Accounting Firms’ Foreign Subsidiaries in For the Long Haul

In the Parmalat securities litigation, Judge Lewis A. Kaplan (S.D.N.Y.) has ruled that the Italian subsidiaries of Deloitte and Grant Thornton will not be dismissed from the action, despite their argument that they “each are factually and legally separate from their Italian affiliates and therefore cannot be liable for the affiliates' alleged fraud.” Although the court rejected Plaintiffs' alter ego argument, it did find that “an agency relationship existed between [Deloitte, Grant Thornton,] and its member firms that conducted the Parmalat audit. As principals, they would be responsible for the actions of their agents and the knowledge and, consequently scienter, of their agents is imputed to them.”

In addressing the causation elements of Dura, Judge Kaplan found it “difficult to imagine that the markets would not have moved on the basis of reports by Parmalat's independent auditors,” and therefore held that Plaintiffs “have pleaded transaction causation sufficiently.” As for loss causation, the court found Plaintiffs met that hurdle too, holding that “an allegation that a corrective disclosure caused the plaintiff's loss may be sufficient to satisfy the loss causation requirement, [but] it is not, however, necessary.” The court went on to observe the fact “that the true extent the fraud was not revealed to the public until February - after Parmalat shares were worthless and after the close of the Class Period - is immaterial where, as here, the risk allegedly concealed by defendants materialized during that time and arguably caused the decline in shareholder and bondholder value.”

Last, but certainly not least, Judge Kaplan confessed he “is in substantial sympathy with defendants” with respect to their motion “to dismiss the complaint under Rules 8(a)(2) and (e)(1), [because] at 368 pages and 1,249 paragraphs, it is too long and confusing.” He remarked that “the requirement of pleading fraud with particularity does not justify a complaint longer than some of the greatest works of literature. A complaint of this length, indeed, is an undue imposition on all who are obliged to read it. Nevertheless, a dismissal under Rule 8 is usually reserved for those cases in which the complaint is so confused, ambiguous, vague, or otherwise unintelligible that its true substance, if any, is well disguised. Although plaintiffs' submission is lengthy, it does not overwhelm the defendants' ability to understand or to mount a defense, [and therefore] it will not be dismissed under Rule 8."

You can read the decision, issued June 28, 2005, at 2005 U.S. Dist. LEXIS 12553.

Nugget: "The significance of the corporate form to the development of capital markets and economic progress in general cannot be denied. Nevertheless, the limited liability entity is not an unmitigated blessing. The limitation of liability that encourages capital formation in some circumstances may eliminate disincentives to fraudulent behavior."

Nugget: "Independent auditors serve a crucial role in the functioning of world capital markets because they are reputational intermediaries. In certifying a company's financial statements, their reputations for independence and probity signal the accuracy of the information disclosed by the company, the managers of which typically are unknown to most of the investing public."

Nugget: "Certification by an entity named Deloitte & Touche, Grant Thornton, or one of the small handful of other major firms is incalculably more valuable than that of a less known firm because the auditor "is in effect pledging a reputational capital that it has built up over many years of performing similar services for numerous clients."

Nugget: "In consequence, allowing those organizations to avoid liability for the misdeeds and omissions of their constituent parts arguably could diminish the organizations' incentives to police their constituent entities, with adverse consequence for participants in capital markets."

So Let Me Get this Straight. I Bring My State Law Claims In Federal Court, and My Federal Law Claims in State Court?

In the Baxter International securities litigation, Senior Judge William T. Hart (N.D. Ill.) issued two rulings in one opinion. In the first ruling, he sent a securities class action based solely on a federal claim (Section 11 of the 1933 Securities Act) back to Circuit Court of Cook County, Illinois. He did that because he said § 16(c) of the Securities Act “plainly and unambiguously limit[s] removal to certain class actions containing state law claims.” He also held that “where the statutory language is plain and unambiguous and does not produce an absurd result, that language should be applied and legislative history need not be considered.” A system that makes claimants file their federal claims in state court, and their state claims in federal court, doesn’t budge the needle on the absurdity-meter? Not even a little?

Moving on to the second ruling, which addressed the consolidated securities class action against Baxter based on '34 Act claims, Judge Hart granted Defendants’ request to dismiss Plaintiffs' claims that “a substantial portion of [Baxter’s] improperly recognized revenue resulted from sales to fictitious customers, fictitious sales to actual customers, and the illegal rigging of bids for the sale of blood by products to the Brazilian government.” Sounds like some pretty bad stuff, huh?

