Securities Class Action Services Alert

In a closely watched case, the U.S. Court of Appeals for the Second Circuit ruled on Oct. 23 that it does not have jurisdiction over class-action claims by foreign investors against the National Australia Bank (NAB).

However, the New York-based court did not adopt a bright-line rule against all claims by foreign investors who purchase shares from non-U.S. exchanges. Writing for a three-judge panel, Judge Barrington Parker, said such a rule “would conflict with the goal of preventing the export of fraud from America . . . the United States should not be seen as a safe haven for securities cheaters.”

The case marked the first time that the influential Second Circuit, which hears appeals from federal judges in New York and Connecticut, had ruled in a so-called “foreign-cubed” (or “f-cubed”) case. Those lawsuits have become more common in recent years as more international institutional investors realized the advantages of suing in U.S. courts. The global credit crisis has also led to more lawsuit filings against foreign banks in American courts.

The case attracted “friend-of-the-court” briefs from corporate and industry advocates, including the Securities Industry and Financial Markets Association (SIFMA), the U.S. Chamber of Commerce, the Association of Corporate Counsel, the Washington Legal Foundation, and a French business group, the Association Française des Enterprises Privées. The Securities and Exchange Commission filed a brief in support of investors.

The case arose from NAB’s 1998 purchase of HomeSide Lending, a Jacksonville, Florida-based mortgage firm. NAB, Australia’s largest bank, took $2.2 billion in write-downs in 2001 to account for less-than-expected mortgage servicing fees, which caused the bank’s shares to fall.

Three individual investors, who purchased NAB ordinary shares in Australia, filed suit in federal court in New York, seeking to represent all non-U.S. purchasers of NAB shares. In arguing for jurisdiction, the investors asserted that the alleged fraud occurred in the U.S., where HomeSide was based. While noting that the question was a “close call,” a federal judge rejected jurisdiction after noting that the company’s public filings and statements were made abroad to investors outside the U.S. The Second Circuit upheld that ruling, noting that NAB’s corporate headquarters in Australia had the primary responsibility for communicating to investors, and that the bank’s statements had no impact on American investors.

“While HomeSide may have been the original source of the problematic numbers, those numbers had to pass through a number of checkpoints manned by NAB’s Australian personnel before reaching investors,” the appeals court noted. The court thus concluded that that the company’s actions in Australia were “significantly more central” to the alleged fraud than HomeSide’s actions in Florida.

Reaction

Corporate advocates hailed the ruling. “The court got this one exactly right,” Ira Hammerman, general counsel for SIFMA, said in a statement. “Non-U.S. companies should not be subjected to American-style class-action securities litigation tactics merely because they conduct operations in the U.S. Finally, legal precedent--which now includes this case--makes clear that U.S. courts should decline jurisdiction in these cases.”

The law firm of Wachtell Lipton Rosen & Katz, which represented NAB, said the decision is “a significant victory” for foreign companies. “The ruling makes clear that the crucial consideration in determining whether a United States court can hear an “f-cubed” case is where the issuer prepares and issues its disclosures,” the firm said in an Oct. 27 memo. “When foreign investors suffer losses as the result of statements made in foreign countries by foreign issuers, the foreign investors will now find it very difficult to maintain actions under American securities laws. If district courts faithfully follow National Australia Bank, much of the current wave of “f-cubed” litigation will have to be dismissed.”

Thomas Dubbs of Labaton Sucharow, who represented the investors, said the ruling has some “good news” for investors. “The court clearly rejected the bright-line ban of ‘foreign-cubed’ securities cases advocated by defendants, which would have always prevented foreign purchasers from bringing securities fraud cases against foreign companies in American courts,” Dubbs said in a statement, according to Bloomberg News. “Such cases must be reviewed on a case-by-case” basis.

Case Updates

Tentative Settlements

Openwave Systems
Openwave Systems has agreed to pay $20 million to resolve a class-action lawsuit pending in the U.S. District Court for the Southern District of New York. The class-action complaint was filed in February 2007 on behalf of investors who purchased Openwave's common stock between Sept. 30, 2002, and Oct. 26, 2006. The lawsuit alleged that senior executives of Openwave in 2000 and 2001 caused the company to grant stock options that improperly had exercise prices below the market price of Openwave stock on the actual date of the grant. According to the complaint, the company and the executives failed to disclose these facts, and instead issued numerous false and misleading public statements misrepresenting the company's financial statements.

