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News and events related to securities class action litigation. Containing all facts, with particularity, and an occasional dose of commentary.

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Wednesday, August 27, 2003
Motion For Voluntary Transfer Granted - Like so many blogs before it, The 10b-5 Daily has moved to a home it can call its own. You have always been able to access this blog via, but now it's the only option! Please update your bookmarks and visit the new location soon. In fact, you should be taken there automatically after a short delay . . .

Tuesday, August 26, 2003
Computer Associates Settles - Computer Associates International Inc. (NYSE: CA) has announced that it will issue up to 5.7 million shares to obtain a global settlement of the securities class actions, ERISA class actions, and derivative litigation pending against the company. (There may be a cash component to the settlement, however, depending on the share price of the stock at the time of distribution.) The cases are based on how the company, which makes software from corporate mainframe computers, recognized revenue and awarded executive compensation. In anticipation of the settlement, the company plans to take a pre-tax charge of approximately $144 million in the current quarter.

Quote of note: According to an Associated Press article, lead counsel for the plaintiffs stated "that getting stock today, if the company has a good future, has a better upside for our clients than waiting three, four, or five years to resolve the case."

Monday, August 25, 2003
How Much Particularity Is Enough? - Less than many other circuit courts have required, is the answer from the U.S. Court of Appeals for the Tenth Circuit in Adams v. Kinder-Morgan, Inc., 2003 WL 21906117 (10th Cir. August 11, 2003). Pursuant to the PSLRA, plaintiffs attempting to plead securities fraud based on information and belief (as opposed to personal knowledge) must "state with particularity all facts" supporting their belief that the specified statements were misleading. Courts have routinely grappled with the meaning of the words "all facts."

The Second Circuit, in Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000), concluded that interpreting the text literally would lead to absurd results, including requiring dismissal "where the complaint pled facts fully sufficient to support a convincing inference if any known facts were omitted." The Second Circuit tempered its holding, however, by finding that it is not enough for plaintiffs to baldly allege facts in support of their allegations, they must provide "documentary evidence and/or a sufficient general description of the personal sources of the plaintiffs' beliefs." (The Fifth Circuit has also adopted this approach, while the First and Ninth Circuits have required detailed source information.)

In Adams, the Tenth Circuit agreed with the Second Circuit that "all facts" should not be interpreted literally, but declined to impose a requirement that plaintiffs state the source of their facts. Noting that the PSLRA did not "purport to move up the trial to the pleadings stage" and does not mention the pleading of sources, the court held that it will "apply a common-sense, case-by-case approach in determining whether a plaintiff has alleged securities fraud with the particularity required by [the PSLRA] without adding a per se judicial requirement that the source of facts must always be alleged to support substantive allegations of fraud in an information and belief complaint." The court did note, however, that in the absence of source information, the facts in the complaint "will usually have to be particularly detailed, numerous, plausible, or objectively verifiable by the defendant before they will support a reasonable belief that the defendant's statements were false or misleading."

Holding: Reversed in part (dismissal based on a lack of particularity, and other grounds, as to all defendants), affirmed in part (dismissal based on insufficient scienter allegations and lack of control as to one defendant).

Quote of note: "While the PSLRA certainly heightened pleading standards for securities fraud lawsuits, we believe that if Congress had intended in securities fraud lawsuits to abolish the concept of notice pleading that underlies the Federal Rules of Civil Procedure, Congress would have done so explicitly."

Friday, August 22, 2003
DaimlerChrysler Settles Merger Suit - The big news today is the announcement of a proposed $300 million settlement in the securities class action against DaimlerChrysler AG. The suit alleges that Daimler-Benz AG misrepresented the acquisition of Chrysler as a "merger of equals" to avoid paying Chrysler shareholders a takeover premium for their shares. (The 10b-5 Daily has posted a few times about the case - see here and here.)

A separate suit brought by billionaire financier Kirk Kerkorian, who was Chrysler's largest single shareholder at the time of the merger, is unaffected by the settlement because Kerkorian will opt out of the class. Kerkorian's case is set for a December trial in the D. of Del.

Bloomberg appears to have the most comprehensive article on the settlement (at least as of this posting). The State Board of Adminstration of Florida, a teacher's and workers' pension fund that acted as one of the lead plaintiffs in the case, has issued a press release.

Quote of note (Bloomberg): "The offer, before any opt-outs, is worth about 43 cents a share, minus attorneys' fees. With Kerkorian opting out, the remaining shareholders would each receive about 47 cents per share, minus attorneys' fees. If approved, the settlement would be one of the largest ever in a securities fraud case, according to Bloomberg data. The agreement is tied for ninth place among the largest recoveries in shareholder class-action suits in history, the data shows."

Quote of note II (Bloomberg): "Han Tjan, a spokesman for the Stuttgart, Germany-based automaker, said the company has insurance to cover $220 million of the settlement. DaimlerChrysler officials say the class-action claims by investors other than Kerkorian presented the 'major risk' in the case. 'Now we'll concentrate on the suit with Tracinda [Kerkorian's holding company],' company spokesman Hartmut Schick said."

Thursday, August 21, 2003
The Battle Over Greenfield's Estate - Harvey Greenfield was a plaintiffs' securities class action lawyer who passed away in 2002. A proud alumnus of Harvard Law School, Greenfield indicated to people that he planned to leave the bulk of his $35 million estate to the school. But a year after Greenfield's death, his will cannot be located and there is an ongoing battle between Harvard and his sole living heir over who will receive the money. The August 20, 2003 edition of the New York Law Journal contains an article (via - free registration required) discussing Greenfield (including his famously abrasive dealings with other lawyers) and the legal contest over his estate.

PricewaterhouseCoopers 2002 Securities Litigation Study - PricewaterhouseCoopers LLP has issued a study on private securities litigation trends in 2002 and the first part of 2003. Notable findings for the period from January 1, 2003 to July 31, 2003 include:

(1) 60 securities class actions were settled with a total settlement value of $1.5 billion ($25.1 million average).

