Ah, six. A unitary perfect number, the answer to the kissing number problem, and now the number of what Judge Richard J. Holwell (S.D.N.Y.) calls "seemingly unrelated parties" that have been appointed as Lead Plaintiff in the Elan Corporation securities class action. Judge Holwell did chastise the so-called "Institutional Investor Group" a bit before appointing them, saying that the Group "fails to address a concern raised by a number of courts, namely, that the aggregation of large, unrelated ‘groups’ of investors defeats the purpose of choosing a lead plaintiff." However, "despite these concerns, there can be no doubt that the PSLRA contemplates that some ‘groups’ can serve as lead plaintiff," and at least "preliminarily, the Court is unconcerned with the size of the group, and finds that six members is not too unwieldy a number to effectively manage the litigation." "This is not, in other words, a group so large that the PSLRA's express purpose of placing the control of securities class action with a small and finite number of plaintiffs (as opposed to their counsel) becomes wholly undermined by its sheer size." "Indeed, even were the Court to deconstruct the Group, two of its individual members would still have the largest financial interest."
In sum, Judge Holwell said that "this is simply not a case where a group of unrelated investors has been cobbled together as a ‘group’ to displace a single competing institutional investor, or a smaller, closely-related group of investors. If it were, the Court would be reluctant to recognize the group under the statute."
You can read Barnet v. Elan, issued August 8, 2005, at 2005 U.S. Dist. LEXIS 16388.
Nugget: "There is also no doubt that not all groups qualify -- consider the reductio ad absurdum of a ‘group’ consisting of the entire class."
Wednesday, August 17, 2005
Tuesday, August 16, 2005
Judge Draws Roadmap For Plaintiffs
Investors in Bio-Technology General Corporation ("BTG") got their 1934 Act claims bounced by Judge Harold A. Ackerman (D. N.J.) last week. Yes, they went down to the canvas, but are they out cold you ask? Maybe not. You see, the shareholders alleged that "BTG and its management falsely attributed the source of a sharp increase in sales of its premier drug product, Oxandrin, to the successful penetration of a new therapeutic market, when in fact BTG's management knew that the spike in sales was the result of wholesalers stocking their inventories ahead of an expected Oxandrin price increase." The problem wasn’t with materiality, as the court said it "has little trouble concluding, in light of these allegations, that Plaintiff has adequately pled a materially false or misleading statement." But it was the scienter requirement that dropped Plaintiffs like a sack of spuds, as "the Complaint fails to explain how the Individual Defendants knew of or participated in the preparation and dissemination of false statements." "Furthermore, in the absence of any allegation of a specific corporate policy requiring the Individual Defendants to be involved in reviewing Oxandrin sales data, the Court is not prepared to impute detailed knowledge of BTG's monthly and quarterly Oxandrin sales data."
But Judge Ackerman gave the Plaintiffs a standing eight-count, during which he noted that "it would be a relatively simple matter for Plaintiff to plead circumstantial evidence of the Individual Defendants' knowledge of the Oxandrin sales data. For instance, Plaintiff could have pled circumstantial evidence of scienter by showing that BTG had a specific policy requiring the Individual Defendants to review Oxandrin sales reports in the periods in which they were provided to BTG's sales staff. Plaintiff might also have pled that the BTG had a policy whereby the sales staff would routinely summarize the Oxandrin sales data and deliver the summaries to the Individual Defendants for review." With 30 days to amend, let’s see if these investors can take the hint.
You can read In re Bio-Technology, issued August 10, 2005, at 2005 U.S. Dist. LEXIS 16603.
Nugget: "Simply asserting that Defendants improperly capitalized certain Oxandrin costs in financial statements representing that all research and development costs are treated as expenses does not establish a strong inference of scienter, even when those financial statements are later restated to expense the formerly capitalized costs."
