Shotgun City

The Eleventh Circuit has ruled in the First Horizon securities class action. But before we get to that, it helps to know that before the case got to the Court of Appeals, the District Judge (after throwing out Plaintiffs’ amended complaint), told Plaintiffs that if they wanted to file a motion to amend, they’d have to pay all of Defendants costs and fees associated with the motion to dismiss. Hmmmm, let’s see. Uh, nope, said the Plaintiffs, instead appealing the ruling.

Well, that appeal has now led to an opinion, authored by Circuit Judge Stanley F. Birch (pictured). In it, the Panel says that “the defendant is a no good defrauder.” Strong language, huh? Actually, the Panel uses that language in a rhetorical sense, ruling for Defendants by accepting the sound-in-fraud argument “when the facts underlying the misrepresentation at stake in the claim are said to be part of a fraud claim, as alleged elsewhere in the complaint.” However, before some of you start to get carried away, the Panel did make clear that they do not intend to “elevate the pleading standard when the claim is not alleged to have been part of another fraud-based claim.” So kind of where we were – don’t allege fraud in your ’33 Act claims.

And here’s another thing not to do if you’re a Plaintiff. The Panel held that “the complaint at issue in this case is a proverbial shotgun pleading,” which to them is a complaint that “incorporate[s] every antecedent allegation by reference into each subsequent claim for relief or affirmative defense.” In other words, how and exactly what you incorporate from the body of the complaint into the Counts is important – especially in the Eleventh Circuit. So if you’re drafting an amended complaint right now, do yourself a favor and read this opinion carefully. Otherwise, you could be responsible for a Nugget article you won’t like.

Oh, and as for the cost and fee thing, the Panel said it chooses to “strike a different path,” concluding that they “disagree that dismissal was the appropriate course of action for the district court to take at this juncture in the litigation,” because things seem “more clearly in Rule 12(e)’s remedy of ordering repleading for a more definite statement of the claim, rather than in Rule 12(b)(6)’s remedy of dismissal for failure to state a claim.” So, “given the district court’s proper conclusions that the complaint was a shotgun pleading and that the plaintiffs’ failed to connect their causes of action to the facts alleged, the proper remedy was to order repleading sua sponte.”

You can read Wagner v. First Horizon, issued yesterday, here.

Nugget: “Shotgun pleadings wreck havoc on the judicial system. Such pleadings divert already stretched judicial resources into disputes that are not structurally prepared to efficiently use those resources.”

Posner Prose

Classic Judge Posner.Just classic.I never get tired of reading his opinions, and believe you me I get tired of many of them quick.So, listen to this from yesterday’s Seventh Circuit opinion in the AT&T/Georgeson class action.You see, as he puts it, “after you buy a car and drive away with your new possession, much can happen to affect the value of your purchase. If what happens is traceable to something that occurred before the sale was complete, such as a defective engine block, you may be able to undo the sale on the basis that that something happened ‘in connection with’ the sale. But if something happens after the transaction is complete to make it less worthwhile to you, such as the dealer’s replacing a tire that has worn out with one that is the wrong size, it is a separate wrong, not anything connected with the original sale unless the wrong is a breach of warranty.”

But “of course there is a literal sense in which anything that happens that would not have happened but for some prior event is connected to that event. In that sense the fraud of which the plaintiff complains is connected to the merger, without which there would not have been such a fraud against the plaintiff and her class. But in the same sense the fraud is connected to the Big Bang, without which there would never have been a MediaOne or even an AT&T.”

There’s more where that came from, so if you like Posner (Yeah!), or you really can’t wait to read another SLUSA case (until now, always a big Zzzzz), you can read the opinion or listen to the oral argument in Gavin v. AT&T & Georgeson, issued September 6, 2006, right here.

Nugget: “Georgeson’s lawyer told us that the defendants had not sought removal on the alternative ground of diversity because they were certain there was jurisdiction under SLUSA. That was a mistake, but he added that he doubted that the plaintiff’s complaint satisfied the requirement that the amount in controversy exceed $ 75,000. That was another mistake.”

Serial Remover Foiled Again

I’ve heard of Defendants trying to remove their state court case to federal court, but these guys over at Prudential have got to be some of the most persistent removers (yes, I believe I have invented a new word in this context, but I think this situation warrants it) I’ve ever seen.Long story short, Plaintiffs brought a class action against Prudential in an Ohio state court alleging state court claims.But Pru claims the case is actually “a federal securities class action masquerading as a state-law case, and claims Plaintiffs’ purpose is to avoid federal jurisdiction where this kind of action was intended to be brought.”Yeah, right.

Anyway, here’s where things heat up.Twice Prudential tried to remove the case, first at the beginning, and next on the eve of trial, and twice they were remanded.Then the firestorm came, as “the state court trial proceeded, and the jury awarded Plaintiffs $11 million in compensatory damages and $250 million in punitive damages.”

