Ernst & Young Settles HealthSouth-Related Claims

Ernst & Young LLP ("E&Y") has entered into a stipulation of settlement in the HealthSouth securities class action in the N.D. of Ala. The case, originally filed in June 2003, stems from allegations that the defendants materially misrepresented the company's earnings by failing to disclose the impact of certain changes in Medicare reimbursement on the company's profits.

The E&Y settlement is for $109 million. HealthSouth settled the claims against the company for $445 million back in 2006. The American Lawyer reports that the E&Y settlement comes just before a court hearing on class certification. E&Y remains a defendant in a separate class action brought by HealthSouth's bondholders.

Topping The List

RiskMetrics has released the SCAS 50, which "lists the top 50 plaintiffs' law firms ranked by the total dollar amount of final securities class action settlements occurring in 2008 in which the law firm served as lead or co-lead counsel."

Last year's leaders:

Total settlements - Coughlin Stoia Geller Rudman & Robbins - 29

Total settlement value - Bernstein Litowitz Berger & Grossmann - $711,950,000

Average settlement value - Grant & Eisenhofer - $108,950,000

Being Myopic

It is going to take a unique set of facts to establish the existence of scheme liability in the wake of the Stoneridge decision. Earlier this week, in the Refco securities class action, a S.D.N.Y. court dismissed the securities fraud claims against Refco's outside counsel. In its decision, the court found the plaintiffs adequately alleged that the law firm facilitated Refco's fraudulent transactions, but not that the company's investors relied on any misstatements by the law firm in purchasing their securities.

The court may have been forced to apply Stoneridge, but it was not happy about it. In an interesting footnote, the court suggested that "a bright line between principals and accomplices may not be appropriate" and offered its own policy solution: "Perhaps a provision authorizing the SEC not only to bring actions in its own right but also to permit private plaintiffs to proceed against accomplices after some form of agency review would provide the necessary flexibility without involving the courts in standardless and difficult-to-administer line drawing exercises." Do all judges secretly long to be legislators?

Press coverage of the decision can be found in the WSJ Law Blog and the American Lawyer.

Holding: Motion to dismiss granted.

Quote of note: "The nub of plaintiffs' contention is that as Refco's primary counsel, the . . . defendants could not be 'remote' within the meaning of Stoneridge, because they were directly involved in creating and executing the fraudulent scheme, including the drafting of misleading communications to Refco investors. Plaintiffs' reading of 'remote' is myopic. The issue is not the distance between the issuer and the defendant, but rather the distance between the defendants' conduct and the investor."

No Double Dipping

The plaintiffs in the Enron litigation have had a tough time establishing a viable theory of liability against the bank defendants. The first setback was the Fifth Circuit's reversal of the district court's grant of class certification. The appellate court held that the banks had not made any actionable omissions because they "did not owe plaintiffs any duty to disclose the nature of the alleged transactions." Later, the Supreme Court's Stoneridge decision severely limited the scope of scheme liability by imposing a strict reliance requirement in fraud-on-the-market cases. The Court also declined to address the plaintiffs' related appeal from the Fifth Circuit decision.

Given the enormous potential damages at stake, however, the plaintiffs were not ready to throw in the towel. In In re Enron Corp. Sec., Derivative &"ERISA" Lit., 2009 WL 565512 (S.D. Tex. March 5, 2009), the plaintiffs attempted to restructure their theory of liability against the bank defendants to avoid the impact of the two adverse decisions. The plaintiffs argued that the banks' "Enron-related market activity in addition to the deceptive transactions" gave rise to a duty to disclose to Enron's investors or the market as a whole. The district court disagreed. On summary judgment, the district court held (a) the "mandate rule" precluded plaintiffs from relitigating whether they had adequately demonstrated a duty of disclosure, and (b) even if they were not barred by the mandate rule, the plaintiffs had failed to establish the fiduciary relationship between the banks and the plaintiffs necessary to find a duty of disclosure.

Holding: Summary judgment motion of bank defendants granted.

Cornerstone Releases Report On Settlements

Cornerstone Research has released its annual report on securities class action settlements. The notable findings include:

(1) There were 99 settlements in 2008. The aggregate value of those settlements was $3.1 billion.

