Lies, Damn Lies, & Forward Looking Statements

I've Moved!

2011-12-20T22:40:00.002-05:00

I have started a new financial services boutique, TXT Capital, that focuses on serving the needs of institutional investors with regard to securities litigation issues.

Our primary service, Institutional Liquidity Solutions(SM), allows pension funds to rapidly monetize their portfolio recoveries.

We also offer a variety of other securities litigation related services, such as:

- RFP consulting, design, and evaluation.

- Independent case analysis (merits and/or losses) for lead plaintiff, opt-out, or settlement decisions.

Until our new website is fully operational, you can find me on LinkedIn or Twitter.

Pack Your Bags, We're Going to Lagos

2007-03-26T22:25:00.000-05:00

The following was first published on 3/12 over at Securities Litigation Watch, my new blog.

If you want current postings and updates on the wide world of securities litigation, I encourage you to update your bookmarks and subscriptions.

* * * * *

The SCAS Research team informs me that a securities class action has been filed against Cadbury Schweppes Plc's Nigerian subsidiary, Cadbury Nigeria Plc, in what is believed to be the first securities class action ever filed in Nigeria.

The class action relates to the revelations by Cadbury last December that it had discovered "a significant and deliberate overstatement of Cadbury Nigeria results, which had existed over a number of years” after increasing its stake in the Nigerian subsidiary.

The Times of London has a story, here.

One of the plaintiffs in the Nigerian class action is Nsongurua Udombana, a professor of international law at the University of Lagos. According to the Times, Professor Udombana and his fellow plaintiffs "are trying to see if we can establish a precedent and start something that could bring a revolution in corporate governance in Nigeria."

Though best known to many as the producer of the seasonally appropriate Cadbury Creme Egg, the company produces a host of well known brands, from Trident to Dr. Pepper. Cadbury also produces regional brands, such as Bournvita, the "biggest selling food drink in Nigeria."

The SCAS 50 for 2006

2007-03-16T22:43:00.000-05:00

The following was first published on 3/6 over at Securities Litigation Watch, my new blog.

If you want current postings and updates on the wide world of securities litigation, I encourage you to update your bookmarks and subscriptions.

* * * * *

For the fourth year, my company (ISS' Securities Class Action Services) has issued its "SCAS 50" report.

Based on data from the SCAS database, the SCAS 50 lists the top 50 plaintiffs' law firms ranked by the total dollar amount of final securities class action settlements occurring in 2006 in which the law firm served as lead or co-lead counsel.

The full report is available here.

2006's Top 10:

RANK	LAW FIRM	SETTLEMENT TOTAL	# OF SETTLEMENTS	AVERAGE
1	Lerach Coughlin Stoia Geller Rudman & Robbins	$7,307,050,000	30	$243,568,333
2	Bernstein Litowitz Berger & Grossmann	$2,634,765,298	9	$292,751,700
3	Heins Mills & Olson	$2,500,000,000	1	$2,500,000,000
4	Milberg Weiss & Bershad	$1,604,608,808	22	$72,936,764
5	Entwistle & Cappucci	$1,100,000,000	1	$1,100,000,000
6	Barrack, Rodos & Bacine	$960,000,000	1	$960,000,000
7	Kirby McInerney & Squire	$650,900,000	5	$130,180,000
8	Abbey Spanier Rodd Abrams & Paradis	$590,295,000	8	$73,865,625
9	Barrett & Weber	$410,000,000	1	$410,000,000
9	Waite, Schneider, Bayless & Chesley	$410,000,000	1	$410,000,000

First BanCorp Settles Securities Class Action

2007-03-08T23:02:00.000-05:00

The following was first published on 3/5 over at Securities Litigation Watch, my new blog.

If you want current postings and updates on the wide world of securities litigation, I encourage you to update your bookmarks and subscriptions.

* * * * *

Today, First BanCorp (NYSE: FBP) announced that it had reached an agreement in principle to settle the securities class action pending against the company and certain officers and directors in the United States District Court for the District of Puerto Rico for $74,250,000.

The Plumbers & Pipefitters Local 51 Pension Fund and two individuals are lead plaintiffs and Lerach Coughlin Stoia Geller Rudman & Robbins LLP and Zwerling Schachter & Zwerling are co-lead counsel in the First BanCorp securities class action.

A quick search of the SCAS database reveals that this is the largest securities class action settlement ever in the District of Puerto Rico.

It also appears that the the First BanCorp litigation is one of only two securities class actions filed in the District of Puerto Rico since the PSLRA was enacted. The other case, on behalf of shareholders in Pepsi-Cola Puerto Rico Bottling Co. (n/k/a PepsiAmericas, Inc. (NYSE: PAS)) was settled in 1997.

