April 2007

Guest Commentary: Lawsuits Help Maintain Market Integrity
Shareholder lawsuits are invaluable in ensuring that U.S. securities laws are vigorously enforced.

Commentary: The SCAS 50 for 2006
Lerach Coughlin obtained the most final settlements and total dollars for investors.

Case Updates

The latest settlements and dismissals of securities class-action suits.

Check Your Mailbox

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

In The News

Appeals Court Reverses Enron Class Certification
The U.S. Supreme Court agrees to hear a "scheme liability" case; justices hear arguments over PSLRA pleading standards; a Chamber of Commerce group calls for securities law changes.

Comments Welcome

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

Guest Commentary: Lawsuits Help Maintain Market Integrity
By Jay W. Eisenhofer and Gregg S. Levin, Grant & Eisenhofer

This commentary first appeared in the March 19, 2007 edition of Pensions Week.

For those of us whose job it is to help maintain and enhance capital market integrity, the last few months have been quite interesting.

In November, the Committee on Capital Markets Regulation (CCMR), a business-led group, issued a report suggesting that the U.S. suffers from the “over-enforcement” of the country’s securities laws. In January, McKinsey & Co. published a study positing that the American “legal environment” was responsible for “growing international concerns about participating in U.S. financial markets.” Picking up on this same theme, Peter Montagnon of the Association of British Insurers wrote in the Financial Times in early January that an “excessive zeal for regulation and litigation” has undermined the ability of the U.S. capital markets to compete. What these reports have in common is an overriding bias and a lack of factual analysis. Tellingly, several non-partisan reports on the same subject have reached the exact opposite conclusion.

We will leave it up to others, better qualified, to comment on the CCMR report. Richard Breeden, former SEC chairman, no less, stated that the interim report “is a bunch of warmed-over, impracticable ideas, many of which have been around for a long time. It is very elegant whining.” New York Governor Eliot Spitzer, no stranger to confronting fraud in corporate America, opined: “the same old tired response from the defenders of the status quo.” Meanwhile, the Council of Institutional Investors reflected that “many of the panel’s recommendations, if adopted, would undermine the effectiveness of market watchdogs and weaken critical investor protections ... Rigorous U.S. investor protections are a boon, not a bust, for our capital markets.” And presciently, Duke University Law Professor James D. Cox commented that the proposals are “an escalation of the culture war against regulation,” which if adopted “would be a dark day for investors."

Critics use the following “fact” to support their thesis--of the 25 largest initial public offerings (IPOs) (by dollar volume) that took place during 2005, 92 percent (or 23 of 25) listed on an exchange outside of the U.S. But, this ignores the fact that current IPO activity on the American securities’ exchanges is indeed robust. Last year, U.S. IPO volume was up 22 percent over 2005, and almost 170 percent over 2003. A recent Thomson Financial report concluded: that during 2006, initial public offerings involving foreign firms comprised 16 percent of the IPOs placed on the American capital markets--the highest level of such offerings over the last 20 years; that the number of foreign IPOs being placed on the American capital markets remained the same in 2006 relative to the prior year (34); and that that during 2006, foreign IPOs were responsible for 23 percent of all new capital raised on the U.S. exchanges--the highest figure in well over a decade. Commenting on these results, Richard Peterson, Thomson’s director of capital markets research, stated that “in terms of proceeds raised by foreign issuers and the number of deals by foreign issuers, the statistics show that things look rather healthy . . . there doesn't seem to be any really significant deterioration of the [U.S.] IPO market."

A Closer Look at IPO Trends
Critics wholly ignore that any volatility in recent U.S. IPO activity can be explained by factors unrelated to the current securities litigation system, including: high American underwriting fees; and expanding economies elsewhere in the world. For example, underwriting fees for U.S. based IPO transactions commonly run from 6.5 to 7 percent, as against an average 3 to 4 percent for deals placed on European exchanges. Goldman Sachs recently found that America's share of global gross domestic product has fallen to 28 percent--from 31 percent seven years ago, as other country’s shares have grown. Reflecting that Ernst & Young recently found that since 2006 the overwhelming majority of firms undertaking IPOs (90 percent) did so in their “home country,” yet 65 percent of the “competitive” IPOs during the first half of 2006 were placed in the U.S. These findings prompted Jim O'Neill, head of global economic research at Goldman Sachs, to opine that “it seems to me that the New York intelligentsia are going through one of their occasional bouts of hysteria” and further that any so-called decline in the American capital markets “is probably in large part a simple reflection of the growth of the rest of the world."

