The Ninth Circuit has reversed the dismissal of a PSLRA action, and although it’s a private placement case rather than a securities class action, it’s still a 10(b) action that offers new insight into multiple PSLRA requirements. Ninth Circuit Judge Dorothy W. Nelson authored the panel decision, which was joined by fellow Ninth Circuit Judges Stephen Reinhardt and Sidney R. Thomas. The panel eviscerated District Judge John C. Coughenour’s (W.D. Wash.) dismissal of all claims against Salomon Smith Barney on multiple grounds, including materiality, scienter, loss causation, reliance, damages, statute of limitations, and even state law securities claims.
Since it’s not a securities class action, you won’t mind if we skip the facts, right? Instead, let’s touch on some of the high points (or maybe they are low points to you), but either way, here’s the meat of the decision. In holding "that the district court erred in concluding that the contested statement was immaterial," the Ninth Circuit announced that it will now "expressly adopt the logic of the First and Seventh Circuits and hold that extension of the bespeaks caution doctrine to statements of historical fact is inappropriate."
Moving on to scienter, the Ninth Circuit found that "because [Plaintiff] alleges that the Defendants knew the contested statement's most obvious interpretation was false when made, [Plaintiff] has met the heightened pleading standard for scienter." The court continued, although we have "found that allegations of a motive to mislead, standing alone, cannot satisfy the heightened scienter standard, we are not precluded from considering allegations of motive in combination with other allegations of Defendants' intent to mislead or deliberate recklessness. Therefore, we hold that the totality of the allegations creates a strong inference that the Defendants acted with the requisite scienter and reverse the district court's conclusion to the contrary."
As for loss causation, the Ninth Circuit relied upon McGonigle v. Combs, 968 F.2d 810 (9th Cir. 1992) in holding that Plaintiff "sufficiently pled both elements of causation because it has alleged both that they would not have purchased the PCI stock but for the misrepresentation and that the Defendants' misrepresentation was directly related to the actual economic loss it suffered." McWho? Where’s Dura? Well, don’t worry, the court didn’t forget about it, they just said "Dura is not controlling," because "at issue is a private sale of privately traded stock." Besides, Plaintiff "not only asserted that it purchased the security at issue at an artificially inflated price, but pled that the Defendants' misrepresentation was causally related to the loss it sustained." So much for that.
Finally, the Ninth Circuit reviewed the district court’s conclusion that, "as a matter of law," Plaintiff "could not establish reliance because the notice contained sufficient cautionary language to make any reliance unreasonable." In rejecting that, the Ninth Circuit said "for the reasons discussed above, we refuse to extend the bespeaks caution doctrine to misrepresentations of historical facts as opposed to forward-looking projections. Therefore, we reverse the district court's finding that [Plaintiff] inadequately plead reliance."
For the rest of the meat, you can find the decision, issued August 2, 2005, here or at 2005 U.S. App. LEXIS 15815.
Nugget: "In finding the statement immaterial, the district court also extended the bespeaks caution doctrine to statements of fact, despite the lack of approval from this circuit for such application of the doctrine as well as the explicit rejection of such an extension by two other circuits."
Thursday, August 04, 2005
Wednesday, August 03, 2005
PSLRA Sanctions Request Denied
Judge Shira A. Scheindlin (S.D.N.Y.) has stymied Defendants’ request for PSLRA and Rule 11 sanctions in one of the consolidated cases related to the In re IPO Litigation actions. Although the case was included in the coordinated In re Initial Public Offering Securities Litigation proceedings, it arose from a very different set of allegations. Essentially, Plaintiffs alleged that Defendants, an investment bank (CSFB) and several issuers of securities (Efficient Networks, eMachines, Lightspan Partnership, Tanning Technology, and Tumbleweed Communications -- all of which, except for Tumbleweed, have since been acquired) that went public during the technology boom of the late 1990s, defrauded investors by setting their earnings estimates below their true estimates, and thereby created excitement in the marketplace when the stocks at issue beat estimate after estimate, conditioning the market to expect superior performance from those stocks and artificially inflating their prices. Nice try, but Judge Scheindlin dismissed the investors’ claims in an order issued a few months ago (See 2005 U.S. Dist. LEXIS 5339).
