Tuesday, July 05, 2005

Class Reps Hold Up Under Heavy Fire

Judge William E. Smith (D.R.I.) has certified a 10(b) class of investors in the Textron securities class action, appointing three benefit funds for the International Brotherhood of Teamsters Local 710 and an individual as class representatives against the aircraft and weapons giant. The representatives allege that Textron engaged in fraudulent accounting practices by delaying required accounting adjustments with respect to its V-22 Osprey Tiltrotor helicopter program. They also allege accounting misdeeds related to Textron’s contract with the DOD to upgrade 280 H-1 "Super-Huey" attack helicopters, and an improper goodwill impairment charge relating to Textron's $477 million acquisition of an industrial equipment manufacturer called Omniquip.

Defendants opposed class certification on the typicality of Local 710 under 23(a)(3) and the adequacy of Swartchild under 23(a)(4). Five separate challenges were lodged against the union based on the fact that that all its investment decisions were made by investment manager Bear Stearns. The court noted that “analysis of Bear Stearns's actions in connection with those purchases (and testimony related thereto) is the key to the resolution of the motion before this Court as it pertains to Local 710.”

In addressing the defendants arguments related to Bear Stearns, Judge Smith found “the critical question is whether a broker's decision to purchase stock at or near its nadir precludes that broker's client from claiming it was the victim of securities fraud as to purchases made on its behalf when the price was at or near its apex. In this Court's view, the fact that Bear Stearns concluded, for example, that Textron stock was a good buy at $ 32.77, following full disclosure, is essentially irrelevant to the question whether it relied on misleading information in buying Textron stock at, for example, $ 50.51 during the Class Period.”

Second, the court found that the deposition testimony of Bear Stearns’ representative which revealed he did not rely on earnings statements in making his purchasing decisions “does not rebut the presumption of reliance granted Plaintiffs under their fraud-on-the-market theory.”

Third, the court rejected the logic of Zlotnick v. Tie Communications, 836 F.2d 818 (3d Cir. 1988), finding Local 710 is not subject to a unique defense because Bear Stearns believed Textron stock was undervalued when it bought shares during the Class Period.

Fourth, the court rejected Defendants’ argument that that Local 710 is subject to a unique defense because Bear Stearns testified that it was not misled ("Q: Do you believe that you were misled in connection with the purchase of Textron stock? A: No."). In doing so, the court noted that at the time of his statement the Bear Stearns representative was not aware of all the alleged improprieties of Textron and thus his testimony might change once he is made aware of all the relevant facts. The court also held that “even if [he] took the stand at trial after reviewing all the pertinent evidence and reiterated his belief that he was not misled, a reasonable jury might still find in favor of Plaintiffs, particularly given that Bear Stearns is not a plaintiff in this case and has nothing to gain (and perhaps something to lose) by publicly accusing a company like Textron of fraud.”

Fifth, Judge Smith found that “the fact that Local 710 sold some shares of Textron stock during the Class Period does not, in light of the significantly greater number of purchases, create a conflict going to the heart of this lawsuit.”

As for Mr. Swartchild (an individual who purchased 1,000 shares of Textron stock during the class period), the attack resembled an assault from Textron’s Huey’s 7.62mm machine guns (an impressive 750 to 850 rounds per minute, mind you). They blasted away at him, saying that Swartchild testified that he has no idea who would have decision-making authority on behalf of the class, has a demonstrated history of abdicating decision-making authority to his counsel, didn’t know the name of the co-lead plaintiff in his attorneys' earlier filings, has never had any communication with Local 710 in the two and one-half years that this lawsuit has been pending, has no attorney-client relationship with plaintiffs' proposed class counsel, and was solicited to participate in the lawsuit. Finished yet?

Plaintiffs countered that Defendants cited certain testimony out of context, and that Defendants are seeking to disqualify “Mr. Swartchild on the ground that he is confused about some of the intricacies of the litigation.” The court concluded that “in light of Plaintiffs' responses to Defendants' specific allegations concerning Swartchild, the applicable standard, and the fact that in the context of complex securities litigation, attacks on the adequacy of the class representative based on the representative's ignorance are rarely appropriate, Plaintiffs have carried their burden, however narrowly, as to Swartchild's adequacy as class representative."

You can read the decision, which was published over the weekend, at 369 F. Supp. 2d 204.

Nugget: “Securities actions are considered particularly appropriate for class action treatment.”

Nugget: “A failure to be ‘shocked’ by the September 26 announcement does not take one outside the parameters of the proposed class.”

Nugget: “The mere fact that a plaintiff sold stock during the class period does not in itself disqualify him from acting as class representative.”

Nugget: “Named plaintiffs are not required to 'have expert knowledge of all the details of the case.”

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