Unique Defenses Can’t Stop Certification

Think the "fact that certain lead plaintiffs may be met by unique defenses" would interfere with class certification? Well, not this time, as Judge Rya W. Zobel (D. Mass.) has concluded in the Transkaryotic action that the whole thing can be solved by simply bifurcating the trial, "so that after first taking up the class-wide issue of fraud-on-the-market, a damages phase could follow if the trier of fact returned a verdict for the class. During this second phase, in which the plaintiff class would be parsed in various ways based upon the precise claims of its members, the defendants would have the opportunity to raise specific defenses against individual plaintiffs or groups of plaintiffs." As a result, "this option offers the means to preserve zealous representation by lead plaintiffs on behalf of the class as to liability under common theories and facts while avoiding a trial skewed towards unique defenses of lead plaintiffs and prejudicing the absent class members."

Result? Class Certified.

You can read In re Transkaryotic, issued November 28, 2005, at 2005 U.S. Dist. LEXIS 29656.

Nugget: "Furthermore, and even more importantly, is the very real risk that potential class members with relatively small claims would not have the financial incentives or wherewithal to seek legal redress for their injuries."

Buried Warnings Insufficient

Here’s a word to all of you future securities class action Defendants out there. Make sure those “warnings” in your IPO papers are upfront and personal. Why? Because in the NYFIX action, Judge Janet C. Hall (D. Conn.) has rejected Defendants’ attempt to rely on its risk disclosures, holding that “while not any more obscure than many other disclosures in the report, they are not prominently referenced in the table of contents, appear towards the end of the report, and are in the same font as most of the report. Thus, although the court does not hold that the disclosures were legally insufficient to put an investor on inquiry notice, it also cannot hold, as a matter of law, that they were sufficient for this purpose.”

Judge Hall also stymied Defendants’ argument that investors should have been on inquiry notice of the alleged fraud years before the truth was revealed, finding that an “important factor” “is that NYFIX's financial statements were audited and approved by an accounting company.” Thus, she held that “it is not reasonable to expect a person of ordinary intelligence to examine them in detail for accounting errors.”

Of course, it didn’t much matter for these Plaintiffs, as Judge Hall dismissed the entire action because the ’33 Act claims sounded in fraud, and Plaintiffs failed to plead scienter. She gave them 21 days to amend, so perhaps we’ll see this one again down the road.

You can read Johnson v. NYFIX, issued October 26, 2005, at 2005 U.S. Dist. LEXIS 25899.

Nugget: “Considering that an accounting firm found the accounting to be proper, it would be unfair to expect investors with far less accounting expertise to pick apart NYFIX's accounting.”

Searching For A Safe Harbor

Although a few execs wiggled out on their motions to dismiss, Plaintiffs can claim victory in the Washington Mutual securities class action. Lots to read here, but if you’re looking for an in-depth analysis of the safe harbor defense, Judge John C. Coughenour (W.D. Wash.) has written just the opinion for you. In it, Judge Coughenour uncovers what he believes could be “possibly the most important way in which the safe harbor is curtailed.” How? He offers the observation that “the PSLRA safe harbor operates in a way similar to hearsay rules, which forbid the admission of certain statements for the truth of the matter asserted, but allow those statements to be admitted for their corollary value.” This results in the possibility that “a single statement may communicate many different meanings, some of which may render the statement actionable.”

You can read South Ferry v. Washington Mutual, issued November 17, 2005, at 2005 U.S. Dist. LEXIS 29390.

Nugget: “The question of whether statements actionable as representations of current expectations are also actionable in their capacity as forward-looking statements must be answered through a full safe harbor analysis.”

Hand Over That Trading Data

You know how Defendants are always trying to get Lead Plaintiffs’ and Class Reps’ trading history in stocks other than the one at issue? Well, this time, Plaintiffs in the Priceline securities class action are turning the tables, demanding that Defendants fork over their non-Priceline trading information. Judge Dominic J. Squatrito (D. Conn.) carefully considered the request, and has ruled that “the information requested could lead to admissible evidence regarding defendants' state of mind while they traded in Priceline shares during the Class Period. Defendants' proposed limitation prohibits plaintiffs from learning the context of defendants' Priceline trades. The context could be relevant to defendants' motivation for trading in Priceline shares during the Class Period.”

