November 1, 2005 · 7:51 pm

Qwest Settles

Qwest Communications International Inc. (NYSE:Q), a Denver-based provider of Internet, data, video, and voice services, has announced the preliminary settlement of the securities class action pending against the company in the D. of Colo. The case was originally filed in 2001 and alleges that Qwest engaged in sham transactions for fiber-optic network capacity to hide declining demand.

The settlement is for $400 million, with an additional $10 million to be paid by co-defendant Arthur Andersen. Qwest’s former CEO and CFO are also co-defendants in the case, but are not part of the settlement. According to the announcement, the settlement can be terminated under certain circumstances, “including in the event that the SEC elects not to distribute to the putative class members the $250 million penalty that Qwest has already committed to pay to the SEC.” Bloomberg has this report.

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October 27, 2005 · 9:41 pm

Economic Realities and Unintended Consequences

The U.S. Chamber Institute for Legal Reform released a study and related article this week on securities class action litigation. The lead author on both papers is Anjan V. Thakor, a professor at the Olin School of Business at Washington University in Saint Louis.

(1) “The Economic Reality of Securites Class Action Litigation,” a study done in conjunction with Navigant Consulting, finds that large institutional investors generally break even from their investments in stocks impacted by fraud allegations because the losses resulting from ill-timed purchases of inflated shares of one company are, over time, largely offset by financial gains generated from well-timed sales of inflated shares of a different company. As a result, institutional investors are often overcompensated as the result of securities fraud litigation. Less diversified investors (i.e., individual investors) are at greater risk of losing money as the result of securities fraud because they lack the natural “hedge” of institutional investors.

(2) “The Unintended Consequences of Securities Litigation” examines the financial impact of securities litigation on defendant companies and their stock holders. The article finds that the mere filing of a securities class action lawsuit on average results in a 3.5% drop in the defendant company’s equity value. Moreover, the economic losses to a defendant company caused by securities fraud litigation are likely to far exceed the gains to the plaintiffs (especially for smaller companies).

The study and article can be found here. Securities Litigation Watch has a number of posts discussing the study (which uses settlement data from SCAS).

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October 25, 2005 · 10:08 pm

Asking Too Much?

In this interview with the Toronto Globe and Mail, the CEO of Deloitte Touche wonders whether investors are asking too much of company auditors.

Quote of note: “He said investors expect a level of detail that audits are not designed for, and expect a certification to assure the company’s financial health when it simply is meant to attest to the accuracy of the financial statements, based on information provided by the company. Auditors are now being held responsible for failing to detect outright fraud perpetrated by several company insiders who go to great lengths to hide their illicit activity, he said.”

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October 25, 2005 · 10:02 pm

The Dual Approach

The author of The 10b-5 Daily has an op-ed in The National Law Journal this week on the overlap between the SEC’s Fair Funds program and private securities litigation.

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October 21, 2005 · 12:37 pm

More On SLUSA And The Discovery Stay

As posted on The 10b-5 Daily last July, the D. of Conn. held in the Crompton securities class action that discovery should be stayed in a parallel state court derivative action pursuant to SLUSA. To obtain this stay, the defendants only needed to show “a likelihood that the federal Plaintiffs will obtain state Plaintiff’s discovery.”

In an interesting follow-up decision – In re Crompton Corp. Sec. Litig., 2005 U.S. Dist. LEXIS 23002 (D.Conn. Aug. 16, 2005) – the court also ordered the return of the discovery that had already been produced. Although the derivative plaintiff argued that it was beyond the federal court’s authority to force the return of the 2.5 million pages of electronic discovery in question, the court found that Congress had intended courts to apply the SLUSA stay provision “liberally.”

Quote of note: “In granting Defendants’ motion to stay discovery in [the derivative case], this Court sought to prevent the erosion of its jurisdiction during the pendency of the motion to dismiss in the federal securities class action suit. By refusing to return discovery produced to date, Plaintiff violates the letter and the spirit of the PSLRA and SLUSA, and thereby circumvents this Court’s determination to preserve its jurisdiction.”

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October 19, 2005 · 6:38 pm

Enron Status

Last week, the Houston Chronicle had a feature article discussing the status of the Enron securities litigation.

Quote of note: “Assuming all the existing settlements get court approval, there already is more than $7.8 billion — that’s billion with a b — gaining interest in the name of disappointed Enron shareholders and ex-employees. Lawyers inside the class-action cases, where most of the cash is accumulating, think it’s possible that in a year or two there will be $10 billion or more ready to be doled out.”

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October 19, 2005 · 6:18 pm

More on Dabit

The official question presented in the Dabit case before the U.S. Supreme Court is:

“Whether, as the Seventh Circuit held earlier this month and in direct conflict with the decision below, SLUSA preempts state law class action claims based upon allegedly fraudulent statements or omissions brought solely on behalf of persons who were induced thereby to hold or retain (and not purchase or sell) securities?

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October 17, 2005 · 5:32 pm

Throwing In A Little Corporate Governance VI

In a special Sarbanes-Oxley section, today’s Wall Street Journal has an article (subscrip. req’d) on the recent trend of requiring corporate governance reforms as part of the settlement of shareholder litigation. Although the article is generally positive about this trend, it has been the subject of some debate.

Quote of note: “There can be immediate advantages, too, such as helping to avoid a protracted fight inside a courtroom, and, more important, possibly reducing payouts. . . . [I]n a handful of cases tracked by NERA since Sarbanes-Oxley was enacted in 2002, evidence suggests that the plaintiffs in a majority of those cases agreed to reduced cash payouts in return for governance reforms. Of the eight settlement agreements tracked that included cash and governance reforms, five included financial payments that were at least 40% lower than NERA’s model had predicted, and only two turned out to be higher.”

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October 14, 2005 · 6:03 pm

Tagging Along

The PSLRA states that securities class action plaintiffs, within 20 days of filing a complaint, shall publish a notice advising the proposed class of the suit. After the publication of this notice, it is not uncommon for other plaintiffs’ firms (who have not filed complaints) to publish similar notices in the hopes of attracting a client who can be put forward as a lead plaintiff candidate. Not surprisingly, as discussed in this post on Securities Litigation Watch, the initial plaintiffs’ firms do not care for this practice. (Click here for more on the battle of the press releases from last June.)

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October 11, 2005 · 12:47 pm

Supreme Court Declines To Revisit Loss Causation

The Associated Press reports that the U.S. Supreme Court has declined to grant cert in the Lentell v. Merrill Lynch case. In Lentell, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of two research analyst cases based on the plaintiffs’ failure to adequately plead loss causation. The 10b-5 Daily’s summary of the Second Circuit decision can be found here.

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