Apart from the foregoing, critics overlook the fact that companies that list in the U.S. enjoy a lower cost of capital (12.48 percent on average), and also enjoy a listing premium of about 16 percent, rising to 37 percent for firms that list on a major U.S. exchange. Interestingly, research confirms that the listing premium actually has grown larger since the enactment of the Sarbanes Oxley Act in 2002. These statistics hardly suggest a system that is in terminal decline, and we would argue that investor protection through litigation is a key determinant.

Rarely discussed is the quality of IPOs. As investors are finding, the granting of a U.K. capital market passport to foreign companies is not costless. Financial fraud there increased by 40 percent in 2006, and many worry that this will only get worse, as ever more overseas companies with dubious backgrounds and governance systems list there. Regulatory arbitrage may give a short-term competitive advantage, but it will come back to haunt the U.K. authorities and cost investors dearly.

Larger Settlements Stem From Greater Investor Losses
According to Montagnon, liabilities from securities law class-action lawsuits have “ballooned” since 1995, bringing negative side effects. From that, Montagnon concludes that the securities class action system ought to be repaired. Once again context is essential. The size of the frauds themselves have ballooned since 1995, while their numbers have increased. Add to that, they are now more complex, and involve a broader range of actors. Reflecting that, the median investor loss for cases settling in 2006 reached $402 million--more than six times the 1996 median of $66 million. As regards to settlements, 2006 brought six out of the ten largest settlements ever, with four of over $1 billion. Turning to the averages, both the mean and median settlement size have increased, again reflecting the size of the investor losses. Stripping out the mega-settlements still leaves an average settlement in 2006 of $34 million, a 37 percent increase over 2005. Including the billion-dollar settlements pushes the average up to almost $87 million. Meanwhile, the median settlement rose to $7.3 million in 2006.

Quite pointedly, after reviewing the data on settlements through the end of 2006, NERA Economic Consulting concluded that “while average settlements have been rising, there is no statistical evidence that this is the result of a more difficult litigation environment for defendants.”

Critics always disregard the dramatic changes that have taken place in our industry since the passage of the 1995 Private Securities Litigation Reform Act. Chief among these has been the rising number of institutional investors as class leaders, who take control of the litigation and use it to achieve positive, long-lasting governance reforms.

The Benefits of Shareholder Litigation
Many recent advances in shareholder rights and corporate governance have stemmed from litigation. The Delaware Supreme Court’s seminal decision in Smith v. Van Gorkom resulted in a host of procedural protections that we now take for granted such as fairness opinions, special committees of independent directors, and independent legal advisors. The Disney shareholder litigation over the payment of $140 million to Michael Ovitz heralded in a number of changes to corporate practices over the setting of executive compensation. In the wake of the WorldCom case, underwriters have been prompted to exercise a greater degree of care during the due diligence process. The superficial review that constituted due diligence before WorldCom apparently has now given way to real critical assessments of management’s representations.

Meanwhile, some critics assert that shareholder litigation is just shareholders suing themselves, since they are the actual owners of the defendant companies. In practice, shareholder suits reallocate funds to injured shareholder purchasers from current shareholders, as the former paid substantially more for a share of the corporation due to the fraud than did the current holders. Some overlap is inevitable here since institutional investors largely own all of corporate America. However, there are countless cases in which the overlap between “injured” and “current” shareholders is quite small. For example, in securities litigation involving Dynegy (settlement of $473 million), shareholders holding 127.23 million shares in the firm at the end the end of the class period (but not at settlement) owned only 5.49 million shares a year later.

