We're Back

Regular posting will now resume.

As my first official act, let me extend a hearty thank you to Kevin LaCroix at The D&O Diary for attempting to compile a comprehensive list (here) of the options backdating related litigation, and to Bruce Carton at Securities Litigation Watch for agreeing to help shoulder the load (here).

The options backdating litigation explosion will almost certainly be the next group of cases that the annual Stanford University /Cornerstone Research, NERA Economic Consulting, and PricewaterhouseCoopers studies exclude from their yearly totals or include with an asterisk, a practice that started back in 2001, with the IPO Allocation cases. The next few years all had their own breed of "atypical" case, except 2005:

2001 - IPO Allocation cases
2002 - Research Analyst cases
2003 - Research Analyst cases and Mutual fund "market-timing" cases
2004 - Mutual fund "market-timing" cases
2005 - ???
2006 - Options backdating cases

When these "atypical" cases have been excluded from the yearly count, the number of new federal securities class action filings has remained fairly steady since the enactment of the PSLRA ten years ago, as explained by Bruce Carton, here.

The "drop" in new case filings that was detailed in a recently released report from Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse. The report has generated a bit of buzz in the blogosphere, with posts on The 10b-5 Daily here, and The D&O Diary here.

I think a more interesting (and to the best of my knowledge unanswered) question is what happened to the "atypical" cases in 2005?

We're outta here...

Posting will resume around August 1.

ECtel Ltd. - Proud Of Their Successful "Vigorous Defense"

ECtel Ltd. (NASDAQ: ECTX) today announced the dismissal of the securities class action lawsuit pending against the company and certain of its directors and officers in the United States District Court for the District of Maryland.

The release quotes ECtel's President and CEO, Eitan Naor, as stating:

We're pleased with this confirmation of our earlier statements that we believe this case was filed without merit. This justifies our vigorous defense of this matter.

According to their website, one of ECtel's products is known as FraudView and "is the leading and most complete fraud management solution for telecom operators." Hmm, that doesn't sound very good. I wonder if the finance folks at WorldCom were early adopters?

Also named as a defendant (and separately announcing their dismissal from the litigation, here) was ECI Telecom Ltd., a major shareholder of ECtel during the class period. Sadly, ECI's press release contains no similar justification, but presumably, they also mounted a vigorous defense.

Judge Roger W. Titus previously appointed Leumi Gemel Ltd. as lead plaintiff and Glancy Binkow & Goldberg LLP and the Law Offices of Jacob Sabo as appointed lead counsel. Cohen, Milstein, Hausfeld & Toll, P.L.L.C. was appointed as liaison counsel.

According to Bank Leumi's 2004 Annual Report, Leumi Gemel Ltd. is a wholly owned subsidiary and:

manages provident funds for the self-employed, provident funds for salaried employees, central funds for severance pay and a fund for the payment of sick pay and Psagot Ofek [Israel's leading investment house]

As an aside, ECI Telecom, Ltd. (NASDAQ: ECIL), the ECtel shareholder named as a defendant in this litigation, settled a prior securities class action alleging that the company fraudulently engaged in a premature revenue recognition scheme, which violated both Generally Accepted Accounting Principles and ECI's own accounting policies. That case settled in 2002 for $21.75 million.

Thanks to an anonymous reader for sending in the ECtel press release.

Bally Total Fitness Securities Class Action Dismissed

Bally Total Fitness Holding Corporation (NYSE: BFT), the largest commercial operator of fitness centers, announced today that the consolidated securities class action pending against the company and several of its current and former officers in the United States District Court of the Northern District of Illinois, was dismissed last week.

The dismissal was without prejudice, and Senior District Judge John F. Grady gave the plaintiffs until August 14, 2006 to file an amended complaint.

A copy of the court's opinion is available here.

The company's former outside auditor, Ernst & Young, LLP, was also a defendant in the litigation. E&Y's motion to dismiss was also granted.

Cosmos Investment Company, LLC was previously appointed the lead plaintiff and Berger & Montague, P.C. and Much Shelist, Freed, Denenberg, Ament & Rubenstein P.C. were appointed lead and liaison counsel, respectively. The Court's order appointing Cosmos as lead plaintiff is available here.

The individual defendants in the litigation were Lee S. Hillman Bally's Chief Executive Officer, President, and Chairman of the Board until December 2002, John W. Dwyer, Bally's former Chief Financial Officer, Executive Vice President, and a member of Bally's Board of Directors, and Paul A. Toback, Bally's current Chief Executive Officer, President, and Chairman of the Board.

Bally's operates more than 400 company owned and franchised facilities in 29 states, Mexico, Canada, Korea, China and the Caribbean.

