Perhaps it's a coincidence, and perhaps it’s a trend, but this is the third reported decision in the past month (the others are here and here) that is critical of Plaintiffs’ amended complaint drafting techniques. This time, it’s Judge Susan R. Bolton (D. Ariz.) entering the fray, commenting (in connection with her complete dismissal without prejudice of the White Electronic Designs securities class action) that “Plaintiffs are advised, if they choose to re-file their Complaint, to give considered thought to efficient pleading and meaningful analysis. For example, it is extremely difficult and time consuming for the Court to piece together the alleged misrepresentations and omissions with factual assertions located in other parts of the Complaint. It would save considerable effort if Plaintiffs could somehow group together the alleged misrepresentations and reasons why they are misleading so that the Court is not forced to continually jump around the document.”
Trend or just business as usual? Feel free to add a comment below with your view (as always, no registration required, and you can be anonymous if you like).
You can read In re White Electronic Designs, issued February 14, 2006, at 2006 U.S. Dist. LEXIS 6961.
Nugget: “If Plaintiffs had provided any of the specific information in the alleged analysis, their claim might survive a motion to dismiss. Presumably CI 3, who prepared the analysis, would be able to provide some details, yet Plaintiffs have not given the Court any information contained in the analysis.”
Tuesday, February 28, 2006
Monday, February 27, 2006
Ninth Circuit Centers on Scienter
Say the headline above five times fast (with no mistake) to win a free year's subscription to the Nugget. So let's see here, looks like the moment you've been waiting for has arrived. Yes, it's true, a Panel of the Ninth Circuit has listened to Plaintiffs’ position that Judge Alicemarie H. Stotler’s (C.D. Cal.) dismissal of the Aspeon securities class action was wrong. But the listening is done (unless you want to listen to the oral argument below), and it’s time to see what they said. Are you ready? A bit nervous? That’s understandable, so just take a deep breath and relax. It’ll all be over soon, don’t worry.
Well, as you now know, the entire focus of the two page decision targets scienter, with the Panel holding that “the complaint here fails to make specific allegations of Defendants' direct involvement, and instead relies on their involvement in the transactions and pre-existing knowledge of the proper way to recognize revenue.” They also held that “the issuance of restatements is not an admission that the Defendants knew the reports were false when made,” and even “when restatements have been considered evidence of scienter, the restatements were of considerably greater magnitude than those here.” That’s because “the restatements here occurred over three quarters, shuffled funds amongst these quarters such that revenue for the December 1999 quarter actually increased, and, in the end, only demonstrated a revenue reduction of 1.57%.” So, these “facts do not give rise to a strong inference the original statements were issued with deliberate or conscious recklessness.”
You already guessed this too, didn’t you? Dismissal affirmed.
So, Plaintiffs pretty much got creamed in this one (you can listen to the oral argument here by typing Case # 04-55651 in the search box), but if it’s any solace to other Plaintiffs, Defendants in other cases won’t be able to use this decision as precendential value as it’s been tagged by the Panel as unpublished.
You can read In re Aspeon, issued February 23, 2006, at 2006 U.S. App. LEXIS 4673.
Nugget: “The complaint does not detail the way in which the information was inaccurate or what the alleged obstacles were.”
Well, as you now know, the entire focus of the two page decision targets scienter, with the Panel holding that “the complaint here fails to make specific allegations of Defendants' direct involvement, and instead relies on their involvement in the transactions and pre-existing knowledge of the proper way to recognize revenue.” They also held that “the issuance of restatements is not an admission that the Defendants knew the reports were false when made,” and even “when restatements have been considered evidence of scienter, the restatements were of considerably greater magnitude than those here.” That’s because “the restatements here occurred over three quarters, shuffled funds amongst these quarters such that revenue for the December 1999 quarter actually increased, and, in the end, only demonstrated a revenue reduction of 1.57%.” So, these “facts do not give rise to a strong inference the original statements were issued with deliberate or conscious recklessness.”
You already guessed this too, didn’t you? Dismissal affirmed.
So, Plaintiffs pretty much got creamed in this one (you can listen to the oral argument here by typing Case # 04-55651 in the search box), but if it’s any solace to other Plaintiffs, Defendants in other cases won’t be able to use this decision as precendential value as it’s been tagged by the Panel as unpublished.
You can read In re Aspeon, issued February 23, 2006, at 2006 U.S. App. LEXIS 4673.
Nugget: “The complaint does not detail the way in which the information was inaccurate or what the alleged obstacles were.”
Sunday, February 26, 2006
Third Circuit Clamps Down on Sound in Fraud Rule
If you’ve ever litigated 1933 Act and 1934 Act claims together, than you’ve no doubt made or defended the “sound in fraud” argument. If you’re a Plaintiff, you know the frustration of trying to draft the two claims together while alleging fraud on one hand -- and negligence on the other. And if you’re a Defendant, you know how fun it is to try to convince the Judge that Plaintiff should have done just that. Well Plaintiffs, you finally may have found a sympathetic ear in the Third Circuit.
You see, in the Suprema Specialties (the melted cheesemaker) securities class action, the Panel reversed most of Judge William H. Walls’ (D. N.J.) complete dismissal of both ’33 and ’34 Act claims, holding that “where, as here, individual defendants are accused in separate claims of the same complaint of having violated Section 11, Section 12(a)(2), and Section 10(b), the Securities Act claims do not sound in fraud if ordinary negligence is expressly pled in connection with those claims. In such a case, the fraud allegations cannot be said to ‘contaminate’ the Section 11 and Section 12(a)(2) claims if the allegations are pled separately.” “Here, ordinary negligence is alleged in the Section 11 and Section 12(a)(2) claims, and those claims are pled separately from the Section 10(b) fraud claims against the same defendants. That is enough to avoid triggering Rule 9(b). A contrary result would effectively preclude plaintiffs from filing suit under Section 11 and Section 12(a)(2) as well as Section 10(b)(5). There is no suggestion that Congress intended such an incongruous approach.”
"In short, the reputational concerns that animate Rule 9(b) with respect to a defendant accused of fraud are not implicated when a defendant stands accused of nothing more than negligence.” So, “because the Section 11 and Section 12(a)(2) claims of the plaintiffs here were expressly negligence-based and pled distinctly in the complaint from the fraud-based claims, it was error for the District Court to hold that they sound in fraud. Accordingly, we will vacate the dismissal of these claims.”