(2) The total number of securities class action filings in 2003 is on track to be approximately 190 (down from 217 in 2002).

(3) The number of securities class actions involving health services and pharmaceutical companies is rising, while the number of cases against telecommunications and utlilities companies has dropped dramatically.

Quote of note (from the related press release): "In 2002, approximately one out of every five shareholder class actions involved either a Department of Justice investigation, or a federal indictment, conviction or guilty plea/conviction, a 200 percent increase over 2001, and a 290 percent increase over the average for the years 1996 through 2000."

Wednesday, August 20, 2003
Analysis Of The Milberg Weiss Breakup - The August 18, 2003 edition of the Legal Times has an article (via - free subscrip. required) on the previously announced breakup of Milberg Weiss Bershad Hynes & Lerach, widely recognized as the leading plaintiffs' securities class action firm. (The 10b-5 Daily posted extensively on this development back in June, starting with this post.) The front page story by Andrew Longstreth (of The American Lawyer) takes a comprehensive look at the issues that may have led to the split.

New York Pursues Claims - The Associated Press reports today that the New York State Comptroller has released a report claiming that corporate scandals have cost New York nearly $13 billion over the last two years in reduced economic performance, tax revenues, and pension fund value. The article also notes that New York's pension fund is the lead plaintiff in several securities class actions.

Tuesday, August 19, 2003
"Bounty On Directors and Officers" - According to the Recorder (via, a prominent securities class action plaintiffs' attorney stated at a recent ABA seminar that "he has been offered 50 percent of any judgment that comes directly from the pocketbooks of individual directors and officers." Moreover, his institutional clients are committed to defending this type of fee arrangement in court.

Note, however, that this is not really a new revelation. An article in the January 2003 issue of the Corporate Legal Times (only available online via Westlaw or LexisNexis) discussed the use of premium fee arrangements to target the personal assets of alleged corporate wrongdoers under the sub-headline "Institutional Investors Place a Bounty on Directors and Officers." Just something else to keep corporate executives up at night.

Medi-Hut Settles - Medi-Hut Co., Inc., a New Jersey pharmaceutical and medical device maker, has announced the settlement of the securities class action filed against it in the D. of N.J. The suit was based on alleged accounting fraud. If approved by the court, the settlement will pay investors $400,000 in cash and 861,990 shares of stock (currently trading at about 15 cents a share).

Addition: The August 20, 2003 edition of the Newark Star-Ledger has an article on Medi-Hut and the settlement.

Monday, August 18, 2003
Qwest Cites Merrill Lynch Decision (And So It Begins) - There is little doubt that Judge Pollack's decision in the Merrill Lynch research class actions is destined to be widely cited by securities litigation defendants -- it certainly has caused attorneys to give more consideration to loss causation as a defense. Exhibit A: Qwest Communications International, Inc.

The Rocky Mountain News reported over the weekend that Qwest has filed a motion to dismiss the securities class action against the company citing the Merrill Lynch decision and arguing that plaintiffs have not adequately alleged that the supposed misconduct, rather than a general market decline, caused their losses. Predictably (especially if you regularly read The 10b-5 Daily), plaintiffs have responded that the Merrill Lynch case isn't relevant, in part, because none of the plaintiffs in that case bought their stock from Merrill Lynch. The Qwest suit is before the U.S. District Court for the District of Colorado.

Quote of note: "In its court brief, Qwest cited the Merrill Lynch decision this summer. The class-action claim was dismissed, Qwest said, because the plaintiffs didn't adequately prove that the conduct of the analysts, rather than a general market decline, caused their losses. Qwest attorneys argue that Qwest's stock price too 'generally rose and fell' in a pattern corresponding to the broader Nasdaq telecommunications index."

Friday, August 15, 2003
Man's Attempt To Bite Dog Rejected - The McKesson HBOC securities fraud cases have generated a number of interesting legal developments over the years. The cases are based on the 1999 merger between McKesson and HBO & Co. After the merger was closed, McKesson announced that HBOC had improperly recorded certain software sales as revenues and that HBOC's financial results would have to be restated. Several securities class actions were filed and the New York State Common Retirement Fund was eventually selected as the lead plaintiff.

In January 2001, McKesson filed a complaint and compulsory counterclaim against the Fund and former HBOC shareholders who exchanged more than 20,000 shares of HBOC stock for McKesson stock. The theory was that the investors were unjustly enriched by trading inflated HBOC shares for properly-valued McKesson shares. The district court dismissed the claim.

On Wednesday, the U.S. Court of Appeals for the Ninth Circuit weighed in on the case, holding that McKesson cannot sue its own investors on an unjust enrichment theory. First, the court held that an equitable remedy for McKesson was unnecessary given that there are legal remedies available to the company for the same alleged wrong. "McKesson has potential legal claims against any number of parties who, unlike the former shareholders, actually played a substantial role in the decision to enter the Merger Agreement; the former HBOC shareholders are not the only targets for recovery." Second, the court declined to pierce the corporate veil to create liability for HBOC's shareholders, noting that "there is no allegation that the HBOC shareholders exercised - or even had the ability to exercise - domination or control over HBOC." Finally, the court concluded that the expansion of liability to the shareholders, who were unaware of the risk that they could be personally liable for corporate acts, would be unjust.

The Recorder has a story on the case (via and the decision can be found here. The case certainly highlights the difficulties in determining the winners and losers in securities fraud.

Q2 2003 Review of Securities Class Actions - Veritas, an Atlanta corporation that provides securities litigation data and services, has released some of the results from its review of class action activity from April 1, 2003 to June 30, 2003. Notable findings include:

(1) 59 securities class actions were filed during the second quarter of 2003, a slight decline from the 65 securities class actions filed during the first quarter of 2003.

