Confidential Sources Not Identified With Particularity

Judge Jose L. Linares (D. N.J.) has ruled that Defendants’ motions to dismiss in the PDI securities class action will be granted in part and denied in part. Of course, reading the decision, at the end you might be wondering what portion of the motions were denied. Well, many of the statements were forward looking, but Judge Linares found that the safe harbor defense could not rescue defendants, saying “the adequacy of the warnings is not so obvious to this Court.” Of course, that doesn’t help too much when the next thing the court says is that your complaint “does not plead any particularized facts to support an inference that Defendants had actual knowledge of their statement’s falsity.”

The decision is quite fact specific and analyzes each of the alleged false statements in depth, but of note is the court’s discussion of confidential sources. The court said “Plaintiffs fail to plead falsity of Defendants’ statements with the particularity demanded by the Reform Act because the confidential sources relied upon by Plaintiffs are not accompanied by corroborative facts. Notably, Plaintiffs have failed to provide supporting facts that explain what department the ‘former senior PDI employee’ worked in, what Saldarini actually said, and what other parties were present. Similarly, Plaintiffs have not provided any details on how the ‘former PDI regional manager’ determined that it was allegedly ‘common knowledge at PDI’ that Evista was guaranteed to lose money — that is, to whom was this language common, and when and how did this knowledge become common. In light of the foregoing, this Court finds that Plaintiffs’ sources have not been described with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged, and therefore, Plaintiffs have failed to plead the falsity of Defendants’ statements with the particularity demanded by the Reform Act.”

You can read In re PDI Securities Litigation, issued August 17, 2005, at 2005 U.S. Dist. LEXIS 18145.

Nugget: “The Court does not see any basis to justify denying Plaintiffs leave to amend. Accordingly, this request is granted, and Plaintiffs are hereby granted leave to amend the Second Amended Complaint.”

Dura a Dud Again

Judge Harvey Bartle III (E.D. Penn.) has finished evaluating Defendants’ motions to dismiss in the Vicuron Pharmaceuticals securities class action. In denying their requests to toss the 1933 and 1934 Act claims against the company and its officers and directors, the court evaluated the shareholders’ claims that “defendants made numerous materially false and misleading statements concerning anidulafungin,” a drug “in development for the treatment of esophageal candidiasis (‘EC’).”

The court had little trouble finding intent as “anidulafungin was Vicuron’s lead product in development, which in itself supports a finding of scienter for alleged misrepresentations as to it.” As for loss causation, Judge Bartle recognized that Dura held that “artificial inflation itself is not enough.” But that didn’t help Defendants, as the judge found that “loss causation has been adequately pleaded” because Plaintiffs alleged (1) that “as a result of the partial disclosure by the Company of the FDA letter, including the shocking news regarding the lack of support for a label claim for EC, the price of Vicuron plummeted,” (2) that “when investors were informed of the implications of the ‘approvable letter’, the true impact of the relapse rate data and the unproven superiority of anidulafungin in the treatment of refractory disease, the market price of Vicuron stock collapsed,” and (3) that “the amended complaint also specifically states that plaintiffs and other members of the Class were deceived and caused to purchase Vicuron securities at inflated prices and to sustain damages.”

Finally, the court rejected Defendants’ sound-in-fraud argument, which attempted to apply Rule 9(b) to the 1933 Securities Act claims. Judge Bartle held that “plaintiffs have drafted this claim without reference to any mental state,” and “while the amended complaint specifically incorporates the foregoing paragraphs into the § 11 claim, it also reads: ‘Plaintiffs for the purposes of this claim, disclaim any allegations of fraud.’”

You can read In re Vicuron, issued July 5, 2005, at 2005 U.S. Dist. LEXIS 15613.

Nugget: “In the amended complaint, plaintiffs have emphasized certain text of excerpted portions in bold and italicized lettering. We interpret the distinction to indicate that the emphasized portions are what plaintiffs claim to be actionable. We will read the plain text portions as simply context for the emphasized portions.”