But Judge Ackerman gave the Plaintiffs a standing eight-count, during which he noted that "it would be a relatively simple matter for Plaintiff to plead circumstantial evidence of the Individual Defendants' knowledge of the Oxandrin sales data. For instance, Plaintiff could have pled circumstantial evidence of scienter by showing that BTG had a specific policy requiring the Individual Defendants to review Oxandrin sales reports in the periods in which they were provided to BTG's sales staff. Plaintiff might also have pled that the BTG had a policy whereby the sales staff would routinely summarize the Oxandrin sales data and deliver the summaries to the Individual Defendants for review." With 30 days to amend, let’s see if these investors can take the hint.
You can read In re Bio-Technology, issued August 10, 2005, at 2005 U.S. Dist. LEXIS 16603.
Nugget: "Simply asserting that Defendants improperly capitalized certain Oxandrin costs in financial statements representing that all research and development costs are treated as expenses does not establish a strong inference of scienter, even when those financial statements are later restated to expense the formerly capitalized costs."
Monday, August 15, 2005
PWC Raises Too Many Flags
Judge Harold Baer, Jr. (S.D.N.Y.) has denied PwC’s (You simply must click this link – why in the world does PwC have this lady staring at us like this? Make her stop, we beg you!) motion to dismiss in the securities class action against Hibernia Foods "an Irish public company that exported beef until the ‘mad cow’ episode in 1997 when it switched to the sale of frozen desserts and ready-made meals." Wow, talk about an overreaction, huh? Plaintiffs said "PwC knew or recklessly disregarded risk factors e.g., Hibernia's repeated default on payments to lenders and suppliers and the sale of inventory at a loss to generate cash flow." PwC balked, saying Plaintiffs were not "specific enough to show how and when PwC acquired knowledge of an alleged fraud." Well, unfortunately for PwC, Judge Baer said "to plead with particularity does not require at this stage that Plaintiff spell out the very moment PwC should have known about the alleged fraud or that PwC had actual knowledge of the scope or particulars of the scheme."
Judge Baer also recognized that "Plaintiffs allege that PwC wanted to keep Hibernia as a client so that PwC could continue to derive a financial benefit from its client." Sounds reasonable, right? Perhaps a bit frustrated with those who might disagree, the judge offered the observation that "while not so far fetched to me, the current state of the case law holds otherwise and concludes that no independent auditor would risk ruination of its reputation for the fees it would collect in order to suppress fraud."
But, as it turns out, the red flags were waving too high and too fast. The court found that "the ‘red flags’ include, inter alia, allegations that Hibernia (1) repeatedly defaulted on payments to lenders and suppliers, (2) sold its products at a loss, (3) recognized revenue on products that had not been shipped, and (4) failed to write off valueless inventory or write down long-lived assets." Although "PwC argues that these ‘red flags’ offer only conclusory allegations that PwC should have known this behavior was tantamount to fraud," "these facts, which must at this stage of the litigation be taken as true, illustrate at the very least behavior that could not conceivably escape a rational auditor's critical eye, if his eyes were open."
You can read Whalen v. Hibernia, issued 2005 U.S. Dist. LEXIS 15489.
Nugget: "When all the ‘flags’ are run up the same poll [surely it said "pole," right?], it seems inescapable that a reasonable auditor was on notice, and acted recklessly when it disregarded all the ‘flags.’"
Judge Baer also recognized that "Plaintiffs allege that PwC wanted to keep Hibernia as a client so that PwC could continue to derive a financial benefit from its client." Sounds reasonable, right? Perhaps a bit frustrated with those who might disagree, the judge offered the observation that "while not so far fetched to me, the current state of the case law holds otherwise and concludes that no independent auditor would risk ruination of its reputation for the fees it would collect in order to suppress fraud."
