The 10b-5 Daily

The Wall Street Journal has an article (subscription required) in today’s edition on the record numbers of mutual-fund investors bringing arbitrations against their brokers. The article discusses the recent mutual fund trading scandal but concludes: “Individual investors aren’t likely to bring arbitration claims related to the explosive allegations involving rapid-fire trading from New York Attorney General Eliot Spitzer. That’s because the damage to any one investor is relatively small, and it’s hard to blame your broker for fund-company practices. Instead, these allegations are more likely to provide fodder for class-action lawsuits.” (The WSJ should catch up with current events, the class action suits are already here and more are being brought every day.) The article goes on, however, to describe some of the other mutual-fund practices being investigated by the regulators that may lead to even more individual, and perhaps class action, claims.

The Delaware Law Weekly has an article (via law.com – free regist. required) on the D. of Del.’s recent grant of class certification in the Tyson Foods. Inc. case. The plaintiffs, a group of hedge funds who were seeking to arbitrage a merger between Tyson and IBP, Inc., allege that on March 29, 2001, Tyson falsely stated that it was backing out of the merger with IBP due to a government investigation into accounting discrepancies at one of IBP’s units. (The 10b-5 Daily has previously posted about the class certification decision.)

The article offers a thorough overview of the numerous cases that have been brought as a result of the IBP acquisition. Interestingly, the genesis of the securities class action appears to be some of the findings in the Delaware Chancery Court’s order directing Tyson to perform on its contract and complete the merger.

Quote of note: “The parties ultimately argued their cases before Vice Chancellor Leo E. Strine Jr., who, on June 15, 2001, ordered specific performance of the merger agreement. Strine determined that Tyson tried to back out of the merger due to buyer’s remorse and not the SEC’s inquiries into IBP’s subsidiary. In an opinion dated June 18, 2001, Strine said Tyson wished it had paid less for IBP, particularly in view of both companies’ poor performances in 2001. Strine also called into question Tyson’s claims that it had relied on misleading information about the SEC inquiries, and thereby was inappropriately induced into the merger. Less than 10 days after the Delaware Chancery Court ordered specific performance of the companies’ agreement, Robinson’s opinion states that the first of several class actions was filed in the matter in the Delaware District Court.”

The American Lawyer looks at the future of securities class actions (from the plaintiffs’ perspective) in its Fall 2003 special edition on litigation. [Unfortunately, the website currently does not have the article posted.] The article focuses on the lead plaintiff provisions of the Private Securities Litigation Reform Act of 1995 (“PSLRA”) and discusses, in depth, the growing role of public pension funds in assuming the leadership of large suits. A number of issues are touched upon, including the effectiveness of the PSLRA, how plaintiffs’ firms attract public pension fund clients, and the statistical trends in this area of the law. Simply put, it’s a must-read article.

Quote of note: “Some thought that major mutual funds would consistently serve as lead plaintiff. The haven’t. And some thought that the number of class actions would steadily decline. Wrong again. But eight years after [the PSLRA’s] passage, the act is making good on its promise to involve institutions. Instead of professional institutional investors, however, its primarily public pension funds that are serving as lead plaintiffs in megaclass actions.”

Quote of note II: “What will be the effect of the Sarbanes-Oxley Act of 2002 and the myriad regulatory corporate governance changes? Will they stifle corporate fraud or will the new causes of action spawn more suits? The early indicators don’t suggest much change in any direction. A recent study by NERA Consulting shows little uptick since the blow-up of Enron and the passage of Sarbanes-Oxley. No increase. No decrease. Just a steady stream of suits.”

Senate Democrats have successfully blocked a floor vote on the Class Action Fairness Act, which almost certainly would have been approved. Proponents of the bill only managed to muster 59 votes in favor of invoking cloture — a one-vote loss. The Associated Press reports that the bill is likely dead for the year. (The 10b-5 Daily has been following the progress of the Class Action Fairness Act through Congress.

The Associated Press reports that Democrats may succeed in blocking Senate approval of the Class Action Fairness Act. The bill was passed by the House of Representatives on June 12.

As discussed previously in The 10b-5 Daily, the Class Action Fairness Act applies some of the reform concepts from securities law (the PSLRA and SLUSA) to all class actions. Notably, class actions meeting certain jurisdictional criteria would have to be heard in federal court.

Quote of note: “But most of the 48 Senate Democrats oppose the legislation to place all national class action lawsuits into the federal system, enough to filibuster if necessary, Democratic leaders say.”

Quote of note II: “Under both the House and Senate versions of the bill, class-action lawsuits in which the primary defendant and more than one-third of the plaintiffs are from the same state would still be heard in state court. But if less than one-third of the plaintiffs are from the same state as the primary defendant, the case would go to federal court. Also, at least $5 million would have to be at stake for a class-action lawsuit to be heard in federal court. The House version would apply to all lawsuits, including ones being argued in court now, but the Senate version is not retroactive. It also would apply only to class action lawsuits and not to similar actions, including lawsuits consolidated into one case or state attorney general actions.”

The U.S. News & World Report has an article in its Oct. 27 edition stating that investors have yet to see much of a return from the various Wall Street suits and settlements. The article discusses the research analyst cases (Judge Pollack is dismissing them), the WorldCom and Enron cases (hard to collect), and the IPO allocation cases (a guaranteed payment of $1 billion, but it may take a while to resolve the claims against the investment banks). The author also notes the potential connection between Judge Schendlin’s recent attorneys’ fees decision and the IPO allocation cases (perhaps he reads The 10b-5 Daily.

Quote of note: “In June, insurers for the 309 companies [named in the IPO allocation cases] agreed to pay up to $1 billion to compensate investors–establishing a minimum recovery fund–depending on how much money Weiss wrestles from the investment banks. ‘It’s in the banks’ interest to drag it out, to raise the cost to the other side,’ says one executive in the case. Still, he and others predict Weiss could ultimately settle with the Wall Street firms for $3 billion to $5 billion–partly because the iconoclastic Pollack isn’t handling the case.”