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.”

A Little Fishy

It’s one thing to mess with Shrek, but involving poor little Nemo in securities class action litigation? I mean if standing up for the little guy causes you to drag a helpless widowed clownfish into the case, well, I’m not sure how you sleep at night.

Seriously though, that’s just what Judge Mariana R. Pfaelzer (C.D. Cal.) had to deal with in Dreamworks, when she looked at Plaintiffs’ channel-stuffing allegations, concluding that “Plaintiffs allege at different points in the Amended Complaint that Dreamworks initially shipped either 25 million or 30 million copies of the Shrek 2 DVD,” and “according to the Amended Complaint, the Finding Nemo DVD, released a year before Shrek 2, sold 31.35 million units in the first 90 days after its release.” So, “given that Shrek 2, according to Plaintiffs’ own sources, had outperformed Finding Nemo at the box office, an initial shipment of 25-30 million units does not appear inconsistent with the trends and expectations set forth in the Prospectus.”

Result? 33 Act claims gone with prejudice. 34 Act claims gone without prejudice. 60 days to amend complaint granted.

You can read In re Dreamworks, issued April 12, 2006, at 2006 U.S. Dist. LEXIS 24456.

Nugget: “Even taking as true the allegation that Defendants were aware of the trend, the documents cited by Plaintiff in the Amended Complaint undermine the contention that Defendants knew or should have known that this trend would have a material impact on the sales of the Shrek 2 DVD.”

Tracing to SPO Can’t Stop Class Certification

So the question for Judge Nanette K. Laughrey (E.D. Mo. + W.D. Mo. and D.D.C.) (sorry for the court confusion here, but if anyone knows why or how Judge Laughrey was appointed to sit in both Missouri Districts, yet is not listed at all on the E.D. Mo site, and is issuing an opinion in a DC case, the rest of us are dying to know, so please tell us by leaving a comment below) in the Iridium securities class action was “whether the inability of aftermarket purchasers to recover under Section 12 defeats certification of a sub-class which pursues both Section 11 and 12 claims.”

What did the Judge do? She reasoned that “any difficulty by individual class members in tracing their particular aftermarket-purchased shares to the Registration Statement is a secondary issue to be resolved after the predominant issue of Defendant Underwriters’ liability has been decided. It would be inappropriate to foreclose such Plaintiffs’ resort to the class action format simply because some of their cases may be difficult to prove.”

Result? Class Certified.

You can read Freeland v. Iridium World Communications, issued January 9, 2006, at 2006 U.S. Dist. LEXIS 744.

Nugget: “Even if the common issues didn’t predominate, Plaintiffs could easily seek to certify two subclasses, one with Section 11 claims and one with Section 12 claims. Forcing the Plaintiffs to do so unnecessarily, however, would add yet another delay to what is already a long-lived case, especially since it would be much more efficient to consider these differences at the damages stage, if and when it is reached. This makes more sense than having repeated trials to decide the common questions of fact. Separate trials might also produce inconsistent findings.”

Inquiring Minds Want to Know

Plaintiffs have taken no prisoners in the Liquidmetal securities class action, having achieved complete victory over Defendants’ motions to dismiss their ’33 and ’34 Act claims. Judge Steven D. Merryday (M.D. Fl.) “carefully considered the ninety-eight page consolidated amended class action complaint, the parties’ exhaustive legal memoranda, and the pertinent legal authorities,” and concluded that “any reasonable investor contemplating investing during a company’s IPO would want to know whether the company was overstating its financial earnings in violation of GAAP. Likewise, any reasonable investor would appreciate learning of an officer’s preexisting obligation to violate the very lock-up agreement touted to investors in the IPO.”

You can read Primavera v. Liquidmetal, issued December 2, 2005, at 2005 U.S. Dist. LEXIS 30418.

Nugget: “Although the amended complaint contains allegations based on ‘forward-looking’ statements, including projections of revenue, business objectives, and future economic performance, the plaintiffs sufficiently allege that no reasonable basis existed for the forward-looking statements issued during the class period.”

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.”

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.”

