Judge Takes Control of Electronic Discovery

Assigned to a Senior District Judge, and feeling a bit, well, unsure about the Court fully engaging in your electronic discovery issues? Well, cast your fears aside if you are in Judge Dominic J. Squatrito’s (D. Conn.) courtroom. You see, in the Priceline securities class action, the Judge had to deal with some complex electronic discovery issues, including how to handle 223 “backup tapes containing e-mail data from former employees.”

In a detailed order that lays out the electronic discovery plan, and throws around terms like “compression” and “production database servers” with ease, Senior Judge Squatrito held that “Defendants shall produce responsive information contained in stored data files to plaintiffs in TIFF or PDF form with Bates numbering and appropriate confidentiality designations, shall produce searchable metadata databases, and shall maintain the original data itself in native format for the duration of the litigation.” He also ruled that “cost-shifting shall be applied for in the method set forth in the proposed revisions to Rule 26(b)(2) and the Committee Note attendant thereto.”

For an earlier post about another discovery ruling by Judge Squatrito in the Priceline action, click here.

You can read In re Priceline, issued December 8, 2005, here or at 2005 U.S. Dist. LEXIS 33636.
Nugget: “The files on this snapshot are in native format and do not need to be restored, but, because the snapshot is a reproduction of the way files are stored on computer hardware by the computer system, the files are arranged in an essentially random configuration.”

Ho, Ho, Ho, Who’s Laughing Now?

Seriously, what would possibly possess you to tell the judge that your opponents’ argument is “laughable” and “nonsensical?” O.K., it’s understandable if you’re John Payne conducting an important holiday sanity hearing, but otherwise this type of invective is more likely to get you an order like this one. In this instance, it was Plaintiffs in the Jasmine securities class action who ridiculed Defendants’ summary judgment position that “there can be no loss causation absent disclosure of the fraud.” Judge Robert B. Kugler (D.N.J.) sure didn’t find it funny, as he ruled that “because the market can only react to news when it is revealed, the price of Jasmine’s stock could not have fallen as a result of the misrepresentations unless the market knew about the misrepresentations – that is, unless the Misrepresentations had directly or indirectly been disclosed to the market.” As a result, he found Plaintiffs’ argument “unpersuasive,” as “loss causation requires disclosure.”

You can read McKown v. Jasmine, issued June 30, 2005, at 2005 U.S. Dist. LEXIS 32164.

Nugget: “Although the plaintiffs now argue that the market can correct a stock price before investors receive notice of the relevant information, there can be no loss causation absent disclosure of the fraud to the market.”

Dura Doesn’t Impose Sell-To-Sue

If you’ve been relying on Judge John Winslow Bissell’s (D. N.J.) August 9, 2005 opinion in Royal Dutch/Shell that held “because the stock had recovered its lost value, any putative class member who did not sell the subject securities within 90 days after the end of the Class Period could not establish the economic loss or loss causation elements of a Section 10(b) securities fraud claim as to those unsold shares,” then you’re probably not going to be very happy with this new development. You see, due to Judge Bissell’s retirement on September 1, 2005, Judge Joel A. Pisano (D. N.J.) now has the case, and has reconsidered Judge Bissell’s imposition of what is appropriately termed sell-to-sue.

In rejecting the doctrine, Judge Pisano concluded that, “in order to plead and prove loss causation and economic loss, a plaintiff alleging fraud in connection with the purchase of securities is not necessarily required to sell the subject securities. First, the statutory scheme that provides the measure of damages available to securities fraud plaintiffs does not mandate sale of the securities. Second, holding plaintiffs have long been permitted to litigate securities fraud claims. Third, policy concerns dictate against the imposition of a sell-to-sue requirement. Finally, Dura neither expressly nor implicitly mandates that the subject securities be sold in order for a plaintiff to have suffered cognizable economic loss.”

Just when you thought Dura might actually change something, right?

You can read In re Royal Dutch/Shell, issued December 12, 2005, at 2005 U.S. Dist. LEXIS 32190.

Nugget: “Mandating that defrauded investors liquidate their holdings in order to preserve their right to pursue damages might have harmful consequences.”

Alito Helps Toss Merck Case

Supreme Court nominee Judge Samuel A. Alito, Jr. was part of a Third Circuit Panel that just issued a unanimous opinion in the Merck securities class action. The decision, which focuses on materiality, shoots Plaintiffs down, noting that Lead Plaintiff “is trying to have it both ways: the market understood all the good things that Merck said about its revenue but was not smart enough to understand the co-payment disclosure,” but alas, “an efficient market for good news is an efficient market for bad news.”