After the dismissal, Judge Scheindlin was faced with Defendants’ sanctions request, which argued that "Plaintiffs' claims rested on factual assertions the falsity of which was evident from publicly available information -- namely, the stock prices of the relevant issuers -- and Plaintiffs' hypothesized securities fraud scheme, even if true, would have benefited, not harmed, the named Plaintiffs." In denying the request, the judge found that "Plaintiffs alleged a complicated scheme," and "though ultimately deficient, plaintiffs' claims were not frivolous." She also said that Plaintiffs argument "rested on the nonfrivolous argument that victims of securities fraud should be entitled to all damages attributable to alleged artificial inflation, even if those victims sold securities for a profit."
You can read the decision, issued July 28, 2005, at 2005 U.S. Dist. LEXIS 15162.
Nugget: "There is no evidence of any improper purpose or conduct on the part of plaintiffs' counsel in pursuing novel theories that were ultimately rejected."
After the dismissal, Judge Scheindlin was faced with Defendants’ sanctions request, which argued that "Plaintiffs' claims rested on factual assertions the falsity of which was evident from publicly available information -- namely, the stock prices of the relevant issuers -- and Plaintiffs' hypothesized securities fraud scheme, even if true, would have benefited, not harmed, the named Plaintiffs." In denying the request, the judge found that "Plaintiffs alleged a complicated scheme," and "though ultimately deficient, plaintiffs' claims were not frivolous." She also said that Plaintiffs argument "rested on the nonfrivolous argument that victims of securities fraud should be entitled to all damages attributable to alleged artificial inflation, even if those victims sold securities for a profit."
You can read the decision, issued July 28, 2005, at 2005 U.S. Dist. LEXIS 15162.
Nugget: "There is no evidence of any improper purpose or conduct on the part of plaintiffs' counsel in pursuing novel theories that were ultimately rejected."
Tuesday, August 02, 2005
Eight Member Group Appointed Lead Plaintiff
Two lead plaintiff groups, "the so-called ‘Webster Group,’ consisting of eight investors, and "the so-called ‘Mayeri Group’ consisting of seven investors" both asked the court to be appointed Lead Plaintiff in the 51job securities class action. The Shanghai based human resource company, a Chinese "monster.com" if you will, with an executive staff with an average age of 36 (not that’s there’s anything wrong with that), managed to get itself embroiled in securities class action litigation just four months into its existence as a public company. Seems its CEO is pretty excited about the prospect of becoming the Far East’s next billionaire. But really, who isn’t, right? But let’s stay on track here.
Since the Webster Group had $311,710 in losses and the Mayeri Group had only $176,641 (and the Mayeri Group did not respond "to the Webster Group's calculations of losses"), veteran Judge Charles S. Haight (S.D.N.Y.) found that "the Webster Group has the larger (if not the largest) financial interest." As for the limited Rule 23 inquiry on adequacy and typicality, the court held that the Webster Group satisfies this test, noting that the "Mayeri group does not assert, let alone attempt to prove, that a basis exists for rebutting the statutory presumption in the Webster Group's favor."
So you’re probably wondering at least two things. What’s the point of the Mayeri Group fighting for lead plaintiff if it’s not making any arguments against the other group that has almost twice its losses? And why did the court appoint a group with eight members? Well, as to the first question, who knows? The decision doesn’t say. The second question is an easy one though. The Webster Group argued that "the motion of the seven-member Mayeri Group should be denied because its membership far exceeds the number of movants recommended by the SEC." The judge mused that since the Webster Group "identifies eight investors as members," that "would seem to invite an et tu quoque response from the Mayeri Group." Sure seems like it. But looking deeper, Judge Haight noticed that "the answer may lie in the fact that the surname of three Group members is "Webster" and that of two others is "Rabhan." If one regards these apparent family members as single investor entity (much as churches regard the members of a parishioner family living together as a single "pledging unit'), the SEC-approved total of five 'persons' is achieved."
