I've Moved!

I have started a new financial services boutique, TXT Capital, that focuses on serving the needs of institutional investors with regard to securities litigation issues.

Our primary service, Institutional Liquidity Solutions(SM), allows pension funds to rapidly monetize their portfolio recoveries.

We also offer a variety of other securities litigation related services, such as:

- RFP consulting, design, and evaluation.

- Independent case analysis (merits and/or losses) for lead plaintiff, opt-out, or settlement decisions.

Until our new website is fully operational, you can find me on LinkedIn or Twitter.

Pack Your Bags, We're Going to Lagos

The following was first published on 3/12 over at Securities Litigation Watch, my new blog.

If you want current postings and updates on the wide world of securities litigation, I encourage you to update your bookmarks and subscriptions.

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The SCAS Research team informs me that a securities class action has been filed against Cadbury Schweppes Plc's Nigerian subsidiary, Cadbury Nigeria Plc, in what is believed to be the first securities class action ever filed in Nigeria.

The class action relates to the revelations by Cadbury last December that it had discovered "a significant and deliberate overstatement of Cadbury Nigeria results, which had existed over a number of years” after increasing its stake in the Nigerian subsidiary.

The Times of London has a story, here.

One of the plaintiffs in the Nigerian class action is Nsongurua Udombana, a professor of international law at the University of Lagos. According to the Times, Professor Udombana and his fellow plaintiffs "are trying to see if we can establish a precedent and start something that could bring a revolution in corporate governance in Nigeria."

Though best known to many as the producer of the seasonally appropriate Cadbury Creme Egg, the company produces a host of well known brands, from Trident to Dr. Pepper. Cadbury also produces regional brands, such as Bournvita, the "biggest selling food drink in Nigeria."

The SCAS 50 for 2006

The following was first published on 3/6 over at Securities Litigation Watch, my new blog.

If you want current postings and updates on the wide world of securities litigation, I encourage you to update your bookmarks and subscriptions.

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For the fourth year, my company (ISS' Securities Class Action Services) has issued its "SCAS 50" report.

Based on data from the SCAS database, the SCAS 50 lists the top 50 plaintiffs' law firms ranked by the total dollar amount of final securities class action settlements occurring in 2006 in which the law firm served as lead or co-lead counsel.

The full report is available here.

2006's Top 10:

RANK	LAW FIRM	SETTLEMENT TOTAL	# OF SETTLEMENTS	AVERAGE
1	Lerach Coughlin Stoia Geller Rudman & Robbins	$7,307,050,000	30	$243,568,333
2	Bernstein Litowitz Berger & Grossmann	$2,634,765,298	9	$292,751,700
3	Heins Mills & Olson	$2,500,000,000	1	$2,500,000,000
4	Milberg Weiss & Bershad	$1,604,608,808	22	$72,936,764
5	Entwistle & Cappucci	$1,100,000,000	1	$1,100,000,000
6	Barrack, Rodos & Bacine	$960,000,000	1	$960,000,000
7	Kirby McInerney & Squire	$650,900,000	5	$130,180,000
8	Abbey Spanier Rodd Abrams & Paradis	$590,295,000	8	$73,865,625
9	Barrett & Weber	$410,000,000	1	$410,000,000
9	Waite, Schneider, Bayless & Chesley	$410,000,000	1	$410,000,000

First BanCorp Settles Securities Class Action

The following was first published on 3/5 over at Securities Litigation Watch, my new blog.

If you want current postings and updates on the wide world of securities litigation, I encourage you to update your bookmarks and subscriptions.

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Today, First BanCorp (NYSE: FBP) announced that it had reached an agreement in principle to settle the securities class action pending against the company and certain officers and directors in the United States District Court for the District of Puerto Rico for $74,250,000.

The Plumbers & Pipefitters Local 51 Pension Fund and two individuals are lead plaintiffs and Lerach Coughlin Stoia Geller Rudman & Robbins LLP and Zwerling Schachter & Zwerling are co-lead counsel in the First BanCorp securities class action.

A quick search of the SCAS database reveals that this is the largest securities class action settlement ever in the District of Puerto Rico.

It also appears that the the First BanCorp litigation is one of only two securities class actions filed in the District of Puerto Rico since the PSLRA was enacted. The other case, on behalf of shareholders in Pepsi-Cola Puerto Rico Bottling Co. (n/k/a PepsiAmericas, Inc. (NYSE: PAS)) was settled in 1997.

