December 2006

Europeans Take a More Active Role in U.S. Cases
More European institutions are serving as lead plaintiffs and filing securities settlement claims.

The latest settlements and dismissals of securities class action suits.

Check Your Mailbox

Funds recently have been disbursed (or approved for disbursal) in the following cases.

In The News

Judge Cuts Attorneys' Fees in Royal Ahold Settlement
More executives agree to make personal payments to resolve investor claims; two banks settle with Parmalat investors; Paulson committee releases recommendations on regulation and securities litigation; mixed verdicts at trials of former McKesson and Cendant executives.

Comments Welcome

For comments on the content of the newsletter, please contact Ted Allen, the editor-in-chief.

Europeans Take a More Active Role in U.S. Cases

By Ted Allen, Director of Publications

More European investors are realizing that it makes sense to participate in U.S. securities class-action cases by serving as lead plaintiffs, or by filing claims for their share of billions of dollars in settlements.

“There has been a sea change in interest among European investors filing claims and claiming money that is rightfully theirs,” Mark S. Willis, a partner with Cohen, Milstein, Hausfeld & Toll, a law firm that represents investors, said during a SCAS Web cast in September. “And there's also been an interesting change in the attitude toward institutional investors here in Europe about taking an activist role in U.S. class actions.”

One prominent example of a U.S. case where European institutional investors are serving as lead plaintiffs is the Parmalat Finanziara class action. The lead plaintiffs include Hermes Focus Asset Management Europe, Cattolica Partecipazioni, Societe Moderne des Terrassements Parisiens, and Capital & Finance Asset Management. (A Hermes affiliate is a part owner of ISS.)

Earlier this year, a group of 26 Dutch pension funds led by Stichting Pensioenfonds filed a securities lawsuit against Royal Dutch Shell. The lawsuit, which is pending in federal court in New Jersey, was filed separately from the consolidated class action that was brought earlier by two Pennsylvania pension funds and other investors. A Canadian institution, the Ontario Teachers' Pension Plan Board, served as a lead plaintiff in the Nortel Networks litigation that resulted in a $2.47 billion settlement in February.

European and other international investors also have joined in derivative lawsuits that seek corporate governance changes. In October 2005, U.K. and Dutch pension funds were part of an international coalition of institutions that sued News Corp. in Delaware court over the company's decision to extend its "poison pill" defense without seeking shareholder approval. After surviving a motion to dismiss, the investors reached a settlement with the media company in April.

In addition, AP7, a Swedish pension fund, is serving as a lead plaintiff in a derivative lawsuit by Viacom investors that seeks to recover compensation paid to top executives, according to Keith Johnson, a Wisconsin-based lawyer who advises foreign pension funds.

International investors have also joined together to lobby for U.S. governance changes, such as majority voting in board elections. In October, pension funds from the Netherlands, Sweden, the United Kingdom, Canada, and Australia urged U.S. regulators to allow shareholders to put proxy access proposals on corporate ballots in 2007.

As Johnson noted, many European investors traditionally have been reluctant to sue companies, because they come from cultures that rely far less on litigation than in the United States. “I don't see a mad rush to doing this, but I do see a slow trend, which will gradually increase in the next few years,” he told the SCAS Alert.

Johnson said European investors have become more interested in litigation as several European nations have taken limited steps to enhance the rights of shareholders to sue. Last year, Germany passed legislation to allow investors or companies to seek model case proceedings to resolve common factual or legal questions in shareholder lawsuits. In November, a new British law took effect that allows shareholders to sue directors who “don't promote the success of the company." However, American legal rules remain far more favorable to investors, so European institutions will continue to bring securities claims in U.S. courts when possible.

Protecting Their Interests
Willis said the interest by European institutions has increased after those investors realized that serving as a lead plaintiff may be necessary to ensure they are treated fairly in U.S. settlements involving European companies. A lead plaintiff plays a key role in defining the class, determining the settlement distribution ratio, negotiating any governance improvements, and deciding whether a proposed accord is sufficient, Willis said. In addition to Parmalat and Shell, a number of major European firms have faced U.S. class-action cases. In 2004, a record 29 foreign issuers were hit with securities class actions in U.S. courts, according to a report by PricewaterhouseCoopers.

