Eighth Circuit Panel Won't Overturn Dismissal

A Panel of the Eighth Circuit has affirmed the District of Nebraska’s dismissal of Plaintiffs’ 1933 and 1934 claims in the Acceptance Insurance securities class action. "The primary allegation of the shareholders was that Acceptance failed to have adequate reserves in place prior to 1999 to account for increased claims stemming from a California Supreme Court decision" (Montrose v. Admiral, 913 P.2d 878 (1995)). So the shareholders claim under Section 11 was that Defendants’ "registration statement misstated the reserve holdings of the company because they did not take into account the Montrose decision." The shareholders argued "that numerous statements made by the [Defendants] after the registration statement was issued show that Acceptance's reserves were inadequate at the time of issuance." But the Panel held that "this type of retrospective analysis of awareness cannot be the basis for a claim," and that "under both FAS-5 and Section 11, information is required to be included only if it is available prior to the issuance of a financial statement." Thus, Plaintiffs "complaint alleges no such facts to support prior knowledge by" Defendants. In addition, Plaintiffs "do not cite any legal authority to support the contention that specific mention of the Montrose decision was required by law."

As for the 10(b) claims, the Panel focused on one particular statement by an employee that the District Court held was inadmissible hearsay. In refusing to overturn the evidentiary ruling, the Panel ruled that Plaintiffs’ experts merely offered "opinions meant to substitute the judgment of the district court." As for the other statements offered by Plaintiffs "to prove scienter," they "do not show knowing falsity about the reserves. They do show concern about the Montrose decision, but they do not weigh on the issue of a failure to properly account for reserves. Without evidence of intentional falsity, the Appellants' claim cannot survive summary judgment."

The opinion was authored by Eighth Circuit Judge Melloy, and joined by Circuit Judges Heaney and Fagg.

You can read In re: Acceptance Insurance Companies, issued August 29, 2005, at 2005 U.S. App. LEXIS 18571.

Nugget: "Given that there are no substantive differences in the facts offered in the proposed amendment, we conclude that the amendment would be futile."

Confidential Sources Not Identified With Particularity

Judge Jose L. Linares (D. N.J.) has ruled that Defendants’ motions to dismiss in the PDI securities class action will be granted in part and denied in part. Of course, reading the decision, at the end you might be wondering what portion of the motions were denied. Well, many of the statements were forward looking, but Judge Linares found that the safe harbor defense could not rescue defendants, saying "the adequacy of the warnings is not so obvious to this Court." Of course, that doesn’t help too much when the next thing the court says is that your complaint "does not plead any particularized facts to support an inference that Defendants had actual knowledge of their statement's falsity."

The decision is quite fact specific and analyzes each of the alleged false statements in depth, but of note is the court’s discussion of confidential sources. The court said "Plaintiffs fail to plead falsity of Defendants' statements with the particularity demanded by the Reform Act because the confidential sources relied upon by Plaintiffs are not accompanied by corroborative facts. Notably, Plaintiffs have failed to provide supporting facts that explain what department the ‘former senior PDI employee’ worked in, what Saldarini actually said, and what other parties were present. Similarly, Plaintiffs have not provided any details on how the ‘former PDI regional manager’ determined that it was allegedly ‘common knowledge at PDI’ that Evista was guaranteed to lose money -- that is, to whom was this language common, and when and how did this knowledge become common. In light of the foregoing, this Court finds that Plaintiffs' sources have not been described with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged, and therefore, Plaintiffs have failed to plead the falsity of Defendants' statements with the particularity demanded by the Reform Act."

You can read In re PDI Securities Litigation, issued August 17, 2005, at 2005 U.S. Dist. LEXIS 18145.

Nugget: "The Court does not see any basis to justify denying Plaintiffs leave to amend. Accordingly, this request is granted, and Plaintiffs are hereby granted leave to amend the Second Amended Complaint."

Dura a Dud Again

Judge Harvey Bartle III (E.D. Penn.) has finished evaluating Defendants’ motions to dismiss in the Vicuron Pharmaceuticals securities class action. In denying their requests to toss the 1933 and 1934 Act claims against the company and its officers and directors, the court evaluated the shareholders’ claims that “defendants made numerous materially false and misleading statements concerning anidulafungin,” a drug “in development for the treatment of esophageal candidiasis (‘EC’).”