Be sure to also check out the decision for rulings on inside trading, accountants’ liability, and tracing issues.
You can read In re Suprema, issued February 23, 2006, here, or at 2006 U.S. App. LEXIS 4307.
Nugget: “To be sure, the ‘sounds in fraud’ determination for Securities Act claims will not always be clear cut in cases where the plaintiff simultaneously raises claims against the same defendants under a provision that requires a showing of scienter, like Section 10(b). But where the plaintiff has exercised care in differentiating asserted negligence claims from fraud claims and in delineating the allegations that support the negligence cause of action as distinct from the fraud, the determination is straightforward.”
You see, in the Suprema Specialties (the melted cheesemaker) securities class action, the Panel reversed most of Judge William H. Walls’ (D. N.J.) complete dismissal of both ’33 and ’34 Act claims, holding that “where, as here, individual defendants are accused in separate claims of the same complaint of having violated Section 11, Section 12(a)(2), and Section 10(b), the Securities Act claims do not sound in fraud if ordinary negligence is expressly pled in connection with those claims. In such a case, the fraud allegations cannot be said to ‘contaminate’ the Section 11 and Section 12(a)(2) claims if the allegations are pled separately.” “Here, ordinary negligence is alleged in the Section 11 and Section 12(a)(2) claims, and those claims are pled separately from the Section 10(b) fraud claims against the same defendants. That is enough to avoid triggering Rule 9(b). A contrary result would effectively preclude plaintiffs from filing suit under Section 11 and Section 12(a)(2) as well as Section 10(b)(5). There is no suggestion that Congress intended such an incongruous approach.”
"In short, the reputational concerns that animate Rule 9(b) with respect to a defendant accused of fraud are not implicated when a defendant stands accused of nothing more than negligence.” So, “because the Section 11 and Section 12(a)(2) claims of the plaintiffs here were expressly negligence-based and pled distinctly in the complaint from the fraud-based claims, it was error for the District Court to hold that they sound in fraud. Accordingly, we will vacate the dismissal of these claims.”
Be sure to also check out the decision for rulings on inside trading, accountants’ liability, and tracing issues.
You can read In re Suprema, issued February 23, 2006, here, or at 2006 U.S. App. LEXIS 4307.
Nugget: “To be sure, the ‘sounds in fraud’ determination for Securities Act claims will not always be clear cut in cases where the plaintiff simultaneously raises claims against the same defendants under a provision that requires a showing of scienter, like Section 10(b). But where the plaintiff has exercised care in differentiating asserted negligence claims from fraud claims and in delineating the allegations that support the negligence cause of action as distinct from the fraud, the determination is straightforward.”
Thursday, February 23, 2006
Uphill Battle
This is truly a story of Davey and Goliath. O.K., let’s see here. You have seven individuals with a combined loss of $10,620.84 in the AstraZeneca securities class action. Not bad, nice job there counsel. Just one tiny obstacle stands in your way though. Your opponent has one institutional investor (the State Universities Retirement System of Illinois) with $1.2 million in losses. So, you guys give up yet, or are you thirsty for more? Nope, you push on, telling Judge Thomas P. Griesa (S.D.N.Y.) that your group should be appointed co-lead plaintiffs because “the broad interests of the class will be more adequately represented by the combination of individual investors and an institutional investor than by an institutional investor alone,” and this arrangement “will protect the action in the event that defendants find any unique defense against the State Universities Retirement System of Illinois.”
Sounds good to you, right? Yeah, but apparently not to Judge Griesa, who held that “the court finds no need to complicate the proceedings with co-lead plaintiffs,” because “courts in this circuit have frequently declined to appoint co-lead plaintiffs in the absence of some actual infirmity with the appointed lead plaintiff,” and “no such infirmity has been suggested here.”
Looks like your “motion to be appointed as co-lead plaintiff is therefore denied.” Oh well, don't worry Davey, you still got Goliath to keep you company, even if you are the only one who can hear him.
You can read In re AstraZenica, issued February 16, 2006, at 2006 U.S. Dist. LEXIS 6479.
Nugget: “The Foster Group does not challenge the State Universities Retirement System of Illinois' claim to the largest financial interest in the litigation or that it satisfies the requirements of Rule 23.”
Sounds good to you, right? Yeah, but apparently not to Judge Griesa, who held that “the court finds no need to complicate the proceedings with co-lead plaintiffs,” because “courts in this circuit have frequently declined to appoint co-lead plaintiffs in the absence of some actual infirmity with the appointed lead plaintiff,” and “no such infirmity has been suggested here.”
Looks like your “motion to be appointed as co-lead plaintiff is therefore denied.” Oh well, don't worry Davey, you still got Goliath to keep you company, even if you are the only one who can hear him.
You can read In re AstraZenica, issued February 16, 2006, at 2006 U.S. Dist. LEXIS 6479.
Nugget: “The Foster Group does not challenge the State Universities Retirement System of Illinois' claim to the largest financial interest in the litigation or that it satisfies the requirements of Rule 23.”
Wednesday, February 22, 2006
Dura Can't Plug These Leaks And Dribbles
Magistrate Judge Andrew J. Peck (S.D.N.Y.) has recommended that Judge Lewis A. Kaplan (S.D.N.Y.) (featured in Monday's Brontosaurus article) certify the NTL securities class action. As Judge Peck noted, “the major issue on the motion is whether the named plaintiffs (Fleck and Cheyne) are typical or are subject to unique defenses based on loss causation issues.” In holding that they were not, “the Court finds that the class complaint adequately alleges that certain negative information about NTL leaked out during the class period, and thus the named plaintiffs can show loss causation and are not atypical.”
That's right, yet another Dura loss for Defendants (regular Nugget readers know the drill). Why you ask? Well, as Judge Peck put it, “because Lead Plaintiffs have made some showing that these disclosing events slowly revealed the false information regarding NTL and have tied some if not all of the dissipation in the value of NTL's stock to those events, they have adequately plead loss causation.” Of course, “some of that loss may be attributable to general stock market declines or decreases in NTL's stock price unrelated to the alleged fraud,” but “the Court cannot determine how much of Fleck's loss is attributable to the alleged fraud and how much is attributable to other factors for which defendants are not liable. But this same question will have to be determined for the class as a whole - it is not unique to Fleck (or Cheyne).”