Critics also fail to appreciate that private investor lawsuits are invaluable in ensuring that this country’s securities laws are vigorously enforced. Former SEC Chairman Arthur Levitt has stated that “private suits are the primary method for compensating defrauded investors.” The U.S. Supreme Court consistently has underscored that private actions “provide a most effective weapon in the enforcement of the securities laws and are a necessary supplement” to SEC action. This has never been more true than at present. While the number of enforcement actions commenced by the SEC is falling, corporate malfeasance is increasing. Financial restatements rose considerably during 2005, and over 100 companies currently are embroiled in the options-backdating scandal, just as questions are raised whether the SEC has adequate resources to investigate and prosecute these cases. Moreover, where corporate malfeasance has been the subject of both a private securities fraud class action and a parallel SEC investigation, the private action typically has resulted in a greater recovery for investors, with countless examples where the SEC’s efforts failed to achieve any financial compensation for aggrieved stockholders.

We share Peter Montagnon’s desire to see the U.S. initiate a system of corporate governance that makes corporate executives truly accountable to shareholders. However, vested business interests in the U.S. have successfully fought off every attempt to achieve our shared goal. Against that backdrop, we would welcome his support for the corporate governance changes that are being won through shareholder litigation. And once again, we have institutional investors to thank for their willingness to bring forward governance-based cases, known in the jargon as “derivative” actions. Our firm was honored to represent the international coalition of pension funds that won significant concessions from Rupert Murdoch and News Corp. Similarly, we helped the U.S. trade union, AFSCME, achieve the historic federal appeals court ruling against AIG that will enable proxy access for shareholders to nominate director candidates, long considered the “holy grail” for investor activists.

Our intention here has been to bring some balance back into the debate around the competitiveness of U.S., capital markets, and to give a different perspective on the reforms promulgated by the CCMR, among others. Shareholder litigation, far from being a drag on capital market competitiveness, promotes integrity by protecting investors. To alter the status quo now--in the wake of continued (and growing) corporate malfeasance--sends the message that accountability to shareholders is a goal not worth pursuing.

Eisenhofer is a senior partner and Levin is an associate with Grant & Eisenhofer, a law firm that represents institutional investors in securities litigation and governance matters.

Commentary: The SCAS 50 for 2006
By Adam Savett, Vice President, Product & Market Segment Manager, Securities
Class Action Services

This month's SCAS Alert includes highlights from ISS' fourth annual "SCAS 50" report. The SCAS 50 for 2006 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.

Topping the 2006 list was Lerach Coughlin Stoia Geller Rudman & Robbins, which served as lead or co-lead counsel in final settlements totaling $7.3 billion--nearly 40 percent of the record $18.3 billion in securities class-action settlement dollars obtained in 2006. Rounding out the Top 5 in our SCAS 50 were Bernstein Litowitz Berger & Grossmann ($2.63 billion); Heins Mills & Olson ($2.5 billion); Milberg Weiss & Bershad ($1.6 billion); and Entwistle & Cappucci ($1.1 billion).

Bernstein Litowitz led the way in 2006 in terms of average settlement amount for firms that served as lead or co-lead counsel in at least three settlements. With its nine settlements in 2006 averaging more than $292 million per accord, the firm beat out Lerach Coughlin's average of $243 million (in 30 settlements). Kirby McInerney & Squire was third, averaging $130 million over five settlements.

With respect to the total number of final settlements, Lerach Coughlin led all firms with 30 settlements. Finishing second in this category for the second year in a row was Milberg Weiss with 22 settlements, followed by the newly renamed Schiffrin, Barroway, Topaz & Kessler, which was lead or co-lead counsel in 12 settlements. In contrast to 2005, these were the only three law firms with at least 10 settlements in 2006.

It was a banner year for settlements overall, though. First the total dollar value of all settlements finalized in 2006 jumped to $18.3 billion. Second, the number of mega-settlements finalized in one year (six of the 10 largest securities class action settlements ever) is unprecedented.

Another interesting trend appeared this year. For the first time ever, a firm cracked the Top 5 with just one settlement--Heins Mills with the $2.5 billion AOL Time Warner settlement and Entwistle & Cappucci with the $1.1 billion Royal Ahold settlement.

