The South Shall Write Law Review Articles Again

Professors James D. Cox (Duke) and Randall S. Thomas (Vanderbilt) are at it again.

After co-authoring two seminal articles on the failure of institutional investors to file claim forms in securities cases (see my earlier post here), they have posted a draft of their latest paper, An Empirical Analysis Of Institutional Investors' Impact as Lead Plaintiffs in Securities Fraud Class Actions, here.

Prof. Cox and Thomas write that they were shocked to find that:

the ratio of settlement amounts to estimated provable losses - which is the most important indicator of whether investors are being compensated for their damages - was statistically significantly lower in the post-PSLRA period. In other words, after the passage of PSLRA investors appear to be worse off because they are recovering a lower percentage of their losses in the cases in our sample. (emphasis added)

Their conclusion:

One possible interpretation of this finding is that Congress should repeal PSLRA in its entirety if it wishes to help defrauded investors. (emphasis added)

A few more interesting tidbits from the draft paper:

Our results show that after controlling for estimated losses, market capitalization of defendant firms, the length of class period and the presence of parallel SEC actions, the dollar amount of post-PSLRA settlements are not statistically significantly different from those in the pre-PSLRA cases in our sample. (emphasis added)

Given that the class periods were often shorter in the pre-Sarbanes-Oxley days (with the shorter statutes of limitations and repose) and that the SEC recently has been aggressively pursuing fraud cases I'm not sure that the controlled-for conclusion actually produces an apples to apples comparison that has much non-academic meaning.

They went on to write:

[W]e find that institutions are more likely to become lead plaintiffs in cases involving larger provable losses, with longer class periods, with larger defendant firms, and when there is a parallel SEC enforcement action. In other words, institutional investors are selecting the biggest cases in which to appear as lead plaintiffs. (emphasis added)

I think that they go on to capture most of the logic behind this - namely that there is little incentive and potentially high (relative) costs for institutions to participate actively in smaller cases. There is another reason that they did not give - many institutions prohibit their investment advisors from trading in stocks that trade below a certain threshold dollar amount or from holding too large a percentage of the outstanding equity of a single company. Thus many institutions have no holdings in the "smaller cases" involving lower priced stocks, and thus are not eligible to file a lead plaintiff motion.

Prof. Cox and Thomas further found:

the presence of an institutional lead plaintiff improves the securities fraud settlement, even holding constant estimated provable losses, firm market capitalization, the length of class period, and the presence of an SEC enforcement action. This result suggests that the trend toward more institutional investor lead plaintiffs should have a positive effect on settlement size in securities fraud cases. (emphasis added)

And lastly:

we find no recorded case where a bank, mutual fund or insurance company has served as a lead plaintiff in a securities class action.

This last one, I predictably take issue with. In my prior posts, here, here, and here, I collected more than a dozen instances of mutual funds moving for appointment as lead plaintiffs.

Renewal of SLW's "Vigorous Challenge"

According to a press release issued this morning:

Pixelplus Plans to Vigorously Defend Against Recently Filed Class Action Lawsuit

Some readers may recall that way back in August 2004, Bruce Carton issued a challenge in Securities Litigation Watch. Noting defendants "apparently unanimous use of the word 'vigorous' for these 'denial' press release[s]," Bruce pondered:

So I ask: is there some other word that can be used for this purpose, if only to mix things up once in a while? Or are we stuck with "vigorous" from here on out?

Well, given that news of Bruce's challenge apparently has not yet reached the four corners of the Earth, or foreign companies such as Pixelplus Co. Ltd., are simply choosing to thumb their nose at Bruce, I hereby renew the challenge. So, crack open those thesauri and let's choose a new word.

I'm voting for peppy.

IPO - Are the Dominoes Starting to Fall?

According to press reports here (AP via Law.com) and here (W$J) JPMorgan Chase & Co., has agreed in principle to pay $425 million to settle claims brought against it in the In re Initial Public Offering Sec. Litig., pending before Judge Shira A. Scheindlin in the Southern District of New York.

The so called "IPO Allocation" cases allege (as summarized here by the 10b-5 Daily) that the issuers and/or underwriters:

manipulated the market with optimistic research; ramped up trading commissions in exchange for access to IPO shares; and that investors allocated IPO shares were required to buy shares in the after-market to help push up the share price.

JPMorgan is the first of the 55 investment banks to settle. No word on whether JPMorgan's decision to be the first to settle was impacted by their prior decision in the WorldCom litigation, to reject an early settlement offer, a move that resulted in JPMorgan later agreeing to pay $2 billion - $630 million or 46% more than the earlier, rejected settlement offer. For a thorough article on the settlement process in WorldCom see Breaking the Banks - The Inside Story of the $6.1 billion WorldCom Settlement, the cover story of Litigation 2005, a supplement to The American Lawyer and Corporate Counsel.