But, as it turns out, the red flags were waving too high and too fast. The court found that "the ‘red flags’ include, inter alia, allegations that Hibernia (1) repeatedly defaulted on payments to lenders and suppliers, (2) sold its products at a loss, (3) recognized revenue on products that had not been shipped, and (4) failed to write off valueless inventory or write down long-lived assets." Although "PwC argues that these ‘red flags’ offer only conclusory allegations that PwC should have known this behavior was tantamount to fraud," "these facts, which must at this stage of the litigation be taken as true, illustrate at the very least behavior that could not conceivably escape a rational auditor's critical eye, if his eyes were open."
You can read Whalen v. Hibernia, issued 2005 U.S. Dist. LEXIS 15489.
Nugget: "When all the ‘flags’ are run up the same poll [surely it said "pole," right?], it seems inescapable that a reasonable auditor was on notice, and acted recklessly when it disregarded all the ‘flags.’"
Friday, August 12, 2005
Investors Can’t State Claim For Cosi IPO
Judge John G. Koeltl (S.D.N.Y.) has dismissed all of the 1933 Act claims brought against Cosi, its executives, and its underwriter William Blair in relation to Cosi’s 2002 IPO. Originally "expected to earn $ 60 million in proceeds," the IPO netted only $ 33 million "due to demand that was weaker than anticipated." Only two months after the IPO, the casual restaurant chain announced that it had "determined to alter our growth strategy," and implement "franchising," mainly because of "Cosi's lack of sufficient capital to carry out the business plan described in the Prospectus." Cosi also announced that it "would be able to open approximately ten new restaurants in 2003, as opposed to the fifty-three to fifty-nine planned in the Prospectus," and that "it intended to dismiss twenty-seven percent of its personnel and to take a $ 1.7 million charge to account for severance and related costs in the first quarter of 2003." "Following the February 3, 2003 announcements, Cosi's stock price dropped thirty-one percent to $ 3.10"
Plaintiffs claimed "that the failure to disclose the possibility of pursuing a franchising model was the allegedly material non-disclosure." Unfortunately for them, Judge Koeltl disagreed. He said that "Plaintiffs do not allege facts that would establish that mere research into the possibility of pursuing a franchising model would be an event of significant importance to potential Cosi investors. The possibility of franchising, according to the plaintiffs' allegations, was still remote at the time the Prospectus was issued." Indeed, "the plaintiffs allege only that Cosi had researched the possibility of franchising for two months before the Prospectus was issued, and do not allege that a franchising plan had been submitted to or approved by the board, or that any affirmative steps had been taken to implement a franchising plan." The court held that it would simply be wrong to "to require the disclosure of the mere research of a potential business plan without any factual allegation that Cosi intended or had taken affirmative steps to implement the plan."
You can read In re Cosi, issued July 27, 2005, at 2005 U.S. Dist. LEXIS 15603.
Nugget: "Because the plaintiffs have not alleged that they purchased their shares in the IPO, they have failed to allege that they have standing to bring a claim under § 12(a)(2)."
Plaintiffs claimed "that the failure to disclose the possibility of pursuing a franchising model was the allegedly material non-disclosure." Unfortunately for them, Judge Koeltl disagreed. He said that "Plaintiffs do not allege facts that would establish that mere research into the possibility of pursuing a franchising model would be an event of significant importance to potential Cosi investors. The possibility of franchising, according to the plaintiffs' allegations, was still remote at the time the Prospectus was issued." Indeed, "the plaintiffs allege only that Cosi had researched the possibility of franchising for two months before the Prospectus was issued, and do not allege that a franchising plan had been submitted to or approved by the board, or that any affirmative steps had been taken to implement a franchising plan." The court held that it would simply be wrong to "to require the disclosure of the mere research of a potential business plan without any factual allegation that Cosi intended or had taken affirmative steps to implement the plan."
You can read In re Cosi, issued July 27, 2005, at 2005 U.S. Dist. LEXIS 15603.
Nugget: "Because the plaintiffs have not alleged that they purchased their shares in the IPO, they have failed to allege that they have standing to bring a claim under § 12(a)(2)."