A printable copy of the SCAS 50, including details on our methodology, is available in PDF format here: http://www.issproxy.com/pdf/SCAS50for2006.pdf

An interactive version of the SCAS 50 that can be sorted by the various columns is available here: http://www.issproxy.com/institutional/analytics/scas50full2006.jsp

The SCAS 50 is published on an annual basis, and as always, we welcome your feedback.

TENTATIVE SETTLEMENTS

D&K Healthcare Resources
D&K Healthcare Resources announced an agreement to settle the securities litigation filed in the U.S. District Court for the Southern District of New York in March 2004. The complaint alleged that between Aug. 10, 2000, and Sept. 16, 2002, the company and its officers issued numerous statements concerning financial results and failed to disclose or misrepresented adverse facts about the company. The tentative settlement is valued at $18.7 million.

D&K Healthcare is a regional pharmaceutical distributor. The company’s primary business is to supply pharmaceuticals, over-the-counter medicines, and health and beauty products to independent and regional pharmacies.

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

RenaissanceRE Holdings
RenaissanceRE has agreed in principle to settle the securities class action litigation filed by investors who acquired the company’s stock between April 22, 2003, and July 25, 2005. The complaint was filed in the U.S. District Court for the Southern District of New York in July 2005; the tentative settlement is about $13.5 million.

Renaissance, through its operating subsidiaries, provides reinsurance and insurance coverage where the risk of natural catastrophe represents a significant component of the overall exposure.

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

TECO Energy
TECO Energy has reached a $17.35 million settlement with investors who filed a class-action lawsuit in the U.S. District Court for the Middle District of Florida. The suit alleges that between Oct. 30, 2001, and Feb. 4, 2003, the company and its officers concealed problems with several independent power plant construction ventures for which TECO would ultimately be fully responsible.

TECO Energy is an energy company headquartered in Tampa. TECO Energy's five business units include Tampa Electric, Peoples Gas System, TECO Coal, TECO Transport, and TECO Guatemala.

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

Other tentative settlements in the past month include Alliance Gaming, Rediff.com India, Direct General, Mikohn Gaming, First BanCorp, and ADESA. For a complete list, please go to the SCAS Web site and click on the “Hot Lists’ Tentative Settlements” link.

DISMISSALS

General Motors Acceptance
A securities lawsuit filed in January 2006 by investors who acquired the company’s debt securities between July 28, 2003, and Nov. 9, 2005, has been dismissed by a federal judge in Michigan.

General Motors Acceptance offers automotive financing, commercial finance, insurance and mortgage products, and real estate services.

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

Salomon Smith Barney Mutual Funds (Class B)
A judge dismissed the securities class action filed in the U.S. District Court for the Southern District of New York in June 2003 by class B mutual fund investors. The complaint alleged that that Salomon Smith Barney's class B shares are an inferior investment choice because class B shareholders were charged higher sales charges and ongoing annual fees than holders of class A and/or L shares in the same fund. The affected class was composed of those persons who purchased, or otherwise invested $100,000 or more in class B shares in one or more Salomon Smith Barney mutual funds, during the period of June 12, 1998, to Dec. 1, 2003.

Salomon Smith Barney is the nation's second-largest retail brokerage firm, offering clients a range of investment products--including stocks, bonds, mutual funds, CDs, insurance and annuities.

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

Bally Total Fitness
A federal judge in Illinois has dismissed a class action filed in May 2004 by investors who purchased Bally Total Fitness shares between Aug. 3, 1999, and April 28, 2004.

Bally Total Fitness is the largest commercial operator of fitness centers in the U.S., with nearly 390 facilities and 30 franchises and joint ventures located in 29 states, Mexico, Canada, Korea, China, and the Caribbean.

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

Please don’t forget to check the SCAS Web site for more dismissals this month, which also include: Lernout & Hauspie Speech Products N.V. and Golden State Vintners.

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

Aquila
Clarent
ConAgra Foods
Corvis (Robertson Stephens)
Hybrid Networks
Inter Mune
SpectraLink

Appeals Court Reverses Enron Class Certification
By Ted Allen, Director of Publications

A federal appeals court ruled March 19 that Enron investors cannot pursue class-action claims against Credit Suisse, Merrill Lynch, and Barclays.