However, focusing almost exclusively on defendants’ knowledge and intent (a/k/a scienter, but to the Nugget more unnecessary Latin-speak), the court found that Plaintiffs’ allegations of weak internal controls, management’s “ineffective financial review,” the receipt by management of monthly financial reports, and overstatements of income or revenues (without more), were not enough to meet the scienter requirement. As for the insider’s stock sales, the court found that “it is not reasonable to infer that [defendants] were motivated to overstate net income by a mere 1.5% ($ 33,000,000 over three years) in order to obtain more favorable rates or returns for the listed transactions valued at more than $ 4,000,000,000. Even if the 1.5% overstatement were to be considered significant enough to affect the alleged transactions, plaintiffs fail to allege facts connecting the overstatements to the transactions nor any facts supporting that the individual defendants would directly benefit from these transactions.”

Judge Hart did not grant or deny Plaintiffs’ permission to modify their complaint. Instead, he gave them 10 days to ask him permission to do that, and ordered them to attach a copy of the proposed amended complaint to their request.

You can read the decision at 2005 U.S. Dist. LEXIS 12006.

Nugget: “No case containing a § 11 claim is removable from state court unless it meets the exception set forth in § 16(c). Section 16(c) provides that it only applies to covered class actions "as set forth in subsection [16](b)." To be a class action set forth in § 16(b), the case must be inter alia a "covered class action based upon the statutory or common law of any State or subdivision thereof.”

Lehman Analyst Case Dismissed on Loss Causation Grounds.

You may recall two years ago, in April 2003, when Lehman Brothers paid $80 million and entered into consent orders with the SEC, the NASD, and Spitzer & Co., because Lehman’s “research analysts generated undeservedly positive coverage of Lehman's investment banking clients in order to help secure additional investment banking fees from those clients.” Lehman even “acknowledged that this practice gave rise to conflicts of interest between its equity research function and its investment banking function.” Investors in Sunrise Technologies, a stock that was covered by Lehman, were none too happy about it, and they filed a securities fraud lawsuit against Lehman and two of its analysts for “seven Lehman research reports concerning Sunrise that are alleged to have contained material misrepresentation or omissions.”

Last Friday, Senior Judge Robert W. Sweet (S.D.N.Y.) addressed Defendants' motion to dismiss, and while finding that Plaintiffs had met the statute of limitations and adequately alleged falsity and scienter, he dismissed the action for failure to properly allege loss causation. In analyzing the issue under the Supreme Court’s recent Dura decision, the court found that Plaintiffs’ complaint “contained no allegations of a causal connection between the alleged misrepresentations and a subsequent economic loss suffered by the Plaintiffs. Rather, the [complaint] merely alleged that (1) Sunrise stock is publicly traded and (2) that the Defendants' misrepresentations falsely inflated the value of Sunrise' shares. The Dura court rejected the proposition that such allegations are adequate to plead loss causation.” Plaintiffs have until July 13, 2005 to amend their complaint.

You can read the decision, issued June 23, 2005, at 2005 U.S. Dist. LEXIS 12313.

Nugget: “The revelations concerning the activities of securities firms has presented the courts with difficult issues as those injured by these practices seek redress. The resolution of this motion reflects that tension.”

Ninth Circuit Amends Daou Decision. Holds Fast on Loss Causation.

When the Ninth Circuit issued its opinion in the Daou securities class action this past February, the U.S. Supreme Court hadn’t yet decided Dura Pharms., Inc. v. Broudo, 125 S. Ct. 1627 ( 2005). However, the day after Dura was decided on April 19, 2005, the panel, consisting of Circuit Judges Betty B. Fletcher, Harry Pregerson, and Melvin Brunetti ordered the parties to brief Dura's impact on their original opinion. Sort of makes one wonder why they just didn’t wait a couple more months for Dura to be decided before issuing the original opinion. How much could two more months hurt an appeal that was filed during Thanksgiving of 2002? At any rate, the old opinion has been amended, and unless you saved a copy of it, you might want to grab it here before the judges send it to that warehouse where they put the Ark in the first Indiana Jones film.