The District of Puerto Rico can now be added back to the list of Federal courts without an active securities class action.

Thanks to Werner Kranenburg (With Vigour and Zeal) for the tip.

Second Circuit Clarifies Primary Liability Standards for Auditors

2007-03-04T23:56:00.000-05:00

The following was first published on 2/28 over at Securities Litigation Watch, my new blog.

If you want current postings and updates on the wide world of securities litigation, I encourage you to update your bookmarks and subscriptions.

* * * * *

Earlier this week, the Second Circuit held that an auditor has a duty to correct its prior certified opinions, and may be held liable under § 10(b) and Rule 10b-5 if it fails to do so. The opinion appears to be the first in the Second Circuit to squarely hold that an accountant has such a duty or may be primarily liable under the federal securities laws.

A copy of the opinion in Overton v. Todman & Co., CPAs, P.C., is available from the Second Circuit, here, or from FindLaw (reg. req'd), here.

The opinion reverses a lower court decision dismissing a securities fraud claim against the auditor, and its successor in interest, Trien, Rosenberg, Rosenberg, Weinberg, Ciullo & Fazzari, LLP.

From 1999 through 2002, Todman audited the financial statements of Direct Brokerage, Inc. (“DBI”), a broker-dealer registered with the Securities and Exchange Commission and a member firm of the New York Stock Exchange. Each year, Todman issued its “unqualified” opinion that DBI’s financial statements accurately portrayed the company’s fiscal health.

Despite its certifications of accuracy, Todman was alleged to have made significant errors that concealed DBI’s largest liability, payroll taxes. The plaintiffs alleged that Todman ignored multiple red flags that cast serious doubt on the accuracy of DBI’s financial statements, and alleged a number of facts in support of their assertion that Todman recklessly audited DBI’s affairs and recklessly evaluated whether DBI could “survive as an ongoing concern.” Plaintiffs alleged that, in 2003, DBI’s payroll tax liability led to the broker-dealer’s collapse.

The Court surveyed its prior law on primary accountant liability and concluded:

that for many years we have recognized the existence of an accountant’s duty to correct its certified opinions, but never squarely held that such a duty exists for the purposes of primary liability under § 10(b) of the 1934 Act and Rule 10b-5. Presented with an opportunity to do so, we now so hold.

The Court held that the District Court erred in dismissing the fraud claim against Todman & Co., and that an auditor may have primary liability under § 10(b) and Rule 10b-5 for a failure to correct a prior audit opinion, when the accountant:

makes a statement in its certified opinion that is false or misleading when made;
subsequently learns or was reckless in not learning that the earlier statement was false or misleading;
knows or should know that potential investors are relying on the opinion and financial statements; yet
fails to take reasonable steps to correct or withdraw its opinion and/or the financial statements; and
all the other requirements for liability are satisfied.

The Court went on to note two limits to the holding.

First, the Court held:

that an accountant has a duty [only] to correct its prior certified statements, as opposed to a broader duty to update those statements. The duty to correct requires only that the accountant correct statements that were false when made. In contrast, the duty to update requires an accountant to correct a statement made misleading by intervening events, even if the statement was true when made.

Second, the Court noted:

that an accountant need correct only those particular statements set forth in its opinion and/or the certified financial statements. Unless an accountant exchanges its role for the role of an insider an accountant is under no duty to divulge information collateral to the statements of accuracy and financial fact set forth in its opinion and the certified financial statements, respectively.

The Court was clear to note that the Todman holding did not conflict with Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994), which held that there was no aiding and abetting liability under § 10(b), as the auditor in this litigation had acted as a speaker in a primary capacity.

A Fourth Circuit Judge Did What?

2007-03-02T22:57:00.000-05:00

The following was first published on 2/21 over at Securities Litigation Watch, my new blog.

If you want current postings and updates on the wide world of securities litigation, I encourage you to update your bookmarks and subscriptions.

* * * * *

First, the non-newsworthy part.

Yesterday, the United States Court of Appeals for the Fourth Circuit affirmed the dismissal of the consolidated securities class action pending against Cree, Inc. (NASDAQ: CREE), and six of the corporation's officers and directors. A copy of the Fourth Circuit's opinion is available here.

The dismissal itself (and certainly the affirmance by the Fourth Circuit) is not the big news. A quick review of the SCAS database reveals that fully 50% of the federal securities class actions filed within the Fourth Circuit since the PSLRA was enacted have been dismissed.

The big news is the dissent in the Cree litigation, authored by Judge Dennis W. Shedd.

Judge Shedd takes issue with the scienter analysis performed by both the District Court and the majority. In his words:

The majority approach to testing the adequacy of the Complaint examines in isolation each individual suspect transaction in order to ascertain whether the elements of securities fraud have been adequately pled with respect to each one. However, this approach ignores the fact that this case revolves around a single securities fraud action against a single company, Cree.