So, “accordingly, Fleck's situation is typical of others in the class - a need to show the drop in NTL's share price during the class period was not attributable to general factors but to ‘dribbled’ disclosures or ‘leakage’ of truthful information regarding NTL's prior misrepresentations and/or omissions.”
You can read In re NTL, issued February 14, 2006, at 2006 U.S. Dist. LEXIS 5346.
Nugget: “Indeed, defendants' opposition to class certification on this ground essentially is a motion to dismiss on loss causation grounds.”
That's right, yet another Dura loss for Defendants (regular Nugget readers know the drill). Why you ask? Well, as Judge Peck put it, “because Lead Plaintiffs have made some showing that these disclosing events slowly revealed the false information regarding NTL and have tied some if not all of the dissipation in the value of NTL's stock to those events, they have adequately plead loss causation.” Of course, “some of that loss may be attributable to general stock market declines or decreases in NTL's stock price unrelated to the alleged fraud,” but “the Court cannot determine how much of Fleck's loss is attributable to the alleged fraud and how much is attributable to other factors for which defendants are not liable. But this same question will have to be determined for the class as a whole - it is not unique to Fleck (or Cheyne).”
So, “accordingly, Fleck's situation is typical of others in the class - a need to show the drop in NTL's share price during the class period was not attributable to general factors but to ‘dribbled’ disclosures or ‘leakage’ of truthful information regarding NTL's prior misrepresentations and/or omissions.”
You can read In re NTL, issued February 14, 2006, at 2006 U.S. Dist. LEXIS 5346.
Nugget: “Indeed, defendants' opposition to class certification on this ground essentially is a motion to dismiss on loss causation grounds.”
Tuesday, February 21, 2006
Back to the Drawing Board
Judge Neil Vincent Wake (D. Ariz.) has given Plaintiffs 30 days to try again in the Hypercom securities class action. In tossing the amended complaint, Judge Wake found that “Plaintiffs allege little more than the fact that Hypercom issued a financial restatement because of GAAP violations. The amount of the restatement is not overly probative. Plaintiffs have failed to allege with particularity how the GAAP violations were so obvious that Smolak and Alexander must have known about the misclassification. The culpability statement only provides that there were internal control deficiencies, which caused the accounting error. Such a culpability statement does not establish a strong inference that Defendants misrepresented Hypercom's financial figures with knowledge or deliberate recklessness.”
“Furthermore, the allegations of one confidential witness in this case fail to raise the level of the inference to ‘strong.’ While Plaintiffs may have alleged facts establishing a reasonable inference of scienter, the standard is a strong inference, which Plaintiffs have not raised. Therefore, Plaintiffs' claim that Defendants violated Section 10(b) of the Securities Exchange Act of 1934 is dismissed without prejudice.”
You can read In re Hypercom, issued January 26, 2005, at 2006 U.S. Dist. LEXIS 2669.
Nugget: “Plaintiffs need to plead particularized facts establishing a strong inference that Defendants acted with scienter, not mere negligence.”
“Furthermore, the allegations of one confidential witness in this case fail to raise the level of the inference to ‘strong.’ While Plaintiffs may have alleged facts establishing a reasonable inference of scienter, the standard is a strong inference, which Plaintiffs have not raised. Therefore, Plaintiffs' claim that Defendants violated Section 10(b) of the Securities Exchange Act of 1934 is dismissed without prejudice.”
You can read In re Hypercom, issued January 26, 2005, at 2006 U.S. Dist. LEXIS 2669.
Nugget: “Plaintiffs need to plead particularized facts establishing a strong inference that Defendants acted with scienter, not mere negligence.”
Monday, February 20, 2006
Judge Wrestles Brontosauraus
Sometimes Judges lambast Defendants, and sometimes they lambast Plaintiffs, so say what you will, but the Nugget prides itself in being an equal-opportunity-reporter-of-lambasting. So pull up a seat, get comfy, and check out Judge Lewis A. Kaplan’s (S.D.N.Y.) conclusion in the Parmalat securites class action after partially granting/denying BoA's motion to dismiss.
“The Court wishes to comment on the extraordinary burden that plaintiffs have placed on the Court and all of the parties to this case. The SAC (second amended complaint) is 389 pages and 1,323 paragraphs long - certainly the very antithesis of the "short and plain statement of the claim" that the authors of the Federal Rules of Civil Procedure had in mind. Naturally, the Court is well aware of the fact that the PSLRA and Rule 9(b) require particularity in pleading some aspects of plaintiffs' claims, thus requiring a more expansive complaint than the one- and two-page form complaints appended to the Federal Rules. It is quite aware also that this is a particularly complicated case.”
“Nevertheless, having struggled through this brontosaurus of a pleading, the Court doubts that a complaint even approaching this length was needed. Indeed, it is concerned that the complexity and length of the pleading may not serve the interests of the alleged class. It already has delayed, and may continue to delay, resolution of the action. It may well multiply the extent and cost of discovery. It has required, and may continue to require, attention to claims against defendants who may be unlikely ever to make any meaningful contribution to settlement or payment of any judgment. And if this case ever were tried to a jury, the potential for confusion and the difficulties of comprehension would be epic in proportions. If indeed the grievous and extensive fraud alleged by plaintiffs actually occurred, there doubtless are ways to focus more on the forest and less on every single tree.”
Sort of reminds you of this recent Nugget article, doesn’t it? Plus, this isn't the first time Judge Kaplan has criticized the length of the Parmalat complaint. Oh, and by the way, bet you didn’t know that there never was such a thing as a Brontosaurus, did you? It’s true, see here and here. Unless you count the one filed in SDNY that is....
You can read In re Parmalat, issued February 9, 2006, at 2006 U.S. Dist. LEXIS 5419.
Nugget: “Should there ever be a fee application in this case, the efficiency and dispatch with which counsel have handled the case are likely to be prominent considerations.”
