Enron Judge Tackles Dura

Even the Enron Judge is getting into the Dura shuffle. And despite what the Nugget said earlier, this opinion could be the most comprehensive analysis of Dura yet. Judge Melinda Harmon (S.D. Tex.) says that “although Plaintiff’s proposed class purchased Enron securities at a highly inflated price because of Enron’s alleged fraudulent financial statements, both complaints make clear that key corrective disclosures in the latter part of 2001 exposing material misstatements and omissions in earlier years of Enron’s financial reports caused the sharp drop in price and the investors’ damage.”

So, “the relatively small time gap between the five transactions at issue and Jeff Skilling‘s August 2001 resignation, Enron’s October 2001 corrective disclosures to the world, followed by SEC‘s investigation, is short, just over a year, thus tightening the causation link. The price of the stock plunged following Enron’s revelation and its swift descent into bankruptcy. The putative class’s economic loss was not the disparity in the inflated purchase price and the actual quality of the investment, but the significant decline in the price of the securities with the startling revelation in the fall of 2001 of Enron’s previously concealed debt obligations, financial exposure, and vulnerability to bankruptcy, which it allegedly had deliberately hidden from investors.”

You, and especially those confused people who think Dura somehow affects the fraud-on-the-market rule (yes, you are confusing transaction causation — factor 4 in Dura — with loss causation — factor 6, which the Supremes actually address), should check out the opinion, which denies RBC’s motion to dismiss.

You can read In re Enron, issued December 22, 2005, at 2005 U.S. Dist. LEXIS 41240.

Nugget: “Plaintiff’s suit was filed on January 9, 2004, more than fifteen months before the Supreme Court issued its ruling in Dura Pharmaceuticals on April 19, 2005. Dismissal based on a complaint’s failure to comply with a Supreme Court’s subsequent ruling, without allowing the plaintiff an opportunity to cure pleading deficiencies if it can, would be unjust.”

Two Birds, One Order.

Defendants must be seeing stars in the Veeco securities class action. Seriously, it’s bad enough losing the motion to dismiss, but losing class certification in the same Order? Say it ain’t so. But it is so, and this time it’s Judge Colleen McMahon (S.D.N.Y.) on the Bench. Her opinion covers a lot of ground, and Defendants aren’t without certain victories (like shaving the class period from 15 to 9 months), but let’s face it, you know you’re in trouble when the Judge says that “Plaintiffs’ extensive allegations of fraud — whether or not sufficient to ultimately establish defendants’ liability — undoubtedly satisfy Rule 9(b)’s and the PSLRA’s heightened pleading requirements.”

And following a trend the Nugget has long reported, Judge McMahon provided what arguably is the best description yet of just how non-complicated the whole Dura loss causation thing really is, holding that “plaintiffs allege that they were harmed when Veeco’s stock plummeted as a result of defendants’ disclosure of prior misrepresentations and material omissions relating to the company’s performance and earnings. The complaint thus contains the very allegations regarding share price decrease and public exposure to the truth the Supreme Court found lacking in the Dura complaint.”

That’s right all you Dura exaggerators (you know who you are), enough to get past motions to dismiss and class certification objections.

You can read In re Veeco, issued March 21, 2006, at 2006 U.S. Dist. LEXIS 13226.

Nugget: “The court has no reason to believe that [the class representative is inadequate based on ignorance], and finds it odd that defendants would set themselves up as champions of the class interests by making such an argument.”

Alito Helps Toss Merck Case

Supreme Court nominee Judge Samuel A. Alito, Jr. was part of a Third Circuit Panel that just issued a unanimous opinion in the Merck securities class action. The decision, which focuses on materiality, shoots Plaintiffs down, noting that Lead Plaintiff “is trying to have it both ways: the market understood all the good things that Merck said about its revenue but was not smart enough to understand the co-payment disclosure,” but alas, “an efficient market for good news is an efficient market for bad news.”

Interestingly, the Panel spends about half of the opinion discussing whether the Lead Plaintiff, Union Investments Privatfonds GmbH, was acting within its authority to unilaterally replace Bernstein Litowitz with Milberg Weiss after losing the motion to dismiss before Judge Stanley R. Chesler (D. N.J.). The Panel held that “all retentions of class counsel by the lead plaintiff–whether lead counsel, trial counsel, or appellate counsel–require court approval under the PSLRA, but that “Milberg Weiss may prosecute this appeal,” although “future lead plaintiffs must obtain court approval for any new counsel.”