The court had little trouble finding intent as “anidulafungin was Vicuron's lead product in development, which in itself supports a finding of scienter for alleged misrepresentations as to it.” As for loss causation, Judge Bartle recognized that Dura held that “artificial inflation itself is not enough.” But that didn’t help Defendants, as the judge found that “loss causation has been adequately pleaded” because Plaintiffs alleged (1) that "as a result of the partial disclosure by the Company of the FDA letter, including the shocking news regarding the lack of support for a label claim for EC, the price of Vicuron plummeted," (2) that "when investors were informed of the implications of the 'approvable letter', the true impact of the relapse rate data and the unproven superiority of anidulafungin in the treatment of refractory disease, the market price of Vicuron stock collapsed," and (3) that “the amended complaint also specifically states that plaintiffs and other members of the Class were deceived and caused to purchase Vicuron securities at inflated prices and to sustain damages."

Finally, the court rejected Defendants’ sound-in-fraud argument, which attempted to apply Rule 9(b) to the 1933 Securities Act claims. Judge Bartle held that “plaintiffs have drafted this claim without reference to any mental state,” and “while the amended complaint specifically incorporates the foregoing paragraphs into the § 11 claim, it also reads: ‘Plaintiffs for the purposes of this claim, disclaim any allegations of fraud.’”

You can read In re Vicuron, issued July 5, 2005, at 2005 U.S. Dist. LEXIS 15613.

Nugget: “In the amended complaint, plaintiffs have emphasized certain text of excerpted portions in bold and italicized lettering. We interpret the distinction to indicate that the emphasized portions are what plaintiffs claim to be actionable. We will read the plain text portions as simply context for the emphasized portions.”

Fifth Circuit Affirms Denial of Class Certification

Some might try to use yesterday’s Fifth Circuit decision affirming a denial of class certification to their advantage, arguing that the Panel held the NASDAQ market inefficient. But they probably wouldn’t get too far, especially if Plaintiffs on the other side take heed of the lessons to be learned from this opinion. You see, Plaintiffs appealed under Rule 23(f) after the Northern District of Texas struck their expert’s report on market efficiency "concluding that his event study was unreliable and purposefully designed to support its market-efficiency conclusion."

The Panel decision, authored by Circuit Judge Jerry E. Smith, and joined by Circuit Judges William Lockhart Garwood and Edith Brown Clement said that "even if competent evidence could be marshaled to make a plausible case that Ascendant common stock traded in an efficient market such that reliance should be presumed for the class, this case comes to us with plaintiffs' expert report excluded and their briefing to the district court devoid of any serious effort to show market efficiency, so plaintiffs have not made that case. Accordingly, because it is their burden to demonstrate that common issues predominate, we find no abuse of discretion in denying class certification." Oh, and don't forget to pick up your Nugget below if you want to learn the fate of these Plaintiffs.

You can read Bell v. Ascendant, issued August 23, 2005, here, or at 2005 U.S. App. LEXIS 18030.

Nugget: "Nor are we persuaded that we should require that they get a second bite at the class certification apple; inadequate briefing on an issue critical to class certification for which a party bears the burden of proof is no basis for us to order a repêchage round."

Stay it Again Sammy

So picture you’re representing a Lead Plaintiff and you win the motion to dismiss. Your hard work has paid off, and you start drafting those document requests. However, six weeks later, the controlling appellate court issues a decision in an unrelated case. Who cares, right? Well, now you do, because Defendants have “renewed” their motions to dismiss, arguing that the new decision requires the dismissal of your claims. At the same time, they say that discovery must again be stayed pursuant to the PSLRA. That’s exactly what happened in the Salomon analyst litigation overseen by Judge Gerard E. Lynch (S.D.N.Y.).

Defendants got their stay, but were arguably their own worst enemy, as Judge Lynch noted that their “assertion that the law is well established that successive motions . . . do stay discovery under the PSLRA is, to say the least, overstated.” In fact, the court noted that the “three district court opinions” cited by Defendants are either “distinguishable, or are flatly misstated.” But lucky for them, Judge Lynch held that he “need not accept defendants' argument in order to grant a stay.” Noting that the Second Circuit’s “intervening appellate decision” in Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005)) “advances new reasoning addressing a significant issue in the case,” “revisiting the Court's analysis of the issue of loss causation” is warranted.

Thus, “in view of the policy of the PSLRA to deny discovery until a complaint has been authoritatively sustained by the court, it is appropriate to extend the stay under the present circumstances. Since that result is appropriate as an exercise of the Court's discretion, there is no need to decide whether the filing of a successive motion, or even of any non-frivolous motion, after a court has already denied on the merits an earlier motion to dismiss would trigger an automatic stay under the PSLRA.”

You can read In re Salomon Analyst Litigation at 2005 U.S. Dist. LEXIS 3629.

Nugget: “To permit defendants indefinitely to renew the stay simply by filing successive motions to dismiss would be to invite abuse. Some judicial discretion to evaluate the desirability of a renewed stay appears to be necessary.”

