Secondary Offering Class Certified in Celera

Judge Christopher F. Droney (D. Conn.) has certified a 1933 Act class of secondary offering investors suing Celera, the human genome mapping company that once sold for nearly $250 per share back in its heyday of early 2000. But don't worry, you're in luck, because you can have your very own share today for only 12 bucks. But let's get down to brass tacks.

Defendants didn’t contest numerosity or commonality, but fought the class representatives on just about everything else, starting with typicality. Defendants argued "that the claims of the proposed class representatives… are not typical because neither party can set forth successful claims under Section 11 or 12 due to the manner in which they purchased Celera common stock." But the court found this argument "unpersuasive," holding that "there was only one prospectus issued, and it applied equally to all purchases of stock during that secondary offering," and "although the defendants may be able to prove that [the class representatives] purchased some of their shares before the secondary offering, this goes to each party's damages; also, they purchased at least some of their shares after the secondary offering, and therefore their claims are typical of the class."

As for adequate representation, the court rejected Defendants position regarding the class representative’s knowledge, holding that "it is unrealistic to require a class action representative to have an in-depth grasp of the legal theories of recovery behind his or her claim."

Having established the 23(a) criteria, the court moved on to 23(b)(3). You get the picture though, this isn’t going to take long. Defendants raised "a truth [on] the market defense" but Judge Droney rejected this too, saying "this defense -- that this information was available to all purchasers prior to the secondary offering -- will be against the entire class, and not the individual purchasers." The court also held that "questions of whether the information was disseminated and available prior to the secondary offering, and what weight to give to that information, are factual questions that go to the merits of the plaintiffs' claims, and therefore are inappropriate to address at this stage of the proceedings."

The court finished things off by certifying the class, noting that "there is only one principal issue in this case -- whether the defendants made proper disclosures in conjunction with the secondary public offering, the Court finds that a class action is superior to other available methods for the fair and efficient adjudication of this controversy."

You can read the decision at 228 F.R.D. 102.

Nugget: "Given the complexities of a securities litigation case, the interest of individual stockholders in controlling the prosecution of separate actions is low."

Progress Energy Class Action Dropped Like It’s Hot

When Progress Energy and Florida Progress merged back in 1999, their “proxy indicated that each share of Florida Progress stock would be exchanged for $54.00 in cash or stock as well as one Contingent Value Obligation ("CVO").” Sure, a CVO. Don’t feel bad if you don’t know what a CVO is because they made it up. That’s right, they invented their own security. What is it? Well, you’ll be sorry you asked because a CVO “represents the right to receive contingent payments based upon the net after-tax cash flow to Progress Energy generated by certain synthetic fuel plants operated by Progress," to be "equal to 50% of the net after-tax cash flow generated by the synthetic fuel plants in excess of $ 80 million per year for each of the years 2001 through 2007, as well as any payments thereafter associated with carryforward credits, which were defined as any synthetic fuel credits earned during an Operation Year and carried forward as part of defendant's minimum tax credit (within the meaning of Section 53 of the Internal Revenue Code) and utilized in one or more tax years after 2007.”

My God. Talk about over-complicating things. Why not just make the price, oh say, $54.30 and call it a day? Anyway, a couple years later, after the merger was completed, Progress told investors that “because of the operation of the alternative minimum tax ("AMT"), synthetic fuel credits earned from the operation of its synthetic fuel plants could not completely eliminate its income tax burden, and, in fact, could not reduce that liability below twenty percent.” The CVOs, which had been trading at 54 cents each, immediately dropped to 42 cents. Plaintiffs filed a 10(b) class action soon thereafter.

In evaluating Plaintiffs' claims, Judge John E. Sprizzo (S.D.N.Y.) held that “it is indisputable that there can be no omission where the allegedly omitted facts are disclosed,” as “defendants disclosed in the proxy the limitations on the use of the synthetic fuel credits which were imposed by the Internal Revenue Code.” “Although the proxy did not mention the AMT by name, it directed investors to the relevant Internal Revenue Code provisions, and it indicated that synthetic fuel credits that could not be used in a given year would be carried over to future years as part of defendants' minimum tax credit.”

Second, the court found that “even if this disclosure was deemed inadequate, the information allegedly omitted here is not of the type which defendants had a duty to disclose,” as it is a “publicly known” “generally applicable tax provision that applies to all corporations.” Finally, the court held that “even if it is assumed that defendants should have disclosed the existence of the AMT, it is simply not the case that the omission of this information made statements that were disclosed materially misleading.”

