Break In The Action

There will be no new posts on The 10b-5 Daily until after Jan. 1.

NERA Releases Study on "Recent Trends In Shareholder Class Action Litigation"

It is not the end of the year, but that has not stopped NERA Economic Consulting from releasing its annual study on securities class actions. The 2007 report is entitled "Recent Trends In Shareholder Class Action Litigation: Filings Return to 2005 Levels as Subprime Cases Take Off; Average Settlements Hit New High."

The study reaches the following notable conclusions:

(1) NERA predicts that there will be 207 filings by year end (a 58% increase as compared to 2006). The increase in filings has been driven in part by subprime-related litigation (38 filings as of Dec. 15).

(2) The value of the average settlement finalized or proposed to be finalized in 2007 (excluding mega-settlements greater than $1 billion) was $33.2 million, a jump up from $22.7 million in 2006.

(3) The post-PSLRA dismissal rates for securities class actions can be difficult to accurately calculate given the long-term nature of these cases, the ability to replead, appeals, etc. Interestingly, the study examines the current status of the 235 securities class actions filed in 2000 and finds that over 90% of these have reached some kind of final resolution. To date, approximately 60% of the cases have reached final settlement and 31.5% of the cases have been dismissed.

Big Fees and Big Checks

A couple of settlement items:

(1) The Tyco settlement has been approved. Not every class member will be happy, however, as the court rejected the fee objections raised by three institutional investors. As requested, the plaintiffs' attorneys will receive $464 million, believed to be the largest fees payout ever by a single company defendant in a securities class action. Reuters and the Associated Press have articles.

(2) Court approval, however, is not the final step in a settlement. The funds have to be distributed, which has turned out to be problematic in the Computer Associates case. The Wall Street Journal has a report discussing the accidental overpayments to some claimants. The settlement administrator is trying to get the money back, but many of the checks have been cashed.

Pleading Issues

The New York Law Journal (subscrip. req'd) has two interesting columns this week discussing developments in the pleading of securities fraud.

(1) Lower Court's Handling of Tellabs' "Inference of Scienter" (Dec. 11) discusses how courts have addressed the PSLRA's scienter pleading standard in the aftermath of the Supreme Court's Tellabs decision earlier this year. After summarizing the relevant decisions, the authors conclude that Tellabs has made it more difficult to survive a motion to dismiss based on a "post-Tellabs trend that corporate investigations, revisions, and restatements do not necessarily support a sufficiently compelling inference of scienter."

Quote of note: "The early returns suggest a significant change in how lower courts are addressing scienter issues in 12(b)(6) motions in Section 10(b) private civil cases. As one court aptly stated, the analysis required by Tellabs 'is akin to holding a minitrial on the merits of the case based only on the complaint.'"

(2) Group Pleading Suffers Another Blow (Dec. 13) addresses the varying court decisions on whether the "group pleading doctrine," which permits the attribution of alleged misstatements in group-published documents to corporate officers without specific factual allegations about their respective involvement in the misstatements, has survived the passage of the PSLRA. As the authors note, some courts (especially the S.D.N.Y.) have drawn a distinction between group pleading for purposes of attributing misstatements (permitted) and group pleading for purposes of establishing the existence of a strong inference of scienter (not permitted). Other courts, most notably the Third Circuit in its recent decision in Winer Family Trust v. Queen, 503 F.3d 319 (3rd Cir. 2007), have rejected the distinction as "illogical" given that it requires a heightened pleading of scienter for an act that the defendant is only presumed to have committed.

Quote of note: "The issue may yet reach the Supreme Court. At present, there is only a latent conflict among the circuits, as no circuit court has expressly held that group pleading is still permissible despite the PSLRA. Nonetheless, many district courts, particularly in the Second Circuit, have continued to apply the doctrine. It is difficult to predict where the Second Circuit would come out on this issue, given its silence to date. However, if it were to adopt the prevailing view of its district courts, that would create a clear conflict between circuit court holdings, which could send the issue to the Supreme Court."

Biovail Settles

Biovail Corporation (NYSE: BVF) (TSX: BVF), an Ontario-based specialty pharmaceutical company, has announced the preliminary settlement of the securities class action pending against the company in the S.D. of New York. Originally filed in 2003, the case stems from allegations that the company made false financial projections.

