Nugget Lite

Well, I took the plunge and resigned my partnership with my current firm. So Nugget posts are probably going to decrease a little in frequency as I have joined Saxena White, P.A., where I will be heading up the litigation department alongside my long-time friends and colleagues, Maya Saxena and Joe White. In the firm’s first two months in operation, we’ve already been appointed lead and/or co-lead counsel in several securities class actions, so we’ll have plenty to do.

O.K., O.K., the shameless plugging is over (for today only though), I know what’s really on your mind — you’re thinking, who gives a crap about Jones’ career, without my Nugget, I’m going to have to read some of these new opinions myself — oh, the sheer horror! But never fear, I’ll try to post about twice a week, and in a couple months, I intend to return to full posting level.

Anyway, thanks again to all you loyal Nugget subscribers and readers — the site should reach 50,000 total hits this week — you make all the work that goes into this blog worthwhile.

Tenth Circuit Speaks in Pre-Paid

It seems like it’s been a while since we had a Court of Appeals PSLRA decision, but the Tenth Circuit has put an end to that dry spell in the Pre-Paid Legal Services action, with colorful language (in places) that definitely reminds me of an Easterbrook opinion. Judge Terrence L. O’Brien (George W. Class of ’02), writing for the Panel, said that “this case may be a close call, but it is difficult to tell because the complaint is so rich in sweeping, generalized and sometimes conclusory allegations. Pleading precision could have better informed the debate and aided the critical analysis necessary to resolve a motion to dismiss.”

So “in the face of a somewhat chaotic complaint the district court understandably cut to the chase. Although the district court listed the numerous alleged GAAP violations, it appears the court distilled the Consolidated Complaint to the single GAAP violation concerning the recording of unearned commission advances as assets. When so limited, the Consolidated Complaint fails to adequately allege scienter because there is no evidence that this alleged GAAP violation was the result of Pre-Paid Defendants’ fraudulent intent to mislead investors. The district court noted Pre-Paid’s SEC filings disclosed it recorded unearned commission advances as assets on its balance sheets and warned it might not be able to recoup unearned commission advances.”

Wrapping it up, the Panel concluded that “if Pre-Paid Defendants intended to deceive investors, it makes little sense for them to overtly disclose their scheme to the SEC and public. But, charitably regarded, the complaint alleges more subtle means and purposes.”

You can read McNamara v. Pre-Paid, issued July 14, 2006, here or at 2006 U.S. App. LEXIS 17902.

Nugget: “Based on the above, we conclude Plaintiffs’ Consolidated Complaint insufficiently pleads scienter. However, unlike the district court, we do not believe Plaintiffs’ fraud theory is “patently absurd.” The Consolidated Complaint raises some serious “red flags” concerning Pre-Paid Defendants’ long term recording of unrecoverable unearned commission advances as assets and the credibility of their pre-2001 SEC disclosures. Nevertheless, it is lacking in allegations demonstrating Pre-Paid Defendants’ alleged fraud was economically logical in light of Pre-Paid’s repurchase of its own stock at allegedly inflated prices. It also fails to adequately allege Pre-Paid’s GAAP violation was the result of an intent to mislead investors. Therefore, dismissal was appropriate.”

The Cold Light of Hindsight

Plaintiffs must be wondering what hit them the Metris action, having received a summary judgment blow to the head from Judge James M. Rosenbaum (D. Minn.) (Reagan Class of ‘85) (the picture to the left was taken immediately after the ruling was issued), who said that “in the cold light of hindsight, defendants’ projections were overly optimistic, but economic prognostication, though faulty, does not, without more, amount to fraud.”

That’s not so bad you say. Oh no, I’m just gettin’ warmed up. How about “these plain vanilla statements are simply too vague to support a securities fraud action; the test is whether a reasonable investor would have considered such statements significant at the time. And a reasonable investor would not. There is nothing concrete or substantial in these statements upon which a reasonable investor would base an investment decision.”

But “where the case unravels,” is on scienter, as, well, “Plaintiffs have failed to produce evidence” of it. “Instead, their case teeters on repeated, but unsupported, theories of motive and opportunity, mixed with a mere suggestion of recklessness. While scienter is generally a question of fact for the jury, neither plaintiffs’ motive and opportunity theory, nor their soupcon of recklessness, is sufficient to withstand summary judgment.”

Yes, I was kidding about when the picture was taken, but maybe, just maybe….

You can read In re Metris, issued April 21, 2006, at 428 F. Supp. 2d 1004.

Nugget: “The fact that a company may have hit a rocky patch does not mean it has no positive prospects. The Court finds these allegations too general to pose a triable issue of fact.”