A three-judge panel of the U.S. Court of Appeals for the Fifth Circuit in New Orleans reversed a district judge’s ruling that allowed the plaintiffs to proceed with a securities class-action against the three underwriters. The investors accuse the investment banks of helping Enron conceal debt and use off-the-book partnerships to inflate revenue. The appeals court ruled that the investors hadn’t shown that the banks directly participated in the energy company’s accounting fraud. The court also concluded that investors had failed to show the banks made misrepresentations that caused investment losses or that the underwriters owed a duty to disclose suspected fraud to Enron investors.

The decision forces investors to try to recoup their losses individually, but few investors will have the resources to sue the banks on their own. Enron investors lost around $40 billion when the Houston-based energy company collapsed in 2001.

“We are very disappointed by the Fifth Circuit’s decision to reverse [U.S. District] Judge [Melinda] Harmon’s class certification ruling,” said Trey Davis, director of special projects for the University of California, which acted as lead plaintiff in the class.

“On behalf of the victims of one of the largest frauds in history, we believe the law is broad enough to include parties who intentionally engage in deceptive conduct for the purpose of misleading investors. We will seek expeditious review by the Supreme Court,” Davis told ISS.

The lawyer for the plaintiffs, William Lerach of San Diego-based law firm Lerach Coughlin Stoia Geller Rudman & Robbins, confirmed that he will appeal the Fifth Circuit’s decision to the U.S. Supreme Court.

With this decision, the Fifth Circuit joins the Eighth Circuit in rejecting scheme liability claims by investors against bankers, accountants, and other “secondary” actors, while the Ninth Circuit has allowed such claims in certain circumstances. On March 26, the U.S. Supreme Court agreed to hear a scheme liability case from the Eighth Circuit. (For more details, see the next item.)

Lerach Coughlin has already secured over $7 billion in settlements with other defendants, such as JP Morgan Chase and Citigroup, which will not be affected by the Fifth Circuit’s ruling.

The decision comes less than a month before a trial in the case against the three underwriters was set to begin in federal court in Houston.

Gibson Dunn, a law firm that represents companies, said the Fifth Circuit’s decision “adds to a growing body of federal case law that places limits on efforts by plaintiffs' lawyers to plead securities fraud claims against secondary actors such as investment banks and other professional advisors, who did not themselves make any misrepresentations or omissions."

“The Fifth Circuit's decision denying class certification also represents another recent example of how federal courts are beginning to impose more rigorous standards for certification of investor classes in securities cases, and are permitting defendants to present more sophisticated `merits-based’ arguments opposing class certification,” the firm explained, noting the Second Circuit’s reversal of class certification in the technology IPO litigation in December.

Supreme Court Agrees to Hear Scheme Liability Case
On March 26, the Supreme Court agreed to hear an appeal in a class-action suit filed by Charter Communications shareholders against two vendors, Scientific-Atlanta and Motorola. The court will address whether vendors and other secondary actors can be held liable to shareholders under a scheme liability theory.

In the case, the U.S. Court of Appeals for the Eighth Circuit ruled that a secondary party cannot be liable under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 for engaging in “schemes” to defraud. The St. Louis-based Eighth Circuit held that liability is limited to those who: “make or affirmatively cause to be made a fraudulent misstatement or omission,” or “directly engage in manipulative securities trading practices.”

The Eighth Circuit affirmed the dismissal of a lawsuit that claimed that the two vendors could be liable for participating in a “scheme” to defraud Charter’s shareholders. The investors allege the “sham” transactions artificially inflated Charter’s cash flow by about $17 million in one quarter, which thereby inflated revenue forecasts and the company’s stock price.

In rejecting liability, the appeals court relied on the Supreme Court’s 1994 Central Bank decision, where the high court held that there was no aiding and abetting liability for claims brought under Section 10(b) and Rule 10b-5. The Supreme Court did not foreclose all liability for secondary actors, noting that the absence of aiding and abetting liability “does not mean that secondary actors in the securities markets are always free from liability.”

The high court will hear the Charter shareholder case during its next term, which begins in October.