You can read In re Merck, issued December 15, 2005, here, or at 2005 U.S. App. LEXIS 27412.

Nugget: “Sunshine is a fine disinfectant, and Merck tried for too long to stay in the shade. The facts were disclosed, though, and it is simply too much for us to say that every analyst following Merck, one of the largest companies in the world, was in the dark.”

Dura No Help to Defendants Again

Yet again, Dura has failed to produce for those who predicted it would put an end to many securities class actions. How these predictions came about in light of the fact that Justice Breyer commented in Dura that “it should not prove burdensome for a plaintiff who has suffered an economic loss to provide a defendant with some indication of the loss and the causal connection that the plaintiff has in mind,” is a bit puzzling, but the securities class action bar hadn’t seen a substantive decision from the Supremes in a long time, so it’s perhaps a bit understandable that some got a bit overzealous.

This time, it’s Judge John R. Tunheim (D. Minn.) taking on Defendants’ 12(c) motion for judgment on the pleadings (their 12(b)(6) motion to dismiss had been denied earlier) in the Retek action, where they argued that since Plaintiffs’ complaint says “the plaintiffs purchased stock at artificially inflated prices and were damaged thereby,” that should spell dismissal under Dura. A nice try, but it didn’t work, as Judge Tunheim recognized that “while it is true that plaintiffs use the same boilerplate language as that found insufficient in Dura, it is also clear that defendants are fully aware that plaintiffs claim the… press release as a corrective disclosure and the subsequent fall in stock value as their economic loss.” Indeed, “in contrast to Dura and Compuware, here plaintiffs’ allegations include a straightforward scenario perfectly consistent with what Dura requires: an allegedly corrective disclosure followed by a drop in the stock price during the time that plaintiffs owned the securities.”

You can read In re Retek, issued October 21, 2005, at 2005 U.S. Dist. LEXIS 25986.

Nugget: “While the thread of causation may be long and somewhat tortured, at this stage, where the Court must accept as true the allegations in the Amended Complaint, the Court finds that plaintiffs have alleged enough to survive Dura.”

You Gotta Know When to Hold ‘Em

Yesterday, a Panel of the Seventh Circuit issued a SLUSA-based opinion reversing Chief Judge G. Patrick Murphy’s (S.D. IL) remand of a state law securities class action brought against
Citigroup Global Markets (formerly known as Salomon Smith Barney (“SSB”)). The key issue under SLUSA boiled down to whether or not Plaintiffs alleged misrepresentations “were in connection with the purchase or sale of securities.” If so connected, Plaintiffs lose. If not, they head back to state court in southern Illinois, and Citigroup had best get its checkbook ready.

Since the U.S. Supreme Court has never decided what is or isn’t “connected” in the SLUSA context, the Panel (with Judge Kenneth F. Ripple as lead author, and Judges William J. Bauer and Michael S. Kanne in standard 0ne-by-two cross-cover formation) had to settle for the next best thing, and that’s Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), in which “the Court held that investors who neither purchase nor sell securities have no standing to maintain private litigation to recover damages under section 10(b) and Rule 10b-5, even if the failure to purchase or sell was the result of fraud.” Having anticipated this definition, Plaintiff’s pointed out that his complaint says “SSB’s misrepresentations caused him and other class members to hold securities, not to purchase or sell them.”

But this didn’t work, as the Panel concluded “that the present claims are connected sufficiently to the purchase and sale of a covered security for the purposes of SLUSA preemption and removal” because “by depicting their classes as containing entirely non-traders, plaintiffs do not take their claims outside § 10(b) and Rule 10b-5; instead they demonstrate only that the claims must be left to public enforcement. It would be more than a little strange if the Supreme Court’s decision to block private litigation by non-traders became the opening by which that very litigation could be pursued under state law, despite the judgment of Congress (reflected in SLUSA) that securities class actions must proceed under federal securities law or not at all.”

Result? Remand vacated and Plaintiff’s claims tossed.

You can listen to the oral argument here.

Plus, you can read Disher v. CitiGroup, issued August 17, 2005, here or at at 2005 U.S. App. LEXIS 17334.

Nugget: “Blue Chip Stamps combined with SLUSA may mean that claims of the sort plaintiffs want to pursue must be litigated as derivative actions or committed to public prosecutors, but this is not a good reason to undercut the statutory language.”