Interestingly, the Panel spends about half of the opinion discussing whether the Lead Plaintiff, Union Investments Privatfonds GmbH, was acting within its authority to unilaterally replace Bernstein Litowitz with Milberg Weiss after losing the motion to dismiss before Judge Stanley R. Chesler (D. N.J.). The Panel held that “all retentions of class counsel by the lead plaintiff–whether lead counsel, trial counsel, or appellate counsel–require court approval under the PSLRA, but that “Milberg Weiss may prosecute this appeal,” although “future lead plaintiffs must obtain court approval for any new counsel.”

You can read In re Merck, issued December 15, 2005, here, or at 2005 U.S. App. LEXIS 27412.

Nugget: “Sunshine is a fine disinfectant, and Merck tried for too long to stay in the shade. The facts were disclosed, though, and it is simply too much for us to say that every analyst following Merck, one of the largest companies in the world, was in the dark.”

Nice Try Guys

Ever feel like you were the only one that thought it a bit odd when Defendants argue that Plaintiffs filed their securities class action too late because of all the red flags and, well, bad stuff that they themselves did? Fear not, as you now have Judge Richard Owen (S.D.N.Y.) on your side, at least on this point. When the executives of former penny-stock Pronetlink (sorry no link, this worthless company is long gone), one of whom is currently serving a 4 year stint in the slammer for his role in the pump-and-dump, tried it, Judge Owen remarked that Defendants’ strategy is just “a bizarre reverse self-serving assertion designed to exculpate themselves.”

Not too hard to guess how this one ends, is it? Motions to dismiss denied in full.

You can read In re Pronetlink, issued December 9, 2005, at 2005 U.S. Dist. LEXIS 32024.

Nugget: “PNL’s initial public offering was not a success. Despite selling 7.5 million shares through private placements, it brought in only $ 150,000.”

After the Fact

Who says a judge can’t look at a corporate Defendant’s financial data issued after the class period, and available at the SEC website, to determine the falsity of earlier statements? Well, if you know, you might want to send them a copy of this opinion. In the SupportSoft action, which has a proposed class period ending in the third quarter of 2004, Judge Susan Illston (N.D. Cal.) considered Defendants argument that “because SupportSoft’s revenues continued increasing after the third quarter of 2004, the allegations that SupportSoft’s business was slowing are not remotely plausible.”

“The Court finds, however, that SupportSoft’s quarterly revenues following the third quarter of 2004 are completely consistent with plaintiffs’ accusations. After falling to $ 13.5 million in the third quarter of 2004, SupportSoft’s revenue rose to $ 15.1 million, $ 15.7 million, and $ 16.9 million over the next three quarters, respectively. Thus, it took three quarters for SupportSoft to meet the guidance it had announced for the third quarter of 2004. This is completely consistent with a deteriorating business environment. Moreover, SupportSoft’s revenue for the fourth quarter of 2004 [2005?] fell again to $ 13 million. (See SupportSoft Form 10-Q dated November 11, 2005, available at http://www.sec.gov/). This is another indication that SupportSoft’s business was suffering and has never fully recovered.”

Result? The corporation and its executives’ motions to dismiss denied.

You can read In re SupportSoft, issued November 21, 2005, at 2005 U.S. Dist. LEXIS 31406.

Nugget: “The strength of plaintiffs’ claim, of course, remains to be seen, but that is an analysis for another day.”

Netflix 2: Credits Rolling Again

Hit your rewind button back to September 5, 2005 if you please. That’s when the Nugget reported that Judge Fern M. Smith (N.D. Cal.), in one of her last official acts before her retirement, threw out the Netflix action. But Plaintiffs pushed on, amending their complaint and trying again. This time, it was up to Judge William Alsup (N.D. Cal.) (who has been referred to at least once as corporate executives’ “worst nightmare”) to evaluate whether the newly minted complaint could overcome Defendants’ motion to dismiss, and well, let’s just say unlike The Chronicles of Narnia, this movie is not likely to have a sequel.

Basically, Plaintiffs claimed that in describing their churn rate, Defendants “cleverly redefined commonly-understood financial measures” and “stated and discussed those measures in a manner designed to suggest that their definitions accorded with the commonly-understood definitions.” Judge Alsup rejected this theory, holding that “the critical key to understanding defendants’ methodology was adequately and repeatedly disclosed. They did not need to repeat this information in telephone calls with analysts because the information already was available in press releases and filings with the SEC.” In addition Netflix CEO Reed Hastings’ “failure to correct an interviewer’s false statement is not a false statement in itself” as he “had no duty to police the media.” So “this time the dismissal is without leave to amend.”

