Reverse Psychology

Here’s a new way to win the coveted Lead Plaintiff position. Just tell the Judge you don’t want it. You laugh? Well, who wouldn’t, but it just worked in the In re Pfizer securities class action. So, here’s the actual exchange: Teachers Retirement System of Louisiana counsel: “Your honor, if I may, we represent Public Pension Group, TRSL, and AP4 from Sweden. We are withdrawing our lead plaintiff motion, and we are supporting the Institutional Investor Group (IIG)… at this time. Should your Honor choose not to appoint IIG, we propose that we are the next most qualified movant for lead plaintiff. We are withdrawing in support of them.” There he said it. Twice. He withdrew twice. Or did he? Judge Richard Owen (S.D.N.Y.) certainly didn’t think so, as he said that TRSL counsel “clearly did not intend a complete withdrawal of his motion. He kept his motion pending, in the event that the Court would not choose IIG. That is the choice that the Court has made.”

You see, Judge Owen also decided that he “will consider each potential lead plaintiff individually, and not as artificially grouped by its attorneys.” He noted that IIG’s largest investor, Central States, lost $ 22.4 million and TRSL lost $ 22.8 million. “Given the probable margin of error involved in the damage estimates before the Court, Central States and TRSL have roughly equal damages. However, I conclude TRSL is the more adequate of the two plaintiffs. It has extensive litigation experience, has served as lead plaintiff in multiple securities class actions, and has overseen sizeable recoveries in several of these. It is precisely the type of plaintiff envisioned under the PSLRA.” IIG threw a “professional plaintiff” argument into the mix in a last ditch effort to bounce TRSL, but even that wouldn’t stick, as the Court held that the five-in-three limit “was not intended to target institutional investors.”

Perhaps even more amazing, there was a third group, called “the CI Funds group,” which had bigger losses than both TRSL and IIG. Unfortunately for them, they “first alleged a loss of $75.8 million,” but “under attack, CI Funds reduced this amount by some $ 10.7 million.” Then, “in its reply memorandum, CI Funds re-calculated its losses using methodology similar to that of the other groups and arrived at a loss figure of $ 32,432,617.” Even though, as Judge Owen recognized, the “losses of the other movants are far less,” he decided to ““pass it by for the multiple inaccuracies in its damage calculations, which call into question its reliability.”

You can read In re Pfizer, issued October 21, 2005, at 2005 U.S. Dist. LEXIS 24891.

Nugget: “To allow an aggregation of unrelated plaintiffs to serve as lead plaintiffs defeats the purpose of choosing a lead plaintiff.”

Wilma Imposes Temporary Break on Nugget

She is about to speak, and power is likely to be cut soon in South Florida. When it goes (and it always does) the Nugget will be on temporary leave. But fear not, the Nugget shall return as soon as FPL decides it’s time. By the way, in last Friday’s article (October 21, 2005, Get Your Snake Oil Here), the Nugget made reference to Telly Savalas (Kojak ring a bell?) in relation to the Diner’s Club card. An astute reader has pointed out that it was the Player’s Club (scroll down) instead. While who among us doesn’t recall with fondess Telly’s scene-stealing performance as villian Ronald ‘Foots’ Pulardos in 1963’s The Man from the Diner’s Club, the Nugget stands corrected. Player’s Club it was. Sure hope Ed Fishman doesn’t find out, he’s not going to be happy.

Get Your Snake Oil Here

Looks like Plaintiffs carried the day on the motions to dismiss in the Pozen securities class action. Basically, they accused Pozen and its execs of issuing false information regarding a pre-FDA approved drug they had developed to treat migraines. Here we go again. Hello, McFly, did any of these guys see what happened to Sam Waksal? What’s that, you don’t know where he is at this very moment? Well, according to the Federal Bureau of Prisons, he’s making license plates at The Federal Correctional Institution (FCI) in Otisville, which they describe as “a medium security facility housing male offenders,” with a “a minimum security satellite prison camp” “situated in the southeastern part of New York state,” about “70 miles northwest of New York City.” Want to see for yourself, or find that long lost friend from college? Just click here, it’s fun.

