Not So Fast

As it turns out, the defense is on a winning streak in securities class action trials. Although the jury verdicts in the recent JDS Uniphase (for defendants) and Apollo Group (for plaintiffs) trials were split, the Apollo Group defendants achieved a post-trial victory yesterday when the court ruled that the plaintiffs had failed to prove loss causation.

The Apollo Group case was based on the company's failure to disclose the existence of a government report finding that its wholly-owned subsidiary, the University of Phoenix, had violated Department of Education regulations. In its decision overturning the jury verdict, the court found that the two analyst reports relied upon by the plaintiffs as "corrective disclosures" that led to a stock price decline "did not provide any new, fraud-revealing analysis." The analyst reports merely repeated information about the government report already known to the market or provided information about the University of Phoenix that was factually wrong (and therefore could not have been corrective).

The plaintiffs plan to appeal the decision, which could lead to an interesting 9th Circuit opinion on loss causation. The WSJ Law Blog and Reuters have additional coverage.

Monster Worldwide Settles

Monster Worldwide, Inc. (NASDAQ: MNST), a New York-based online employment solutions company, has announced the preliminary settlement of the securities class action pending against it in the S.D.N.Y. The case, originally filed in March 2007, stems from allegations that Monster Worldwide and certain of its former executives failed to adhere to the company's stated options granting practices, resulting in the issuance of false and misleading financial statements.

The settlement is for $47.5 million, including a $550,000 payment from Monster's former Chief Executive Officer. The National Law Journal has an article on the settlement, which notes the recent decision in the case rejecting one of the proposed class representatives. Additional coverage can be found at Securities Litigation Watch, including a useful presentation tracking all of the options backdating class actions.

Adding Up The Numbers

The mid-year numbers are in on securities class action filings and settlements. This week saw the publication of 2008 Trends: Subprime and Auction-Rate Cases Continue to Drive Filings, and Large Settlements Keep Averages High from NERA Economic Consulting and 2008 Mid-Year Assessment from Cornerstone Research.

(1) The reports agree that filings are on the upswing, although they differ on the exact number. Cornerstone finds that there were 110 filings in the first half of 2008, while NERA finds that there were 139 filings in the first half of 2008. Both reports agree that around half of the total filings were related to subprime mortgage/credit crunch problems. On an annualized basis (using either report's total), the number of filings will be up significantly as compared to the past three years.

(2) Overall market volatility is an additional factor driving the increase in filings. NERA reports that nearly one-third of companies whose stock fell by 40% or more in a single day, net-of-market, were confronted with a federal filing within three months.

(3) The market capitalization losses associated with the subprime mortgage/credit crunch filings are significantly higher than usual. NERA concludes that although the average settlement value in the first half of 2008 remained constant at around $30 million, that number is likely to rise as more recent filings reach settlement.

Reforming The System

The U.S. Chamber Institute for Legal Reform has issued a paper entitled Securities Class Action Litigation: The Problem, Its Impact, and the Path To Reform. The paper expands upon some of the concerns and recommendations raised by recent capital market studies and offers a series of proposed reforms. The proposed reforms include: more disclosure surrounding possible conflicts of interest between plaintiffs and their counsel, permitting cost-shifting for certain discovery, providing equal access to interlocutory appeals, and having Congress clarify the pleading standards for scienter and loss causation.

WLF Webcast On The SEC And Securities Class Actions

The author of The 10b-5 Daily, Lyle Roberts (Dewey & LeBoeuf), is participating in a Washington Legal Foundation webcast on the SEC and securities class actions. The webcast will take place on Tuesday, July 29 at 10 a.m. ET. Click here (PDF) for the details.

Addition: An archive of the webcast can be found here.

Hot Off The Press

Two columns from the New York Law Journal on securities litigation.

(1) In 'Oscar': Misinterpretation of Fraud-on-the-Market Theory (July 17 edition - subscrip. req'd), the author discusses a Fifth Circuit decision on class certification. Notably, the court held that loss causation must be established at the class certification stage of a case by a preponderance of all admissible evidence before the plaintiffs can receive the benefit of the fraud-on-the-market presumption. The author argues that the decision, handed down last year, creates an impermissibly high barrier to class certification that other circuit courts have declined to adopt.