(2) Milberg Weiss was bumped out of its historically commanding position for lead counsel appointments by Schiffrin & Barroway, who garnered 27% of lead counsel appointments in the second quarter (Milberg came in second with 23% of the appointments).

(3) Milberg Weiss continued to dominate the settlement arena, with 30% of the settlements that were approved in the second quarter for a total of 68% of the total funds recovered.

Thursday, August 14, 2003
Alliant Energy Case Dismissed - The Milwaukee Business Journal reports that the securities class action against Alliant Energy, filed in the U.S. District Court for the Western District of Wisconsin, has been dismissed without prejudice. The case was based on Alliant's alleged misrepresentations concerning its expected financial performance.

Homestore Settles - Homestore Inc. has agreed to pay $63.6 million in cash ($13 million) and stock (20 millon shares) to settle the pending securities class action against the company. The Associated Press reports that the settlement terms include corportate governance reforms.

Quote of note: "As part of the settlement, Homestore agreed to adopt corporate governance reforms within 30 days of the final approval. The company agreed to two-year board terms, the appointment of a new shareholder-appointed director and minimum stock ownership requirements for directors. The company also agreed to not use future stock options for director compensation."

Wednesday, August 13, 2003
Tenth Circuit Partially Reverses Novell Dismissal - The Salt Lake Tribune reports today that the U.S. Court of Appeals for the Tenth Circuit has partially reversed the earlier dismissal of a securities class action against Novell. The appellate court held that claims alleging that Novell and certain of its officers "created a fictional 'in transit' category and improperly recorded shipments to OEMs (or original equipment manufacturers, companies that incorporated Novell products into retail computers, or acted as resellers) as sales revenue" could proceed. The suit is based on conduct that allegedly occurred in 1996 and 1997. The decision can be found here.

Tuesday, August 12, 2003
First Union Settles Just Inside Courthouse - First Union National Bank has agreed to settle the securities class action suit against the company, based on its alleged participation in a securities fraud commited by Cyprus Funds, for $5 million. According to an article in the Sun-Sentinel, the settlement was reached after two days of testimony in a federal jury trial in Fort Lauderdale.

Quote of note: "Legal experts say the case against First Union was unusual because it resulted in a jury trial. While 'third parties' such as banks or law firms sometimes are sued in connection with securities fraud cases, usually such matters are settled out of court or dropped."

Intel Order - The recent unpublished order granting Intel Corp.'s motion to dismiss the securities class action against the company has been posted by The Securities Law Beacon. (The 10b-5 Daily has previously noted the decision.)

Judge Pollack Declines To Rehear Merrill Lynch Cases - Reuters reports that Judge Pollack of the S.D.N.Y. has declined to reconsider his ruling, or allow the plaintiffs to file an amended complaint, in the Merrill Lynch research class actions he recently dismissed. (The 10b-5 Daily has posted extensively about the original decision, starting here.)

Quote of note: "Pollack said on Tuesday that the plaintiffs had done 'nothing to change the unalterable, judicially-noticeable facts relating to the widespread public dissemination, years prior to the filing of the cases at bar, of information regarding analyst conflicts of interest and the service of investment banking business.'"

Monday, August 11, 2003
Ohio Sues Freddie Mac - The state of Ohio, on behalf of its pension funds, continues to supplement pending securities class actions with its own individual suits. Over the weekend, the Washington Post reported that Ohio has both individually sued Freddie Mac and certain fomer officers for securities fraud and filed a motion asking that it be named lead plaintiff in the securities class action. The state currently has individual suits pending against AOL Time Warner (discussed in The 10b-5 Daily here), Enron, and WorldCom and is the lead plaintiff in a securities class action against Global Crossing.

Quote of note: "'I don't mean be excessively litigious, but I think in terms of what we've seen, we need to see more corporate accountability,' [Ohio Attorney General Jim Petro] said."

SuperGen Obtains Voluntary Dismissal - SuperGen, Inc. (NASDAQ: SUPG) has announced the voluntary dismissal of the securities class action against the pharmaceutical company. The suit, originally filed in April in the U.S. District Court for the Northern District of California, alleged that the company sold shares while failing to disclose material information about one of its drugs.

Friday, August 08, 2003
Appellate Monitor (Loss Causation) - It has been a big summer for loss causation cases. A clear split in authority has developed between courts that believe plaintiffs must demonstrate a causal connection between the misrepresentations and a subsequent decline in the stock price (Semerenko v. Cendant Corp., 223 F.3d 165 (3d Cir. 2000); Robbins v. Koger Props, Inc., 116 F.3d 1441 (11th Cir. 1997)) and courts that believe plaintiffs merely need to allege that the misrepresentations artificially inflated the stock price (Gebhardt v. ConAgra Foods, Inc., 335 F.3d 824 (8th Cir. 2003)). (The 10b-5 Daily discussed the ConAgra decision here.)

In Broudo v. Dura Pharmaceuticals, 2003 WL 21789028 (9th Cir. Aug. 5, 2003), the Ninth Circuit clarified that it will not require plaintiffs to establish a causal connection between the misrepresentations and a decline in the stock price: loss causation "merely requires pleading that the price at the time of purchase was overstated and sufficient identification of the cause." The facts of the case, however, underline the problems with this reasoning. Broudo is a securities class action on behalf of investors who purchased Dura stock between April 15, 1997 and February 24, 1998. The defendants allegedly made misleading statements during that time period about, among other things, the clinical trials necessary to obtain new drug approval from the FDA for Dura's Albuterol Spiros delivery device for asthma medication. On February 24, 1998, Dura revealed that it expected lower-than-forecast 1998 revenues and 1998 earnings per share, but did not make any disclosures about its Albuterol Spiros delivery system. The February 24 announcement caused Dura's stock price to decline by 47%. It was not until November 1998, nearly nine months after the end of the class period, that Dura announced the FDA had "found the Albuterol Spiros device not approvable due to electro-mechanical reliability issues and chemistry, manufacturing, and control concerns." The district court found that the plaintiffs had failed to properly plead loss causation for his claims based on misleading statements concerning the Albuterol Spiros device because the complaint did "not contain any allegations that the FDA's non-approval [of the Albuterol Spiros device] had any relationship to the February price drop."