There you have it folks. Looks like this case is going to get rolling. Judge Haight ordered lead counsel "to move for class certification" "without undue delay," "not later than August 31, 2005."
You can read the decision, issued July 26, 2005, at 2005 U.S. Dist. LEXIS 15059.
Nugget: "The two groups of investors vie with each other for these procedural plums."
Since the Webster Group had $311,710 in losses and the Mayeri Group had only $176,641 (and the Mayeri Group did not respond "to the Webster Group's calculations of losses"), veteran Judge Charles S. Haight (S.D.N.Y.) found that "the Webster Group has the larger (if not the largest) financial interest." As for the limited Rule 23 inquiry on adequacy and typicality, the court held that the Webster Group satisfies this test, noting that the "Mayeri group does not assert, let alone attempt to prove, that a basis exists for rebutting the statutory presumption in the Webster Group's favor."
So you’re probably wondering at least two things. What’s the point of the Mayeri Group fighting for lead plaintiff if it’s not making any arguments against the other group that has almost twice its losses? And why did the court appoint a group with eight members? Well, as to the first question, who knows? The decision doesn’t say. The second question is an easy one though. The Webster Group argued that "the motion of the seven-member Mayeri Group should be denied because its membership far exceeds the number of movants recommended by the SEC." The judge mused that since the Webster Group "identifies eight investors as members," that "would seem to invite an et tu quoque response from the Mayeri Group." Sure seems like it. But looking deeper, Judge Haight noticed that "the answer may lie in the fact that the surname of three Group members is "Webster" and that of two others is "Rabhan." If one regards these apparent family members as single investor entity (much as churches regard the members of a parishioner family living together as a single "pledging unit'), the SEC-approved total of five 'persons' is achieved."
There you have it folks. Looks like this case is going to get rolling. Judge Haight ordered lead counsel "to move for class certification" "without undue delay," "not later than August 31, 2005."
You can read the decision, issued July 26, 2005, at 2005 U.S. Dist. LEXIS 15059.
Nugget: "The two groups of investors vie with each other for these procedural plums."
Thursday, July 28, 2005
Central Bank Can’t Save Third Party Banker Defendants
Citigroup and CSFB had best break out the Stovetop, because they are definitely staying in the Parmalat securities class action, Central Bank or no Central Bank. You see, Judge Lewis A. Kaplan (S.D.N.Y.) has largely denied their motions to dismiss (as he did with Parmalat’s foreign auditors in another opinion reported by the Nugget last month, albeit on very different grounds). This time, Judge Kaplan tackles Plaintiffs’ 1934 Act claims against the banks for "(1) structuring and participating in transactions that were hidden or mischaracterized on Parmalat's financial statements" and (2) "making certain statements or omissions in connection with the foregoing, allegedly in violation of Rule 10b-5(b)."
The banks, hunkering down under Central Bank of Denver, N.A. v. First Interstate Bank of Denver, 511 U.S. 164 (1994) argued that "that they were at most aiders and abettors of a program pursuant to which Parmalat made misrepresentations on its financial statements." However, Judge Kaplan found that this argument "misses the mark," as "the transactions in which the defendants engaged were by nature deceptive" because "they depended on a fiction, namely that [certain worthless] invoices [that Citigroup purchased and securitized] had value."
Where most opinions simply analyze violation of Rule 10b-5, Judge Kaplan’s analysis went further. He analyzed the claims under 10b-5’s subsections, namely 10b-5(a) and (c). The banks argued that "subsections (a) and (c) apply only to the narrow category of acts understood as ‘manipulative’ in a technical sense." However, Judge Kaplan found that "this interpretation is refuted by the language of the rule as well as the case law, which make it clear that subsections (a) and (c) apply to at least some deceptive acts as much as to certain technical forms of market manipulation."
