September 3, 2003 · 8:09 pm

Let The Mudslinging Begin

Under the PSLRA, the lead plaintiff in a securities class action is presumptively the party with the largest financial interest in the relief sought by the class. The presumption may be rebutted, however, by a showing that this party will not fairly and adequately protect the interests of the class or is subject to unique defenses not applicable to other class members. Not only does the lead plaintiff get to run the case, it also has virtually free reign to appoint its attorney as lead counsel for the class. Given that the lead counsel can obtain significant fees from a successful securities class action, the battle over the lead plaintiff position is often intense.

The State of New Jersey has been an active participant in securities class actions over the past few years, often applying for the lead plaintiff role. (The 10b-5 Daily previously posted about this development.) In In re Motorola Securities Litigation, 2003 WL 21673928 (N.D. Ill. July 16, 2003), New Jersey was far and away the lead plaintiff candidate with the most alleged losses. Its candidacy came under fierce attack, however, from another group of investors, led by Commerzbank, who were also seeking the lead plaintiff position.

First, Commerzbank argued that New Jersey would be subject to a unique defense because state officials have publicly criticized the state’s Department of Investment, blaming it for the relevant losses. The court rejected this argument, noting that “if New Jersey’s investment strategy during the early part of the decade was less than ideal, this actually may make the State more typical of those who have lost money in the stock market rather than less.”

Second, Commerzbank argued that newspaper reports in New Jersey suggested the existence of a “pay-to-play” scheme, in which Governor McGreevey would consider hiring law firms to represent the state in securities litigation if they made political contributions. The newspaper article in question, however, made no mention of the Motorola litigation or the two firms representing the state in the case (who both submitted declarations denying they had been awarded the representation in return for political contributions).

Holding: New Jersey appointed lead plaintiff.

The decision can be found here by putting in the case number (No. 03 CV 287).

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September 2, 2003 · 10:45 pm

Infonet Case Dismissed

Infonet Services Corporation (NYSE: IN), a California communication services provider, has announced the dismissal, without prejudice, of the securities class action against the company. The plaintiffs have until October 2, 2003 to refile.

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September 2, 2003 · 10:38 pm

Throwing In A Little Corporate Governance

Over the holiday weekend, the USA Today had an article discussing the recent trend of including corporate governance reforms as part of the settlement of shareholder litigation. The article focuses on the recent settlements of the Siebel Systems derivative case and the Computer Associates securities class action (posted about in The 10b-5 Daily).

Addition: TheStreet.com has posted a more comprehensive article on the same topic. The author argues that the increased participation of institutional investors as lead plaintiffs in securities class actions is behind the surge in settlements containing corporate governance reforms.

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September 2, 2003 · 10:37 pm

Throwing In A Little Corporate Governance

Over the holiday weekend, the USA Today had an article discussing the recent trend of including corporate governance reforms as part of the settlement of shareholder litigation. The article focuses on the recent settlements of the Siebel derivative case and the Computer Associations securities class action (posted about in The 10b-5 Daily).

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September 2, 2003 · 10:23 pm

South Korean Debate Over Securities Class Actions Continues

The South Korean legislature continues to debate over legislation that would permit investors to bring securities class actions. The Korea Herald reports that South Korea’s major business lobbying groups have urged the government to “think twice” before implementing the change, which “could hamper business activities.”

The 10b-5 Daily has been following this story intently. South Korea is starting with a blank slate, with full knowledge of the pros and cons of the U.S. securities class action system. It will be interesting to see what the final legislation looks like.

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August 28, 2003 · 12:03 am

Blame Canada

Corel Corp., the Canadian software company that manufactures WordPerfect, has agreed to pay $7 million to settle a securities class action based on allegedly misleading statements it made in 1999 and 2000 concerning its entry into the Linux market. The case is pending in the E.D. of Pa.

According to an article in the Legal Intelligencer (via law.com – free registr. required), the plaintiffs’ damages expert had estimated losses of about $46.3 million based on the alleged fraud. The article discusses in some detail the plaintiffs’ justifications to the court for accepting a 15% recovery, including Corel’s poor financial position, the defendants’ argument that the investors had not suffered any damages, and the relatively small amount of D&O insurance that would be available after a trial. Plaintiffs also alleged that the Corel’s defense lawyers had threatened to seek the protection of the Canadian bankruptcy court if plaintiffs managed to obtain a judgment.

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August 27, 2003 · 7:29 pm

Oxford Health Settles Insurance Claims

Oxford Health Plans Inc. has been in a dispute with its excess insurance carriers over their contribution to the company’s March 2003 settlement of a securities class action for $225 million.

According to an article on the Dow Jones Newswires (suscrip. required), the company has agreed in principle to settle $17.9 million of its claims against the insurers for a total of about $14.3 million, which will be reflected in its third-quarter earnings. An additional claim for $23.9 million against one insurance carrier is still outstanding.