Fifth Circuit Affirms Denial of Class Certification

Some might try to use yesterday’s Fifth Circuit decision affirming a denial of class certification to their advantage, arguing that the Panel held the NASDAQ market inefficient. But they probably wouldn’t get too far, especially if Plaintiffs on the other side take heed of the lessons to be learned from this opinion. You see, Plaintiffs appealed under Rule 23(f) after the Northern District of Texas struck their expert’s report on market efficiency “concluding that his event study was unreliable and purposefully designed to support its market-efficiency conclusion.”

The Panel decision, authored by Circuit Judge Jerry E. Smith, and joined by Circuit Judges William Lockhart Garwood and Edith Brown Clement said that “even if competent evidence could be marshaled to make a plausible case that Ascendant common stock traded in an efficient market such that reliance should be presumed for the class, this case comes to us with plaintiffs’ expert report excluded and their briefing to the district court devoid of any serious effort to show market efficiency, so plaintiffs have not made that case. Accordingly, because it is their burden to demonstrate that common issues predominate, we find no abuse of discretion in denying class certification.” Oh, and don’t forget to pick up your Nugget below if you want to learn the fate of these Plaintiffs.

You can read Bell v. Ascendant, issued August 23, 2005, here, or at 2005 U.S. App. LEXIS 18030.

Nugget: “Nor are we persuaded that we should require that they get a second bite at the class certification apple; inadequate briefing on an issue critical to class certification for which a party bears the burden of proof is no basis for us to order a repêchage round.”

Stay it Again Sammy

So picture you’re representing a Lead Plaintiff and you win the motion to dismiss. Your hard work has paid off, and you start drafting those document requests. However, six weeks later, the controlling appellate court issues a decision in an unrelated case. Who cares, right? Well, now you do, because Defendants have “renewed” their motions to dismiss, arguing that the new decision requires the dismissal of your claims. At the same time, they say that discovery must again be stayed pursuant to the PSLRA. That’s exactly what happened in the Salomon analyst litigation overseen by Judge Gerard E. Lynch (S.D.N.Y.).

Defendants got their stay, but were arguably their own worst enemy, as Judge Lynch noted that their “assertion that the law is well established that successive motions . . . do stay discovery under the PSLRA is, to say the least, overstated.” In fact, the court noted that the “three district court opinions” cited by Defendants are either “distinguishable, or are flatly misstated.” But lucky for them, Judge Lynch held that he “need not accept defendants’ argument in order to grant a stay.” Noting that the Second Circuit’s “intervening appellate decision” in Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005)) “advances new reasoning addressing a significant issue in the case,” “revisiting the Court’s analysis of the issue of loss causation” is warranted.

Thus, “in view of the policy of the PSLRA to deny discovery until a complaint has been authoritatively sustained by the court, it is appropriate to extend the stay under the present circumstances. Since that result is appropriate as an exercise of the Court’s discretion, there is no need to decide whether the filing of a successive motion, or even of any non-frivolous motion, after a court has already denied on the merits an earlier motion to dismiss would trigger an automatic stay under the PSLRA.”

You can read In re Salomon Analyst Litigation at 2005 U.S. Dist. LEXIS 3629.

Nugget: “To permit defendants indefinitely to renew the stay simply by filing successive motions to dismiss would be to invite abuse. Some judicial discretion to evaluate the desirability of a renewed stay appears to be necessary.”