The District of Puerto Rico can now be added back to the list of Federal courts without an active securities class action.

Thanks to Werner Kranenburg (With Vigour and Zeal) for the tip.

Second Circuit Clarifies Primary Liability Standards for Auditors

The following was first published on 2/28 over at Securities Litigation Watch, my new blog.

If you want current postings and updates on the wide world of securities litigation, I encourage you to update your bookmarks and subscriptions.

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Earlier this week, the Second Circuit held that an auditor has a duty to correct its prior certified opinions, and may be held liable under § 10(b) and Rule 10b-5 if it fails to do so. The opinion appears to be the first in the Second Circuit to squarely hold that an accountant has such a duty or may be primarily liable under the federal securities laws.

A copy of the opinion in Overton v. Todman & Co., CPAs, P.C., is available from the Second Circuit, here, or from FindLaw (reg. req'd), here.

The opinion reverses a lower court decision dismissing a securities fraud claim against the auditor, and its successor in interest, Trien, Rosenberg, Rosenberg, Weinberg, Ciullo & Fazzari, LLP.

From 1999 through 2002, Todman audited the financial statements of Direct Brokerage, Inc. (“DBI”), a broker-dealer registered with the Securities and Exchange Commission and a member firm of the New York Stock Exchange. Each year, Todman issued its “unqualified” opinion that DBI’s financial statements accurately portrayed the company’s fiscal health.

Despite its certifications of accuracy, Todman was alleged to have made significant errors that concealed DBI’s largest liability, payroll taxes. The plaintiffs alleged that Todman ignored multiple red flags that cast serious doubt on the accuracy of DBI’s financial statements, and alleged a number of facts in support of their assertion that Todman recklessly audited DBI’s affairs and recklessly evaluated whether DBI could “survive as an ongoing concern.” Plaintiffs alleged that, in 2003, DBI’s payroll tax liability led to the broker-dealer’s collapse.

The Court surveyed its prior law on primary accountant liability and concluded:

that for many years we have recognized the existence of an accountant’s duty to correct its certified opinions, but never squarely held that such a duty exists for the purposes of primary liability under § 10(b) of the 1934 Act and Rule 10b-5. Presented with an opportunity to do so, we now so hold.

The Court held that the District Court erred in dismissing the fraud claim against Todman & Co., and that an auditor may have primary liability under § 10(b) and Rule 10b-5 for a failure to correct a prior audit opinion, when the accountant:

1. makes a statement in its certified opinion that is false or misleading when made;
2. subsequently learns or was reckless in not learning that the earlier statement was false or misleading;
3. knows or should know that potential investors are relying on the opinion and financial statements; yet
4. fails to take reasonable steps to correct or withdraw its opinion and/or the financial statements; and
5. all the other requirements for liability are satisfied.
   

The Court went on to note two limits to the holding.

First, the Court held:

that an accountant has a duty [only] to correct its prior certified statements, as opposed to a broader duty to update those statements. The duty to correct requires only that the accountant correct statements that were false when made. In contrast, the duty to update requires an accountant to correct a statement made misleading by intervening events, even if the statement was true when made.

Second, the Court noted:

that an accountant need correct only those particular statements set forth in its opinion and/or the certified financial statements. Unless an accountant exchanges its role for the role of an insider an accountant is under no duty to divulge information collateral to the statements of accuracy and financial fact set forth in its opinion and the certified financial statements, respectively.

The Court was clear to note that the Todman holding did not conflict with Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994), which held that there was no aiding and abetting liability under § 10(b), as the auditor in this litigation had acted as a speaker in a primary capacity.

A Fourth Circuit Judge Did What?

The following was first published on 2/21 over at Securities Litigation Watch, my new blog.

If you want current postings and updates on the wide world of securities litigation, I encourage you to update your bookmarks and subscriptions.

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First, the non-newsworthy part.

Yesterday, the United States Court of Appeals for the Fourth Circuit affirmed the dismissal of the consolidated securities class action pending against Cree, Inc. (NASDAQ: CREE), and six of the corporation's officers and directors. A copy of the Fourth Circuit's opinion is available here.

The dismissal itself (and certainly the affirmance by the Fourth Circuit) is not the big news. A quick review of the SCAS database reveals that fully 50% of the federal securities class actions filed within the Fourth Circuit since the PSLRA was enacted have been dismissed.

The big news is the dissent in the Cree litigation, authored by Judge Dennis W. Shedd.