While being careful to note that his analysis of these subsections "is not a back door into liability for those who help others make a false statement or omission in violation of subsection (b) of Rule 10b-5," Judge Kaplan noted the "lack of precision" that many pre-Central Bank courts implemented when "dealing with primary violations as compared with aiding and abetting liability." For example, "for decades the distinction between the conduct covered by subsections (a) and (c) on the one hand, and subsection (b) on the other was largely insignificant. A corollary is that courts for the most part found it unnecessary to consider the extent to which the phrase ‘manipulative or deceptive device or contrivance’ in Section 10(b) applied to conduct other than misrepresentations, omissions, and market manipulation." He concluded that "it no longer is possible, however, to ignore these issues.
Thus, "the major question here is whether the banks directly or indirectly used or employed any device or contrivance with the capacity or tendency to deceive." He then parsed and separated each bank’s activities, finding that some of their activities satisfied this test, while others did not. He concluded by holding that "the complaint alleges that the banks' actions in connection with the relevant transactions actually and foreseeably caused losses in the securities markets. The banks made no relevant misrepresentations to those markets, but they knew that the very purpose of certain of their transactions was to allow Parmalat to make such misrepresentations. In these circumstances, both the banks and Parmalat are alleged causes of the losses in question. So long as both committed acts in violation of statute and rule, both may be liable."
Remains to be seen how many Plaintiffs will pick up this new twist against third party defendants.
You can read the decision, issued July 13, 2005, at 2005 U.S. Dist. LEXIS 14542.
Nugget: "It is impossible to separate the deceptive nature of the transactions from the deception actually practiced upon Parmalat's investors."
Nugget: "This analysis is not an end run around Central Bank. If a defendant has committed no act within the scope of Section 10(b) and Rule 10b-5 -- as in fact was the case in Central Bank -- then liability will not arise on the theory that that defendant assisted another in violating the statute and rule. But where, as alleged here, a financial institution enters into deceptive transactions as part of a scheme in violation of Rule 10b-5(a) and (c) that causes foreseeable losses in the securities markets, that institution is subject to private liability under Section 10(b) and Rule 10b-5."
The banks, hunkering down under Central Bank of Denver, N.A. v. First Interstate Bank of Denver, 511 U.S. 164 (1994) argued that "that they were at most aiders and abettors of a program pursuant to which Parmalat made misrepresentations on its financial statements." However, Judge Kaplan found that this argument "misses the mark," as "the transactions in which the defendants engaged were by nature deceptive" because "they depended on a fiction, namely that [certain worthless] invoices [that Citigroup purchased and securitized] had value."
Where most opinions simply analyze violation of Rule 10b-5, Judge Kaplan’s analysis went further. He analyzed the claims under 10b-5’s subsections, namely 10b-5(a) and (c). The banks argued that "subsections (a) and (c) apply only to the narrow category of acts understood as ‘manipulative’ in a technical sense." However, Judge Kaplan found that "this interpretation is refuted by the language of the rule as well as the case law, which make it clear that subsections (a) and (c) apply to at least some deceptive acts as much as to certain technical forms of market manipulation."
While being careful to note that his analysis of these subsections "is not a back door into liability for those who help others make a false statement or omission in violation of subsection (b) of Rule 10b-5," Judge Kaplan noted the "lack of precision" that many pre-Central Bank courts implemented when "dealing with primary violations as compared with aiding and abetting liability." For example, "for decades the distinction between the conduct covered by subsections (a) and (c) on the one hand, and subsection (b) on the other was largely insignificant. A corollary is that courts for the most part found it unnecessary to consider the extent to which the phrase ‘manipulative or deceptive device or contrivance’ in Section 10(b) applied to conduct other than misrepresentations, omissions, and market manipulation." He concluded that "it no longer is possible, however, to ignore these issues.
Thus, "the major question here is whether the banks directly or indirectly used or employed any device or contrivance with the capacity or tendency to deceive." He then parsed and separated each bank’s activities, finding that some of their activities satisfied this test, while others did not. He concluded by holding that "the complaint alleges that the banks' actions in connection with the relevant transactions actually and foreseeably caused losses in the securities markets. The banks made no relevant misrepresentations to those markets, but they knew that the very purpose of certain of their transactions was to allow Parmalat to make such misrepresentations. In these circumstances, both the banks and Parmalat are alleged causes of the losses in question. So long as both committed acts in violation of statute and rule, both may be liable."