Willis recalled the example of the $120 million Deutsche Telekom settlement, where the class was defined narrowly to include only those shareholders who bought their shares on American exchanges. Those investors, who accounted for 24 percent of the firm's equity, ended up sharing the entire settlement, which was a “fairly inequitable result,” Willis said. The excluded European investors had to file a multitude of separate claims in Germany. “Had a European been a lead plaintiff in that case, that likely would have not happened," Willis said, adding that concern about getting shortchanged has been "a major motivating force” for European institutions.

European investors were also excluded in the Elan, DaimlerChrysler, and Lernout & Hauspie settlements, Willis recalled. In the Lernout settlement, the class included only those investors who purchased shares on Nasdaq or other U.S. markets. The larger group of investors who bought their shares through Easdaq (Nasdaq's former European technology market) since have filed a separate class action in the United States, Willis said.

As the Parmalat case illustrates, American courts “have been quite willing to appoint Europeans either as co-lead plaintiffs or sole lead plaintiffs in U.S. class actions,” as long as the Europeans can show that a U.S. court has jurisdiction over their claims, Willis said. If a European investor didn't buy its shares in the U.S., the court considers whether the alleged fraud had a substantial impact on the U.S. market or was carried out in some substantial way in the United States. In the Parmalat case, the judge found there was a sufficient connection because the company used U.S. bankers and attorneys to perpetrate the alleged fraud, Willis said.

U.S. courts have rejected some lawsuits by foreign investors on jurisdictional grounds. In January, a federal judge in Delaware dismissed a lawsuit by foreign DaimlerChrysler investors who weren't included in the $300 million settlement obtained by U.S. investors. In 2005, a federal judge in New York dismissed a lawsuit by Bayer investors after noting that just 8 percent of the German company's shares are traded in the United States.

Willis cautioned that European institutions should be careful about the cases they participate in and avoid those that might damage their reputations. “There are many cases that they can get involved in where they can really step forward to protect their own interest and make a statement about corporate fraud,” Willis said. “But they need to be thoughtful about that.”

In at least one case, Europeans were surprised to learn that they were a plaintiff. In October, the City of London's pension fund joined a U.S. shareholder lawsuit against BP's board over problems at the company's Prudhoe Bay oilfield in Alaska. According to The Times of London, city officials initially were unaware of the fund's involvement, but they later explained that the decision to join the suit was made by ABN AMRO Mellon, which manages the pension fund.

U.S. Law Firms Reach Out to Investors
In the past year, a number of U.S. law firms have formed partnerships with European firms, sponsored European pension fund conferences, and undertaken other efforts to woo foreign institutions. Attorney Adam T. Savett, writing in his “Lies, Damn Lies, & Forward Looking Statements” Web log, has described these efforts as an “arms race.”

In October, Schiffrin & Barroway, a firm based outside of Philadelphia, announced a cooperation agreement with Winheller Attorneys at Law of Frankfurt, Germany. Schiffrin & Barroway, in cooperation with the Universities Superannuation Scheme of the U.K., recently issued a primer on U.S. securities litigation for European institutions.

Earlier this year, Labaton Sucharow & Rudoff, a New York-based law firm, formed an alliance with the TILP Group of Germany. “With increasing global investments in the U.S. securities markets and a scourge of corporate fraud that knows no geographic boundaries, financial institutions throughout the world require an international team to safeguard their interests,” Labaton Sucharow says in a statement on its Web site.

Meanwhile, Cohen Milstein plans to open an office in London in January that will include as many as 11 attorneys. According to The Times of London, "American lawyers are increasingly identifying London as a potential new market for aggrieved investors."

Lerach Coughlin Stoia Geller Rudman & Robbins, one of the largest plaintiffs' firms in the U.S., also has assembled a number of international clients. According to the San Diego-based firm's Web site, those clients include: Bank of Ireland Asset Management, the London Pension Funds Authority, the Lothian Pension Fund of Scotland, the Merseyside Pension Fund of Britain, Standard Life Investments of Scotland, the Steelworkers Pension Trust of Britain, UniSuper of Australia, and Britain's West Midlands Pension Fund.

More Claim-Filing by European Investors
Prompted by press reports, more U.K. and European investors are taking steps to file claims for their share of U.S. securities settlements. For years, few European investors have bothered to file claims, in part because of ignorance about claim-filing procedures or distaste for American litigiousness.

These attitudes have changed in recent years as the pension press and other media have highlighted the issue. In July 2005, The Times noted that $4.7 billion in U.S. securities settlements went unclaimed by investors, recalled Alan Owens, a partner with the Irwin Mitchell firm in London. One recent example of this greater interest in filing claims is the U.S. Securities and Exchange Commission's WorldCom settlement, where investors from 110 countries submitted almost 450,000 claims, the agency said.