Judge Shedd takes issue with the scienter analysis performed by both the District Court and the majority. In his words:

The majority approach to testing the adequacy of the Complaint examines in isolation each individual suspect transaction in order to ascertain whether the elements of securities fraud have been adequately pled with respect to each one. However, this approach ignores the fact that this case revolves around a single securities fraud action against a single company, Cree.

Judge Shedd goes on to write:

the Complaint does not-and need not-allege an action for securities fraud with respect to all six companies with which Cree dealt. Instead, the Complaint alleges a single cause of action for securities fraud, as evidenced by many transactions with multiple companies. If even one of these transactions is pled adequately enough to meet the pleading requirements under the PSLRA and Rules 8 and 9, the cause of action must survive the motion to dismiss. Moreover, if the totality of Cree's actions reveals a larger picture of fraud sufficient to meet the necessary pleading requirements, this case must advance beyond the current stage of the proceedings

Judge Shedd also takes issue with the analysis adopted by the majority regarding the standards to be applied to so-called "confidential sources." Such information sources, typically former employees or customers of the corporate defendant are a common investigative and pleading technique used by plaintiffs to meet the pleading standard imposed by the PSLRA.

The majority adopted the standard employed by the Seventh and Second Circuits in Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588 (7th Cir.2006) and Novak v. Kasaks, 216 F.3d 300 (2d Cir.2000), respectively. Under that analysis, a complaint which relies on confidential sources must allege facts sufficient "to support the probability that a person in the position occupied by the source would possess the information alleged."

Judge Shedd, in his dissent disagrees with the adoption of the Tellabs/Novak standard, noting:

I would resolve the issues surrounding unnamed sources differently because the approach adopted by the majority does not inhere in the plain language of the PSLRA. The plain language of the PSLRA does not subject unnamed sources to higher scrutiny than other averments made upon information and belief. Accordingly, in my view, a complaint must simply identify unnamed sources "with particularity," as required by the plain language of the PSLRA, which might include the source's job title and years of employment, or possibly, other facts sufficient to support a reasonable belief that the plaintiff did not merely invent sources. The purpose of the PSLRA's particularity requirement is to prevent the fabrication of information, not to weigh its reliability or credibility.

The Teachers' Retirement System of Louisiana is the lead plaintiff and Grant & Eisenhofer, P.A. are lead counsel in the Cree litigation.

A Gentle Rebuttal to Prof. Grundfest

The following was first published on 2/13 over at Securities Litigation Watch, my new blog.

If you want current postings and updates on the wide world of securities litigation, I encourage you to update your bookmarks and subscriptions.

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Last week, in a widely-circulated and much discussed Wall Street Journal op-ed column entitled “The Class Action Market” (here, sub. req'd), former SEC Commissioner and current Stanford Law Professor Joseph Grundfest suggested that private securities class actions have lost their utility in policing the securities markets and compensating investors.

I respectfully disagree with Prof Grundfest.

And so, apparently do the Department of Justice and the Securities and Exchange Commission.

In a little noticed amicus brief filed last Friday by the DOJ and the SEC in the Tellabs, Inc. v. Makor Issues & Rights, Ltd. appeal before the U.S. Supreme Court, the federal regulators noted:

Meritorious private actions are an essential supplement to criminal prosecutions and civil enforcement actions brought, respectively, by DOJ and the SEC.

Prof. Grundfest also suggests that private securities litigation is "virtually useless as means of compensating investors for their losses."

Investors in AOL or Time Warner securities would also probably disagree with Prof. Grundfest.

The private securities class actions involving AOL Time Warner settled for $2.5 billion. Time Warner settled with the federal regulators for a small fraction of that amount - $150 million to the Department of Justice and $300 million to the United States Securities and Exchange Commission. While the combined $450 million in federal regulatory settlements is not chicken feed, it is only 18% of the amount recovered in the private class action.

And the AOL case represents two of the largest payments ever made by a corporate defendant to the federal government to settle securities fraud related allegations. In many private cases, there are no state or federal penalties or disgorgements to compensate investors. For example, in the Williams Securities Litigation:

1. The company had not restated their financial statements.
2. No governmental investigation had uncovered any fraud.
3. No employees of the corporate defendants had been fired
4. Defendants never acknowledged that any improper conduct had occurred.

Yet the private securities class litigation was able to recover a substantial sum for investors, settling in 2006 for $311 million.

Expect more chatter on Prof. Grundfest's proposal during the next few months.