Ninth Circuit Affirms Summary Judgment Dismissal

After nearly eight years of litigation, it looks as if a Panel of the Ninth Circuit has put an end to the Imperial Credit Industries ("ICII") securities class action, perhaps for good. In evaluating a summary judgment ruling from the Central District of California in favor of ICII’s executives and auditor KPMG, the Panel, consisting of Ninth Circuit Judges Kim McLane Wardlaw and Marsha S. Berzon, along with Senior District Judge James M. Fitzgerald (D. Alaska), has affirmed the case-ending ruling. The problem? Well, you see, "the gravamen of plaintiffs' claims is that ICII's public filings during the class period fraudulently inflated the value of ICII's securities by inflating the value of its 46.9% equity holdings in Southern Pacific Funding Corporation ("SPFC")." But, the Panel noted that "the plaintiffs failed to provide evidence that SPFC's residuals, were, in fact, overvalued at any point in time during the class period," because they "failed to introduce the testimony of a qualified residuals valuation expert, or any other proof of an actionable misrepresentation or transaction or loss causation."

You can read Mortensen v. Imperial Credit (issued as unpublished on August 17, 2005) at 2005 U.S. App. LEXIS 17790.

Nugget: "The district court correctly concluded that the Moore Report and Marek Report, the only expert reports submitted by plaintiffs, failed to qualify as proper expert testimony on this subject."

You Gotta Know When to Hold ‘Em

Yesterday, a Panel of the Seventh Circuit issued a SLUSA-based opinion reversing Chief Judge G. Patrick Murphy’s (S.D. IL) remand of a state law securities class action brought against
Citigroup Global Markets (formerly known as Salomon Smith Barney ("SSB")). The key issue under SLUSA boiled down to whether or not Plaintiffs alleged misrepresentations "were in connection with the purchase or sale of securities." If so connected, Plaintiffs lose. If not, they head back to state court in southern Illinois, and Citigroup had best get its checkbook ready.

Since the U.S. Supreme Court has never decided what is or isn't "connected" in the SLUSA context, the Panel (with Judge Kenneth F. Ripple as lead author, and Judges William J. Bauer and Michael S. Kanne in standard 0ne-by-two cross-cover formation) had to settle for the next best thing, and that’s Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), in which "the Court held that investors who neither purchase nor sell securities have no standing to maintain private litigation to recover damages under section 10(b) and Rule 10b-5, even if the failure to purchase or sell was the result of fraud." Having anticipated this definition, Plaintiff’s pointed out that his complaint says "SSB's misrepresentations caused him and other class members to hold securities, not to purchase or sell them."

But this didn’t work, as the Panel concluded "that the present claims are connected sufficiently to the purchase and sale of a covered security for the purposes of SLUSA preemption and removal" because "by depicting their classes as containing entirely non-traders, plaintiffs do not take their claims outside § 10(b) and Rule 10b-5; instead they demonstrate only that the claims must be left to public enforcement. It would be more than a little strange if the Supreme Court's decision to block private litigation by non-traders became the opening by which that very litigation could be pursued under state law, despite the judgment of Congress (reflected in SLUSA) that securities class actions must proceed under federal securities law or not at all."

Result? Remand vacated and Plaintiff's claims tossed.

You can listen to the oral argument here.

Plus, you can read Disher v. CitiGroup, issued August 17, 2005, here or at at 2005 U.S. App. LEXIS 17334.

Nugget: "Blue Chip Stamps combined with SLUSA may mean that claims of the sort plaintiffs want to pursue must be litigated as derivative actions or committed to public prosecutors, but this is not a good reason to undercut the statutory language."

Global Crossing Judge Fights Way Through Fog

Two decisions were recently issued by Judge Gerard E. Lynch (S.D.N.Y.) in the Global Crossing securities class action, and though they reach diverging results, both focus heavily on control person liability. Sounds exciting, doesn't it? No, you say? Well, we must forge ahead anyway. In the first opinion, Judge Lynch tackled J.P. Morgan Chase & Co.’s ("JPMC") argument that it did not act "as a controlling person of its subsidiary J.P. Morgan Chase Securities, Inc. for purposes of Section 15 of the 1933 Securities Act." Judge Lynch rejected this argument, as "Plaintiffs have alleged that [it] is JPMC's wholly owned subsidiary, that the directors of both corporations were ‘interchangeable,’ and that JPMC had direct involvement in the day-to-day operations of" the subsidiary." That wasn't so bad now was it? C'mon, just one more and you'll be ready to pick up your Nugget.