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August 26, 2003 · 7:41 pm

Computer Associates Settles

Computer Associates International Inc. (NYSE: CA) has announced that it will issue up to 5.7 million shares to obtain a global settlement of the securities class actions, ERISA class actions, and derivative litigation pending against the company. (There may be a cash component to the settlement, however, depending on the share price of the stock at the time of distribution.) The cases are based on how Computer Associates, which makes software from corporate mainframe computers, recognized revenue and awarded executive compensation. In anticipation of the settlement, the company plans to take a pre-tax charge of approximately $144 million in the current quarter.

Quote of note: According to an Associated Press article, lead counsel for the plaintiffs stated “that getting stock today, if the company has a good future, has a better upside for our clients than waiting three, four, or five years to resolve the case.”

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August 25, 2003 · 8:16 pm

How Much Particularity Is Enough?

Less than many other circuit courts have required, is the answer from the U.S. Court of Appeals for the Tenth Circuit in Adams v. Kinder-Morgan, Inc., 2003 WL 21906117 (10th Cir. August 11, 2003). Pursuant to the PSLRA, plaintiffs attempting to plead securities fraud based on information and belief (as opposed to personal knowledge) must “state with particularity all facts” supporting their belief that the specified statements were misleading. Courts have routinely grappled with the meaning of the words “all facts.”

The Second Circuit, in Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000), concluded that interpreting the text literally would lead to absurd results, including requiring dismissal “where the complaint pled facts fully sufficient to support a convincing inference if any known facts were omitted.” The Second Circuit tempered its holding, however, by finding that it is not enough for plaintiffs to baldly allege facts in support of their allegations, they must provide “documentary evidence and/or a sufficient general description of the personal sources of the plaintiffs’ beliefs.” (The Fifth Circuit has also adopted this approach, while the First and Ninth Circuits have required detailed source information.)

In Adams, the Tenth Circuit agreed with the Second Circuit that “all facts” should not be interpreted literally, but declined to impose a requirement that plaintiffs state the source of their facts. Noting that the PSLRA did not “purport to move up the trial to the pleadings stage” and does not mention the pleading of sources, the court held that it will “apply a common-sense, case-by-case approach in determining whether a plaintiff has alleged securities fraud with the particularity required by [the PSLRA] without adding a per se judicial requirement that the source of facts must always be alleged to support substantive allegations of fraud in an information and belief complaint.” The court did note, however, that in the absence of source information, the facts in the complaint “will usually have to be particularly detailed, numerous, plausible, or objectively verifiable by the defendant before they will support a reasonable belief that the defendant’s statements were false or misleading.”

Holding: Reversed in part (dismissal based on a lack of particularity, and other grounds, as to all defendants), affirmed in part (dismissal based on insufficient scienter allegations and lack of control as to one defendant).

Quote of note: “While the PSLRA certainly heightened pleading standards for securities fraud lawsuits, we believe that if Congress had intended in securities fraud lawsuits to abolish the concept of notice pleading that underlies the Federal Rules of Civil Procedure, Congress would have done so explicitly.”

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August 22, 2003 · 4:04 pm

DaimlerChrysler Settles Merger Suit

The big news today is the announcement of a proposed $300 million settlement in the securities class action against DaimlerChrysler AG. The suit alleges that Daimler-Benz AG misrepresented the acquisition of Chrysler as a “merger of equals” to avoid paying Chrysler shareholders a takeover premium for their shares.

A separate suit brought by billionaire financier Kirk Kerkorian, who was Chrysler’s largest single shareholder at the time of the merger, is unaffected by the settlement because Kerkorian will opt out of the class. Kerkorian’s case is set for a December trial in the D. of Del.

Bloomberg appears to have the most comprehensive article on the settlement (at least as of this posting). The State Board of Adminstration of Florida, a teacher’s and workers’ pension fund that acted as one of the lead plaintiffs in the case, has issued a press release.

Quote of note (Bloomberg): “The offer, before any opt-outs, is worth about 43 cents a share, minus attorneys’ fees. With Kerkorian opting out, the remaining shareholders would each receive about 47 cents per share, minus attorneys’ fees. If approved, the settlement would be one of the largest ever in a securities fraud case, according to Bloomberg data. The agreement is tied for ninth place among the largest recoveries in shareholder class-action suits in history, the data shows.”

Quote of note II (Bloomberg): “Han Tjan, a spokesman for the Stuttgart, Germany-based automaker, said the company has insurance to cover $220 million of the settlement. DaimlerChrysler officials say the class-action claims by investors other than Kerkorian presented the ‘major risk’ in the case. ‘Now we’ll concentrate on the suit with Tracinda [Kerkorian’s holding company],’ company spokesman Hartmut Schick said.”

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