The court capped things off by dismissing the case with prejudice (thereby denying plaintiffs any chance to amend their complaint), but finding all parties had met their Rule 11(b) obligations regarding bringing claims in good faith.

You can read the decision at 371 F. Supp. 2d 548.

Nugget: “The federal securities laws simply do not require the excruciatingly lengthy and complicated disclosure that would result if every indicia of the modern regulatory state needed to be compiled, catalogued, and explained to potential investors.”

District of Wyoming Issues First Reported PSLRA Decision Ever

When any of the judges in the District of Wyoming weighs in on the PSLRA, you had better lean in close and listen like it was E.F. Hutton himself. Why? Well, in the ten years since the PSLRA’s enactment, no reported decision from that District has ever mentioned the statute. That is until now. Who knows why that means you should listen more, but you have to at least be able to use this information to win some kind of bet. Or here is a better one to try on your friends. Since the District of Wyoming was first created on September 20, 1890, how many Article III judges have served on the Court? Nope, way to high. Six. Yes, 6. It’s true. And that even includes the current three sitting now. You still don’t believe it? O.K., verify it here at the Federal Judicial Center’s Judicial Database.

Anyway, seems a Wyoming company called Bishop Capital decided that it no longer wanted to be a public company, so they issued a proxy to their shareholders proposing a 1 for 110 reverse stock split. But before a vote could take place, a New York investment company filed a 10(b) action alleging Bishop made “false, misleading, and unlawful statements in their proxy statement in an effort to discourage shareholders from voting against the stock split.”

Judge Clarence Addison Brimmer, Jr. evaluated the claims under the PSLRA, first finding that “the Amended Complaint specifically sets forth the statements made by Bishop Capital which Plaintiffs believe were misleading and why such statements were misleading.” Statements like “the proxy statement among other things falsely stated that the value of the Company's gas interests was $ 351,605, when in fact the value was in excess of $ 2.33 million” hit the spot.

Second, the court found Plaintiffs had properly “established a strong inference of scienter” under Pirraglia v. Novell, Inc., 339 F.3d 1182, 1194 (10th Cir. 2003) because “Defendants could have made false statements in the proxy statement to encourage the reverse stock split which would allow the company to acquire outstanding shares at an unfairly low value.” The court also found “motive and opportunity,” as Plaintiffs alleged Defendants “intentionally made fraudulent statements regarding the various assets of the company in order to facilitate the reverse stock split.” In conclusion, the judge stated “these allegations of motive, opportunity, and fraudulent statements, when combined and read as a whole, meet the legal pleading requirements of the PSLRA in regards to the Defendants' state of mind.”

So there you have it, and you had better enjoy it. At this rate, we won’t get another until George Jung is released.

You can read the decision, issued June 29, 2005, at 2005 U.S. Dist. LEXIS 12932.

Nugget: “In reviewing the Amended Complaint as a whole, and accepting Plaintiffs' allegations as true, it is clear that Plaintiffs have established a strong inference of scienter.”

Seventh Circuit Shoots Down Professional Objector

The American Lawyer recently called him a "holdup artist," "the outlaw of class action litigation," and a "notorious class action objector." You see, for those of you not yet lucky enough to meet John Pentz, he is the lawyer who calls his firm the "Class Action Fairness Group" (guess the old title of the "Objector's Group" was a little too obvious, but it still seems a bit odd to refer to yourself as a "Group"). O.K., O.K., but you be the judge if he was being resourceful or just plain shameless for filing an objection on behalf of his late grandmother in an AT&T/Lucent settlement a couple years ago in Madison County, Illinois. "That's my Johnny, such a good boy."

Anyway, seems Mr. Pentz, who started his objecting organization back in 2000 after several years as an associate at Berman DeValerio, is still stirring things up today. This time around its about 300 clicks north at the headquarters of the Chicago School of Economics, the Seventh Circuit. Seems Mr. Pentz' client, Hannah Feldman, wasn't too keen on the $7.25 million settlement in the Aon securities class action. Never mind the fact that "an SEC investigation essentially cleared Aon of any perceived wrongdoing," or the fact that the District Court held that it "was not an easy case," or that "counsel was taking on a significant degree of risk of nonpayment with the case." No, the Class Action Fairness Group was here with Ms. Feldman (the only objector by the way) to save the day by trying to torpedo lead counsel's 30% fee. Can't we all just get along?