In the second opinion, Judge Lynch eyed Microsoft and Softbank’s position that just because they each became 15.8% owners of Global Crossing’s subsidiary, Asia Global Crossing’s ("AGC") common stock after the IPO, and designated several directors from Microsoft and Softbank (named Koll, Knook, or Hippeau) to sit on the AGC board, that did not make them control persons under the securities laws. The court noted that "at the heart of plaintiffs' allegations is their contention that AGC was integral to Global Crossing's alleged scheme to defraud the public and its investors." But turns out Plaintiffs' allegations were not enough, as Judge Lynch found that "the power to appoint a representative to the AGC board, even combined with minority shareholder status, is insufficient to raise the inference that Microsoft or Softbank controlled Koll, Knook, or Hippeau," and that "Plaintiffs allege no facts from which it could be inferred that these individuals acted at the behest of Microsoft or Softbank in exercising their duties as directors in relation to the ordinary operations of AGC." However, Judge Lynch did note the existence of a proposed amended complaint, which he said "may well cure the deficiencies identified by this opinion of the second amended complaint." Very good, you've earned your Nugget. Don't be shy, go get it, it's free ya' know.

You can read the In re Global Crossing decisions, issued August 8, 2005, at 2005 U.S. Dist. LEXIS 16228 and 2005 U.S. Dist. LEXIS 16232.

Nugget: "Although it is true as defendant points out that plaintiffs' arguments and assertions sometimes seem to ‘blow fog’ more than to provide notice of the claim, once the smoke is clear, sufficient facts remain to allege control-person liability against JPMC."

Group of Six Unrelated Investors Appointed Lead Plaintiff

Ah, six. A unitary perfect number, the answer to the kissing number problem, and now the number of what Judge Richard J. Holwell (S.D.N.Y.) calls "seemingly unrelated parties" that have been appointed as Lead Plaintiff in the Elan Corporation securities class action. Judge Holwell did chastise the so-called "Institutional Investor Group" a bit before appointing them, saying that the Group "fails to address a concern raised by a number of courts, namely, that the aggregation of large, unrelated ‘groups’ of investors defeats the purpose of choosing a lead plaintiff." However, "despite these concerns, there can be no doubt that the PSLRA contemplates that some ‘groups’ can serve as lead plaintiff," and at least "preliminarily, the Court is unconcerned with the size of the group, and finds that six members is not too unwieldy a number to effectively manage the litigation." "This is not, in other words, a group so large that the PSLRA's express purpose of placing the control of securities class action with a small and finite number of plaintiffs (as opposed to their counsel) becomes wholly undermined by its sheer size." "Indeed, even were the Court to deconstruct the Group, two of its individual members would still have the largest financial interest."

In sum, Judge Holwell said that "this is simply not a case where a group of unrelated investors has been cobbled together as a ‘group’ to displace a single competing institutional investor, or a smaller, closely-related group of investors. If it were, the Court would be reluctant to recognize the group under the statute."

You can read Barnet v. Elan, issued August 8, 2005, at 2005 U.S. Dist. LEXIS 16388.

Nugget: "There is also no doubt that not all groups qualify -- consider the reductio ad absurdum of a ‘group’ consisting of the entire class."

Judge Draws Roadmap For Plaintiffs

Investors in Bio-Technology General Corporation ("BTG") got their 1934 Act claims bounced by Judge Harold A. Ackerman (D. N.J.) last week. Yes, they went down to the canvas, but are they out cold you ask? Maybe not. You see, the shareholders alleged that "BTG and its management falsely attributed the source of a sharp increase in sales of its premier drug product, Oxandrin, to the successful penetration of a new therapeutic market, when in fact BTG's management knew that the spike in sales was the result of wholesalers stocking their inventories ahead of an expected Oxandrin price increase." The problem wasn’t with materiality, as the court said it "has little trouble concluding, in light of these allegations, that Plaintiff has adequately pled a materially false or misleading statement." But it was the scienter requirement that dropped Plaintiffs like a sack of spuds, as "the Complaint fails to explain how the Individual Defendants knew of or participated in the preparation and dissemination of false statements." "Furthermore, in the absence of any allegation of a specific corporate policy requiring the Individual Defendants to be involved in reviewing Oxandrin sales data, the Court is not prepared to impute detailed knowledge of BTG's monthly and quarterly Oxandrin sales data."

But Judge Ackerman gave the Plaintiffs a standing eight-count, during which he noted that "it would be a relatively simple matter for Plaintiff to plead circumstantial evidence of the Individual Defendants' knowledge of the Oxandrin sales data. For instance, Plaintiff could have pled circumstantial evidence of scienter by showing that BTG had a specific policy requiring the Individual Defendants to review Oxandrin sales reports in the periods in which they were provided to BTG's sales staff. Plaintiff might also have pled that the BTG had a policy whereby the sales staff would routinely summarize the Oxandrin sales data and deliver the summaries to the Individual Defendants for review." With 30 days to amend, let’s see if these investors can take the hint.

You can read In re Bio-Technology, issued August 10, 2005, at 2005 U.S. Dist. LEXIS 16603.

