Both Sides Win, Both Sides Lose

Many of you surely remember reading in the Nugget last October about how Judge Marilyn Hall Patel (N.D. Cal.) called everyone down to the courthouse and basically advised Defendants to file answers instead of motions to dismiss in the Cornerstone securities class action. Well, now we are at the class certification stage, and Judge Patel has issued her ruling. In it, she finds that “Defendants’ assertion that Lead Plaintiff and the named representatives are atypical and inadequate as class representatives because of Lamphere’s [he’s a class rep] purported non-reliance on the CornerStone financial statements, the possibility of a statute of limitations defense, and the existence of potential intra-class conflicts is not supported by the relevant caselaw.” However, “pursuant to the Supreme Court’s holding in Dura, the Class may not include individuals who purchased and sold CornerStone stock prior to any corrective disclosure by the company.”

Result this time? “Plaintiff’s motion for class certification is granted, subject to an amendment of the Class definition to exclude plaintiffs who purchased and sold their stock prior to any corrective disclosure in July 2001.”

So — not a total loss for Defendants by any means, as Plaintiffs proposed class period reached back to July 1998.

You can read In re Cornerstone Propane Partners, issued May 3, 2006, at 2006 U.S. Dist. LEXIS 25819.

Nugget: “Statute of limitations defenses for named plaintiffs are not a bar to class certification for securities fraud.”

Right Back Where We Started

After an unscheduled stop at the Eleventh Circuit, Judge Steven D. Merryday (M.D. Fla.) seemed a bit frustrated in the Tello v. Dean Witter action. Why? Well, because, as he put it, “the circuit court leaves unclear both why the issue of ‘inquiry notice’ might be resolvable by the district court without a jury and why resolution of a motion to dismiss pursuant to Rule 12(b)(6) requires an evidentiary hearing.” Indeed, he said he “is unaware of any precedent except this case for that procedure.”

But, pushing forward, he ordered limited discovery on the statute of limitation issue anyway, which eventually resulted in the submission by both sides of “memoranda accompanied by thirty-two exhibits comprising hundreds of pages of deposition, newspaper and magazine stories, business journal articles, online message-board postings, newspaper and magazine circulation data, annual corporate reports, and pertinent stock transactions–all of which the parties supplemented at the December 19, [2005] hearing by two hours of vigorous oral argument.” At the end of all this (which no doubt must have been overwhelmingly fun), Judge Merryday observed that “unsurprisingly, the plaintiffs’ theory places inquiry notice on October 1, 2002, after the effective date of Sarbanes-Oxley,” and of course “equally unsurprisingly, the defendants’ theory places inquiry notice on or before August 14, 2000.”

The result? Judge Merryday said that “because the circuit court acknowledges that resolving a disputed issue of inquiry notice is within the exclusive province of a jury, and because the plaintiffs in this case have demanded and perfected their right to a jury trial, the district court interprets the circuit court’s mandate to require a determination whether, without improperly invading the province of the jury (that is, without resolving a “genuine issue of material fact”), the district court can identify the moment at which the plaintiffs were on “inquiry notice” of the alleged, actionable fraud.” So “after affording the parties a full hearing on the inquiry notice question, the district court finds no such moment.” “The parties’ irreconcilable versions of the pertinent history present genuine issues of material fact resolvable only by a jury.”

So, after four years of litigation, it seems like the action is about where it was the day it was filed. Sounds like a great system, huh?

You can read Tello V. Dean Witter, issued January 25, 2006, at 2006 U.S. Dist. LEXIS 5211.

Nugget: “This remand to the district court results in an unusual event: a proceeding to determine a fact that the circuit court finds dispositive of a motion to dismiss under Rule 12(b)(6), Federal Rules of Civil Procedure (the disposition of which, to say the least, normally involves no judicial fact finding).”

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.”

Psst… Hey Mack. Wanna Buy the Brooklyn Bridge?

Talk about some nice fellas. Well, at least it appears they started out that way. Back in 1987, a company called Immune Response Corporation (“IRC”) invented a drug called REMUNE® to treat HIV. A noble cause no doubt. What wasn’t so noble is what IRC did when “Study 806” showed that REMUNE® had “no effect on indicators of immune response and viral loads.” Is that bad? We had better meet with these “science folk.” At the meeting, IRC’s representatives “feverishly reviewed” the data, but apparently could not put Humpty Dumpty back together again. So they did what we all do in dire straights — they issued a press release. But somehow the release failed to mention “the negative results from Study 806.” Oops. We just forgot to mention it, really. Oh, and what about the smaller, less “comprehensive” study that showed “significant improvements” in patients using REMUNE®. You know, the one our statistician told us not to “over-interpret.” We mentioned that one.

