SCAS Alert | September 2007

September 2007

White House Backs Companies in Scheme Liability Case
Ignoring calls from lawmakers and the SEC, the Bush administration files a brief in support of the defendants in the Stoneridge case before the Supreme Court.

Case Updates

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

Milberg and Lerach Firms Hit With a Class Action
A federal judge refuses to dismiss criminal charges against Milberg Weiss; investor advocate William Lerach retires; opt-out investors win a court ruling over filing deadlines.

Comments Welcome

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

White House Backs Companies in Scheme Liability Case

By Ted Allen, Director of Publications

The Bush administration is supporting the corporate defendants in a closely watched U.S. Supreme Court case, Stoneridge Investment Partners v. Scientific-Atlanta, that concerns the liability of bankers, vendors, and other third parties who help companies commit securities fraud.

On Aug. 15, U.S. Solicitor General Paul D. Clement, the administration official who represents the government before the high court, filed a brief in support of two corporate vendors despite a request by the Securities and Exchange Commission to back investors in the case. The Bush administration also disregarded an Aug. 13 letter by U.S. Sen. Christopher Dodd, who chairs the Senate Banking Committee and urged the government to stay neutral in the matter. In addition, U.S. Reps. Barney Frank and John Conyers, who chair two key House committees, have filed their own brief in support of investors.

The justices will hear arguments on Oct. 9 in Stoneridge, which one industry group has called “the most important case in a generation.”

While the Supreme Court previously barred suits against “aiders and abettors” in its 1994 Central Bank of Denver decision, the investors argue that they should be able to bring “scheme liability” claims against bankers, lawyers, and others who knowingly participate in transactions that help companies mislead shareholders, even if the third parties didn’t publicly mislead anyone. Billions of dollars may be at stake in the case, as the high court’s decision likely will have far-reaching implications and affect the ability of Enron investors to pursue a class lawsuit against the company’s former investment banks.

The Stoneridge case stems from claims by shareholders of Charter Communications against Motorola and Scientific-Atlanta, which manufactured set-top boxes used by Charter’s cable television subscribers. The investors allege that the two vendors engaged in “wash” transactions in 2000 to help Charter meet its annual operating cash flow goals.

A federal judge in Missouri dismissed investors’ claims against the vendors, and the U.S. Court of Appeals for the Eighth Circuit affirmed that decision. The appellate court ruled that Section 10(b) of the Securities and Exchange Act of 1934 only permits claims against parties who make a misleading disclosure or fail to disclose information to someone the party owed a duty to. The Eighth Circuit also upheld the lower court’s ruling that the investors had not shown they relied on any misstatements by the vendors.

While acknowledging that private lawsuits are an “essential supplement” to criminal prosecutions and civil enforcement efforts, the Bush administration’s brief warned that investor suits “can be abused in ways that impose substantial costs on companies that have complied fully with the applicable laws."

The government’s brief argued that allowing the Charter investors to pursue their claims against the vendors would “vastly expand liability in unpredictable ways,” and undermine Congress’ efforts to limit private lawsuits by only authorizing the SEC to pursue claims against those who aid or abet securities fraud.

The Bush administration’s brief didn’t agree entirely with the Eighth Circuit’s interpretation of Section 10(b). The government argued that liability should not be limited to fraudulent misstatements or omissions, but should also extend to non-verbal deceptive conduct. Nevertheless, the administration concluded the appellate court properly upheld the dismissal of the case because the investors did not show they relied on the vendors’ conduct.

The Bush administration joins various business groups that submitted “friend of the court” (or “amicus”) briefs in support of the defendants. Among those groups are the National Association of Manufacturers, the Securities Industry and the Financial Markets Association, the Washington Legal Foundation, and the American Institute of Certified Public Accountants. For instance, the manufacturers’ group warned that permitting “scheme liability” would lead investors to try to sue anyone with “deep pockets” who had even a passing relationship with corporate wrongdoers. In addition, a group of 16 ex-SEC officials, including former Chairman Harvey Pitt and ex-Commissioner Joseph Grundfest, have filed a brief backing the defendants.

SEC’s Request Ignored
The filing of the government’s brief was somewhat surprising, as some legal observers predicted that the Bush administration would stay neutral after it was criticized by top Democratic lawmakers in June for failing to allow the SEC to submit a brief in support of investors.

In late May, the SEC unanimously voted to file a brief in support of the investors, and the agency submitted a draft to the solicitor general, according to The American Lawyer magazine. (Earlier news reports indicated that the commissioners split 3 to 2 on that recommendation.) While all five commissioners agreed that conduct alone (without a public statement) can constitute fraud, only three commissioners concluded that conduct that has the principal purpose of creating a false appearance of material fact amounts to a violation of Section 10(b), the legal magazine reported. Chairman Christopher Cox joined with the commission’s two Democrats in supporting that view.