Options Backdating Revelations - Far from Over

An article in today's New York Times reports that "[m]ore than 2,000 companies appear to have used backdated stock options to sweeten their top executives' pay packages."

The article is based on a newly released study, What Fraction Of Stock Option Grants To Top Executives Have Been Backdated Or Manipulated?, by Professors Erik Lie (Henry B. Tippie College of Business, University of Iowa) and Randall A. Heron (Kelley School of Business, Indiana University - Indianapolis).

According to the Times, the study's authors used information from the Thomson Financial Insider Filing database of insider transactions reported to the Securities and Exchange Commission, to examine nearly 40,000 stock option grants from January 1, 1996 through December 1, 2005 to top executives at more than 7,700 companies.

The article goes on to note:

The findings were based on an analysis of whether share values increased or declined after option grant dates. "Half should be negative and half should be positive," said Professor Lie. "That's the underlying logic."

But the analysis revealed that the distribution was shifted upward.

"This is not random chance. It's something that's manipulated, clearly," said Professor Lie.

The study concluded that before Aug. 29, 2002, 23% of unscheduled grants - as distinguished from grants that companies routinely schedule annually - were backdated.

On that day, revisions to Rules 16a-3, 16a-6 and 16a-8 under the Securities Exchange Act of 1934 took effect, and the SEC began requiring executives to report stock option grants they receive within two business days.

According to the study, after the enactment of the enhanced reporting requirements, "the backdating figure declined to 10 percent of unscheduled grants."

While approximately 5 dozen companies have already disclosed that they: 1) are the targets of government investigations; 2) are the subject of investor lawsuits; or 3) have conducted internal audits involving the practice, this new study estimates:

that 29.2 percent of companies have used backdated options and 13.6 percent of options granted to top executives from 1996 to 2005 were backdated or otherwise manipulated

It appears that all of the options backdating taskforces will have their hands full.

Vigorous Defense, Again

According to news reports here (Austin Business Journal) and here (Austin American-Statesman), a class action lawsuit has been filed in Travis County District Court challenging the proposed acquisition of Encore Medical Corporation (NASDAQ: ENMC) by a subsidiary of Blackstone Capital Partners V L.P.

The American-Statesman article has a quote from Harry L. Zimmerman, Encore's Executive Vice President and General Counsel. Regular readers can guess what Mr. Zimmerman said:

The lawsuit is baseless and without merit, and we will vigorously defend it.

If only it was in a press release. . .

The deal, valued at approximately $870 million, was announced on June 30.

Encore Medical is a diversified orthopedic device company that develops, manufactures and distributes a range of orthopedic devices, including surgical implants, sports medicine equipment and products for orthopedic rehabilitation, pain management and physical therapy.

Blackstone Capital Partners V is one of the world's largest private equity funds, having raised over $15.6 billion in 2006.

The American-Statesman article indicates that Willie C. Briscoe of Provost Umphrey Law Firm LLP is counsel for plaintiff Louis Dudas in the litigation. According to the firm's website:

Although the Texas Board of Legal Specialization has certified only 10% of lawyers in Texas, every Senior Partner at Provost Umphrey Law Firm is Board Certified in Personal Injury Trial Law.

We can only assume that they will vigorously prosecute the litigation.

Parlux, Part Deux

According to a press release and an 8-K filed by the company this week, the offer to acquire all of the outstanding shares of common stock of Parlux Fragrances, Inc. (NASDAQ: PARL) by the company's CEO, Ilia Lekach, has been withdrawn.

This will likely largely moot the controversy raised in the class and derivative cases discussed in my prior post on Parlux here, so in all likelihood, we will never know if Parlux intended to raise a vigorous defense. I have posted about the vigorous defense phenomenon (and some interesting permutations) here, here, and here.

But our story doesn't end there. According to this post from the WSJ Law Blog:

Yesterday . . . the Miami Herald reported that six of the seven company directors, including the CEO and CFO, sold Parlux stock in big chunks back in February, when the stock was at or near its all-time high. Since then, the stock price has been cut in half

If the prior cases did not include allegations relating to this unusual trading foresight (and given the timing of the company's disclosure, they probably did not), it is likely that they will soon be amended. So as one controversy subsides without a vigorous defense, another rises in its place.

As an aside, Parlux has posted on their website the following policies:

• Code of Business Conduct and Ethics (here);
• Code of Ethics For Executive And Financial Officers (here)
• Insider Information And Trading policy (here)

Copies of other pertinent corporate governance policy documents are also available here.