The JPMorgan settlement in the IPO cases follows a June 2003 settlement with the issuers and individual defendants that guaranteed a "floor" for later settlements of $1 billion.

Plaintiff's counsel in the IPO cases have set up a website here, with copies of the amended complaints and many of the other pleadings.

Ohio State Retirement Funds - 1; Secondary Mortgage Finance Lenders - 0

Today Freddie Mac announced a settlement of the securities class actions and derivative litigation that was filed following the company's restatement of financial results for the years 2000 through 2002.

According to the release:

The proposed settlement of these actions includes a cash payment by Freddie Mac of $410 million. The settlement is also based on corporate governance reforms instituted by the company under its current management. The settlement does not include any admission of wrongdoing by the company.

The Ohio Public Employees Retirement System (OPERS) and the State Teachers Retirement System of Ohio (STRS) were appointed as lead plaintiff in the Freddie Mac litigation.

OPERS and STRS are also currently serving as lead plaintiff in the Fannie Mae litigation.

Visual Aids

Earlier this month, Lead Plaintiffs RH Capital Associates LLC and Pacific Investment Management Company LLC filed a Consolidated Class Action Complaint in the In re Refco, Inc. Sec. Litig., pending before Judge Gerald Lynch in the Southern District of New York.

The complaint, at 226 pages and 636 paragraphs is certainly not short. Indeed, as discussed by Prof. Christopher M. Fairman in several articles, including The Myth of Notice Pleading, 45 Ariz. L. Rev. 987 (2003), some courts would label the Refco complaint as "prolix" and dismiss it for failure to comply with Rule 8.

To assist readers in following the tale of Refco's spectacular collapse, Plaintiffs attached two useful exhibits to the complaint:

- A nine page "Glossary of Certain Key Terms" that appears to include all of the short form references from the complaint together with a brief definition; and

- A "Reference Chart for Claims" outlining which of the fourteen separate counts are brought against which of the defendants or groups of defendants.

I humbly suggest that future pleaders in complex cases consider submitting similar exhibits with their amended complaints.

Are Blogs Having an Impact on Legal Scholarship?

The Berkman Center for Internet & Society at Harvard Law School is hosting a symposium on April 28, Bloggership: How Blogs Are Transforming Legal Scholarship.

I think the answer has to be dramatically. For those that have not looked at it yet, I recommend 3L Epiphany. It is a blog written by Ian Best, a 3L at Moritz College of Law (Ohio State University) for academic credit. Among other useful posts, he has created A Taxonomy of Legal Blogs, a fairly comprehensive list of legal blogs organized by topic, discipline, etc. Recently, he posted A Collection of Law Review Articles Citing Legal Blogs, a 27-page collection of law review articles and state bar journals which cite legal blogs.

Among the panelists at the Harvard symposium will be Howard Bashman, author of How Appealing, "The Web's first blog devoted to appellate litigation," and Peter Lattman, principal contributor to the Wall Street Journal’s Law Blog.

The papers presented at the symposium will be available here.

Corporate Governance Lit. Review

No, it's not an elective for third year law students.

It's a recent roundup of "academic studies, scholarly articles and reports of interest to institutional investors" on corporate governance posted here on the Corporate Governance Blog, the sister blog in the Institutional Shareholder Services' family to Bruce Carton's Securities Litigation Watch.

ADDITION - Another one of the articles mentioned in the review, "The Case for Increasing Shareholder Power," Lucian A. Bebchuk, Harvard Law School, Harvard Law Review, Volume 118, Nr. 3, January 2005, is available online, here.

Motion Practice and Frontier Justice

It's more than a little off topic, but I couldn't resist. The Tennessee Business Litigation Law Blog put us on to this "Motion for Fist Fight" filed by a criminal defendant.

The County Attorney for Mineral (Montana) took but a single day to oppose the motion. The opposition is in the same file above, following the motion.

It appears that frontier justice will not be swift today, but on the plus side the County Attorney does offer a free notary service.

Grave Doubts and Absurdity

If the Federal Rules of Civil Procedure were applicable to judicial opinions, few would have the temerity to argue that Judge Scheindlin was in violation of Rule 9 when she opines on the federal securities laws.

In this recent ruling in the In re eSpeed, Inc. Sec. Litig. , 05 Civ. 2091 (S.D.N.Y.), Judge Scheindlin has written an extensive overview of the state of the federal securities laws today.

