Buried Warnings Insufficient

Here’s a word to all of you future securities class action Defendants out there. Make sure those “warnings” in your IPO papers are upfront and personal. Why? Because in the NYFIX action, Judge Janet C. Hall (D. Conn.) has rejected Defendants’ attempt to rely on its risk disclosures, holding that “while not any more obscure than many other disclosures in the report, they are not prominently referenced in the table of contents, appear towards the end of the report, and are in the same font as most of the report. Thus, although the court does not hold that the disclosures were legally insufficient to put an investor on inquiry notice, it also cannot hold, as a matter of law, that they were sufficient for this purpose.”

Judge Hall also stymied Defendants’ argument that investors should have been on inquiry notice of the alleged fraud years before the truth was revealed, finding that an “important factor” “is that NYFIX’s financial statements were audited and approved by an accounting company.” Thus, she held that “it is not reasonable to expect a person of ordinary intelligence to examine them in detail for accounting errors.”

Of course, it didn’t much matter for these Plaintiffs, as Judge Hall dismissed the entire action because the ’33 Act claims sounded in fraud, and Plaintiffs failed to plead scienter. She gave them 21 days to amend, so perhaps we’ll see this one again down the road.

You can read Johnson v. NYFIX, issued October 26, 2005, at 2005 U.S. Dist. LEXIS 25899.

Nugget: “Considering that an accounting firm found the accounting to be proper, it would be unfair to expect investors with far less accounting expertise to pick apart NYFIX’s accounting.”

Searching For A Safe Harbor

Although a few execs wiggled out on their motions to dismiss, Plaintiffs can claim victory in the Washington Mutual securities class action. Lots to read here, but if you’re looking for an in-depth analysis of the safe harbor defense, Judge John C. Coughenour (W.D. Wash.) has written just the opinion for you. In it, Judge Coughenour uncovers what he believes could be “possibly the most important way in which the safe harbor is curtailed.” How? He offers the observation that “the PSLRA safe harbor operates in a way similar to hearsay rules, which forbid the admission of certain statements for the truth of the matter asserted, but allow those statements to be admitted for their corollary value.” This results in the possibility that “a single statement may communicate many different meanings, some of which may render the statement actionable.”

You can read South Ferry v. Washington Mutual, issued November 17, 2005, at 2005 U.S. Dist. LEXIS 29390.

Nugget: “The question of whether statements actionable as representations of current expectations are also actionable in their capacity as forward-looking statements must be answered through a full safe harbor analysis.”

Hand Over That Trading Data

You know how Defendants are always trying to get Lead Plaintiffs’ and Class Reps’ trading history in stocks other than the one at issue? Well, this time, Plaintiffs in the Priceline securities class action are turning the tables, demanding that Defendants fork over their non-Priceline trading information. Judge Dominic J. Squatrito (D. Conn.) carefully considered the request, and has ruled that “the information requested could lead to admissible evidence regarding defendants’ state of mind while they traded in Priceline shares during the Class Period. Defendants’ proposed limitation prohibits plaintiffs from learning the context of defendants’ Priceline trades. The context could be relevant to defendants’ motivation for trading in Priceline shares during the Class Period.”

You can read In re Priceline, issued November 23, 2005, here or at 2005 U.S. Dist. LEXIS 29132.

Nugget: “The party resisting discovery bears the burden of demonstrating that its objections should be sustained, and pat, generic, non-specific objections, intoning the same boilerplate language, are inconsistent with both the letter and the spirit of the Federal Rules of Civil Procedure.”

Oh Canada

Where’s a Lead Plaintiff to sue when a Company’s securities are traded on various exchanges located in different countries? Well, if any of it is traded here in the U.S., the investor can try and sue here. But that doesn’t mean the case will actually stay here. You might recall a few months ago, when the Nugget reported on Bayer AG shareholders who were sent packing to Germany because only 8% of the stock was traded on a U.S. exchange. This time, it’s 12% of Canadian based Royal Group Technologies, and you guessed it — the same result. Judge Harold Baer, Jr. (S.D.N.Y.) held that the action should be brought in Canada, as it is an “adequate alternative forum.”

By the way, if you do plan to try this, you might want to have a Plaintiff who hails from the U.S. of A, as the two Lead Plaintiffs (an individual and the Canadian Commercial Workers Industry Pension Plan) in this action were both “Canadian citizens.” This certainly didn’t help matters, as Judge Baer held that “the named plaintiffs’ lack of bona fide connections to this district indicates that their choice of forum should be accorded less deference than that due a resident plaintiff seeking redress.”

You can read In re Royal Group Technologies, issued November 21, 2005, at 2005 U.S. Dist. LEXIS 28688.