Remains to be seen how many Plaintiffs will pick up this new twist against third party defendants.
You can read the decision, issued July 13, 2005, at 2005 U.S. Dist. LEXIS 14542.
Nugget: "It is impossible to separate the deceptive nature of the transactions from the deception actually practiced upon Parmalat's investors."
Nugget: "This analysis is not an end run around Central Bank. If a defendant has committed no act within the scope of Section 10(b) and Rule 10b-5 -- as in fact was the case in Central Bank -- then liability will not arise on the theory that that defendant assisted another in violating the statute and rule. But where, as alleged here, a financial institution enters into deceptive transactions as part of a scheme in violation of Rule 10b-5(a) and (c) that causes foreseeable losses in the securities markets, that institution is subject to private liability under Section 10(b) and Rule 10b-5."
Wednesday, July 27, 2005
Judge Steers Mutual Fund Investors to State Court
An investor bringing direct claims against "a number of defendants acting as mutual fund directors, advisors and affiliates of the Nuveen Family of Funds," for failing "to ensure that the funds participated in dozens of securities class action settlements for which they were eligible" has been handed a loss (at least on his federal claims) by Judge Milton I. Shadur (N.D. Ill.). You may recall the Nugget covered another case that reached a similar result last month, although James V. Selna (C.D. Cal.) took a slightly different approach in getting there.
In evaluating Plaintiff’s 1940 Act claims under § 36(a) (alleging "personal misconduct") Judge Shadur found that only the SEC could assert this claim, not private plaintiffs, because the Supreme Court’s recent decision in Exxon Mobil Corp. v. Allapattah Servs., Inc., 125 S.Ct. 2611 (2005) "forecloses any possibility of using Section 36(a)'s clear legislative history to create a private right of action where the unambiguous statutory language creates none." The court also held that "Congress plainly did not create Section 36(a) as a catchall for any fiduciary breach."
As for the Plaintiff’s 1940 Act claims under § 36(b) (for breach of fiduciary duty), Judge Shadur held that Plaintiff’s "’real complaint’ is that defendants made a poor management decision by failing to participate in dozens of settlement agreements for which some fund was eligible, and he has not alleged any inherent improprieties in the compensation agreement itself." In addition, "the textual and legislative history arguments previously addressed as to Jacobs' unsuccessful Section 36(a) claim have equal force as to Section 36(b)." Nailing the coffin, Judge Shadur ruled that "because the flaws identified here would not be resolved if Jacobs were to attempt to replead a derivative action, his Section 36(b) claim is dismissed without leave to replead."
As for Plaintiff’s "state law claims of negligence and breach of fiduciary duty," the court dismissed those "without prejudice" "so that those claims can be pursued in state court."
Bet we haven't seen the last of these Plaintiffs.
You can read the decision, issued July 20, 2005, at 2005 U.S. Dist. LEXIS 14762.
Nugget: "The prevailing caselaw has read ‘personal misconduct’ to require some showing of self-dealing. [Plaintiff] has advanced no such allegations, instead setting out a garden-variety fiduciary claim, which remains the domain of state law."
In evaluating Plaintiff’s 1940 Act claims under § 36(a) (alleging "personal misconduct") Judge Shadur found that only the SEC could assert this claim, not private plaintiffs, because the Supreme Court’s recent decision in Exxon Mobil Corp. v. Allapattah Servs., Inc., 125 S.Ct. 2611 (2005) "forecloses any possibility of using Section 36(a)'s clear legislative history to create a private right of action where the unambiguous statutory language creates none." The court also held that "Congress plainly did not create Section 36(a) as a catchall for any fiduciary breach."
As for the Plaintiff’s 1940 Act claims under § 36(b) (for breach of fiduciary duty), Judge Shadur held that Plaintiff’s "’real complaint’ is that defendants made a poor management decision by failing to participate in dozens of settlement agreements for which some fund was eligible, and he has not alleged any inherent improprieties in the compensation agreement itself." In addition, "the textual and legislative history arguments previously addressed as to Jacobs' unsuccessful Section 36(a) claim have equal force as to Section 36(b)." Nailing the coffin, Judge Shadur ruled that "because the flaws identified here would not be resolved if Jacobs were to attempt to replead a derivative action, his Section 36(b) claim is dismissed without leave to replead."