What’s the bottom line? Well, it seems Dura didn’t change the final result (that Plaintiffs sufficiently alleged loss causation and damages) one bit. However, consistent with Dura, the Ninth Circuit modified the final three factors it uses to evaluate the basic elements of a securities fraud claim from causation, reliance, and damages to “a connection with the purchase or sale of a security, transaction and loss causation, and economic loss.” In analyzing these three factors, the Panel knocked the first one out in a single sentence, saying “plaintiffs have sufficiently alleged a connection.” The court also disposed of the economic loss prong in two sentences, holding that the complaint’s “assertions of a steep drop in Daou's stock price following the revelation of Daou's true financial situation” are sufficient. The only real discussion occurred in the analysis of the causation requirements. In a somewhat fact-specific analysis, the court held that Plaintiffs allegations regarding the “disclosures of Daou's true financial health, the result of prematurely recognizing revenue before it was earned, led to a "dramatic, negative effect on the market, causing Daou's stock to decline to $ 3.25 per share, a staggering 90% drop from the Class Period high of $ 34.375 and a $ 17 per share drop from early August 1998." Draw your own conclusion, but the italics in that sentence was added by the court, not the Plaintiffs.

The other significant holding in the case (which didn’t change from the original opinion, but is interesting nonetheless) relates to 1933 Act claims sounding in fraud. The court accepted the doctrine, and found Plaintiffs ’33 Act claims did in fact sound in fraud. However, it also found that Plaintiffs met Rule 9(b)’s standard for pleading fraud with particularity, and refused to dismiss those claims. For reasons unknown, Plaintiffs appear to have incorporated the ’34 Act allegations into their ’33 Act counts. The court seemed persuaded that this makes all the ’33 Act claims sound in fraud. Might not want to do that next time.

You can read the amended decision, issued June 21, 2005, here or at 2005 U.S. App. LEXIS 1641.

Nugget: "As long as the misrepresentation is one substantial cause of the investment's decline in value, other contributing forces will not bar recovery under the loss causation requirement but will play a role in determining recoverable damages."

Broadcom Judge Shatters Record Held For Quarter Century

Big news today. Huge. A new all-time record has been set for the number of times the phrase "under the unique facts of this particular case" has ever been used in a reported U.S. decision. No kidding, ever. Judge Gary L. Taylor (C.D. Cal.) crushed the old record by wielding the phrase four times in one decision. You heard it right, four times. Actually, he did it six times if you are willing to count the extra "under the unique circumstances of this particular case" he started the whole thing off with, and the "under the particular circumstances of this case" he threw in for a second change-up.

But what about the old record? You can't remember? Surely you jest. Who among us doesn't remember where we were when the Juice was acquitted, the Berlin Wall came down, or the late California Jurist Bernard S. Jefferson issued his grumpy "under the unique facts of this particular case" not once, but twice, in his now infamous dissent in People v. Campbell, 87 Cal. App. 3d 678 (Cal. App. 2d Dist. 1978), a sordid tale of a cellmate getting his "butt kicked in the dayroom of tank 3."

But we can't dwell on this milestone for long, as there is case law to be learned. So, what was it that was so unique? Well, in the Broadcom securities class action, the opposing sides were at odds over what type of model should be used to determine damages. The Plaintiffs wanted to use the trading model, while the defendants preferred the damages to be proven-up in the claims administration process. After a two day evidentiary hearing (reportedly during which fans were on the edge of their seats), Judge Taylor settled on Defendants' proposal. Sure there were lots of reasons, but how much would it help you to know them unless your case has facts that are just as "unique" as those in the Broadcom litigation.

In case your securities class action has the same facts as the Broadcom case boasts, you should run, not walk, to 2005 U.S. Dist. LEXIS 12118.

Nugget: "After review of the PSLRA, the Court concludes the statute neither requires nor prohibits proof of aggregate damages. The statute leaves it open for a court to select the most reliable method of damages proof that is available in that particular case."

Nugget: "Rule 23 allows district courts to devise imaginative solutions to problems created by the presence of individual damages issues in a class action litigation."