While ultimately dismissing the complaint for failing to adequately allege scienter and finding that the complained of statements were either mere puffery or covered by the bespeaks caution doctrine, there are several interesting passages in the Opinion.

First, while Judge Scheindlin dismissed the complaint, she granted plaintiffs leave to replead. Normally a non-event, Judge Scheindlin added some drama, noting:

I grant leave to replead with some reluctance. After reviewing the pleadings in this case, I harbor grave doubts as to whether plaintiffs can ever allege facts sufficient to survive a motion to dismsiss . . . plaintiffs should not file an amended Complaint unless they reasonably believe that the deficiencies identified in this Opinion can be addressed.

Second, the Court held that the complaint was not time-barred and noted that Defendants argument:

that plaintiffs could have drafted the complaint based on an article published in November 2002, before [the product at issue] was even launched, is absurd, as the Complaint alleges specific misrepresentations [made after that article was published].

And as the case does have an analysis of loss causation under Dura, be on the lookout for The PSLRA Nugget to weigh in.

The Supremes & SLUSA - Round II

As detailed by the 10b-5 Daily here and here, the Supreme Court will here oral argument on April 24 in Kircher v. Putnam Funds Trust, the second Securities Litigation Uniform Standards Act of 1998 (SLUSA) case to be heard by the Court this term.

Most of the Amicus briefs filed in the case are now available online.

The Washington Legal Foundation's brief is here.

The Securities Industry Association and the Bond Market Association filed a joint brief available here.

The U.S. Chamber of Commerce's brief is here.

The brief filed by law professors Arthur R. Miller, E. Farish Percy, Michael E. Solimine, and Jill E. Fisch does not appear to be available yet online.

Just to complete the list, the petitioners' brief is available here and the respondents' brief is available here.

Spring Cleaning

Some may chalk it up to spring cleaning by the judiciary resulting in a spate of dismissals clustered during the same period. Others may suggest that defendants were simply tired of plaintiffs having all the fun with press releases.

In either event, in what I perceive to be a trend, there has been a recent avalanche of press releases from companies announcing the dismissal of the putative securities fraud class actions filed against them.

During the past two weeks alone, I have noticed the following half dozen announcements from issuers:

3/30 - Court Dismisses Purported Securities Class Action Lawsuits Against Belo, Individuals

3/31 - Career Education Corporation Announces Favorable Ruling in Securities Class Action Litigation

3/31 - Court Dismisses Class Action Securities Litigation Against Administaff

4/1 - Class Action Against Nokia Dismissed in its Entirety

4/3 - Judge dismisses suit against Teco

4/4 - Stonepath Granted Motion to Dismiss in Class Action Lawsuit

What I have not seen, yet, is an avalanche of announcements (like this one from Cooley Godward) from law firms that have successfully defended their clients in these cases.

ADDITION - The PSLRA Nugget has a post on the underlying decision in the Belo Corp. litigation.

When is a group really a group?

One of the many unsettled questions under the PSLRA is the ability of individuals or groups that timely filed lead plaintiff motions to combine themselves into a new group after the expiration of the sixty day period for filing lead plaintiff motions.

In the Able Labs litigation, eight different groups or individuals filed timely lead plaintiff motions. Of the original movants, an individual had the largest alleged losses. Subsequent to the expiration of the sixty day period, two institutional investors that had separately and timely moved for appointment sought to combine as a group. When combined, those two entities, the Denver Employees Retirement Plan and Deka International (Ireland) Ltd. , had slightly larger losses than the individual.

Judge Greenaway in addressing the objections of the individual to allowing the after-formed group looked to the Third Circuit's decision in In re Cendant Corp. Litig., 264 F.3d 201 (3d Cir. 2001). Judge Greenaway noted that the Court (as directed by Cendant) is to examine "the way in which a group seeking to become lead plaintiff was formed or the manner in which it is constituted would preclude it from fulfilling the tasks assigned to a lead plaintiff." Id. at 266. He went on to note:

Essentially, the Third Circuit disapproves of groups that are created by counsel in an effort to satisfy the largest financial loss requirement. If the court concludes that the group was created by counsel rather than class members, then 'the court should disqualify that movant on the grounds that it will not fairly and adequately represent the interests of the class.'

Finding that there was ample evidence in the record that the formation of the Deka / DERP group was not driven by counsel, and that the individual had not rebutted the presumption afforded to the newly-formed group, Judge Greenaway appointed the two institutions as lead plaintiff and approved their choice of counsel.

The Able Labs opinion is available here (ECF registration required, but no charge for viewing opinions)

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.