Half Full

We had Plaintiffs getting hammered the other day, but now it’s time to turn the tables. This time it’s Defendants who get stomped, and oh boy, do they get stomped. Listen to these comments from Judge Curtis Joyner (E.D. Pa.) on the motions to dismiss in the Select Medical securities class action.

O.K., well, let’s see, Judge Joyner concluded that Defendants’ arguments are “unpersuasive and irrelevant,” “would entirely undermine the Exchange Act’s fraud provisions,” “ignores significant distinctions,” they “offer no legal authority for this conclusion,” “present no binding authority,” “is not persuasive,” “is unavailing,” “present no legal authority for the categorical exclusion of second-hand knowledge,” “is seriously misplaced,” “have not persuaded us otherwise,” their “reliance on the lack of market reaction is misplaced,” make unpersuasive “conclusory arguments” regarding “the confidential witnesses” “offer no authority,” “cannot defend alleged material omissions by noting that their statements omitted the same information on which Plaintiffs’ claims are based,” and to top it all off, “we reject Defendants characterization of the case.”

But that’s just on the issues of on the issues of materiality, duty, safe harbor, bespeaks caution, particularity, confidential witnesses, loss causation, and scienter. This glass is half full, as Defendants did “correctly point out that it is not a violation of the securities laws to simply fail to . . . provide sufficient internal controls.” Nice.

Result? Plaintiffs take near total victory on the motions.

You can read Marsden v. Select Medical, issued April 6, 2006, at 2006 U.S. Dist. LEXIS 16795.

Nugget: “Because we have found that Plaintiffs have identified actionable statements made earlier in the Class Period, we will not dismiss their claims based on post-Class Period statements.”

Block Quotes Don’t Cut It

Judge Jeffrey S. White (N.D. Cal.), who upheld Plaintiffs’ 1933 Act claims, but dismissed the 1934 Exchange Act claims, has a few words of advice for Plaintiffs should they choose to amend their complaint again in the Intrabiotics securities class action. You see, because the complaint contains “large block quotes,” and “Plaintiffs engage in a pattern of quoting long excerpts from documents which contain multiple statements,” Judge White said that Plaintiffs, who “are responsible for identifying with particularity what statements are false and misleading,” “have not fulfilled their responsibility in this regard.” So, next time around, they “should clearly identify which specific statements within the documents or block quotes they contend are false or misleading.”

Of possible interest: Intrabiotics, with $15 million in D&O insurance, and about $50 million in cash, has not generated a single penny of revenue since its inception in 1994. Not even one.

You can read In re Intrabiotics, issued January 23, 2006, at 2006 U.S. Dist. LEXIS 15753.

Nugget: “If the DSMB, and then Defendants, were able to determine before the trial was completed that iseganan was not achieving its goals and was unsafe, then it is possible that the DSMB and Defendants had such information even sooner than the decision to terminate the trial was announced. The problem with Plaintiffs’ Complaint is that it provides no basis for determining, or even inferring, when, Defendants may have had such information.”

Oligarch’s Unique Defense Won’t Fly

What do a Siberian prison, a brutal knife attack, and the richest oligarch in Russia all have in common? Why, the Yukos Oil Company securities class action, of course. You see, “in October 2003, the Russian Federation arrested Yukos’ President, Mikhail Khodorkovsky (“Khodorkovsky”), and seized his equity holdings in the Company. Soon thereafter, the Russian Ministry of Taxation charged Yukos with underpaying the previous years’ taxes by approximately $ 27.5 billion” (did he say billion, with a B?) “and the Russian Federation confiscated Yukos’ primary assets, sending the Company into an economic tailspin.”

Judge William H. Pauley III ‘s (SDNY) opinion on the motion to dismiss is long and reaches various results, but is notable for its analysis of the “state doctrine” defense. The what you ask? Don’t feel bad, the Nugget never heard of it either, but apparently it “prevents the courts of the United States from questioning the validity of public acts (acts jure imperii) performed by other sovereigns within their own borders.” See where this is going? Basically, Defendants argued that “the adjudication of this dispute inevitably will require this Court to inquire into the actions and motives of the Russian Government.”