You can read In re Priceline, issued November 23, 2005, here or at 2005 U.S. Dist. LEXIS 29132.

Nugget: “The party resisting discovery bears the burden of demonstrating that its objections should be sustained, and pat, generic, non-specific objections, intoning the same boilerplate language, are inconsistent with both the letter and the spirit of the Federal Rules of Civil Procedure.”

Oh Canada

Where's a Lead Plaintiff to sue when a Company’s securities are traded on various exchanges located in different countries? Well, if any of it is traded here in the U.S., the investor can try and sue here. But that doesn’t mean the case will actually stay here. You might recall a few months ago, when the Nugget reported on Bayer AG shareholders who were sent packing to Germany because only 8% of the stock was traded on a U.S. exchange. This time, it’s 12% of Canadian based Royal Group Technologies, and you guessed it -- the same result. Judge Harold Baer, Jr. (S.D.N.Y.) held that the action should be brought in Canada, as it is an “adequate alternative forum.”

By the way, if you do plan to try this, you might want to have a Plaintiff who hails from the U.S. of A, as the two Lead Plaintiffs (an individual and the Canadian Commercial Workers Industry Pension Plan) in this action were both “Canadian citizens.” This certainly didn’t help matters, as Judge Baer held that “the named plaintiffs' lack of bona fide connections to this district indicates that their choice of forum should be accorded less deference than that due a resident plaintiff seeking redress.”

You can read In re Royal Group Technologies, issued November 21, 2005, at 2005 U.S. Dist. LEXIS 28688.

Nugget: “While plaintiffs are correct that depositions can be taken abroad pursuant to letters rogatory, live testimony is especially important in a fraud action where the factfinder's evaluation of witnesses' credibility is central to the resolution of the issues.”

Broken Record

There’s seems to be two trends emerging in loss causation. The first is that over the past seven months, Defendants who already lost motions to dismiss in securities class actions have been filing Rule 12(c) motions to dismiss based on Dura. This has resulted in the second trend -- Defendants losing those motions. Today’s decision offers yet another interesting twist on this argument, but ends the same way.

In the Cisco action, Judge James Ware (N.D. Cal.) listened to Defendants' argument that "plaintiffs in this case have merely alleged that the purported disclosures 'had a negative effect on Cisco's stock price, rather than the requisite corrective effect.'" In rejecting the argument, Judge Ware held that since Plaintiffs’ complaint “alleges that there was a steep drop in the price of Cisco's stock after Cisco Defendants began to disclose the alleged ‘truth’ about its financial condition,” it “provides the defendant with fair notice of what the plaintiffs claim is and the grounds upon which it rests.”

You can read Plumbers & Pipefitters Local 572 v. Cisco Systems, issued October 27, 2005, at 2005 U.S. Dist. LEXIS 25398.

Nugget: “Notably, the Dura decision itself does not define the pleading standard for loss causation.”

Turbocharged Rocket Docket

The Eastern District of Virginia’s infamous rocket docket is apparently nothing compared to being in Judge Donald M. Middlebrooks’ (S.D. Fla.) courtroom. Listen to this. You just largely defeated the motions to dismiss, but now the Judge gives both sides just two months to "finish" discovery, and sets the trial for less than three months after that. Let’s see here. Two months to prepare and serve the document requests, serve the third party subpoenas, get the documents, review them, and depose the witnesses? Yeah, that seems reasonable. Oh, and let’s not forget class certification, which hasn’t even been briefed yet. Summary Judgment motions? C’mon, let’s not dwell on technicalities here. Empanel the jury, and let’s go. While we're at it, ten seconds for opening statements should do the trick (don't worry, that's ten seconds each side).

