Going Private Deals Maybe Not So Sweet for Shareholders

According to news reports here (Bloomberg) and here (Reuters) a class action complaint (Murphy v. Kohlberg Kravis, 06-cv-13210 (S.D.N.Y.) has been filed against more than a dozen private equity firms, alleging that the plaintiffs did not receive full value for the shares they exchanged because of a conspiracy that violated antitrust laws.

The complaint was filed in the United States District Court for the Southern District of New York by Wolf Haldenstein Adler Freeman & Herz LLP and follows on the heels of reports last month that Department of Justice was investigating this very issue. Both Business Law Prof Blog and Ideoblog have posts on the DOJ's investigation.

As of tonight, a copy of the complaint is not yet available from either the firm's website or the Court's ECF website, but according to the Reuters article, it alleges that the investment firms formed "clubs" among themselves to bid collectively in buyout actions. It also charges that the firms exchanged information and submitted bids at agreed upon prices.

The complaint also alleges that the plaintiffs:

were paid less for their equity shares that they sold to the private equity defendants and their co-conspirators than they would have been paid under conditions of free and open competition.

And according to the Bloomberg article:

Investors in the target company are deprived of the full economic value of their holdings and 'squeezed out' at artificially low valuations.

The class action names many of the largest private equity firms, including:

• Apollo Management
• Bain Capital
• The Blackstone Group
• The Carlyle Group
• Clayton, Dubilier & Rice, Inc.
• Kohlberg Kravis Roberts & Co.
• Madison Dearborn Partners
• Providence Equity Partners, Inc.
• Silver Lake Partners
• Texas Pacific Group Ventures Inc.
• Thomas H. Lee Partners, L.P.
  
• Warburg Pincus, LLC
  

The plaintiffs are individuals who own shares of Univision Communications Inc. (NYSE: UVN) (which agreed in June to a $12.3 billion buyout by four private equity firms), HCA Inc. (NYSE: HCA) (which agreed to be acquired by an investor group that includes Bain Capital, KKR, and Merrill Lynch & Co. for about $21 billion) and Harrah's Entertainment Inc. (NYSE: HET) (which is reviewing a buyout offer worth $15 billion from Apollo Management and Texas Pacific Group).

Daily Trivia: One of Madison Dearborn Partners portfolio companies is WM. Bolthouse Farms, Inc., the leading North American producer of carrots and carrot-related products. The Bolthouse family created the so called "Baby-cut Carrots" in 1990, which much to the surprise of children everywhere are really just cut and peeled full-size carrots. The leftover carrot pulp is recycled into cattle feed.

Immune Response Settles Class and Derivative Litigation

The Immune Response Corporation (OTC: IMNR) announced today that the company has reached an agreement to settle the consolidated federal securities class action pending against the company in the United States District Court for the Southern District of California as well as the related derivative lawsuit pending in the Superior Court of San Diego County.

The settlement in the class action is valued at approximately $9.6 million, and will be paid entirely by the company's insurers.

The derivative complaint, which was filed nearly four years after the securities complaints, will be settled for $250,000, and will also be funded entirely by the company's insurers.

Michael Baghdoian and Scott Carroll are lead plaintiffs and Weiss & Lurie (as successor to Weiss & Yourman) and Lerach Coughlin Stoia Geller Rudman & Robbins LLP (as successor to Milberg Weiss Bershad Hynes & Lerach, LLP) are lead counsel in the Immune Response litigation.

A copy of the amended consolidated complaint in the securities class action is available from Stanford, here.

Daily Trivia: Immune Response was co-founded in 1986 by Dr. Jonas Salk, inventor of the polio vaccine.

Gilat Drops Vigorous Defense, Settles Class Action

Today, Gilat Satellite Networks Ltd. (Nasdaq: GILT) announced that the company, along with certain former officers, had reached a proposed settlement in the consolidated securities class action lawsuit pending in the United States District Court for the Eastern District of New York.

While the amount of the settlement was not disclosed, according to the release, "the entire amount...will be covered by Gilat's insurance carriers."

The Leumi PIA Sector Fund, Leumi PIA World Fund, and Leumi PIA Export Fund were previously appointed lead plaintiffs and Bernstein Liebhard & Lifshitz, LLP, Cohen, Milstein, Hausfeld & Toll, P.L.L.C., and Glancy Binkow & Goldberg LLP were appointed lead counsel in the Gilat litigation.

The class action complaint alleged that the company's 1999-2001 revenues:

were fueled by knowing or reckless accounting practices that included: premature revenue recognition; boosting revenues with undisclosed related party income; failure to properly reserve for doubtful accounts; converting uncollectible accounts receivable into equity (and subsequently recording a capital loss); failing to write-off uncollectible accounts receivable as bad debts, and/or failing to timely do so.

A copy of the amended consolidated complaint is available here.

Daily Trivia: Shortly after the filing of the initial complaints back in 2002, Gilat issued an announcement that was both familiar and interesting. The familiar part:

The Company intends to vigorously defend its position in this litigation.

The interesting part:

The Company has not received the complaints to date but has reviewed one of the complaints available online and believes that the lawsuits are without merit.

While it is not uncommon for a company to say that it has not yet been served with a class action complaint, I cannot recall another example of a company affirmatively indicating that they had gone to a plaintiff-side firm's website to obtain a copy of a complaint.

Settlements, Dismissals, and Newly Filed Complaints, Oh My

This will be the first of a series of quick posts cleaning out the overflowing "to blog about" folder.