Well, Judge Pauley, in rejecting the argument, first noted that “Defendants have not cited any precedent invoking the act of state doctrine to abstain from adjudicating a securities fraud action.” Of course, even if they had, their new argument seemed destined for failure, as Judge Pauley pointed out that “under the arguments advanced by Defendants, the doctrine would mandate abstention from any action in which a foreign corporation is alleged to have concealed conduct deemed illegal by its home country upon a defendant’s mere assertion that the sovereign’s determination was in error. Such an application of the act of state doctrine would effectively insulate foreign corporations from a large swath of securities fraud claims by United States investors.”

So whatever happened to that Khodorkovsky fellow that fifteen Russian FSB agents arrested as he stepped off his private jet? Well, it looks like he’s pulling a nine year stint in Prison Camp 13 (yes, in Siberia), where he was recently slashed and disfigured by knife wielding attackers (his attorneys say it was orchestrated by the guards). It’s true, really, see here and here. Good thing for Scrushy he didn’t live in Russia, huh?

You can read In re Yukos, issued March 30, 2006, at 2006 U.S. Dist. LEXIS 13794.

Nugget: “Moreover, Plaintiffs’ scienter allegations stem from the Russian Federation’s arrest of two other oligarchs, Boris Berezovsky and Vladimir Gusinsky, who openly criticized Putin.”

Hammertime

There’s just no other way to say it. Plaintiffs got hammered by Judge Phyllis J. Hamilton (N.D. Cal.) in the Silicon Storage Technology securities class action. After dismissing them on scienter, falsity, Dura, and just about every other basis imaginable, Judge Hamilton served up this rosy prediction: “Notwithstanding the fact that the dismissal is with leave to amend, the court questions whether plaintiffs will be able to state a claim. The gravamen of plaintiffs’ complaint as presented in the CAC is that SST mismanaged the valuation of its inventory, and then failed to disclose that mismanagement. The allegation that defendants should have written down the inventory earlier than they did, or should have disclosed that SST’s valuation system was ‘arbitrary,’ is essentially a claim that there were material deficiencies in SST’s inventory control procedures. Generally speaking, incidents of fiduciary misconduct and internal mismanagement are not by themselves sufficient to trigger liability under the Exchange Act.”

Of course, the last time we reported on Judge Hamilton, she was being partially reversed up at the Ninth Circuit, so it should be interesting to see what happens next. If anyone knows what Plaintiffs plan to do, please click the Comment below and tell the rest of us.

You can read In re Silicon Storage Technology, issued March 10, 2006, at 2006 U.S. Dist. LEXIS 14790.

Nugget: “The CAC alleges that the overvaluation of inventory and later disclosure of the lack of internal controls that led to the overvaluation caused a 22.5% decline in the price of SST’s stock price. The court finds that the allegations in the CAC do meet the requirements of Dura.”

The Big Picture

Who says Buckeyes can’t churn out opinions just as long and complex as they do in SDNY? Well, if it’s you, it’s time to check out Judge Algenon L. Marbley’s (S.D. Ohio) 100 page monster in the In re Cardinal Health securities class action. The best part is the conclusion, where Judge Marbley commented that “as Plaintiffs stated during oral argument, the scienter analysis in these types of securities fraud cases is akin to looking at a painting. Though one or two brush strokes may be more powerful up close, to fully appreciate the painting, the viewer must step back to take in the ‘big picture.’ Applying this analogy to the facts in this case, the Complaint viewed in toto the conclusion that Plaintiffs have met their burden under the PSLRA, pleading sufficient facts to raise a strong inference that the Cardinal Defendants acted with the requisite scienter.”

Bottom line? E&Y and one exec dismissed. The company and 5 execs remain in the case.

You can read In re Cardinal Health Inc., issued April 12, 2006, at 2006 U.S. Dist. LEXIS 18687.

Nugget: “Considering Plaintiffs’ arguments, the Court agrees that where the Plaintiffs allege that the subject of the misrepresentations and omissions caused their losses, they need not specify “corrective disclosures” causing the decline in stock value.”

