There will be no new posts on The 10b-5 Daily until after June 30.
Global Fraud On The Market
The jurisdictional issues surrounding “foreign cubed” cases – i.e., an action brought against a foreign issuer, on behalf of a class that includes not only investors who purchased the securities in question on a U.S. securities exchange, but also foreign investors who purchased the securities on a foreign securities exchange – continue to be a hot topic. In In re Astrazeneca Sec. Lit., 2008 WL 2332325 (S.D.N.Y. June 3, 2008), the court addressed a proposed class in which 90% of the members were foreigners who purchased on foreign exchanges.
Under the conduct test for subject matter jurisdiction, the plaintiffs needed to adequately allege that (a) the defendants’ conduct in the U.S. was more than merely preparatory to the fraud, and (b) the defendants’ actions in the U.S. “directly caused losses to foreign investors abroad.” Although the court held that the plaintiffs adequately alleged “several of the fraudulent misrepresentations took place in the United States,” the court was unwilling to apply a global fraud on the market presumption and find that the foreign purchasers relied on the U.S.-based conduct when deciding to acquire the stock. Accordingly, the court dismissed the action as to foreign purchasers on foreign exchanges.
Holding: Motion to dismiss granted (both on jurisdictional and, more generally, pleading grounds).
Quote of note: “The Securities Exchange Act does not address the question of extraterritorial reach. The Second Circuit has not yet given guidance on whether the fraud-on-the-market theory should apply to foreign countries. In the absence of clear authority in favor of a global fraud-on-the-market theory, this Court declines to adopt such a theory.”
Filed under Motion To Dismiss Monitor
The Business Of Getting Business
The recruitment of foreign institutional investors to act as lead plaintiffs in U.S. securities class actions is a well-established practice. An interesting look into how these clients are obtained can be found in a breach of contract action recently filed by a plaintiffs’ firm against the lawyers it hired as “independent contractors” to develop international clients.
The agreement between the parties, which is an exhibit to the answer and counterclaim, stated that the lawyers would receive monthly compensation and 10% of any fees the plaintiffs’ firm earned in cases where a client obtained by the lawyers acted as lead plaintiff (with a deduction for the monthly compensation). The action arose when the lawyers decided to terminate the agreement after a few months and become associated with a different plaintiffs’ firm.
Filed under All The News That's Fit To Blog
Around The Web
A few items of interest from around the web.
(1) Professor Michael Perino’s paper finding that investors may have been damaged in cases where Milberg Weiss improperly compensated the lead plaintiff has some critics. Ideoblog has a comment and response with the author (here and here).
(2) Forbes has an article on “collusive settlements” in securities litigation.
(3) Bruce Carton, the founder of Securities Litigation Watch, is back with a new blog on securities litigation and enforcement. Readers of The 10b-5 Daily will want to add Unusual Activity to their favorites list.
Filed under All The News That's Fit To Blog
Going To Trial
The Wall Street Journal had an article in yesterday’s edition on the JDS Uniphase securities class action trial. The article discusses how the inability to reach a settlement forced the company to risk bankruptcy by taking its chances with a jury.
Quote of note: “Marty Kaplan, JDS’s chairman, says the nine-member JDS board had its ‘hawks,’ who wanted to push to trial, and others who preferred to settle. But he says the plaintiffs’ demands far exceeded even the largest settlement the board considered, meaning there was no ‘serious debate’ about whether to go to trial.”
Filed under All The News That's Fit To Blog
Brocade Settles
Brocade Communications Systems, Inc. (NASDAQ: BRCD), a California-based data center networking and services company, has announced the preliminary settlement of the securities class action pending against the company in the N.D. of California. The case, originally filed in May 2005, stems from allegations that Brocade failed to correctly account for its stock-based compensation.
The settlement is for $160 million. The WSJ Law Blog has extensive coverage of the settlement, including relevant links.
Filed under Settlement
Cooperation
(1) The New York Law Journal has an article on the assistance being provided by Refco’s ex-CEO, Phillip R. Bennett, to the investors suing the company for securities fraud. The unusual cooperation came to light when plaintiffs’ counsel submitted a letter to the court in conjunction with Bennett’s criminal sentencing.