“The Court wishes to comment on the extraordinary burden that plaintiffs have placed on the Court and all of the parties to this case. The SAC (second amended complaint) is 389 pages and 1,323 paragraphs long - certainly the very antithesis of the "short and plain statement of the claim" that the authors of the Federal Rules of Civil Procedure had in mind. Naturally, the Court is well aware of the fact that the PSLRA and Rule 9(b) require particularity in pleading some aspects of plaintiffs' claims, thus requiring a more expansive complaint than the one- and two-page form complaints appended to the Federal Rules. It is quite aware also that this is a particularly complicated case.”
“Nevertheless, having struggled through this brontosaurus of a pleading, the Court doubts that a complaint even approaching this length was needed. Indeed, it is concerned that the complexity and length of the pleading may not serve the interests of the alleged class. It already has delayed, and may continue to delay, resolution of the action. It may well multiply the extent and cost of discovery. It has required, and may continue to require, attention to claims against defendants who may be unlikely ever to make any meaningful contribution to settlement or payment of any judgment. And if this case ever were tried to a jury, the potential for confusion and the difficulties of comprehension would be epic in proportions. If indeed the grievous and extensive fraud alleged by plaintiffs actually occurred, there doubtless are ways to focus more on the forest and less on every single tree.”
Sort of reminds you of this recent Nugget article, doesn’t it? Plus, this isn't the first time Judge Kaplan has criticized the length of the Parmalat complaint. Oh, and by the way, bet you didn’t know that there never was such a thing as a Brontosaurus, did you? It’s true, see here and here. Unless you count the one filed in SDNY that is....
You can read In re Parmalat, issued February 9, 2006, at 2006 U.S. Dist. LEXIS 5419.
Nugget: “Should there ever be a fee application in this case, the efficiency and dispatch with which counsel have handled the case are likely to be prominent considerations.”
Thursday, February 16, 2006
Fifth Circuit Tanks Amresco Action
The Fifth Circuit has spoken, and it looks like it could be the end of the line for investors in the Amresco securities class action. You see, despite that fact that Plaintiffs’ contested the district court's order: “(1) implicitly denying application of collateral estoppel; (2) striking part of their expert's affidavit; (3) holding the SAC (second amended complaint) failed to satisfy the PSLRA's pleading requirements; and (4) denying leave to amend the SAC,” the Fifth Circuit didn’t budge.
The Panel first held that “the district court correctly rejected group-pleading allegations.” Next, it noted that “an Individual Defendant is not liable for an Amresco business filing unless he either signed it or was involved in its creation,” and that “Plaintiffs provide no specific facts either tying any of the Individual Defendants to such filings they did not sign or demonstrating scienter for any filings they did sign.” Plus, “Plaintiffs' mere allegation that the Individual Defendants were motivated by a desire to retain their jobs does not satisfy the scienter requirement.,” and “Plaintiffs never pleaded with specificity how, or why, Deloitte was unreasonable in failing to determine Amresco did not have a reasonable turnaround plan.”
Finally, the Panel considered Plaintiffs’ argument that “even if their SAC was properly dismissed, they should have been granted leave to amend (to permit a fourth try).” Rejecting this position, they held that “in seeking to avoid dismissal, Plaintiffs' opposition employed facts claimed unavailable when filing the SAC. Although they had three prior opportunities to produce this information, and although they claimed the facts were previously unavailable and that others might become known, Plaintiffs did not explain why they were unable to obtain the information before filing the SAC. In other words, they never explained this to the district court as a basis for being allowed leave to file a fourth complaint. In short, Plaintiffs never provided the requisite specificity for leave to file a fourth complaint.”
You can read Financial Acquisition Partners v. Blackwell here, issued February 14, 2006, or at 2006 U.S. App. LEXIS 3523.
Nugget: “Even if non-opinion portions of an expert's affidavit constitute an instrument pursuant to Rule 10, opinions cannot substitute for facts under the PSLRA.”
The Panel first held that “the district court correctly rejected group-pleading allegations.” Next, it noted that “an Individual Defendant is not liable for an Amresco business filing unless he either signed it or was involved in its creation,” and that “Plaintiffs provide no specific facts either tying any of the Individual Defendants to such filings they did not sign or demonstrating scienter for any filings they did sign.” Plus, “Plaintiffs' mere allegation that the Individual Defendants were motivated by a desire to retain their jobs does not satisfy the scienter requirement.,” and “Plaintiffs never pleaded with specificity how, or why, Deloitte was unreasonable in failing to determine Amresco did not have a reasonable turnaround plan.”
Finally, the Panel considered Plaintiffs’ argument that “even if their SAC was properly dismissed, they should have been granted leave to amend (to permit a fourth try).” Rejecting this position, they held that “in seeking to avoid dismissal, Plaintiffs' opposition employed facts claimed unavailable when filing the SAC. Although they had three prior opportunities to produce this information, and although they claimed the facts were previously unavailable and that others might become known, Plaintiffs did not explain why they were unable to obtain the information before filing the SAC. In other words, they never explained this to the district court as a basis for being allowed leave to file a fourth complaint. In short, Plaintiffs never provided the requisite specificity for leave to file a fourth complaint.”
You can read Financial Acquisition Partners v. Blackwell here, issued February 14, 2006, or at 2006 U.S. App. LEXIS 3523.
Nugget: “Even if non-opinion portions of an expert's affidavit constitute an instrument pursuant to Rule 10, opinions cannot substitute for facts under the PSLRA.”
Wednesday, February 15, 2006
Right Back Where We Started
After an unscheduled stop at the Eleventh Circuit, Judge Steven D. Merryday (M.D. Fla.) seemed a bit frustrated in the Tello v. Dean Witter action. Why? Well, because, as he put it, “the circuit court leaves unclear both why the issue of ‘inquiry notice’ might be resolvable by the district court without a jury and why resolution of a motion to dismiss pursuant to Rule 12(b)(6) requires an evidentiary hearing.” Indeed, he said he “is unaware of any precedent except this case for that procedure.”
