August 4, 2005 · 11:08 pm

When A Promotion Is Not Enough

Everything a CEO does can effect his company’s public disclosures. Regular readers will recall the case of the company that was forced to restate its CEO’s resume. A similar type of case was decided earlier this year.

In In re Ariba, Inc. Sec. Litig., 2005 WL 608278 (N.D. Cal. March 16, 2005), the company failed to disclose that its outgoing CEO had personally, out of his own funds, paid another officer $10 million (plus $1.2 million in travel benefits and expenses) to assume the CEO position. Ariba was eventually forced to restate its financial statements to record the payments as capital contributions. In the resulting securities class action, the plaintiffs alleged that the payments were made to “create the false impression that Ariba was doing better than it was” and that “confidence in Ariba’s management would have eroded completely” had it been disclosed that the new CEO had only agreed to accept the position after receiving the payments.

The court found that the plaintiffs had failed to adequately plead that the defendants acted with a fraudulent intent (i.e., scienter). The complaint relied heavily on statements from a confidential witness identified as an “executive assistant,” the existence of GAAP violations, and the individual defendants’ positions at the company. The court held that these allegations did not “constitute the strong circumstantial evidence of deliberately reckless or conscious misconduct with respect to each omission required for Plaintiff to overcome Moving Defendants’ motion to dismiss.”

Holding: Dismissed with prejudice.

Leave a comment

Filed under Curiouser and Curiouser, Motion To Dismiss Monitor

August 3, 2005 · 7:57 pm

Time Warner Settles

Time Warner Inc. (NYSE: TWX), the world’s largest media company, has announced the preliminary settlement of the securities class action pending against the company in the S.D.N.Y. The suit alleges that AOL inflated its revenue between January 1999 and August 2002 as part of a scheme to gain approval for its merger with Time Warner. Reuters reports that the settlement is for $2.4 billion.

Addition: Co-defendant Ernst & Young has agreed to settle the claims against it for $100 million.

Leave a comment

Filed under Settlement

August 2, 2005 · 6:03 pm

CIBC Settles Enron-Related Claims

Canadian Imperial Bank of Commmerce (“CIBC”) (TSX: CM, NYSE: BCM) has agreed to a preliminary settlement of the claims brought against it as part of the Enron securities class action pending in the S.D. of Texas. The suit alleges that CIBC helped Enron inflate its revenues by hiding debt.

Bloomberg reports that the settlement is for $2.4 billion, which is more than the Enron-related settlements entered into by JPMorgan Chase or Citigroup and equivalent to 22% of CIBC’s book value. The settlements in the Enron case have reached a total of approximately $7 billion.

Leave a comment

Filed under Enron, Settlement

August 1, 2005 · 7:36 pm

Reliant Settles

Reliant Energy, Inc. (NYSE: RRI), a Houston-based energy provider, has announced the preliminary settlement of the securities class action pending against the company in the S.D. of Tex. The case alleges that from 1999 to 2001 the company engaged in “round trip” energy deals to inflate its revenues and trading volume. The settlement is for $68 million, of which $61.5 million will be paid for by Reliant’s insurance carriers. In addition, co-defendant Deloitte & Touche will make a settlement payment of $7 million.

Leave a comment

Filed under Settlement

July 29, 2005 · 7:13 am

A Curious Statute

The PSLRA created a safe harbor for forward-looking statements to encourage companies to provide investors with information about future plans and prospects. Under the first prong of the safe harbor, a defendant is not liable with respect to any forward-looking statement if it is identified as forward-looking and is accompanied by “meaningful cautionary statements” that alert investors to the factors that could cause actual results to differ.

Some commentators have described this provision as a “license to lie,” because it arguably protects companies from liability based on even deliberately false forward-looking statements. The U.S. Court of Appeals for the First Circuit agrees. In In re Stone & Webster, Inc., Sec. Litig., 2005 WL 1654040 (1st Cir. July 14, 2005), the court evaluated an allegedly misleading statement that the company “has on hand . . . sufficient sources of funds to meet its anticipated [needs].” The district court found the statement to be forward-looking based on its reference to an anticipated futher need for funds and dismissed the claim based on the PSLRA’s safe harbor. On appeal, the First Circuit found “that the meaning of this curious statute, which grants (within limits) a license to defraud, must be somewhat more complex and restricted.”