Judge Shedd goes on to write:

the Complaint does not-and need not-allege an action for securities fraud with respect to all six companies with which Cree dealt. Instead, the Complaint alleges a single cause of action for securities fraud, as evidenced by many transactions with multiple companies. If even one of these transactions is pled adequately enough to meet the pleading requirements under the PSLRA and Rules 8 and 9, the cause of action must survive the motion to dismiss. Moreover, if the totality of Cree's actions reveals a larger picture of fraud sufficient to meet the necessary pleading requirements, this case must advance beyond the current stage of the proceedings

Judge Shedd also takes issue with the analysis adopted by the majority regarding the standards to be applied to so-called "confidential sources." Such information sources, typically former employees or customers of the corporate defendant are a common investigative and pleading technique used by plaintiffs to meet the pleading standard imposed by the PSLRA.

The majority adopted the standard employed by the Seventh and Second Circuits in Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588 (7th Cir.2006) and Novak v. Kasaks, 216 F.3d 300 (2d Cir.2000), respectively. Under that analysis, a complaint which relies on confidential sources must allege facts sufficient "to support the probability that a person in the position occupied by the source would possess the information alleged."

Judge Shedd, in his dissent disagrees with the adoption of the Tellabs/Novak standard, noting:

I would resolve the issues surrounding unnamed sources differently because the approach adopted by the majority does not inhere in the plain language of the PSLRA. The plain language of the PSLRA does not subject unnamed sources to higher scrutiny than other averments made upon information and belief. Accordingly, in my view, a complaint must simply identify unnamed sources "with particularity," as required by the plain language of the PSLRA, which might include the source's job title and years of employment, or possibly, other facts sufficient to support a reasonable belief that the plaintiff did not merely invent sources. The purpose of the PSLRA's particularity requirement is to prevent the fabrication of information, not to weigh its reliability or credibility.

The Teachers' Retirement System of Louisiana is the lead plaintiff and Grant & Eisenhofer, P.A. are lead counsel in the Cree litigation.

A Gentle Rebuttal to Prof. Grundfest

2007-02-25T23:04:00.001-05:00

The following was first published on 2/13 over at Securities Litigation Watch, my new blog.

If you want current postings and updates on the wide world of securities litigation, I encourage you to update your bookmarks and subscriptions.

* * * * *

Last week, in a widely-circulated and much discussed Wall Street Journal op-ed column entitled “The Class Action Market” (here, sub. req'd), former SEC Commissioner and current Stanford Law Professor Joseph Grundfest suggested that private securities class actions have lost their utility in policing the securities markets and compensating investors.

I respectfully disagree with Prof Grundfest.

And so, apparently do the Department of Justice and the Securities and Exchange Commission.

In a little noticed amicus brief filed last Friday by the DOJ and the SEC in the Tellabs, Inc. v. Makor Issues & Rights, Ltd. appeal before the U.S. Supreme Court, the federal regulators noted:

Meritorious private actions are an essential supplement to criminal prosecutions and civil enforcement actions brought, respectively, by DOJ and the SEC.

Prof. Grundfest also suggests that private securities litigation is "virtually useless as means of compensating investors for their losses."

Investors in AOL or Time Warner securities would also probably disagree with Prof. Grundfest.

The private securities class actions involving AOL Time Warner settled for $2.5 billion. Time Warner settled with the federal regulators for a small fraction of that amount - $150 million to the Department of Justice and $300 million to the United States Securities and Exchange Commission. While the combined $450 million in federal regulatory settlements is not chicken feed, it is only 18% of the amount recovered in the private class action.

And the AOL case represents two of the largest payments ever made by a corporate defendant to the federal government to settle securities fraud related allegations. In many private cases, there are no state or federal penalties or disgorgements to compensate investors. For example, in the Williams Securities Litigation:

1. The company had not restated their financial statements.
2. No governmental investigation had uncovered any fraud.
3. No employees of the corporate defendants had been fired
4. Defendants never acknowledged that any improper conduct had occurred.

Yet the private securities class litigation was able to recover a substantial sum for investors, settling in 2006 for $311 million.

Expect more chatter on Prof. Grundfest's proposal during the next few months.

Does a Serial Recidivist = Corporate Scienter?

2007-02-20T00:51:00.000-05:00

The following was first published last week over at Securities Litigation Watch, my new blog.

If you want current postings and updates on the wide world of securities litigation, I encourage you to update your bookmarks and subscriptions.

* * * * *

If a company engages in two separate alleged securities frauds six years apart, with an

intervening bankruptcy reorganization but retains at least six officers or directors from the predecessor entities, is it possible that the prior allegations could be used to bolster the corporate scienter allegations in the new litigation?

