Press Releases as "Mini" Lead Plaintiff Motions

Earlier this month, I noted the emerging trend of lead plaintiff movants and their counsel issuing pre-emptive press releases.

The trend has taken a new turn. Yesterday, Dr. Jan Gilbert and his counsel, Kahn Gauthier Swick, LLC, issued this release regarding their intention to file a lead plaintiff motion in the Nature's Sunshine Products, Inc. securities litigation currently pending in the District of Utah.

The release notes:

Dr. Jan Gilbert is well suited to lead this litigation. As both a significant shareholder of the Company and a prominent member of the New York medical community and founder of the leading company devoted to nutrition for dental health and general health, Dr. Gilbert has both the interest and understanding to make an ideal Lead Plaintiff and class representative.

These types of assertions are similar to those often found in lead plaintiff motions regarding the adequacy of a proposed lead plaintiff.

As noted in the release, Dr. Gilbert is the founder of Oral Medicine Today, a dental and general nutrition health company. An affiliate of Oral Medicine Today is Superior Kosher Vitamins, a supplier of kosher certified nutritionals.

Fannie Mae - Settlement Near?

As reported today here (NY Times) and here (Washington Post), mortgage giant Fannie Mae has agreed to pay $400 million in civil penalties under an agreement with the Securities and Exchange Commission and the Office of Federal Housing Enterprise Oversight, to settle charges related to its $10.8 billion accounting scandal.

The SEC's litigation release announcing the settlement can be found here and the Commission's complaint can be found here.

The SEC had charged Fannie Mae with violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; and violations of Sections 17(a)(2) and (3) of the Securities Act of 1933.

OFHEO's announcement can be found here, OFHEO's Report of the Special Examination of Fannie Mae can be found here, and a summary of the report can be found here.

Though these settlements do nothing to settle the consolidated ERISA, securities and derivative litigation pending against Fannie Mae, readers may recall that Freddie Mac announced a settlement with federal regulators just prior to announcing a settlement of the private derivative and securities class actions.

Disclosure: The author and his law firm are counsel for certain plaintiffs in the currently pending Fannie Mae derivative litigation.

Vacation

Sorry folks, but postings will be somewhere south of slim for the next week or so, as I take a break from my regularly scheduled programming.

Regular posting will resume around May 22.

Good Sarbanes-Oxley Internal Controls = Higher Stock Prices

According to a report issued this week by Lord & Benoit, LLC (a national Sarbanes-Oxley research and compliance firm), the share price of companies that reported clean internal controls (i.e. no material weaknesses) beat the Russell 3000® Index by an average of about 10% over a two year period from March 31, 2004 through March 31, 2006. Shares of companies that reported internal control weaknesses in both 2004 and 2005 lost about 6% over the same period.

The report examined results for all December year-end Accelerated Filers that were registrants one year before Section 404 was required and have submitted at least two Section 404 internal controls assertions. That represents nearly 2,500 publicly traded companies and about half of the entire market capitalization of all publicly traded companies in the United States.

Pre-Emptive Press Releases

They don't appear often enough to call them a trend, yet.

A number of law firms (and their clients) have begun putting out press releases in advance of the deadline for filing a lead plaintiff motion, often indicating their intention to file a lead plaintiff motion.

Last week, Bernstein Litowitz Berger & Grossmann LLP and the Police and Fire Retirement System of the City of Detroit put out this release regarding the securities class actions pending against Bausch & Lomb Inc. in the United States District Court for the Southern District of New York. The release indicated the Police & Fire Retirement System's intention to both file an expanded complaint and a lead plaintiff motion.

The previous week, Kahn Gauthier Swick, LLC and WestEnd Capital Management, LLC put out this release regarding the securities class actions pending against Pixelplus Co., Ltd., also in the Southern District of New York. This release simply noted that WestEnd had retained Kahn Gauthier to pursue claims, with no mention of lead plaintiff issues.

GAO Releases Report On Sarbanes-Oxley Costs For Smaller Businesses

The Government Accountability Office (GAO) has released a report, Consideration of Key Principles Needed in Addressing Implementation for Smaller Public Companies.

According to the GAO's Highlights, the report:

1. Analyzes the impact of the Sarbanes-Oxley Act on smaller public companies, particularly in terms of compliance costs;
2. Describes responses of the Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) to concerns raised by smaller public companies; and
3. Analyzes smaller public companies' access to auditing services and the extent to which the share of public companies audited by mid-sized and small accounting firms has changed since the act was passed.

The report starts with the premise that "regulators, public companies, audit firms and investors generally agree" that Sarbanes-Oxley has had "a positive and significant impact on investor protection and confidence."

Putting that aside, the GAO did find that:

costs associated with implementing the Sarbanes-Oxley Act - particularly those costs associated with the internal control provisions in section 404 - were disproportionately higher (as a percentage of revenues) for smaller public companies.

(emphasis added)

The report went on to note however, that:

While public companies - both large and small - have been required to establish and maintain internal accounting controls since the Foreign Corrupt Practices Act of 1977, most public companies and their external auditors generally had limited practical experience in implementing and using a structured framework for internal control over financial reporting as envisioned by the implementing regulations for section 404.

