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Top 5 SCAS 50 Settlement Averages in 2007 (Minimum 3 settlements required) Click to see the full accompanying graphic. |
Feature StoryBanks Reach ARS Settlements With RegulatorsEight brokerage firms agree to regulatory
settlements over auction rate securities.
Case UpdateThe latest settlements and dismissals of securities class-action suits.Check Your MailboxFunds recently have been disbursed (or approved for disbursal) in the following cases.In The NewsFederal Judge Overturns $277.5 Million Verdict Against Apollo GroupGM investors negotiate a
$303 million settlement; the SEC announces three
new Fair Fund distributions. Comments WelcomeFor comments on the content of the
newsletter, please contact Ted Allen, the
editor-in-chief. |
Feature StoryBanks Reach ARS Settlements With RegulatorsBy Ted Allen, Head of Publications
UBS, Citigroup, Morgan Stanley, JPMorgan Chase, Wachovia, Goldman Sachs, Deutsche Bank, and Merrill Lynch have reached settlements with state and federal regulators over the failure of the auction rate securities (ARS) market. The $330 billion market for auction rate securities--which many investors once believed were as safe as cash--collapsed in mid-February after major brokerage firms stopped supporting the auctions as the global credit crisis worsened. Auction rate securities typically are municipal bonds or student loan securities whose interest rates are reset by periodic bidding by dealers. After the market failure, investors no longer were able to liquidate more than $27 billion in ARS holdings. Regulators have alleged that the banks improperly marketed ARS bonds as highly liquid, money-market investments. Swiss bank UBS agreed to buy back $8.2 billion in auction rate securities from 31,300 small investors (including charities and small businesses) and help 1,000 institutions liquidate another $10.3 billion in ARS bonds, according to a press release from the Securities and Exchange Commission. UBS also will pay a $150 million fine to New York and other states, which include Massachusetts, Texas, Illinois, and Missouri. Citigroup has agreed to pay a $100 million fine and repurchase about $7.5 billion in ARS securities from 38,000 small investors and use its best efforts to help 2,600 institutions sell $12 billion in those bonds. On Aug. 14, New York Attorney General Andrew Cuomo announced that JPMorgan and Morgan Stanley had agreed to buy back ARS bonds. JPMorgan will pay a $25 million penalty, while Morgan Stanley will pay a $35 million fine, Cuomo said. “Returning billions of dollars back to investors not only protects their interests but also increases confidence in the entire market,” Cuomo said in a press release on the JPMorgan and Morgan Stanley accords. “Today’s multi-billion dollar agreements are the latest victories for investors seeking relief from the collapse of the auction rate securities market, which has left a stranglehold on billions of dollars.” In a settlement announced Aug. 15, Wachovia agreed to buy back $5.7 billion of ARS held by small investors in November. The Charlotte-based firm also will offer to purchase $3.1 billion of ARS held by other investors in June 2009, according to an SEC press release. Wachovia also will pay a $50 million fine to New York and the North American Securities Administrators Association. On Aug. 21, Cuomo announced settlements with Goldman Sachs, Deutsche Bank, and Merrill Lynch, which agreed to pay penalties of $22.5 million, $15 million, and $125 million, respectively. The settlements also would require the brokerage firms to compensate investors who sold auction rate securities for a loss (or suffered losses from being unable to sell those bonds) and provide for a dispute resolution process to be overseen by the Financial Industry Regulatory Authority. “These are developments of gigantic, historic proportions,” James Cox, a securities law professor at Duke University, told Bloomberg News. “Never have we witnessed defendants, who created a product that isn’t inherently illegal, being required to buy back such a large market.” Other financial firms soon may follow suit. Bank of America and Bank of New York Mellon have disclosed that they face regulatory investigations over their ARS transactions. So far, regional brokerages--such as Raymond James, Stifel Nicolaus, Oppenheimer, and Fidelity Investments--that sold ARS bonds have declined to engage in buyback programs, according to The Wall Street Journal. These “downstream” firms argue that they didn’t run the auctions and were unaware of the problems in the ARS market. A spokesman for Cuomo said, “The culpability of downstream brokerages will depend on the facts uncovered in our investigation; what did they know about the liquidity risks of the auction-rate securities, and when did they know it, and most importantly what representations, if any, did these brokerages make to their customers,” adding that the investigation is “far from over,” the Journal reported on Aug. 19. What Will Be the Impact on Investor Lawsuits?Meanwhile, financial firms still face more than 20 lawsuits from investors and companies who purchased ARS