Anyway, Judge Frank W. Bullock, Jr. (M.D.N.C.) (just so you know, the Middle District is now accepting Diners Club, presumably in case Telly Savalas or one of the six people that still carry them want to file a case there; see here, it’s true) found that some of the statements Pozen made touting the drug could be false, and wrapped up the scienter issue in a one-liner, saying “Plaintiffs have also adequately alleged that Defendants made such statements with scienter.” Remains to be seen if the Pozen execs will be joining Mr. Waksal. No idea, but here’s the visiting guidelines should they want to stop by and check the place out. It sounds lovely.

You can read In re Pozen, issued August 30, 2005, at 2005 U.S. Dist. LEXIS 22617.

Nugget: “Use of the same term with different definitions within a single public statement could undoubtedly confuse some investors.”

Fries Are Up

They might not be able to find that ever elusive Boardwalk game piece in that McDonald’s Monopoly Game you claim to have never played, but Plaintiffs sure have scored a victory in the securities class action pending against the ole’ Mac and Don’s Steakhouse. Judge Blanche M. Manning (N.D. Ill.) started it all off with the observation that “this case stems from a factual situation which is very common in today’s economic environment.” What situation is that you ask? Why, the situation that “Defendants made optimistic predictions about McDonald’s future economic performance,” “released current financial results which were in-line with Wall Street’s predictions,” and when “the predictions turned out to be less than prophetic, “the stock price took a beating.” Oh, that situation, why didn’t you just say so?

Basically, Plaintiffs alleged “that Defendants concocted the above ‘fraudulent scheme’ to inflate McDonald’s stock price so that: (1) Defendant Greenberg, who was under tremendous pressure by McDonald’s board, could remain as CEO; (2) individual Defendants and other high level executives could sell their McDonald’s stock at an artificially inflated price; and (3) McDonald’s could issue $ 900 million in debt at lower interest rates than if its actual financial condition had been disclosed.” Judge Manning didn’t go for (2) and (3), finding these allegations insufficient “to show opportunity and motivation.” However, (1) carried the day on the motions to dismiss, as “defendants were high level managers who had access to reports which would lead a reasonable person to believe that the predictions being made in public statements are not accurate and/or missing relevant information.”

You can read Selbst v. McDonald’s, issued September 21, 2005, at 2005 U.S. Dist. LEXIS 23093.

Nugget: “At this point in the litigation, before discovery, it would be impossible for Plaintiffs to have access to such detailed facts or for this Court to make such a determination on a motion to dismiss.”

Sounds of Fraud Go Unheard

Judge William P. Dimitrouleas (S.D. FL.) has largely denied the Company’s and it top officers’ motions to dismiss in the Medical Staffing Network Holdings securities class action. He upheld the 1933 Securities Act claims in their entirety, rejecting Defendants materiality, particularity, and bespeaks caution arguments. He also blasted Defendants’ attempts to say those claims “sound in fraud,” holding that “Plaintiffs carefully craft their Section 11 count in a manner to avoid that.”

As for the 1934 Exchange Act claims, Plaintiffs didn’t fare quite as well for statements made before a certain date, but the Court did find that the “failure to disclose material information concerning MSN’s financial situation by misrepresenting and falsifying the company’s earnings releases and periodic reports in an attempt to mislead potential investors” “alleges more than mere corporate mismanagement.” Judge Dimitrouleas also found that “manipulating financial forecasts and failing to disclose the closure of [certain branch] offices amounts to an extreme departure from the standards of ordinary care and presents a danger of misleading investors that is so obvious that the Defendants should have been aware of it.”

You can read Marrari v. Medical Staffing Network Holdings, issued September 27, 2005, at 2005 U.S. Dist. LEXIS 22700.