Nugget: "Simply asserting that Defendants improperly capitalized certain Oxandrin costs in financial statements representing that all research and development costs are treated as expenses does not establish a strong inference of scienter, even when those financial statements are later restated to expense the formerly capitalized costs."

PWC Raises Too Many Flags

Judge Harold Baer, Jr. (S.D.N.Y.) has denied PwC’s (You simply must click this link – why in the world does PwC have this lady staring at us like this? Make her stop, we beg you!) motion to dismiss in the securities class action against Hibernia Foods "an Irish public company that exported beef until the ‘mad cow’ episode in 1997 when it switched to the sale of frozen desserts and ready-made meals." Wow, talk about an overreaction, huh? Plaintiffs said "PwC knew or recklessly disregarded risk factors e.g., Hibernia's repeated default on payments to lenders and suppliers and the sale of inventory at a loss to generate cash flow." PwC balked, saying Plaintiffs were not "specific enough to show how and when PwC acquired knowledge of an alleged fraud." Well, unfortunately for PwC, Judge Baer said "to plead with particularity does not require at this stage that Plaintiff spell out the very moment PwC should have known about the alleged fraud or that PwC had actual knowledge of the scope or particulars of the scheme."

Judge Baer also recognized that "Plaintiffs allege that PwC wanted to keep Hibernia as a client so that PwC could continue to derive a financial benefit from its client." Sounds reasonable, right? Perhaps a bit frustrated with those who might disagree, the judge offered the observation that "while not so far fetched to me, the current state of the case law holds otherwise and concludes that no independent auditor would risk ruination of its reputation for the fees it would collect in order to suppress fraud."

But, as it turns out, the red flags were waving too high and too fast. The court found that "the ‘red flags’ include, inter alia, allegations that Hibernia (1) repeatedly defaulted on payments to lenders and suppliers, (2) sold its products at a loss, (3) recognized revenue on products that had not been shipped, and (4) failed to write off valueless inventory or write down long-lived assets." Although "PwC argues that these ‘red flags’ offer only conclusory allegations that PwC should have known this behavior was tantamount to fraud," "these facts, which must at this stage of the litigation be taken as true, illustrate at the very least behavior that could not conceivably escape a rational auditor's critical eye, if his eyes were open."

You can read Whalen v. Hibernia, issued 2005 U.S. Dist. LEXIS 15489.

Nugget: "When all the ‘flags’ are run up the same poll [surely it said "pole," right?], it seems inescapable that a reasonable auditor was on notice, and acted recklessly when it disregarded all the ‘flags.’"

Investors Can’t State Claim For Cosi IPO

Judge John G. Koeltl (S.D.N.Y.) has dismissed all of the 1933 Act claims brought against Cosi, its executives, and its underwriter William Blair in relation to Cosi’s 2002 IPO. Originally "expected to earn $ 60 million in proceeds," the IPO netted only $ 33 million "due to demand that was weaker than anticipated." Only two months after the IPO, the casual restaurant chain announced that it had "determined to alter our growth strategy," and implement "franchising," mainly because of "Cosi's lack of sufficient capital to carry out the business plan described in the Prospectus." Cosi also announced that it "would be able to open approximately ten new restaurants in 2003, as opposed to the fifty-three to fifty-nine planned in the Prospectus," and that "it intended to dismiss twenty-seven percent of its personnel and to take a $ 1.7 million charge to account for severance and related costs in the first quarter of 2003." "Following the February 3, 2003 announcements, Cosi's stock price dropped thirty-one percent to $ 3.10"

Plaintiffs claimed "that the failure to disclose the possibility of pursuing a franchising model was the allegedly material non-disclosure." Unfortunately for them, Judge Koeltl disagreed. He said that "Plaintiffs do not allege facts that would establish that mere research into the possibility of pursuing a franchising model would be an event of significant importance to potential Cosi investors. The possibility of franchising, according to the plaintiffs' allegations, was still remote at the time the Prospectus was issued." Indeed, "the plaintiffs allege only that Cosi had researched the possibility of franchising for two months before the Prospectus was issued, and do not allege that a franchising plan had been submitted to or approved by the board, or that any affirmative steps had been taken to implement a franchising plan." The court held that it would simply be wrong to "to require the disclosure of the mere research of a potential business plan without any factual allegation that Cosi intended or had taken affirmative steps to implement the plan."

You can read In re Cosi, issued July 27, 2005, at 2005 U.S. Dist. LEXIS 15603.

Nugget: "Because the plaintiffs have not alleged that they purchased their shares in the IPO, they have failed to allege that they have standing to bring a claim under § 12(a)(2)."