bonds. For instance, Credit Suisse was accused in an Aug. 6 lawsuit by Swiss computer-chip maker STMicroelectronics of wrongly placing more than $450 million of the company’s cash into ARS bonds--some of which were backed by subprime real estate loans. A Credit Suisse spokesman told Bloomberg News that the lawsuit was “meritless.” On Aug. 8, an individual investor from Kentucky filed an ARS suit against Stifel Nicolaus. It’s unclear what impact the settlements may have on the class-action lawsuits by investors. In the past, securities settlements have been comparably larger in cases where there is a government investigation or criminal charges. In addition, courts do not always look at regulatory settlements as offsets, so it will depend on the facts of each case, the group of investors included in each case, and the judge who hears the lawsuit. Michael J. Rivera and Erik N. Frias, who are lawyers with the defense firm of Fried, Frank, Shriver & Jacobson, predict that the regulatory settlements may have a “debilitating impact” on the numerous class actions and other private lawsuits filed over auction rate securities. In an Aug. 18 commentary in Legal Times, they note that retail investors will be fully compensated for their losses through the settlements and the dispute resolution process, without the involvement of the courts, leaving “little opportunity for the plaintiffs’ bar to profit.” “Most problematic for any private suit, including putative class actions, is the inability to prove damages--a central element of any private action,” they wrote. “If all auction dealers ultimately agree to implement their own buyback programs for customers, then all those potential plaintiffs will have no remaining damages.” Rivera and Frias further argue that it will be difficult for plaintiffs’ lawyers to establish the commonality required to obtain class-action certification because investors’ fraud claims presumably will be rooted in representations made by hundreds of individual brokers, which likely varied widely. However, attorney Kevin LaCroix notes that no ARS lawsuits have been voluntarily dismissed so far. “The plaintiffs’ lawyers may not go quietly, and one angle I can imagine them trying to work relates to institutional investors, [as their] benefits under the various settlements are less defined and less comprehensive,” LaCroix said in a posting on his weblog, “The D&0 Diary.”
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Case UpdatesTentative Settlements
Monster WorldwideMonster Worldwide, a New York-based provider of online employment ads, has agreed to pay $47.5 million to resolve the securities class action litigation pending in the U.S. District Court for the Southern District of New York. The investors, who sued in March 2007, contend that company officials improperly dated stock options and misled shareholders about Monster’s grant practices. The Monster case is the 24th securities class action over alleged options backdating to reach a resolution. Of the resolved cases, 10 have been dismissed and 14 have settled. The 14 settlements total $1.36 billion, for an average of $97.7 million, according to SCAS data. If one excludes the largest settlement (UnitedHealth Group), the average settlement would be $36.41 million. Another 15 cases are still pending. For more details, please go to the SCAS website: http://scas.issproxy.com/casesummary.php?CaseId=29761
Refco (Sandler O’Neill)Investment firm Sandler O’Neill has agreed to pay $3.5 million to Refco investors. Refco, once a prominent brokerage firm, collapsed into bankruptcy in late 2005 after disclosing millions of dollars in related-party transactions with then-CEO Phillip Bennett. Sandler O’Neill was part of a 15-member investment banking syndicate that underwrote Refco's initial public offering in August 2005. The litigation against other defendants is still ongoing. For more details, please go to the SCAS website: http://scas.issproxy.com/casesummary.php?CaseId=29389&SettlementId=14016 Other recent tentative settlements include: Vitesse Semiconductor, Infosonics, Merrill Lynch (ARS), Citigroup (ARS), and Electronic Data Systems.
Dismissals
TRMTRM has announced the dismissal of the securities class-action lawsuit filed in federal court in Oregon in May 2008. The complaint alleged that company officials issued misleading statements about TRM’s financial health and performance from March 16, 2006, to May 22, 2007. Portland, Ore.-based TRM provides self-service cash delivery and account-balance inquiry services through the operation of automated teller machines in the United States. For more details, go to the SCAS website: http://scas.issproxy.com/casesummary.php?CaseId=30528 Other recent dismissals include: USANA Health Sciences and Macy’s.
Reversal of Tentative DismissalsThe Netlist litigation had been tentatively dismissed by a court. The investor plaintiffs were given leave to file an amended complaint, and they have now done so.
Tentative DismissalsThe Threshold Pharmaceuticals case has been dismissed without prejudice. The investor plaintiffs will have an opportunity to file an amended complaint before the dismissal becomes final.