You Just Can’t Make Some Lead Plaintiffs Happy

Guess what, as lead counsel, we represented you for four long years and settled your case for $490 million, netting the third largest securities class action settlement ever. What’s that, you’re suing me? Sounds unbelievable, but that’s exactly what is happening right now in the Southern District of New York. No, make that the Eastern District of Missouri. You see, when Judge Marrero (S.D.N.Y.) got the former BankAmerica Lead Plaintiffs’ lawsuit on his docket, he shipped it to Missouri faster than you can say, “The Private Securities Litigation Refo….” Sorry, too slow. Of course, the Plaintiffs cried foul when they arrived, arguing that Judge Marrero was “manifestly unjust” in transferring their case to Missouri without anybody even asking him to do it (a/k/a sua sponte, but the Nugget shuns Latin-speak, as, well, it’s pretty silly unless you are the Solicitor General decked out in your morning coat).

Back to the Eastern District. Judge Nangle (E.D. Mo.) started out with the exceedingly neutral observation that “[I] am hesitant to proceed with useless acts that do nothing but take up time and cause unnecessary expense.” Sounds a little like Pat Robertson running for President again. Though of course, in “an abundance of caution,” the Court agreed to analyze the venue issue. Let’s see. The underlying BankAmerica litigation was in Missouri, where the MDL Panel centralized it years ago. A bunch of the Defendants, witnesses, and even Plaintiffs are located there. And the case is “essentially an outgrowth of the BankAmerica case, an action that has been ongoing in [Missouri] since 1999.” Maybe that’s why Judge Nangle found that “the facts are so clear and convincing and obvious, that it is easy to see” why the case got relocated from New York.

So it appears the parties will be duking this one out in the Show-Me State. It could be tough going for Plaintiffs though. After all, it appears they explained their problems to Judge Nangle at the fairness hearing way back in 2002, but got nowhere as he approved the settlement anyway. Their appeal to the Eighth Circuit didn’t work very well either. (See 350 F.3d. 747). It’s no wonder they went to New York. But alas, their escape attempt was futile, and now everyone will have to face the music in St. Louis, whatever that may hold.

You can read the decision at 2005 U.S. Dist. LEXIS 9691

Nugget: “Needless to say, this Court is hesitant to predict what an appellate court will do, but it does seem quite evident that this case will ultimately end up in the Eastern District of Missouri.”

Court Orders Mutual Bar Order in MTC Shareholder Litigation

After being instructed by the Second Circuit to “fully consider the competing equities” in evaluating what type of bar order (mutual or non-mutual) to use in a partial settlement of the MTC securities litigation, Judge John Gleeson (E.D.N.Y.) has decided to opt for the mutual bar order (MBO). The Judge had originally approved a non-mutual bar order (NMBO), which favors the settling defendants by preventing the non-settling defendants from seeking indemnity and contribution from them, but not offering the same protection for the non-settling defendants. So its easy to see why the defendants who remained in the case didn’t care much for that plan. Instead, they favored implementing the MBO, which means that if the settling defendant ends up shelling out more than the eventual amount that the jury finds it is liable, the non-settling party’s “payment is reduced by any amount the settling party ‘overpaid.’” In addition, under a MBO, “neither the settling defendant, nor the non-settling defendants, will be able to seek indemnity or contribution against the other.”

In compliance with the instructions handed down to him from on-high, Judge Gleeson analyzed the following five factors in determining whether to utilize the MBO or the NMBO: 1) fairness to the various parties; 2) the risk of collusion; 3) whether one of the non-settling defendants benefited from a NMBO in an earlier related settlement; 4) the PSLRA’s preference for MBO’s; and 5) the settling party’s representations about how it intended to use the NMBO. In a largely fact-specific decision, he found that each factor weighed in favor of using the MBO. In doing so, he observed that “a mutual bar order is by no means unfair – it merely forces a settling party to bear the risk of the settlement it negotiated.” In addition, he found that a settling party receives certain benefits that the remaining defendants do not enjoy, such as “avoiding the risk of the unknown” and “eliminating any further expenses associated with litigation.” Thus, the Judge reasoned it fair that the settling party may wind up paying more in the settlement than the jury eventually says it should have. That’s just the way it goes.

For all the details, you can find the decision, issued May 31, 2005, at 2005 U.S. Dist. LEXIS 10312.

Nugget: “The equities do not favor either the settling parties or the non-settling parties. Nevertheless, the facts and circumstances of this action favor the application of the mutual rule over the application of the non-mutual rule.”