DHB Settles Class and Derivative Litigation for $40 Million

DHB Industries, Inc. (OTC: DHBT) has announced the settlement of both the securities class action and derivative suits pending in the United States District Court for the Eastern District of New York before Judge Joanna Seybert.

The class action will be settled for $34.9 million in cash, plus 3,184,713 shares of DHB common stock. The derivative action will be settled in consideration of DHB adopting certain corporate governance provisions and paying $300,000, as attorneys' fees and expenses to lead counsel in the derivative action.

According to this Reuters article, "the settlement also includes the removal of Chief Executive David Brooks and other executives from the company's board." It is not clear if these removals are the "corporate governance" changes that result from the settlement of the derivative action.

Brooks was placed on leave earlier this week and according to the Reuters article "is expected to help fund DHB's payments by exercising 3 million warrants. Additionally, DHB can require Brooks to purchase 3 million shares of its common stock to finance the remaining portion of the company's cash settlement."

Lead plaintiffs in the class action are RS Holdings, the NECA-IBEW Pension Trust Fund, and George Baciu. Co-Lead Counsel in the class action are Labaton Sucharow & Rudoff LLP and Lerach Coughlin Stoia Geller Rudman & Robbins LLP.

From a review of the docket, it appears that the settlement comes after the motions to dismiss were fully briefed, but before the Court had ruled on those motions.

DHB is a manufacturer of:

technically advanced bullet and projectile resistant garments, bullet resistant and fragmentation vests, bomb projectile blankets, and related ballistic accessories and technologies for the United States Military and Law Enforcement Agencies.

Wearing them instead of selling them might have been a good idea for Mr. Brooks, if you ask me.

ADDITION: An alert reader (is there any other type?) pointed out this article which dubs Mr. Brooks a "War Profiteer" and indicates that the bat mitzvah Mr. Brooks threw for his daughter in late 2005 cost an estimated $10 million. Flown in by private jet to perform for the affair - Aerosmith, Tom Petty, Don Henley and Joe Walsh, who performed with Fleetwood Mac's Stevie Nicks, Kenny G, 50 Cent, and Ciara. He apparently can afford it, having received more than $70 million in compensation in 2004 alone.

ADDITION: The 10b-5 Daily and the WSJ Law Blog have posts on the settlement, here and here, respectively.

Showdown at the Options Backdating Taskforce Corral

According to a post today from WSJ Law Blog, Proskauer Rose LLP has announced the creation of a "Stock Options Task Force." The "special, multi-disciplinary" group of lawyers will work with companies in all matters relating to stock option-related issues.

While it probably wouldn't qualify as a replacement for professional wrestling, now we have the makings of a showdown.

As noted here last month, the plaintiff-side firm of Kahn Gauthier Swick, LLC announced the creation of their own "Options Pricing Investigations Division."

As an aside, I had forgotten that the former "World Wrestling Federation" had been forced to change their name to "World Wrestling Entertainment" after losing an intellectual property case earlier this decade to the World Wildlife Fund.

ADDITION: The D&O Diary also has a post on this showdown.

Securities Litigation and Its Lawyers, Perfect Together

Professors Stephen J. Choi (New York University School of Law) and Robert B. Thompson (Vanderbilt University School of Law) have authored a paper Securities Litigation and Its Lawyers: Changes During the First Decade After PSLRA that contains a fairly interesting analysis of the post-PSLRA behavior of class action firms and their institutional investor clients.

Dividing the decade since the PSLRA went into effect, the article bisects the intervening years into two periods:

the immediate several years right after the enactment of the PSLRA, where law firm behavior likely reflected the need to find a plaintiff or group of plaintiff with the largest financial stake, likely outside the group of institutional investors who initially remained on the sidelines (the "initial" post-PSLRA period)

and

the years after the initial several years (2000 and beyond) where plaintiff law firm behavior reflected the need to respond to institutional investors as they came to play a greater role as lead plaintiffs (the "mature" post-PSLRA period).

In the former period, the authors found that so-called "top plaintiff law firms" (as determined by settlement values obtained in a sampling of pre- and post-PSLRA cases) were more likely to join together with lower ranked law firms compared with the pre-PSLRA period.

Their hypothesis:

First, the need to create a large group of lead plaintiffs (at least where institutional investors do not act as lead plaintiffs) may lead law firms to join with lower ranked law firms that bring specific lead plaintiffs to the group . . . Second, severe limits on discovery prior to the hearing on the motion to dismiss in the post-PSLRA period increased the importance of diversification as a motive in joining with other law firms. To the extent diversification simply requires other firms willing to help pay the costs of pursuing any particular litigation, we predict that an increased diversification motivation will lead to less discriminate pairing among plaintiffs law firms.