Reversal of DismissalsThe Gilead Sciences litigation had been previously dismissed by a federal judge. A federal appeals court has reversed the dismissal of the complaint.
Class CertificationThe court ruled in favor of class certification for the following cases: Accredo Health, Fannie Mae, Forest Laboratories, Monster Worldwide, and Retek.
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In the NewsBy Ted Allen, Head of Publications
Federal Judge Overturns $277.5 Million Verdict Against Apollo GroupThe $277.5 million Apollo Group verdict, one of the few securities case to go to trial and result in a significant jury award, was overturned by a federal judge on Aug 4. U.S. Judge James Teilborg ruled that the trial testimony did not support the jury’s finding of loss causation and the January verdict. The investors alleged that the Phoenix-based online education company and its officers issued false and misleading statements over a program review by the U.S. Department of Education (DoE) in 2004. The company’s shares, which did not fall after that program review first became public in September 2004, declined after an analyst’s report about the company’s potential liability. The court found that the analyst’s report did not constitute “corrective disclosure,” because there was no new information about the alleged fraud. While concluding that Apollo “misled the markets in various ways concerning the DoE program review,” the judge said the shareholders “failed to prove that Apollo’s actions caused investors to suffer harm.” The company said the ruling was “a vindication for its students, alumni, employees, and shareholders.” “It has always been Apollo Group's position that the plaintiffs in the case did not suffer any damages arising from the disclosure of the initial government report and its unsubstantiated allegations, and we are pleased that the court has agreed,” P. Robert Moya, senior vice president and general counsel for Apollo Group, said in an Aug. 5 press release. The ruling is another trial setback for investors. In November 2007, a jury returned a defense verdict in a closely watched lawsuit against JDS Uniphase. “This development together with the defense verdict in the JDS Uniphase trial would seem to argue pretty compellingly in favor of avoiding jury trials and seeking pretrial resolution,” attorney Kevin LaCroix noted in a posting on The D&O Diary weblog. For more details on this case, go to the SCAS website: http://scas.issproxy.com/casesummary.php?CaseId=29053 General Motors Investors Obtain a $303 Million SettlementGeneral Motors and its outside auditor, Deloitte & Touche, have reached a $303 million settlement with the automaker’s investors. The investors, who sued in the Eastern District of Michigan, alleged that GM accelerated the booking of revenue from 2002 to 2006 and failed to disclose benefits paid to former employees of GM’s Delphi unit, which was spun off in 1999. According to news reports, GM will pay $277 million, while Deloitte will contribute $26 million. The settlement is subject to the approval of U.S. Judge Gerald Rosen. The investors, which include two European lead plaintiffs--Deka Investment GmbH and Deka International--are represented by the law firms of Grant & Eisenhofer and Labaton Sucharow. A spokeswoman for Deloitte said the audit firm concluded “that it was in the best interests of the firm and its clients to settle this matter now rather than face the burden, expense and uncertainty of continued litigation,” according to The Wall Street Journal. For more details on this case, go to the SCAS website: http://scas.issproxy.com/casesummary.php?CaseId=29053 SEC Announces Three New Fair Fund DistributionsThe pace of Fair Fund payments to investors appears to be increasing. In the past month, the Securities and Exchange Commission's new Office of Collections and Distributions has announced three new distributions. On Aug. 18, the agency announced a $40 million distribution to 600,000 investors in mutual funds managed by Putnam Investment Management, the first part of what will be a $150 million distribution to 1.5 million investors. Putnam agreed to a settlement in 2004 to resolve claims by the SEC and Massachusetts regulators that mutual fund investors were harmed by undisclosed market timing and excessive short-term trading. On Aug. 15, the SEC said that 325,000 Janus Capital Management mutual fund investors soon would receive $18 million, the first installment in a $100 million settlement over market-timing allegations. In addition, the agency said Aug. 11 that 12,000 Vivendi investors soon would receive $48 million. This distribution stems from a 2003 enforcement settlement over claims that the Paris-based media conglomerate engaged in fraudulent financial reporting. Of the 12,115 investors receiving checks, approximately 6,800 are from outside the United States, the SEC said. “This distribution highlights the continued efforts and increased capacity of the commission to repay injured investors, regardless of their physical location and their currency of choice,” Dick D'Anna, director of the Office of Collections and Distributions, said in a press release. The SEC reports that it has returned more than $4 billion to investors since the Fair Funds program was created by the Sarbanes-Oxley Act of 2002.
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