Sounds a little complicated, so let's break it down.

Way back in February 2001, Globalstar, L.P., Globalstar Capital Corporation and Globalstar Telecommunications Limited (collectively "Old Globalstar") were accused of making false and misleading statements regarding Globalstar’s financial prospects and condition. That case culminated in one of those ultra-rare securities class action trials, and ultimately settled for $20 million.

After the complaints in the first case were filed, but before that case went to trial, all of the Old Globalstar entities filed for bankruptcy protection.

Fast forward to 2007.

The Globalstar entities have reorganized as Globalstar, Inc. (NASDAQ: GSAT), filed a registration statement for a new IPO, and, as of last week, been hit with a fresh group of securities class actions.

How then do allegations of serial recidivism help to establish the scienter of a defendant corporation?

There are at least three distinct tests for corporate scienter, including two versions of the "collective scienter" theory being applied by the courts today.

Under the collective scienter theory, the analysis is based on the collective knowledge of the corporation's employees.

Under the stronger version of the collective scienter theory, a plaintiff can establish that the corporation acted with fraudulent intent without any reference to a particular employee. See, e.g. In re Dynex Capital, Inc. Sec. Litig., 2006 WL 1517580 (S.D.N.Y. June 2, 2006).

Under the weaker version of the collective scienter theory, a plaintiff need only establish that a management-level employee of the corporation acted with the requisite fraudulent intent, even if that employee is not a defendant and did not make any alleged false statement. See, e.g. In re Sonus Networks, Inc. Sec. Litig., 2006 WL 1308165 (D. Mass. May 10, 2006); In re Marsh & McLennan Companies, Inc. Sec. Litig., 2006 WL 2057194 (S.D.N.Y. July 20, 2006).

At the far end of the spectrum, and seemingly losing support by the day, is the concept that the corporate scienter analysis could only be determined by looking:

to the state of mind of the individual corporate official or officials who make or issue the statement . . . rather than generally to the collective knowledge of all the corporation's officers and employees acquired in the course of their employment.

Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353 (5th Cir. 2004).

While the new Globalstar cases have just been filed, the overlap of six senior officers or directors between the old and new entities (none of whom are currently named as defendants in the new litigation) may provide an interesting test case for the limits of the collective scienter theory.

Moving on...

2007-02-11T21:51:00.000-05:00

Many of you are already aware that I recently joined Institutional Shareholder Services as their Vice President, Product & Market Segment Manager for Securities Class Action Services.

As previously noted here, this means that I have revived Securities Litigation Watch, the blog started in 2003 by Bruce Carton, my predecessor at ISS.

As also previously noted, I am putting this blog (Lies, Damn Lies, & Forward Looking Statements) up for adoption.

Interested parties should e-mail me at liesdamnliesblog@gmail.com.

For the near term, postings here will merely be reposts of original content first posted over at Securities Litigation Watch.

Thanks again for your loyal readership, and I look forward to seeing and hearing from you over at Securities Litigation Watch.

"The Fab Fifty"

2007-02-08T22:17:00.000-05:00

The American Lawyer magazine has published a "Young Litigators Fab Fifty" list of fifty lawyers ages 45 and under. The members are considered to be "Litigation's Rising Stars."

Of interest to readers - two partners at two different prominent plaintiff side firms made the list.

The first, Blair A. Nicholas, 36, of Bernstein Litowitz Berger & Grossmann, LLP makes the list here.

Mr. Nicholas earned his spot on the list for his work as one of the lead trial counsel in the Clarent Corporation Securities Litigation, one of those rare securities cases that actually went to trial, and for his work in the Williams Securities Litigation, which settled for $311 million - the largest securities fraud settlement ever in Oklahoma.

The second, name partner Darren J. Robbins, 40, of Lerach Coughlin Stoia Geller Rudman & Robbins LLP, makes the list here.

Mr. Robbins serves on the firm's executive committee and as head of the mergers and acquisitions practice at Lerach Coughlin. According to this short firm bio, Mr. Robbins "concentrates his practice in the structuring of corporate governance enhancements in connection with the resolution of shareholder class and derivative litigations."

Securities Class Actions - Next Stop Thailand?

2007-02-05T00:20:00.000-05:00

According to an article in the Bangkok Post this morning (you have to love the international dateline!), the Thai Investors Association (TIA) is pressing the government of Thailand to pass a "new class-action law to help strengthen the rights of retail investors."

Wichai Poolworaluk, TIA's president, suggests that:

In overseas markets, class-action suits are used as a tool to protect investor rights. And under this law, authorities gain greater leeway to help protect the rights of retail investors.

The TIA also is seeking to amend the Public Companies Act "to help increase the rights of shareholders, particularly in voting rights to contest controversial items that could damage the interest of minority investors."