Well, a series of other press releases went out, none of which disclosed Study 806, and eventually IRC conducted a Secondary Offering. $15 million later, still no real deep discussion of that pesky study. Then things got interesting. Seems the doctor in charge of Study 806 decided to publish a manuscript describing Study 806 in JAMA. The unmitigated gall. But before he could do so, IRC filed an arbitration to put a stop to that medical nonsense. Wow, an arbitration? Please no, not that! So, the next day, the manuscript appeared where? Very good, a gold star for you today — in JAMA. Have these guys ever heard of a TRO?

The stock tanked 24% after the JAMA article was published. IRC trashed the article as “tabloid journalism,” and said that “the truth in the long run will come out.” Side Note: That was nearly five years ago, and well, you can take a quick peek here and see for yourself whether REMUNE® has been approved yet. Go ahead, it’ll be fun, guaranteed.

Anyway, it was up to Judge Napoleon A. Jones (S.D. Cal.) to sort out the shareholder’s complaint regarding all of this fun. He started out by denying Defendants’ attempt to submit additional documents (the decision doesn’t say what documents, but probably the usual suspects) at the motion to dismiss stage. Every document Plaintiffs challenged — he ruled he would not consider. Just isn’t proper he said. Moving to the merits, the court accepted Plaintiffs’ position on falsity, recognizing that “Plaintiffs’ criticism is not that what was said was inaccurate, but that it was incomplete, thus portraying the results of the clinical trial in an unduly optimistic light.” If you’re looking for an omisions case, this is it. In addressing scienter, Judge Jones distinguished Silicon Graphics, finding that the complaint properly “alleges that Defendants had knowledge of the circumstances concerning REMUNE’s ineffectiveness.” No inside trading here.

As for loss causation, the court started out by finding that Dura “did not create a heightened pleading standard for loss causation.” The Judge then went on to find that “the conjunction of these two allegations makes clear that Plaintiffs claim the disclosures caused the drop in stock price”: “(1) Defendants’ wrongdoing caused stock prices to become artificially inflated; and (2) stock price dropped sharply when the truth became public.” Sorry to you Dura fans camping out all night to get in, that’s it. Really.

In two other notable rulings (both of which the Ninth Circuit has never decided), Judge Jones accepted the inquiry notice standard, but denied Defendants’ statute of limitations arguments. Defendants did a lot better on their argument that the court should accept the group pleading doctrine though. The court accepted that one, holding that “Defendants liability, if any, is based solely on the statements directly attributed to them.” But after those two rulings, Defendants didn’t fare so well in their “truth-on-the-market” argument, as the court said it “cannot conclude as a matter of law that the market had sufficient credible information indicating that Defendants’ optimism about REMUNE was unwarranted.”

In a final interesting note, the court upheld Plaintiffs’ 1933 Act claims, finding that they meet “the requirements of Rule 9(b) and sufficiently state[] a claim.” Wait a minute. Did he say 9(b)? Never fear, the Nugget has looked into this. Turns out Judge Jones relied on Falkowski v. Imation Corp., 309 F.3d 1123 (9th Cir. Cal. 2002), which does in fact say “violations of the 1933 Act” are subject to Federal Rule of Civil Procedure 9(b).” However, four months later the Ninth Circuit amended that decision in Falkowski v. Imation Corp., 320 F.3d 905 (9th Cir. Cal. 2003). Another gold star if you guessed the amendment: “In the second sentence of part IVB, insert “to the extent the claims are grounded in fraud.” Keep an eye out for a correction to the IRC decision soon too, and steer clear of a certain law clerk bound to be in a bad mood.

You can read the decision at 2005 U.S. Dist. LEXIS 12602.

Nugget: “Defendants would not be responsible if its investors’ perceptions were based solely on Defendants’ predictions about the prospects of REMUNE’s efficacy or FDA approval. That is not the case, however. Rather, Plaintiffs allege that Defendants’ misstatements of fact formed a false basis for its investors’ perceptions.”

Nugget: “Where negative clinical study results are fully available to the market, investors can better weigh positive predictions, and securities are more accurately valued.”

Nugget: “In the present matter, Plaintiffs’ Complaint contains the very allegations regarding share price decrease and public exposure to the truth the Supreme Court found lacking in the Dura complaint.”

Note: The thoughts in italics above are manufactured for your entertainment by the Nugget, not the actual parties, but you knew that already.