Openwave provides software for communications and media firms in the United States, Asia, Europe, the Middle East, and Africa.

For more details, please go to the SCAS website: http://scas.issproxy.com/casesummary.php?CaseId=29743

American International Group
A partial settlement of $97.5 million has been reached in the American International Group (AIG) securities class action litigation with current independent auditor PricewaterhouseCoopers. The federal court lawsuit was filed in October 2004 in the Southern District of New York on behalf of all purchasers of AIG’s publicly traded securities. The investors alleged that defendants disseminated false and misleading financial statements concerning AIG's results and operations between Oct. 28, 1999, and April 1, 2005.

For more details, please go to the SCAS website: http://scas.issproxy.com/casesummary.php?CaseId=29060

AIG, through its subsidiaries, provides insurance and financial services in the United States and internationally.

Bridgestone
Bridgestone has agreed to a $30 million settlement to resolve the securities-class action lawsuit filed in January 2001. The complaint was brought in the U.S. District Court for the Middle District of Tennessee on behalf of all purchasers of Bridgestone’s common stock or American Depository Receipts between March 30, 2000, and Aug. 31, 2000. The lawsuit alleged that defendants disseminated misleading statements designed to cover up defects in steel-belted radial ATX tires manufactured by Bridgestone's U.S. subsidiary, Bridgestone/Firestone, and used principally on Ford Motor's Explorer sport-utility vehicles.

The company sells a broad line of products, including consumer, commercial truck and bus, agricultural, and off-the-road tires.

For more details, please go to the SCAS website: http://scas.issproxy.com/casesummary.php?CaseId=27413

Other recent tentative settlements include: Isolagen, Hienergy Technologies, RBC Capital Markets (ARS) (SEC), WSB Financial, and Gehl.

Dismissals

Dell
A federal judge has dismissed a class-action lawsuit filed against Dell in the U.S. District Court for the Western District of Texas. The complaint was filed in September 2006 on behalf of the purchasers of Dell's publicly traded securities between May 16, 2002, and Sept. 8, 2006. The lawsuit contends that company officials caused Dell to report inflated financial results, including misstating the accrual and reserves reported on the company's balance sheet.

Dell and its subsidiaries engage in the design, development, manufacture, marketing, sale, and support of computer systems and services worldwide.

For more details, please go to the SCAS website: http://scas.issproxy.com/casesummary.php?CaseId=29634

Custom Designed Compressor Systems
Custom Designed Compressor Systems announced the dismissal of the securities lawsuit filed in August 2005 in federal court in New Mexico. The complaint, which sought to represent investors who bought the firm's shares between Sept. 14, 2004, and Oct. 22, 2004, alleged that the company issued false press releases describing itself as a profitable manufacturer of custom compressor systems for natural gas wells.

For more details, please go to the SCAS website: http://scas.issproxy.com/casesummary.php?CaseId=29350

International Coal Group
The securities lawsuit filed against International Coal Group (ICG) has been dismissed. The class action was filed in the U.S. District Court for the Southern District of West Virginia in April 2005 on behalf of investors who acquired ICG stock in connection with stock offerings in November and December 2005. ICG produces coal in Northern and Central Appalachia.

For more details, please go to the SCAS website: http://scas.issproxy.com/casesummary.php?CaseId=29794

Other recent dismissals include: Comcast, Diebold, the Shaw Group, and Medis Technologies.

Reversal of Tentative Dismissals

The Threshold Pharmaceuticals litigation was tentatively dismissed by a court. Plaintiffs were given leave to file an amended complaint, and they have now done so.

Tentative Dismissals

The following cases have been tentatively dismissed by a court. Plaintiffs were given leave to file an amended complaint. If they do not do so, and do not appeal, then the dismissal will become final: First Home Builders of Florida; Yahoo!; Valueclick; and Optionable.

Class Certification

The court ruled in favor of class certification for the following cases: AOL Time Warner (Credit Suisse analyst)
Goldman Sachs; Nature’s Sunshine Products; and Parmalat Finanziaria.

Reversal of Class Certification

A federal appeals court reversed the class certification in the Metromedia Fiber Network litigation.

Check Your Mailbox

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

· Sirius Satellite Radio

· Intershop Communications

· CHS Electronics

· Asia Pulp & Paper

· Vicuron Pharmaceuticals

· Level 3 Communications (Salomon analyst)

· Chaparral Resources

· XO Communications

· Immune Response

· American Italian Pasta

· Cigna

In the News

By Ted Allen, Head of Publications

A Novel Proposal for Securities Litigation Reform

A University of Michigan law professor is urging shareholders to file proposals that seek to reduce the incentives for filing securities class-action cases.