While no U.K. courts have held that pension fund trustees have a legal obligation to file claims, fund trustees do have an obligation to derive value for their fund, and filing settlement claims is an “obvious way to derive value after a loss has been incurred,” Owens said during a SCAS Web cast in September.

“There are many hundreds, perhaps thousands, of institutions right across the U.K. and Europe already putting procedures in place to ensure that this particular part of their investment protection is covered,” Owens said. Otherwise, they may face “difficult questions [from beneficiaries] if nothing at all has been done.”

TENTATIVE SETTLEMENTS

Krispy Kreme Doughnuts
Krispy Kreme Doughnuts has agreed to pay $75 million to resolve class-action claims by investors. The proposed settlement would be open to all investors who purchased the company's publicly traded securities between March 8, 2001, and April 18, 2005. The original lawsuit was filed in May 2004 in the U.S. District Court for the Middle District of North Carolina.

Founded in Winston-Salem, North Carolina, in 1937, Krispy Kreme is a retailer and wholesaler of doughnuts.

For more details, see the SCAS Web site by clicking here.

Martha Stewart Living Omnimedia
Martha Stewart Living Omnimedia founder Martha Stewart is expected to pay about $5 million to settle a class-action lawsuit that alleged she misled investors about her sale of ImClone Systems shares in 2001. Stewart was convicted of obstruction of justice and conspiracy charges over the stock sale and served five months in prison.

The total settlement likely will cost $30 million, of which the company expects to pay about $15 million, its insurers about $10 million, and Stewart the rest. The settlement likely will be open to purchasers of Martha Stewart Living common stock from Jan. 8, 2002, to Oct. 2, 2002. The case was filed in August 2002 in the U.S. District Court for the Southern District of New York.

Martha Stewart Living is a provider of "how-to" content and houseware products.

For more details, see the SCAS Web site by clicking here.

Transaction System Architects
The proposed $24.5 million settlement will resolve claims brought by the Genesee County Employees' Retirement System and other company investors. The case is pending in the U.S. District Court for Nebraska. The settlement likely will be open to investors who purchased the company's shares between Jan. 21, 1999, and Nov. 19, 2002.

Transaction Systems Architects provides electronic-payment and related services to banks, retailers, and payment processors around the world.

For more details, see the SCAS Web site by clicking here.

In addition to the above tentative settlements, additional accords were reached by investors in the following companies: Immune Response, Intergraph, Amerigroup, Dobson Communications, Mamma.com, and Gilat Satellite Networks. For more details on these settlements, please use the search or advanced search functions on the SCAS Web site. You may find the "Tentative Settlements Hotlist" useful as well.

DISMISSALS

Barrier Therapeutics
Barrier Therapeutics announced that the securities class action filed against the company, certain officers, and underwriters of the company's 2004 initial public offering and 2005 secondary offering has been voluntarily dismissed, with prejudice, by the lead plaintiffs' counsel. The lawsuit, which was pending in the U.S. District Court for New Jersey, was filed in October 2005 on behalf of purchasers of the company's stock from April 29, 2004, to June 29, 2005.

Barrier Therapeutics is a pharmaceutical company focused on the development and commercialization of products in the field of dermatology.

For more details, go to the SCAS Web site:
http://scas.issproxy.com/Details.php?CaseId=29390

Eastman Kodak
Eastman Kodak announced that the U.S. District Court for the Western District of New York granted summary judgment in favor of the company in a class action lawsuit by investors. On Nov. 1, the court dismissed the case after concluding that the allegations were insufficient to support the claims. The lawsuit was filed in June 2005 on behalf of purchasers of Kodak's common stock between April 23, 2003, and Sept. 25, 2003.

Rochester, N.Y.-based Kodak provided products and services to the photographic, graphic communications, and healthcare markets.

For more details, see the SCAS Web site by clicking here.

PDI
The U.S. District Court for New Jersey has dismissed with prejudice an amended class action lawsuit by investors. The action was originally filed in January 2002 against PDI, its former CEO, and former CFO, on behalf of all persons who purchased PDI's common stock between May 22, 2001, and Aug. 12, 2002.

Saddle River, New Jersey-based PDI is a contract sales and marketing services provider to the pharmaceutical industry.

For more details, see the SCAS Web site by clicking here.