During a House committee hearing in late June, Cox explained his vote by noting that he was trying to be consistent with the position the agency took on scheme liability in the Simpson v. AOL Time Warner litigation in 2004. In addition, the SEC filed a brief in support of Enron investors when they were trying to persuade a district court judge to allow them to sue investment banks that allegedly participated in sham transactions.

According to news reports, the Treasury Department, the Comptroller of the Currency, and the Federal Reserve all sent letters opposing the SEC’s recommendation. President George W. Bush also reportedly told his advisers that he was concerned about the economic burden posed by “unnecessary lawsuits.”

The Bush administration’s decision to disregard the SEC’s request disappointed former SEC lawyers, who said it was “absurd” for the White House to defer to other agencies on a question that arises from a law that the SEC enforces, according to The American Lawyer.

David Becker, a former SEC general counsel, said the solicitor general in the past has made legal suggestions but has rarely blocked an SEC brief. “It is unusual for the SEC on amicus briefs to say, ‘we want to file a brief,’ and the solicitor general says “no,’” Becker told the magazine.

Investors, State Officials Support Charter Shareholders
Meanwhile, the Charter shareholders have received the backing of various investor advocates and state officials. The Council of Institutional Investors (CII), the North American Securities Administrators Association, the University of California, the New York State Teachers’ Retirement System, the Change to Win labor federation, and 30 state attorneys general have filed briefs in support of investors.

“Without taking a position on the precise standard for primary liability under Section 10(b), the Council believes that if the Supreme Court were to adopt an overly restrictive test for scheme liability, investors and the capital markets would be harmed,” Jeff Mahoney, general counsel for CII, told the SCAS Alert. “Such a ruling would eliminate an important deterrent to bankers, lawyers, accountants, and other financial gatekeepers who might otherwise participate in complex financial frauds that jeopardize the assets of millions of American workers and investors.”

In July, a separate group of ex-SEC officials, including two former SEC chairmen, William Donaldson and Arthur Levitt, and former Commissioner Harvey Goldschmid, asked the high court for permission to file a post-deadline brief in support of the Charter investors. (Editor’s note: Levitt is a board member of ISS’ parent, RiskMetrics Group.)

“The decision below immunizes non-issuers who commit securities fraud from private liability merely because they were cunning enough to avoid making a public statement,” the former SEC officials wrote in their brief.

In total, 30 amicus briefs have been filed in the Stoneridge case. That's a “startling” number for a securities case, Thomas Goldstein, a lawyer with Akin Gump Strauss Hauer & Feld who specializes in Supreme Court litigation, told The Wall Street Journal's Law Blog.

Stanley Grossman, an attorney with Pomerantz Haudek Block Grossman & Gross who represents the Charter investors, discounts the warnings from industry advocates that a ruling for the investors will lead to a flood of securities litigation.

“You hear all these cries that the sky will fall if lawyers and investment bankers are held liable,” Grossman told The American Lawyer. He emphasized that investors are not trying to sue anyone who simply engaged in a transaction with a company, noting, “you have to do something fraudulent.”

The Stoneridge case likely will be decided by next June, but the full nine-member court may not hear the matter. Chief Justice John Roberts and Justice Stephen Breyer recused themselves from the court’s decision on whether to hear the case. Both justices reported in their 2006 financial disclosure forms that they own shares in Cisco Systems, the parent of Scientific-Atlanta, Legal Times reported.

Given the importance of the case, some Supreme Court observers say that one or both of the justices may sell their Cisco shares so they can participate in the court’s deliberations on Stoneridge, according to Legal Times. Under a new federal law, justices may sell stock holdings to resolve a conflict of interest and defer any capital gains tax they might owe.

TENTATIVE SETTLEMENTS

Hollinger International
Hollinger announced a $24.5 million settlement with investors who sued in the U.S. District Court for the Northern District of Illinois. The suit was brought on behalf of purchasers of Hollinger shares between Aug. 13, 1999, and Mar. 31, 2003. Investors alleged that company officials hid the transfer of millions of dollars of Hollinger funds into their own pockets, falsified the company's financial results, and misrepresented sales of company assets and related-party transactions.

Hollinger, which is now known as the Sun-Times Media Group, is a newspaper publisher and media company.

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

KVH Industries
KVH has agreed to a $5.3 million settlement with investors who sued in federal court in Rhode Island. The suit was brought on behalf of shareowners who bought KVH stock between Oct. 1, 2003, and July 2, 2004. Investors claimed that the company made false and misleading statements that artificially inflated the company’s stock price.