The 9th Circuit reversed. The court did not address the logical inconsistency of the plaintiffs' argument that statements revealed to be misleading in November caused them to suffer losses the previous February. Instead, the court found that it was unnecessary for the plaintiffs to plead "that a disclosure and subsequent drop in the market price of the stock have actually occurred, because the injury occurs at the time of the transaction."

The decision improperly conflates transaction causation and loss causation. Plaintiffs may have purchased on the basis of the alleged misrepresentations, but any loss requires the stock they purchased to decline in value. The practical problems created by the Broudo opinion are significant. As noted by Judge Pollack in the Merrill Lynch cases, "allowing plaintiffs in a fraud on the market case to satisfy loss causation simply by alleging that a misrepresentation caused the price to be artificially inflated without having to allege any link between the conduct and the decline in price would undoubtedly lead to speculative claims and procedural intractibility." Moreover, the PSLRA expressly states that plaintiffs have the burden of establishing that their losses were caused by the defendants' acts or omissions. How can plaintiffs' claims be plead with particularity if they do not connect the alleged fraudulent conduct to any loss?

Holding: Reversed and remanded with leave to amend.

Thursday, August 07, 2003
Halliburton Settlement On Hold - The Financial Times has a story on the dispute between the lead plaintiffs in the Halliburton securities class action. As previously noted in The 10b-5 Daily, Halliburton Company announced at the end of May that it had agreed to a $6 million settlement.

In a remarkable development, however, Scott + Scott (which represents one of the four lead plaintiffs) has refused to sign onto the settlement and is attempting to have Schiffrin & Barroway removed as lead counsel in the case. Scott + Scott claims that Schiffrin "did not convene a single meeting of the lead plaintiffs, refused to give other firms evidence it had investigated the charges, and then settled the case for $6m, even though some have estimated the damages as high as $6.8bn." There is also some controversy over why Vice President Dick Cheney, the CEO of Halliburton during some of the class period, was not named as a defendant.

The court has scheduled a hearing for August 25.

Wednesday, August 06, 2003
The Rent-Way Story - The Eire Times News is running an interesting series of articles on the financial fraud at Rent-Way, Inc. (NYSE: RWY), one of the nation's largest rent-to-own retailers. The articles detail both the fraud, which was first revealed in Oct. 2000, and the legal consequences for the company and its officers. The first article in the series can be found here (links to subsequent installments are at the bottom of the page).

ABA Considers Ethics Proposals On The Reporting Of Financial Misconduct - As part of its upcoming annual meeting, the American Bar Association is considering new ethics proposals on the reporting of financial misconduct by lawyers, including when lawyers can reveal information to public authorities about their clients. Opponents of the proposals, according to a Reuters article, fear that the new ethics rules will make lawyers an inviting target for securities litigation.

Quote of note: "The vote will be closely watched by the Securities and Exchange Commission, which has been charged by the U.S. Congress to set standards of professional conduct for in-house and outside attorneys who advise public companies. Some SEC rules for lawyers went into effect earlier this week and the agency could adopt more stringent requirements if it is dissatisfied with the ABA's actions."

Quote of note II: "Philadelphia attorney Lawrence Fox, who previously chaired the ABA's ethics committee, said the amendments would 'drive a wedge' between lawyers and their clients. He also said it was 'not much of a leap' to envision lawsuits charging that attorneys should have known about financial fraud, even though the defendant lawyers may not be accountants. 'We're setting lawyers up,' Fox said."

Tuesday, August 05, 2003
Journal Roundup - Looking for some fun beach reading this summer? Stay away from these articles! But if you want some interesting examinations of securities class action law, here are a few of the latest offerings.

1) The Santa Clara Law Review has an empirical study entitled "Securities Class Action Settlements" by Mukesh Bajaj, Sumon Mazumdar, and Atulya Sarin (43 Santa Clara L. Rev. 1001 (2003)). The authors studied 1203 federal case filings and 92 state court filings, spanning from 1988 to 1999, to draw conclusions about dismissal and settlement trends.

Quote of note: Among other conclusions, the authors found: (a) "The settlement process, as well as the rate of dismissals, has declined since the passage of the PSLRA;" (b) "Quick settlements generally involve relatively small settlement amounts;" (c) "Mean and median settlements have increased in the post-PSLRA period;" and (d) "Cases naming accounting firms as co-defendants, while relatively rare, involve average and median settlements that are greater than the sample as a whole." Many of these results are similar to those in the recent NERA study (discussed in The 10b-5 Daily here).

2) The ALI-ABA has published an article entitled "Central Bank is Alive and Well: Defense Strategies for Defeating 'Scheme To Defraud' Allegations in Private Securities Litigation" by Brian Pastuszenski, Christopher Robertson, and Jason Frank (SHO83 ALI-ABA 439 (May 8-9, 2003)). The authors focus on plaintiffs' recent attempts to use the holding in SEC v. Zandford, 535 U.S. 813 (2002), where the Supreme Court found a broker liable for engaging in a "scheme to defraud" under Rule 10b-5 when he misappropriated funds from a customer's account, to avoid the prohibition on "aiding and abetting" liability found in the Court's earlier holding in Central Bank. Recent district court decisions (notably in the Enron case) "have allowed claims to proceed against secondary actors who were not alleged to have made any actual misstatements relied on by plaintiffs, but instead were alleged only to have participated in certain transactions underlying the alleged misstatements."

Quote of note: "Successfully arguing a motion to dismiss based on Central Bank, however, requires articulating clearly the difference between (a) a 'misstatement' case in which plaintiffs complain about the purchase of stock at inflated prices as a result of allegedly false and misleading statements and (b) a case that alleges other forms of 'deception' that caused plaintiffs harm . . . In the typical class action case, only the defendant who actually made the offending statements themselves has any potential liability after Central Bank." (A discussion of another recent article on this general topic, with a different viewpoint, can be found in The 10b-5 Daily here.)