The Nugget usually doesn’t venture beyond reported decisions, but who could resist seeing what would happen next. Yep, you guessed it. In a November 14, 2005 Order, Judge Middlebrooks denied Plaintiffs’ request to speed up the normal thirty day rule to get the documents. Why you ask? Because Plaintiffs should have started discovery back at the beginning of the case. Why again you ask? Since no discovery stay was in place until the motions to dismiss were filed, of course. Therefore, due to “Plaintiffs’ lack of diligence,” there is “little reason to punish defendants.” These counsel probably wondered if they just got on a new Court TV episode of Punk’d. Is that Ashton Kutcher hiding in a control room behind the bench? Please let it be. Sorry, this crew is SOL, and their discovery cutoff remains Monday December 19, 2005. But hey, look at the bright side. Now you finally have something to actually be thankful for this Thanksgiving - not being them.

You can read In re Spear & Jackson, issued October 19, 2005, at 2005 U.S. Dist. LEXIS 27555.

Nugget: “There is no reason to delay this litigation any further.”

Bribes and Bid Rigging Just Business As Usual

This time, Judge Robert B. Kugler (D. N.J.) takes on shareholders’ claims that Commerce Bancorp executives violated the 1934 Act “by failing to disclose bid-rigging and other unlawful practices committed on behalf of Commerce Bank.” You see, the “the allegations arise out of the events surrounding the June 28, 2004, indictment of three Commerce Bank/Pennsylvania executives and directors for employing illegal practices to obtain lucrative business with the City of Philadelphia.” Yep, sounds like Philly alright. Anyway, Judge Kugler didn’t buy it, holding that “while omissions regarding criminal conduct are material, omissions relating to ‘the attendant risks’ or unsustainability of criminal conduct are not. Even if a corporation is engaging in illegal practices, predictions of future events such as criminal indictments are too speculative to be material.” As such, “the Court will not reach Defendants' arguments regarding scienter, reliance, or causation,” and this action “must be dismissed.”

As for the result of the indictments? All but one were convicted in May, and each were sentenced to a couple years in prison. The one who got off? Influential attorney Ronald A. White, a/k/a "Philadelphia's Son." But he died of pancreatic cancer waiting for the criminal trial. He was only 55.

You can read Galati v. Commerce Bancorp, issued November 7, 2005, at 2005 U.S. Dist. LEXIS 26851.

Nugget: “Illegal payments that are so small as to be relatively insignificant to the corporation's bottom line can still have vast economic implications, as they may endanger all of a corporation's business if they are discovered.”

Ninth Circuit Partially Reverses Dismissal

Chalk one up for both the Plaintiff and the Defendant bars in the Ninth Circuit, as a Panel there has only partially affirmed Judge Phyllis J. Hamilton’s dismissal of the Harmonic/C-Cube securities class action. Of course, don’t get too excited, as none of you will be able to cite to the decision in that Circuit because it’s been designated unpublished. Basically, the complaint said that “Defendants and several of their executives made a series of misleading statements for the purpose of obtaining shareholder approval of Harmonic's acquisition of C-Cube's DiviCom division while they engaged in insider selling and thereby violated” the 1933 and 1934 Acts. The Ninth Circuit held that “statements that there was ‘strong demand’ just don’t cut the mustard under the PSLRA (click it, it's mildly amusing). Scienter wasn’t there either, as “Plaintiffs fail to allege basic facts (such as author, date prepared, contents) regarding [certain] ‘weekly forecasts’ or Harmonic's internal reports.”

As for the 1933 Act claims, the Panel reversed their dismissal, holding that they “are not ‘grounded in fraud’ because Plaintiffs allege a basis for Section 11 liability other than fraud; i.e., the omission of a material fact from the Registration statement. Notably, plaintiffs do not rely on a unified course of fraudulent conduct or on the ‘wholesale adoption’ of their securities fraud allegations,” and they “also disclaim any allegations of fraud.”

You can read Knollenberg v. Harmonic, issued November 8, 2005, at 2005 U.S. App. LEXIS 24274.

Nugget: “While a disclaimer alone is insufficient to re-characterize a complaint whose gravamen is plainly fraud, here plaintiffs have made an effort to plead a non-fraudulent basis for Section 11 liability.”

Sex, Lies, and Lead Plaintiff

It’s Friday, so let’s keep it light, shall we? So, what do Wolf Popper, an alleged stalker, sex at the lake, a New York City Police detective, a former model allegedly cheating on her new husband with the alleged stalker, and an uber-famous journalist's third marriage have in common? No, it’s not the screenplay for Pulp Fiction 2, but that was a pretty good guess.

Actually, seems the Lead Plaintiff in the Genesis Microchip securities class action (which is on appeal to the Ninth Circuit after being dismissed this September), Christine Kuehbeck, is the center of attention in an alleged love triangle gone awry. Very awry. This time, you’ll have to read the decision to get all the details, so find a friend with a Lexis password, and break out the beer and popcorn. It’s going to be a wild ride.

Do not pass GO, go directly to Silver v. Kuehbeck, issued November 7, 2005, at 2005 U.S. Dist. LEXIS 26956.

Nugget: “As Plaintiff walked away, Defendant turned to him and said, ‘I’m going to have you taken care of.’”

Multiple Restatements Not Enough

By the third restatement, and a 46% drop in the value of their shares, investors in once high-flying Stonepath Group, Inc., had been battered and bruised. So they sued, alleging that the company and its executives portrayed “Stonepath as an increasingly profitable company positioned to expand and continue earnings growth through strategic acquisitions," when in reality it "was plagued by internal control deficiencies that caused the Company to consistently understate its most significant operating cost."

Well, it all came down to scienter, with a lot hinging on whether the three seemingly unrelated restatements by the company would be enough. Judge Stewart R. Dalzell (E.D. Pa.) held that “since the restatements addressed such unrelated problems, it cannot be said that the mere fact that there were three restatements shows defendants acted recklessly.” He also held that it was “significant” that “Plaintiffs do not allege that either internal or external auditors or any participant in the comprehensive review process alerted defendants to the problems leading to the third restatement.”

Getting nowhere with recklessness, Plaintiffs tired to prove that Defendants had motive and opportunity to commit the fraud. In doing so, “Plaintiffs rely primarily on two alleged motivations: (1) to inflate Stonepath stock to use it in various acquisitions, and (2) to inflate EBITDA to comply with Stonepath's debt covenants.” The Court rejected both, finding that “Plaintiffs rely mainly on one acquisition to establish motive,” and this can “hardly” be a “concrete and personal benefit." As for the “the need to comply with debt covenants,” he held that “at most,” this “can be a contributing motive to commit securities fraud, but standing alone even severe cash flow problems are insufficient to establish motive.”

Result: Case dismissed with leave to amend, as long as Plaintiffs “can do so conformably with the foregoing analysis and with Fed. R. Civ. P. 11.”

You can read In re Stonepath, issued October 27, 2005, at 2005 U.S. Dist. LEXIS 25250.

Nugget: “The magnitude of the restatement is undeniably large, and therefore relevant, but alone it does not establish recklessness.”

Sarbanes 304 Finally Addressed

In what appears to be the first time in a reported securities class action decision, a court has addressed the issue of whether private investors can seek to disgorge personal profits from the CEO and CFO under Section 304 of Sarbanes-Oxley. In the Qwest action, Judge Robert E. Blackburn (D. Colo.) took a look at the provision, which could force the two execs to pay back “any bonus or other incentive-based or equity-based compensation” earned “during the 12-month period following the first public issuance” of a “accounting restatement” made “as a result of misconduct.”

Qwest’s CFO, Robin Szeliga, argued that Plaintiff “does not have standing to assert a claim under § 304 because the statute provides only for reimbursement to the issuer which, in this case, is Qwest.” Judge Blackburn agreed, holding that Plaintiff “is not entitled to the reimbursement required by the statute” because he “is not asserting derivative claims on behalf of Qwest.” Therefore, Plaintiff “does not have standing to assert a claim against” the CFO under § 304 and it “should be dismissed.”

Plaintiffs probably shouldn’t feel too bad though. First, they just negotiated a $400 million partial settlement. And second, the other two reported decisions on Sarbanes 304 are both derivative actions, and both courts ruled that Plaintiffs had no authority to bring 304 claims as the statute does not provide them with a private right of action. Guess the SEC is going to have to enforce 304. Remains to be seen if they are ever going to get serious about it though.

You can read In re Qwest, issued September 12, 2005, at 387 F. Supp. 2d 1130.

Nugget: “Qwest restated its GAAP revenues for this period from $ 40.674 billion to 37.8 billion, an overstatement of $ 2.874 billion, and its losses from $ 4.802 billion to $ 30.290 billion, an understatement of $ 25.488 billion.”

Dura No Help to Defendants Again

Yet again, Dura has failed to produce for those who predicted it would put an end to many securities class actions. How these predictions came about in light of the fact that Justice Breyer commented in Dura that “it should not prove burdensome for a plaintiff who has suffered an economic loss to provide a defendant with some indication of the loss and the causal connection that the plaintiff has in mind,” is a bit puzzling, but the securities class action bar hadn’t seen a substantive decision from the Supremes in a long time, so it’s perhaps a bit understandable that some got a bit overzealous.

This time, it’s Judge John R. Tunheim (D. Minn.) taking on Defendants’ 12(c) motion for judgment on the pleadings (their 12(b)(6) motion to dismiss had been denied earlier) in the Retek action, where they argued that since Plaintiffs’ complaint says “the plaintiffs purchased stock at artificially inflated prices and were damaged thereby,” that should spell dismissal under Dura. A nice try, but it didn’t work, as Judge Tunheim recognized that “while it is true that plaintiffs use the same boilerplate language as that found insufficient in Dura, it is also clear that defendants are fully aware that plaintiffs claim the… press release as a corrective disclosure and the subsequent fall in stock value as their economic loss.” Indeed, “in contrast to Dura and Compuware, here plaintiffs' allegations include a straightforward scenario perfectly consistent with what Dura requires: an allegedly corrective disclosure followed by a drop in the stock price during the time that plaintiffs owned the securities.”

You can read In re Retek, issued October 21, 2005, at 2005 U.S. Dist. LEXIS 25986.

Nugget: “While the thread of causation may be long and somewhat tortured, at this stage, where the Court must accept as true the allegations in the Amended Complaint, the Court finds that plaintiffs have alleged enough to survive Dura.”

Fifth Circuit Approves New Jersey Fund’s Outside Counsel

No one can say Defendants didn’t try everything they could to stop Judge Leonard E. Davis (E.D. Tex.) from appointing the Department of the Treasury of the State of New Jersey, including its Division of Investment on behalf of Common Pension Fund A (“New Jersey”) as class representative on behalf of investors in the IT Services giant Electronic Data Systems securities class action, including bringing the issue to the Fifth Circuit. They attacked on every imaginable (and unimaginable) front, but lost at every turn. Perhaps most interesting is the fact that “New Jersey engaged retired New Jersey Superior Court Judge C. Judson Hamlin (Hamlin) to oversee securities class actions in which New Jersey was involved, including this one.”

Defendants made lots of arguments, but focused their attack on Hamlin by arguing “(1) that the district court found New Jersey adequate only because of Hamlin's involvement, and (2) that New Jersey should not be allowed to rely on Hamlin to establish its adequacy because Hamlin is not New Jersey's employee, but is instead an independent lawyer engaged by New Jersey and, moreover, because Hamlin's fees are paid not by New Jersey, but by class counsel.” In support, Defendants told the Fifth Circuit that "the District Court found that New Jersey has 'only generalized knowledge of the case.'" Really? The Panel noted that “the district court would be surprised to learn of this 'finding,'" as “actually, the district court wrote: "Defendants argue that John McCormac, the Treasurer of New Jersey, Peter Langerman, the Director of the New Jersey Division of Investment, and other high ranking government officials have only generalized knowledge of the case." Oh yeah, that’s what we meant to say. Must have been a typo. Fire that secretary. Lucky for Jones Day, the Panel tagged them gently, remarking that Defendants’ “characterization of the district court's summary of their argument as a finding that their argument is correct is, at best, wholly lacking in merit.”

As for the attacks on Hamlin, the Panel recognized that he “has great incentive to act objectively in protecting the interests of New Jersey and the class of plaintiffs, and little incentive to take actions adverse to New Jersey's interests," his “pay arrangement does not create a conflict of interest with the class members,” he “is not a puppet of class counsel, and he does not answer to class counsel. On the contrary, Hamlin answers to the New Jersey Attorney General. Hamlin's pay is not contingent on the outcome of the class action, nor is it contingent on any approval thereof by class counsel or on keeping class counsel happy. Hamlin's interests are fully aligned with those of New Jersey, which are fully aligned with those of the absent members of the class.”

Result: Class Certification Affirmed.

You can read Feder v. Electronic Data Sys., issued October 24, 2005, here, or at 2005 U.S. App. LEXIS 23618.

Nugget: “New Jersey was not required to submit a trial plan as a prerequisite for finding that this class action meets the superiority requirement of Rule 23(b)(3).”

Excuses, Excuses

Your car salesman did it to you and betcha you didn’t get a penny. Puffery is a bad thing he says? OK smart guy, how in the world am I supposed to sell these Chryslers then? And don’t even talk to me about moving these Kia’s. Yes, of course they are all highway miles. Well, he might be able to get away with it on the lot, but when it comes to running a public company, it’s a different story. No exaggeration.

You see, the executives in the Uniroyal Technology securities class action basically tried to say we didn’t lie, we just “puffed” up the truth. At the worst your Honor. But his Honor, Judge James D. Whittemore (M.D. Fla.), didn’t go for it, holding that “while aspects of the alleged misstatements contain elements of corporate optimism, this Court cannot conclude, at this stage of the litigation, that Defendants' assurances regarding Uniroyal's progress in developing and producing [certain] products were clearly immaterial to investors. When the comments Defendants contend are mere puffery are read in context and in conjunction with Plaintiffs' other allegations, the Court cannot conclude that the alleged misstatements are merely general predictions and not material as a matter of law.”

Judge Whittemore also rejected Defendants’ argument that they forewarned investors of the trouble ahead, finding that “Defendants fail to sufficiently identify the cautionary language they rely on and fail to sufficiently link a cautionary statement to the projection about which Plaintiffs complain.” Finally, the Court also found that the GAAP violations were adequate, because “by failing to write down the inventory to the lower of cost or market value through a charge to earnings during the Class Period, Uniroyal's financial statements reflected grossly overstated assets, income, and net worth.”

Guess these execs' excuses are their own.

You can read Bellocco v. Curd, issued October 20, 2005, at 2005 U.S. Dist. LEXIS 24251.

Nugget: “The Court cannot conclude that these statements are so vague, exaggerated or unspecific that a reasonable investor would not rely on them.”

Tenth Circuit Rules on Notice Requirements

How much advance warning is enough for shareholders to be informed of their right to opt-out or object to a securities class action settlement? Well, in the Sprint case, a Panel of the Tenth Circuit evaluated a situation where certain shareholders “received notice of a class settlement two weeks after the deadline for filing objections to the settlement and on the same day as the final fairness hearing on the settlement.” The shareholders, who “held their shares in ‘street name’ (meaning that they held only beneficial title to the shares while legal title was vested in their broker's name),” in the $50 million settlement argued that “the thirty-two-day period between the initial mailing of the settlement notice and the deadline for objections did not sufficiently account for the delays involved in forwarding notice packets to beneficial stock owners.”

In affirming the District Court’s rejection of the street name objectors’ claims that their Due Process and Rule 23 rights had been violated, the Panel held that the focus should be not upon “actual notice rates,” but instead “upon whether the district court gave the best notice practicable under the circumstances including individual notice to all members who can be identified through reasonable effort.” In concluding that the time period was fair, the Panel concluded that “in the instant case, particularly given the absence of any evidence that anyone other than Appellants received their notice after the deadline for objections or the settlement hearing, the initial and secondary rounds of mailings were sufficient to flush out any objections that might arise to the fairness of the settlement.”

You can read Dejulius v. New England Health Care Employees Pension Fund, issued October 28, 2005, here or at 2005 U.S. App. LEXIS 23353.

Nugget: “Many controversies have raged about the cryptic and abstract words of the Due Process Clause but there can be no doubt that at a minimum they require that deprivation of life, liberty or property by adjudication be preceded by notice and opportunity for hearing appropriate to the case.”