Thursday, August 11, 2005
Dura a Toothless Tiger in OmniVision Understatement Action
For those of you wondering what language Plaintiffs need to allege in their amended complaints to satisfy Dura, you’re in luck. At least, that is, if you happen to be in Judge Samuel Conti’s (N.D. Cal.) courtroom. You see, Plaintiffs’ complaint in the OmniVision securities class action originally alleged that "members of the Class acquired OmniVision securities during the Class Period at artificially high prices and were damaged thereby." Ah, the Good Old Days. But put away that nostalgia, as Judge Conti (unsurprisingly) held this allegation to be "insufficient" under Dura. But he gave the investors a chance to try again. So the second time around, the complaint said: "Plaintiffs purchased OmniVision securities at artificially inflated prices and suffered damages when revelation of the true facts caused a decline in the value of their investments." In ruling on the OmniVision and its executives’ motions to dismiss, the court found this was "a sufficient allegation of economic loss as required" by Dura. Sorry to those of you wanting more out of your Dura, but that's it. Seven more words. Really. No, really.
As for the rest of the Defendants’ arguments, Judge Conti denied them all, even despite the fact that "the allegations concern understating of revenue," instead of overstating it. Why? Well, Judge Conti said because "the one third drop in OmniVision's stock price on June 9, 2004 overwhelmingly demonstrates that the investing community finds improper revenue recognition incidents to be serious matters regardless of the direction of the improper recognition."
But just when the Plaintiffs thought they were home-free, Judge Conti ruled that "the restatement and GAAP violations" were not enough to meet scienter. But that didn’t save Defendants because they had engaged in suspicious inside trading, in which "two of the Individual Defendants more than doubled the relative proportion of their shares they sold during the class period," and "the other two simply sold all of their shares." Defendants countered that "because this case involves earnings understatements, instead of overstatements, insider sales are not indicative of scienter." But the judge rejected this "misconstrued theory," saying that Defendants suffer from a "dramatic misconception of how stock markets function." Ouch. "As demonstrated by the movement of OmniVision's stock" "by approximately one third on June 9, 2004 when the company first announced its accounting problems," "Defendants' argument that there is a distinction between overstatements and understatements of revenue is simply not credible."
You can read In re OmniVision, issued July 29, 2005, at 2005 U.S. Dist. LEXIS 16009.
Nugget: "The Court holds that at this time the group pleading doctrine does apply."
As for the rest of the Defendants’ arguments, Judge Conti denied them all, even despite the fact that "the allegations concern understating of revenue," instead of overstating it. Why? Well, Judge Conti said because "the one third drop in OmniVision's stock price on June 9, 2004 overwhelmingly demonstrates that the investing community finds improper revenue recognition incidents to be serious matters regardless of the direction of the improper recognition."
But just when the Plaintiffs thought they were home-free, Judge Conti ruled that "the restatement and GAAP violations" were not enough to meet scienter. But that didn’t save Defendants because they had engaged in suspicious inside trading, in which "two of the Individual Defendants more than doubled the relative proportion of their shares they sold during the class period," and "the other two simply sold all of their shares." Defendants countered that "because this case involves earnings understatements, instead of overstatements, insider sales are not indicative of scienter." But the judge rejected this "misconstrued theory," saying that Defendants suffer from a "dramatic misconception of how stock markets function." Ouch. "As demonstrated by the movement of OmniVision's stock" "by approximately one third on June 9, 2004 when the company first announced its accounting problems," "Defendants' argument that there is a distinction between overstatements and understatements of revenue is simply not credible."
You can read In re OmniVision, issued July 29, 2005, at 2005 U.S. Dist. LEXIS 16009.
Nugget: "The Court holds that at this time the group pleading doctrine does apply."