3) The same ALI-ABA "course of study" has an article on "Anonymous Informants: How Identifiable Must They Be Under The PSLRA" by Peter Saparoff and Justin Kudler (SH083 ALI-ABA 479 (May 8-9 2003)). The authors survey the recent case law on this contentious issue.

Quote of note: "The trend in the case law now has solidified around providing a description of the informant, but not necessarily his or her name, in a complaint alleging violations of the federal securities laws that was pleaded under the PSLRA."

FTD Settles - FTD, Inc. (Nasdaq: FTDI) has sent itself a bunch of flowers with the announcement that it is settling the securities class action against the company for $10.7 million in stock. The case was related to the company's 2002 merger.

Friday, August 01, 2003
Appellate Watch (Stay of Discovery) - The PSLRA provides that "all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss, unless the court finds upon the motion of any party that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party." With the passage of SLUSA, Congress attempted to strengthen the discovery stay by granting the power to federal court judges to quash discovery in state court actions if discovery in the state case conflicted with an order of the federal court.

In Newby v. Enron Corp., 2003 WL 21658666 (5th Cir. July 30, 2003), the underlying lawsuit was a state court action in Texas (Bullock), filed on behalf of thirteen individuals, against many of the same defendants as in the Enron federal securities class action litigation (Newby). The plaintiffs received permission from the state court to commence discovery, even though there was no dispute "that the discovery sought in Bullock would have fallen squarely within the discovery that may eventually take place in Newby if the plaintiffs survive a motion to dismiss." The defendants requested emergency injunctive relief from the U.S. District Judge presiding over the Newby case to stay discovery in the Bullock case. Pursuant to SLUSA, the discovery was enjoined until a ruling on the motion to dismiss in the Newby case. The Bullock plaintiffs appealed.

In Newby, the Fifth Circuit addressed whether the power granted to federal court judges to quash state court actions is only limited to state court actions brought on behalf of a class of investors. The plain language in SLUSA would appear to suggest otherwise, "a court may stay discovery in any private action in a State court . . . ." Appellants argued, however, that (1) the PSLRA and SLUSA were enacted to combat abuses in class action securities cases; and (2) other provisions of SLUSA refer specifically to state court class actions and control over the more general terminology in the operative provision.

Not surprisingly, the Fifth Circuit decided to stick with the plain language of the statute. "The title of [the SLUSA provision] reflects its purpose: to prevent the 'circumvention of stay of discovery' provided for in [the PSLRA]. The provision in [SLUSA] allows the federal court presiding over an action subject to the automatic stay of discovery to order a similar stay in a state court action. On its face [the SLUSA provision] applies to 'any private action in a State court.' The action stayed by the district court is plainly within the scope of this clause."

Holding: Stay of discovery affirmed (the panel also upheld additional injunctive relief granted by the district court).

Winona, Martha & The Securities Fairy - Fortune magazine has a short, often funny, and very effective interview with former SEC commissioner Joseph Grundfest. Among other things, Grundfest has a two-word explanation for the recent spate of corporate scandals: Winona Ryder. (Thanks to the Securities Law Beacon for the link.)

Quote of note:

Interviewer: "You've argued historically the class-action system has compensated investors - but hasn't deterred future misbehavior. Why?"

Grundfest: "I'm not suggesting that it has no deterrent effect. It's just weak compared with the criminal and the SEC enforcement mechanisms. The reason is that only 0.5% of the settlements in the 15 largest settlements came out of the pockets of the wrongdoer."

Thursday, July 31, 2003
Dismissal Of Suit Against Two WorldCom Executives Upheld - The Jackson Clarion Ledger reports that the U.S. Court of Appeals for the Fifth Circuit has upheld the dismissal of a securities class action against WorldCom former executives Bernie Ebbers and Scott Sullivan. The decision can be found here.

It is important to note, however, that this suit was not based on the accounting irregularties that led to WorldCom's recent bankruptcy. Instead, it was based on the failure of WorldCom to write-off certain receivables in 2000.

Quote of note: "In the original complaint, shareholders claimed Ebbers and Sullivan withheld information about $685 million in write-offs of uncollectible receivables. The ruling said, 'the plaintiffs simply ignore evidence that WorldCom frequently took large write-offs and that, indeed, a $768 million write-off had been taken in 1999.'"

Rising Cost Of D&O Insurance - Today's Wall Street Journal (subscrip. req.) has a feature article on the rising cost of directors and officers liability insurance (for more on this topic see these posts on The 10b-5 Daily). Insurers are both raising premiums and "holding firm on many of their efforts to rein in the generous terms and conditions they adopted during a price war in the late 1990s." A side graph identifies AIG (34% of premiums; 19% of policies) and Chubb (16% of premiums; 21% of policies) as the D&O insurance leaders.

Quote of note: "And while the reforms of the Sarbanes-Oxley corporate-governance act may reduce corporate scandals, in the near future they could prove expensive. For example, the law increases the responsibility of audit-committee members for overseeing the company's audits, potentially raising the stakes for individual committee members if problems are later found. 'There's a general confusion about what Sarbanes-Oxley really means,' says Bill Cotter, chief underwriting officer for National Union Fire Insurance Co., of Pittsburgh, a unit of American International Group Inc., the leading underwriter of D &O insurance. 'The fear is that it will be defined through litigation.'"

Quote of note II: "Companies have a variety of options to mitigate higher costs. These include buying less coverage and retaining more of their risk with higher deductibles or co-insurance, in which the policyholder pays a fixed portion of eventual claims, much as health-insurance often requires patients to pay part of their costs, brokers say. Deductibles, recently $1 million or even lower on even large policies, have risen to as high as $100 million. Co-insurance of 10% to 30% or more has become more commonplace as well."

