July 15, 2005 · 10:07 pm

Who Is The Client?

The 10b-5 Daily has previously posted about a petition filed in New York state court against the plaintiffs’ law firms that settled the Computer Associates securities class action. Texas billionaire Sam Wyly is seeking the discovery collected in the case and argues that the firms have breached their fiduciary duty to him by not granting access to the materials because, as a CA shareholder, he was effectively a client of the firms until he declined to participate in the settlement.

The plaintiffs’ law firms removed the case to federal court, arguing that the petition raised numerous federal questions, including “whether under the PSLRA lead counsel represents the class as a whole or individual class members.” In Wyly v. Milberg Weiss Bershad & Schulman, 2005 WL 1606034 (S.D.N.Y. July 8, 2005), the court disagreed, finding that none of the cited reasons were sufficient to find federal jurisdiction, and remanded the case back to state court. The court declined, however, to award Wyly any attorneys’ fees for fighting the removal, noting “the dubious nature of petitioner’s cause of action and the surrounding circumstances.”

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July 14, 2005 · 7:37 pm

The PSLRA And The Supreme Court

Why has the Supreme Court declined to hear cases that would clarify the PSLRA? Business Week has a “news analysis” on the Supreme Court’s reluctance to take cases in “vital areas such as antitrust, environmental, intellectual-property, securities, and tax law.” In particular, the article cites the varied application of the PSLRA’s heightened pleading standards as a “prime example of the legal confusion that the Supreme Court has allowed to fester.”

The article does not state how many cert petitions involving interpretations of the PSLRA the Supreme Court has rejected. That said, anecdotal evidence abounds. A recent example is the Supreme Court’s decision not to hear the Baxter case, an appeal from a Seventh Circuit decision that created a circuit split over the PSLRA’s safe harbor for forward-looking statements.

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July 13, 2005 · 11:21 pm

Upside Surprises

Judge Scheindlin (S.D.N.Y.) has issued two loss causation decisions in an offshoot of the IPO allocation cases.

In the case in question, the plaintiffs alleged a scheme by an investment bank and several issuers to systematically set the issuers’ announced earnings forecasts below internal forecasts. When earnings consistently beat the announced forecasts, the resulting excitement in the market allegedly drove the issuers’ stock prices up. According to the complaint, the scheme was ultimately revealed to the market through a series of announcements disclosing that earnings were below expectations or warning that future earnings would not meet expectations. These announcements allegedly ended “the fraudulently induced expectation of continuing upside surprises.”

In re Initial Public Offering Sec. Litig., No. MDL 1554 (SAS), 2005 WL 1162445 (S.D.N.Y. May 13, 2005), the court responded to a motion for reconsideration of an earlier dismissal of the claims by rejecting the plaintiffs’ reliance on the announcements because they were not “corrective disclosures.” The court explained that “[t]o allege loss causation, plaintiffs must allege that, at some point, the concealed scheme was disclosed to the market.” None of the disclosures relied on by the plaintiffs, however, implied that there had been a fraudulent scheme.

In response to a second motion for reconsideration, Judge Scheindlin issued another decision. In In re Initial Public Offering Sec. Litig., 2005 WL 1529659 (S.D.N.Y. June 28, 2005), the court noted that the Supreme Court’s Dura opinion “did not disturb Second Circuit precedent regarding loss causation.” After a lengthy discussion of how to reconcile this sometimes contradictory Second Circuit precedent, the court again found that loss causation had not been adequately plead.

The June 28 decision is the subject of a New York Law Journal article (via law.com – free regist. req’d).

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Filed under IPO Allocation Cases, Motion To Dismiss Monitor

July 11, 2005 · 9:25 pm

Fair Funds

The Wall Street Journal had a feature article (subscrip. req’d) last week on the SEC’s efforts, pursuant to Section 308 of Sarbanes-Oxley (the “Fair Funds” provision), to pay out some of the large civil penalties it has collected to investors. The article focuses on the logistical challenges of the WorldCom case, where tracking down all of the injured investors and sorting out their claims is expected to take close to two years.

Quote of note: “Regulators are looking for cheaper and faster ways to get money back to investors. While the Fair Funds program was set up to be separate from private class-action lawsuits, the SEC is moving to work more closely with trial lawyers and has hitched several of its Fair Fund efforts to related class-action settlements that cover a similar set of investors. SEC funds have been combined with class-action settlements in about a half-dozen cases, including the agency’s $150 million settlement with Bristol-Myers Squibb Co. and its $25 million settlement with Lucent Technologies Inc.”

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July 8, 2005 · 7:25 pm

Relying On Confidential Sources

The June issue of The Review of Securities & Commodities Regulation (Vol. 38, No. 11) contains an excellent overview of the law surrounding the use of confidential sources. The article, entitled “Anonymous Sources in Securities Class Action Complaints,” is authored by John Henn, Brandon White, and Matthew Baltay and provides a circuit-by-circuit analysis.

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July 8, 2005 · 6:55 pm

Scienter and Rule 10b5-1 Trading Plans

Whether trading under a Rule 10b5-1 trading plan can help shield corporate executives from securities fraud liability is a topic that courts continue to explore.

