Finding jurors that do not have strong feelings about the WorldCom corporate scandal may prove difficult for the company’s former auditors. Arthur Andersen is the last remaining defendant in the WorldCom securities class action and the case is about to go to trial. According to a Bloomberg report, counsel for Arthur Andersen has informed the judge that many of the individuals in the jury pool “owned WorldCom stock while others displayed ‘deeply felt’ bias against Andersen and WorldCom.” Jury selection begins on Monday and the trial is expected to last until the end of May.
Lightning Fails To Strike Twice
It may have been too much to expect that the U.S. Supreme Court would grant cert in two securities litigation cases within the span of a year. Having just addressed the issue of loss causation, the court has passed on the opportunity to interpret the PSLRA’s safe harbor for forward-looking statements.
The PSLRA created the safe harbor 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.
As discussed in a post in The 10b-5 Daily from last August, entitled “The Safe Harbor May Just Be A Safe Puddle,” the U.S. Court of Appeals for the Seventh Circuit has weakened the protection afforded by the safe harbor. In Asher v. Baxter Int’l, the court found that it may be impossible, on a motion to dismiss, to determine whether a company’s cautionary statements are “meaningful.” Prior to this decision, however, numerous courts had dismissed cases pursuant to the first prong of the safe harbor. The defendants petitioned for a writ of certiorari to the Supreme Court to address the circuit split.
On Monday, however, the Supreme Court denied the cert petition. The Chicago Tribune has an article on the decision.
Quote of note: “Numerous business groups filed legal briefs in support of Baxter with the Supreme Court urging review of the case. The Business Roundtable, in its brief, argued that the 7th Circuit decision could affect how public companies across the country handle disclosures. ‘The ramifications of the decision below could be enormous,’ it wrote, adding that companies ‘may choose to avoid making forward-looking disclosures rather than risk lawsuits like this one.'”
Filed under Appellate Monitor
Ex-WorldCom Directors Settle
As of today, all of the former directors sued in the WorldCom securities class action pending in the S.D.N.Y. have agreed to settle the case. The twelve board members will pay $60.75 million ($24.75 million in personal payments and $36 million from their insurers), bringing the total settlements in the case to slightly over $6 billion. The last remaining defendant is Arthur Anderson. The Associated Press has a report.
Filed under Settlement, WorldCom
More On “Statistical” Tracing
Texas Lawyer has an article (via law.com – free regist. req’d) on the U.S. Court of Appeals for the Fifth Circuit’s recent decision rejecting the use of “statistical” tracing to establish standing for Section 11 claims. The 10b-5 Daily posted about the case last week.
Filed under All The News That's Fit To Blog
Make That $6 Billion And Counting
JPMorgan Chase & Co. (NYSE: JPM) has announced the preliminary settlement of the claims brought against it as part of the WorldCom securities class action pending in the S.D.N.Y. JPMorgan is accused of failing to engage in proper due diligence while acting as an underwriter for WorldCom bond offerings and is the last of the defendant banks in the case to settle. The settlement is for $2 billion.
Bloomberg reports that JPMorgan will pay a significant premium (more than 17.5%) over the formula used to establish Citigroup’s related settlement. Taken together, the WorldCom securities class action settlements now total approximately $6 billion.
Filed under Settlement, WorldCom
Paying Analysts
Is it fraudulent to pay analysts to promote your company’s stock? In a break from the run-of-the-mill securities class action, investors in Diomed Holdings, Inc. alleged that, in 2002, the company and its chairman “devised a plan to artificially inflate the price of Diomed’s stock by secretly paying stock analysts to tout Diomed to unsuspecting investors.” The plaintiffs argued that this was part of a “pump and dump” scheme and and unlawful pursuant to Rule 10b-5.