Dura a Toothless Tiger in OmniVision Understatement Action

For those of you wondering what language Plaintiffs need to allege in their amended complaints to satisfy Dura, you’re in luck. At least, that is, if you happen to be in Judge Samuel Conti’s (N.D. Cal.) courtroom. You see, Plaintiffs’ complaint in the OmniVision securities class action originally alleged that "members of the Class acquired OmniVision securities during the Class Period at artificially high prices and were damaged thereby." Ah, the Good Old Days. But put away that nostalgia, as Judge Conti (unsurprisingly) held this allegation to be "insufficient" under Dura. But he gave the investors a chance to try again. So the second time around, the complaint said: "Plaintiffs purchased OmniVision securities at artificially inflated prices and suffered damages when revelation of the true facts caused a decline in the value of their investments." In ruling on the OmniVision and its executives’ motions to dismiss, the court found this was "a sufficient allegation of economic loss as required" by Dura. Sorry to those of you wanting more out of your Dura, but that's it. Seven more words. Really. No, really.

As for the rest of the Defendants’ arguments, Judge Conti denied them all, even despite the fact that "the allegations concern understating of revenue," instead of overstating it. Why? Well, Judge Conti said because "the one third drop in OmniVision's stock price on June 9, 2004 overwhelmingly demonstrates that the investing community finds improper revenue recognition incidents to be serious matters regardless of the direction of the improper recognition."

But just when the Plaintiffs thought they were home-free, Judge Conti ruled that "the restatement and GAAP violations" were not enough to meet scienter. But that didn’t save Defendants because they had engaged in suspicious inside trading, in which "two of the Individual Defendants more than doubled the relative proportion of their shares they sold during the class period," and "the other two simply sold all of their shares." Defendants countered that "because this case involves earnings understatements, instead of overstatements, insider sales are not indicative of scienter." But the judge rejected this "misconstrued theory," saying that Defendants suffer from a "dramatic misconception of how stock markets function." Ouch. "As demonstrated by the movement of OmniVision's stock" "by approximately one third on June 9, 2004 when the company first announced its accounting problems," "Defendants' argument that there is a distinction between overstatements and understatements of revenue is simply not credible."

You can read In re OmniVision, issued July 29, 2005, at 2005 U.S. Dist. LEXIS 16009.

Nugget: "The Court holds that at this time the group pleading doctrine does apply."

Thanks Anyway, But Only One Lead Plaintiff Group Needed Here

The lead plaintiff contest has come to a close in the Molex securities class action, with a group of three investors taking the prize. Interestingly, despite the electronics giant's $5 billion market cap, the two largest groups lost only $18,000 (Pontiac Group) and $12,000 (Ponzo Group). But no matter which way you slice it up, that put Pontiac ahead of the game, making Judge Ruben Castillo's (N.D. Ill.) job a walk in the park. OK, well almost.

One thing you should know before we start (and don't worry, we'll be done soon) is that Molex has three distinct classes of stock: Common Stock, Class A Shares, and Class B Shares. Ponzo tried to use this to their advantage, or as the judge saw it, "muddy these otherwise clear waters." In a nutshell, Ponzo asserted "that it should be appointed as co-lead plaintiff to represent a sub-class of the purported class members consisting of holders of Molex Common Stock." In other words, Ponzo argued it should win "because it suffered $12,273 in losses from its purchase of Common Stock while the Pontiac Group only suffered $5,450 in losses from its purchase of Common Stock," with "the remainder of the Pontiac Group's losses stemm[ing] from its purchase of Class A Shares."

Well, if you glanced at the headline, you won't be surprised to learn that Judge Castillo wholeheartedly rejected this, finding "that the Ponzo Group's request to slice and dice the reported losses between Common Stock and Class A Shares departs from the presumption laid out in the PSLRA," of appointing the movant that "has the largest financial interest in the relief sought by the class." "The Ponzo Group has pointed to nothing in the pleadings which would suggest that any of the relief sought by Common Stock holders is different than the relief sought by Class A shareholders. The relief sought by the class here is compensation for losses sustained from investment in Molex securities," so Pontiac wins, and Ponzo doesn't.

You can read Takara v. Molex, issued July 6, 2005, at 2005 U.S. Dist. LEXIS 15820.

Nugget: "It is not uncommon for a representative who purchased one type of security to represent class members who purchased a different type of security where the action is based on the same set of misrepresentations."

Plaintiffs Fail to Satisfy Dura Requirements

Judge David F. Hamilton (S.D. Ind.) has granted the Individual Defendants’ motions to dismiss in the Conseco securities class action. Basically, the court held that Plaintiffs "failed to allege loss causation adequately under the standards set forth by" Dura because "the truth about matters that plaintiffs allege were concealed or misrepresented did not come out publicly until months after the end of the class period." The court also observed that "this is not a case where Plaintiffs can point to a sharp drop in the company's stock price following announcement of the allegedly concealed truth," as "the stock had long since hit bottom before these alleged misrepresentations became known."