Defeat Snatched from Jaws of Victory

So, “for the reasons set forth below, the Court grants Defendants’ request to reconsider its previous opinion.” Hooray! Pop that cork, and let’s get me some bubbly! What… wait… what’s that? What do you mean he’s not finished? Uh, sorry, but you forgot to read the other part, the one that says “but denies the relief requested as the newly considered case law does not alter the Court’s prior decision.”

Bet they kind of feel like this kid, don’t you think? Anyway, it’s our old friend Dura in play here, and this time it has Judge Dennis M. Cavanaugh (D. N.J.) (Clinton Class of ‘00) observing in the Sealed Air action that he “would have to address many issues of fact to make a determination of whether Plaintiff has established loss causation,” but “the Court is prohibited from making these determinations at this point in the litigation.”

You can read Senn v. Hickey, issued July 10, 2006, at 2006 U.S. Dist. LEXIS 46332.

Nugget: “Again, this decision does not mean Defendants may not later prove Plaintiff failed to establish loss causation. The Court is only stating that it would be improper to make a ruling on this issue during a motion to dismiss.”

A Whole Lot of No Fraud

OK, here’s a hint for all you ’33 Act groupies. If you allege that your Section 11 claim “is the stuff of a quintessential fraud claim” then, um, you’re probably not going to win an argument that your claim doesn’t, well, sound in fraud. I mean try and imagine being slated to do the oral argument in that one? No, Your Honor, quintessential fraud means so much fraud that there actually isn’t any fraud — I mean, that’s a lot of no fraud Judge.

But, believe it or not, that seems to be exactly what Plaintiffs in the Capital Bancorp action did (at least in writing, and we’re sure not on purpose), and it brought a swift ruling from Judge Phyllis J. Hamilton (N.D. Cal.) (Clinton Class of ‘00) who noted that — are you ready for the cliffhanger ending — “plaintiffs’ complaint “sounds in fraud.”

Result? Complaint dismissed with partial leave to amend.

You can read Rubke v. Capital Bancorp, issued June 16, 2006, at 2006 U.S. Dist. LEXIS 43745.

Nugget: “Where the complaint makes a wholesale adoption of the securities fraud allegations for purposes of the 1933 § 11 claim, the Ninth Circuit has held that the district court is not required to sift through allegations of fraud in search of some ‘lesser included’ claim of strict liability. It may dismiss. If it does so, it should ordinarily accept a proffered amendment that either pleads with the requisite particularity or drops the defective allegations and still states a claim.”

Wish Upon a Stay

In deciding whether to lift the PSLRA stay, Judge William H. Pauley III (S.D.N.Y.) (Clinton Class of ‘98) considered Plaintiffs “claim that because Defendants have previously produced much of the requested material to the SEC, Defendants could easily produce the same material to Plaintiffs.” But, he found that “this consideration is irrelevant,” as “there is no exception to the discovery stay for cases in which discovery would not burden the defendant.” Instead, “the proper inquiry under the PSLRA is whether the plaintiff would be unduly prejudiced by the stay, not whether the defendant would be burdened by lifting the stay.”

Lifting the stay DEE-NYED. Sorry — I can’t find a picture of Judge Pauley anywhere after spending an exhausting 32 seconds looking for one. You can send me one if you want, but of course I won’t get it until Friday night — and I do not post judicial pictures after Happy Hour.

You can read In re Smith Barney Transfer Litigation, issued June 26, 2006, at 2006 U.S. Dist. LEXIS 42646.

Nugget: “Plaintiffs’ have identified no “prejudice” beyond the routine delay arising from the PSLRA stay. Because no exceptional circumstances are present in this case, discovery will remain stayed as to Plaintiffs’ securities claims.”

Unique HP Theory Fails

Yep, he’s Justice Stephen Breyer’s younger brother, and no, this time I didn’t mix up the family member pictures like last time (but only because I already knew what Justice Breyer looks like). So you see, “Plaintiffs’ theory is unprecedented and unpersuasive.” In fact, “Plaintiffs cite no law, and the Court is aware of none, that suggests that when a director votes in favor of a written agreement a company is under a legal obligation to modify the language of the agreement to reflect the views expressed orally by that director.” So looks like that’s it (at least at the District Court level) for the Hewlett-Packard securities class action, as Judge Charles R. Breyer (N.D. Cal.) (Clinton ’97) kicked it straight to the curb with prejudice.

You can read Hanrahan v. Hewlett-Packard, issued June 16, 2006, at 2006 U.S. Dist. LEXIS 43768.

Nugget: “Plaintiff does not cite any case that suggests a publicly-traded company cannot report the accurate fact that a board of directors has unanimously approved some action when one board member who voted for the action has expressed reservations or even opposition to the action. Such a ruling would greatly expand the reach of the securities laws.”