There is much more in this draft article, but it will have to wait for another day.

One last note, though. The article states:

There has been a substantial increase in participation of public pension firms, a group that includes well-known public employees' funds such as Calpers, NYCERS and funds related to various unions. At the same time, there has not been any substantial involvement by private investors, such as mutual funds, banks, and insurance companies.

This is the same fallacy that I have been on a quixotic quest to banish from the kingdom, as detailed in prior posts here, here, and here.

Listen up academia - Mutual funds can and do serve as lead plaintiffs in private securities litigation. You've been warned.

As an aside, Choi and Thompson provide a cogent analysis of one of the potential disincentives for private institutional investors to serve as lead plaintiffs, noting:

In a world where investment manager performance is regularly measured by relative returns, the possibility of competing managers' free riding on your efforts, or the comparative option of your free riding on other investors operates as a disincentive to participate as a lead investor.

Food for thought.

Apologies for the title to former New Jersey Governor Tom Kean.

Diversity Training

Late last month, Magistrate Judge Franklin Noel ordered counsel in the UnitedHealth Group Inc. (NYSE: UNH) derivative litigation to provide:

information concerning the minority and gender membership in your respective law firms, and on the proposed leadership team.

and:

a statement advising the Court of any legal-ethical issues raised concerning each individual attorney, and that attorney's law firm in the past ten years.

The AP has a story on the Judge Noel's order, here and The Volokh Conspiracy has a post here.

While a number of firms had filed motions seeking appointment as lead counsel, only two groups of firms filed a response to Judge Noel's order. They took slightly different tacks, though.

As an aside, neither response took issue with the use of the term "gender" as opposed to "sex" to describe the information the Court sought. There is a difference, as noted in Encyclopædia Britannica's definition of gender identity. Gender is:

an individual's self-conception as being male or female, as distinguished from actual biological sex. For most persons, gender identity and biological characteristics are the same. There are, however, circumstances in which an individual experiences little or no connection between sex and gender.

Back to the business at hand.

The firms of Chestnut & Cambronne, P.A. and Shapiro Haber & Urmy LLP comprise one group, and represent Jan Brandin, the first plaintiff to file a derivative complaint.

Having been given little guidance by Magistrate Noel as to how inclusive the response was to be, the response filed by Chestnut & Cambronne and Shapiro Haber & Urmy, categorized and specifically identified the attorneys working on the litigation in a number of ways, including their gender and sexual orientation.

The other group to file a response to Magistrate Noel's order, represents the "Pension Fund Group" and includes the firms of Bernstein Litowitz Berger & Grossmann LLP and Grant & Eisenhofer, P.A.

The Pension Fund Group's response included statistical information on all of the employees at both firms as well as a breakdown of the attorneys, noting the number and percentage of each group that "identify themselves as members of racial or ethnic groups commonly described as 'minorities' in the United States." While noting that certain attorneys at Bernstein Litowitz are openly homosexual, the Pension Fund Group's response did not specifically identify those attorneys.

Another interesting note.

Judge Noel's order also requested information on the "makeup of previous steering committees to which [the firms] have been assigned."

Both Bernstein Litowitz and Grant & Eisenhofer indicated in their response that they had not served in any capacity on a "steering committee," as they regularly serve only in the capacity of either lead or co-lead counsel.

For those lead plaintiff junkies out there (all three of you), the Pension Fund Group is composed of:

• St. Paul Teachers' Retirement Fund Association
• Public Employees' Retirement System of Ohio
• State Teachers' Retirement System of Ohio
• Public Employees' Retirement System of Mississippi
• Jacksonville Police & Fire Pension Fund
• Louisiana Municipal Police Employees' Retirement System
• Louisiana Sheriffs' Pension & Relief Fund
• Fire & Police Pension Association of Colorado
• The Connecticut Retirement Plans And Trust Funds

Note - The responses and Judge Noel's order are being hosted by FileDEN, a free hosting service - please let the author know if you have any trouble accessing those documents.

Sarbanes-Oxley For Dummies - Really!

While catching up on some long overdue reading, an article in the May 2006 issue of CFO Magazine alerted me to the availability of a laugh-out-loud book title, Sarbanes-Oxley For Dummies.

I was further delighted to see that it is the best selling Sarbanes-Oxley related book on Amazon.

The author, Jill Gilbert Welytok, is a CPA and a practicing attorney, and is the author of a host of other books, including the QuickBooks Bible and The Online Investing Bible.

And Welytok's Amazon profile lists another laugh-out-loud book as one of her favorites - Captain Underpants and the Wrath of the Wicked Wedgie Woman.