You can read In re Netflix, issued November 18, 2005, at 2005 U.S. Dist. LEXIS 30992.

Nugget: “The use of a unique measure in and of itself does not render their reports false and misleading.”

Dismiss it Like a Ford

Well, the Second Circuit has sure made a quick job of the Ford securities class action, which had been tossed out by Judge Charles S. Haight (S.D.N.Y.) earlier this year. After summarizing the procedural history and a bit of the facts, the Panel said “upon de novo review, we conclude, substantially for the reasons set forth in the District Court’s thoughtful and comprehensive opinions, that the amended complaint was properly dismissed for failure to plead with particularity that defendants made any material misrepresentation or omission with scienter.”

That’s it folks. No analysis, no discussion, just a swift kick to the curb. Ouch.

You can read Fadem v. Ford Motor Co., issued December 7, 2005, here, or at 2005 U.S. App. LEXIS 26839.

Nugget: “We have considered all of plaintiffs’ arguments on appeal and find them to be without merit.”

Ninth Circuit Says Give ‘Em a Chance

After getting smacked down by Judge James C. Mahan (D. Nev.) in the Saxton securities class action, Plaintiffs cried foul to the Ninth Circuit because Judge Mahan refused to let them try to cure their first amended complaint. The Ninth Circuit is now shipping the action back to Judge Mahan, reminding everyone that “leave to amend shall be freely given when justice so requires,” and that “adherence to liberal grants of leave to amend is especially important in the context of the PSLRA.” Indeed, “because the district court dismissed the Complaint based solely on Plaintiffs’ failure to plead scienter, and did not provide any reasoned explanation as to why leave to amend would be futile with respect to the individual Saxton officers, we conclude that the court abused its discretion. Therefore, we determine that the district court should not have dismissed the Complaint, as to the individual Saxton officers, with prejudice.”

Welcome back.

You can read In re Saxton, issued December 2, 2005, here or at 2005 U.S. App. LEXIS 26574.

Nugget: “This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by Ninth Circuit Rule 36-3.”

The Money Race

Well, looks like “it is time to decide which of the plaintiffs’ law firms will win the money race.” That’s the way Judge Kent A. Jordan (D. Del.) put it in the lead plaintiff battle between Milberg and Lerach clients in the Molson Coors (don’t you love their stock symbol: TAP) securities class action. Judge Jordan immediately explained his comment by saying “by this observation, I mean no disrespect to these firms or others engaged in the representation of plaintiffs in securities litigation. I mean simply to be honest about what appears to be at stake. It is the lead counsel who stands to gain, not the lead plaintiff, as both the tone of the arguments and the logic of the incentives suggest here. The ‘pick me’ urgency seems far more likely to come from the lawyers than the parties because, in the real world, people are not so eager to undertake work that someone else will do for them.”

Want more? Well, OK. He continued “if another plaintiff is willing to shoulder the burden of supervising the litigation, one would think other class members would be pleased to step back. That, at least, is what one would could conclude is rational when, as is the case here, there is no persuasive suggestion that one group of plaintiffs will be any more competent at or dedicated to the job than the other. The incentives giving rise to the classic ‘free rider’ phenomenon, i.e., the inclination of people to take advantage of a benefit without bearing a commensurate portion of the associated burden, do not evaporate simply because securities are involved. They get overridden because securities lawyers are involved, lawyers who are vying for the chance to take the laboring oar in litigation and the monetary rewards that go with it.”

Still want more? All-right, but this is it. He concluded that “after going over the parties’ submissions and counter-submissions, which, including appendices, run to hundreds of pages in length, it strikes me that this exercise is simply a business investment for the lawyers. They invest their time and consume judicial resources in the hope of scoring a significant financial return. That is perfectly rational from an economic perspective, but, from a public policy perspective, one might question whether the right incentives are yet in place. It is for others to determine the degree, to which the Congressional goal of making class action securities cases more client-driven and less lawyer-driven has been realized. At this stage of this case, however, it appears that the lawyers are still very much in the driver’s seat.”

Result: Milberg’s client won the lead this time.

You can read In re Molson Coors, issued December 2, 2005, at 2005 U.S. Dist. LEXIS 30569.

Nugget: “These firms have a familial relationship. Milberg Weiss used to be known as Milberg Weiss Bershad Hynes & Lerach, the name change apparently reflecting Mr. Lerach’s decision to launch the competing law firm that bears his name and is the rival to Milberg Weiss for lead counsel in this action.”