In addition, two other securities cases were recently dismissed: GlaxoSmithKline and Bio-Technology General. For more details on dismissed cases please click on the "Advanced Search" option in the SCAS Web site, check the "Dismissal Date" box and then click on the "GO" button to enter a date range.

Funds recently have been recently disbursed (or approved for disbursal) in the following cases:

Alloy

Applied Digital Solutions

Biomatrix

Caminus

CareScience

Covad Communications Group

Cygne Designs

Intelect Communications

Ionics

InaCom

Interspeed

L90

Laidlaw

Providian Financial

PSS World Medical (f/k/a Physician Sales & Services)

Southwest Gas

Washington Group International

Judge Cuts Attorneys' Fees in Royal Ahold Settlement
By Ted Allen, Director of Publications

On Nov. 3, a federal judge in Maryland made a $32.7 million reduction in the attorneys' fees sought by class counsel in the $1.1 billion Royal Ahold class settlement.

U.S. District Judge Catherine Blake reduced the $163.3 million fee request (15 percent of the settlement) to $130.6 million (12 percent). U.S. Trust, a fiduciary for ERISA plans, objected to the request, noting that legal fees have not exceeded 10 percent in other settlements of $1 billion or more. Investors originally sued Royal Ahold in 2003 after the Dutch company disclosed accounting problems at its U.S. Foodservice unit and said it would restate financial results for three years.

The class counsel, Entwistle & Cappucci, was permitted under the retainer agreement with the lead plaintiff, the Colorado Public Employees' Retirement Association, to seek a 20 percent fee, but the firm reduced its request to 15 percent, the judge noted in her opinion.

The $163.3 million request amounted to 3.21 times the $50.9 million worth of time that the class attorneys said they spent on the case. The fee request was supported by an affidavit from Columbia University Law Professor John Coffee.

In deciding to reduce the fee request, Judge Blake noted U.S. Trust's arguments about the fee percentages in other large cases and concluded that a 12 percent fee was reasonable. While noting that the case settled well before trial and was apparently aided by the company's concessions, the judge praised class counsel for obtaining 40 percent of provable damages in one of the largest securities settlements ever.

The Royal Ahold case is the second time this year that objecting investors have persuaded a judge to significantly cut a fee request in a securities class action. In September, a federal judge in Colorado cut the fee award in the Qwest Communications International settlement from $96 million (24 percent of the $400 million accord) to $60 million (15 percent). The Association of U.S. West Retirees, the Pennsylvania State Employees' Retirement System, and the New York State Teachers' Retirement System, were among the investors who objected to that fee request. (For more details on the Qwest case, see the November 2006 issue of the SCAS Alert.)

In the Elan (2005) and InfoSpace (2004) settlements, judges did order substantial percentage cuts in fee awards, but the aggregate reductions won by the Qwest and Royal Ahold investors were greater.

Two Banks Settle With Parmalat Investors
Credit Suisse Group and Italian bank Banca Nazionale del Lavoro (BNL) have agreed to a $50 million settlement with Parmalat investors, according to news reports.

Credit Suisse and BNL were the first two defendants to settle, with each paying $25 million, Stuart Grant, a lawyer representing the investors said Nov. 21, according to Reuters. According to Forbes, the two financial institutions have agreed to institute corporate governance changes to prevent future problems, Grant said.

Investors have accused the banks and others of helping Parmalat conceal financial problems before the Italian food products company collapsed into insolvency in 2003. The class action case is pending in federal court in New York. Other remaining defendants include Citigroup, Bank of America, Deloitte & Touche, and Grant Thornton International.

Among the lead investor plaintiffs are Hermes Focus Asset Management Europe, Cattolica Partecipazioni, and Capital & Finance Asset Management. (For more on the role of European investors in U.S. securities class actions, see the Feature story.)

Paulson Committee Releases Report
On Nov. 30, the Committee on Capital Markets Regulation released a report calling for scaling back some governance reforms and giving auditors and directors more protection from lawsuits and regulators. The report also urges the Securities and Exchange Commission to perform cost-benefit analyses on all new rules.

The committee, which is chaired by former Bush White House adviser Glenn Hubbard and John Thornton, a former Goldman Sachs executive, includes corporate lawyers, Wall Street executives, and academics. The group is known informally as the “Paulson committee,” because its report was prepared for U.S. Treasury Secretary Henry Paulson, who has argued that regulators have gone too far in responding to corporate scandals.