Mamma.com Settles Securities Class Action

Mamma.com Inc. (NASDAQ: MAMA) announced last week that it has entered into an agreement to settle the class action securities litigation pending against the company and certain officers and directors in the United States District Court for the Southern District of New York before Judge Harold Baer, Jr.

The settlement is valued at $3.15 million, $2.5 million of which will be paid by the company's insurance carrier and $650,000 from the company.

Five individuals are lead plaintiffs and Cohen, Milstein, Hausfeld & Toll, P.L.L.C. and Milberg Weiss Bershad & Schulman LLP are lead counsel in the Mamma.com litigation.

A copy of the consolidated amended complaint can be found here.

This blog previously discussed the Mamma.com litigation here.

Barrier Therapeutics Litigation Voluntarily Dismissed

Last week, Barrier Therapeutics, Inc. (NASDAQ: BTRX) announced that the putative securities class action lawsuit filed against the company, certain of its officers and certain of the underwriters for the company's 2004 initial public offering and 2005 secondary offering has been voluntarily dismissed, in its entirety and with prejudice, by the lead plaintiffs' counsel.

The Barrier litigation was pending in the United States District Court for the District of New Jersey before Judge Joel A. Pisano.

Five individuals were appointed lead plaintiffs by the Court and Lerach Coughlin Stoia Geller Rudman & Robbins LLP and the Rosen Law Firm P.A. were appointed co-lead counsel.

According to the release, lead counsel submitted the stipulation of dismissal "without any payment by the company or any of the defendants to the plaintiffs or their counsel. The company expects the court to enter an order with respect to the submission promptly."

Intergraph Settles Merger-Related Class Actions

Also last week, Intergraph Corporation (NASDAQ: INGR) announced that Intergraph and the other named defendants have entered into a memorandum of understanding with plaintiffs' counsel to settle two purported class action lawsuits pending in the Chancery Court for the State of Delaware in and for New Castle County that have been filed in connection with the proposed acquisition of Intergraph by an entity primarily owned by entities affiliated with Hellman & Friedman LLC and Texas Pacific Group.

Under the terms of the settlement, Intergraph has agreed to provide additional information to shareholders in order to supplement the proxy statement that was previously provided to Intergraph's shareholders in connection with the special meeting of stockholders concerning the proposed merger as to the following matters, among others:

• Projected financial information considered by Intergraph's Board of Directors;
• Certain intellectual property litigation updates; and
• Certain of Intergraph's non-core assets, including real estate and an equity investment in Bentley Systems, Inc.

Additionally, Intergraph has agreed to pay the legal fees and expenses of plaintiffs' counsel, subject to the approval by the court.

Gateway Announces the Filing of a Derivative Complaint

According to this 10-Q filed by Gateway, Inc. (NYSE: GTW), a derivative lawsuit was filed in Orange County (California) Superior Court against the individual members of Gateway's board of directors and Gateway (as a nominal defendant) alleging that the board members breached their fiduciary duties in connection with the Gateway's September 1, 2006 announcement that it had rejected an earlier offer by shareholder Lap Shun "John" Hui to acquire Gateway's retail operations for approximately $450 million.

A review of the docket reveals that the plaintiff is represented by the Johnson Law Firm and the defendants are represented by Sheppard, Mullin, Richter & Hampton LLP. According to his bio, name partner Frank J. Johnson is a former partner at Sheppard Mullin.

Daily Trivia: Gateway's famous corporate symbol - the black and white cows, are both real, and were chosen for a reason other than whimsy. According to this 1996 annual report, the three official mascots are Holstein cows named Bonnie, Hanako and Colleen that joined Gateway in 1996. Gateway was founded in 1985, which was the Chinese Year of the Cow.

Some Light Reading Before You Sign...

In has been four years since the passage of the Sarbanes-Oxley Act of 2002 (SOX), and courts are continuing to address the liability that potentially stems from false or fraudulent Section 302 certifications by corporate officers.

Plaintiffs began pleading Section 302 violations both as separate, substantive false statements and as evidence of scienter (see complaints here (Lattice Semiconductor) and here (Virbac)), and federal securities regulators and prosecutors have been making use of 302 certifications in bringing actions against CEOs and CFOs.

A recent article, Minding Your 302s: Assessing Potential Civil, Administrative and Criminal Liability for False Financial Statement Certifications, from a Practising Law Institute program of the same name (course information here) provides a good resource for practitioners seeking guidance on both civil and criminal liability for filing false or fraudulent Section 302 certifications.

The article was written by Timothy P. Harkness, a litigation partner at Kramer Levin Naftalis & Frankel LLP, Celiza P. Braganca, senior counsel at Sperling & Slater, P.C., and John Bessonette, a corporate associate at Kramer Levin Naftalis & Frankel LLP. While it was published before the 11th Circuit's recent decision in Garfield v. NDCHealth Corp., 2006 WL 2883238 (11th Cir. Oct. 12, 2006) (holding that SOX certifications are "only probative of scienter if the person signing the certification was severely reckless in certifying the accuracy of the financial statements"), it is still a good starting point for anyone researching in this area.

In the context of private securities litigation, the authors conclude that inaccurate Section 302 certifications:

do not give rise to independent private claims under the securities laws, nor do they appear to alter the fundamental standards that are applied in Section 10(b) actions.

Rather, they are viewed by courts in the overall context of a case and only bear on civil liability when other pleaded facts create a strong inference of scienter against the 302 certifier.

In the context of liability in government actions, the authors conclude that:

302 certifications do not substantially change the potential liabilities of certifying CEOs and CFOs, with two important exceptions.