But, pushing forward, he ordered limited discovery on the statute of limitation issue anyway, which eventually resulted in the submission by both sides of “memoranda accompanied by thirty-two exhibits comprising hundreds of pages of deposition, newspaper and magazine stories, business journal articles, online message-board postings, newspaper and magazine circulation data, annual corporate reports, and pertinent stock transactions--all of which the parties supplemented at the December 19, [2005] hearing by two hours of vigorous oral argument.” At the end of all this (which no doubt must have been overwhelmingly fun), Judge Merryday observed that “unsurprisingly, the plaintiffs' theory places inquiry notice on October 1, 2002, after the effective date of Sarbanes-Oxley,” and of course “equally unsurprisingly, the defendants' theory places inquiry notice on or before August 14, 2000.”
The result? Judge Merryday said that “because the circuit court acknowledges that resolving a disputed issue of inquiry notice is within the exclusive province of a jury, and because the plaintiffs in this case have demanded and perfected their right to a jury trial, the district court interprets the circuit court's mandate to require a determination whether, without improperly invading the province of the jury (that is, without resolving a "genuine issue of material fact"), the district court can identify the moment at which the plaintiffs were on "inquiry notice" of the alleged, actionable fraud.” So “after affording the parties a full hearing on the inquiry notice question, the district court finds no such moment.” “The parties' irreconcilable versions of the pertinent history present genuine issues of material fact resolvable only by a jury.”
So, after four years of litigation, it seems like the action is about where it was the day it was filed. Sounds like a great system, huh?
You can read Tello V. Dean Witter, issued January 25, 2006, at 2006 U.S. Dist. LEXIS 5211.
Nugget: “This remand to the district court results in an unusual event: a proceeding to determine a fact that the circuit court finds dispositive of a motion to dismiss under Rule 12(b)(6), Federal Rules of Civil Procedure (the disposition of which, to say the least, normally involves no judicial fact finding).”
But, pushing forward, he ordered limited discovery on the statute of limitation issue anyway, which eventually resulted in the submission by both sides of “memoranda accompanied by thirty-two exhibits comprising hundreds of pages of deposition, newspaper and magazine stories, business journal articles, online message-board postings, newspaper and magazine circulation data, annual corporate reports, and pertinent stock transactions--all of which the parties supplemented at the December 19, [2005] hearing by two hours of vigorous oral argument.” At the end of all this (which no doubt must have been overwhelmingly fun), Judge Merryday observed that “unsurprisingly, the plaintiffs' theory places inquiry notice on October 1, 2002, after the effective date of Sarbanes-Oxley,” and of course “equally unsurprisingly, the defendants' theory places inquiry notice on or before August 14, 2000.”
The result? Judge Merryday said that “because the circuit court acknowledges that resolving a disputed issue of inquiry notice is within the exclusive province of a jury, and because the plaintiffs in this case have demanded and perfected their right to a jury trial, the district court interprets the circuit court's mandate to require a determination whether, without improperly invading the province of the jury (that is, without resolving a "genuine issue of material fact"), the district court can identify the moment at which the plaintiffs were on "inquiry notice" of the alleged, actionable fraud.” So “after affording the parties a full hearing on the inquiry notice question, the district court finds no such moment.” “The parties' irreconcilable versions of the pertinent history present genuine issues of material fact resolvable only by a jury.”
So, after four years of litigation, it seems like the action is about where it was the day it was filed. Sounds like a great system, huh?
You can read Tello V. Dean Witter, issued January 25, 2006, at 2006 U.S. Dist. LEXIS 5211.
Nugget: “This remand to the district court results in an unusual event: a proceeding to determine a fact that the circuit court finds dispositive of a motion to dismiss under Rule 12(b)(6), Federal Rules of Civil Procedure (the disposition of which, to say the least, normally involves no judicial fact finding).”
Tuesday, February 14, 2006
Dura Saves Defendants
Your wait is finally over. Yes, it took two years, but there has been a ruling on Defendants’ motion to dismiss the First Union securities class action. You see, the motion was originally filed back in Febraury 2004, but Judge H. Brent McKnight (W.D. N.C.), who was only 52 and had been an Article III Judge for only a year, tragically passed away on November 27, 2004, so Magistrate Judge Carl Horn, III stepped in to handle the case.
More time passed after Defendants asked to supplement the briefing in light of Dura, but their argument carried the day with Judge Horn, as he held that “assuming for purposes of this motion only that the Plaintiffs have adequately pled the other elements of their securities fraud claim, they have failed to establish causation for the losses that they suffered on First Union shares they purchased, that is, that the subsequent decrease in the First Union stock price was caused by the Defendants' misrepresentations concerning the Money Store and gain-on-sale accounting.” Thus, “applying the particularity pleading requirement to loss causation, the specific allegations of the Third Amended Complaint contradict the Plaintiffs' otherwise generalized allegations that they suffered an economic loss as a result of the alleged misrepresentations.”
You can read In re First Union, issued January 20, 2006, at 2006 U.S. Dist. LEXIS 5083.
Nugget: “The Plaintiffs clearly state that the stock price decline was caused by two public statements, the January and May 1999 revised earnings estimates, after which the First Union share price did fall, but they equally clearly allege that the Defendants did not disclose the ‘truth’ about the Money Store and gain-on-sale accounting until June 26, 2000.”
More time passed after Defendants asked to supplement the briefing in light of Dura, but their argument carried the day with Judge Horn, as he held that “assuming for purposes of this motion only that the Plaintiffs have adequately pled the other elements of their securities fraud claim, they have failed to establish causation for the losses that they suffered on First Union shares they purchased, that is, that the subsequent decrease in the First Union stock price was caused by the Defendants' misrepresentations concerning the Money Store and gain-on-sale accounting.” Thus, “applying the particularity pleading requirement to loss causation, the specific allegations of the Third Amended Complaint contradict the Plaintiffs' otherwise generalized allegations that they suffered an economic loss as a result of the alleged misrepresentations.”
You can read In re First Union, issued January 20, 2006, at 2006 U.S. Dist. LEXIS 5083.
Nugget: “The Plaintiffs clearly state that the stock price decline was caused by two public statements, the January and May 1999 revised earnings estimates, after which the First Union share price did fall, but they equally clearly allege that the Defendants did not disclose the ‘truth’ about the Money Store and gain-on-sale accounting until June 26, 2000.”