But alas, seems Circuit Judges Kanne, Bauer, and Ripple didn't see it Pentz' way. First they held that he failed to articulate an "argument regarding fee-setting methodology to the court below," and thus "waived the argument." Then, the court proceeded to the less stringent abuse of discretion standard, but again rejected the objector's arguments, pointing out "thirteen cases in the Northern District of Illinois where counsel was awarded fees amounting to 30-39% of the settlement fund," and that "attorneys' fees from analogous class action settlements are indicative of a rational relationship between the record in this similar case and the fees awarded by the district court." As for the "objector's quarrel" with the $111,000 expense award, the Seventh Circuit noted that it "barely warants comment."

So 30% it is.

You can read the decision, issued July 5, 2005, at 2005 U.S. App. LEXIS 13310.

Nugget: "District courts are far better suited than appellate courts to assess a reasonable fee in light of the case's history."

Second Time Not Quite a Charm in Whitehall Securities Class Action

Earlier this year, Judge Amy J. St. Eve (N.D. Ill.) blocked Plaintiffs in the Whitehall securities class action from challenging false statements made after the Lead Plaintiff's last purchase of the stock. Basically, the court ruled that because Greater Pennsylvania Carpenters Pension Fund’s last sale occurred 18 months before the end of the class period, they could not have been misled by any statements after that date. Despite this, Judge St. Eve allowed Plaintiffs to file an amended complaint to fix the standing issue.

Instead of attempting to add another Lead Plaintiff, Plaintiffs simply added an individual (one Mr. Milton Pfeiffer) as a "representative party" in their new complaint. Mr. Pfeiffer purchased his five shares after all of the false statements had been issued. But Defendants balked, arguing that Pfeiffer, who was one of the original named Plaintiffs, failed to submit a new sworn certification, and did not otherwise meet the requirements of Rule 23. The judge agreed with Defendants that Pfeiffer's certification was flawed in that it did not inform the court whether Pfeiffer has ever "sought to serve as a representative on behalf of a class." However, the court gave Plaintiffs 20 days to fix this problem by filing an amended certification. Here we go again.

Defendants also argued that since Pfeiffer has filed nine securities class actions in the past three years, and since he only purchased five shares of Whitehall stock for $53.80 (sounds like a very careful investor), that he is inadequate to serve as a class representative. But Judge St. Eve rejected that argument, noting that the PSLRA "does not provide a vehicle for the court to address his adequacy at this stage of the litigation."

Finally, our old friend Dura popped up again, and followed the emerging trend of, well, not changing anything very much. The judge quickly disposed of Defendants' argument that Dura should alter her January 2005 decision on their motions to dismiss, recognizing that "Plaintiff has alleged more than simply inflation of the purchase price."

You can read the decision, issued June 30, 2005, at 2005 U.S. Dist. LEXIS 12971.

Nugget: “Once a potential representative party complies with the PSLRA's certification requirements, the Court must wait to address class representative issues under Rule 23's standards. The PSLRA does not alter Rule 23.”

Class Reps Hold Up Under Heavy Fire

Judge William E. Smith (D.R.I.) has certified a 10(b) class of investors in the Textron securities class action, appointing three benefit funds for the International Brotherhood of Teamsters Local 710 and an individual as class representatives against the aircraft and weapons giant. The representatives allege that Textron engaged in fraudulent accounting practices by delaying required accounting adjustments with respect to its V-22 Osprey Tiltrotor helicopter program. They also allege accounting misdeeds related to Textron’s contract with the DOD to upgrade 280 H-1 "Super-Huey" attack helicopters, and an improper goodwill impairment charge relating to Textron's $477 million acquisition of an industrial equipment manufacturer called Omniquip.

Defendants opposed class certification on the typicality of Local 710 under 23(a)(3) and the adequacy of Swartchild under 23(a)(4). Five separate challenges were lodged against the union based on the fact that that all its investment decisions were made by investment manager Bear Stearns. The court noted that “analysis of Bear Stearns's actions in connection with those purchases (and testimony related thereto) is the key to the resolution of the motion before this Court as it pertains to Local 710.”