The first exception:

a certifier who can prove a thorough [internal controls] evaluation done in good faith is more likely to avoid being charged with filing a false 302 certification than a certifier who cannot do so.

The second exception:

certification of immaterial misstatements or omissions may subject a certifier to liability to the extent that they are part of a larger fraudulent scheme.

Daily Trivia: NDCHealth Corporation (NYSE: NDC) merged in early 2005 with Per-Se Technologies, Inc. (NASDAQ: PSTI), which in turn announced this week that it was being acquired by McKesson Corporation (NYSE: MCK) in a transaction valued at approximately $1.8 billion.

No Discovery Yet in Discovery Labs Class Action

Today Discovery Laboratories, Inc. (NASDAQ: DSCO) announced the dismissal, without prejudice, of the securities class action pending against the company and two of its executive officers in the United States District Court for the Eastern District of Pennsylvania.

The "Mizla Group" (Joseph, Denise, Alan, Erin and Julia Mizla) was appointed as the lead plaintiff and Chimicles & Tikellis LLP was appointed as lead counsel in the securities class action.

A copy of the consolidated amended complaint is available here.

The decision is not yet available online, but will be posted here when it is.

A pair of derivative actions remain pending in the Eastern District of Pennsylvania against the company and certain current and former officers and directors of the company. According to this 10-Q:

The parties have entered into a stipulation providing that the Company is not required to respond to these consolidated complaints until 60 days following defendants' answer or a dispositive ruling on a motion to dismiss filed in response to the consolidated amended complaint in the class actions.

Daily Trivia: Five Chimicles & Tikellis lawyers were named to the list of Pennsylvania Super Lawyers. Distributed by the publishers of Law & Politics and Philadelphia Magazine, the list is a cousin to the New Jersey Super Lawyers list that New Jersey's Committee on Attorney Advertising ruled violates state rules of professional conduct. The WSJ Law Blog has a post on the New Jersey decision here.

In response to the New Jersey decision, the Super Lawyers publishers have created a website, www.superlawyersfacts.com, whose tagline is Setting the Record Straight: The Truth About Legal Marketing in New Jersey. It may remind readers of www.milbergweissjustice.com, the website created by Milberg Weiss Bershad & Schulman LLP to respond publicly to the firm's indictment.

Yukos Securities Litigation Dismissed

Last month Judge William H. Pauley III, granted the defendants' motion for reconsideration in the In re Yukos Oil Company Securities Litigation, essentially dismissing all of the remaining claims in the litigation.

A copy of Judge Pauley's opinion is available here.

Yukos Oil Company (OTC: YUKOY) was one of Russia's leading vertically-integrated oil companies, and one of the world's largest non-state owned oil companies, both in terms of reserves and market capitalization, until the October 2003 arrest of the company's CEO and December 2004 forced sale of Yukos' main production unit, to recover alleged tax debts.

Judge Pauley's prior opinion (In re Yukos Oil Co. Sec. Litig., No. 04 Civ. 5243 (WHP), 2006 WL 800736 (S.D.N.Y. Mar. 30, 2006)) is available here.

In the prior opinion, Judge Pauley, granted defendant Group Menatep Limited’s motion to dismiss and also granted in part and denied in part a motion to dismiss by defendants Yukos and Bruce K. Misamore (Yukos' former CFO).

In essence, the defendants raised three principal arguments in their motions to dismiss and for reconsideration.

First, that the District Court must abstain from deciding the merits of the case under the "act of state" doctrine. The doctrine prevents United States courts from "question[ing] the validity of public acts (acts jure imperii) performed by other sovereigns within their own borders." Republic of Austria v. Altmann, 541 U.S. 677, 700 (2004).

Judge Pauley rejected this argument, holding:

this Court is not being called on to either invalidate or enforce the Russian Federation's measures, nor will the validity of those sovereign acts have any bearing on Defendants' motions to dismiss or on questions likely to affect the merits of this litigation . . . As such, the act of state doctrine does not warrant abstention.

Second, the defendants asserted a lack of federal subject matter jurisdiction for claims of two of the three lead plaintiffs. Judge Pauley found that the conduct at issue was insufficient under either the "conduct test" or the "effects test," and dismissed the claims of the foreign plaintiff (Roxwell Holdings) that purchased Yukos common stock on the Russian Trading System Stock Exchange and those of the American plaintiff (Parsimony) that purchased the equity-linked bonds on the Luxembourg Stock Exchange that were restricted from being "offered, sold or delivered within the United States or to U.S. persons."

Finally, the defendants argue that the complaint fails to state a claim for either primary violations of the securities laws or control person liability. Judge Pauley found that plaintiffs had failed to adequately plead any material misrepresentation and further failed to adequately plead scienter. Having found that the complaint failed to state a claim for primary liability, Judge Pauley further found that the defendants were not subject to control person liability on those claims.

Roxwell Holdings Limited and Mykola Buinyckyi are the lead plaintiffs for the putative sub-class of purchasers of Yukos common stock and ADRs and Lerach Coughlin Stoia Geller Rudman & Robbins LLP is lead counsel for the sub-class.

Parsimony Ltd. is the lead plaintiff for the putative sub-class of purchasers of Yukos' equity linked convertible bonds and Murray Frank & Sailer LLP is lead counsel for the sub-class.

A copy of the consolidated amended complaint is available here.

Technically, three defendants remain in the case - Mikhail B. Khodorkovsky (Yukos' former president, CEO and largest shareholder), Platon Lebedev (Menatep's CEO), and PricewaterhouseCoopers Russia. As noted in Judge Pauley's opinion however, all three were not served with the consolidated amended complaint, thus for all intents and purposes, absent an appeal by the plaintiffs, the litigation is over.