Ninth Circuit Affirms Summary Judgment Dismissal

After nearly eight years of litigation, it looks as if a Panel of the Ninth Circuit has put an end to the Imperial Credit Industries (“ICII”) securities class action, perhaps for good. In evaluating a summary judgment ruling from the Central District of California in favor of ICII’s executives and auditor KPMG, the Panel, consisting of Ninth Circuit Judges Kim McLane Wardlaw and Marsha S. Berzon, along with Senior District Judge James M. Fitzgerald (D. Alaska), has affirmed the case-ending ruling. The problem? Well, you see, “the gravamen of plaintiffs’ claims is that ICII’s public filings during the class period fraudulently inflated the value of ICII’s securities by inflating the value of its 46.9% equity holdings in Southern Pacific Funding Corporation (“SPFC”).” But, the Panel noted that “the plaintiffs failed to provide evidence that SPFC’s residuals, were, in fact, overvalued at any point in time during the class period,” because they “failed to introduce the testimony of a qualified residuals valuation expert, or any other proof of an actionable misrepresentation or transaction or loss causation.”

You can read Mortensen v. Imperial Credit (issued as unpublished on August 17, 2005) at 2005 U.S. App. LEXIS 17790.

Nugget: “The district court correctly concluded that the Moore Report and Marek Report, the only expert reports submitted by plaintiffs, failed to qualify as proper expert testimony on this subject.”

You Gotta Know When to Hold ‘Em

Yesterday, a Panel of the Seventh Circuit issued a SLUSA-based opinion reversing Chief Judge G. Patrick Murphy’s (S.D. IL) remand of a state law securities class action brought against
Citigroup Global Markets (formerly known as Salomon Smith Barney (“SSB”)). The key issue under SLUSA boiled down to whether or not Plaintiffs alleged misrepresentations “were in connection with the purchase or sale of securities.” If so connected, Plaintiffs lose. If not, they head back to state court in southern Illinois, and Citigroup had best get its checkbook ready.

Since the U.S. Supreme Court has never decided what is or isn’t “connected” in the SLUSA context, the Panel (with Judge Kenneth F. Ripple as lead author, and Judges William J. Bauer and Michael S. Kanne in standard 0ne-by-two cross-cover formation) had to settle for the next best thing, and that’s Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), in which “the Court held that investors who neither purchase nor sell securities have no standing to maintain private litigation to recover damages under section 10(b) and Rule 10b-5, even if the failure to purchase or sell was the result of fraud.” Having anticipated this definition, Plaintiff’s pointed out that his complaint says “SSB’s misrepresentations caused him and other class members to hold securities, not to purchase or sell them.”

But this didn’t work, as the Panel concluded “that the present claims are connected sufficiently to the purchase and sale of a covered security for the purposes of SLUSA preemption and removal” because “by depicting their classes as containing entirely non-traders, plaintiffs do not take their claims outside § 10(b) and Rule 10b-5; instead they demonstrate only that the claims must be left to public enforcement. It would be more than a little strange if the Supreme Court’s decision to block private litigation by non-traders became the opening by which that very litigation could be pursued under state law, despite the judgment of Congress (reflected in SLUSA) that securities class actions must proceed under federal securities law or not at all.”

Result? Remand vacated and Plaintiff’s claims tossed.

You can listen to the oral argument here.

Plus, you can read Disher v. CitiGroup, issued August 17, 2005, here or at at 2005 U.S. App. LEXIS 17334.

Nugget: “Blue Chip Stamps combined with SLUSA may mean that claims of the sort plaintiffs want to pursue must be litigated as derivative actions or committed to public prosecutors, but this is not a good reason to undercut the statutory language.”

Global Crossing Judge Fights Way Through Fog

Two decisions were recently issued by Judge Gerard E. Lynch (S.D.N.Y.) in the Global Crossing securities class action, and though they reach diverging results, both focus heavily on control person liability. Sounds exciting, doesn’t it? No, you say? Well, we must forge ahead anyway. In the first opinion, Judge Lynch tackled J.P. Morgan Chase & Co.’s (“JPMC”) argument that it did not act “as a controlling person of its subsidiary J.P. Morgan Chase Securities, Inc. for purposes of Section 15 of the 1933 Securities Act.” Judge Lynch rejected this argument, as “Plaintiffs have alleged that [it] is JPMC’s wholly owned subsidiary, that the directors of both corporations were ‘interchangeable,’ and that JPMC had direct involvement in the day-to-day operations of” the subsidiary.” That wasn’t so bad now was it? C’mon, just one more and you’ll be ready to pick up your Nugget.