Nugget: “Anonymous sources may be used to sustain complaints under the PSLRA so long as the sources are described with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged,” so “this Court adopts this standard.”

Tripos Plaintiffs Largely Victorious

Rush Limbaugh’s uncle (it’s true, really), Judge Stephen N. Limbaugh, Sr. (E.D. Mo.), has issued two decisions in the Tripos securities class action. In them, he denies the Company’s (including its CEO and CFO) motion to dismiss, although in the other he decides to kick Ernst and Young out of all the fun. Basically, Plaintiffs alleged that Defendants knew of “a lost software contract and improper accounting methods, which when eventually disclosed, caused a significant drop in the stock value.” However, in spite of this, they continued “to forecast extremely positive revenues.”

Perhaps part of the problem for Defendants, as Judge Limbaugh put it, was that they “spend considerable time, not addressing the pleading standards but rather defending themselves against the allegations.” Oops, guess that didn’t work. At any rate, “the bottom line is that the plaintiffs have pleaded that during the Class Period, the defendants had in their possession (or could have easily obtained) facts which rendered their financial results materially false when first stated to the investing public, and given these facts, intentionally delayed recognition of these ‘facts’ in violation of GAAP, then intentionally delayed recognition of the GAAP violations in order to induce plaintiffs to continue investing in a ‘profitable’ enterprise.”

Oh, as for E&Y, the Judge found that even “assuming GAAP and GAAS violation did occur, at best, all the plaintiffs have alleged is negligence.”

You can read the In re Tripos decisions, issued on September 30, 2005, at 2005 U.S. Dist. LEXIS 22752 and 2005 U.S. Dist. LEXIS 22753.

Nugget: “Without a doubt the ‘merits’ of the allegations as presented can be argued fervently; however such a debate involves questions of fact that cannot render the complaint inadequate, lest the heightened pleading requirements of the Reform Act replace the function of a trial.”

Eighth Circuit Rebuffs Cerner Action

A Panel of the Eighth Circuit has said no to the Cerner securities class action, which basically seems to be a projections case. No to the particularity, as Plaintiff fails “to allege the amount of any overstatements,” and “the complaint is devoid… of any indication that this alleged loss of deals, even if ‘material,’ is necessarily inconsistent with Cerner’s statements that its demand was ‘strong.’ A company could conceivably lose a material number of deals it had pursued, and yet continue to see a strong demand for its products and substantial future opportunities. Furthermore, there is no indication on the face of the complaint that even a material loss of deals necessarily rendered Cerner unable to achieve its projected earnings. Finally, and perhaps most importantly, the complaint does not identify a single specific deal that was lost due to alleged changes in Cerner’s corporate structure and strategies.”

The Panel also said no to the scienter, as one executive selling “4% of his stock” “is certainly not unusual on its face.” Also, “the complaint cites the statement of a former Cerner regional sales manager that he and some of his personnel discussed among themselves the unattainable nature of the earnings forecasts,” but “at best, this allegation establishes that such an opinion was held by the regional sales manager and his peers. It sheds no light on the relevant issue of whether the Individual Defendants shared this view, or indeed of whether the forecasts were necessarily unattainable.”

You can read In re Cerner, issued October 6, 2005, here, or at 2005 U.S. App. LEXIS 21610.

Nugget: “A desire to increase executive compensation is also insufficient to prove scienter.”

Dismissed Cornerstone Action Rises from the Ashes

Back in February of this year, Judge Marilyn Hall Patel (N.D. Cal.) tossed the complaint in the Cornerstone Propane Partners securities class action. In doing so, she gave Plaintiffs some pretty specific instructions on how they should plead their next complaint. Well, it looks like they took the advice. Believe it or not, after they filed their new complaint, Judge Patel called everyone down to the courthouse and advised Defendants against moving to dismiss this version. Five of the seven took the subtle hint, choosing to answer instead.