Daily Trivia: Taking a page from embattled American executives, both Khodorkovsky and Lebedev have created websites to take their case to the people. Khodorkovsky's site can be found here and Lebedev's can be found here. You can find additional information on the prison camps they are being held in using this interactive map.

Revenge of the Bees, Err Trial Lawyers

Last week, we poked some good-natured fun at Xethanol Corporation (AMEX: XNL) for their odd press release lambasting plaintiff's counsel for issuing the required PSLRA notice.

Thanks to a tip from an astute reader, we get to poke a little more fun at Xethanol. Earlier this week, the company issued an "Open Letter to Shareholders Regarding Recent Lawsuit Filings."

It is a "Dear Shareholder" letter, though it is intended to be the opposite of a "Dear John" letter.

The letter, signed by Louis Bernstein, the company's president, interim CEO, and a board member, is, shall we say interesting:

First, a few words about the recent spate of lawsuits. As a lawyer with more than 25 years' experience managing the defense of various types of litigation, I assure you that the pattern you see here unfortunately has become the norm.

Like bees drawn to honey, law firms from near and far will file these kinds of lawsuits, trolling for clients as well as for prospective lead plaintiffs, and ultimately seeking to serve as lead plaintiffs' counsel in order to gain the largest possible share of attorneys fees at the end of the case - assuming their side prevails in the litigation.

While it is true that the PSLRA only requires the first plaintiff filing a securities class action to put out a notice (see Section 21D(a)(3)(A)(ii) of the Securities Exchange Act of 1934, here), assuming that subsequent notices comport with the applicable rules of professional conduct, there is nothing untoward about those notices.

Hey, at least he didn't call trial lawyers cockroaches.

Mr. Bernstein goes on to note:

Again, Xethanol is committed to defending these and any future similar lawsuits vigorously. To that end, the company is carefully considering our choice of defense counsel and we will inform you once we have made that decision.

So, we can look forward to a future "Scary Defense Counsel" press release from Xethanol.

Daily Trivia: Mr. Bernstein is indeed a licensed attorney in the State of New York, though he should probably update his registration, which still indicates that he is with Pfizer Inc. (NYSE: PFE).

Snohomish. Gesundheit!

According to news reports (King County Journal), two shareholders have filed class action lawsuits against ICOS Corporation (NASDAQ: ICOS), Eli Lilly and Company (NYSE: LLY) and certain ICOS officers and directors.

The complaints seek to enjoin the proposed acquisition by Eli Lilly of ICOS' outstanding common stock, announced on October 17, 2006, and allege that the ICOS defendants breached their fiduciary duties by adopting the merger agreement and approving the proposed acquisition.

Lilly and ICOS have been partners in Lilly ICOS LLC, a joint venture that manufactures, markets and sells Cialis, the erectile dysfunction treatment.

In a 10-Q filed today, ICOS offered the now ubiquitous explanation:

ICOS believes the lawsuits are without merit and intends to defend the actions vigorously.

The cases were both filed in Snohomish County (WA) Superior Court, the day after the acquisition was announced. Though complete dockets are not available online, a review of available information indicates that both plaintiffs are represented (at least as local counsel) by Clifford A. Cantor.

According to additional news reports (MarketWatch) HealthCor Management L.P., the owner of 3.3 million shares of ICOS indicated that it will vote against the proposed acquisition. HealthCor delivered a letter to the board of directors suggesting that a more appropriate price was "well in excess of $40 per share," and noting:

Although the proposed purchase price represents a premium over the recently depressed share price, the proposed purchase price represents a:

• zero premium over the ICOS stock price from one year and two years ago;
• 30% discount from ICOS share prices seen three years ago;
• 50% discount from ICOS share prices seen five years ago; and
• 30% discount from June 1999 when Paul Clark joined ICOS as President and Chief Executive Officer.
  

The letter goes on to state:

THE BOARD OF DIRECTORS IS SELLING ICOS FOR A DISCOUNT BID, NOT A PREMIUM. (emphasis in original)

Daily Trivia: Eli Lilly and Company was founded in May 1876 by Colonel Eli Lilly, a pharmaceutical chemist and a veteran of the Union Army. Colonel Lilly was apparently influenced by the premature malaria-related death of his wife.

Mmmm, Donuts!

Yesterday, Krispy Kreme Doughnuts, Inc. (NYSE: KKD) announced that the company had entered into an agreement to settle the securities class action and derivative litigation that were pending against the company and certain current and former officers and directors in the United States District Court for the Middle District of North Carolina.

The settlement in the securities litigation is valued at approximately $75 million, consisting of:

• $34,967,000 in cash from the company's directors' and officers' insurers;
• $200,000 in cash from John W. Tate, the former Chief Operating Officer and Randy Casstevens, the former Chief Financial Officer;
• $4,000,000 in cash from PricewaterhouseCoopers LLP, the company's outside auditors; and
  
• Common stock and warrants to purchase common stock to be issued by Krispy Kreme having an aggregate value of $35,833,000.

The settlement in the derivative litigation provides for:

• Messrs. Tate and Casstevens each agreed to contribute $100,000 in cash to the settlement of the securities class action;
• Mr. Tate's agreement to cancel his interest in 6,000 shares of company stock;
• Messrs. Tate and Casstevens agreed to limit their claims for indemnity from the Krispy Kreme in connection with future proceedings before the Securities and Exchange Commission or the United States Attorney for the Southern District of New York to specified amounts.