The GAO also found that many of these increased costs are one-time expenses incurred as companies put in place internal accounting controls.

Also of note, the report found that Sarbanes-Oxley benefited the accounting industry as more companies hired mid-size and smaller accounting firms. The effect seems somewhat muted, however, when the full picture is examined:

Overall, mid-sized and small accounting firms conducted 30 percent of the total number of public company audits in 2004 - up from 22 percent in 2002. However, the overall market for audit services remains highly concentrated, with companies audited by large firms representing 98 percent of total U.S. publicly traded company sales (revenues).

The Washington Post has a story on the report here.

ADDITION: Financial Executives International (FEI) has an analysis of the report here.

Feds Restate Financials, Film At 11

Even the Federal government is not immune from having to restate its financials from time to time.

Last week, the Bureau of Economic Analysis (an agency of the U.S. Department of Commerce) announced that:

The estimates of personal income for March and for the first quarter of 2006, which were released on May 1, were overstated.

According to BEA's errata, available here:

Personal income for March was overstated by $38.9 billion (annual rate), and its growth was overstated by 0.3 percentage point (not annualized); first-quarter personal income was overstated by $12.9 billion, and its growth was overstated by 0.5 percentage point (annual rate).

Don't worry - the income is real, the government just recognized it prematurely:

This overstatement of income resulted from including in the March estimate of Government social benefits to persons a prepayment for April for Medicare Part D benefits - the new prescription drug plan that began on January 1.

* * *

In the Monthly Treasury Statement - BEA's data source for payments for the Medicare Prescription Drug Plan - the payment for the month of April, which would normally be made on the first day of the month, was made on March 31 because April 1 fell on a Saturday. According to BEA's standard practice for recording government transactions, this prepayment should have been recorded in April.

The original release with the incorrect data is available here.

Any purchasers of treasury note or bonds out there that feel they paid inflated prices for their government securities as a result of this material misstatement or omission are likely out of luck.

As any law student learns in Constitutional Law, the United States is immune from suit unless it waives its sovereign immunity and consents to be sued. See United States v. Mitchell, 463 U.S. 206, 212 (1983). The sovereign immunity of the United States also extends to its agencies. Gilbert v. DaGrossa, 756 F.2d 1455, 1460 n. 6 (9th Cir.1985). Suffice to say - the feds have not in recent memory chosen to waive sovereign immunity for violations of the federal securities laws.

Opting Out, Or How To Try and Wring Blood From a Stone

Over at the WSJ Law Blog today, Peter Lattman has a post here on the recent spate of announcements by institutional investors that they were opting out of the recently settled securities class action against Qwest.

A press release from the New York State Comptroller Alan G. Hevesi regarding the individual case brought by the New York State Common Retirement Fund (NYSCRF) can be found here. NYSCRF is represented in the Qwest litigation by Lieff, Cabraser, Heimann & Bernstein, LLP.

Of interest (at least to me) - the decision to name Qwest's former outside auditor, Arthur Andersen LLP, as a defendant.

Andersen, of course, was famously convicted of obstruction of justice in 2002 in charges stemming from document preservation issues regarding the auditor's Enron files. That conviction was overturned by a unanimous Supreme Court in 2005.

Following the conviction in 2002, Anderson for all intents and purposes wound down business and while it still exists, press reports indicate that only 200 of Andersen's 28,000 employees remain with the firm.

Indeed, in this release from Comptroller Hevesi regarding Andersen's 2005 settlement in the WorldCom litigation:

The settlement follows intense scrutiny of Andersen's financial status. Anderson only agreed to show us its financial condition after we had finished presenting our case. The $65 million represents a substantial amount of Andersen's remaining assets.

Thus, Andersen:

1. Is essentially out of business.
2. Has little to no assets remaining.
3. Likely has little or no income at this point.
4. Potentially has burned through any insurance policies it carried that covered the relevant period.
   

The logical question - Why name Andersen as a defendant?

Readers, please send in your thoughts.

From Bad, to Worse, to Really, Really Bad

Sometimes the news really does keep getting worse. Just ask Comverse Technology, Inc.

Back on March 14, the company announced that it was creating a special committee of its board of directors to review matters related to stock options grants and indicated a possible need to restate prior results.

Barely a month later the bad news wagon was picking up steam as Comverse announced on April 17 that the company was going to delay filing its 10-K and would restate its historical financial statements for fiscal years 2001-2005 and for the first three quarters of the fiscal year 2006.

In the wake of those announcements, at least six derivative actions have been filed according to this 8-K - four in the New York State Supreme Court and two in the United States District Court for the Eastern District of New York and several securities class actions, also in the United States District Court for the Eastern District of New York.

Then on Monday the company announced the resignations of Kobi Alexander, the company's Chairman and CEO, David Kreinberg, the CFO, and William F. Sorin, a director, Senior General Counsel, and Corporate Secretary.