Wednesday, July 30, 2003
"Biggest Hog At The Trough" - The Bristol Herald Courier has an article today on the lead plaintiff contest in the King Pharmaceuticals securities class action in the E.D. of Tenn. (Thanks to the SW Virginia Law Blog for the link.) The case is based on allegedly misleading financial statements made by the company.

At least two groups of pensions funds, as well as some individual investors who were shareholders in a company King Pharmaceuticals acquired, have moved for lead plaintiff status. U.S. Magistrate Judge Dennis Inman presided over the hearing.

Quote of note: "Inman said federal law favors the appointment of the stockholder who lost the most money. 'I'd like to know who is the biggest hog at the trough,' Inman said. That question prompted a lively debate among the dozen-plus lawyers, all of whom had a reason that their client should get the nod."

The Fine Line Between Being An "Aider and Abettor" Or A "Primary Violator" - There is an interesting article on the ABA's Business Law eSource (July 2003) entitled "Securities Litigation Against Third Parties: Pre-Central Bank Aiders And Abettors Become Targeted Primary Defendants." The authors, Jay Eisenhofer and Cynthia Calder, offer a comprehensive summary of the post-Central Bank case law on who is a "primary violator" for purposes of Rule 10b-5, including separate sections on cases involving accountants, lawyers, underwriters/investment banks, and ratings agencies.

As noted previously in The 10b-5 Daily, the line between a "primary violator" (liable) and an "aider and abettor" (not liable) is becoming blurred. Eisenhofer and Calder conclude that "accountants, lawyers, and investment bankers ought to be taking a hard look at their relationships with their clients, and their own potential for primary liability under Rule 10b-5 in cases of corporate fraud."

Quote of note: "Although neither has achieved majority acceptance, two different approaches - the 'bright line' and 'substantial participations standards - have emerged from the lower courts. According to those courts that have adopted the 'bright line' standard, only if a defendant actually makes a statement to the plaintiff (or the investing public) which contains a misrepresentation or omission can that defendants be liable. By contrast, under the 'substantial participation' rubric, a defendant that plays a significant role in creating the statement can be held liable."

Tuesday, July 29, 2003
Banks' Enron Settlement - J.P. Morgan Chase & Co. and Citigroup, Inc have agreed to pay $305 million in fines to the SEC and the Manhatten district attorney's office to settle charges that they helped Enron hide billions of dollars worth of loans. The Washington Post ran this story on the settlement in yesterday's edition.

Quote of note: "'The shareholders' claim is that the various banks, including these two, were doing exactly what the SEC says they were doing in this action,'" [Professor Henry T.C. Hu, a law professor at the University of Texas] said. "'The banks are not paying this amount of money for charity purposes; it is not chump change. It tends to give credence to the shareholder allegations. . . . This settlement, complete with the SEC's harsh language, will be materially helpful to the massive shareholder lawsuit.'"

Quote of note II: "Under today's settlement with the SEC and the district attorney, $236 million will eventually be distributed to 'victims' of Enron's fraud. Exactly who will be eligible for restitution has not been determined."

Baxter Suit Dismissed - Apparently, it's a good day to be a defendant. Baxter International, Inc. , a medical products maker, has announced the dismissal of the securities class action filed against it in Illinois federal court. The suit was based on earnings forecasts Baxter had made for FY2002.

Intel Suit Dismissed With Prejudice - The Associated Press reports that the securities class action against Intel Corp., the semiconducter company, has been dismissed with prejudice.

Quote of note: "U.S. District Judge Jeremy Fogel granted Intel's motion to dismiss Monday, saying plaintiffs failed to show company officials knowingly misled investors about Intel products or revenues in the third quarter of 2000."

Monday, July 28, 2003
Pollack Keeps Getting Press (Even Overseas) - TheLawyer.Com, a UK website, has an article on Judge Pollack's decision in the Merrill Lynch analyst research cases. Notably, the article contains the words "loss causation."

Quote of note: "Coffee [Columbia University law professor John Coffee] reckons that Judge Pollack's most important line of reasoning is that the plaintiff has to prove 'loss causation'. 'They can't simply prove that the plaintiff was fraudulently induced to buy the stock by the false inflated and insincere recommendation, but rather he has to prove first, and then later, that the recommendation was causally related to the stock's ultimate fall.' That is a very difficult burden for litigators to have to meet, he adds."

Saturday, July 26, 2003
Baker's Bill Postponed- Reuters reports that Rep. Baker has agreed to postpone a vote on the Securities Fraud Deterrence and Investor Restitution Act of 2003 (discussed in The 10b-5 Daily here).

Quote of note: "The bill is largely aimed at boosting the SEC's powers. But one section of it targets state officials, such as New York Attorney General Eliot Spitzer, by proposing barring them from writing securities law exceeding or adding to federal statute. State securities regulators have attacked the bill as a shield meant to protect Wall Street's largest brokerages from state-level investigations like the one Spitzer mounted recently into stock analyst conduct at Merrill Lynch."

Plaintiffs' Perspective - The Associated Press has a lengthy interview with Mel Weiss of Milberg Weiss, the leading plaintiffs' securities class action firm.

Quote of note:

Interviewer - "How big was the $1 billion settlement for ordinary investors in the IPO fraud case in your view? How much do you hope to get from the brokerages?"

Weiss - "The billion dollars is an expression of concern that these allegations are real and could give rise to staggering liability. It simplifies the litigation in that we can focus our attention on the conduct of the investment banks. The interesting part here is how much broader our inquiries will be than the government's has been because we're covering 55 banks, not 10. It's going to be far more fascinating to demonstrate that the conduct we allege to be serious violations of the law was widespread throughout the entire industry. ... I would be very disappointed if we don't achieve multiple billions (in recovery)."