As for Plaintiff’s "state law claims of negligence and breach of fiduciary duty," the court dismissed those "without prejudice" "so that those claims can be pursued in state court."
Bet we haven't seen the last of these Plaintiffs.
You can read the decision, issued July 20, 2005, at 2005 U.S. Dist. LEXIS 14762.
Nugget: "The prevailing caselaw has read ‘personal misconduct’ to require some showing of self-dealing. [Plaintiff] has advanced no such allegations, instead setting out a garden-variety fiduciary claim, which remains the domain of state law."
Tuesday, July 26, 2005
Court Wields SLUSA in Tossing Mutual Fund Action
In October 2003, an investor filed a putative class action in Madison County, Illinois against the Templeton Funds, alleging that the Fund “breached a duty of care owed to investors by using stale pricing information to value securities in their open end mutual funds” (to be more specific, during the interval that elapses between when the Fund sets its share Net Asset Value (or “NAV”) and releases it to the NASD for communication to the public, securities markets in countries such as Japan, Russia, Germany, and Australia have traded for an entire session, thus making the prices stale).
Anyway, a month after the case was filed, Templeton promptly removed the action to the Southern District of Illinois. However, Judge Michael J. Reagan sent the case back to the state court, finding that his federal forum had no subject matter jurisdiction. Over a year later, Defendants again removed the case, “claiming that the Seventh Circuit's April 5, 2005 opinion in an unrelated case, Kircher v. Putnam Funds Trust, 403 F.3d 478 (7th Cir. 2005), rendered” the action “freshly removable.” Judge Reagan noted that the Seventh Circuit’s opinion held that “SLUSA's removal and preemption provisions are triggered when four conditions are met: (1) the underlying suit is a "covered class action," (2) the action is based on state or local law, (3) the action concerns a "covered security," and (4) the defendant misrepresented or omitted a material fact for employed a manipulative or deceptive device or contrivance "in connection with the purchase or sale" of that security.” Since the judge found that the four conditions had been satisfied, he held removal proper, and further found that “Kircher mandates that this Court dismiss all of Plaintiffs' state law claims as barred by SLUSA,” as SLUSA “effectively blocks state court litigation of such claims.”
You can read the decision, issued July 12, 2005, at 2005 U.S. Dist. LEXIS 14500.
Nugget: “Plaintiffs -- whose briefs focused on removal under 28 U.S.C. § 1446(b) -- have not addressed the removability of the case under the above-cited SLUSA provision. Nor have Plaintiffs disputed Defendants’ argument that the allegations in this action are ‘identical’ to those examined by the Seventh Circuit in Kircher.”
Anyway, a month after the case was filed, Templeton promptly removed the action to the Southern District of Illinois. However, Judge Michael J. Reagan sent the case back to the state court, finding that his federal forum had no subject matter jurisdiction. Over a year later, Defendants again removed the case, “claiming that the Seventh Circuit's April 5, 2005 opinion in an unrelated case, Kircher v. Putnam Funds Trust, 403 F.3d 478 (7th Cir. 2005), rendered” the action “freshly removable.” Judge Reagan noted that the Seventh Circuit’s opinion held that “SLUSA's removal and preemption provisions are triggered when four conditions are met: (1) the underlying suit is a "covered class action," (2) the action is based on state or local law, (3) the action concerns a "covered security," and (4) the defendant misrepresented or omitted a material fact for employed a manipulative or deceptive device or contrivance "in connection with the purchase or sale" of that security.” Since the judge found that the four conditions had been satisfied, he held removal proper, and further found that “Kircher mandates that this Court dismiss all of Plaintiffs' state law claims as barred by SLUSA,” as SLUSA “effectively blocks state court litigation of such claims.”