Additionally the derivative claims against Scott A. Livengood, Krispy Kreme's former Chairman and Chief Executive Officer have not been resolved, and "counsel for the derivative plaintiffs are deferring their application for fees until conclusion of the derivative actions against Mr. Livengood."

Lead plaintiffs in the class action are the Alaska Electrical Pension Fund, Pompano Beach Police & Firefighters Retirement System, City of St. Clair Shores (Mich.) Police and Fire Pension System, City of Sterling Heights (Mich.) General Employees Retirement System, and Jason Hennessy, and lead counsel is Lerach Coughlin Stoia Geller Rudman & Robbins LLP.

Daily Trivia: Mr. Tate's (the former COO) employment contract, provides that Tate is not permitted to:

engage in the business of making and selling doughnuts and complementary products

(a) within a 100 mile radius of any place of business of the Company (including franchised operations) or of any place where the Company (or one of its franchised operations) has done business since the Effective Date of this Agreement,

(b) in any county where the Company is doing business or has done business since the Effective Date, or

(c) in any state where the Company is doing business or has done business since the Effective Date.

According to the company's store locator, Alaska, Maine, Montana, New Hampshire, Vermont, and Wyoming, are the only states that Mr. Tate could possibly sell donuts in during the period of his non-compete.

This is a theoretical statement, as a) there is no indication that Mr. Tate has any interest in hawking donuts and b) the 100 mile restriction would likely knock out New Hampshire and Vermont due to their proximity to Canadian, New York, and Massachusetts locations.

Desperately Seeking Standing

Last week, Labaton Sucharow & Rudoff LLP, lead counsel in the In re National Australia Bank Securities Litigation, issued this press release, noting that the Court had:

dismissed the Complaint, holding that the Court lacked subject matter jurisdiction over the claims of foreign purchasers of NAB securities purchased on non-U.S. exchanges.

The Court also ruled that the plaintiff who purchased NAB ADRs did not sustain damages and dismissed the claims of ADR purchasers.

According to the release:

This means that someone who purchased NAB ADRs between April 1, 1999 and September 3, 2001, inclusive, and lost money on the investment, may seek to be substituted as a plaintiff so that the action can continue.

And:

IF NO ADR PURCHASER STEPS FORWARD, NO RECOVERY BY WAY OF SETTLEMENT OF, OR JUDGMENT IN, THIS LITIGATION WILL OCCUR.

(emphasis in original)

The National Australia Bank Ltd. (NYSE: NAB) press release came just one day after this one in the Wells Fargo mutual funds litigation, discussed here last week.

Two similar press releases in one week are enough to create a trend, so without further ado, let's roll out our newest addition to the "Securities Litigation Universe of [Press] Release Permutations", or SLURP.

We'll call the newcomer to SLURP the "Personal Ad Press Release."

It describes a press release discussing securities litigation where some or all of a case has been dismissed on standing grounds, and plaintiff's counsel is attempting to find a substitute plaintiff that will cure the standing issue.

Daily Trivia: Labaton Sucharow partner Mark S. Arisohn was one of the attorneys that represented Vincent Chiarella before the Supreme Court in Chiarella v. United States, 445 U.S. 222 (1980), the seminal insider trading case.

Savient Wins On Scienter

Savient Pharmaceuticals, Inc. (NASDAQ: SVNT) today announced that securities class action pending against the company and three of its former officers was dismissed with prejudice.

The case is pending in the United States District Court for the District of New Jersey before Senior Judge Harold A. Ackerman.

During the class period Savient was known as Bio-Technology General Corporation, but changed its name on June 23, 2003. The litigation is thus captioned as In re Bio-Technology General Corp. Sec. Litig.

Poalim Mutual Funds and Joseph Rago are the lead plaintiffs and Glancy Binkow & Goldberg LLP and the Law Offices of Jacob Sabo are lead counsel in the Bio-Technology General litigation. A copy of Judge Ackerman's opinion appointing lead plaintiffs and lead counsel can be found here.

The lead plaintiffs filed a first amended consolidated class action complaint on September 25, 2003, and by this opinion, Judge Ackerman dismissed the complaint without prejudice.

On October 11, 2005 the plaintiffs filed this second amended complaint (complete with attachments from a "confidential witness") and the defendants again moved to dismiss.

According to the press release, Judge Ackerman's dismissal of the second complaint was based on the failure:

to set forth particularized facts, through direct or circumstantial evidence, which give rise to a strong inference that the defendants acted with intent to defraud, recklessness or a conscious disregard of the truth.

In other words - insufficient scienter allegations.

Daily Trivia: Poalim Mutual Funds was one of the two mutual fund managers of Bank Hapoalim Ltd., Israel's largest bank. In late 2005, Hapoalim and the second largest mutual fund manager in Israel, Bank Leumi Le-Israel Ltd., began selling their mutual and provident fund-management units to comply with a new law that required Israeli banks to divest their asset-management businesses.

The Wells Fargo Wagon

Judge William H. Alsup has partially denied the latest motion to dismiss in the Wells Fargo & Co. (NYSE: WFC) mutual funds litigation according to a press release issued today by lead counsel, Gutride Safier LLP.

A copy of Judge Alsup's October 24, 2006 opinion is available here, but as alluded to earlier, this is merely the latest motion to dismiss in the litigation, and a copy Judge Alsup's August 14, 2006 opinion also denying in part and granting in part the prior motion to dismiss is available here.

In the August 14 opinion, Judge Alsup held that the plaintiff had failed to allege that he had standing to bring his claim for violation of Section 36(b) of the Investment Company Act of 1940, and that there was no private right of action for violations of Section 48(a) of the ICA, and dismissed those claims.

Judge Alsup found however, that plaintiff had properly plead violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 and denied the motions to dismiss those counts in the prior amended complaint.

In the latest opinion, Judge Alsup granted the motion to dismiss with respect to the claims alleged against H.D. Vest Investment Services, LLC, an affiliated, broker/dealer, non-bank subsidiary of Wells Fargo, due to standing issues.

Judge Alsup also dismissed the Section 10(b) claims alleged against the investment advisor and distributor defendants, holding that the plaintiff had not adequately plead that those defendants had made any statements or participated substantially enough in the alleged scheme to defraud.

A copy of the "Second Amended Consolidated Class Action Complaint For Violation Of The Federal Securities Laws And For Violation Of The Investment Company Act" (say that five times fast) is available here.

The plaintiff "may seek leave to amend by filing a motion proposing yet another complaint, to be filed and served by November 17, 2006," so yet another round of motions to dismiss will be "a-comin' down the street."

Daily Trivia: Judge Alsup is also a passionate outdoorsman, having spent considerable time exploring and helping to conserve the Sierra Nevada Mountains. Judge Alsup has even written a pair of books for the Yosemite Association, including Missing in the Minarets: The Search for Walter A. Starr, Jr., which details the mysterious 1933 disappearance of a prominent San Francisco attorney among the rugged peaks of the Sierra Nevada.

Wait, I Though the Cart Went After the Horse

We've talked about a fair number of press release permutations over the life of this blog.

Today, Xethanol Corporation (AMEX: XNL) decided to add a new one to the list - the "we don't understand securities litigation, but that won't stop us from commenting on it" press release.

The press release starts off in familiar territory, with the routine headline:

Xethanol Says Class Action Lawsuit Without Merit

But instead of staying on course and setting forth the company's intent to put on a "vigorous defense," the press release takes an unexpected left turn:

"All that we have received thus far is the law firm's press release that ran at 5:19 p.m. yesterday afternoon. Not only are the allegations and insinuations baseless, but also the case apparently has no lead plaintiff," said Louis Bernstein, Xethanol's President and interim CEO.

Well, Mr. Bernstein, that is actually the point. The PSLRA requires that:

Not later than 20 days after the date on which the complaint is filed, the plaintiff or plaintiffs shall cause to be published, in a widely circulated national business-oriented publication or wire service, a notice advising members of the purported plaintiff class--

1. of the pendency of the action, the claims asserted therein, and the purported class period; and

2. that, not later than 60 days after the date on which the notice is published, any member of the purported class may move the court to serve as lead plaintiff of the purported class.

If the good folks at Xethanol have any further questions about the securities litigation process, Kaplan Fox & Kilsheimer LLP have prepared this handy flowchart to assist them.

The press release that started the furor was issued by Kahn Gauthier Swick, LLC. That release also contained some interesting language:

SPECIAL NOTICE: While federal law does not prohibit other lawyers from "announcing" this lawsuit, Kahn Gauthier Swick is the law firm that researched, investigated, drafted and filed the securities fraud case against Xethanol. If you are a Xethanol shareholder who decides to contact one of these lawyers, Kahn Gauthier Swick reminds you to fully interview any lawyer to assure that they fully understand the facts surrounding the Xethanol claims our firm has filed in Court.

This is indeed a recurring them, last discussed in June 2005 byThe 10b-5 Daily and Securities Litigation Watch, regarding the PEMSTAR litigation.

It also harkens back to the practice discussed in this November 2002 Fulton County Daily Report article on Bill Lerach's efforts to stop other firms from simply copying and re-filing his firm's securities complaints by copyrighting those complaints.

Not to encourage anyone, but a copy of the Kahn firm's complaint in the Xethanol litigation is available here.

Daily Trivia: One of Xethanol's Advisory Board members is Jed Schutz, a real estate developer and chairman of the board of Campusfood.com, Inc., a subsidiary of Dotmenu, Inc., "The #1 source for online food ordering at college campuses."

The Suit That Wasn't

Back in August, Interserve Plc (FTSE: IRV), a U.K. construction services company, announced that it was restating financial results for at least five years and would write down the value of its assets by 25 million pounds ($47 million).

As part of the restatement, KPMG, LLP and Linklaters were to conduct an "independent forensic review."

Predictably, shares of Interserve plunged (Bloomberg) following this news - the restatement - not the appointment of accountants and lawyers to perform a financial review.

Then things took some interesting turns.

A group of shareholders that had received their shares as a result of Interserve's acquisition of MacLellan Group plc hired law firm Mishcon de Reya to "consider whether to sue the support services company, its individual directors and its auditor Deloitte."

The independent review was completed (The Times of London) in late September and shares of Interserve soared (Reuters via Scotsman.com).

Of note - the acounting review resulted in 5 million pounds (about $9.3 million) in professional fees for KPMG and Linklaters. The total writedown was only 25.9 million pounds.

By comparison, Alston & Bird, LLP, the law firm of R. Neal Batson, the examiner appointed by the court overseeing Enron Corp.'s Chapter 11 bankruptcy was paid about $100 million. And Kirkpatrick & Lockhart Nicholson Graham LLP, the law firm of Richard Thornburgh, the examiner appointed in the WorldCom bankruptcy was paid in the neighborhood of $10 million.

Thanks again to reader Werner Kranenburg, a former Schiffrin & Barroway, LLP summer associate, and current law student in the United Kingdom for sending this one in.

Daily Trivia: Governor Thornburgh married not one, but two women named "Ginny." His first wife, Ginny Hooton was killed in an automobile accident. Several years later, he married his second wife, Ginny Judson.

Canadian Securities Class Action Expansion

According to this newsletter from Canadian law firm Stikeman Elliott LLP, the first statements of claim (the Canadian equivalent of a complaint) to invoke the secondary-market liability provisions that were recently added to the Ontario Securities Act have been filed in a proposed class action against Imax Corporation and certain directors and officers of the company.

The statements of claim were filed in Ontario's Superior Court of Justice in early September 2006 and contain allegations similar to the class action complaints filed in the United States District Court for the Southern District of New York, namely that Imax's 2005 earnings were misrepresented during the class period by recognizing revenue from theatres that had not yet opened.

A copy of the relevant Ontario statute (Bill 198) can be found here.

Daily Trivia: IMAX technology premiered at the 1970 World's Fair and Exposition in Osaka, Japan.

Institutional Activism through Litigation

Prof. Michael A. Perino (St. John's University School of Law) has penned a new paper, Institutional Activism through Litigation: An Empirical Analysis of Public Pension Fund Participation in Securities Class Actions, available from SSRN here .

Prof. Perino attempts to analyze:

whether there is any correlation between cases with public pension fund lead plaintiffs and settlement outcomes, attorney effort, or fee requests or awards.

His conclusions:

• cases with public pension participation are positively correlated with settlement amounts (measured both in absolute terms and as a proportion of investors' overall market losses), even when controlling for institutional self-selection of larger, more high profile cases.

• cases with public pension fund acting as lead plaintiffs are positively correlated with two "proxies for attorney effort," the number of docket entries in the case and the ratio of settlement to docket entries.

• Attorneys' fee requests and fee awards are lower in cases with public pension lead plaintiffs, either because public pensions are sophisticated repeat players or as a result of attorney competition to represent these institutions.

The paper's conclusion:

that public pension funds do act as effective monitors of class counsel.

I don't have much to quibble with in the paper, but one thing stuck out to me as worthy of discussion.

First, Prof. Perino suggests that:

Under the PSLRA, plaintiffs' lawyers increasingly have incentives to develop longstanding relationships with institutions willing to become active in class litigation because doing so should increase the number of lucrative lead counsel opportunities

I agree, but that is one-half of the "problem" that led to the enactment of the PSLRA in the first place. As discussed later in the paper:

long-term relationships frequently existed between attorneys and individuals (dubbed, "professional plaintiffs"), who agreed to buy stock in likely litigation targets and to serve as representative plaintiffs in any ensuing action in exchange for payments from the lawyer. . . such agreements made sense for plaintiffs' attorneys - who were able to reduce the search costs associated with initiating a case by having a ready stable of plaintiffs.

As an aside, I am unable to buy into the theory that pre-PSLRA investors were both: (a) able to predict likely litigation targets in advance with great precision; and (b) that they agreed to buy and hold these stocks and suffer guaranteed losses.

If the investor (or the attorneys) for that matter, were able to predict securities fraud (much like the SEC's "Pre-Crime Unit" joked about by Bruce Carton over at Securities Litigation Watch) wouldn't they do better financially by shorting the stock before the disclosure caused the resulting decline in price and the supposedly inevitable "race to the courthouse?"

Update: The D&O Diary has a thoughtful post on the article, here and the WSJ Law Blog has a post here.

Daily Trivia: Professor Perino was "one of the principal developers of Stanford Law School's Securities Class Action Clearinghouse." The Clearinghouse was nominated by the Smithsonian Institution for the 1997 Computerworld Smithsonian Award (since renamed The Computerworld Honors Program) as one of the five most important applications of information technology created by an educational institution.

The eventual winner in 1997 was The Virtual Alphabet Book, which is a:

multimedia presentation of the traditional ABCs. It contains alternative ways to learn the alphabet. You can also interact with the objects in the Virtual Alphabet Book with switches, infra-red head pointers, or a touch screen. This makes the alphabet accessible to children with severe physical limitations.

It's Getting Hot in Here...

It's that time of year again.

The National Law Journal has come out with their annual "Plaintiffs' Hot List" - an admittedly highly subjective survey of the plaintiffs' bar.

Eleven firms were highlighted on "The Year's Hottest Firms" list.

Of those, ten have a substantial securities litigation practice.

In alphabetical order the ultra hot securities litigators of 2006 are:

Baron & Budd, P.C. - An 80 attorney firm founded in Dallas nearly twenty years ago. Among noteworthy securities cases mentioned in the article is In re 7-Eleven Inc. Shareholders Litig., where Randall K. Pulliam represented shareholders attempting to force the company to pay more to take the corporation private. The company ultimately agreed to boost its tender offer by $5 per share, worth $145 million to the shareholders.

Bernstein Liebhard & Lifshitz, LLP - A 42 attorney firm that is just slightly older than the PSLRA, the New York based firm is on the plaintiffs' executive committee in the In re Initial Public Offering Securities Litig, and secured an important decision in the In re Royal Dutch/Shell Transport Securities Litigation, that will allow shareholders to proceed with their claims even if they held their stock.

Bernstein, Litowitz, Berger & Grossmann LLP - The 50 lawyer firm "had a hand in six of the 10 largest securities fraud class actions to date," including the $1.3 billion settlement in In re Nortel Networks Corp. Securities Litig. that "represents the largest recovery on record for a non-U.S. lead plaintiff."

Cohen, Milstein, Hausfeld & Toll, P.L.L.C. - With 60 attorneys and offices in four states (well three states and the District of Columbia), the firm has often been cited as having a cutting edge litigation practice, including the recent news that the firm would soon open a London office, an apparent first for a plaintiff side firm. Last year, the firm also had the rare opportunity to try a securities fraud class action - with In re Globalstar Securities Litig.

