The 10b-5 Daily

As previously discussed in The 10b-5 Daily, the state of Ohio has pursued a strategy of supplementing pending securities class actions with its own individual suits. That strategy appears to have paid off, at least in the WorldCom case. Columbus Business First reports that Ohio, on behalf of its pension funds, has agreed to a $94 million settlement with individuals and banks it alleged participated in the WorldCom securities fraud.

Quote of note: “The litigation was initiated by former Ohio Attorney General Betty Montgomery, who split with several states involved in a federal class-action lawsuit against WorldCom and its executives in September 2002. At the time, Montgomery said she made the move because Ohio was unable to gain lead plaintiff status in the federal case.”

On Friday, the Wall Street Journal had a front-page story (subscrip. req’d) on the increase in foreign investors acting as lead plaintiffs in U.S. securities class actions. (A related trend is the rise in suits filed against foreign companies listed on U.S. exchanges.)

Quote of note: “The tort bar’s newfound interest in overseas clients — in particular, those involved in securities litigation — is driven by a broader phenomenon: the globalization of business and investing. In U.S. securities cases, judges are required to tap shareholders with the largest losses as the lead plaintiffs. Increasingly, these shareholders are based overseas, from pension funds to hedge funds and private-equity players.”

Quote of note II: “One [foreign investor bringing a suit in the U.S.] is retired tire-company executive Markus Blechner. Last year, when DaimlerChrysler AG paid $300 million to settle allegations it mislead U.S. investors, the Swiss national received nothing because he had purchased his shares in the auto maker on a Swiss exchange. . . . ‘I thought, ‘That’s not fair. Don’t I deserve to get paid, too?’ recalls Mr. Blechner. He and two Austrian investment funds are now suing the auto maker in U.S. federal court in Delaware. ‘Why not? It doesn’t cost me anything,’ Mr. Blechner says.”

As noted in The 10b-5 Daily late last year, the Canadian province of Ontario is set to implement new securities class action legislation. The most significant change is the creation of a broader private right of action for shareholders who purchased their shares in the secondary market. The Toronto Globe and Mail had an article in yesterday’s edition discussing the legislation and the need for Canadian companies to implement new disclosure policies in response to the increased litigation risk.

Quote of note: “Until now, investors who bought shares on the secondary market were able to sue only by alleging outright fraud as opposed to mere negligence. They also had to prove they relied on the misrepresentation when they bought or sold shares, an argument challenging to prove in court. By contrast, the new legislation makes no such stipulation, automatically assuming the plaintiff relied on the information. It is mainly for these reasons that a coalition of companies, including Alcan Inc., had opposed the bill, which was in the works for years. Those objectors pointed to the United States where, by contrast, plaintiffs must demonstrate that a defendant knowingly made a misleading or false statement.”

The Associated Press has a column deploring the tax deductibility of securities class action settlements.

Quote of note: “For some companies, federal and state tax deductions will amount to as much as 40 cents on every dollar they pay to settle investors’ claims. And given all the major settlements announced this year from the likes of Time Warner Inc., Citigroup Inc., JPMorgan Chase & Co. and many others, that quickly adds up.”