Plaintiffs lawyers are slapping public companies with securities class actions months or years after the date the alleged fraud came to light as they turn their attention from cases related to the financial meltdown back to traditional securities suits.
The delayed filings are a shift from the previously common practice of pursuing a securities fraud class action days or a handful of weeks after a stock-price decline caused investor losses. Eight of the 23 securities class actions filed against public companies in October and November define the class as investors who bought or acquired the company's stock during some time between 2006 and the first half of 2009. One has already been voluntarily dismissed by the plaintiffs. These cases are listed on Stanford Law School's Securities Class Action Clearinghouse.
Sam Rudman, a lawyer in the New York office of San Diego-based Coughlin Stoia Geller Rudman & Robbins, a plaintiffs firm, said he's working through a backlog of potential targets. Coughlin Stoia has beaten other plaintiffs firms to the courthouse in six cases with older class periods that were filed in October and November. The defendants in these cases are from a range of industries and include Advanta Corp., Limited Brands Inc., Men's Wearhouse Inc., