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.”