Plaintiffs were probably in trouble from the beginning when they relied on the Ninth Circuit’s soon-to-be-doomed version of Dura, as Judge Hamilton pointed out that Plaintiffs’ "brief asserts ‘the absurdity of applying a loss causation standard which requires the value of plaintiffs' shares to decline following the revelation of the truth.’" As the Supreme Court’s version of Dura eventually obliterated that argument midstream, Plaintiffs were forced to shift gears, seizing "on Justice Breyer's use of the phrase ‘leak out’ in the sentence: ‘But if, say, the purchaser sells the shares quickly before the relevant truth begins to leak out, the misrepresentation will not have led to any loss.’" In other words, Plaintiffs argued "they can prove that the truth was beginning to ‘leak out’ about some of the matters they allege, contributing to the massive decline in Conseco stock prices during the Class Period as Conseco disclosed a host of financial problems it faced." Judge Hamilton noted that "whether the Court's use of the phrase ‘leak out’ shows that plaintiffs' suggestion would be sufficient under Dura Pharmaceuticals is not clear." What is clear, he said, is "that this theory is certainly not what Plaintiffs have alleged in the operative complaint."

Judge Hamilton is going to let Plaintiffs have another crack at it anyway though, saying "perhaps plaintiffs can salvage some portions of the case under the Dura Pharmaceuticals standard," so "they are entitled to try to do so by amending their complaint, though in light of the many and daunting problems Conseco faced, the problem of loss causation may pose a major challenge of proof even if plaintiffs can plead it adequately for a portion of the case."

You can find Porter v. Conseco Inc., issued July 14, 2005, at 2005 U.S. Dist. LEXIS 15466.

Nugget: "This is not so much a case where plaintiffs are alleging that defendants painted a falsely rosy picture. It is more as if plaintiffs allege that defendants painted with shades of gray that were not quite dark and gloomy enough."

Ninth Circuit Reverses PSLRA Dismissal

The Ninth Circuit has reversed the dismissal of a PSLRA action, and although it’s a private placement case rather than a securities class action, it’s still a 10(b) action that offers new insight into multiple PSLRA requirements. Ninth Circuit Judge Dorothy W. Nelson authored the panel decision, which was joined by fellow Ninth Circuit Judges Stephen Reinhardt and Sidney R. Thomas. The panel eviscerated District Judge John C. Coughenour’s (W.D. Wash.) dismissal of all claims against Salomon Smith Barney on multiple grounds, including materiality, scienter, loss causation, reliance, damages, statute of limitations, and even state law securities claims.

Since it’s not a securities class action, you won’t mind if we skip the facts, right? Instead, let’s touch on some of the high points (or maybe they are low points to you), but either way, here’s the meat of the decision. In holding "that the district court erred in concluding that the contested statement was immaterial," the Ninth Circuit announced that it will now "expressly adopt the logic of the First and Seventh Circuits and hold that extension of the bespeaks caution doctrine to statements of historical fact is inappropriate."

Moving on to scienter, the Ninth Circuit found that "because [Plaintiff] alleges that the Defendants knew the contested statement's most obvious interpretation was false when made, [Plaintiff] has met the heightened pleading standard for scienter." The court continued, although we have "found that allegations of a motive to mislead, standing alone, cannot satisfy the heightened scienter standard, we are not precluded from considering allegations of motive in combination with other allegations of Defendants' intent to mislead or deliberate recklessness. Therefore, we hold that the totality of the allegations creates a strong inference that the Defendants acted with the requisite scienter and reverse the district court's conclusion to the contrary."

As for loss causation, the Ninth Circuit relied upon McGonigle v. Combs, 968 F.2d 810 (9th Cir. 1992) in holding that Plaintiff "sufficiently pled both elements of causation because it has alleged both that they would not have purchased the PCI stock but for the misrepresentation and that the Defendants' misrepresentation was directly related to the actual economic loss it suffered." McWho? Where’s Dura? Well, don’t worry, the court didn’t forget about it, they just said "Dura is not controlling," because "at issue is a private sale of privately traded stock." Besides, Plaintiff "not only asserted that it purchased the security at issue at an artificially inflated price, but pled that the Defendants' misrepresentation was causally related to the loss it sustained." So much for that.

Finally, the Ninth Circuit reviewed the district court’s conclusion that, "as a matter of law," Plaintiff "could not establish reliance because the notice contained sufficient cautionary language to make any reliance unreasonable." In rejecting that, the Ninth Circuit said "for the reasons discussed above, we refuse to extend the bespeaks caution doctrine to misrepresentations of historical facts as opposed to forward-looking projections. Therefore, we reverse the district court's finding that [Plaintiff] inadequately plead reliance."

