Hedge Funds as Plaintiffs, err Defendants

Over at the WSJ Blog, Peter Lattman has written about the SEC's recently filed (and settled) case against hedge fund manager Jeffrey Thorp and three of Thorp's hedge funds. One of those funds, Langley Partners, L.P. is actually a plaintiff in an individual action against Tripath Technology Inc.

While the In re Tripath Technology Inc. Sec. Litig. class action recently settled, the stipulation of settlement expressly reserved "claims against any Class Members, which arise or relate to actions other than the [class action] including but not limited to Langley Partners, L.P. v. Tripath Technology Inc."

It is interesting to note that Tripath is not one of the 23 PIPE transactions that Thorp and his hedge funds were accused of wrongdoing in connection with by the SEC.

Mutual Funds as Lead Plaintiffs (Part III)

Two anonymous readers have added their two cents to the topic, though the net result is actually a subtraction from the list and some "color" regarding one of the other entities on the list.

First, the subtraction. A reader has pointed out that the Provident funds appointed as lead plaintiff in the ECI Telecom litigation are not in fact mutual funds, but are instead pension funds, as described here. I hereby take them off the list, but beg and plead for a reader to send in a replacement entry, so I don't have to renumber the whole list.

Now for the color. Another reader has pointed out that various entities related to the Gintel Fund (which was named as a co-lead plaintiff in the Milestone Scientific litigation along with several of those entities) consented with the SEC in 2002 to the entry of a cease-and desist order.

The crux of the SEC's complaint is that from 1997 through 1999, Gintel Asset Management, Inc. (investment advisor to the fund), Gintel & Co. LLC (broker-dealer for the fund), and Robert M. Gintel (Chairman and CEO of the fund and Gintel Asset Management and majority owner of Gintel & Co.) :

effected at least 40 cross trades on a principal basis between an investment company, the Gintel Fund, and accounts in which [Gintel] had an ownership interest in violation of the Investment Company Act's provision prohibiting trades between a registered mutual fund and affiliated accounts unless such trades meet the criteria for an exemption, which these did not.

And:

Gintel Asset Management also engaged in principal transactions in violation of the Advisers Act by causing client portfolios not affiliated with Robert Gintel to trade with accounts in which Gintel held a substantial ownership stake, including the Fund.

But wait! there's more! (with a nod to Ron Popeil):

In addition to these prohibited cross transactions, Robert Gintel engaged in extensive personal trading in securities, frequently within seven days of trades in the same securities by the Fund and other clients, in violation of the Fund and Gintel Asset Management's Code of Ethics.

Now here's the kicker:

The first set of prohibited cross trades took place at the end of 1998 and involved Milestone Scientific stock.

Granted, it was outside the class period in the securities litigation, but one more episode like that, and the Gintel Fund will be off the list.

Squeezing blood out of a stone

In a forthcoming article, Reforming the Securities Class Action: An Essay on Deterrence and its Implementation, Prof Coffee suggests that the although the damages recovered through securities class actions substantially outstrip the financial penalties levied by public enforcement, there is a deterrence element that is lacking in private enforcement of the federal securities laws and that the costs of such actions are not borne by the actual wrongdoers.

Prof. Coffee notes that "[a]lthough [corporate officers and directors] are regularly sued, they rarely appear to contribute to the settlement. Rather, the corporate defendant and its insurer typically advance the entire settlement amount." He goes on to cite to a forthcoming study of federal securities class action settlements, which found that of the 1,754 class actions settled between 1991 and 2004, there were "only thirteen settlements 'since 1980 in which outside directors made out-of-pocket payments.'" His conclusion - that the corporation and thus its shareholders are wrongfully "punished" in such situations, with little or no deterrent effect on corporate officers and directors.

Prof. Coffee suggests that requiring corporate insiders to contribute more frequently to settlements will provide a much needed deterrent effect, if "the expected penalty, which would include both the financial and non-financial costs of a securities class action settlement, exceed the expected gain [to the insider.]"

As a further incentive to the plaintiff's bar, Prof. Coffee also suggests that "the
court awarding attorneys fees in a securities class action should award substantially higher fees for the portion of the recovery obtained from insiders than on the portion obtained from the corporation."

The Tale of the Serial Recidivist

The intrepid Irving Kott is at it again.

Some may remember him from his days as the "de facto CEO" at JB Oxford & Co. He pled guilty to two charges of concealing material facts regarding his financial relationship to the firm's publicly traded parent company in 2004.

Others may remember Kott as the putative owner and major player in the now-defunct First Commerce Securities. An Amsterdam-based brokerage firm, First Commerce was accused of using high-pressure sales tactics to push dubious securities before the company was raided by Dutch authorities in 1986 and forced into bankruptcy the following year. According to Dutch prosecutor Jan Koers there was "overwhelming evidence that Kott owned the company and played a major role in running it."

Some would suggest that at that point, Mr. Kott should have listened to W.C. Fields:

"If at first you don't succeed, try, try again. Then quit. No use being a damn fool about it."