In the second opinion, Judge Lynch eyed Microsoft and Softbank’s position that just because they each became 15.8% owners of Global Crossing’s subsidiary, Asia Global Crossing’s (“AGC”) common stock after the IPO, and designated several directors from Microsoft and Softbank (named Koll, Knook, or Hippeau) to sit on the AGC board, that did not make them control persons under the securities laws. The court noted that “at the heart of plaintiffs’ allegations is their contention that AGC was integral to Global Crossing’s alleged scheme to defraud the public and its investors.” But turns out Plaintiffs’ allegations were not enough, as Judge Lynch found that “the power to appoint a representative to the AGC board, even combined with minority shareholder status, is insufficient to raise the inference that Microsoft or Softbank controlled Koll, Knook, or Hippeau,” and that “Plaintiffs allege no facts from which it could be inferred that these individuals acted at the behest of Microsoft or Softbank in exercising their duties as directors in relation to the ordinary operations of AGC.” However, Judge Lynch did note the existence of a proposed amended complaint, which he said “may well cure the deficiencies identified by this opinion of the second amended complaint.” Very good, you’ve earned your Nugget. Don’t be shy, go get it, it’s free ya’ know.

You can read the In re Global Crossing decisions, issued August 8, 2005, at 2005 U.S. Dist. LEXIS 16228 and 2005 U.S. Dist. LEXIS 16232.

Nugget: “Although it is true as defendant points out that plaintiffs’ arguments and assertions sometimes seem to ‘blow fog’ more than to provide notice of the claim, once the smoke is clear, sufficient facts remain to allege control-person liability against JPMC.”

Group of Six Unrelated Investors Appointed Lead Plaintiff

Ah, six. A unitary perfect number, the answer to the kissing number problem, and now the number of what Judge Richard J. Holwell (S.D.N.Y.) calls “seemingly unrelated parties” that have been appointed as Lead Plaintiff in the Elan Corporation securities class action. Judge Holwell did chastise the so-called “Institutional Investor Group” a bit before appointing them, saying that the Group “fails to address a concern raised by a number of courts, namely, that the aggregation of large, unrelated ‘groups’ of investors defeats the purpose of choosing a lead plaintiff.” However, “despite these concerns, there can be no doubt that the PSLRA contemplates that some ‘groups’ can serve as lead plaintiff,” and at least “preliminarily, the Court is unconcerned with the size of the group, and finds that six members is not too unwieldy a number to effectively manage the litigation.” “This is not, in other words, a group so large that the PSLRA’s express purpose of placing the control of securities class action with a small and finite number of plaintiffs (as opposed to their counsel) becomes wholly undermined by its sheer size.” “Indeed, even were the Court to deconstruct the Group, two of its individual members would still have the largest financial interest.”

In sum, Judge Holwell said that “this is simply not a case where a group of unrelated investors has been cobbled together as a ‘group’ to displace a single competing institutional investor, or a smaller, closely-related group of investors. If it were, the Court would be reluctant to recognize the group under the statute.”

You can read Barnet v. Elan, issued August 8, 2005, at 2005 U.S. Dist. LEXIS 16388.

Nugget: “There is also no doubt that not all groups qualify — consider the reductio ad absurdum of a ‘group’ consisting of the entire class.”