(2) The median amount for cases settled in 2008 was $8 million (down from the all-time high of $9 million in 2007). The average settlement amount was $31.2 million - which is in line with the historic average if the top four settlements of all time are removed from the analysis.

(3) Reversing a recent upward trend, the number of settled cases involving companion derivative suits fell from 55% in 2007 to 40% in 2008.

The press release accompanying the report can be found here.

Where Are They Now?

A visit to the U.S. Supreme Court does not necessarily mean the end of a securities class action, even if the defendants win their legal argument. The defendants in the Tellabs case successfully overturned the Seventh Circuit's interpretation of the "strong inference" pleading standard for scienter (i.e., fraudulent intent). On remand, however, the Seventh Circuit found that the plaintiffs had adequately plead scienter even under the Supreme Court's more rigorous interpretation and sent the case back to the district court for further proceedings.

A mere eight years after the case was filed, the issue of class certification has been decided. In Makor Issues & Rights, Ltd. v. Tellabs, Inc., 2009 WL 448895 (N.D. Ill. Feb. 23, 2009), the court rejected the defendants' attempts to limit the class period and class members. Among other rulings, the court found that in-and-out traders, members of the class in a related ERISA class action, and Tellabs employees should not be excluded from the class. However, the court did exclude one of the proposed representative plaintiffs because, under a last-in, first-out ("LIFO") analysis of his stock trading, his gains during the class period outweighed any losses.

Holding: Class certification granted.

General Re Settles AIG-Related Claims

General Re Corp., a subsidiary of Berkshire Hathaway Inc. and a global reinsurance company, has agreed to a tentative settlement in the AIG securities class action pending in the S.D.N.Y. The case was originally filed in October 2004. The claims against General Re relate to its alleged participation in a fraudulent $500 million reinsurance transaction with AIG that allowed AIG to improperly inflate its loss reserves.

The General Re settlement is for $72 million. Last October, PwC settled the claims against it in the case for $97.5 million. CFO.com has an article on the settlements.

Analyzing The JPMC Decision

The Second Circuit's recent decision affirming the dismissal of a securities class action against JP Morgan Chase is getting some press attention. The New York Law Journal had two columns this week discussing the case.

In "Circuit Gives Guidance to Litigators on Securities Fraud Claims" (Feb. 23 - subscrip. req'd) and "Clarifying Pleading Requirement for Scienter, Materiality Under PSLRA" (Feb. 25 - subscrip. req'd), the authors focus on the court's application of SEC Staff Accounting Bulletin 99 as "persuasive authority" on the issue of materiality. Both columns conclude that the decision is helpful for defendants who can demonstrate that their alleged misstatements are quantitatively immaterial.

Not Expert Enough

In In re Williams Sec. Litig. - WCG Subclass, 2009 WL 388048 (10th Cir. Feb. 18, 2009), the court considered whether the plaintiffs' expert was able to "reliably link the class's losses to the revelation of the alleged misrepresentations." In examining the validity of the expert's methodology, the court also provided its views on the application of the Supreme Court's Dura decision on loss causation.

(1) Although loss causation "is easiest to show when a corrective disclosure reveals the fraud to the public and the price subsequently drops," a "leakage theory that posits a gradual exposure of the fraud rather than a full and immediate disclosure" is permissible under the Dura decision.

(2) To be a corrective disclosure, "the disclosure need not precisely mirror the earlier representation, but it must at least relate back to the misrepresentation and not to some other negative information about the company."

(3) The plaintiffs must be able to demonstrate that the stock price decline was due "to the revelation of the fraud and not to another significant piece of negative information that was released" at the same time.

As to the plaintiffs' expert, the court found that his "leakage theory" failed to adequately identify when the "materialization of the concealed risk" occurred. The expert's alternative theory - that there was a series of corrective disclosures at the end of the class period - was inadequate because he failed to show "that it was the revelation of the fraud, and not other factors, that caused the subsequent declines in price."

Holding: Affirmed district court's exclusion of expert testimony and grant of summary judgment in favor of defendants.

Addition: Note that the plaintiffs did not appeal the district court's rejection of the "constant percentage" method of calculating damages (see here for a discussion of that holding).

Addition: A summary of the case by the defendants' expert can be found here.