In the instant case, the statement was “composed of elements that refer to estimates of future possibilities and elements that refer to present facts.” The court found that the specific claim of fraud related to whether the defendants were “lying about the Company’s present access to funds,” not whether the defendants “were underestimating the amount of their future cash needs.” Under these circumstances, the “mere fact that a statement contains some reference to a projection of future events cannot sensibly bring the statement within the safe harbor.”

Holding: Judgment affirmed in part and vacated in part. (The decision contains holdings on a number of other pleading issues. It also creates an interesting bit of nomenclature, referring to the PSLRA’s heightened pleading standards for false statements as the “clarity-and-basis” requirement.)

Leave a comment

Filed under Appellate Monitor

July 26, 2005 · 7:02 pm

Cox Hearing

The New York Times reports that Representative Chris Cox, the President’s nominee to head the SEC, had a confirmation hearing today before the Senate Banking, Housing and Urban Affairs Committee. He is expected to be confirmed, but did face questions about his role in sponsoring the PSLRA.

Quote of note: “Mr. Cox said many advocates for and against him were wrongly assuming that he would be lax in protecting shareholders because of his work on the 1995 securities law. ‘I view that legislation today as I did then – and as Senator Stevens described in his introduction of me – it’s a vital part of the regime to protect shareholders,’ Mr. Cox said.”

Leave a comment

Filed under All The News That's Fit To Blog

July 25, 2005 · 10:55 pm

SLUSA And The Discovery Stay

As part of the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), Congress mandated that “a court may stay discovery proceedings in any private action in state court, as necessary in aid of its jurisdiction, or to protect or effectuate its judgments, in an action subject to a stay of discovery pursuant to [the PSLRA].” One of the primary goals of this provision was to prevent plaintiffs from using a simultaneous state court action to circumvent the mandatory discovery stay imposed by the PSLRA in federal securities fraud cases. There is a growing judicial debate over when courts should exercise this power.

A court in the D. of Conn. has taken a broad view of the provision’s applicability. In a decision handed down last Friday in In re Crompton Corp. Sec. Litig., 3:03-CV-1293 (D. Conn. July 22, 2005), the court held that discovery should be stayed in a parallel state court derivative action. The defendants only needed to show “a likelihood that the federal Plaintiffs will obtain state Plaintiff’s discovery.” In this regard, the court found that a substantial portion of the federal and state complaints were identical and that the derivative plaintiff was “a putative class member in the federal action, and her receipt of discovery without a showing that it is necessary to preserve evidence or prevent undue prejudice violates the PSLRA.” The court also noted that it would be burdensome to the defendants to produce the same discovery that had been stayed, the risk of inconsistent rulings between the federal and state courts was high, and the derivative plaintiff would not be prejudiced by the stay. (The 10b-5 Daily will post an electronic cite to the decision when available.)

Holding: Motion for protective order granted.

Addition: The decision can be found electronically here – In re Crompton Corp. Sec. Litig., 2005 U.S. Dist. LEXIS 23001 (D. Conn. July 25, 2005).

Leave a comment

Filed under Discovery Stay

July 22, 2005 · 11:24 pm

SLUSA Splits And Class Action Trials

Two interesting articles on securities fraud issues:

(1) This month’s issue of the Wall Street Lawyer (Vol. 9, No. 2 – July 2005) has an article on two circuit splits concerning the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). In “Showdown Over SLUSA,” the authors (Greg Harris and Christian Word) discuss the splits between the Second Circuit and Seventh Circuit over: (a) whether SLUSA preempts “holder” cases in which the plaintiff class consists entirely of investors who neither bought nor sold securities during the alleged class period; and (b) whether a district court’s decision to remand an action removed to federal court under SLUSA is appealable. The authors speculate that this double-split “raises the prospect of Supreme Court intervention and the high court’s first decision addressing SLUSA.” (The 10b-5 Daily’s discussion of the splits can be found here and here.)