The Quintessential Class Action

You could read the 20 page class certification decision in the Priceline.com securities class action, but let’s face it, if you had the energy to do that, you wouldn’t need the Nugget now would you? So want to know how Judge Dominic J. Squatrito (D. Conn.) summed it all up?

Well, he said quite simply that “this is the quintessential securities fraud class action.” That’s right, you see that’s because “an enormous group of potential plaintiffs, with losses ranging from millions of dollars to tens of dollars, seek to recover damages arising from one entity’s actions.” So, since “the focus of this litigation is upon the propriety defendants’ conduct, and any issues pertaining to individual class members only pale in comparison to the importance of defendants’ potential liability,” “this class action shall be certified under Rule 23(b)(3).”

So attack the class reps all you want, but no one can argue with this logic. No one except someone who’s wrong, of course. You know — the drinking the Flavor-Aid types.

You can read In re Priceline, issued April 4, 2006, at 2006 U.S. Dist. LEXIS 18603.

Nugget: “The court will not, at this stage of the litigation, determine which plaintiffs may or may not be able to prove loss causation; it is enough at this time that the class definition includes all persons who may have been harmed by the fraud alleged in the complaint — whether each person within this class may recover is a question reserved for another day.”

NextCard Execs Can’t Blame Auditor

Looks like the NextCard securities class action is going to be around for a while. If you hadn’t heard, the case was thrown out at the motion to dismiss stage back in February 2005, but Plaintiff were allowed to try again, and that’s exactly what they did. This time, they fared much better, with Judge Jeremy Fogel (N.D. Cal.) concluding that he was “not persuaded by Defendants’ argument that the certification of the company’s financials by its outside auditor, Ernst & Young, LLP (“E&Y”), negates or weakens the inference of scienter. Plaintiffs originally named E&Y as a defendant in this action based upon allegations that E&Y was a knowing participant in a scheme to defraud the market and in colluded in accounting improprieties. E&Y has settled with Plaintiffs. Under these circumstances, the fact that E&Y certified the financials does not raise an inference that the financials were appropriate or that Defendants were entitled to rely upon E&Y’s certification.”

Result? Plaintiffs allegations are upheld against 4 of the 5 individual defendants.

You can read In re NextCard, issued March 20, 2006, at 2006 U.S. Dist. LEXIS 16156.

Nugget: “While allegations that Defendants were involved in a “scheme” are relevant to paint a picture of what was going on at the company during the class period, and may be relevant to the question of scienter, the Court’s focus must be on the alleged misrepresentations and omissions made by Defendants.”

Defendants Bet it All on Dura, and Win

Judge James D. Whittemore (M.D. Fla.) seems a bit frustrated with the parties in the TECO securities class action, commenting that “Plaintiffs spend an inordinate amount of time arguing their position on the other elements of their fraud claim,” and “these arguments are neither relevant nor helpful as Defendants’ seek dismissal based on failure to plead loss causation and do not challenge the other elements.” “Further, the parties spend an inordinate of time arguing about the requirements for proving loss causation.” But, “regardless of the words or labels used, the requirements are the same. Under Dura, it is not enough for Plaintiffs to allege an inflated stock price. Rather, Plaintiffs must allege that some truth was disclosed in the market that revealed prior misstatements or omissions — fraud — by Defendants that is causally connected to their losses.”

So what’s the result? Not good for Plaintiffs, as Judge Whittemore concluded that “although the ‘revelations’ referenced by Plaintiffs suggest that analysts were pessimistic regarding TECO’s future, the information contained in the purported revelations does not identify, reveal or correct any prior misstatement, omission, or improper accounting practice by Defendants. In fact, none of the purported revelations indicate or establish that the changes occurring with TECO were remotely associated with prior fraudulent conduct.”

Case dismissed without prejudice.

You can read In re TECO Energy Inc., issued March 30, 2006, at 2006 U.S. Dist. LEXIS 18101.