Hagens Berman Sobol Shapiro LLP - Though more noted these days for the firm's work in antitrust, healthcare, and consumer litigation, Hagens Berman has strong securities litigation roots. Plus, they have to be the only firm on the list that sponsors a cycling team.


Grant & Eisenhofer, P.A. - Formed just as the PSLRA was taking effect, this relative newcomer to the securities litigation arena has made waves as noted in a companion article, Investors Press Their Demands. The firm "has been pursing litigation intended to shake up the way corporate boards do business."

Labaton Sucharow & Rudoff LLP - One of the older firms in the plaintiff's class action bar, the Labaton firm is a frequent guest on these pages, including recent settlements of the In re DHB Industries Inc. Class Action Litig., and In re HealthSouth Corp. Securities Litig. securities class actions.

Lerach Coughlin Stoia Geller Rudman & Robbins LLP - The largest class action firm in the country, with 180 attorneys, the firm has achieved an eye-popping $45 billion in recoveries, including $7.3 billion in the Enron litigation alone. As noted previously, here, about 10% of the firm's attorneys are former prosecutors.

Lieff Cabraser Heimann & Bernstein, LLP - The 60 attorney firm has offices in three states and an impressive roster of securities litigation clients. The securities case mentioned in the article, Merrill Lynch Fundamental Growth Fund v. McKesson HBOC Inc., is an opt-out case where the firm reached a settlement on the verge of trial and recovered nearly all of the $150 million in losses claimed by the firm's two mutual fund clients.

Motley Rice LLC - The 74 attorney firm is perhaps best known for their work in toxic torts, products liability and catastrophic injury, but as noted several months ago by The D & O Diary, the securities litigation group at Motley Rice was substantially enlarged in February 2006 with the addition of four seasoned Atlanta-based lawyers from Chitwood Harley Harnes LLP.

Daily Trivia: The one firm on the National Law Journal list that is not highlighted above, Girardi & Keese, now employs Erin Brockovich, perhaps the most famous paralegal in the world.

Second Circuit Affirms SEC's Ability to Direct Fair Funds Distribution

In an opinion earlier this month that failed to garner even a mention in the collective securities litigation blogging universe, the United States Court of Appeals for the Second Circuit affirmed the District Court's approval of a plan by the Securities and Exchange Commission to distribute money to the victims of WorldCom, Inc.'s massive fraud.

The SEC had prepared a distribution plan pursuant to the "Fair Funds for Investors" provision of the Sarbanes-Oxley Act of 2002 (15 U.S.C. § 7246(a)). Judge Jed S. Rakoff approved the plan, which "excluded investors whose aggregated sales and purchases of WorldCom securities over the relevant time period resulted in a net profit," or recovered than thirty-six cents on the dollar either in the bankruptcy proceeding or through the sale of their WorldCom securities."

The Official Committee of Unsecured Creditors of WorldCom, Inc. appealed, arguing that:

the district court extended inappropriate deference to the SEC when it approved the Fair Fund distribution and erred in rejecting the Committee's objections.

The Second Circuit held, in a case of first impression, both inside and outside the Circuit, that the "fair and reasonable" standard of review applied by the district court is the appropriate one for Fair Fund distribution plans. Further, the Court held:

We have long understood that the SEC's charge to enforce the securities laws carries with it the discretion to determine how to distribute recovered profits among injured investors.

The distribution is to be made from the WorldCom Victim Trust. Further information can also be found at the SEC's Spotlight on SEC v. WorldCom page, here, or the website maintained by lead counsel in the securities class action, here.

Thanks to reader Werner Kranenburg, a former Schiffrin & Barroway, LLP summer associate, and current law student in the United Kingdom for nudging us in the direction of the opinion.

Daily Trivia: Judge Rakoff, who gave the 2003 commencement speech at Swarthmore College, took the opportunity to recount the story of A. Mitchell Palmer, a fellow Swarthmore graduate. Judge Rakoff described Palmer as "the worst of all Swarthmore graduates."

Palmer, who was appointed Attorney General in 1919, was twice the intended victim of anarchist bomb attacks. These personal attacks are believed to have been a significant influence for Palmer's campaign against radicalism, which culminated in the "Palmer Raids," a series of police roundups, warrantless wiretaps, and mass arrests of suspected leftists and radicals from 1918-1921.

International Institutional Investor "Arms Race" Ratchets Up a Notch

As previously discussed here and here, American class action law firms are taking a number of steps to solidify their relationships with foreign institutional investors and outside counsel for those investors.

Many of those steps have involved forming official and unofficial affiliations with foreign based firms.

In what appears to be a first for a plaintiffs firm though, Cohen, Milstein, Hausfeld & Toll, P.L.L.C. is set to open their own London office on January 1, 2007 according to this article from The Lawyer.

According to the article, the new office will be staffed by "one or two partners and up to nine associates," and "will initially focus on antitrust and competition matters," though "securities actions, employee discrimination and environmental law" actions will also be on the new office's agenda.

As previously noted, Cohen Milstein already has an international practice area portion of their website and boasted that they had "affiliated offices in the United Kingdom, Italy, South Africa, Panama, Australia and China."

This appears to be a major step forward, going beyond the "joint alliance" formed earlier this year between Labaton Sucharow & Rudoff LLP and the TILP Group and the "formal cooperation agreement" formed between Schiffrin & Barroway, LLP and Winheller.

Update: The Times (of London) also has an article on the office opening.