Picture This

Well, there goes the Eastman Kodak securities class action, and yes I mean with prejudice.Why?Because Judge Michael A. Telesca (W.D.N.Y.) says “that Kodak’s warnings not only alerted investors of potential problems with changes in Kodak’s products, but also informed investors that the company was then currently facing the very problems identified in the Complaint.”

So “because the ‘total mix’ of information available to potential investors clearly informed investors that Kodak’s plans were subject to risks, and clearly informed investors of the nature of those risks, the allegedly false and misleading statements made by the defendants during the class period are not material, in that based on a totality of the information, the risks that plaintiffs claim were concealed were disclosed, and no reasonable investor would have been misled.”

You can read In re Eastman Kodak, issued November 1, 2006, at 2006 U.S. Dist. LEXIS 79879.

Nugget: “Therefore, the court, while bound to accept plaintiffs’ factual allegations as true, is not required to accept the plaintiffs’ conclusions or inferences based on those facts.”

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.”

Bribes and Bid Rigging Just Business As Usual

This time, Judge Robert B. Kugler (D. N.J.) takes on shareholders’ claims that Commerce Bancorp executives violated the 1934 Act “by failing to disclose bid-rigging and other unlawful practices committed on behalf of Commerce Bank.” You see, the “the allegations arise out of the events surrounding the June 28, 2004, indictment of three Commerce Bank/Pennsylvania executives and directors for employing illegal practices to obtain lucrative business with the City of Philadelphia.” Yep, sounds like Philly alright. Anyway, Judge Kugler didn’t buy it, holding that “while omissions regarding criminal conduct are material, omissions relating to ‘the attendant risks’ or unsustainability of criminal conduct are not. Even if a corporation is engaging in illegal practices, predictions of future events such as criminal indictments are too speculative to be material.” As such, “the Court will not reach Defendants’ arguments regarding scienter, reliance, or causation,” and this action “must be dismissed.”

As for the result of the indictments? All but one were convicted in May, and each were sentenced to a couple years in prison. The one who got off? Influential attorney Ronald A. White, a/k/a “Philadelphia’s Son.” But he died of pancreatic cancer waiting for the criminal trial. He was only 55.

You can read Galati v. Commerce Bancorp, issued November 7, 2005, at 2005 U.S. Dist. LEXIS 26851.

Nugget: “Illegal payments that are so small as to be relatively insignificant to the corporation’s bottom line can still have vast economic implications, as they may endanger all of a corporation’s business if they are discovered.”

Eighth Circuit Rebuffs Cerner Action

A Panel of the Eighth Circuit has said no to the Cerner securities class action, which basically seems to be a projections case. No to the particularity, as Plaintiff fails “to allege the amount of any overstatements,” and “the complaint is devoid… of any indication that this alleged loss of deals, even if ‘material,’ is necessarily inconsistent with Cerner’s statements that its demand was ‘strong.’ A company could conceivably lose a material number of deals it had pursued, and yet continue to see a strong demand for its products and substantial future opportunities. Furthermore, there is no indication on the face of the complaint that even a material loss of deals necessarily rendered Cerner unable to achieve its projected earnings. Finally, and perhaps most importantly, the complaint does not identify a single specific deal that was lost due to alleged changes in Cerner’s corporate structure and strategies.”

The Panel also said no to the scienter, as one executive selling “4% of his stock” “is certainly not unusual on its face.” Also, “the complaint cites the statement of a former Cerner regional sales manager that he and some of his personnel discussed among themselves the unattainable nature of the earnings forecasts,” but “at best, this allegation establishes that such an opinion was held by the regional sales manager and his peers. It sheds no light on the relevant issue of whether the Individual Defendants shared this view, or indeed of whether the forecasts were necessarily unattainable.”

You can read In re Cerner, issued October 6, 2005, here, or at 2005 U.S. App. LEXIS 21610.

Nugget: “A desire to increase executive compensation is also insufficient to prove scienter.”

Judge Draws Roadmap For Plaintiffs

Investors in Bio-Technology General Corporation (“BTG”) got their 1934 Act claims bounced by Judge Harold A. Ackerman (D. N.J.) last week. Yes, they went down to the canvas, but are they out cold you ask? Maybe not. You see, the shareholders alleged that “BTG and its management falsely attributed the source of a sharp increase in sales of its premier drug product, Oxandrin, to the successful penetration of a new therapeutic market, when in fact BTG’s management knew that the spike in sales was the result of wholesalers stocking their inventories ahead of an expected Oxandrin price increase.” The problem wasn’t with materiality, as the court said it “has little trouble concluding, in light of these allegations, that Plaintiff has adequately pled a materially false or misleading statement.” But it was the scienter requirement that dropped Plaintiffs like a sack of spuds, as “the Complaint fails to explain how the Individual Defendants knew of or participated in the preparation and dissemination of false statements.” “Furthermore, in the absence of any allegation of a specific corporate policy requiring the Individual Defendants to be involved in reviewing Oxandrin sales data, the Court is not prepared to impute detailed knowledge of BTG’s monthly and quarterly Oxandrin sales data.”

But Judge Ackerman gave the Plaintiffs a standing eight-count, during which he noted that “it would be a relatively simple matter for Plaintiff to plead circumstantial evidence of the Individual Defendants’ knowledge of the Oxandrin sales data. For instance, Plaintiff could have pled circumstantial evidence of scienter by showing that BTG had a specific policy requiring the Individual Defendants to review Oxandrin sales reports in the periods in which they were provided to BTG’s sales staff. Plaintiff might also have pled that the BTG had a policy whereby the sales staff would routinely summarize the Oxandrin sales data and deliver the summaries to the Individual Defendants for review.” With 30 days to amend, let’s see if these investors can take the hint.

You can read In re Bio-Technology, issued August 10, 2005, at 2005 U.S. Dist. LEXIS 16603.

Nugget: “Simply asserting that Defendants improperly capitalized certain Oxandrin costs in financial statements representing that all research and development costs are treated as expenses does not establish a strong inference of scienter, even when those financial statements are later restated to expense the formerly capitalized costs.”

ABFS dismissed

Judge O’Neil (E.D. Pa.) has dismissed the American Business Financial Services action in its entirety. In his decision, he finds Plaintiffs’ allegations concerning ABFS’ loan delinquency rates failed to meet the PSLRA’s requirements for falsehood, materiality, and scienter. Although the Plaintiffs were successful in providing the proper background information of the five confidential witnesses, they weren’t particular enough with the information they provided. Also, the court indicated that it would not dismiss claims pertaining to false statements made after the named Plaintiffs’ final stock purchase, as long as false statements or omissions were made prior to the last purchase, and they were part of a common scheme to defraud. But there was no such occasion, as the court, after rejecting general application of the group pleading doctrine (but allowing individual liability for group published documents), proceeded to find the scheme alleged by Plaintiffs was not particularized, and even if it was, it was simply not material to investors. Twenty days were given to amend.

Finally, something we can all agree on: “Obviously, there can be no securities fraud liability for a true statement.”

Nugget: “While insider sales are one way to prove scienter, they are not required.”