The TIA is a:

leading organization in protecting investors rights and promoting good corporate governance among listed companies in order to help provide on environment for sustainable growth of the Thai capital market.

A review of the different litigation options currently available to Thai investors under Thai law is available from The Thailand Law Forum, here. The Law Forum "is a non-profit web site that strives to provide the English-speaking public with a free, unbiased and up-to-date source of information about Thai law."

The "Qwest" Is Over for CalSTRS

2007-02-01T23:02:00.000-05:00

Back in December, we looked at the results that one group of "opt-out" pension funds trumpeted in the AOL Time Warner securities litigation.

The opt-out trend continues, with apparent success by some investors.

According to a press release issued earlier this week, the California State Teachers' Retirement System (CalSTRS) was able to recover "approximately 30 times what it would have received had it participated in the federal class action as a class member," in reaching a $46.5 million settlement with Qwest Communications, Qwest's former auditors and underwriters, and and certain former Qwest executives.

CalSTRS, which is the second-largest public pension fund in the United States, was represented in the litigation by "Cotchett, Pitre, Simon & McCarthy" and Girard Gibbs LLP in the Qwest litigation.

The Cotchett firm's name is in quotes because an article (sub. req'd) in The Recorder from earlier this week indicated that name partner Bruce Simon was leaving the firm to start his own solo antitrust practice. A review of the firm's website reveals that the firm is now known as Cotchett, Pitre & McCarthy.

A copy of CalSTRS complaint, filed in December 2002 in the San Francisco County Superior Court, is available here, and the executed settlement agreement is available here.

The federal class actions were largely settled in 2005 for $400 million. Lead counsel in the class action is Lerach Coughlin Stoia Geller Rudman & Robbins LLP and the New England Healthcare Employees Pension Fund, Satpal Singh, Tejinder Singh, and Clifford Mosher are lead plaintiffs in the class action.

Of Tangential Interest (since postings are not daily at this point): A side by side review of the press release issued by CalSTRS after the filing of the complaint with the press release issued after the settlement reveals that the fund leapfrogged from the third largest public pension fund in 2002 to the second largest fund in 2006 as assets grew from $94 to $157.8 billion.

The fund that CalSTRS passed to move into second place is the New York State Common Retirement Fund (NYSCRF), which had assets of $140.45 billion as of March 2006. The NYSCRF is no stranger to securities litigation, having served as lead plaintiff in two of the largest securities class actions ever, WorldCom and Cendant.

Even Associates Can Be On TV

2007-01-30T22:08:00.000-05:00

A reader, who has requested anonymity for reasons that will become clear in a moment, has tipped us off to a story that is already making the rounds in the securities litigation world.

Marisa N. DeMato, an associate in Lerach Coughlin Stoia Geller Rudman & Robbins LLP's Boca Raton office is the latest person to be "fired" by The Donald in his "world's toughest job interview," The Apprentice.

This is of potential interest to readers because according to her Lerach Coughlin bio, "[a] substantial portion of Ms. DeMato’s time is currently devoted to aggressively representing investors in class actions involving securities fraud by public companies and their officers."

Ms. DeMato's official Apprentice biography, interview, picture gallery, etc., can be found here.

A Change of Scenery

2007-01-30T21:26:00.000-05:00

Dear Readers:

First, an apology for the extended absence.

Now, for the news.

I have joined Institutional Shareholder Services as the Vice President for Product and Market Segment Management for their Securities Class Action Services (SCAS) suite of products.

SCAS provides the industry’s most comprehensive securities litigation database and performs professional notification, tracking and claims filing services for institutional investors in securities class action suits.

Sometime in early to mid-February I will be reviving Securities Litigation Watch, the blog started in 2003 by Bruce Carton, my predecessor at ISS.

Bruce has joined The Garden City Group and started a new class action centered blog, Best in Class.

To complete the muscial blogging chairs - I am putting this blog (Lies, Damn Lies, & Forward Looking Statements) up for adoption.

Interested parties should e-mail me at liesdamnliesblog@gmail.com.

Postings here will be light until the transition to Securities Litigation Watch is complete.

Holiday break

2006-12-28T13:19:00.000-05:00

Things are slow in securities litigation land this time of year, so I'll take the opportunity to wish all of my readers great health and happiness in the New Year!

Checkmate for Check Point

2006-12-21T11:02:00.000-05:00

Today, Check Point Software Technologies Ltd. (NASDAQ: CHKP) announced that it has reached an agreement-in-principle to settle the securities class action lawsuits pending against the company and certain of it's officers and directors for $13 million.

According to the release, the entire settlement will be paid by Check Point's insurance carrier.