Eighth Circuit Panel Won’t Overturn Dismissal

A Panel of the Eighth Circuit has affirmed the District of Nebraska’s dismissal of Plaintiffs’ 1933 and 1934 claims in the Acceptance Insurance securities class action. “The primary allegation of the shareholders was that Acceptance failed to have adequate reserves in place prior to 1999 to account for increased claims stemming from a California Supreme Court decision” (Montrose v. Admiral, 913 P.2d 878 (1995)). So the shareholders claim under Section 11 was that Defendants’ “registration statement misstated the reserve holdings of the company because they did not take into account the Montrose decision.” The shareholders argued “that numerous statements made by the [Defendants] after the registration statement was issued show that Acceptance’s reserves were inadequate at the time of issuance.” But the Panel held that “this type of retrospective analysis of awareness cannot be the basis for a claim,” and that “under both FAS-5 and Section 11, information is required to be included only if it is available prior to the issuance of a financial statement.” Thus, Plaintiffs “complaint alleges no such facts to support prior knowledge by” Defendants. In addition, Plaintiffs “do not cite any legal authority to support the contention that specific mention of the Montrose decision was required by law.”

As for the 10(b) claims, the Panel focused on one particular statement by an employee that the District Court held was inadmissible hearsay. In refusing to overturn the evidentiary ruling, the Panel ruled that Plaintiffs’ experts merely offered “opinions meant to substitute the judgment of the district court.” As for the other statements offered by Plaintiffs “to prove scienter,” they “do not show knowing falsity about the reserves. They do show concern about the Montrose decision, but they do not weigh on the issue of a failure to properly account for reserves. Without evidence of intentional falsity, the Appellants’ claim cannot survive summary judgment.”

The opinion was authored by Eighth Circuit Judge Melloy, and joined by Circuit Judges Heaney and Fagg.

You can read In re: Acceptance Insurance Companies, issued August 29, 2005, at 2005 U.S. App. LEXIS 18571.

Nugget: “Given that there are no substantive differences in the facts offered in the proposed amendment, we conclude that the amendment would be futile.”

Dura a Dud Again

Judge Harvey Bartle III (E.D. Penn.) has finished evaluating Defendants’ motions to dismiss in the Vicuron Pharmaceuticals securities class action. In denying their requests to toss the 1933 and 1934 Act claims against the company and its officers and directors, the court evaluated the shareholders’ claims that “defendants made numerous materially false and misleading statements concerning anidulafungin,” a drug “in development for the treatment of esophageal candidiasis (‘EC’).”

The court had little trouble finding intent as “anidulafungin was Vicuron’s lead product in development, which in itself supports a finding of scienter for alleged misrepresentations as to it.” As for loss causation, Judge Bartle recognized that Dura held that “artificial inflation itself is not enough.” But that didn’t help Defendants, as the judge found that “loss causation has been adequately pleaded” because Plaintiffs alleged (1) that “as a result of the partial disclosure by the Company of the FDA letter, including the shocking news regarding the lack of support for a label claim for EC, the price of Vicuron plummeted,” (2) that “when investors were informed of the implications of the ‘approvable letter’, the true impact of the relapse rate data and the unproven superiority of anidulafungin in the treatment of refractory disease, the market price of Vicuron stock collapsed,” and (3) that “the amended complaint also specifically states that plaintiffs and other members of the Class were deceived and caused to purchase Vicuron securities at inflated prices and to sustain damages.”

Finally, the court rejected Defendants’ sound-in-fraud argument, which attempted to apply Rule 9(b) to the 1933 Securities Act claims. Judge Bartle held that “plaintiffs have drafted this claim without reference to any mental state,” and “while the amended complaint specifically incorporates the foregoing paragraphs into the § 11 claim, it also reads: ‘Plaintiffs for the purposes of this claim, disclaim any allegations of fraud.’”

You can read In re Vicuron, issued July 5, 2005, at 2005 U.S. Dist. LEXIS 15613.

Nugget: “In the amended complaint, plaintiffs have emphasized certain text of excerpted portions in bold and italicized lettering. We interpret the distinction to indicate that the emphasized portions are what plaintiffs claim to be actionable. We will read the plain text portions as simply context for the emphasized portions.”