Quote of note: [Plaintiffs’ counsel] said he would not mind a reduction, however slight, in Bennett’s sentence because of his cooperation with shareholders’ lawyers. ‘It would be a helpful future precedent,’ he said.”
(2) Of course, cooperating with plaintiffs’ counsel can go too far, as illustrated by the Milberg Weiss indictment. Point of Law has a post on the presentation of a new paper by Professor Michael Perino (author of the leading PSLRA treatise) finding that investors may have been damaged in cases where Milberg Weiss improperly compensated the lead plaintiff.
Quote of note: “These findings cast doubt on Milberg Weiss’ claim that paying kickbacks was a completely victimless crime. They are consistent with the hypothesis that Milberg Weiss asked for and got a greater share of the settlements in these cases than it otherwise would—a real economic harm to the class members who therefore would have had a lower net recovery.”
Filed under All The News That's Fit To Blog
Opportunistic Objectors
The Cardinal Health securities class action is the case that keeps on giving, at least as far as this blog is concerned. Having previously posted about the lead plaintiff, discovery stay, motion to dismiss, settlement, and attorneys’ fees decisions in the case, it seems appropriate to note the latest offering from the court.
In In re Cardinal Health, Inc. Sec. Litig., 2008 WL 1934162 (S.D. Ohio May 5, 2008), the court considered whether two of the several fees objectors should be paid for their efforts. Although lead counsel had requested 24% of the settlement (or $145 million), the court awarded only 18% of the settlement (or $108 million). Based on this $37 million savings, the two objectors requested that they, in turn, be paid between $3.7 million and $6.6 million. The court was not amused, finding that the objectors were making “outlandish fee requests in return for doing virtually nothing.”
Holding: Motions for attorneys’ fees denied.
Quote of note: “[C]lass actions also attract those in the legal profession who subsist primarily off of the skill and labor of, to say nothing of the risk borne by, more capable attorneys. These are the opportunistic objectors. Although they contribute nothing to the class, they object to the settlement, thereby obstructing payment to lead counsel or the class in the hope that lead plaintiff will pay them to go away. Unfortunately, the class-action kingdom has seen a Malthusian explosion of these opportunistic objectors, which now seem to accompany every major securities litigation. Such is the case here.”
Filed under Settlement
Around The Web
A few items of interest from around the web:
(1) The New York Law Journal (May 19 edition) has an article on the global reach of securities class actions. In particular, the article discusses (a) the developing standards for subject matter jurisdiction over claims by foreign investors in U.S. courts, and (b) the evolution of the class action device for securities claims in foreign jurisdictions.
(2) Securities Litigation Watch has a post on the Top 10 Corporate and Securities Articles of 2007, complete with links. The list includes a number of securities litigation related articles.
(3) NERA has issued a report on the settlement of options backdating class actions. The report concludes: “in the cases that have settled to date, the amounts paid to plaintiffs have been substantially lower than in comparable non-backdating class actions.”
Filed under All The News That's Fit To Blog
Contrary To Common Sense
One of the concerns raised by Congress, as part of the PSLRA, was that the application of traditional joint and several liability in securities cases may be unfair, given the enormous potential damages. To combat this problem, the PSLRA replaced joint and several liability with a proportionate liability scheme for defendants who are not found to have knowingly violated the securities laws. An unanswered question, however, is whether this proportionate liability scheme also applies to defendants who are found to have controlling person liability. Section 20(a) of the ’34 Act, which creates controlling person liability, specifically states that the controlling person shall be liable “jointly and severally with and to the same extent” as the primary violator.
In Laperriere v. Vesta Ins. Group, Inc., 2008 WL 1883482 (11th Cir. April 30, 2008), the Eleventh Circuit has held that the proportionate liability provisions of the PSLRA also apply to controlling persons. In the comprehensive decision, which discusses the relevant statutory provisions at length, the court found that both the plain language and legislative history suggest that Congress intended to include controlling persons.
Quote of Note: “We ought to avoid any interpretation of the statute that would treat controlling persons more harshly than the primary violator – that would put derivatively liable controlling persons on the hook for all damages, but let primary violators off the hook for any damages that their actions did not cause. That result would be contrary to common sense, to what the committee that drafted the PSLRA said it intended to do, and to what Congress actually did in the plain language of the PSLRA.”
Filed under Appellate Monitor
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