Top Brass

Plaintiffs can declare victory on the motion to dismiss the St. Paul Travelers securities class action, with Judge John R. Tunheim (D. Minn.) holding that “the facts alleged in the complaint, when taken as a whole, strongly suggest that the company’s senior executives were aware that the financial statements issued during the class period were false or misleading when made.”

That’s because “the complaint alleges that the senior executives were aware that the financial statements neither accurately accounted for nor made sufficient disclosures regarding defendants’ alleged participation in bid-rigging or misuse of finite reinsur-ance, and that “the alleged kickback scheme was so pervasive that the company named it the ‘Top Brass’ program, underwriters made false or ‘B’ bids on a regular basis to rig the insurance market, underwriters violated the company’s underwriting policies to obtain large group insurance policies through the kickback program, senior executives had access to the Minnesota Department of Commerce Report that opined that the company had repeatedly violated its own underwriting policies, and the alleged misconduct accelerated after Jay Fishman became the CEO of the company.”

You can read In re St. Paul Travelers, issued September 25, 2006, at 2006 U.S. Dist. LEXIS 70261.

Nugget: “Investors need the complete picture to ensure that optimistic statements about a company’s financial condition do not mislead investors.”

Try and Try Again — and You Still Won’t Succeed

You may remember the article I wrote back in March about the Invision Technologies securities class action. That article, entitled Try Try Again, featured Judge Martin J. Jenkins (N.D. Cal.) gleefully (OK, I added the gleefully part) tossing the case. At the time, I commented that “all may not be lost,” as “Judge Jenkins is going to allow Plaintiffs to submit another amended complaint, but warned that ‘vague assertions and allegations, scattered throughout Plaintiffs’ Complaint will not serve to meet their PLSRA burden.’”

Well, here we are in Round II, and Judge Jenkins sure doesn’t seem satisfied. In throwing the case out for good, he says that “for obvious reasons it would have been impossible for Defendants to have disclosed violations that they were not aware of,” and “as a matter of logic it makes little sense to read Defendants’ statement as affirming the non-existence unknown violations.”

I’d tell you more, but what’s the point really? This goose appears cooked.

You can read In re Invision, issued August 31, 2006 at 2006 U.S. Dist. LEXIS 76458.

Nugget: “Plaintiffs have plead no specific allegations indicating that Defendants knew of facts at the time that this statement was made such that it would render this statement false.”

Trex Chilled

Looks like Plaintiffs didn’t fare too well in the Trex securities class action. Reading the opinion, it seemed as if Judge Glen E. Conrad (W.D. Va.) (who was appointed a U.S. Magistrate Judge in 1976 at age 27, and elevated to Article III status in 2003) rejected their complaint on nearly every point imaginable, as he concluded “that the facts and circumstances alleged in this case are not such as to support a departure from the general rule that puffing and forward looking statements do not constitute misstatements or omissions of material facts for purposes of the PSLRA.”

He continued, “as for plaintiffs’ claims which arguably implicate statements of present fact, the court concludes that, when read in context with other statements and information made available to the investing public, no reasonable investor could have been misled. To hold otherwise, would create unreasonable reporting requirements that would discourage and chill meaningful communication by corporate officers.”

You can read In re Trex, issued October 6, 2006 at 2006 U.S. Dist. LEXIS 73503 or here.

Nugget: “Even assuming that the accused statements and/or omissions could be viewed as false or misleading, the court concludes that the facts and circumstances alleged by plaintiffs do not give rise to a viable inference of scienter.”

Cray’s Day

Plaintiffs sure tried in the Cray action, but it looks like their first amended complaint just didn’t cut it. They lost on a bunch of points, but a couple of the more interesting ones was Judge Thomas S. Zilly (W.D. Wash.) findings that “a five-month period of stock sales does not create a strong inference of scienter where the allegedly false statements were made in a uniform and routine manner for over two years,” and “here, Plaintiffs do not adequately allege that the sales were timed to maximize the benefit from false SOX 302 certifications that were issued quarterly for at least nine quarters.”

Also, Plaintiffs reliance on a confidential witness who made the case-cracking revelation “that there was ‘talk’ that Cray was ‘fudging its books’” was apparently misplaced, with Judge Zilly calling that mere “gossip and innuendo.”

So the complaint was dismissed, but Judge Zilly did give a generous 120 days for them to try one more time.

You can read Limantour v. Cray, issued April 28, 2006, at 2006 U.S. Dist. LEXIS 27186.

Nugget: “The Court concludes that the Complaint adequately alleges that the 10-Q and SOX 302 certifications for third quarter 2002 through third quarter 2004 were false or misleading based on the disclosure in 2005 that there were material weaknesses in Cray’s internal controls and procedures.”

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.”

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.”

Merry-Go-Round Stops

If you read yesterday’s article, you already know that getting leave to amend isn’t necessarily going to help you. But today it does. Just look at the Checkpoint securities class action, which Judge Richard M. Berman (S.D.N.Y.) dismissed in March 2005, with leave to amend of course.

Looks like this time Plaintiffs got it right, as Judge Berman said that the new allegations “cure the scienter deficiencies relating to revenue projections” “to the effect that the Individual Defendants knew of material differences between their public statements and Check Point’s financial performance. Among other things, Plaintiffs allege that Defendants had access to specific information of sales results, sales projections, and updates with various departments that sales were declining due to increased competition and that problems with NG, Check Point’s most important product, were well understood.”

Also, “Plaintiffs adequately alleges loss causation” under Dura because they “allege that competitive pressure and problems with NG caused Check Point’s revenue shortfall which caused Check Point’s share price to decline when the Company announced its 1Q02 revenue.”

You can read In re Check Point Software Technologies, issued April 26, 2006, at 2006 U.S. Dist. LEXIS 24317.

Nugget: “The Court has previously determined that the timing and the amount of information that Check Point disclosed is a question of fact.”

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.”

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.”