In a recent Cato Institute article, Professor Adam C. Pritchard recommends that investors file proposals (as permitted by Exchange Act Rule 14a-8) that would urge directors to amend their company’s articles of incorporation to rebut the “fraud of the market” presumption that underlies many securities class-action cases. That presumption, which was recognized by the U.S. Supreme Court in Basic v. Levinson in 1988, allows investors to file lawsuits under Rule 10b-5 even if they did not directly rely on a particular corporate misstatement or omission.

In Pritchard’s view, the Basic decision has “unwittingly released the floodgates for securities class actions.” The current system of damages “compensates shareholders on the losing end of trades--which can amount to billions in damages--while ignoring the equivalent windfall gain that the selling shareholder got from selling at an inflated price,” Pritchard wrote in a National Law Journal commentary. In essence, shareholders take money from one pocket, remove about half of that money for legal fees on both sides, and then “put the leftover change in their other pocket,” he wrote.

Instead, Pritchard argues that damages should be based on the corporate defendants’ gain. Such an approach, he argues, would reduce the incentive to bring marginal lawsuits and focus plaintiffs’ lawyers on the executives who misled investors.

Pritchard has prepared a model shareholder resolution. So far, no resolutions have been filed for the 2009 season, but he said that some small investors or hedge funds might consider filing it. In a recent interview with Bruce Carton’s Securities Docket weblog, Pritchard said he expects that companies would oppose the resolution because it would put their officers at greater risk. He expects that no company would support the idea unless the SEC first rejects a “no action” challenge that the proposal is inconsistent with federal law.

Professors Debate the Merits of Securities Litigation

On Oct. 23, Stanford Law School Professor Joseph Grundfest and Duke Law School Professor James Cox debated the deterrence value of securities litigation at a forum in New York hosted by the Bernstein Litowitz Berge & Grossman law firm.

The following is derived from a summary of the debate published by insurance lawyer Kevin LaCroix on his “D&O Diary” weblog:

Grundfest characterized private securities litigation as a process “for moving money around for the benefit of the people moving the money around.” Grundfest also argued that private securities litigation is a poor deterrent of misconduct. He pointed to the many allegations of wrongdoing that have accompanied the current financial crisis as evidence that private securities litigation is not a deterrent to misconduct. Because the vast preponderance of private securities litigation is settled with insurance proceeds or company money, there is no "individual responsibility,” because the “wrongdoers” are not "hit in the pocketbook,” he noted.

To provide deterrence, Grundfest suggested, the process should be changed so that the primary objective is no longer to produce "the largest pot of money" from whatever source, but should be geared toward settlements funded directly out of individual executives’ pockets, even if that results in a much smaller settlement.

Cox challenged the assertion that private securities lawsuits provides no deterrence, stating that it is not enough to look at the defendants alone to determine whether securities litigation has a deterrent effect. Rather, he argued, the question is whether the threat of litigation raises the standard of conduct among all companies. Cox said that it is difficult to measure the benefit to the entire marketplace of increased disclosures and other conduct calculated to avoid litigation.

Cox observed that the performance of the U.S. markets in the current financial crisis demonstrates that these safeguards do work. He noted that while the markets around the world are all down, the U.S. markets are down less because the U.S. markets generally are viewed as more transparent and more trustworthy.

Cox also noted that the U.S. system of securities enforcement has come to require a public-private partnership. He cited research that shows that the SEC has tended to pursue enforcement cases against securities violations involving smaller companies where fewer dollars are involved, while the private securities litigation lawyers have concentrated on the larger companies where more is at stake, and where both the costs and the incentives for private action are greater. Cox said he was not opposed to the idea of having individuals contribute toward class settlements, and he suggested that the judiciary should have their consciousness raised about asking what the individual defendants have contributed toward settlement.

In his comments on the debate, LaCroix noted “that there are a large number of sophisticated, well-informed, and profit-motivated institutional investors that continue to actively participate in securities litigation, some serving frequently as lead plaintiffs. These institutional investors believe that the litigation is in their financial interest, notwithstanding what modern portfolio [theory] might purport to suggest. In addition, many of these investor plaintiffs are often interested in using litigation to achieve governance changes or other non-monetary objectives. They clearly believe that private securities litigation helps them to achieve those goals.”

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