Tempered Rigas Celebration Seems Likely

Former Adelphia tycoon John Rigas and his son Tim are no doubt in chipper spirits this evening after learning of their victory in one of the many securities fraud actions pending against them. Yes, just as the Rigas’ have been arguing for nearly a year, at least one case against them will remain in federal court instead of being shipped back to the Luzerne County, Pennsylvania Court of Common Pleas.

To understand what happened here, you’ll need to get a bit dizzy first. Ready? It all started back in January 2003 when a group of investors sued Deloitte & Touche in Luzerne County for securities fraud related to Adelphia stock they received in a merger. Deloitte of course wasted little time adding Rigas and Sons as third-party defendants. In the meantime, Adelphia filed for bankruptcy in the Southern District of New York. So, using the powers of 28 U.S.C. § 1452(a), which allows a party to remove state court actions related to bankruptcy cases, the Rigas’ removed their case to the Bankruptcy Court in the Middle District of Pennsylvania. In the meantime, the case was conditionally transferred to Senior Judge Lawrence M. McKenna's courtroom in the Southern District of New York by the Judicial Panel on MultiDistrict Litigation. Plaintiffs asked the Panel to reconsider. Then the Pennsylvania Bankruptcy Court remanded the case back to Luzerne County. The Rigas’ appealed the remand order to Judge McKenna in the SDNY, and shortly thereafter, the MDL Panel (despite the remand order) fully transferred the case to Judge McKenna. Happens all the time, right?

After hearing all sides, Judge McKenna rejected Plaintiffs’ arguments that the Southern District of New York has no authority to hear the appeal of the remand order issued by the Pennsylvania Bankruptcy Court, finding that “review of any order of the district court in a transferred cause, made before transfer, is within the jurisdiction of the court of appeals of the circuit to which the cause has been transferred.” Judge McKenna also rejected Plaintiffs argument that the remand order divested the MDL Panel of jurisdiction based primarily on the fact that the Rigas’ had timely appealed that Order to the District Court in Pennsylvania, opining that “it seems unlikely, to say the least, that Congress intended that a transfer by the MDL Panel could eliminate Article III review of a bankruptcy judge's decision.”

The Court ended the decision by denying Plaintiffs’ request to remand under either the abstention doctrine or equitable remand principles. In sum, Judge McKenna found that since the Rigas Defendants showed that the case against them is related to the Adelphia bankruptcy, it was therefore properly removed pursuant to § 1452(a).

So c’mon guys, what’s wrong? You won. It’s time to break out the bubbly and celebrate.

You can read the decisions, filed June 13, 2005 and May 2, 2005 at 2005 U.S. Dist. LEXIS 7909 and 2005 U.S. Dist. LEXIS 11685.

Nugget: “[A] transfer under section 1407 transfers the action lock, stock and barrel.”

Sue Your Mutual Fund For Failing to Participate in Securities Class Action Settlements?

So you mull over your latest mutual fund statement, fully disheartened by the S&P 500’s meager 0.42% total gain this year, and wonder to yourself, “Why doesn’t my mutual fund submit the short paperwork necessary to collect the securities class action settlement money to which it is legally entitled?” Free money for me, right? It sure seems easy enough. Let’s see, fill out a form, attach the trades, slap a stamp on it, and head outside to look for one of those ubiquitous blue boxes on the corner. Now just wait for the check, and when it comes, add it to the pot. Presto – no pesky breach of fiduciary lawsuits and the funds’ rate of return just ticked upward a notch or two.

As it turns out, investors with their hard-earned money in the Allianz Funds were thinking just like you. Of course, they jumped in with both feet, serving the financial services giant with a class action lawsuit for failing to pick up its share of these settlements. Even George Tenet might agree this one is slated to be a slam dunk.

But you didn’t think this was going to be that easy, did you? Judge James V. Selna (C.D. Cal.) sure didn’t. He took a look at plaintiffs’ claims that Allianz violated the Investment Company Act of 1940, breached its fiduciary duty, and committed plain old negligence, and well, let’s just say you had better start sharpening your pencil and get that demand letter drafted if you are going to be litigating this one anywhere near his courtroom.