Wednesday, July 23, 2003
South Korea Proceeds With Plan To Permit Securities Class Actions - As previously posted in The 10b-5 Daily, the South Korean legislature is considering a proposal to permit investors to bring securities class actions. The JooAng Daily reports that the Legislation and Judiciary Committee’s review subcommittee approved the measure yesterday.

Quote of note: "[T]he proposed legislation only allows filing of such suit for financial fraud complaints: book-rigging, stock price manipulation or false disclosures and audits. At least 50 shareholders who collectively owns either 0.01 percent of a firm’s shares or own shares valued at 100 million won would be required for a suit to be filed. The court would have the right to investigate the qualifications of shareholders as plaintiffs. The court could also ask for basic information from financial authorities. If a court rejected the filing of a lawsuit, aggrieved shareholders would have the right to appeal the decision. "

Green Tree Settles - The Associated Press reports that Green Tree Financial Corp. has settled the securities class action against the company that has been ongoing since 1998. The suit alleged that the company and its officers engaged in fradulent accounting practices to artificially inflate its stock price and increase the CEO's compensation. The preliminary settlement is for $12.5 million, which will be paid by the company's D&O insurer.

Note that this suit led to the 8th Circuit's seminal decision interpreting the scienter pleading requirements of the Reform Act: Florida State Board of Admin. v. Green Tree Financial Corp. (8th Cir. 2001).

President of ATLA Criticizes Class Action Reform - In case there was any doubt about the Association of Trial Lawyers of America's position on the Class Action Fairness Act.

Quote of note: "Alexander stated that the convention would work 'to strengthen the fight against the Administration's and Congress' anti-consumer actions, especially concerning medical malpractice rights, and class action lawsuits against major malfeasant corporations like Enron and Global Crossing, who are almost unaccountable on issues from pensions to pollution.'"

Where Is Judge Pollack Taking Us? - An interesting column by Michael Carroll in yesterday's Wall Street Journal (subscrip. required) about the potential ramifications of Judge Pollack's decision in the Merrill Lynch cases. The author questions whether private securities class actions, as opposed to regulatory actions by the S.E.C., are the right method for remedying the societal costs of misleading market information.

Quote of note: "The judge's ruling draws on ideas which, if they are followed by other courts, could change the world of securities class actions as we know it. As Judge Pollack put it, when plaintiffs are a class of disappointed investors who lost money in trades on the secondary market, there is another class of lucky investors who were on the other side of those trades. In the language of economics, the losses that class plaintiffs were seeking to recover in the Merrill Lynch case were transfer payments that had been made to other investors in the market. Judge Pollack decided that Merrill Lynch did not have to underwrite those transfer payments."

Quote of note II: "Transfer payments among investors based on false or misleading market information impose a cost on society, but it is not a cost that is best measured by the total of all transfer payments or that is best remedied by private lawsuits. The societal cost imposed by bad market information is a lessening of market confidence and the decrease in investment activity that can follow. These are macro results that can be addressed by regulatory agencies such as the Securities and Exchange Commission, whose job it is to protect market confidence by policing information in the market."

Tuesday, July 22, 2003
AOL Sued Separately By Ohio And California Pension Funds In State Court - Over the weekend, the Associated Press reported that state public employee pension funds in Ohio and California have declined to join the federal securities class action against AOL (postings about the AOL case can be found here and here). Instead, they have sued AOL separately in state court based on the same conduct. Note that this is part of a trend for the Ohio funds, which have also sued Enron and WorldCom in state court.

Quote of note: "'The class-action lawsuit, you get peanuts at the end of it,' Ohio Attorney General Jim Petro said."

The Plaintiffs' Hot List - The National Law Journal (July 21, 2003 edition) has a breakout of "The Plaintiffs' Hot List" of law firms. A number of plaintiffs firms that focus on securities class actions have made the list.

Friday, July 18, 2003
Read Judge Pollack's Opinion For Yourself - The conventional wisdom on Judge Pollack's decision in the Merrill Lynch analyst research cases is that he dismissed the cases because the plaintiffs were not Merrill Lynch clients, and therefore could not demonstrate that they reasonably relied on the brokerage's research. Columnists for Forbes and Bloomberg continue to provide a forum for this incorrect reading of the case, which is being promoted vociferously by (surprise) attorneys representing individual Merrill Lynch clients in arbitration claims against the brokerage.

In fact, as discussed in The 10b-5 Daily here and here, Judge Pollack dismissed the cases because plaintiffs failed to establish any connection between the analyst research and the companies' financial troubles or the collapse of the overall market. In Judge Pollack's view, that is what actually caused plaintiffs' losses. But as Chico Marx once said, "who are you going to believe, me or your own two eyes?" Here's the opinion again -- whether you agree with Judge Pollack or not, it's fascinating reading.

Thursday, July 17, 2003
Panel Discussion On Lead Plaintiff/Lead Counsel Selection - The May 2003 edition of the Fordham Law Review contains a transcript of an interesting, if slightly dated, panel discussion on the selection of lead plaintiff/lead counsel in securities class actions. See 71 Fordham L. Rev. 2363 (panel discussion took place on Feb. 5, 2002). The panel participants included Judge Edward Becker (3rd Cir.), Judge Milton Shadur (N.D. Ill.), Jill Fisch (Professor - Fordham), Gregory Joseph (private attorney), and Mel Weiss (private attorney).

Quote of note (Judge Becker): "Congress originally thought that institutions in this new client-driven, as opposed to lawyer-driven, regime that it was creating would be the lead plaintiffs, but it really has not turned out that way. The only institutions that have agreed to be lead plaintiffs are public pension funds and a few union-related institutions. By and large, the mutual funds was the group that I think Congress had in mind--because they've got more stock than anybody in any of these corporations that go sour--but the mutual funds won't touch it. Doing a cost/benefit analysis, they think that it just ain't worth it for them to get involved. So the mutual funds have not come forth as lead plaintiffs. The private pension funds have not."