Monday, February 13, 2006
Another Dura 12(c) Motion Bites the Dust
The trend of Defendants losing 12(c) motions based on Dura marches onward (and on, and on, and you get the point). This time, it's Judge Blanche M. Manning (N.D. Ill.) who has rejected Defendants attempts to jettison the Baxter International securities class action (which earlier almost died an untimely death until the Seventh Circuit revived it) by noting “[a]lthough it is a close question, this court concludes that, at this stage of the pleadings, plaintiffs have adequately alleged loss causation. Unlike the plaintiffs in Dura who alleged only that they paid artificially inflated prices, plaintiffs here allege that their loss was indeed caused by Baxter's announcement of its second-quarter results, which revealed the dire financial situation that the defendants had tried to conceal.”
And “although defendants attempt to characterize this drop as nothing more than the market's reaction to bad news, a liberal reading of plaintiffs' complaint reveals more. Plaintiffs are essentially alleging not just that the price dropped as the result of bad financial news, but rather as the result of the unattainable rosy "financial commitments" issued by Baxter--commitments the company could not possibly have met given its internal state of affairs. In other words, plaintiffs are claiming that the startling disconnect between Baxter's predictions and its actual second-quarter results revealed to the market that the predictions had been unattainable.”
Motion denied.
You can read Asher v. Baxter, issued February 7, 2006, at 2006 U.S. Dist. LEXIS 4821.
Nugget: “If Baxter had not lied about its internal state of affairs and its ability for growth, the disappointing second-quarter results would not have had such a negative impact on the share price.”
And “although defendants attempt to characterize this drop as nothing more than the market's reaction to bad news, a liberal reading of plaintiffs' complaint reveals more. Plaintiffs are essentially alleging not just that the price dropped as the result of bad financial news, but rather as the result of the unattainable rosy "financial commitments" issued by Baxter--commitments the company could not possibly have met given its internal state of affairs. In other words, plaintiffs are claiming that the startling disconnect between Baxter's predictions and its actual second-quarter results revealed to the market that the predictions had been unattainable.”
Motion denied.
You can read Asher v. Baxter, issued February 7, 2006, at 2006 U.S. Dist. LEXIS 4821.
Nugget: “If Baxter had not lied about its internal state of affairs and its ability for growth, the disappointing second-quarter results would not have had such a negative impact on the share price.”
Sunday, February 12, 2006
Allegations Against Execs Fail Beef Test
Looks like a mixed result on the motions to dismiss in the Dynex Capital securities class action. Although Judge Harold Baer, Jr. (S.D.N.Y.) denied the company’s motion, the CEO and President fared much better. In finding “that the allegations leveled against a particular individual must demonstrate that his or her culpability is based upon more than that person's mere position in the corporate hierarchy,” Judge Baer held that “with respect to the individual defendants, plaintiff's complaint fails the ‘where's the beef’ test.”
Why? Because “if plaintiff's allegations against Potts and Benedetti suffice to demonstrate scienter, senior officers of any corporation in which a pattern of wrongdoing is alleged would be liable for securities fraud. In broad terms, senior officers will always have ‘access’ to information indicative of malfeasance (if such information exists). The PSLRA demands more. Plaintiff has not alleged that Potts or Benedetti saw or had access to specific reports or statements that indicated malfeasance, or that contradicted their public statements. Nor has plaintiff alleged that Potts or Benedetti directly supervised or knew of any identified individual(s) who were engaged in specific wrongdoing. Therefore, plaintiff has failed to adequately plead scienter with respect to Potts and Benedetti.”
But is this just Round 1? Perhaps, as Judge Baer gave Plaintiffs 30 days to replead allegations against the execs.
You can read In re Dynex, issued February 10, 2006, here or at 2006 U.S. Dist. LEXIS 4988.
Nugget: “A plaintiff may, and in this case has, alleged scienter on the part of a corporate defendant without pleading scienter against any particular employees of the corporation.”
Why? Because “if plaintiff's allegations against Potts and Benedetti suffice to demonstrate scienter, senior officers of any corporation in which a pattern of wrongdoing is alleged would be liable for securities fraud. In broad terms, senior officers will always have ‘access’ to information indicative of malfeasance (if such information exists). The PSLRA demands more. Plaintiff has not alleged that Potts or Benedetti saw or had access to specific reports or statements that indicated malfeasance, or that contradicted their public statements. Nor has plaintiff alleged that Potts or Benedetti directly supervised or knew of any identified individual(s) who were engaged in specific wrongdoing. Therefore, plaintiff has failed to adequately plead scienter with respect to Potts and Benedetti.”
But is this just Round 1? Perhaps, as Judge Baer gave Plaintiffs 30 days to replead allegations against the execs.
You can read In re Dynex, issued February 10, 2006, here or at 2006 U.S. Dist. LEXIS 4988.
Nugget: “A plaintiff may, and in this case has, alleged scienter on the part of a corporate defendant without pleading scienter against any particular employees of the corporation.”
Thursday, February 09, 2006
Log This
If only you had a nickel for everytime you got a worthless privilege log (not the actual privilege log of course, because then you’d really be in the poorhouse given the number of litigants that never supply one). Well, this time, Judge Dominic J. Squatrito (D. Conn.) is calling the producing party to the carpet in the Priceline securities class action, finding that “the bases for defendants' privilege and work product objections are, in some cases, complex, and defendants must elaborate upon why these documents deserve protection.”
Indeed, “many of the documents listed in the privilege log were sent to several persons outside of Priceline-such as attorneys from multiple law firms and persons from other business firms, such as WebHouse. Plaintiffs justifiably express the concern that the information within the documents listed may not be privileged because it may have been revealed to persons outside the attorney-client zone of protection.” “Likewise, defendants must attempt to explain how documents it claims are immune from discovery pursuant to the work product doctrine were created in anticipation of litigation,” and “should also identify documents, or portions thereof, that qualify as opinion work product, and are therefore eligible for heightened protection.”
Shouldn’t everyone just do this in the first place? Like this one, for example? Yeah, right.
You can read In re Priceline, issued December 8, 2005, here or at 2005 U.S. Dist. LEXIS 33635.
Nugget: “Defendants shoulder the burden of demonstrating that information is protected by the attorney-client privilege or the work product immunity doctrine, and must therefore supplement their privilege log to provide information necessary to make an informed determination of the validity of their objections.”