The litigation is pending in the United States District Court for the Southern District of New York before Judge Richard M. Berman.

Jay Stegmann is the lead plaintiff in the Check Point litigation, and Schiffrin & Barroway LLP and Milberg Weiss Bershad & Schulman LLP are lead and liaison counsel, respectively.

Philadelphia Stock Exchange Sale Challenged

2006-12-21T00:05:00.000-05:00

According to a press release issued last week, Chancellor William B. Chandler III of the Delaware Court of Chancery has denied the defendants' motions to dismiss in a class action brought on behalf of shareholders of the Philadelphia Stock Exchange to challenge a proposed sale of 90% of the equity of the stock exchange from the Class A shareholders to a group of Wall Street firms and members of the Exchange's Board of Governors.

A copy of Chancellor Chandler's opinion is available here and a copy of the class action complaint can be found here.

The Wall Street firms named in the complaint are UBS Securities, LLC, Morgan Stanley & Co., Inc., Citigroup Financial Products, Inc., Credit Suisse First Boston, Citadel Derivatives Group , LLC, and Merrill Lynch, Pierce Fenner & Smith.

Berger & Montague, P.C. and Rosenthal, Monhait & Goddess, P.A. are counsel for the plaintiff.

Daily Trivia: The Philadelphia Stock Exchange was the first securities exchange in the United States. The exchange was officially established in 1790, and initially mainly government obligations were traded. Among the securities listed in the early days of the Exchange were shares of The Philadelphia and Lancaster Turnpike Company, the first turnpike in the United States. The route that formed the turnpike is now known as Route 30, or Lancaster Avenue.

Yet Another Options Backdating Study

2006-12-20T00:05:00.000-05:00

A new study by Harvard Law School's Program on Corporate Governance released this week suggests that options grants to outside directors "have been favorably timed to an extent that cannot be explained by mere luck."

The study, entitled Lucky Directors, was written by Prof. Lucian Bebchuk (Harvard Law School), Prof. Yaniv Grinsten (Cornell University - Samuel Curtis Johnson Graduate School of Management) and Prof. Urs Peyer (INSEAD).

The authors found that, out of all director options grant events during 1996-2005, 9% were so called "lucky grant events" - falling on days with a stock price equal to a monthly low.

The study estimates that about 800 "lucky grant events" were timed opportunistically, and that approximately 460 different companies and more than 1400 outside directors were associated with grant events involving such timing.

Additionally, the study found that 3.8% of all options grant events were "super-lucky," defined as taking place at the lowest price of a calendar quarter.

Daily Trivia: Harvard's Program on Corporate Governance is part of the John M. Olin Center for Law, Economics, and Business. The Center was founded in 1985, but in 2003 received a $10 million grant from the John M. Olin Foundation. The gift was the largest foundation grant in the history of Harvard's Law School. The foundation was started by John Merrill Olin, the late founder of Olin Corporation (NYSE: OLN), a major manufacturer of copper alloys, ammunition, and chlorine and sodium hydroxide.

Help Wanted - Apply by Lead Plaintiff Motion

2006-12-19T00:02:00.000-05:00

The current lead plaintiffs in the Cyberonics, Inc. securities litigation are looking for some help.

According to a press release issued on Monday, the lead plaintiff process in the case has been reopened, nearly 15 months after the original lead plaintiffs were appointed.

Curiously, the announcement comes after a prior consolidated amended complaint was dismissed, and four months after the first amended complaint was filed. A copy of the first amended complaint is available from Stanford, here.

The new complaint substantially expands the class period and adds allegations related to options backdating.

The Cyberonics litigation is pending in the United States District Court Southern District Of Texas before Judge Gray H. Miller.

EFCAT, Inc., John E. and Cecilia Catogas, Blanca Rodriguez and Mohamed Bakry are the current lead plaintiffs in the Cyberonics litigation and Finkelstein & Krinsk LLP and Scott + Scott LLC are currently serving as co-lead counsel.

Daily Trivia: Cyberonic's only product is an implantable medical device for the long-term treatment of epilepsy, depression, and other chronic disorders using vagus nerve stimulation therapy.

The vagus nerve is the only nerve that starts in the brainstem and extends down below the head, to the abdomen. It is also known as the "pneumogastric nerve since it innervates both the lungs and the stomach." The name is derived from the Latin word vagus, literally meaning "wandering."

Securities Class Action Filed Down Under

2006-12-18T00:40:00.000-05:00

An article in The West Australian today notes that shareholders of Multiplex Group (ASX: MXG) have filed a class action against the Australian property developer in The Federal Court of Australia in Melbourne.

According to the article, the litigation stems from the alleged failure of Multiplex to:

keep the market properly informed about problems it was having with the [redevelopment of London's Wembley Stadium] and the likely impact those problems would have on the company's profits.