Justices Hear Arguments on Pleading Standards
On March 28, several U.S. Supreme Court justices appeared sympathetic to corporate arguments that investors should have to meet a high pleading standard to bring securities lawsuits.

The justices heard oral arguments in Tellabs v. Makor Issues & Rights, a potential landmark case that has been closely watched by corporate and shareholder advocates. At issue is what type of showing an investor must make to bring a class action under the Private Securities Litigation Reform Act of 1995 (PSLRA), which Congress enacted in an attempt to curb securities suits. The law requires investors to point to specific facts that give rise to a “strong inference” that [corporate] defendants knew they were doing something wrong.

The investors claim that Tellabs, an Illinois telecommunications equipment firm, deceived them about the sales prospects for two of its products. The justices are reviewing the ruling by the U.S. Court of Appeals for the Seventh Circuit that a shareholder lawsuit should survive "if it alleges facts from which, if true, a reasonable person could infer that the defendant" acted with an intent to deceive or sufficient recklessness. Tellabs, which is supported by industry groups and the Securities and Exchange Commission, argues that Seventh Circuit's standard is too permissive.

According to news reports, the justices’ questions and comments suggest that they will overturn the decision of the Chicago-based Seventh Circuit. Justice Antonin Scalia said Congress was concerned about the expense of the pre-trial discovery process where parties exchange potential evidence, "and tried to set a high wall to get to the discovery stage." The law "just established an entry qualification for [shareholders] getting into court," he noted, according to the Associated Press. Likewise, Chief Justice John Roberts said the PSLRA "established a very different standard" than the rules that apply to most federal lawsuits.

However, Justice Stephen Breyer and several justices noted that Congress’ intent to limit the number of shareholder suits that can go to trial must be reconciled with the Seventh Amendment, which provides the right to a jury trial, Bloomberg News reported.

Arthur Miller, a Harvard law professor who argued the case for investors, urged the justices not to set a pleading standard that is too onerous. "Let’s not throw the baby out with the bathwater," he said, according to AP. If a stricter standard is applied, Miller said, "I think we've got a stone rolling downhill" toward dismissal of investor cases.

The state of Ohio and 23 states and territories have filed a brief in support of the investors. Among the investor groups that submitted supporting briefs in the case are the Council of Institutional Investors, the University of California, and the labor-affiliated Amalgamated Bank.

Various industry groups have weighed in, including the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association, the Washington Legal Foundation, the American Institute of Certified Public Accountants, Quest Software, and TechNet, which represents technology executives.

The Supreme Court likely will issue a decision by the end of June.

Chamber Group Calls for Securities Law Changes
A group affiliated with the Chamber of Commerce has issued its own set of proposals to improve the competitiveness of the U.S. capital markets. The group, the “Commission on the Regulation of the U.S. Capital Markets in the 21st Century,” issued a March 12 report, which notes there is a “strong need to investigate the accuracy of the widely held global perception that the U.S. securities litigation and regulatory environment makes it dangerous to participate in our capital markets.”

The group's securities law recommendations include:

Federal courts should follow the Second Circuit's rulings that professional service firms may only be liable to investors under Rule 10b-5 if the firm actually makes a material misstatement or omission;
Federal courts should adopt the Eighth Circuit's rejection of scheme liability for secondary actors under Rule 10b-5;
The SEC should clarify its Fair Fund rules to consider the amount that investors receive from private litigation settlements of substantially similar legal claims when determining Fair Fund payouts.
Companies and officers should be able to share privileged information and documents with the SEC or external audit firms without waiving any privilege with respect to claims by private litigants; and
The SEC should study the PSLRA's impact on the effectiveness of federal securities laws.

The Chamber group joins the growing chorus of business groups and conservative academics and commentators who have called for securities law changes in the past five months. In a March 20 commentary in The Wall Street Journal, Peter J. Wallison, a senior fellow with the American Enterprise Institute said the benefits of securities class-action suits are “precious little.” He urged lawmakers to eliminate private lawsuits and allow only the SEC to enforce Rule 10b-5. (For another view on this topic, see this month's Guest Commentary.)

ISS Staff Writer L. Reed Walton and Vice President Adam Savett contributed to this news summary.

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