The settlement is for $138 million, of which Biovail estimates it will pay $85 million after settling all insurance claims. The 10b-5 Daily has previously posted on the tumult surrounding the Biovail securities litigation, including the company's attempts to sue short-sellers of its stock.

A Little Birdy Told Me

Whether the plaintiffs in a securities class action should be required to disclose the identities of their confidential witnesses as part of the discovery process is an issue that continues to be the subject of litigation. The 10b-5 Daily had a post last year about an E.D. of Pa. decision in which the court held that the defendants were entitled to the names of all individuals known by the plaintiff to have relevant knowledge, but the plaintiff was not required to specifically identify the confidential witnesses relied upon in the complaint. The court did note, however, that it would consider revisiting its decision if the defendants were presented with an overwhelming list of names.

How many names would be "overwhelming"? A court in the N.D. of Cal. has an answer: 77. In In re Harmonic, Inc. Sec. Litig., 245 F.R.D. 424 (N.D. Cal. 2007), the court found the only effect of allowing the plaintiffs to withhold the names of the five confidential witnesses relied upon in the complaint would be "to force the Defendants to expend resources on taking the depositions of 77 people [i.e., the witnesses identified in the plaintiffs' initial disclosures] in order to obtain the information." The court also rejected the plaintiffs' argument that the names of their confidential witnesses were protected work product, noting that the information would "inevitably come to light."

Holding: Motion to compel answers to interrogatories concerning confidential witnesses granted.

Challenging The Settlement

Judge Vaughn Walker of the N.D. of Cal. has often expressed skepticism about attorneys' fees payments in securities class actions (click here and here). So the parties in the Chiron case may not have been surprised when he denied preliminary approval of their $30 million settlement agreement on the grounds that the attorneys' fees request was excessive. Milberg Weiss had asked for $7.5 million or 25% of the settlement, which Judge Walker found resulted in a lodestar of between 8 and 10. More noteworthy, however, is that the court's opinion reportedly also: (a) expressed concern over the pending criminal charges against Milberg Weiss; (b) questioned whether the lead plaintiff was an adequate class representative given its approval of the attorneys' fees request; and (c) suggested that defense counsel, which represents some individuals in connection with the Milberg Weiss-related criminal probes, may have had an incentive not to look too closely at the adequacy issue. The Recorder and Reuters have articles on the decision.

Wyly's Back

Texas billionaire Sam Wyly has been in litigation over the settlement in the Computer Associates securities class action for years, alleging that plaintiffs' counsel improperly settled the case for a low amount just prior to the company's public disclosures of accounting fraud. The 10b-5 Daily has previously posted about Wyly's efforts to obtain documents related to the case (see here, here, and here). Having finally obtained the documents earlier this year, Wyly has brought a fraud action in New York state court against the relevant plaintiff law firms. Newsday has an article on the suit.

Quote of note: "The heart of Wyly's claim is the distinct difference between two sets of shareholder lawsuits filed against CA -- one in 1998 following a sharp drop in CA's share price, and another in 2002 following revelations of federal probes of CA's accounting. . . . The suit takes exception with the law firms' claims that allegations in the two suits were largely similar and therefore could be combined for the purposes of a settlement. The suit claims that if allegations in the latter suit had been properly researched and argued, the settlement would have been much larger. Instead, Wyly's suit argues, the 2002 suit never even reached the discovery phase."

Addition: An alert reader notes that Wyly has not actually been given the documents he was seeking from plaintiffs' counsel. According to the relevant court docket, production has been stayed pending an appeal of the court's decision.

The Verdict

The trial of the year - if you are a securities litigator - has come to an end. Reuters and the Associated Press report that the jury in the JDS Uniphase trial has returned a unanimous verdict in favor of the defendants. (Thanks to Securities Litigation Watch for the links.)

Quote of note (Associated Press): "Christopher Dewees, JDS Uniphase's chief legal officer, said the company participated in multiple settlement talks since the lawsuit was filed in 2002, but the parties remained 'very far apart.' 'The company is obviously extremely pleased that the jury recognized that this case is without merit,' he said in an interview. 'But it is obviously chagrined to have spent the time, effort and money over the past 6 years to achieve this verdict.'"