For the rest of the meat, you can find the decision, issued August 2, 2005, here or at 2005 U.S. App. LEXIS 15815.

Nugget: "In finding the statement immaterial, the district court also extended the bespeaks caution doctrine to statements of fact, despite the lack of approval from this circuit for such application of the doctrine as well as the explicit rejection of such an extension by two other circuits."

PSLRA Sanctions Request Denied

Judge Shira A. Scheindlin (S.D.N.Y.) has stymied Defendants’ request for PSLRA and Rule 11 sanctions in one of the consolidated cases related to the In re IPO Litigation actions. Although the case was included in the coordinated In re Initial Public Offering Securities Litigation proceedings, it arose from a very different set of allegations. Essentially, Plaintiffs alleged that Defendants, an investment bank (CSFB) and several issuers of securities (Efficient Networks, eMachines, Lightspan Partnership, Tanning Technology, and Tumbleweed Communications -- all of which, except for Tumbleweed, have since been acquired) that went public during the technology boom of the late 1990s, defrauded investors by setting their earnings estimates below their true estimates, and thereby created excitement in the marketplace when the stocks at issue beat estimate after estimate, conditioning the market to expect superior performance from those stocks and artificially inflating their prices. Nice try, but Judge Scheindlin dismissed the investors’ claims in an order issued a few months ago (See 2005 U.S. Dist. LEXIS 5339).

After the dismissal, Judge Scheindlin was faced with Defendants’ sanctions request, which argued that "Plaintiffs' claims rested on factual assertions the falsity of which was evident from publicly available information -- namely, the stock prices of the relevant issuers -- and Plaintiffs' hypothesized securities fraud scheme, even if true, would have benefited, not harmed, the named Plaintiffs." In denying the request, the judge found that "Plaintiffs alleged a complicated scheme," and "though ultimately deficient, plaintiffs' claims were not frivolous." She also said that Plaintiffs argument "rested on the nonfrivolous argument that victims of securities fraud should be entitled to all damages attributable to alleged artificial inflation, even if those victims sold securities for a profit."

You can read the decision, issued July 28, 2005, at 2005 U.S. Dist. LEXIS 15162.

Nugget: "There is no evidence of any improper purpose or conduct on the part of plaintiffs' counsel in pursuing novel theories that were ultimately rejected."

Eight Member Group Appointed Lead Plaintiff

Two lead plaintiff groups, "the so-called ‘Webster Group,’ consisting of eight investors, and "the so-called ‘Mayeri Group’ consisting of seven investors" both asked the court to be appointed Lead Plaintiff in the 51job securities class action. The Shanghai based human resource company, a Chinese "monster.com" if you will, with an executive staff with an average age of 36 (not that’s there’s anything wrong with that), managed to get itself embroiled in securities class action litigation just four months into its existence as a public company. Seems its CEO is pretty excited about the prospect of becoming the Far East’s next billionaire. But really, who isn’t, right? But let’s stay on track here.

Since the Webster Group had $311,710 in losses and the Mayeri Group had only $176,641 (and the Mayeri Group did not respond "to the Webster Group's calculations of losses"), veteran Judge Charles S. Haight (S.D.N.Y.) found that "the Webster Group has the larger (if not the largest) financial interest." As for the limited Rule 23 inquiry on adequacy and typicality, the court held that the Webster Group satisfies this test, noting that the "Mayeri group does not assert, let alone attempt to prove, that a basis exists for rebutting the statutory presumption in the Webster Group's favor."

So you’re probably wondering at least two things. What’s the point of the Mayeri Group fighting for lead plaintiff if it’s not making any arguments against the other group that has almost twice its losses? And why did the court appoint a group with eight members? Well, as to the first question, who knows? The decision doesn’t say. The second question is an easy one though. The Webster Group argued that "the motion of the seven-member Mayeri Group should be denied because its membership far exceeds the number of movants recommended by the SEC." The judge mused that since the Webster Group "identifies eight investors as members," that "would seem to invite an et tu quoque response from the Mayeri Group." Sure seems like it. But looking deeper, Judge Haight noticed that "the answer may lie in the fact that the surname of three Group members is "Webster" and that of two others is "Rabhan." If one regards these apparent family members as single investor entity (much as churches regard the members of a parishioner family living together as a single "pledging unit'), the SEC-approved total of five 'persons' is achieved."

There you have it folks. Looks like this case is going to get rolling. Judge Haight ordered lead counsel "to move for class certification" "without undue delay," "not later than August 31, 2005."

You can read the decision, issued July 26, 2005, at 2005 U.S. Dist. LEXIS 15059.

Nugget: "The two groups of investors vie with each other for these procedural plums."