Specifically, the complaint alleges:

Multiplex was behind schedule and had incurred cost overruns by August 2004, but did not announce the project would be making a loss until May 2005.

The complaint was filed on behalf of 45 investors by the Australian firm Maurice Blackburn Cashman Lawyers. The firm has a specific page devoted to the litigation, here.

Daily Trivia: For non-soccer fans, Wembley Stadium is perhaps best remembered as one of the two concert sites for Live Aid, the 1985 concert that sought to raise awareness of famine in Africa. According to this VH1 article, "an estimated 1.4 billion of the planet's five billion" tuned in to the concert that day, and more stunning still, "95 percent of the world's television sets were tuned in to" the concert at one point.

Vigorous Defense, With a Twist

2006-12-14T19:45:00.000-05:00

Today, AtriCure, Inc. (NASDAQ: ATRC) issued a press release regarding the securities class action lawsuits that were recently filed in the United States District Court for the Southern District of New York against the company and certain of its officers that adds yet another wrinkle to the Securities Litigation Universe of [Press] Release Permutations (a/k/a SLURP).

The SLURP collection was previously discussed here and here.

In the release, David Drachman, the president and CEO of the West Chester, Ohio based medical device company stated:

We believe that these allegations are without merit and we intend to vigorously defend the Company. As a public company, the Company has maintained insurance coverage to address such matters. Management is and will remain focused on the growth and development of our Company.

Mr. Drachman has the party line down with his "vigorous defense" proclamation, but it is a bit unusual to publicly discuss reliance on insurance coverage to pay for costs associated with a securities class action when there has been no adjudication of the claims, and thus the insurer may still deny coverage.

NASDAQ (where AtriCure is listed) has "A Guide for North American Companies Listing on the U.S. Securities Markets," which explains many of the issues surrounding public offerings and D&O policies. Latham & Watkins LLP also has an excellent Client Alert discussing D&O insurance issues in the context of options-backdating cases.

So this new version of the vigorous defense press release will be called the, "We didn't do it, we're going to come out swinging, and, hey, somebody else is going to pay for it" press release.

I wonder if The D&O Diary has anything to say about this?

Daily Trivia: Latham's web page for the firm's "Securities Litigation and Professional Liability" practice group indicates that the attorneys with the firm have handled "more than 200 securities class actions" in the past decade. According to Stanford's Securities Class Action Clearinghouse, that is about 8% of all securities class actions filed since the passage of the PSLRA.

Preemptive Vigorous Defense or Buried Notice?

2006-12-13T23:12:00.000-05:00

Today, Technical Olympic USA, Inc. (NYSE: TOA) announced that the securities class action complaint filed against the company and certain executive officers of the company:

is without merit and that it intends to defend the lawsuit vigorously.

The complaint was filed in the United States District Court for the Southern District of Florida.

Here's the rub - a quick search of Yahoo! Finance, MarketWatch, TheStreet.com, and The Motley Fool, reveals that no press release has yet been issued by the firm(s) that filed the complaint.

It appears that we have another "preemptive vigorous defense" press release.

Or we may have a case of so-called "buried notice," as previously discussed by Bruce Carton over at Securities Litigation Watch, here.

UPDATE: Lerach Coughlin Stoia Geller Rudman & Robbins LLP issued a PSLRA notice today, available here.

Daily Trivia: Konstantinos A. Stengos, Technical Olympic's chairman of the board and the founder of the Technical Olympic Group of Companies is among the "50 Wealthiest Greeks in America." Among his diverse holdings are the Greek Porto Carras vineyards.

Company Bites Auditor

2006-12-12T22:30:00.000-05:00

Ok, it's not quite man bites dog, but today Fannie Mae (NYSE: FNM) announced that it has filed suit against KPMG LLP, the company's former outside auditor, for negligence and breach of contract in the Superior Court of the District of Columbia.

The 17-count complaint seeks:

[c]ompensatory damages to be determined at trial in an amount not less than $2,000,000,000 (Two Billion Dollars)

A copy of the complaint is available from Fannie Mae, here.

Articles on the litigation can be found here (The Wall Street Journal - sub. req'd), here (MarketWatch.com), and here (Reuters).

The Journal article quotes a KPMG spokesman, who indicated that the accounting firm "is likely to file a countersuit," and that KPMG "will remove this suit to [the United States District Court for the District of Columbia], where we intend to pursue our own claims."

Disclosure: The author and his law firm are counsel for certain plaintiffs in the currently pending Fannie Mae derivative litigation.

Securities Litigation Settlements May Be Tax-Deductible

2006-12-12T21:19:00.000-05:00

An article today from WebCPA notes that the Internal Revenue Service has agreed, in a letter ruling, that a publicly-traded acquiring corporation can deduct the amount it paid to settle class action securities litigation against the target corporation that was triggered by misstatements in the target corporation’s reported earnings.