As for the other two, one actually won his motion, but perhaps the most interesting thing about the opinion is this comment from the Judge: “As this court conveyed in the case management conference, the PSLRA is not an invitation to dizzy the district courts with a revolving door of complaints and motions to dismiss. For this case, at least, the complaint is far from the type of fishing expedition the PSLRA prohibits. As written, there is a “there there” — allegations of a system of fraud corroborated by identified, substantive sources of knowledge, such as former employees and officers acting as confidential sources, accounting and compensation data, auditors’ opinions regarding accounting processes and irregularities, and other concrete sources of information. The second amended complaint is eighty-five pages long, including its incorporated chronology of statements and knowledge, and it now contains little boilerplate repetition. To ask more of plaintiffs would make the PSLRA “fatal in fact” at the pleading stage and pit the statute against the dictates of Federal Rule of Civil Procedure 8.”

You can read In re Cornerstone Propane Partners, issued July 5, 2005, at 2005 U.S. Dist. LEXIS 21469.

Nugget: “The [PSLRA] administers the twin requirements of fraud and scienter rigorously and in parallel, but does not require omnipotence as to a defendant’s mental state at each moment of alleged misstatement.”

Lexar Action Doesn’t Cut It

Say goodbye to the Lexar Media class action, at least for now. Judge Samuel Conti (N.D. Cal.) summed it all up with the following colloquy: “Neither party disputes that Lexar and its executives made optimistic statements about the company’s performance that were soon followed by a business slowdown and a dramatic decrease in the stock price. However, there is nothing unusual or necessarily unlawful about such a fact pattern. Businessmen are by nature optimistic, and sudden stock price movements are often a sign that the market is digesting new information about a company. Financial markets could hardly function if every significant decline in a company’s stock created liability on the part of formerly optimistic executives. Rather, this fact pattern is only unlawful if the optimistic statements are part of a fraudulent plan. Plaintiffs here have put forth virtually no evidence to suggest that there was such a fraudulent plan carried out by Lexar’s executives. Plaintiffs merely point to an anonymous source who sheds little light on Plaintiffs’ allegations and some far from unusual stock trades by senior management. Such allegations come nowhere close to meeting the heightened pleading requirements of the PSLRA.”

You can read In re Lexar Media, issued July 5, 2005, at 2005 U.S. Dist. LEXIS 21467.

Nugget: “Almost every day, some company somewhere announces a change in its business forecast that results in a steep fall in the share price. Not every such event gives rise to legal liability.”

Confidential Witness Descriptions Come Up Short

So much for the Business Objects securities class action. This time, it’s the confidential witness allegations that did it in. Not to mention the falsity, loss causation, scienter… well, you get the point. But the main focus really did seem to be on the “three confidential witnesses,” with Judge Martin J. Jenkins (N.D. Cal.) noting that Plaintiffs “failed to describe the confidential witnesses with a sufficient degree of specificity,” because “the Amended Complaint provides no more than the job title of the confidential witnesses.” “Moreover, besides the statements of these three confidential witnesses, Plaintiffs have offered the Court no corroborating evidence, such as internal documents or public filings, to support their assertions of falsity.” In addition, “the witness statements are long on speculation, but short on relevant detail,” and “offer no detail regarding how the witnesses learned of the facts in their statements or how, if at all, Defendants knew about such facts.”

But don’t count Plaintiffs out just yet, as the Judge did say “it is possible that Plaintiffs could remedy their significant pleading defects in an amended complaint by adding detailed factual support for their allegations of false or misleading statements, and demonstrating that Defendants had the requisite scienter at the time the statements were made. Accordingly, the Court dismisses the Amended Complaint without prejudice.”

You can read In re Business Objects S.A., issued July 27, 2005, at 2005 U.S. Dist. LEXIS 20215.

Nugget: “Therefore, where, as here, a securities fraud complaint requires a laborious deconstruction and reconstruction of a great web of scattered, vague, redundant and often irrelevant allegations, the spirit and letter of the PSLRA support dismissal.”