The committee's efforts have prompted concern from investors, plaintiffs' lawyers, and some academics. “This is an escalation of the culture war against regulation,” Duke Law School Professor James Cox said recently, according to The Wall Street Journal. Cox said many of the proposals, if adopted, “would be a dark day for investors.”

Likewise, Harvey J. Goldschmid, a former SEC commissioner, told The New York Times: "The report pays lip service to the need for rigorous enforcement but would dramatically diminish the effectiveness of the SEC, of criminal enforcement, of state attorney general enforcement, and of private damage actions.”

According to the Journal, the report calls for the SEC to clarify liability issues that frequently arise in securities class-action lawsuits. The group urges the SEC to provide more guidance on issues of “materiality, scienter (the requisite knowledge the wrongdoer needs to have about his/her wrongdoing), and reliance [by investors].”

The report also raises concern over political contributions made by plaintiffs' law firms to elected officials who oversee state or municipal pension funds. “Plaintiff law firms contribute to the political campaigns of elected officials who hold control over decisions of pension funds [who] possibly in return pick the law firm as its class counsel when it becomes lead plaintiff,” the report said. The panel recommends prohibiting law firms that make political contributions to elected officials from representing the officials' pension funds as lead plaintiffs.

More Executives Agree to Make Personal Payments
On Nov. 7, Martha Stewart Living Omnimedia announced a $30 million class-action settlement with investors that would include a $5 million personal payment from founder Martha Stewart. The settlement would resolve investor claims over statements that Stewart made over her sale of ImClone Systems stock in 2001, which eventually led to her conviction on obstruction of justice and conspiracy charges. (For more details on this settlement, see Case Updates.)

Kevin LaCroix, writing in his D&O Diary Web log, said Stewart's agreement and other recent high-profile securities settlements "seem to suggest that individual contributions to securities fraud lawsuit settlements may represent an increasingly important part of case resolution."

Another recent example is Krispy Kreme Doughnuts' settlement of securities and derivative lawsuits in late October. The proposed settlement calls for former Chief Operating Officer John Tate and ex-Chief Financial Officer Randy Casstevens to contribute $100,000 to the securities settlement, without using their director and officer insurance coverage. The settlement also would include $34.97 million from insurers; $4 million from Krispy Kreme's auditors; and $35.83 million in company stock and warrants.

Earlier this year, the former CEO and chief operating officer of Tenet Healthcare agreed to pay $1.5 million toward a $215 million securities class settlement. In 2005, former directors at WorldCom and Enron agreed to make personal payments to resolve investor claims.

"While aggrieved shareholders and their counsel may view this development as a just way to compensate for harm done for alleged misrepresentations, it does create a disturbing prospect for potential future individual defendants," noted LaCroix, a lawyer with OakBridge Insurance Services. "A movement toward non-recourse individual recoveries puts individuals in a position where their service as corporate officials requires them to expose their personal assets."

Mixed Verdicts at McKesson, Cendant Trials
Charles McCall, the former chairman of McKesson was acquitted Nov. 3 of charges that he conspired to defraud investors of the drug distribution company, according to Bloomberg News.

A federal court jury in San Francisco deadlocked on six other charges, including securities fraud. Investors lost $9 billion dollars after the company disclosed in April 1999 that HBO & Co., which McKesson had acquired, had prematurely booked sales. McCall was the CEO of HBOC at the time of the takeover. McKesson reached a $960 million settlement with shareholders last year.

In another notable corporate accounting prosecution, former Cendant Chairman Walter Forbes was convicted Oct. 31 at a third trial on criminal charges. A federal court jury in Bridgeport, Connecticut, found Forbes guilty of conspiracy and two counts of false reporting, while acquitting him of securities fraud, according to Bloomberg News. An attorney for Forbes said he would appeal the verdict. Jurors deadlocked at two earlier trials.

Forbes was accused of inflating $252 million in income at CUC International, which merged with HFS in 1997 to form Cendant, a travel and real estate services company.

The company's investors lost $14 billion in one day in April 1998 after the company disclosed accounting problems. In 2003, Cendant agreed to pay $3.2 billion to compensate investors, in what was then the largest securities class-action settlement ever. The company's accountant, Ernst & Young, also paid $335 million to Cendant investors.

For more information about Securities Class Action Services, please reply to this e-mail or contact Institutional Shareholder Services.

© 1988-2006 Institutional Shareholder Services. All Rights Reserved.
ISS and the ISS logo, Securities Class Action Alert, and other ISS service names and logos are protected under trademark and may not be used without permission.