You can read the decision, issued July 12, 2005, at 2005 U.S. Dist. LEXIS 14500.
Nugget: “Plaintiffs -- whose briefs focused on removal under 28 U.S.C. § 1446(b) -- have not addressed the removability of the case under the above-cited SLUSA provision. Nor have Plaintiffs disputed Defendants’ argument that the allegations in this action are ‘identical’ to those examined by the Seventh Circuit in Kircher.”
Monday, July 25, 2005
KPMG Tagged as "Virtual Pushover" in Xerox Decision.
Judge Alvin W. Thompson (D. Conn.) has denied all of the motions to dismiss in the Xerox securities class action, which brings ’34 Act claims against the company, six of its executives, and KPMG. According to Plaintiffs, Xerox "was able to meet Wall Street's earning expectations only by engaging in massive accounting fraud." In doing so, Defendants "used a smorgasbord of methods to misstate Xerox's earnings, revenues and margins in virtually every reporting period throughout the Class Period." Xerox's "improper accounting methodologies throughout the Class Period included" what its auditor "KPMG referred to" as "half-baked revenue recognition," and rampant abuse of "Cookie Jar Reserves," just to name a couple. In fact, "without such accounting manipulations, Xerox would not have met earnings expectations in 11 of 12 quarters during 1997-1999 . . . Moreover, by 1998, almost $ 3 of every $ 10 of annual pre-tax reported earnings and up to 37 percent of Xerox's reported quarterly pre-tax earnings were generated through undisclosed accounting manipulations." Internally, Xerox "approved of and expressly directed the use of ‘accounting actions’" when referring to the accounting manipulations. In fact, a former Xerox Assistant Treasurer (who was fired when he attempted to expose the fraud), "stated that many executives at Xerox had developed the attitude ‘There is no accounting standard we can't beat.’" How's that for a marketing slogan?
Initially, Xerox tried to blame everything on its "Mexican subsidiary," (sounds a little like the runaway bride, doesn’t it), but eventually that ruse was exposed. By the time the dust of two restatements settled (along with what was at the time the largest SEC fine in history), Xerox shareholders were stuck with "a total reduction in profits of nearly $ 2.4 billion for the years 1997 to 1999." Ouch.
Given these facts, the court appears to have had little trouble denying each Defendant’s motion to dismiss. The court found that the factual allegations "make it clear that this is not a case of a client innocently relying on advice from its accountants," as the "Xerox Defendants knew the company was underperforming and used accounting manipulations to bridge the gap between actual versus desired financial results," the CFO "informed Xerox senior management, including both the chief executive officer and the chairman of the Board of Directors, that without the benefit of the accounting actions, Xerox had essentially no growth through the late 1990s, that the directives as to the accounting manipulations emanated from Xerox senior management," "that many of the Xerox Defendants' accounting manipulations involved violations of simple and unambiguous accounting principles, and in specified instances, the Xerox Defendants were told by their accountants that the accounting action violated GAAP but proceeded with the action anyway," "that the Xerox Defendants insisted that KPMG replace its senior audit engagement partner when he refused to sign off on one of their proposals," and "filed a minimal restatement and came out with a press release saying they had cleaned everything up, knowing full well that the staff of the SEC still had serious problems with Xerox's accounting."
As for the six executives’ knowledge, the court said "the plaintiffs do not allege scienter on the part of the Individual Defendants simply by virtue of the positions those individuals held at Xerox, but rather by virtue of the fact that Xerox's senior management orchestrated the scheme to disguise the company's true operating performance and the directives as to the accounting manipulations emanated from Xerox senior management at corporate headquarters."
Finally, the court denied KPMG’s request to dismiss the case, as "the factual allegations in the Complaint do, in fact, portray KPMG as a virtual pushover in its dealings with the Xerox Defendants, which at a minimum went along with accounting practices it knew to be clear violations of GAAP, and which, even after it was clear early in 2001 that there were very serious concerns about Xerox's accounting practices and it was apparent that it was questionable--at best--whether Xerox took seriously its obligation to comply with applicable accounting rules, was intimidated into signing off on a minimal restatement of Xerox's financial statements that accounted for only a small portion of Xerox's overstatements of revenues and pre-tax earnings."