KVH Industries, based in Middletown, Rhode Island, develops, manufactures, and markets mobile communication, navigation, guidance, and other products for defense and commercial use.

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

Viisage Technology
Viisage has announced a $2.3 million settlement in a class-action suit that is pending in federal court in Massachusetts. Shareowners who bought Viisage stock between May 12, 2004, and March 2, 2005, alleged that company's officers and directors engaged in a scheme to defraud investors.

Viisage Technology (now called L-1 Identity Solutions) is based in Stamford, Connecticut, and provides biometrics, encryption, and other technologies for identity and asset protection.

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

Other recent tentative settlements include: Alltel, Cosine Communications, CDW, SFBC International, Cardinal Health, Ryland Group, Genzyme, Sprint PCS, and Ceridian. Please check the SCAS Web site for more details on these and other tentative settlements.

DISMISSALS

e-Net
A class action suit against e-Net was dismissed in the U.S. District Court for the Middle District of Florida. The suit was filed in November 2002 on behalf of shareholders who bought e-Net securities between Jan. 1, 1998, and Aug. 19, 1998. Investors claimed that the company deceived shareholders to inflate the company's share price.

The company, now defunct, was a Maryland-based telecommunications software firm.

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

XL Capital
A federal judge in Connecticut dismissed a class-action suit against XL Capital. The suit, filed in November 2003, was brought on behalf of investors who bought XL stock between Nov. 1, 2001, and Oct. 16, 2003. Shareholders claimed that the company stated it would strengthen its reserves by $95 million so it could acquire NAC Re (another insurance firm), but XL failed to maintain adequate reserves and overstated its earnings.

XL Capital, based in Hamilton, Bermuda, provides insurance and reinsurance coverage to commercial firms.

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

Home Depot
Home Depot announced the dismissal of the securities class-action suit filed in May 2006 in the U.S. District Court for the Northern District of Georgia. Investors who bought company stock between May 29, 2001, and Feb. 22, 2005, had accused the company of deceiving vendors and falsifying financial results using fraudulent return-to-vendor policies.

Atlanta-based Home Depot owns home improvement retail stores worldwide.

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

Please don’t forget to check the SCAS Web site for other recent dismissals, which include: Inspire Pharmaceuticals, New York Community Bancorp, and Universal American Financial.

TENTATIVE DISMISSALS

Shareholder lawsuits against Astea International and Mercury Interactive have been dismissed “without prejudice.” Investors will have an opportunity to file an amended complaint before each dismissal become final.

CLASS CERTIFICATION

Investors have won class certification in the following cases: Chaparral Resources, Schering-Plough, and Sears Roebuck.

LEAD PLAINTIFF APPOINTMENTS

BKF Capital
Jolly Roger Offshore Fund and Jolly Roger Fund have been appointed lead plaintiffs and Labaton Sucharow & Rudoff has been appointed lead counsel. The case, which was filed on behalf of investors who bought BKF shares from May 10, 2004, to Oct. 18, 2005, is pending in the Southern District of New York.

Wireless Facilities
The Washington-Idaho Laborers-Employers Pension Trust Funds were been appointed lead plaintiff. Coughlin Stoia Geller Rudman & Robbins and Johnson & Perkinson were appointed as co-lead counsel. The case is pending in the Southern District of California.

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

AOL Time Warner

Conseco

ECI Telecom

EcoScience

Hamilton Bancorp

Hayes Lemmerz International (bondholders)

Micromuse

Quality Distribution

U.S. Aggregates

Xicor

Two Plaintiffs' Firms Sued by Investors
By Ted Allen, Director of Publications

Two law firms that have represented investors in hundreds of securities class-action cases now are defendants in a lawsuit by investors.

The law firms of Milberg, Weiss & Schulman, and Lerach Coughlin Stoia Geller Rudman & Robbins were sued by six individual investors in federal court in New York on Aug. 2. The lawsuit claims the firms violated federal racketeering laws and committed fraud by making secret kickback payments to other investors so they would agree to serve as lead plaintiffs.

The lawsuit, which also names lawyers Melvyn Weiss, Steven Schulman, and David Bershad as defendants, was filed by Russ Beatie of Beatie & Osborn, a rival plaintiffs' firm in New York. Beatie, who doesn't hide his disdain for the defendants, has likened his suit to “a religious crusade.”

The allegations in Beatie's complaint go beyond those raised in criminal charges filed by federal prosecutors in May 2006 against Schulman, Bershad, and Milberg Weiss. The firm and Schulman have denied any wrongdoing. Bershad, who is now longer with the firm, reached a deal with prosecutors and pleaded guilty to a conspiracy charge in July.

