible negative effects of the federal indictment against the firm; and (c) the firm’s failure to clearly inform the court of the role of one of its indicted attorneys in the case.
Quote of note: “The court realizes that refusing to certify a class will make it more difficult to prosecute the fraud alleged in this case. But the allegation of fraud is not alone enough to merit class certification. The additional requirements exist for the important reason of ensuring that the named plaintiffs effectively represent the claims of the absent parties.”
The WSJ Law Blog and the National Law Journal have articles on the case that focus on the lead counsel decision.
While the Dura decision by the Supreme Court suggests that in-and-out traders (i.e., investors who both bought and sold their shares during the class period) cannot establish the existence of loss causation, lower courts have not uniformly applied this principle. In the latest case to consider the issue, In re Comverse Technology, Inc. Securities Litigation, a court in the E.D.N.Y. has issued a decision vacating a magistrate judge’s order appointing the Plumbers and Pipefitters National Pension Fund (P&P) as lead plaintiff in the case. The court concluded that the magistrate judge improperly overvalued P&P’s financial interest in the action by including losses resulting from in-and-out trades.
Citing Dura, the court held that “any losses that P&P may have incurred before Comverse’s misconduct was ever disclosed to the public are not recoverable, because those losses cannot be proximately linked to the misconduct at issue in this litigation.” P&P actually realized a gain on the Comverse shares that it purchased during the class period and held until after the alleged corrective disclosures were made. As a result, the court appointed a different lead plaintiff and lead counsel. The New York Law Journal has an article on the case.
Quote of note (opinion): “While the Dura Court decided a motion to dismiss, and not a lead plaintiff motion, the logical outgrowth of that holding is that [in-and-out] losses must not be considered in the recoverable losses calculation that courts engage in when selecting a lead plaintiff.”
There have been some new developments in a pair of old disputes.
(1) Newsday reports that after a long-running legal battle, a California state court has granted a motion brought by Texas billionaire Sam Wyly and “order[ed] three class action law firms to turn over years’ worth of evidence they collected as part of their lawsuits alleging accounting fraud by former [Computer Associates] executives.” Wyly, who was a class member in the suits, alleges that the litigation was improperly settled for a low amount just prior to Computer Associates’ public disclosures of accounting fraud.
(2) The court presiding over the Halliburton securities class action has granted a motion by the Archdiocese of Milwaukee Supporting Fund, which is acting as lead plaintiff in the case, to remove Lerach Coughlin and Scott + Scott as lead counsel. Legal Pad has a post.
Both the Federal Rules of Civil Procedure and the PSLRA provide that plaintiffs’ counsel in a securities class action may be awarded a “reasonable” fee as determined by the court. Courts generally agree that it is appropriate to cross-check a proposed percentage fee award using the lodestar method (take the reasonable hours expended times a reasonable hourly rate and adjust with a multiplier), but there is no uniformity as to what are the appropriate hours, rates, and multiplier to use.
Bloomberg has an article on the approval of the settlement in the Nortel securities litigation. There are two items of note. First, the overall settlement value apparently has declined by over $1 billion since the settlement was first announced. Second, the court reduced the proposed attorneys’ fees from 8.5% (approximately $96 million) to 3% (approximately $34 million) of the settlement value.
A review of the opinion, which is not yet available online, reveals that the court’s main concern was that the proposed attorneys’ fees award resulted in a lodestar multiplier of 5.8 (i.e., “fees totaling 5.8 times the number of hours actually worked”). The court viewed this as excessive, citing a number of prominent cases (including Bristol-Myers Squibb and Worldcom) where other S.D.N.Y. judges approved attorneys’ fee awards that had lodestar multipliers of 3.5 or less. Based on a 3% award, the lodestar multiplier in Nortel is approximately 2.05.
The Halliburton securities litigation is back in the news, two years after the S.D. of Tex. rejected a proposed settlement of the case. Forbes has an article on a motion by the Archdiocese of Milwaukee Supporting Fund, which is acting as lead plaintiff in the case, to replace Lerach Coughlin and Scott + Scott as lead counsel.
Terayon Communications Systems, Inc. (Nasdaq: TERN), a Santa Clara-based provider of digital video networking applications, has announced the preliminary settlement of the securities class action pending against the company in the N.D. of Cal. The case originally was filed in 2000 and is based on allegedly misleading statements concerning the company’s ability to obtain certification for its technology.
The settlement is for $15 million, with Terayon paying $2.3 million and the rest covered by insurance. Prior to this settlement, the case had been a lightening rod for criticism over the relationship between short sellers and the securities plaintiffs’ bar.
Professor Michael Perino, author of the leading treatise on the PSLRA, has published an empirical study of attorneys’ fees in securities class actions. The paper is entitled “Markets and Monitors: The Impact of Competition and Experience on Attorneys’ Fees in Securities Class Actions.” Perino finds that the participation of a public pension fund as a lead plaintiff is correlated with lower attorneys’ fees requests and awards. By contrast, there is no statistically significant correlation associated with the participation of a union pension fund, the other type of institutional investor examined by the study. Court auctions of the lead counsel role result in significantly lower attorneys’ fees. In addition, the participation of repeat players (either courts that are more experienced handling securities class actions or institutional objectors) are correlated with lower attorneys’ fees.
Quote of note: “These findings suggest four basic policy responses. First, because the fee arrangements that public pension funds negotiate appear to be the product of at least some competitive bargaining, courts should look to those arrangements as guidelines for awarding fees in cases without institutional investors. Second, to obtain the benefits of judicial experience in fee awards, courts with comparatively little experience in handling securities class actions should look to the fees that more experienced courts award, a process that will be facilitated by making award decisions (which are predominantly unreported) more widely available. Third, policy should continue to encourage institutions, most particularly public pension funds, to serve as lead plaintiffs and to encourage institutions to monitor fee requests and object to those that are excessive. Finally, courts should continue to experiment with auctioning the role of lead counsel in those cases in which the available lead plaintiffs do not appear to have used competition or otherwise to have engaged in arm’s length bargaining to select class counsel.”
The Denver Post has an article on the (in)famous Footnote 4 from the Molson Coors lead plaintiff decision.