In addressing the defendants arguments related to Bear Stearns, Judge Smith found “the critical question is whether a broker's decision to purchase stock at or near its nadir precludes that broker's client from claiming it was the victim of securities fraud as to purchases made on its behalf when the price was at or near its apex. In this Court's view, the fact that Bear Stearns concluded, for example, that Textron stock was a good buy at $ 32.77, following full disclosure, is essentially irrelevant to the question whether it relied on misleading information in buying Textron stock at, for example, $ 50.51 during the Class Period.”

Second, the court found that the deposition testimony of Bear Stearns’ representative which revealed he did not rely on earnings statements in making his purchasing decisions “does not rebut the presumption of reliance granted Plaintiffs under their fraud-on-the-market theory.”

Third, the court rejected the logic of Zlotnick v. Tie Communications, 836 F.2d 818 (3d Cir. 1988), finding Local 710 is not subject to a unique defense because Bear Stearns believed Textron stock was undervalued when it bought shares during the Class Period.

Fourth, the court rejected Defendants’ argument that that Local 710 is subject to a unique defense because Bear Stearns testified that it was not misled ("Q: Do you believe that you were misled in connection with the purchase of Textron stock? A: No."). In doing so, the court noted that at the time of his statement the Bear Stearns representative was not aware of all the alleged improprieties of Textron and thus his testimony might change once he is made aware of all the relevant facts. The court also held that “even if [he] took the stand at trial after reviewing all the pertinent evidence and reiterated his belief that he was not misled, a reasonable jury might still find in favor of Plaintiffs, particularly given that Bear Stearns is not a plaintiff in this case and has nothing to gain (and perhaps something to lose) by publicly accusing a company like Textron of fraud.”

Fifth, Judge Smith found that “the fact that Local 710 sold some shares of Textron stock during the Class Period does not, in light of the significantly greater number of purchases, create a conflict going to the heart of this lawsuit.”

As for Mr. Swartchild (an individual who purchased 1,000 shares of Textron stock during the class period), the attack resembled an assault from Textron’s Huey’s 7.62mm machine guns (an impressive 750 to 850 rounds per minute, mind you). They blasted away at him, saying that Swartchild testified that he has no idea who would have decision-making authority on behalf of the class, has a demonstrated history of abdicating decision-making authority to his counsel, didn’t know the name of the co-lead plaintiff in his attorneys' earlier filings, has never had any communication with Local 710 in the two and one-half years that this lawsuit has been pending, has no attorney-client relationship with plaintiffs' proposed class counsel, and was solicited to participate in the lawsuit. Finished yet?

Plaintiffs countered that Defendants cited certain testimony out of context, and that Defendants are seeking to disqualify “Mr. Swartchild on the ground that he is confused about some of the intricacies of the litigation.” The court concluded that “in light of Plaintiffs' responses to Defendants' specific allegations concerning Swartchild, the applicable standard, and the fact that in the context of complex securities litigation, attacks on the adequacy of the class representative based on the representative's ignorance are rarely appropriate, Plaintiffs have carried their burden, however narrowly, as to Swartchild's adequacy as class representative."

You can read the decision, which was published over the weekend, at 369 F. Supp. 2d 204.

Nugget: “Securities actions are considered particularly appropriate for class action treatment.”

Nugget: “A failure to be ‘shocked’ by the September 26 announcement does not take one outside the parameters of the proposed class.”

Nugget: “The mere fact that a plaintiff sold stock during the class period does not in itself disqualify him from acting as class representative.”

Nugget: “Named plaintiffs are not required to 'have expert knowledge of all the details of the case.”

Psst… Hey Mack. Wanna Buy the Brooklyn Bridge?

Talk about some nice fellas. Well, at least it appears they started out that way. Back in 1987, a company called Immune Response Corporation ("IRC") invented a drug called REMUNE® to treat HIV. A noble cause no doubt. What wasn't so noble is what IRC did when "Study 806" showed that REMUNE® had "no effect on indicators of immune response and viral loads." Is that bad? We had better meet with these "science folk." At the meeting, IRC's representatives "feverishly reviewed" the data, but apparently could not put Humpty Dumpty back together again. So they did what we all do in dire straights -- they issued a press release. But somehow the release failed to mention "the negative results from Study 806." Oops. We just forgot to mention it, really. Oh, and what about the smaller, less "comprehensive" study that showed "significant improvements" in patients using REMUNE®. You know, the one our statistician told us not to "over-interpret." We mentioned that one.