The Enron Watch V - Mark your calendars. The judge in the Enron securities class action has laid out the case schedule. According to an article in the Houston Chronicle, the trial will commence on Oct. 17, 2005, provided, of course, that the case ever gets to that stage.

Wednesday, July 16, 2003
The PSLRA: Much Ado About Nothing?- NERA, an economics consulting firm, has released its latest study on securities class actions entitled "Recent Trends in Securities Class Action Litigation: Will Enron and Sarbanes-Oxley Change The Tides?" The study reached the following conclusions about the trends in securities litigation since the passage of Sarbanes-Oxley in June 2002:

1) Securities class action filings have not increased dramatically (annual rate of 214 filings, compared to average annual rate of 208 filings from 1996-2001).

2) Dismissals have fallen sharply (half as many dismissals as in the previous 11 month period).

3) Average settlement values have fallen modestly ($22.7 million per settled case, compared to $25.5 million from 1996-2002).

These short-term trends are not nearly as interesting, however, as NERA's findings suggesting that the PSLRA (enacted in 1995) has not achieved Congress' goal of reducing meritless securities litigation. Indeed, the chances of a publicly-traded company being sued in a securities class action has increased (by 40.5%), while the percentage of cases dismissed (12-13%) or settled for nuisance value (24%) have remained roughly the same. These results lead to one question: has all of the controversy over the PLSRA (presidential veto, periodic calls for its repeal, etc.) been much ado about nothing?

Congress may want to take a hard look at the lessons of the PSLRA as it considers the Class Action Fairness Act and other tort reforms.

Tuesday, July 15, 2003
Motion To Dismiss Filed In The AOL Time Warner Case - The New York Times is keeping on top of the AOL Time Warner securities class action. In a followup to its July 7 overview of the case (posted on The 10b-5 Daily), the paper has an article on the recently filed motion to dismiss. Among other things, AOL Time Warner argues that its restatement of $190 million is just 1% of its revenue over the period in question and that it disclosed all of its two-way deals with customers.

Quote of note: "The company's motion to dismiss the suit is an expected part of the proceedings, and legal scholars consider it unlikely to succeed. But the relative strength of AOL Time Warner's legal defense will help determine how costly it is for the company to resolve the suit, most likely through a settlement payment."

Using Sarbanes-Oxley In Securities Litigation - The July 11, 2003 edition of the New York Law Journal contains an article (via - regist. required) on the potential impact of the Sarbanes-Oxley Act of 2002 on securities litigation. The authors, Robert Jossen and Neil Steiner, discuss three issues: (1) the statute of limitations; (2) the advancement of legal fees for individual defendants; and (3) possible attempts to bootstrap violations of the act into Rule 10b-5 claims.

Quote of note: "One area that can be anticipated to be a field for imaginative claims concerns the new certification requirements of the act. Indeed, class action plaintiffs in at least two recent cases have included allegations that the company and its top executives filed the certifications required by Sarbanes-Oxley, but the underlying financial data nevertheless was incorrect. While those complaints do not take the next step and allege that the incorrect certification itself constituted a violation of the securities laws, it may be only a matter of time before defendants see class action complaints make such allegations."

Monday, July 14, 2003
Double Down On Winnick - Gary Winnick, the former Global Crossing executive, was not amused to find that his likeness appears on the "Shareholders' Most Wanted" playing cards and sent a cease-and-desist letter directly to the distributers. The distributers, however, claim in this Reuters article that the letter was inappropriate because they are plaintiffs in the Global Crossing securities class action.

IPO Settlement Examined - The San Jose Mercury News ran a story yesterday on the proposed settlement by the issuer defendants in the IPO allocation cases. The author states that investors should not expect a quick or large recovery. The 10b-5 Daily has an earlier post on the settlement terms.

Quote of note: "Like many average IPO investors, Gallagher is hazy on exactly what iBeam or its investment bank was alleged to have done wrong. But he feels he deserves a cut of the settlement anyway. 'I feel I deserve it because, well, I'm not certain why,' Gallagher said sheepishly. 'Nobody talked me into it, that's for sure. The opportunity was there, and I decided to go for it.'"

Employees vs. Executives - The Atlanta Business Chronicle (via MSNBC News) has an article on the proliferation of ERISA class actions by employees being filed in the wake of similar securities class actions by shareholders. BellSouth and Scientific-Atlanta are two companies facing this situation. The 10b-5 Daily has commented on the issues raised by these parallel ERISA suits.

Quote of note: "The lawsuits are among the first in what could be many by members of company retirement plans, who, under federal law, can sue their employers more easily than average shareholders. Such lawsuits have already prompted some companies to extricate themselves from the process of overseeing their retirement plans."

Thursday, July 10, 2003
The Enron Watch IV - According to a Reuters article, the trial in the securities class action against Enron is now scheduled to begin in October 2005 (nearly four years after the company's bankruptcy).

Quote of note: "Kathy Patrick, a lawyer who represents Enron's outside directors, told the judge that discovery could produce more than 100 million pages of documents. She likened the case to 'the Bataan death march.'"

Sarbanes-Oxley And The Statute Of Limitations - The June 27, 2003 edition of the National Law Journal contains a column (via - subscrip. required) analyzing the case law on the statute of limitations for securities fraud cases. Sarbanes-Oxley has extended the statute of limitations "to the earlier of two years after the discovery of the facts constituting the violation or five years after such violation."

Quote of note: Sarbanes-Oxley "clearly provides that this amendment 'shall apply to all proceedings addressed by this section that are commenced on or after the date of enactment of this Act [July 30, 2002].' Left unresolved is whether the amendment salvages expired claims or extends the limitations period for pending claims. Compare Roberts v. Dean Witter Reynolds Inc., 2003 WL 1936116 (M.D. Fla. March 31, 2003) (holding that the amendment revives expired claims) with De La Fuente v. DCI Telecommunications Inc., 2003 WL 832009 (S.D.N.Y. March 4, 2003) (holding that the amendment does not apply to claims pending at time of enactment)."