The 10b-5 Daily

Although the media generally has praised the recent trend of requiring corporate governance reforms as part of the settlement of shareholder litigation, the response has not been uniform. Business Week has a column in its Sept. 6 edition that is critical of the real value of these reforms.

Quote of note: “It is just another example of how there’s as much bluster as big bucks behind the recent wave of such therapeutic shareholder deals. Governance experts and the lawyers who push the lawsuits laud them for forcing boards closer to true independence and pressuring executives to be more accountable. But while some financial payouts have been impressive, the governance changes, with few exceptions, have not. Worse, the settlements are taking some of the pressure off companies to make more substantive changes.”

The 10b-5 Daily has been actively following the unusual dispute among the lead plaintiffs in the Halliburton securities class action over a proposed $6 million settlement. According to an Associated Press story today, the new judge presiding over the case will decide whether to approve the settlement next week.

Quote of note: “[Judge Barbara Lynn of the N.D. of Tex.] pointed out that the $6 million settlement, cut in half by attorney and administrative fees, would result in low payouts to thousands of plaintiffs in the class-action lawsuit. She said they wouldn’t lose much if she rejected the settlement, allowed the case to move forward and it eventually failed.”

The Wall Street Journal reported (subscrip. req’d) today that seventeen former WorldCom bond underwriters, as part of the pretrial “requests for admission” in the securities class action pending in the S.D.N.Y., refused to admit that any of WorldCom’s financial reports were false. Judge Cote apparently expressed scepticism over this position at the hearing.

The WSJ also reported that ten of WorldCom’s former directors have agreed to settle allegations that they did not properly oversee the company for $50 million. An official announcement of the settlement could come this week. Bloomberg has a story on the settlement.

Quote of note (WSJ): “Asked about its attorney’s exchange with Judge Cote, J.P. Morgan spokeswoman Kristin Lemkau yesterday said the bank and its co-defendants ‘do not contend that no financial fraud occurred at WorldCom.’ While Judge Cote characterized the banks’ responses as an across-the-board denial, Ms. Lemkau said that, in fact, is not the banks’ position. ‘The financial fraud and its concealment from us has been the centerpiece of the underwriters’ defense for two years and is a substantial part of our motion for summary judgment to have the entire case dismissed,’ Ms. Lemkau said. ‘That is different from whether — for purpose of responding to a request to admit — a particular line item in a particular financial statement was false, an issue which involves, among other things, accounting judgment and a review of the discovery record, which is not complete.'”

CBS MarketWatch.com has a column on the mutual fund fee cases, which allege “that the operational savings that a fund company accrues when its issues reach the multibillion-dollar level never get passed to individual investors.” The columnist argues that the cases will ultimately benefit investors by either resulting in fee cuts or creating an environment in which mutual fund companies will be reluctant to raise fees.

The Wall Street Journal has an editorial (subscrip. req’d) in today’s paper on the relationship between public pension funds and the securities plaintiffs’ bar. The editorial is entitled “Pension Fund Shenanigans” and discusses what the authors describe as “a couple of recent cases show[ing] that some public pension funds are not only failing their own beneficiaries, they are making mischief for well-run corporations.”

Stephen Choi, a law professor at Berkeley, has published an article entitled “Do the Merits Matter Less After the Private Securities Litigation Reform Act?” Choi finds that the PSLRA has reduced nuisance litigation, but may discourage some meritorious suits.

Notably, Choi’s research suggests that two classes of cases are less likely to be brought post-PSLRA: (1) cases against “companies engaged in smaller offerings or with a lower secondary market volume (and therefore reduced potential damage awards);” and (2) cases against “companies engaged in fraud where no hard evidence of the fraud is announced pre-filing of a suit.” Choi concludes that the PSLRA “has operated less like a selective deterrence against fraud and more as a simple tax on all litigation (including meritorious suits).”

Judge Milton Pollack (S.D.N.Y.) passed away last week. During his long career on the bench, Judge Pollack decided a number of well-known financial fraud cases, including the Drexel Burnham Lambert bankruptcy case and the Merrill Lynch research analyst cases (currently on appeal in the Second Circuit). The New York Times ran an obituary in Monday’s edition.