Rule 10b5-1, put into place in 2000, establishes that a person’s purchase or sale of securities is not “on the basis of” material nonpublic information if, before becoming aware of the information, the person enters into a binding contract, instruction, or trading plan (as defined in the rule) covering the securities transaction at issue. To take advantage of this potential affirmative defense, many executives have implemented trading plans for their sales of company stock.

Insider trading, of course, is often used by plaintiffs in securities class actions to create an inference of scienter (i.e., fraudulent intent). The plaintiffs allege that the individual corporate defendants profited from the alleged fraud by selling their company stock at an artificially inflated price. In the latest decision to consider the impact of Rule 10b5-1 trading plans on insider trading scienter allegations, the court in In re Netflix, Inc. Sec. Litig., 2005 WL 1562858 (N.D. Cal. June 28, 2005) found that the fact that the trading in question took place pursuant to a trading plan mitigated against a finding of an inference of scienter.

The author of The 10b-5 Daily has written an article (with one of his colleagues) on this topic.

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July 6, 2005 · 8:00 pm

Off To The Races

No sooner does France announce that it may permit class actions than the first securities class action appears. Reuters reports that a French lawyer has launched a class action against Vivendi Universal on behalf of small shareholders. The company already faces a similar suit in the U.S.

Quote of note: “‘Until now, no one has had the courage to do this’ in France, Canoy told Reuters. ‘But why can the Americans do certain things and not the French?'”

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July 5, 2005 · 7:55 pm

Second Circuit To Hear IPO Allocation Appeal

The IPO allocation cases (brought against the underwriters of over 300 initial public offerings) generally allege that the defendants ramped up trading commissions in exchange for providing access to IPO shares and required investors allocated IPO shares to buy additional shares in the after-market to help push up the share price. Last year, Judge Scheindlin (S.D.N.Y.) granted class certification in six “focus” cases that have been used to test the sufficiency of the overall allegations.

A reader points out that the Second Circuit has agreed to hear an appeal from that grant (by order dated June 30, 2005). Moreover, the court has specifically asked for briefing on two hot-button issues:

(1) Whether the Second Circuit’s previous position that plaintiffs are only required to make “some showing” that the proposed class comports with all of the elements of Federal Rule of Civil Procedure 23 is consistent with the 2003 amendments to that rule.

(2) Whether the presumption of reliance established in Basic v. Levinson, 485 U.S. 224 (1988) (i.e., the fraud-on-the-market theory) was properly extended to plaintiffs’ claims against the non-issuer defendants and to the market manipulation claims.

The Second Circuit has come close to addressing the scope of the fraud-on-the-market theory before, but was thwarted by a settlement. The resolution of this issue has wide-ranging implications for securities fraud litigation. Take a look, for example, at The 10b-5 Daily’s discussion of two opposing district court decisions in cases brought against research analysts. Stay tuned.

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June 30, 2005 · 11:11 pm

Ebbers Adds To WorldCom Settlement

The former CEO of WorldCom is forfeiting most of his assets in settlement of the securities class action claims against him. The Associated Press reports that Bernard Ebbers, who was convicted in March of criminal fraud, “will pay $5 million up front and place the rest of his assets in a trust that will be sold off for an estimated $25 million to $40 million.” These sums will be added to the more than $6 billion paid by former WorldCom investment banks in settlement of the suit.

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June 29, 2005 · 11:22 pm

Parmalat’s Auditors

In an interesting opinion released yesterday in the Parmalat securities class action, Judge Kaplan (S.D.N.Y.) addresses some important topics.

(1) Parmalat’s primary auditors were the Italian affiliates of two multinational accounting firms – Grant Thornton and Deloitte & Touche. The court found that the plaintiffs sufficiently alleged an agency relationship between the global umbrella organizations, Grant Thornton International (“GTI”) and Deloitte Touche Tohmatsu (“DTT”), and their Italian member firms so as to allow the claims against the global entities to go forward.

(2) GTI and DTT argued that the plaintiffs had failed to adequately plead loss causation “because they do not allege that any misrepresentation by them was the proximate cause of the decline in the value of the price of Parmalat securities or that a corrective disclosure about their prior misrepresentations caused the company’s collapse.” The court disagreed, holding that under Second Circuit precedent the plaintiffs’ allegations that the risks concealed by Parmalat and its auditors caused the decline in investor value were sufficient.

(3) Section 20(a) of the ’34 Act creates a cause of action against defendants alleged to have been “control persons” of those who engaged in securities fraud. There is a split within the Second Circuit over whether a plaintiff must allege culpable participation to state a legally sufficient claim under this provision. The court found that allegations of culpable participation are not necessary.

(4) The defendants evidently also moved to dismiss the 368-page complaint as failing to comply with F.R.C.P. 8 (“short and plain statement” of the claim). The court noted that it was in “substantial sympathy” with this position: “The requirement of pleading fraud with particularity does not justify a complaint longer than some of the greatest works of literature.” Nevertheless, the court declined to dismiss the complaint on this basis.

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