(2) This month’s issue of the Securities Reform Act Litigation Reporter (Vol. 19, No. 4 – July 2005) has an article providing an overview of the securities class actions that have gone to trial since the enactment of the PSLRA. In “Ten Years After the Reform Act: Trends in Securities Class Action Trials,” the author (Michael Tu) finds that a total of seven cases have been brought to a trial verdict during this period, with only four cases involving claims based on post-Reform Act conduct. The Securities Litigation Watch has been following this issue closely and has both a handy list of the cases and a link to the article.

Leave a comment

Filed under All The News That's Fit To Blog

July 20, 2005 · 10:02 pm

Lead Plaintiff Issues

Judge Scheindlin of the S.D.N.Y., who is presiding over the IPO allocation cases, continues to publish notable securities law decisions. This time the issue is lead plaintiff selection. 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 (i.e., the movant who alleges the most potential damages). In creating this provision, Congress sought to encourage the participation of institutional investors as lead plaintiffs. There is an ongoing debate over to what extent this legislative history, as opposed to the plain language of the “largest financial interest” presumption, should influence a court in its selection of a lead plaintiff.

In In re eSpeed, Inc. Sec. Litig., 2005 WL 1653933 (S.D.N.Y. July 13, 2005), the court addressed whether a group of individual investors (which included a family and one other individual) or a single insititutional investor should be named lead plaintiff. After surveying the relevant case law in the S.D.N.Y., the court found:

“[A] group of unrelated investors should not be considered as lead plaintiff when that group would displace the institutional investor preferred by the PSLRA. But where aggregation would not displace an institutional investor as presumptive lead plaintiff based on the amount of losses sustained, a small group of unrelated investors may serve as lead plaintiff, assuming they meet the other necessary requirements.”

Based on this standard, the relevant question was whether the family members (i.e., the related members of the individual investor group) had greater losses than the institutional investor. In making that evaluation, the court was forced to address another controversial issue: whether the “first-in, first-out” (FIFO) or “last-in, first-out” (LIFO) methods for estimating losses should be used. The court decided to apply the LIFO method, which matches the last purchases made during the class period with the first sales made during the class period, noting that “it takes into account gains that might have accrued to plaintiffs during the class period due to the inflation of the stock price.” Under the LIFO method, the family members had greater losses than the institutional investor. Accordingly, the court named the entire individual investor group as the presumptive lead plaintiff.

The New York Law Journal has an article (via law.com – free regist. req’d) on the decision. Another recent decision applying the LIFO method is Arenson v. Broadcom Corp., 2004 WL 3253646 (C.D. Cal. Dec. 6, 2004), where the court granted summary judgment against certain plaintiffs who could not establish damages under this method.

Leave a comment

Filed under Uncategorized

July 18, 2005 · 8:32 pm

NERA Releases Study On “Recent Trends In Shareholder Class Litigation”

NERA Economic Consulting has released a study entitled “Recent Trends In Shareholder Class Action Litigation: Are WorldCom and Enron the New Standard?” The study reaches the following notable conclusions:

(1) In the first half of 2005, the median settlement value of securities class action cases jumped nearly 30% to $6.8 million from $5.3 million last year. The study states that the driving factor behind this increase is a sharp reduction in “nuisance” settlements of under $3 million.

(2) While bigger settlements have yielded lower percentage fees for plaintiffs’ counsel, the average settlement in 2005 will result in over $6 million in fees (as compared to $3.6 million five years ago).

(3) Securities class action filings are down by 17 percent in the first half of 2005. The study finds that the slowdown is attributable to a drop in filings in the 9th Circuit, where plaintiffs’ firms may have delayed filing cases pending the Dura decision.

(4) Dismissal rates have nearly doubled after the passage of the PSLRA and account for 39.3% of dispositions of securities class actions filed 1996-2002. This increase offsets the increased likelihood that a public company will be sued in a securities class action. As a result, the annual probability of a company facing a suit that survives a motion to dismiss has remained roughly constant at 1.2%.

The statistics on dismissal rates are surprising, especially since an earlier NERA study found that the PSLRA had not significantly increased the likelihood of a securities class action being dismissed.

Leave a comment

Filed under Lies, Damn Lies, And Statistics