Tuesday, August 09, 2005
Thanks Anyway, But Only One Lead Plaintiff Group Needed Here
The lead plaintiff contest has come to a close in the Molex securities class action, with a group of three investors taking the prize. Interestingly, despite the electronics giant's $5 billion market cap, the two largest groups lost only $18,000 (Pontiac Group) and $12,000 (Ponzo Group). But no matter which way you slice it up, that put Pontiac ahead of the game, making Judge Ruben Castillo's (N.D. Ill.) job a walk in the park. OK, well almost.
One thing you should know before we start (and don't worry, we'll be done soon) is that Molex has three distinct classes of stock: Common Stock, Class A Shares, and Class B Shares. Ponzo tried to use this to their advantage, or as the judge saw it, "muddy these otherwise clear waters." In a nutshell, Ponzo asserted "that it should be appointed as co-lead plaintiff to represent a sub-class of the purported class members consisting of holders of Molex Common Stock." In other words, Ponzo argued it should win "because it suffered $12,273 in losses from its purchase of Common Stock while the Pontiac Group only suffered $5,450 in losses from its purchase of Common Stock," with "the remainder of the Pontiac Group's losses stemm[ing] from its purchase of Class A Shares."
Well, if you glanced at the headline, you won't be surprised to learn that Judge Castillo wholeheartedly rejected this, finding "that the Ponzo Group's request to slice and dice the reported losses between Common Stock and Class A Shares departs from the presumption laid out in the PSLRA," of appointing the movant that "has the largest financial interest in the relief sought by the class." "The Ponzo Group has pointed to nothing in the pleadings which would suggest that any of the relief sought by Common Stock holders is different than the relief sought by Class A shareholders. The relief sought by the class here is compensation for losses sustained from investment in Molex securities," so Pontiac wins, and Ponzo doesn't.
You can read Takara v. Molex, issued July 6, 2005, at 2005 U.S. Dist. LEXIS 15820.
Nugget: "It is not uncommon for a representative who purchased one type of security to represent class members who purchased a different type of security where the action is based on the same set of misrepresentations."
One thing you should know before we start (and don't worry, we'll be done soon) is that Molex has three distinct classes of stock: Common Stock, Class A Shares, and Class B Shares. Ponzo tried to use this to their advantage, or as the judge saw it, "muddy these otherwise clear waters." In a nutshell, Ponzo asserted "that it should be appointed as co-lead plaintiff to represent a sub-class of the purported class members consisting of holders of Molex Common Stock." In other words, Ponzo argued it should win "because it suffered $12,273 in losses from its purchase of Common Stock while the Pontiac Group only suffered $5,450 in losses from its purchase of Common Stock," with "the remainder of the Pontiac Group's losses stemm[ing] from its purchase of Class A Shares."
Well, if you glanced at the headline, you won't be surprised to learn that Judge Castillo wholeheartedly rejected this, finding "that the Ponzo Group's request to slice and dice the reported losses between Common Stock and Class A Shares departs from the presumption laid out in the PSLRA," of appointing the movant that "has the largest financial interest in the relief sought by the class." "The Ponzo Group has pointed to nothing in the pleadings which would suggest that any of the relief sought by Common Stock holders is different than the relief sought by Class A shareholders. The relief sought by the class here is compensation for losses sustained from investment in Molex securities," so Pontiac wins, and Ponzo doesn't.
You can read Takara v. Molex, issued July 6, 2005, at 2005 U.S. Dist. LEXIS 15820.
Nugget: "It is not uncommon for a representative who purchased one type of security to represent class members who purchased a different type of security where the action is based on the same set of misrepresentations."
Monday, August 08, 2005
Plaintiffs Fail to Satisfy Dura Requirements
Judge David F. Hamilton (S.D. Ind.) has granted the Individual Defendants’ motions to dismiss in the Conseco securities class action. Basically, the court held that Plaintiffs "failed to allege loss causation adequately under the standards set forth by" Dura because "the truth about matters that plaintiffs allege were concealed or misrepresented did not come out publicly until months after the end of the class period." The court also observed that "this is not a case where Plaintiffs can point to a sharp drop in the company's stock price following announcement of the allegedly concealed truth," as "the stock had long since hit bottom before these alleged misrepresentations became known."