So guess what Prudential did?Yep, that’s right, they removed the case a third time (now seven years after the case was filed), arguing that Merrill Lynch v. Dabit confers federal jurisdiction.Well, I must admit my eyes glazed over reading the rest (something about 28 U.S.C. § 1446), but you’ll surely want to know that newly commissioned Judge Jack Zouhary (N.D. Ohio) (pictured) sent the case back to state court again, and also declined “to decide the issue of whether the holding of Dabit otherwise precludes this class action.”

Want to try for a fourth removal?I wouldn’t put it past them. I have a perfect time – how about after Pru loses each appeal?

Update: Looks like Pru just lost the first appeal, although they did get quite a hefty reduction in the punitive damages — $250 million cut down to $6 million.

You can read Burns v. Prudential, issued July 10, 2006, at 2006 U.S. Dist. LEXIS 46329.

Nugget: “Ultimately, the cases Prudential cites in its effort to expand the concept of ‘order or other paper’ are either easily distinguishable or unpersuasive.”

Third Circuit Squashes Ungrateful Objectors

It takes a lot of nerve, let me tell you. Sorry, I’m getting ahead of myself again. You see, Plaintiffs’ counsel in the AT&T securities class action reviewed more than 4 1/2 million pages of documents, took eighty depos, and even went to trial for eight days (back in October 2004) before securing a $100 million settlement. And after all that (and that’s just scratching the surface I’m sure), some objectors come in at the end complaining that counsel’s fee request of 21.25% was too high. Too high? Are these people serious? In a country where most contingent attorneys routinely charge 1/3 (and in some jurisdictions 40% if the case goes to trial), 21.25% is certainly reasonable. And when you factor in four years of intense work with no guarantee of any payment, well, all-right I’ll stop.

So anyway, after being rejected by the District Court, the objectors appealed, “contending the award of attorneys’ fees and expenses is unfair and unreasonable because (1) it is excessive, (2) it employs a sliding scale that provides for the fee percentage to increase rather than decrease as the settlement amount increases, and (3) it provides for payment of the full amount of attorneys’ fees before class members will receive payment. Objectors ask that fees be reduced to 15% of the settlement fund, in addition to requested costs and expenses, and that the pay-out be staged, with the final installment withheld until class members have been paid.”

Well, the Third Circuit rejected the objectors on every point, with perhaps the most interesting part saying that “the District Court did not abuse its discretion in concluding the sliding scale was fair and reasonable in light of the size of the settlement fund, the difficulty and length of the litigation, and the fact that all benefits accruing to class members are properly credited to the efforts of class counsel.”

You can enjoy In re AT&T, issued July 20, 2006, right here. I sure did.

Nugget: “The lodestar cross-check, while useful, should not displace a district court’s primary reliance on the percentage-of-recovery method.”

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.”

Seventh Circuit Mentions PSLRA in Prisoner Case

Looks like inmate Willie Simpson isn’t very happy. That’s because he alleges that his complaints about prison officials caused retaliation which earned him “300 days in segregation.” Who’s Willie you want to know? Well, who knows, but yesterday, when the Seventh Circuit upheld his complaint under notice pleading (anyone remember what that is anymore?) it observed that “not even the Securities Litigation Reform Act, the statute that has moved the farthest from notice pleading for a particular subject matter (securities class actions), requires proof as opposed to plausible allegations.”

Yes, yes, I know it’s not terribly relevant, but it’s nice to hear an appellate court formally recognize this fact — one which obviously no one (dare we say even the 10b-5 Daily?) can reasonably argue with.

Anyway, unless you’re a FOW (sorry — Friend of Willie), believe me, there’s absolutely no point for you to read Simpson v. Nickel, issued June 12, 2006, but if you still want to, it’s at 2006 U.S. App. LEXIS 14329.

Nugget: “Any district judge (for that matter, any defendant) tempted to write ‘this complaint is deficient because it does not contain. . .’ should stop and think: What rule of law requires a complaint to contain that allegation?”

Second Circuit Scienter

When the Second Circuit (OK, OK all you bowtied appellate geeks, a Panel of the Second Circuit) speaks out on scienter, you had better listen. You see, they say that the “appropriate lens for understanding Plaintiffs’ allegations is to evaluate whether they assert the kind of “conscious recklessness” that we have found to create a strong inference of scienter.” That’s because “the requisite inference of intent may not be based on the types of motives shared by virtually all public companies and corporate insiders, but rather may arise where the complaint sufficiently alleges that the defendants: (1) benefited in a concrete and personal way from the purported fraud; (2) engaged in deliberately illegal behavior; (3) knew facts or had access to information suggesting that their public statements were not accurate; or (4) failed to check information they had a duty to monitor.”

So, since “Plaintiffs’ Complaint lacks adequate allegations that Defendants were undertaking the challenged transactions for motives other than long-term profitability through the cultivation of major clients,” and it “also does not sufficiently allege that Defendants were undertaking the challenged transactions with contemporaneous knowledge that its transactions with Enron and other prominent clients were illegal under generally accepted accounting principles or were proceeding in a manner that easily can be foreseen to result in harm,” the dismissal is affirmed.

