The 10b-5 Daily

In 2003, KPMG settled the claims against it in the Rite Aid securities litigation for $125 million. As reported in The 10b-5 Daily, a class member objected to the payment of 25% of that sum (i.e., $31 million) in attorneys’ fees. The district court approved the settlement terms despite the objection and an appeal followed.

According to an article (via law.com – free regist. req’d) in the Legal Intelligencer, the U.S. Court of Appeals for the Third Circuit has held that the district court should reconsider its fee award. The district court correctly applied the percentage-of-recovery approach, but erred in its application of a lodestar ‘crosscheck’ by focusing only on the hourly rates for the top lawyers handling the case, making the fee award appear more reasonable. The court found: “Had the hourly rates been properly blended, taking into account the approximate hourly billing rates of the partners and associates who worked on the case, the multiplier would have been a higher figure, alerting the trial court to reconsider the propriety of its fee award.”

It is important to note, however, that the court also rejected the argument that courts should be required to apply a sliding scale and reduce the percentage of a settlement going to attorneys’ fees based on the size of the fund. The opinion can be found here.

Whether and how to apply the fraud-on-the-market theory (i.e., reliance by investors on an alleged misrepresentation is presumed if the company’s shares were traded on an efficient market) to research analyst statements continues to be controversial.

In DeMarco v. Lehman Brothers, 222 F.R.D. 243 (S.D.N.Y. 2004), a case alleging that a Lehman analyst made buy recommendations for RealNetworks, Inc. stock while secretly holding negative views of the stock, Judge Rakoff denied the motion for class certification based on the plaintiffs’ inability to provide sufficient evidence that the fraud-on-the-market theory was applicable. The court noted that there is a “qualitative difference” between a statement of fact from an issuer and a statement of opinion by a research analyst. In particular, a “well-developed efficient market can reasonably be presumed to translate the former into an effect on price, whereas no such presumption attaches to the latter.” As a result, the court held that the fraud-on-the-market doctrine can apply to a case based on research analyst statements “only where the plaintiff can make a prima facie showing that the analyst’s statements materially impacted the market price in a reasonably quantifiable respect.”

Another district judge in the S.D.N.Y., however, has disagreed with that standard and granted class certification in a similar case. In DeMarco v. Robertson Stephens, 2005 WL 12033 (S.D.N.Y. Jan. 20, 2005), Judge Lynch addressed a case alleging that a Robertson Stephens’ analyst and certain corporate officers maintained a buy rating on Corvis Corp. stock while privately selling their own holdings. (An earlier post on the case can be found here). In determining whether the fraud-on-the-market theory could be applicable, the court “decline[d] to adopt a higher standard at class certification for plaintiffs alleging securities fraud by research analysts and their employers.” The court found that “by presenting a mix of market activity evidence, logical arguments, and statistical studies of the influence of at least some analyst statements, plaintiffs have made ‘some showing’ of their ability to make a common legal and factual presentation on reliance to an eventual factfinder.”

The Second Circuit has come close to deciding this issue before, only to be thwarted by a settlement. It may get another chance.

Addition: The New York Law Journal has an article (via law.com – free regist. req’d) on the decision.

Securities Litigation Watch has an interesting post on the recent series of suits by mutual fund investors alleging that the funds failed to collect as much as $2 billion in securities class action settlement payouts to which the investors were entitled.

The U.S. Senate is set to pass the Class Action Fairness Act. The legislation applies some of the reform concepts in the PSLRA and SLUSA to all class actions. Notably, class actions meeting certain jurisdictional criteria would have to be heard in federal court. Reuters reports that the Senate floor debate may take place the week of Feb. 7.

At the same time, proponents of U.S. class action reform are urging France not to permit these types of suits. Jacques Chirac, France’s president, announced earlier this year that he had asked his government to propose legislation allowing collective suits against companies. An article in today’s Financial Times discusses comments made by the president of the U.S. Chamber of Commerce on a trip to Paris, where he warned France that U.S.-style class actions “would damage the economy and shift money from ‘good companies to lawyers.'”