Indeed, “many of the documents listed in the privilege log were sent to several persons outside of Priceline-such as attorneys from multiple law firms and persons from other business firms, such as WebHouse. Plaintiffs justifiably express the concern that the information within the documents listed may not be privileged because it may have been revealed to persons outside the attorney-client zone of protection.” “Likewise, defendants must attempt to explain how documents it claims are immune from discovery pursuant to the work product doctrine were created in anticipation of litigation,” and “should also identify documents, or portions thereof, that qualify as opinion work product, and are therefore eligible for heightened protection.”
Shouldn’t everyone just do this in the first place? Like this one, for example? Yeah, right.
You can read In re Priceline, issued December 8, 2005, here or at 2005 U.S. Dist. LEXIS 33635.
Nugget: “Defendants shoulder the burden of demonstrating that information is protected by the attorney-client privilege or the work product immunity doctrine, and must therefore supplement their privilege log to provide information necessary to make an informed determination of the validity of their objections.”
Wednesday, February 08, 2006
In. Out. Certified.
In the BearingPoint securities class action pending in the rocket docket, Judge T. S. Ellis, III (E.D. Va.) found himself confronted with the “somewhat novel question” of “whether ‘in-and-out’ purchasers of BearingPoint stock, namely those who bought and sold their shares within the class period, can prove loss causation.” Defendants, relying on Dura (no, don't adjust your set, just more defendants going down the drain with Dura -- again), argued that including these traders "in the proposed class will require individual examination of each in-and-out trader to determine whether each such trader has satisfied the loss causation requirement.”
But Judge Ellis rejected Defendants' argument, holding instead that “although in-and-out traders often have no associated damage because they purchased and sold at prices with the same artificial inflation, this is not always the case. In cases where, as here, there are multiple disclosures, in-and-out traders may well be able to show a loss. Moreover, it is also conceivable that the inflationary effect of a misrepresentation might well diminish over time, even without a corrective disclosure, and thus in-and-out traders in this circumstance would be able to prove loss causation. In sum, because in-and-out traders may conceivably prove loss causation, they are appropriately counted as members of the proposed class.”
Result? You guessed it, class certified.
You can read In re Bearing Point, issued January 17, 2006, at 2006 U.S. Dist. LEXIS 1718.
Nugget: “Even so, the conclusion that the proposed class includes in-and-out traders, does not, alter the conclusion that common issues of law and fact will predominate over individual issues. The issue of whether in-and-out traders can satisfy loss causation is a single legal issue, not dependent on individual factual determinations, and the proper determination of individual damages can be determined at trial through the use of expert witnesses.”
But Judge Ellis rejected Defendants' argument, holding instead that “although in-and-out traders often have no associated damage because they purchased and sold at prices with the same artificial inflation, this is not always the case. In cases where, as here, there are multiple disclosures, in-and-out traders may well be able to show a loss. Moreover, it is also conceivable that the inflationary effect of a misrepresentation might well diminish over time, even without a corrective disclosure, and thus in-and-out traders in this circumstance would be able to prove loss causation. In sum, because in-and-out traders may conceivably prove loss causation, they are appropriately counted as members of the proposed class.”
Result? You guessed it, class certified.
You can read In re Bearing Point, issued January 17, 2006, at 2006 U.S. Dist. LEXIS 1718.
Nugget: “Even so, the conclusion that the proposed class includes in-and-out traders, does not, alter the conclusion that common issues of law and fact will predominate over individual issues. The issue of whether in-and-out traders can satisfy loss causation is a single legal issue, not dependent on individual factual determinations, and the proper determination of individual damages can be determined at trial through the use of expert witnesses.”
Tuesday, February 07, 2006
Judge Finds Way Through GeoPharma Mist
Judge Shira A. Scheindlin (S.D.N.Y.), who first tossed the GeoPharma securities class action back in September 2005, took another look when Plaintiffs filed an amended complaint. The key to the forty page opinion is scienter, with Judge Scheindlin framing the question as how should a "court should determine whether the alleged failure to disclose additional information is intentional, reckless, or negligent, when the alleged misleading statement is literally true?"
The answer? Well, Judge Scheindlin said that "the long answer is found by reading the entire Opinion," something you should do if your interested. But for the rest of you, "the short answer is that a court must consider the viability of the alleged scheme to defraud, the entire alleged misstatement (not just certain phrases), the context in which the statement was made, the public's access to additional information, the defendant's response to any market confusion resulting from the alleged misstatement, and any other indicia that the defendant acted with fraudulent intent. If all of these factors are given full consideration, the mist created by creative counsel dissipates and the intent, or lack of it, is revealed."
After analyzing the scienter allegations and rejecting them, she concluded that "although plaintiffs again request leave to amend, further amendment would be pointless. Having already been given the opportunity to replead, plaintiffs, who are represented by highly experienced counsel, have surely presented all relevant facts by now, and have twice failed to plead scienter. Accordingly, the Amended Complaint is dismissed with prejudice."
You can read In re GeoPharma, issued January 27, 2006, at 2006 U.S. Dist. LEXIS 3342.
Nugget: "The purpose of section 10(b) and Rule 10b-5 is to punish knowing fraud or reckless behavior, not mistakes that arise from negligent or even grossly negligent behavior."
The answer? Well, Judge Scheindlin said that "the long answer is found by reading the entire Opinion," something you should do if your interested. But for the rest of you, "the short answer is that a court must consider the viability of the alleged scheme to defraud, the entire alleged misstatement (not just certain phrases), the context in which the statement was made, the public's access to additional information, the defendant's response to any market confusion resulting from the alleged misstatement, and any other indicia that the defendant acted with fraudulent intent. If all of these factors are given full consideration, the mist created by creative counsel dissipates and the intent, or lack of it, is revealed."
After analyzing the scienter allegations and rejecting them, she concluded that "although plaintiffs again request leave to amend, further amendment would be pointless. Having already been given the opportunity to replead, plaintiffs, who are represented by highly experienced counsel, have surely presented all relevant facts by now, and have twice failed to plead scienter. Accordingly, the Amended Complaint is dismissed with prejudice."
You can read In re GeoPharma, issued January 27, 2006, at 2006 U.S. Dist. LEXIS 3342.