In evaluating the state law claims and the 1940 Act claims under § 36(b) (for breach of fiduciary duty), Judge Selna held these must be brought on a derivative basis because “[t]he fact that Defendants allegedly failed to ensure the participation [in the settlements] injured the funds,” not the shareholders directly. Since the funds “owned the securities,” plaintiffs would have to bring the claims in a derivative lawsuit, following the procedures of Massachusetts law, under which the fund was established. He also ruled that Plaintiffs’ 1940 Act claims under § 36(a) (alleging “personal misconduct”) could only be brought by the SEC, not private plaintiffs.

So where does it go from here? One thing that seems fairly certain is that these investors won’t get to re-file the case as a derivative action, at least not in federal court. Since the federal claims were ruled fatally defective, the court held it no longer had jurisdiction, and bounced the entire action with prejudice. Remains to be seen if we’ll see these investors next in San Francisco or Boston. Stay tuned. You can read the decision, filed on June 8, 2005, at 2005 U.S. Dist. LEXIS 11388.

Nugget: “The [Plaintiffs] injury is identical to every other investor’s in that their pro rata share of the fund allegedly would have been more valuable had Defendants participated in the settlements.”

Named Plaintiffs Don’t Have to Respond to Discovery

In the Qwest securities litigation case, Defendant Arthur Andersen determined that it needed the named plaintiffs’ trading records and investment strategies in order to properly evaluate reliance, loss causation, and statute of limitations issues. Plaintiffs refused, arguing that only the proposed class representatives should have to respond to discovery, and that the named plaintiffs’ information was irrelevant. U.S. Magistrate Judge Shaffer (D. Colo.) stepped in and sided with Plaintiffs on this one. Relying on In re Lucent, 2002 U.S. Dist. LEXIS 24973 (D.N.J. 2002), the Court accepted Plaintiffs’ position that “[A]ndersen shows no reason why the sample of seven [named plaintiffs] – which happens to comprise less than one hundredth of one percent of the class – represents a cross section of the class in this case.” Andersen also wanted discovery from a proposed non-party class representative who withdrew its request to serve after being hit with a Fed.R.Civ.P. 26(a) & (b) initial disclosure request. Based on the same reasoning, Judge Shaffer denied that discovery as well. Milberg Weiss is lead counsel for Plaintiffs and Arnold & Porter represents Andersen. The decision, filed June 7, 2005, is available at 22005 U.S. Dist. LEXIS 11618.

Priceline Judge Defines Scope of Discovery

Who’s the winner here? Well, it seems Plaintiffs and Defendants can claim both victory and defeat in two separate decisions issued by Judge Squatrito (D. Conn.) in the Priceline.com securities class action. In a victory for Plaintiffs, the Court found that the identity of any confidential witnesses identified in their amended complaint, as well as the identity of any witnesses interviewed during Plaintiffs’ investigation, is protected by the work product doctrine, and if revealed would allow defendants to “possibly gain insight into counsel's thought process.” However, this victory turned out to be bittersweet, as Judge Squatrito (while acknowledging the conflicting authority) held that under Fed.R.Civ.P. 26(b)(3) “defendants' need for the information substantially outweighs the potential for an intrusion into plaintiffs' counsel's case preparation.” Thus, at least this time around, it appears Plaintiffs will have to reveal the identity of the witnesses.

Fortunately for Plaintiffs, the Court wasn't willing to go quite that far with Defendants’ attempt to obtain documents regarding Plaintiffs’ investigation of the amended complaint. Although the Court ordered Plaintiffs to produce a privilege log listing these documents, it did not find that the documents themselves must be turned over. The Court did tell Plaintiffs that they must produce documents showing both their investment strategies and the composition of their portfolios though.

As for Plaintiffs’ interrogatory requesting Defendants to “identify all individuals or entities who received stock, stock options or warrants of Priceline,” the Court found Defendants’ attempt to rely on Rule 33(d) by merely pointing plaintiffs to certain records inadequate, and ordered Defendants to properly comply with the rule.

For more details, you can read these decisions at 2005 U.S. Dist. LEXIS 11142 and 2005 U.S. Dist. LEXIS 10989.

Nugget: “The objecting party must do more than simply intone the familiar litany that the interrogatories are burdensome, oppressive or overly broad. Instead, the objecting party must show specifically how, despite the broad and liberal construction afforded the federal discovery rules, each request is not relevant or how each question is overly broad, burdensome or oppressive by submitting affidavits or offering evidence revealing the nature of the burden.”

