The 10b-5 Daily

A few years ago, Senior Judge Milton Shadur of the N.D. of Ill. issued a lead plaintiff decision in the Comdisco securities litigation. See In re Comdisco Sec. Litig., 150 F. Supp. 2d 943 (N.D. Ill. 2001). The decision disqualified the Pennsylvania State Employees’ Retirement Systems (“PASERS”) from serving as lead plaintiff despite the fact that PASERS had the most claimed losses of any of the movants. The court reasoned:

It turns out that when the Class Period of January 25 through October 3, 2000 (which is the proper referent) is focused upon, PASERS’ claim that it suffered some $2.4 million in losses in connection with its investment in Comdisco common stock is only a mirage created by PASERS’ adoption of a FIFO (first-in-first-out) approach to its dealings in the stock. In fact PASERS was an active trader during the Class Period, with 15 separate sales that more than matched its purchases during that time frame: Its Class Period purchases of Comdisco common stock aggregated 213,800 shares, while its sales during the same period totaled 218,400 shares. And when those transactions are properly matched, rather than by the impermissible application of a FIFO methodology (which by definition brings into play PASERS’ pre-Class-Period holdings as the purported measure of its claimed loss), PASERS’ Class Period sales at inflated prices caused it to derive unwitting benefits rather than true losses from the alleged securities fraud–so much so that [another movant] demonstrates that PACERS derived a net gain of almost $300,000 (rather than any net loss at all) from its purchases and sales during the Class Period.

In essence, the court applied a “last-in, first out” (LIFO) methodology in examining PASERS’ trades and determined that PASERS did not have any cognizable losses based on the alleged fraud.

A member of the plaintiffs’ bar subsequently wrote an analysis of the case entitled Fee-Fi-Fo-Fum: Why The Rejection Of FIFO Is . . . Not Smart, 2 Class Action Litig. Report (BNA) 786 (2001). The article concluded that Judge Shadur’s decision to use LIFO to determine PASERS’ losses had the effect of improperly comparing green apples (pre-class-period shares) with red apples (class-period shares) because it brought “into play the sale of pre-class-period holdings.” In the author’s view, “it is only the inflated purchases that are relevant, because only those shares relate to the fraud.”

Apparently, plaintiffs’ counsel in the Comdisco case (which is still pending) recently brought the article to Judge Shadur’s attention. The judge was not amused. In an unusual memorandum opinion issued this week, Judge Shadur decided to clarify his earlier statements on the topic. See In re Comdisco Sec. Litig., 2004 U.S. Dist. LEXIS 7230 (N.D. Ill. April 26, 2004). The court noted that “one possible consequence of working with apples may be the production of applesauce — as Webster’s Third New Int’l Dictionary (unabridged) 104 defines that product: ‘an insincere expression of opinion: an assertion that is patently absurd and usu. phrased in exaggerated terms: BUNK, BALONEY (I know applesauce when I hear it — Ring Lardner).'” The court found that this was the case here, because any real-world analysis of losses required the use of LIFO.

“Simply put, the article’s attempted criticism of the use of LIFO in determining the identity of the ‘most adequate plaintiff’ under the [PSLRA] impermissibly ignores the obvious fact that with every securities class action having to identify a class period, the focal point of the inquiry must begin (for standing purposes and otherwise) with purchases or sales — or both — during that class period. And in turn that focus calls for a primary concentration on class period transactions, with is consistent with LIFO rather than FIFO treatment. Regrettably the cited article, like the source from which it drew its Fee-Fi-Fo-Fum title, is no better than a fairy tale.”

Astute readers will note that this debate is closely related to the larger debate over what is necessary to adequately plead loss causation in securities class actions.

Addition: Both decisions referenced in this post can be found at this website under case number 1 01-CV-2110.