Nugget: “Even assuming that the revelations gave some indication of prior misstatements, omissions, or improper accounting practices, Plaintiffs have not sufficiently alleged that those revelations were related to the fraudulent scheme alleged in the Complaint.”

Eighth Circuit Addresses Aiding & Abetting Liability

Ever wonder why you get that free cable TV? C’mon admit it, you know you’ve received free cable at some point. Oh, sorry, you were the one who reported it right away, and demanded the cable company come out today (at some unknown point between 6 AM and 11:30 PM, of course) and get it shut off. Then, you hand-delivered a check (uphill through a ferocious blizzard) to the company for the exact amount of free cable you received, regardless if you watched. You are so good, bet even Johnny’s Gram-gram is smiling down upon you right now.

Anyway, back to the point. The reason you got free cable was so your friendly publicly traded cable company can claim you as a subscriber, thus boosting (temporally and artificially) the number of customers they can claim they have, silly. Well, at least that’s part of the allegations in the Charter (NASDAQ: CHTR) securities class action.

But today, we are only concerned with Plaintiffs’ appeal of their failed attempt in the District Court to add two of Charter’s vendors (that’s who Charter purchased the set-top boxes from) into the mix of Defendants, and to find out what the Eighth Circuit is going to do about it.

Well, apparently not much, as the Panel held that “we are aware of no case imposing § 10(b) or Rule 10b-5 liability on a business that entered into an arm’s length non-securities transaction with an entity that then used the transaction to publish false and misleading statements to its investors and analysts.” Indeed, “this point is significant,” because “to impose liability for securities fraud on one party to an arm’s length business transaction in goods or services other than securities because that party knew or should have known that the other party would use the transaction to mislead investors in its stock would introduce potentially far-reaching duties and uncertainties for those engaged in day-to-day business dealings. Decisions of this magnitude should be made by Congress.”

So Plaintiffs lose this battle, and their free HBO. What, no Soprano’s? Now that’s enough to get the Supreme’s involved.

You can read In re Charter here, or read the briefs, or even listen to the oral argument, issued April 11, 2006, at 2006 U.S. App. LEXIS 8798.

Nugget: “Thus, any defendant who does not make or affirmatively cause to be made a fraudulent misstatement or omission, or who does not directly engage in manipulative securities trading practices, is at most guilty of aiding and abetting and cannot be held liable under § 10(b) or any subpart of Rule 10b-5.”

LIFO Wins the Day Again

Quick. Which do you use for calculating a Lead plaintiffs’ losses, FIFO or LIFO? Don’t know? Well, the City of Philadelphia Board of Pensions & Retirement no doubt does now, because they have just won the Lead Plaintiff position in the Dana Corp securities class action, and LIFO helped them do it.

You see, Judge James G. Carr (N.D. Ohio), who appointed the City as lead, reasoned that “with respect to any pre-existing shares, defendant’s misconduct did not influence the purchases which were based on accurate information. Thus, those shares fall outside the purpose and plain language of the statute.” “Further, losses with respect to pre-existing shares stem not from defendant’s misconduct, but from the failure of defendant’s business. If a firm overstates its earnings, artificially propping up its share price, and then corrects the problem causing that share price to fall, the drop in value itself is not a product of the overstatement – only the timing of the drop in value is. Put simply, the value of those pre-existing shares would have fallen even if the firm did not misstate its earnings – the drop in value would just have occurred sooner.”

So, “to determine which party has the largest financial interest for the purposes of appointing a lead plaintiff, this court endorses the use of LIFO over FIFO. Consequently, the City of Philadelphia has the largest financial interest and is the presumptive lead plaintiff.”

If you want more on this LIFO thing (like who wouldn’t, right?), you can hop over to this Nugget article from last July.

You can read Johnson v. Dana Corp, issued March 27, 2006, at 2006 U.S. Dist. LEXIS 17018.

Nugget: “The IRS, [on the other hand], adopts FIFO not because it is necessarily more accurate than LIFO, but because it forces taxpayers to recognize gains they would prefer – for tax purposes – to ignore. In this context, however, FIFO has the opposite effect – allowing plaintiffs to cordon off their profits from the defendant’s misconduct.”