Sixth Circuit Chimes in on Dura

A panel of the Sixth Circuit consisting of Judges Kennedy, Daughtrey, and Sutton issued a unanimous opinion yesterday affirming Judge Rosen’s (E.D. Mich.) September 19, 2003 pre-Dura dismissal of the Kmart securities class action. The Court of Appeals found that plaintiffs’ loss causation allegations did “not differ in any material respect from Broudo’s” allegations in Dura, and therefore did not meet the required pleading standard. The Court held that the Kmart plaintiffs “did not plead that the alleged fraud became known to the market on any particular day, did not estimate the damages that the alleged fraud caused, and did not connect the alleged fraud with the ultimate disclosure and loss.” The decision, which was not recommended for full-text publication, is available here or at 2005 U.S. App. LEXIS 11267.

Nugget: “[T]he observation that a stock price dropped on a particular day, whether as a result of bankruptcy or not, is not the same as an allegation that a defendant’s fraud caused the loss.”

Court Interprets Dura in Appointing Group as Lead Plaintiff

Rejecting arguments that two proposed independent lead plaintiffs can not move together for appointment, Judge Harold Baer (S.D.N.Y.) has granted lead plaintiff status to a group of movants in the Mamma.com action. Judge Baer also found that the movants’ “in-and-out” purchases did not disqualify them from serving as lead plaintiffs. Finally, the court stated that “in accordance with the PSLRA, Dura Pharmaceuticals, Inc. v. Broudo, 125 S. Ct. 1627, 1631 (2005), and Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161, 174 (2d Cir. 2005), plaintiffs need only allege that the misstatement or omission concealed something from the market that, when disclosed, negatively affected the value of the security, and loss causation does not require full disclosure and can be established by partial disclosure during the class period which causes the price of shares to decline.” Milberg Weiss and Cohen Milstein were appointed co-lead counsel. The decision is available at 2005 U.S. Dist. Lexis 10224.

Nugget: “[T]he Witkowski-Mamma.com Group demonstrated that the lead plaintiff, and other class members, purchased a substantial portion of their securities before the April 6, 2004 disclosure of the alleged fraud, sold a substantial portion of their shares after the April 6, 2004 disclosure of the alleged fraud and, therefore, can allege that ‘the subject of the fraudulent statement or omissions was the cause of the actual loss suffered’ and, therefore, satisfy the tests articulated by the Supreme Court in Dura and the Second Circuit in Lentell.”

Lead Plaintiff Contest Reopened

In the Bombardier action, Judge Scheindlin (S.D.N.Y.) has ruled that since the amended complaint expanded the class period and added new securities, a new press release would be required. The current Lead Plaintiffs, the Teamsters Local 445 Freight Division Pension Fund, must issue a new press release by June 21, 2005, thus restarting the 60 day period for investors to move for appointment as Lead Plaintiff. The Fund is represented by Schoengold Sporn Laitman & Lometti, P.C. The decision is available at 2005 U.S. Dist. LEXIS 10780.

Nugget: "This appears to be a matter of first impression. Although previous courts have addressed the question of whether a new notice need be issued when the class period is amended -- and have generally answered that question in the negative -- the parties and the Court have found no decision regarding whether adding new classes of securities to the ambit of the class requires republication."

ABFS dismissed

Judge O’Neil (E.D. Pa.) has dismissed the American Business Financial Services action in its entirety. In his decision, he finds Plaintiffs’ allegations concerning ABFS’ loan delinquency rates failed to meet the PSLRA’s requirements for falsehood, materiality, and scienter. Although the Plaintiffs were successful in providing the proper background information of the five confidential witnesses, they weren’t particular enough with the information they provided. Also, the court indicated that it would not dismiss claims pertaining to false statements made after the named Plaintiffs’ final stock purchase, as long as false statements or omissions were made prior to the last purchase, and they were part of a common scheme to defraud. But there was no such occasion, as the court, after rejecting general application of the group pleading doctrine (but allowing individual liability for group published documents), proceeded to find the scheme alleged by Plaintiffs was not particularized, and even if it was, it was simply not material to investors. Twenty days were given to amend.

Finally, something we can all agree on: “Obviously, there can be no securities fraud liability for a true statement.”

Nugget: “While insider sales are one way to prove scienter, they are not required.”