Well, a series of other press releases went out, none of which disclosed Study 806, and eventually IRC conducted a Secondary Offering. $15 million later, still no real deep discussion of that pesky study. Then things got interesting. Seems the doctor in charge of Study 806 decided to publish a manuscript describing Study 806 in JAMA. The unmitigated gall. But before he could do so, IRC filed an arbitration to put a stop to that medical nonsense. Wow, an arbitration? Please no, not that! So, the next day, the manuscript appeared where? Very good, a gold star for you today -- in JAMA. Have these guys ever heard of a TRO?

The stock tanked 24% after the JAMA article was published. IRC trashed the article as "tabloid journalism," and said that "the truth in the long run will come out." Side Note: That was nearly five years ago, and well, you can take a quick peek here and see for yourself whether REMUNE® has been approved yet. Go ahead, it'll be fun, guaranteed.

Anyway, it was up to Judge Napoleon A. Jones (S.D. Cal.) to sort out the shareholder's complaint regarding all of this fun. He started out by denying Defendants' attempt to submit additional documents (the decision doesn't say what documents, but probably the usual suspects) at the motion to dismiss stage. Every document Plaintiffs challenged -- he ruled he would not consider. Just isn't proper he said. Moving to the merits, the court accepted Plaintiffs' position on falsity, recognizing that "Plaintiffs' criticism is not that what was said was inaccurate, but that it was incomplete, thus portraying the results of the clinical trial in an unduly optimistic light." If you're looking for an omisions case, this is it. In addressing scienter, Judge Jones distinguished Silicon Graphics, finding that the complaint properly "alleges that Defendants had knowledge of the circumstances concerning REMUNE's ineffectiveness." No inside trading here.

As for loss causation, the court started out by finding that Dura "did not create a heightened pleading standard for loss causation." The Judge then went on to find that "the conjunction of these two allegations makes clear that Plaintiffs claim the disclosures caused the drop in stock price": "(1) Defendants' wrongdoing caused stock prices to become artificially inflated; and (2) stock price dropped sharply when the truth became public." Sorry to you Dura fans camping out all night to get in, that's it. Really.

In two other notable rulings (both of which the Ninth Circuit has never decided), Judge Jones accepted the inquiry notice standard, but denied Defendants' statute of limitations arguments. Defendants did a lot better on their argument that the court should accept the group pleading doctrine though. The court accepted that one, holding that "Defendants liability, if any, is based solely on the statements directly attributed to them." But after those two rulings, Defendants didn't fare so well in their "truth-on-the-market" argument, as the court said it "cannot conclude as a matter of law that the market had sufficient credible information indicating that Defendants' optimism about REMUNE was unwarranted."

In a final interesting note, the court upheld Plaintiffs' 1933 Act claims, finding that they meet "the requirements of Rule 9(b) and sufficiently state[] a claim." Wait a minute. Did he say 9(b)? Never fear, the Nugget has looked into this. Turns out Judge Jones relied on Falkowski v. Imation Corp., 309 F.3d 1123 (9th Cir. Cal. 2002), which does in fact say "violations of the 1933 Act" are subject to Federal Rule of Civil Procedure 9(b)." However, four months later the Ninth Circuit amended that decision in Falkowski v. Imation Corp., 320 F.3d 905 (9th Cir. Cal. 2003). Another gold star if you guessed the amendment: "In the second sentence of part IVB, insert "to the extent the claims are grounded in fraud." Keep an eye out for a correction to the IRC decision soon too, and steer clear of a certain law clerk bound to be in a bad mood.

You can read the decision at 2005 U.S. Dist. LEXIS 12602.

Nugget: "Defendants would not be responsible if its investors' perceptions were based solely on Defendants' predictions about the prospects of REMUNE's efficacy or FDA approval. That is not the case, however. Rather, Plaintiffs allege that Defendants' misstatements of fact formed a false basis for its investors' perceptions."

Nugget: "Where negative clinical study results are fully available to the market, investors can better weigh positive predictions, and securities are more accurately valued."

Nugget: "In the present matter, Plaintiffs' Complaint contains the very allegations regarding share price decrease and public exposure to the truth the Supreme Court found lacking in the Dura complaint."

Note: The thoughts in italics above are manufactured for your entertainment by the Nugget, not the actual parties, but you knew that already.