C'mon guys, don't be so negative. Look at the bright side. At least there should be plenty of copiers available for all those documents those pesky owners (a/k/a shareholders) will soon be subpoenaing.
You can read the decision, issued July 13, 2005, at 2005 U.S. Dist. LEXIS 14427.
Nugget: "The PSLRA does not require a plaintiff to prove his case in his complaint. And, it is appropriate to recall that the heightened standard of pleading scienter was meant simply to prevent strike suits and other abuses that had arisen in securities fraud litigation. . . . Plaintiff generally must frame the facts respecting the defendant's mental state (i.e., the scienter element of the claim) without the benefit of discovery, and therefore, most often, allegations about a defendant's culpable state of mind must be drawn from limited state of mind evidence augmented by circumstantial facts and logical inferences."
Initially, Xerox tried to blame everything on its "Mexican subsidiary," (sounds a little like the runaway bride, doesn’t it), but eventually that ruse was exposed. By the time the dust of two restatements settled (along with what was at the time the largest SEC fine in history), Xerox shareholders were stuck with "a total reduction in profits of nearly $ 2.4 billion for the years 1997 to 1999." Ouch.
Given these facts, the court appears to have had little trouble denying each Defendant’s motion to dismiss. The court found that the factual allegations "make it clear that this is not a case of a client innocently relying on advice from its accountants," as the "Xerox Defendants knew the company was underperforming and used accounting manipulations to bridge the gap between actual versus desired financial results," the CFO "informed Xerox senior management, including both the chief executive officer and the chairman of the Board of Directors, that without the benefit of the accounting actions, Xerox had essentially no growth through the late 1990s, that the directives as to the accounting manipulations emanated from Xerox senior management," "that many of the Xerox Defendants' accounting manipulations involved violations of simple and unambiguous accounting principles, and in specified instances, the Xerox Defendants were told by their accountants that the accounting action violated GAAP but proceeded with the action anyway," "that the Xerox Defendants insisted that KPMG replace its senior audit engagement partner when he refused to sign off on one of their proposals," and "filed a minimal restatement and came out with a press release saying they had cleaned everything up, knowing full well that the staff of the SEC still had serious problems with Xerox's accounting."
As for the six executives’ knowledge, the court said "the plaintiffs do not allege scienter on the part of the Individual Defendants simply by virtue of the positions those individuals held at Xerox, but rather by virtue of the fact that Xerox's senior management orchestrated the scheme to disguise the company's true operating performance and the directives as to the accounting manipulations emanated from Xerox senior management at corporate headquarters."
Finally, the court denied KPMG’s request to dismiss the case, as "the factual allegations in the Complaint do, in fact, portray KPMG as a virtual pushover in its dealings with the Xerox Defendants, which at a minimum went along with accounting practices it knew to be clear violations of GAAP, and which, even after it was clear early in 2001 that there were very serious concerns about Xerox's accounting practices and it was apparent that it was questionable--at best--whether Xerox took seriously its obligation to comply with applicable accounting rules, was intimidated into signing off on a minimal restatement of Xerox's financial statements that accounted for only a small portion of Xerox's overstatements of revenues and pre-tax earnings."
C'mon guys, don't be so negative. Look at the bright side. At least there should be plenty of copiers available for all those documents those pesky owners (a/k/a shareholders) will soon be subpoenaing.
You can read the decision, issued July 13, 2005, at 2005 U.S. Dist. LEXIS 14427.
Nugget: "The PSLRA does not require a plaintiff to prove his case in his complaint. And, it is appropriate to recall that the heightened standard of pleading scienter was meant simply to prevent strike suits and other abuses that had arisen in securities fraud litigation. . . . Plaintiff generally must frame the facts respecting the defendant's mental state (i.e., the scienter element of the claim) without the benefit of discovery, and therefore, most often, allegations about a defendant's culpable state of mind must be drawn from limited state of mind evidence augmented by circumstantial facts and logical inferences."
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