But Mr. Kott would have none of that. His latest adventure involves Mamma.com, the self proclaimed "mother of all search engines."

In Montoya, et. al., v. Mamma.com, et. al., 05 Civ. 2313 (S.D.N.Y.) (lead plaintiff / lead counsel order), Plaintiffs brought an action for violations of sections 10(b) and 20(a) of the Exchange Act. The crux of the complaint appears to be that during the class period, Mamma.Com was "secretly controlled, influenced and/or owned by Irving Kott." The failure to disclose this relationship, plaintiffs allege "would have materially impacted the share price" of Mamma.com securities.

The good news for plaintiffs is that Judge Baer agrees. In this opinion, Judge Baer denied the motions to dismiss filed by four of the defendants, holding:

"While senior officers do not, solely by virtue of their positions, always have access to information indicative of fraud, plaintiffs allege here that Kott personally controlled the company's affairs. Goldman, Bertrand and Fauré surely had a 'duty to monitor' who was actually running the company that they purportedly managed. Therefore, plaintiffs' allegations are sufficient to plead scienter."

Though named as a defendant, according to the opinion, Mr. Kott chose to answer the complaint instead.

How much is too much?

Pay for top executives that is.

Well the SEC isn't asking that question, but they do want companies to provide:

"investors with a clearer and more complete picture of the compensation earned by a company's principal executive officer, principal financial officer and highest paid executive officers and members of its board of directors."

and

"better information about key financial relationships among companies and their executive officers, directors, significant shareholders and their respective immediate family members."

Or at least that's what the summary for the SEC's proposed rule on Executive Compensation and Related Party Disclosure says. The comment period for the proposed rule ends April 10, 2006. Comments already received are available here and you can submit your own comments here.

Lead Plaintiff = Landlord?

Those Vanderbilt University Law professors sure love writing law review articles about securities class actions. No, we're not talking about Randall S. Thomas, the co-author of two seminal articles on the failure of institutional investors to file claim forms in securities cases, but instead his colleague Richard A. Nagareda. In his forthcoming article, Restitution, Rent Extraction, and Class Representatives: Implications of Incentive Awards, Prof. Nagareda argues that the PSLRA's empowerment of shareholders to serve as "gatekeepers" in selecting and retaining lead counsel comes with a twist:

When the law itself puts into place a gatekeeper to stand between class counsel and the considerable financial returns that flow from control of class action litigation, there is a real possibility that the gatekeeper will catch on to what is happening. The gatekeeper soon may become a toll taker.

For those that may not have perused the two articles co-authored by Prof. Thomas, I have provided links to both below:

Leaving Money On the Table: Do Institutional Investors Fail to File Claims in Securities Class Actions?, 80 Wash. U. L. Q. 855 (2002)

Letting Billions Slip Through Your Fingers: Empirical Evidence and Legal Implications of the Failure of Financial Institutions To Participate in Securities Class Action Settlements, 58 Stanford Law Review 411 (2005)

Please Pardon the Interruption

Posts will be slim for the next few days, as I will be at the International Union of Police Associations 2006 Annual Benefits Conference in Sarasota, Florida.

Restatements are Like Rabbits

In this article, Bruce Meyerson from The Associated Press highlights the sometimes serial nature of earnings restaters. According to Glass Lewis & Co. during the period from 2003 through 2005, nearly 15% of the public U.S. companies that restated their financials did so at least twice, with six different companies restating their financials four times apiece in just two years.

Meyerson notes that "while most companies don't make a habit of revising their past earnings reports, one visit to the accounting confessional can lead to an encore appearance, making it best to view restatements with the suspicious eye of an exterminator: where there's one, there may be more. "

Bonus points to any reader that can identify the six companies that restated four times between 2003 and 2005.

The Supremes & SLUSA - Round I

The Supreme Court has vacated the decision of the Second Circuit in Merrill Lynch v. Dabit, and remanded the case. In an 8-0 decision, Justice Stevens held that SLUSA preempted state law class actions pled on behalf of holders, as to allow such suits would "run contrary to SLUSA's stated purpose." In finding that the federal securities laws reached Dabit's claims, the Court held that "[t]he requisite showing, in other words, is 'deception 'in connection with the purchase or sale of any security,' not deception of an identifiable purchaser or seller."

Noting that the general presumption against Congressional preemption of state law causes of action did not apply, Justice Stevens wrote:

But that presumption carries less force here than in other contexts because SLUSA does not actually pre-empt any state cause of action. It simply denies plaintiffs the right to use the class action device to vindicate certain claims. The Act does not deny any individual plaintiff, or indeed any group of fewer than 50 plaintiffs, the right to enforce any state-law cause of action that may exist.

So gather 48 of your closest friends, and file a holders claim.

Thanks to Gregg Fishbein for sending this one in and to Tom Howe and the good folks at SCOTUSblog for collecting the links.

ADDITION - The 10b-5 Daily and WSJ Law Blog have more on the Dabit decision.