Nugget: “While plaintiffs are correct that depositions can be taken abroad pursuant to letters rogatory, live testimony is especially important in a fraud action where the factfinder’s evaluation of witnesses’ credibility is central to the resolution of the issues.”

Broken Record

There’s seems to be two trends emerging in loss causation. The first is that over the past seven months, Defendants who already lost motions to dismiss in securities class actions have been filing Rule 12(c) motions to dismiss based on Dura. This has resulted in the second trend — Defendants losing those motions. Today’s decision offers yet another interesting twist on this argument, but ends the same way.

In the Cisco action, Judge James Ware (N.D. Cal.) listened to Defendants’ argument that “plaintiffs in this case have merely alleged that the purported disclosures ‘had a negative effect on Cisco’s stock price, rather than the requisite corrective effect.'” In rejecting the argument, Judge Ware held that since Plaintiffs’ complaint “alleges that there was a steep drop in the price of Cisco’s stock after Cisco Defendants began to disclose the alleged ‘truth’ about its financial condition,” it “provides the defendant with fair notice of what the plaintiffs claim is and the grounds upon which it rests.”

You can read Plumbers & Pipefitters Local 572 v. Cisco Systems, issued October 27, 2005, at 2005 U.S. Dist. LEXIS 25398.

Nugget: “Notably, the Dura decision itself does not define the pleading standard for loss causation.”

Turbocharged Rocket Docket

The Eastern District of Virginia’s infamous rocket docket is apparently nothing compared to being in Judge Donald M. Middlebrooks’ (S.D. Fla.) courtroom. Listen to this. You just largely defeated the motions to dismiss, but now the Judge gives both sides just two months to “finish” discovery, and sets the trial for less than three months after that. Let’s see here. Two months to prepare and serve the document requests, serve the third party subpoenas, get the documents, review them, and depose the witnesses? Yeah, that seems reasonable. Oh, and let’s not forget class certification, which hasn’t even been briefed yet. Summary Judgment motions? C’mon, let’s not dwell on technicalities here. Empanel the jury, and let’s go. While we’re at it, ten seconds for opening statements should do the trick (don’t worry, that’s ten seconds each side).

The Nugget usually doesn’t venture beyond reported decisions, but who could resist seeing what would happen next. Yep, you guessed it. In a November 14, 2005 Order, Judge Middlebrooks denied Plaintiffs’ request to speed up the normal thirty day rule to get the documents. Why you ask? Because Plaintiffs should have started discovery back at the beginning of the case. Why again you ask? Since no discovery stay was in place until the motions to dismiss were filed, of course. Therefore, due to “Plaintiffs’ lack of diligence,” there is “little reason to punish defendants.” These counsel probably wondered if they just got on a new Court TV episode of Punk’d. Is that Ashton Kutcher hiding in a control room behind the bench? Please let it be. Sorry, this crew is SOL, and their discovery cutoff remains Monday December 19, 2005. But hey, look at the bright side. Now you finally have something to actually be thankful for this Thanksgiving – not being them.

You can read In re Spear & Jackson, issued October 19, 2005, at 2005 U.S. Dist. LEXIS 27555.

Nugget: “There is no reason to delay this litigation any further.”

Bribes and Bid Rigging Just Business As Usual

This time, Judge Robert B. Kugler (D. N.J.) takes on shareholders’ claims that Commerce Bancorp executives violated the 1934 Act “by failing to disclose bid-rigging and other unlawful practices committed on behalf of Commerce Bank.” You see, the “the allegations arise out of the events surrounding the June 28, 2004, indictment of three Commerce Bank/Pennsylvania executives and directors for employing illegal practices to obtain lucrative business with the City of Philadelphia.” Yep, sounds like Philly alright. Anyway, Judge Kugler didn’t buy it, holding that “while omissions regarding criminal conduct are material, omissions relating to ‘the attendant risks’ or unsustainability of criminal conduct are not. Even if a corporation is engaging in illegal practices, predictions of future events such as criminal indictments are too speculative to be material.” As such, “the Court will not reach Defendants’ arguments regarding scienter, reliance, or causation,” and this action “must be dismissed.”

As for the result of the indictments? All but one were convicted in May, and each were sentenced to a couple years in prison. The one who got off? Influential attorney Ronald A. White, a/k/a “Philadelphia’s Son.” But he died of pancreatic cancer waiting for the criminal trial. He was only 55.

You can read Galati v. Commerce Bancorp, issued November 7, 2005, at 2005 U.S. Dist. LEXIS 26851.

Nugget: “Illegal payments that are so small as to be relatively insignificant to the corporation’s bottom line can still have vast economic implications, as they may endanger all of a corporation’s business if they are discovered.”