Generally, as noted in the letter,

amounts paid in settlement of lawsuits are currently deductible if the acts which gave rise to the litigation were performed in the ordinary conduct of the taxpayer's business. See, e.g., Federation Bank & Trust Co. v. Commissioner, 27 T.C. 960 (1957).

But, if the litigation arises from a capital transaction,

then the settlement costs and legal fees associated with such litigation are characterized as acquisition costs and must be capitalized under § 263(a). See Woodward v. Commissioner, 397 U.S. 572, 575 (1970) (holding litigation costs incurred by corporation in appraisal proceedings mandated by state law to determine the value of dissenter’s shares were part of the cost of acquiring those shares); United States v. Hilton Hotels Corp., 397 U.S. 580, 583 (1970); (similarly, deciding that litigation costs incurred in appraisal action to determine fair purchase price were costs to acquire property); Berry Petroleum Co. v. Commissioner, 143 F.3d 442 (9th Cir. 1998)(concluding that legal expenses to defend class action lawsuit alleging breach of fiduciary duty in accomplishing merger were nondeductible acquisition costs).

Certain business expenses are not converted into capital expenditures even though they have some connection to a capital transaction. In determining whether litigation costs are deductible expenses or capital expenditures, the courts and the IRS have looked to the "origin of the claim" test.

The acquiring corporation:

claimed that the settlement costs were deductible as ordinary and necessary business expenses because the complaints were the product of an ongoing dispute between target's shareholders and the taxpayer, as controlling shareholder of target, for withholding dividends, issuing fraudulent and incomplete financial statements, and artificially depressing its stock price.

As a result, the acquiring corporation argued these claims were related to ordinary course business activities, and did not originate in the merger of the two companies or any other capital acquisition.

The IRS agreed, holding that:

Under these circumstances, we believe that the origin of these claims was in the ordinary conduct of [the target company's] trade or business.

The ruling, as with most letter rulings by the IRS, is directed only to the taxpayer requesting it and is not precedential in other cases.

Daily Trivia: The origin of the IRS can be traced back to the Civil War, when President Lincoln and Congress created the position of commissioner of Internal Revenue and enacted an income tax to pay war expenses. In 1872, the income tax was repealed, but in 1894 Congress revived the income tax in 1894, only to have the Supreme Court rule it unconstitutional the following year. The country remained without a federal income tax until 1913, when Wyoming ratified the 16th Amendment, which gave Congress the authority to enact an income tax.

Options Backdating, Eh?

2006-12-11T23:38:00.000-05:00

According to a recent Chicago Tribune article, a forthcoming study by economics professors at the University of Manitoba suggests that options backdating could might be as much of an issue for Canadian companies as it has turned out to be for US companies.

The study, Remuneration and Incentives of Managers: Executive Stock Options and Backdating in Canada, examined stock options granted to executive by 66 of Canada's largest publicly traded companies from June 2003 through October 2006.

The authors found trading patterns that may be consistent with options backdating and that many options grants were not being reported as quickly as required.

A preliminary draft of the study notes:

While it is impossible to determine unequivocally that companies are engaging in backdating. . .the aggregate evidence certainly supports such a story.

The study found that unscheduled grants had a higher rate than scheduled grants of abnormally high returns.

The authors also found that reporting requirements regarding stock options were not being properly followed. Toronto Stock Exchange rules (See Toronto Stock Exchange Company Manual Sec. 613(h)(i), here) require that:

the exercise price for any stock options granted under a security based compensation arrangement or otherwise must not be lower than the market price of the securities at the time the option is granted.

In other words, options must not be granted 'in the money.'

Moreover, Canadian securities regulations require that a company report all stock-option grants within 10 days of the grant. As a result of this long reporting period, companies may be setting the exercise price at the lowest point during a particular time period, giving the option recipients an immediate boost in the options' value.

The study analyzed more than 5,600 instances of stock-options granting. It found that 17% of reports for grants were filed after the 10-day window had expired, with 9% of those reports filed more than 50 days after the grant date.

The article was authored by Prof. Ryan A. Compton, Jonathon N. Giller, and Prof. Lindsay M. Tedds.

The D&O Diary also has a post on the study, here.

Daily Trivia: Of the 66 Canadian companies discussed in the study eight have been the subject of federal securities class actions since the passage of the PSLRA.

They are:

ATI Technologies Inc. (twice)
Barrick Gold Corp.
Biovail Corp.
Bombardier Inc.
Cognos Inc.
Inco Limited
Kinross Gold Corp.
Nortel Networks Corp. (twice)
Cott Corp. (pre-PSLRA)