The Name Game

There have been oodles of articles in the past few years on the lengths that large defense firms have gone to shorten their firm names as part of a "branding effort."

Plaintiffs' firms seem to be taking the opposite approach, and keeping the typesetters quite busy.

The law firm of Abbey Gardy, LLP sent out a press release last week, announcing a name change to Abbey Spanier Rodd Abrams & Paradis, LLP. But this was not the first name change for the firm, or even the second.

The firm started life in 1983 as Abbey & Ellis, and continued under that name until 1993, with the death of name partner Ralph Ellis. Next on the letterhead - Abbey, Gardy & Squitieri, LLP. In 2001, the printers again got a call, as Abbey Gardy & Squitieri split into two firms, with partners Lee Squitieri and Steve Fearon leaving to form their own firm, Squitieri & Fearon, LLP. The remaining partners reconstituted the firm as Abbey Gardy, which had a nice run for the past five years.

No word on where former name partner Mark Gardy has disappeared to, but I'd ask the typesetters.

UPDATE - Mark Gardy is safe and sound, and practicing at his new firm, Gardy & Notis, LLP, with another former Abbey Gardy partner, James Notis. Thanks to an anonymous and intrepid reader for the tip.

Mutual Funds as Lead Plaintiffs (Part II)

We already have some additions to the list.

14. Cytyc Corp. (D. Mass.) - Deka Investment GmbH was appointed co-lead plaintiff.

15. Parmalat (S.D.N.Y.) - The Hermes European Focus Fund I, Hermes European Focus Fund II and Hermes European Focus Fund III were appointed co-lead plaintiff. Thanks to Josh Devore for the tip.

16. Royal Dutch / Shell Transport - KBC Asset Management unsuccessfully moved for appointment as a lead plaintiff.

Please keep them coming in.

Mutual Funds as Lead Plaintiffs

In their latest article on the failure of institutional investors to file claim forms in securities class action settlements, Prof. James D. Cox and Randall S. Thomas posit that they "find no recorded case where a bank, mutual fund, or insurance company has served as a lead plaintiff in a securities class action."

Well, I looked under a few rocks and found a bakers dozen of cases where mutual funds either moved for appointment or had been appointed as a lead plaintiff. Along the lines of Bruce Carton's counting up the securities trials, I'd like to invite readers to add to the below list.

Here goes (with links to a case document where available):

1. Bio-Technology General Corp. (D. N.J.) - The Poalim Mutual Funds were appointed co-lead plaintiff.

2. ECI Telecom (E.D. Va.) - Ozma Provident Fund and Sion Provident Fund, Ltd. were appointed co-lead plaintiff.

4. Federal Mogul Corp. (E.D. Mich.) - Dynamic Mutual Funds Limited was appointed co-lead plaintiff.

4. Hayes Lemmerz Int'l (E.D. Mich) - Pacholder Hi-Yield Fund was appointed co-lead plaintiff.

5. Leapfrog Enterprises (N.D. Cal.) - The Parnassus Fund and the Parnassus Equity Fund were appointed co-lead plaintiff.

6. Lucent Technologies - The Parnassus Fund and the Parnassus Income Trust/Equity Income Fund were appointed co-lead plaintiff.

7. Merck & Co. (D. N.J.) - Union Investment Privatfonds GmbH was appointed sole lead plaintiff.

8. Milestone Scientific (D.N.J.) - The Gintel Fund was appointed co-lead plaintiff.

9. Network Associates (N.D. Cal.) - KBC Equity Funds and ING Fund Management both moved unsuccesfully for appointment as lead plaintiff.

10. Oxford Health Plans, Inc. (S.D.N.Y.) - PBHG Funds, Inc. was appointed as a co-lead plaintiff on behalf of 5 funds that purchased Oxford common stock the PBHG Growth II Portfolio, the PBHG Large Cap Growth Portfolio, the PBHG Select 20 Portfolio, the PBHG Large Cap Growth Fund and the PBHG Large Cap 20 Fund).

11. Peregrine Systems, Inc. (S.D. Cal.) - Needham Growth Fund unsuccessfully moved for appointment as lead plaintiff.

12. Royal Ahold (D. Md.) Union Asset Management Holding AG unsuccessfully moved for appointment as lead plaintiff.

13. Tribune Co. (N.D. Ill.) - Deka Investment GmbH unsuccessfully moved for appointment as lead plaintiff.

There is one more worth remembering, though it doesn't really belong on the list. In the Conseco, Inc. (S.D. Ind.) litigation, The Gintel Fund was appointed co-lead plaintiff, but in the derivative case.

OK readers - what other mutual fund lead plaintiffs do you have hiding up your sleeves? Send them in, and we'll update the list.

Dipping a toe into the blogosphere

After being a long time contributor to a number of the other securities litigation related blogs, I have decided to dip my toe into the wild world of blogging.

Hopefully you will find this blog entertaining and even a little informative.

Welcome, and thanks for stopping by.