The court disagreed. In Garvey v. Arkoosh, 2005 WL 273135 (D. Mass. Feb. 4, 2005), the court held that “nothing in the securities laws bars the issuer of a regulated security from paying an analyst for a stock recommendation.” While the applicable regulatory scheme requires the person who publishes the report to disclose a conflict of interest (see Section 17(b) of the ’33 Act), there is no similar duty imposed on the issuer who paid for the promotion. Moreover, the analysts had clearly stated in their reports that they were being paid to tout the stock, even if the disclosures did not directly connect Diomed to the payments.
Holding: Motion to dismiss granted.
Quote of note: “Any reasonable investor told that the publisher of an investment report had received $700,000, $100,000, or even $50,000 to tout a particular stock would give the analyst’s recommendation the proverbial grain of salt regardless of the source of the funds.”
Filed under Motion To Dismiss Monitor
Amazon Settles ’34 Act Claims
Amazon.com, Inc. (Nasdaq: AMZN), a Seattle-based Internet retailer, has announced the partial settlement of the securities litigation pending against the company in the W.D. of Wash. The plaintiffs brought ’33 Act and ’34 Act claims based on alleged false statements about the company’s financial condition. The settlement is for $27.5 million and only covers the ’34 Act claims. The Seattle Times has a report.
Filed under Settlement
Promoting Institutional Investors
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). The presumption may be rebutted, however, by a showing that this party will not fairly and adequately protect the interests of the class or is subject to unique defenses not applicable to other class members. In creating this provision, Congress sought to encourage the participation of institutional investors as lead plaintiffs.
An open question is 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. To put it another way, what happens when the mechanism created by Congress does not result in the preferred outcome? In two recent cases, courts appear to have been swayed heavily by Congressional intent.
In Malasky v. IAC/Interactive Corp., 2004 WL 2980085 (S.D.N.Y. Dec. 21, 2004), the court found that an individual investor had the largest financial stake in the case and was otherwise qualified to act as lead plaintiff. Nevertheless, the court held that because the individual investor was “not an institutional investor,” he would be paired with an institutional investor as co-lead plaintiff.
Taking this analysis even a step further, in In re Cardinal Health, Inc. Sec. Litig., 2005 WL 238073 (S.D.Ohio Jan. 26, 2005), the court rejected an institutional investor, at least in part, because it was not a pension fund. Based on a statement in the House Conference Report on the PSLRA, the court found that the “PSLRA prefers pension funds.”
There has already been one appellate decision, on a writ of mandamus, holding that “a straightforward application of the [PSLRA lead plaintiff] statutory scheme . . . provides no occasion for comparing plaintiffs with each other on any basis other than their financial stake in the case.” See In re Cavanaugh, 306 F.3d 726 (9th Cir. 2002). More appellate courts may be asked to take up this issue in the future.
Filed under Lead Plaintiff/Lead Counsel
$4 Billion And Counting
Three more banks have agreed to a preliminary settlement of the claims brought against them as part of the WorldCom securities class action pending in the S.D.N.Y. Deutsche Bank AG, WestLB AG, and Caboto Holding SIM Spa will pay a total of $437.5 million based on their roles as underwriters for WorldCom bond offerings.
Bloomberg reports that the premium over the formula used to establish Citigroup’s settlement continues to rise as the case gets closer to trial. The current group of settling banks are paying a 13%-17.5% premium.
Taken together, the WorldCom securities class action settlements now total just under $4 billion.
Filed under Settlement, WorldCom
Four More WorldCom Banks Settle
Four more banks have agreed to a preliminary settlement of the claims brought against them as part of the WorldCom securities class action pending in the S.D.N.Y. ABN Amro, Mitsubishi Securities International, BNP Paribas Securities, and Mizuho International, who are accused of failing to engage in proper due diligence while acting as underwriters for WorldCom bond offerings, will pay a total of $428.4 million.
These are the latest in a string of settlements by defendant banks just prior to trial. While the earlier settlements were all calculated using a formula pioneered by Citigroup’s settlement, Bloomberg reports that this group of banks is paying a 5%-13% premium.
Filed under Settlement, WorldCom
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