(2) In Whither 'Stoneridge v. Scientific-Atlanta'? Early Results (July 8 edition - subscrip. req'd), the author surveys lower court decisions that have applied the U.S. Supreme Court's holding on scheme liability. The author argues that the Pugh (7th Cir.) and DVI (E.D.Pa.) decisions suggest courts are inclined to interpret Stoneridge "broadly and dismiss claims against any third parties, regardless of their affiliation with an issuer, who are not alleged to have participated in preparing or disseminating false financial statements or other public statements."

Clueless

While a proposed class representative does not have to possess "expert knowledge" of the case, there are some limits on how clueless it can be. In the Monster Worldwide, Inc. securities class action before the S.D.N.Y., the court has rejected a proposed class representative (a pension fund) that put forward a witness (the co-chairman of the fund) who "did not know the name of the stock at issue in this case, did not know the name of either individual defendant, did not know whether [the pension fund] ever owned Monster stock, did not know if an amended complaint had been filed, did not know whether he had ever seen any complaint in the action, did not know that [a defendant] had moved to dismiss the complaint, and did not know that [the pension fund] had moved for pre-discovery summary judgment." Following this testimony, the pension fund put forward a second witness who "admitted that he had mostly learned about the substance of the litigation only in the week before his deposition."

The court rejected the pension fund as a class representative, but approved the appointment of the other lead plaintiff to that role. Despite its concerns that the counsel for the pension fund "may not have fulfilled their professional responsibilities in proposing [the pension fund] as a class representative," the court nevertheless appointed the firm as class counsel. The New York Law Journal has an article on the decision.

Quote of note (opinion): "The Court will not be a party to this sham. The foregoing events establish beyond a doubt that [the pension fund] has no interest in, genuine knowledge of, and/or meaningful involvement in this case and is simply the willing pawn of counsel."

Must Have Known

In Berson v. Applied Signal Tech., Inc., 527 F.3d 982 (9th Cir. 2008), the company allegedly misled investors into believing it was likely to perform contracted work. According to the plaintiffs, however, the work had actually ceased pursuant to “stop-work” orders and was not likely to be resumed. On appeal, the U.S. Court of Appeals for the Ninth Circuit reversed the dismissal of the case. A couple of interesting holdings in the decision:

(1) Scienter - The plaintiffs did not allege particular facts indicating that the individual defendants knew about the stop-work orders. Instead, they argued that Applied Signal’s CEO and CFO must have known about the stop-work orders because of the devastating effect of the orders on the corporation’s revenue. The court agreed and found that the stop-work orders “were prominent enough that it would be ‘absurd to suggest’ that top management was unaware of them.” The decision continues a recent appellate trend of finding "must have known" allegations sufficient in situations where the underlying events are deemed to be highly important to the corporation.

(2) Loss Causation – The Supreme Court’s Dura decision left open the question of whether loss causation is subject to a heightened pleading standard. A number of courts have held that notice pleading pursuant to F.R.C.P. 8(a)(2) is sufficient (see, e.g., Greater Penn. Carpenters Pension Fund v. Whitehall Jewellers, Inc., 2005 WL 1563206 (N.D. Ill. June 30, 2005)), while a few others have required pleading with particularity pursuant to F.R.C.P. 9(b) (see, e.g., In re The First Union Corp. Sec. Litig., 2006 WL 163616 (W.D.N.C. Jan. 20, 2006)). The Applied Signal court noted that this is still an open question in the Ninth Circuit, but declined to decide it because the loss causation allegations in the case met the more stringent standard.

Coca-Cola Settles

Coca-Cola Co. (NYSE: KO), the world’s largest manufacturer, distributor, and marketer of nonalcoholic beverages and syrups, has agreed to the preliminary settlement of the securities class action pending against it in the N.D. of Georgia. The long-running case, originally filed in October 2000, stems from allegations that company executives artificially boosted Coca-Cola’s revenues by forcing some of the company’s key bottlers to accept hundreds of millions of dollars of excessive beverage concentrate, and that the company falsely represented that the improved financial condition of its key bottlers would lead to substantial revenue growth. The settlement is for $137.5 million.

Earlier this year, The 10b-5 Daily reported that the plaintiffs’ motion for class certification had been assigned to a special master, who recommended that the court deny class certification because of concerns that plaintiffs’ lead counsel had engaged in improper conduct when it paid a former Coca-Cola employee to provide the plaintiffs with stolen company documents. The court appears to have rejected the special master’s recommendation in conjunction with its preliminary approval of the settlement.