San Diego-based Lerach Coughlin, which split off from New York-based Milberg in 2004, has not been charged criminally. (Editor's note: On Aug. 31, the Lerach firm changed its name to Coughlin Stoia Geller Rudman & Robbins after the retirement of founding partner William Lerach.)

Beatie's lawsuit contends the defendants inflated their clients’ investment losses to persuade judges to appoint Milberg Weiss as lead counsel in various securities cases, according to Fortune's Legal Pad weblog. Beatie's firm unsuccessfully sought lead counsel status in at least three of those cases, according to Fortune. The suit alleges that the defendants acted improperly in shareholder litigation against Network Associates, Oxford Health Plans, Safeskin, Linux VA, Chubb, Waste Management, MicroStrategy, Sonus Networks, and Organogenesis.

Judge Refuses to Dismiss Milberg Criminal Charges
On Aug. 6, U.S. District Judge John Walter in Los Angeles refused to dismiss most of the criminal charges against the Milberg Weiss firm and Steven Shulman. According to The Wall Street Journal’s Law Blog, the judge said he “tentatively” had decided to dismiss three mail-fraud charges, while siding with prosecutors on 20 other charges.

Milberg Weiss and the other defendants have denied making any payments to investors. Even if those payments were made, the defendants argue that class members were not harmed because the firm's lawyers still achieved significant recoveries for investors. In addition, any alleged payments would have come out of the firm’s legal fees, not the class members’ pockets, the defendants contend.

According to the Journal, the judge concluded that any payments could have created a risk that the lead plaintiffs would not act in the best interests of the class. The judge said prosecutors do not need to prove that the kickbacks resulted in actual harm.

William Lerach Retires Amid Federal Probe
William S. Lerach, one of the most successful advocates for investors, has retired from Lerach Coughlin, the law firm that he founded in 2004.

The firm, which has been renamed Coughlin Stoia Geller Rudman & Robbins, announced Lerach’s retirement in an Aug. 28 press release.

Lerach has been investigated by federal authorities in connection with the alleged payments to clients of his former firm, Milberg Weiss, but he has not been charged with any criminal offense. His law firm’s press release said Lerach was stepping down so he could “focus his time and energy on this matter, and allow the firm to move forward with its work.”

The Journal's Law Blog reported, citing two unnamed sources, that Lerach “is in advanced talks with prosecutors on a plea deal that could be announced in September and involve serving prison time.”

“Despite my mistakes, I am immensely proud that together we built a firm without peer and never shied away from taking on the world’s most powerful and corrupt corporations,” Lerach wrote in an e-mail to the firm, according to the Journal, which noted that portions of his e-mail echo President Richard Nixon's farewell speech.

“It is no small accomplishment that despite numerous challenges, we created the largest and most successful firm in the U.S., recovering more money for victimized shareholders and consumers than all other firms combined,” Lerach wrote. “Ever since I saw the pain on my father’s face when he told me how it felt to lose everything in the crash of ‘29, I’ve never forgotten that when corporations commit fraud, ordinary people are hurt and real people’s lives are destroyed.”

Coughlin Stoia vowed to continue its efforts to represent institutional investors. “We will not pause in our ongoing advocacy for shareholders and consumers,” partner Darren Robbins said in the firm’s press release. “We are pleased that Coughlin Stoia Geller Rudman & Robbins LLP continues to be the go-to law firm for institutional investors seeking to hold corporate wrongdoers accountable.”

In 2006, the firm served as lead counsel or co-lead counsel in cases that resulted in final settlements totaling $7.3 billion, the most settlement dollars obtained by any plaintiffs' firm last year, according to SCAS data. Among those firms with at least three final settlements, Coughlin Stoia ranked second in the average settlement ($244 million) obtained. (For more details, see the chart at the start of this month's edition of the SCAS Alert.)

Opt-Out Investors Win a Court Ruling
The U.S. Court of Appeals for the Second Circuit has ruled that investors who opt out of a securities lawsuit before a decision on class certification may benefit from a freeze in filing deadlines.

The U.S. Supreme Court has ruled that the filing of a securities class-action case “tolls” the deadlines for all potential class members to bring individual suits over the same conduct if the case isn’t certified as a class action.

On July 26, the Second Circuit, which hears appeals from federal courts in New York and Connecticut, ruled that this principle also extends to investors who opt out of proposed class-action cases before a court rules on class certification. The ruling came in a case filed by former WorldCom investors. Several district courts in the Second Circuit had differed on this issue previously, which created uncertainty for investors.

“It is a significant advantage for investors to be able to opt out before the class certification stage, but until recently that was not feasible within the Second Circuit,” the law firm of Grant & Eisenhofer, which represents institutional investors, noted in a client alert memo.

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

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