Plaintiffs were probably in trouble from the beginning when they relied on the Ninth Circuit’s soon-to-be-doomed version of Dura, as Judge Hamilton pointed out that Plaintiffs’ "brief asserts ‘the absurdity of applying a loss causation standard which requires the value of plaintiffs' shares to decline following the revelation of the truth.’" As the Supreme Court’s version of Dura eventually obliterated that argument midstream, Plaintiffs were forced to shift gears, seizing "on Justice Breyer's use of the phrase ‘leak out’ in the sentence: ‘But if, say, the purchaser sells the shares quickly before the relevant truth begins to leak out, the misrepresentation will not have led to any loss.’" In other words, Plaintiffs argued "they can prove that the truth was beginning to ‘leak out’ about some of the matters they allege, contributing to the massive decline in Conseco stock prices during the Class Period as Conseco disclosed a host of financial problems it faced." Judge Hamilton noted that "whether the Court's use of the phrase ‘leak out’ shows that plaintiffs' suggestion would be sufficient under Dura Pharmaceuticals is not clear." What is clear, he said, is "that this theory is certainly not what Plaintiffs have alleged in the operative complaint."
Judge Hamilton is going to let Plaintiffs have another crack at it anyway though, saying "perhaps plaintiffs can salvage some portions of the case under the Dura Pharmaceuticals standard," so "they are entitled to try to do so by amending their complaint, though in light of the many and daunting problems Conseco faced, the problem of loss causation may pose a major challenge of proof even if plaintiffs can plead it adequately for a portion of the case."
You can find Porter v. Conseco Inc., issued July 14, 2005, at 2005 U.S. Dist. LEXIS 15466.
Nugget: "This is not so much a case where plaintiffs are alleging that defendants painted a falsely rosy picture. It is more as if plaintiffs allege that defendants painted with shades of gray that were not quite dark and gloomy enough."
Plaintiffs were probably in trouble from the beginning when they relied on the Ninth Circuit’s soon-to-be-doomed version of Dura, as Judge Hamilton pointed out that Plaintiffs’ "brief asserts ‘the absurdity of applying a loss causation standard which requires the value of plaintiffs' shares to decline following the revelation of the truth.’" As the Supreme Court’s version of Dura eventually obliterated that argument midstream, Plaintiffs were forced to shift gears, seizing "on Justice Breyer's use of the phrase ‘leak out’ in the sentence: ‘But if, say, the purchaser sells the shares quickly before the relevant truth begins to leak out, the misrepresentation will not have led to any loss.’" In other words, Plaintiffs argued "they can prove that the truth was beginning to ‘leak out’ about some of the matters they allege, contributing to the massive decline in Conseco stock prices during the Class Period as Conseco disclosed a host of financial problems it faced." Judge Hamilton noted that "whether the Court's use of the phrase ‘leak out’ shows that plaintiffs' suggestion would be sufficient under Dura Pharmaceuticals is not clear." What is clear, he said, is "that this theory is certainly not what Plaintiffs have alleged in the operative complaint."
Judge Hamilton is going to let Plaintiffs have another crack at it anyway though, saying "perhaps plaintiffs can salvage some portions of the case under the Dura Pharmaceuticals standard," so "they are entitled to try to do so by amending their complaint, though in light of the many and daunting problems Conseco faced, the problem of loss causation may pose a major challenge of proof even if plaintiffs can plead it adequately for a portion of the case."
You can find Porter v. Conseco Inc., issued July 14, 2005, at 2005 U.S. Dist. LEXIS 15466.
Nugget: "This is not so much a case where plaintiffs are alleging that defendants painted a falsely rosy picture. It is more as if plaintiffs allege that defendants painted with shades of gray that were not quite dark and gloomy enough."
Subscribe to:
Posts (Atom)