Investors Can’t State Claim For Cosi IPO

Judge John G. Koeltl (S.D.N.Y.) has dismissed all of the 1933 Act claims brought against Cosi, its executives, and its underwriter William Blair in relation to Cosi’s 2002 IPO. Originally “expected to earn $ 60 million in proceeds,” the IPO netted only $ 33 million “due to demand that was weaker than anticipated.” Only two months after the IPO, the casual restaurant chain announced that it had “determined to alter our growth strategy,” and implement “franchising,” mainly because of “Cosi’s lack of sufficient capital to carry out the business plan described in the Prospectus.” Cosi also announced that it “would be able to open approximately ten new restaurants in 2003, as opposed to the fifty-three to fifty-nine planned in the Prospectus,” and that “it intended to dismiss twenty-seven percent of its personnel and to take a $ 1.7 million charge to account for severance and related costs in the first quarter of 2003.” “Following the February 3, 2003 announcements, Cosi’s stock price dropped thirty-one percent to $ 3.10”

Plaintiffs claimed “that the failure to disclose the possibility of pursuing a franchising model was the allegedly material non-disclosure.” Unfortunately for them, Judge Koeltl disagreed. He said that “Plaintiffs do not allege facts that would establish that mere research into the possibility of pursuing a franchising model would be an event of significant importance to potential Cosi investors. The possibility of franchising, according to the plaintiffs’ allegations, was still remote at the time the Prospectus was issued.” Indeed, “the plaintiffs allege only that Cosi had researched the possibility of franchising for two months before the Prospectus was issued, and do not allege that a franchising plan had been submitted to or approved by the board, or that any affirmative steps had been taken to implement a franchising plan.” The court held that it would simply be wrong to “to require the disclosure of the mere research of a potential business plan without any factual allegation that Cosi intended or had taken affirmative steps to implement the plan.”

You can read In re Cosi, issued July 27, 2005, at 2005 U.S. Dist. LEXIS 15603.

Nugget: “Because the plaintiffs have not alleged that they purchased their shares in the IPO, they have failed to allege that they have standing to bring a claim under § 12(a)(2).”

Secondary Offering Class Certified in Celera

Judge Christopher F. Droney (D. Conn.) has certified a 1933 Act class of secondary offering investors suing Celera, the human genome mapping company that once sold for nearly $250 per share back in its heyday of early 2000. But don’t worry, you’re in luck, because you can have your very own share today for only 12 bucks. But let’s get down to brass tacks.

Defendants didn’t contest numerosity or commonality, but fought the class representatives on just about everything else, starting with typicality. Defendants argued “that the claims of the proposed class representatives… are not typical because neither party can set forth successful claims under Section 11 or 12 due to the manner in which they purchased Celera common stock.” But the court found this argument “unpersuasive,” holding that “there was only one prospectus issued, and it applied equally to all purchases of stock during that secondary offering,” and “although the defendants may be able to prove that [the class representatives] purchased some of their shares before the secondary offering, this goes to each party’s damages; also, they purchased at least some of their shares after the secondary offering, and therefore their claims are typical of the class.”

As for adequate representation, the court rejected Defendants position regarding the class representative’s knowledge, holding that “it is unrealistic to require a class action representative to have an in-depth grasp of the legal theories of recovery behind his or her claim.”

Having established the 23(a) criteria, the court moved on to 23(b)(3). You get the picture though, this isn’t going to take long. Defendants raised “a truth [on] the market defense” but Judge Droney rejected this too, saying “this defense — that this information was available to all purchasers prior to the secondary offering — will be against the entire class, and not the individual purchasers.” The court also held that “questions of whether the information was disseminated and available prior to the secondary offering, and what weight to give to that information, are factual questions that go to the merits of the plaintiffs’ claims, and therefore are inappropriate to address at this stage of the proceedings.”

The court finished things off by certifying the class, noting that “there is only one principal issue in this case — whether the defendants made proper disclosures in conjunction with the secondary public offering, the Court finds that a class action is superior to other available methods for the fair and efficient adjudication of this controversy.”

You can read the decision at 228 F.R.D. 102.

Nugget: “Given the complexities of a securities litigation case, the interest of individual stockholders in controlling the prosecution of separate actions is low.”