Then, fast on the heels of the resignations, according to press reports (W$J here and AP via Yahoo! here), Comverse received a subpoena this week from the U.S. attorney's office for the Eastern District of New York regarding a continuing probe into potential backdating of stock option grants at the company.

"Top Ten" Corporate & Securities Articles for 2005

Thanks to Prof. Larry E. Ribstein of Ideoblog for pointing me to Brian Leiter's Law School Reports where I found the "Top Ten" Corporate & Securities Articles for 2005.

As a service to readers, I have tracked down online versions of all ten of the articles and linked to them below.

In alphabetical order by primary author, the articles are:

The Case for Increasing Shareholder Power, 118 Harv. L. Rev. 833-914 (2005), Lucian Arye Bebchuk (Harvard).

The New Dividend Puzzle, 93 Geo. L.J. 845-895 (2005), William W. Bratton (Georgetown).

Sacrificing Corporate Profits in the Public Interest, 80 N.Y.U. L. Rev. 733-869 (2005), Einer Elhauge (Harvard).

Corporate Officers and the Business Judgment Rule, 60 Bus. Law. 439-469 (2005), Lyman P.Q Johnson (Washington & Lee).

In the Shadow of Delaware? The Rise of Hostile Takeovers in Japan, 105 Colum. L. Rev. 2171-2216 (2005), Curtis J. Milhaupt (Columbia).

Are Partners Fiduciaries?, 2005 U. Ill. L. Rev. 209-251, Larry E. Ribstein (Illinois).

Delaware's Politics, 118 Harv. L. Rev. 2491-2543 (2005), Mark J. Roe (Harvard).

The Sarbanes-Oxley Act and the Making of Quack Corporate Governance, 114 Yale L.J. 1521-1611 (2005), Roberta Romano (Yale).

Fixing Freezeouts, 115 Yale L.J. 2-70 (2005), Guhan Subramanian (Harvard). (n.b. Prof Subramanian is the Joseph Flom Professor of Law and Business - yes that Joseph Flom.)

The Public and Private Faces of Derivative Lawsuits, 57 Vand. L. Rev. 1747-1793 (2004), Robert B. Thompson and Randall S. Thomas (Vanderbilt - both) (n.b. - the article is also for sale on Amazon.com here)

File Early, Then Free Ride: How Delaware Law (Mis)Shapes Shareholder Class Actions, 57 Vand. L. Rev. 1797-1881 (2004), Elliott J. Weiss (Arizona) and Lawrence J. White (NYU Business School).

Former Tyco General Counsel settles with SEC

The Securities and Exchange Commission announced Tuesday it had reached a settlement with Mark A. Belnick, the former general counsel of Tyco International Ltd., over claims he received around $14 million in unauthorized and undisclosed relocation loans from the company.

Belnick agreed to pay a $100,000 civil penalty, without admitting or denying the allegations. He was also barred for five years from serving as a director or officer of a public company.

The New York Law Journal has an article here (via law.com).

Belnick remains a defendant in the private securities fraud litigation, where the motions to dismiss were largely denied in October 2004. That opinion is available here.

Meanwhile, in his spare time, Belnick has opened his own law practice, specializing in:

Commercial Litigation; Securities Litigation; White Collar Criminal Litigation; International Litigation; Antitrust and Trade Regulation; Government Litigation; Internal Corporate Investigations; Government Investigations; Intellectual Property Litigation; Arbitration; International Arbitration.

Belnick has received an "AV" rating in Martindale-Hubbell Peer Review Rating, which:

shows that a lawyer has reached the height of professional excellence. He or she has usually practiced law for many years, and is recognized for the highest levels of skill and integrity.

Compliance Week article on PwC Study

Today's edition of Compliance Week has an article (registration required - 30 day free trial) on the PwC study released yesterday, with a quote from yours truly and Securities Litigation Watch's Bruce Carton.

Compliance Week describes itself as:

a newsletter on corporate governance and compliance issues that reaches over 40,000 financial and legal executives at U.S. public companies.

* * *

Relentlessly focused on the disclosure, reporting and compliance requirements of our subscribers, Compliance Week has quickly emerged as a leading resource in this constantly-changing market.

PwC releases 2005 Securities Litigation Study

PricewaterhouseCoopers LLP today released their 2005 Securities Litigation Study. The study is available here (registration required). A press release is also available here.

Noting the "drop" in the number of new filings (see Bruce Carton's take on this trend as (with regard to the earlier Stanford / Cornerstone report) over at Securities Litigation Watch here), the study suggests a number of factors behind the decline in the number of new securities class action filings:

The first is the so-called printing-press factor (see quote from MoFo's Jordan Eth here), suggesting that:

the current backlog of major cases . . . already being handled by the plaintiffs' bar, consum[es] the time and resources of securities plaintiffs' lawyers and caus[es] them to delay new case filings.

The study also points to "the hoped-for deterrent effect of Sarbanes-Oxley," and "[m]ore vigorous investigation, enforcement, and prosecution by the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ)" as possible factors in the decline.

Also, for those that may have missed it, The 10b-5 Daily had a post last week on NERA Economic Consulting's recently released study of class action securities litigation.

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.