You can read the unpublished Fadem v. Citigroup, issued February 6, 2006, at 165 Fed. Appx. 928.

Nugget: “Because we agree that the issue of scienter was not adequately pleaded, we need not reach the issue of the sufficiency of Plaintiffs’ allegations of falsity.”

Tell Us Again Please

So get this, in the Interbank securities class action, the D.C. Circuit Court of Appeals reviewed Judge John D. Bates‘ (D.D.C.) 2004 partial dismissal of CIBC and Radin Glass and sent it back to him, telling him to explain why he dismissed with prejudice. Well, looks like he’s complied with that Order, and it is doubtful (to say the least) that Plaintiffs will be very happy about it. As Judge Bates puts it, “Plaintiffs did not merely fail to comply with some technical procedural requirement; rather, they failed to come forward with allegations sufficient to sustain the claims against either of these two defendants in the face of a motion to dismiss under Rule 12(b)(6) or a motion for judgment on the pleadings under Rule 12(c).”

Of course, “had plaintiffs’ failure to meet the pleading requirements been the result of ignorance about the PSLRA’s standards, and had plaintiffs represented that they were capable of making more detailed allegations, perhaps dismissal with leave to re-plead would have been warranted. But, as it was, plaintiffs could not possibly have alleged other facts consistent with the challenged complaint sufficient to make out a proper cause of action against CIBC or Radin.” So, you see, “dismissal without prejudice would only have resulted in a futile effort by plaintiffs to re-litigate the same issues determined against them by this Court and not challenged on appeal.”

You can read In re Interbank, issued May 26, 2006, at 2006 U.S. Dist. LEXIS 33463.

Nugget: “By limiting their appeal to the finding that there was no proper motion to amend and the decision to dismiss the claims with prejudice, plaintiffs conceded that their complaint was inadequate.”

Ninth Circuit Wants Reasons For Refusal to Allow Fourth Version of Complaint

Looks like the Ninth Circuit isn’t going to let Judge Napoleon A. Jones’ (S.D. Cal.) dismissal of the third amended complaint in the JNI securities class action stand — at least not without more explanation. You see, although the Panel said that they “agree with the district court’s careful and well-reasoned decision,” Judge Jones, who “issued detailed orders dismissing Plaintiffs’ first and second amended complaints with leave to amend,” “then dismissed Plaintiffs’ third amended complaint without leave to amend.” However, he “did not discuss any of the Foman factors,” “stating only the following with respect to whether Plaintiffs should be granted leave to amend: ‘In its previous Order, the court cautioned Plaintiffs that they would receive no further opportunities to amend their pleadings. Accordingly, the TACC is DISMISSED WITH PREJUDICE.’”

But, the Panel recognized, “Plaintiffs represent that they could amend their pleading to address at least some of the deficiencies noted by the district court, so “on remand, the district court may permit Plaintiffs once again to amend their complaint or it may state with particularity its reasons for declining to do so.”

Click here to read Hey Mack, an early Nugget article (boy, was the Nugget overly-energetic back then) on another Judge Jones decision — for Plaintiffs.

You can read Osher v. JNI (which is unpublished), issued May 12, 2006, at 2006 U.S. App. LEXIS 12186.

Nugget: “Leave to amend is to be granted with extreme liberality in securities fraud cases, because the heightened pleading requirements imposed by the PSLRA are so difficult to meet.”

Ouch

Seems like that document preservation Order the Nugget reported on back in January might not matter much now. That’s because Plaintiffs have suffered (yet more) pain from Judge William L. Standish (W.D. Pa.) (pinch hitting for Judge Arthur J. Schwab) in the IT Group securities class action. The nearly one-and-a-half pound decision (literally — it’s 100 pages), eliminates all of Plaintiffs’ claims with prejudice, and observes that this “third version” of the complaint was “developed over a period of more than four years, and based upon evidence gleaned from an on-going bankruptcy proceeding from which Plaintiffs have received documentary and deposition evidence not usually available to typical securities fraud class plaintiffs.”

But Judge Standish said that in his “previous opinion” he “pointed out precisely the shortcomings in pleading scienter for the individual Defendants, advice which Plaintiffs either failed to follow or are unable to allege with the particularity required by the PSLRA.” In addition, “Plaintiffs have made allegations related to loss causation which are not merely offered in the alterative, but are self-contradictory, a defect which is fatal to their claims.”

Possible appeal? The Nugget thinks so.

Looking back: Loyal Nuggets will likely remember this article, a definite classic, where Judge Standish refused to appoint local counsel.

You can read Payne v. DeLuca, issued May 2, 2006, at 2006 U.S. Dist. LEXIS 25621.

Nugget: “Plaintiffs attempt, it appears, to plead their case by successive approximation, asking Defendants and the Court to point out shortcomings which they then assert they will ‘fix.’ This is not an acceptable method of pleading one’s case in federal court.”