The October 2003 edition of ISS’s Securities Class Actions Services Alert, contains a useful summary of the recent settlements containing corporate governance reforms. The 10b-5 Daily has previously posted about this developing trend.
Democrats May Block Class Action Fairness Act
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.”
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Don’t Wait By The Mailbox
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.”
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A Billion Here, A Billion There . . .
The Rocky Mountain News has an article on Qwest Communications Int., Inc. (NYSE: Q) and the completion of its $2.5 billion financial restatement. The 10b-5 Daily has been following the securities class action filed against Qwest in the D. of Colo. with interest. As part of yesterday’s Form 10-K filing, the company disclosed that “lead counsel for the plaintiffs has indicated that plaintiffs will seek damages in the billions of dollars.” Qwest has moved to dismiss the fourth amended complaint in the case and that motion is currently pending before the court.
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Enterasys Settles
Enterasys Networks, Inc. (NYSE: ETS), a Massachusetts-based business network service provider, has announced a settlement in the securities class action against the company pending in the D. of N.H. The proposed settlement is for $50.4 million ($17.4 million in cash and $33 million in shares) and is subject to approval by the court. The settlement also covers related derivative actions against the company that have been brought in New Hampshire and Delaware state court.
Enterasys has been the subject of two securities class actions in the past five years. The current settlement is for the case brought in 2002, following a financial restatement, alleging that the company improperly recognized revenue in violation of GAAP. An earlier securities class action against the company filed in the D. of N.H. in 1998 was dismissed with prejudice by the district court, but the decision was reversed by the U.S. Court of Appeals for the First Circuit in this opinion. According to Enterasys’ most recent quarterly SEC filing, the 1998 case is still pending.
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The High Cost Of The Mutual Fund Trading Scandal
A column in today’s National Post discusses the potentially enormous costs of the mutual fund trading scandal, including the expense of defending against “the inevitable wave of class-action lawsuits.” The author notes that Bank of America, which is one of the known targets of the New York Attorney General’s investigation, has announced the creation of a $100 million fund for direct costs and the increase of its litigation reserves by $75 million.
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THQ Resolves Arbitration Dispute With D&O Insurer
THQ, Inc. (Nasdaq: THQI) has announced the settlement of its arbitration dispute with National Union, the company’s directors’ and officers’ insurance carrier, over the coverage due for the settlement of a class action lawsuit filed against THQ in February 2000. According to the press release, “National Union had previously contributed $5.0 million to the class action settlement, but had disputed its obligation to pay the balance of $5.0 million under THQ’s total of $10.0 million in directors’ and officers’ insurance coverage.” As part of the settlement, THQ will receive a $4 million payment and “additional considerations” from National Union.
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Paradyne Settles
Paradyne Networks, Inc. (Nasdaq: PDYN), a Florida-based provider of high-speed network access solutions for broadband voice, data and video, has announced the settlement of the securities class action pending against the company in the M.D. of Fla. The proposed settlement is for $3 million, to be funded by Paradyne’s insurance, and is subject to approval by the court.
The plaintiffs have alleged that Paradyne and certain of its officers and directors fraudulently inflated the price of the company’s stock from September 1999 to September 2000 by making false and misleading representations about the company’s practice of managing and reporting its inventory. The court denied the defendants’ motion to dismiss in April 2002.
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How Many Bites At The Apple Are Too Many?
Rule 15(a) of the Federal Rules of Civil Procedure provides that leave to amend a complaint “should be freely given when justice so requires.” The PSLRA, on the other hand, states “[i]n any private action arising under this chapter, the court shall, on the motion of any defendant, dismiss the complaint if the [pleading] requirements . . . are not met.” It is a tension-packed clash leading to the inevitable question: how many bites at the apple are too many in a securities class action?
The U.S. Court of Appeals for the Sixth Circuit does not give an exact answer in Miller v. Champion Enterprises, Inc., 2003 WL 22298649 (6th Cir. Oct. 8, 2003), but it does conclude that repeated amendments should not be permitted. In Miller, the plaintiffs moved for leave to file a second amended complaint (the fourth complaint in the action) after their first amended complaint was dismissed for failure to meet the PSLRA’s pleading requirements. The district court denied the motion for two reasons: (1) the PSLRA was designed to prevent strike suits and “could not achieve this purpose if plaintiffs were allowed to amend and amend until they got it right;” and (2) the proposed amended complaint was futile because it did not correct the earlier pleading deficiencies.
In affirming the decision, the Sixth Circuit states that the “district court also correctly held that allowing repeated filing of amended complaints would frustrate the purpose of the PSLRA.” The appellate court expressly rejects the argument that courts should be lenient in allowing amendments to pleadings in securities fraud cases because plaintiffs do not have discovery available to them.
Holding: Dismissal affirmed.
Quote of note: “In light of [the PSLRA’s heightened pleading] requirements, we think it is correct to interpret the PSLRA as restricting the ability of plaintiffs to amend their complaint, and thus as limiting the scope of Rule 15(a) of the Federal Rules of Civil Procedure.”
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Hedge Funds Cleared To Bring Class Action Against Tyson
An interesting twist on the normal securities class action. The Associated Press reports that Judge Robinson of the D. of Del. has granted class action status to a suit against Tyson Foods, Inc. (NYSE: TSN) alleging securities fraud in connection with Tyson’s 2001 acquisition of beef-packing giant IBP Inc.
The plaintiffs, a group of hedge funds who were seeking to arbitrage the merger, 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. As a result, Tyson artificially deflated the price of IBP’s stock. Tyson eventually completed the acquisition in September 2001. The plaintiffs seek to represent all IBP shareholders who bought on or before March 29, 2001, and then sold their shares following Tyson’s announcement.
Quote of note: “In her 20-page opinion, Robinson said Tyson had contended the lead plaintiffs’ sophistication ‘cuts against a finding that a class action is a superior forum’ for resolving such claims. But she said that argument conflicts with Congress’ intent. ‘Federal securities laws do not protect investors any differently, and certainly no less, simply because they engage in more complicated investment strategies,’ she wrote.”
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