Nugget: "The purpose of section 10(b) and Rule 10b-5 is to punish knowing fraud or reckless behavior, not mistakes that arise from negligent or even grossly negligent behavior."
Monday, February 06, 2006
Who Says We're Professionals?
Perhaps you recall back in August when Judge Harvey Bartle III (E.D. Penn.) rejected Defendants’ Dura arguments in the Vicuron Pharmaceuticals securities class action. Well, it looks like things aren’t improving much for them at the class certification stage. You see, Defendants balked when Lead Plaintiffs "Massachusetts State Carpenters Pension Fund ("MSCPF"), Massachusetts State Guaranteed Annuity Fund ("MSGAF"), and the Greater Pennsylvania Carpenters Pension Fund ("GPCPF") asked to also serve as class representatives (seems nice of them to offer, doesn’t it?), arguing that they "are unfit" "because they are ‘professional plaintiffs’ barred from serving in this capacity by the PSLRA and because they played little or no role in the decision to purchase Vicuron stock."
But, alas, Judge Bartle rejected the first argument, holding that "the fact that the MSCPF and MSGAF have been class representatives in as many prior class actions as they have does not preclude their filling that role in this case." And as for the argument about their role in purchasing the stock, Judge Bartle shot that down too, saying "the fact that institutional plaintiffs used money managers and investment advisors to purchase Vicuron stock does not suggest plaintiffs are inadequate to protect and pursue the interests of the class."
Result? Class certified.
You can read In re Vicuron, issued February 1, 2006, here, (thanks again to Adam T. Savett at Mehri & Skalet for the link) or at 2006 U.S. Dist. LEXIS 3861.
Nugget: "If an institutional investor cannot be a class representative simply because it turned over day-to-day investment decisions to professional money managers or advisors, few if any institutional investors could be class representatives in any securities action. Such a result is contrary to the intentions of Congress embodied in the PSLRA that institutional investors should oversee more securities actions."
But, alas, Judge Bartle rejected the first argument, holding that "the fact that the MSCPF and MSGAF have been class representatives in as many prior class actions as they have does not preclude their filling that role in this case." And as for the argument about their role in purchasing the stock, Judge Bartle shot that down too, saying "the fact that institutional plaintiffs used money managers and investment advisors to purchase Vicuron stock does not suggest plaintiffs are inadequate to protect and pursue the interests of the class."
Result? Class certified.
You can read In re Vicuron, issued February 1, 2006, here, (thanks again to Adam T. Savett at Mehri & Skalet for the link) or at 2006 U.S. Dist. LEXIS 3861.
Nugget: "If an institutional investor cannot be a class representative simply because it turned over day-to-day investment decisions to professional money managers or advisors, few if any institutional investors could be class representatives in any securities action. Such a result is contrary to the intentions of Congress embodied in the PSLRA that institutional investors should oversee more securities actions."
Sunday, February 05, 2006
Judge Protects Confidential Informants
Sorry about the lack of new articles last week, but there just weren’t any interesting decisions to write about. But Judge Michael M. Baylson (E.D. Pa.) sure has put an end to that dry spell in the Cigna securities class action. In a fascinating opinion evaluating whether Lead Plaintiff has to reveal the names of their confidential witnesses cited in their complaint, Judge Baylson recognized that "confidential informants play a decidedly important role in many areas of public life. They are essential to the craft of espionage, and there are many books revealing the valuable role which confidential information has played in enabling our country to survive numerous wars. In the field of law enforcement, confidential informants are, of course, heavily relied upon by police and other law enforcement agents to detect everything from drug dealing to kidnapping to solving gruesome murders. The role of confidential informants in providing information to the press has recently been under great attention with regard to the so-called "CIA leak case" in which the Court of Appeals for the District of Columbia Circuit upheld a special prosecutor's subpoena requiring Judith Miller, a reporter for the New York Times, to testify about her sources. In refusing to obey this order, Ms. Miller spent several weeks in prison but eventually testified."
Judge Baylson continued, "of course, the recent identification of "Deep Throat," whose provision of information to the Washington Post led to the infamous Watergate scandal, also reminds us of the value of the free flow of information in a democratic society without fear of disclosure or retribution. However, as the DC Circuit's decision in the case of Judith Miller shows, the ability to avoid disclosing a confidential informant is not absolute; in most instances there is indeed a balancing test. How should the optimal balance be determined in this case?"
Well, keeping in mind that "there seems to be little public policy to support the Court requiring Lead Plaintiff to disclose its confidential informants in this case," "the Court concludes that requiring specific identification of confidential sources from among the universe of individuals with relevant knowledge in a securities fraud case would chill informants from providing critical information which may end up being in the public eye," therefore "Plaintiff should not be put under any compulsion to disclose the specific identity of its confidential informants."
You can read In re Cigna, issued January 31, 2006, here (many thanks to Adam T. Savett at Mehri & Skalet for the link), or at 2006 U.S. Dist. LEXIS 3864.
Nugget: "Fairness compels only that if an individual who is a confidential informant does have relevant information, that person's identity should be disclosed as a discoverable matter, but without disclosing that he or she is a confidential informant."
Judge Baylson continued, "of course, the recent identification of "Deep Throat," whose provision of information to the Washington Post led to the infamous Watergate scandal, also reminds us of the value of the free flow of information in a democratic society without fear of disclosure or retribution. However, as the DC Circuit's decision in the case of Judith Miller shows, the ability to avoid disclosing a confidential informant is not absolute; in most instances there is indeed a balancing test. How should the optimal balance be determined in this case?"
Well, keeping in mind that "there seems to be little public policy to support the Court requiring Lead Plaintiff to disclose its confidential informants in this case," "the Court concludes that requiring specific identification of confidential sources from among the universe of individuals with relevant knowledge in a securities fraud case would chill informants from providing critical information which may end up being in the public eye," therefore "Plaintiff should not be put under any compulsion to disclose the specific identity of its confidential informants."
You can read In re Cigna, issued January 31, 2006, here (many thanks to Adam T. Savett at Mehri & Skalet for the link), or at 2006 U.S. Dist. LEXIS 3864.
Nugget: "Fairness compels only that if an individual who is a confidential informant does have relevant information, that person's identity should be disclosed as a discoverable matter, but without disclosing that he or she is a confidential informant."
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