Ninth Circuit Partially Reverses Dismissal

Chalk one up for both the Plaintiff and the Defendant bars in the Ninth Circuit, as a Panel there has only partially affirmed Judge Phyllis J. Hamilton’s dismissal of the Harmonic/C-Cube securities class action. Of course, don’t get too excited, as none of you will be able to cite to the decision in that Circuit because it’s been designated unpublished. Basically, the complaint said that “Defendants and several of their executives made a series of misleading statements for the purpose of obtaining shareholder approval of Harmonic’s acquisition of C-Cube’s DiviCom division while they engaged in insider selling and thereby violated” the 1933 and 1934 Acts. The Ninth Circuit held that “statements that there was ‘strong demand’ just don’t cut the mustard under the PSLRA (click it, it’s mildly amusing). Scienter wasn’t there either, as “Plaintiffs fail to allege basic facts (such as author, date prepared, contents) regarding [certain] ‘weekly forecasts’ or Harmonic’s internal reports.”

As for the 1933 Act claims, the Panel reversed their dismissal, holding that they “are not ‘grounded in fraud’ because Plaintiffs allege a basis for Section 11 liability other than fraud; i.e., the omission of a material fact from the Registration statement. Notably, plaintiffs do not rely on a unified course of fraudulent conduct or on the ‘wholesale adoption’ of their securities fraud allegations,” and they “also disclaim any allegations of fraud.”

You can read Knollenberg v. Harmonic, issued November 8, 2005, at 2005 U.S. App. LEXIS 24274.

Nugget: “While a disclaimer alone is insufficient to re-characterize a complaint whose gravamen is plainly fraud, here plaintiffs have made an effort to plead a non-fraudulent basis for Section 11 liability.”

Sex, Lies, and Lead Plaintiff

It’s Friday, so let’s keep it light, shall we? So, what do Wolf Popper, an alleged stalker, sex at the lake, a New York City Police detective, a former model allegedly cheating on her new husband with the alleged stalker, and an uber-famous journalist’s third marriage have in common? No, it’s not the screenplay for Pulp Fiction 2, but that was a pretty good guess.

Actually, seems the Lead Plaintiff in the Genesis Microchip securities class action (which is on appeal to the Ninth Circuit after being dismissed this September), Christine Kuehbeck, is the center of attention in an alleged love triangle gone awry. Very awry. This time, you’ll have to read the decision to get all the details, so find a friend with a Lexis password, and break out the beer and popcorn. It’s going to be a wild ride.

Do not pass GO, go directly to Silver v. Kuehbeck, issued November 7, 2005, at 2005 U.S. Dist. LEXIS 26956.

Nugget: “As Plaintiff walked away, Defendant turned to him and said, ‘I’m going to have you taken care of.’”

Multiple Restatements Not Enough

By the third restatement, and a 46% drop in the value of their shares, investors in once high-flying Stonepath Group, Inc., had been battered and bruised. So they sued, alleging that the company and its executives portrayed “Stonepath as an increasingly profitable company positioned to expand and continue earnings growth through strategic acquisitions,” when in reality it “was plagued by internal control deficiencies that caused the Company to consistently understate its most significant operating cost.”

Well, it all came down to scienter, with a lot hinging on whether the three seemingly unrelated restatements by the company would be enough. Judge Stewart R. Dalzell (E.D. Pa.) held that “since the restatements addressed such unrelated problems, it cannot be said that the mere fact that there were three restatements shows defendants acted recklessly.” He also held that it was “significant” that “Plaintiffs do not allege that either internal or external auditors or any participant in the comprehensive review process alerted defendants to the problems leading to the third restatement.”

Getting nowhere with recklessness, Plaintiffs tired to prove that Defendants had motive and opportunity to commit the fraud. In doing so, “Plaintiffs rely primarily on two alleged motivations: (1) to inflate Stonepath stock to use it in various acquisitions, and (2) to inflate EBITDA to comply with Stonepath’s debt covenants.” The Court rejected both, finding that “Plaintiffs rely mainly on one acquisition to establish motive,” and this can “hardly” be a “concrete and personal benefit.” As for the “the need to comply with debt covenants,” he held that “at most,” this “can be a contributing motive to commit securities fraud, but standing alone even severe cash flow problems are insufficient to establish motive.”

Result: Case dismissed with leave to amend, as long as Plaintiffs “can do so conformably with the foregoing analysis and with Fed. R. Civ. P. 11.”

You can read In re Stonepath, issued October 27, 2005, at 2005 U.S. Dist. LEXIS 25250.

Nugget: “The magnitude of the restatement is undeniably large, and therefore relevant, but alone it does not establish recklessness.”