Judge Draws Roadmap For Plaintiffs

Investors in Bio-Technology General Corporation (“BTG”) got their 1934 Act claims bounced by Judge Harold A. Ackerman (D. N.J.) last week. Yes, they went down to the canvas, but are they out cold you ask? Maybe not. You see, the shareholders alleged that “BTG and its management falsely attributed the source of a sharp increase in sales of its premier drug product, Oxandrin, to the successful penetration of a new therapeutic market, when in fact BTG’s management knew that the spike in sales was the result of wholesalers stocking their inventories ahead of an expected Oxandrin price increase.” The problem wasn’t with materiality, as the court said it “has little trouble concluding, in light of these allegations, that Plaintiff has adequately pled a materially false or misleading statement.” But it was the scienter requirement that dropped Plaintiffs like a sack of spuds, as “the Complaint fails to explain how the Individual Defendants knew of or participated in the preparation and dissemination of false statements.” “Furthermore, in the absence of any allegation of a specific corporate policy requiring the Individual Defendants to be involved in reviewing Oxandrin sales data, the Court is not prepared to impute detailed knowledge of BTG’s monthly and quarterly Oxandrin sales data.”

But Judge Ackerman gave the Plaintiffs a standing eight-count, during which he noted that “it would be a relatively simple matter for Plaintiff to plead circumstantial evidence of the Individual Defendants’ knowledge of the Oxandrin sales data. For instance, Plaintiff could have pled circumstantial evidence of scienter by showing that BTG had a specific policy requiring the Individual Defendants to review Oxandrin sales reports in the periods in which they were provided to BTG’s sales staff. Plaintiff might also have pled that the BTG had a policy whereby the sales staff would routinely summarize the Oxandrin sales data and deliver the summaries to the Individual Defendants for review.” With 30 days to amend, let’s see if these investors can take the hint.

You can read In re Bio-Technology, issued August 10, 2005, at 2005 U.S. Dist. LEXIS 16603.

Nugget: “Simply asserting that Defendants improperly capitalized certain Oxandrin costs in financial statements representing that all research and development costs are treated as expenses does not establish a strong inference of scienter, even when those financial statements are later restated to expense the formerly capitalized costs.”

PWC Raises Too Many Flags

Judge Harold Baer, Jr. (S.D.N.Y.) has denied PwC’s (You simply must click this link – why in the world does PwC have this lady staring at us like this? Make her stop, we beg you!) motion to dismiss in the securities class action against Hibernia Foods “an Irish public company that exported beef until the ‘mad cow’ episode in 1997 when it switched to the sale of frozen desserts and ready-made meals.” Wow, talk about an overreaction, huh? Plaintiffs said “PwC knew or recklessly disregarded risk factors e.g., Hibernia’s repeated default on payments to lenders and suppliers and the sale of inventory at a loss to generate cash flow.” PwC balked, saying Plaintiffs were not “specific enough to show how and when PwC acquired knowledge of an alleged fraud.” Well, unfortunately for PwC, Judge Baer said “to plead with particularity does not require at this stage that Plaintiff spell out the very moment PwC should have known about the alleged fraud or that PwC had actual knowledge of the scope or particulars of the scheme.”

Judge Baer also recognized that “Plaintiffs allege that PwC wanted to keep Hibernia as a client so that PwC could continue to derive a financial benefit from its client.” Sounds reasonable, right? Perhaps a bit frustrated with those who might disagree, the judge offered the observation that “while not so far fetched to me, the current state of the case law holds otherwise and concludes that no independent auditor would risk ruination of its reputation for the fees it would collect in order to suppress fraud.”

But, as it turns out, the red flags were waving too high and too fast. The court found that “the ‘red flags’ include, inter alia, allegations that Hibernia (1) repeatedly defaulted on payments to lenders and suppliers, (2) sold its products at a loss, (3) recognized revenue on products that had not been shipped, and (4) failed to write off valueless inventory or write down long-lived assets.” Although “PwC argues that these ‘red flags’ offer only conclusory allegations that PwC should have known this behavior was tantamount to fraud,” “these facts, which must at this stage of the litigation be taken as true, illustrate at the very least behavior that could not conceivably escape a rational auditor’s critical eye, if his eyes were open.”

You can read Whalen v. Hibernia, issued 2005 U.S. Dist. LEXIS 15489.

Nugget: “When all the ‘flags’ are run up the same poll [surely it said “pole,” right?], it seems inescapable that a reasonable auditor was on notice, and acted recklessly when it disregarded all the ‘flags.’”