All joking aside, her Sarbanes-Oxley book has received excellent reviews at Amazon.

ADDITION - If you intend to buy this book (and I won't judge you), I urge you to visit Amazon through the following link:




This benefits, OBG Cocker Spaniel Rescue, an all-volunteer non-profit animal rescue organization based in Washington DC that is dedicated to the rescue, medical care, rehabilitation and placement by adoption of homeless and/or abandoned cocker spaniels and cocker spaniel mixes to good homes in the Mid-Atlantic region.

We adopted Norm, our 4 year-old cocker spaniel last July through OBG.

International Institutional Investor "Arms Race"

One of the newer trends in the securities class action arena is a rise in the profile of foreign plaintiffs in US litigation.

Adding to this trend is the increasing emphasis that plaintiff side firms have placed on solidifying their relationships with foreign institutional investors and outside counsel for those investors.

Earlier this year, Labaton Sucharow & Rudoff LLP issued a press release announcing a joint alliance with the TILP Group, a German based firm with offices in Europe and the Middle East that represents private and institutional investors in Germany, Austria, Ireland and Luxembourg. A related announcement by TILP is available here.

The European invasion is being led by Labaton partner Eric J. Belfi, a recent addition to the firm, according to this release.

Other firms certainly represent international clients in securities class actions in the United States, but none have so publicly indicated that they are working together with foreign attorneys to prosecute securities class actions.

For example, Bernstein Litowitz Berger & Grossmann LLP represents the Ontario Teachers' Pension Plan Board in The Williams Cos. securities litigation and the Nortel Corp. securities litigation.

Lerach Coughlin Stoia Geller Rudman & Robbins LLP provides a list on their website of foreign institutional investors they represent, including The London Pensions Fund Authority, and UniSuper - a fund dedicated "exclusively to all who work in Australia's higher education and research sector."

Schiffrin & Barroway, LLP makes their website available in 17 languages (well 15 and two Chinese versions, but I'm not counting) and dedicates a specific part of their website and firm brochure to foreign institutional investors.

Not to be outdone, Cohen, Milstein, Hausfeld & Toll, P.L.L.C. also has an international practice area portion of their website and boasts that they have "affiliated offices in the United Kingdom, Italy, South Africa, Panama, Australia and China." Sadly though, the "International Securities Case" page is "Coming Soon."

Cohen Milstein is also among the growing group of American class action firms that sponsor, speak at, and attend international pension fund summits such as the European Pension Investment Forum and the UK & Irish Pension Summit.

Hypercom Complaint Dismissed (Again)

Today, Hypercom announced the dismissal with prejudice of the Second Consolidated Amended Class Action Complaint filed against the company and its former Chief Financial Officer, John W. Smolak. The litigation was pending in the District of Arizona.

A copy of the second amended complaint is available here.

According to another release from the company, the prior complaint was dismissed with leave to amend, back on January 25, 2006.

Co-lead counsel are Schiffrin & Barroway, LLP and Cohen Milstein Hausfeld & Toll, P.L.L.C.

Yet Another Press Release Permutation

It appears that someone forgot to send the vigorous defense memo to Parlux Fragrances, Inc.

According to a press release issued by the Fort Lauderdale-based fragrance maker and distributor, the company was recently served with both a shareholder's class action complaint and a derivative complaint, both filed in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida. The derivative complaint was filed by the NECA-IBEW Pension Fund.

Both the derivative and class cases relate to a proposal, detailed in Parlux's June 14, 2006 Form 8-K, ) from the company's CEO, Ilia Lekach, to acquire all of the outstanding shares of common stock of Parlux. As noted here, this is not the first time that Lekach has attempted to take the company private.

Parlux's release goes on to state that:

Parlux and the other named defendants have engaged experienced Florida securities counsel and intend to respond to the Class Action and the Derivative Action in a timely manner, but Parlux believes that the Class Action and the Derivative Action are without merit.

Be that as it may, enquiring minds want to know if the defendants will mount a vigorous defense?

As an aside, it is with some sadness that I note, according to Wikipedia, the National Enquirer has dropped that famous catchphrase.

Merrill Lynch Settles Enron Bankruptcy Claims

According to press reports here (AP via Yahoo! Finance) and here (MarketWatch) Merrill Lynch & Co. will pay $29.5 million to settle claims asserted against it by Enron Corp. as part of the so-called MegaClaims litigation in the bankruptcy court.

In addition, Merrill Lynch agreed to drop approximately $74 million of claims that it had asserted in the bankruptcy proceeding against the Enron estate.

Merrill Lynch remains a defendant in the Enron securities class action, currently pending in the Southern District of Texas and set for trial on October 16, 2006.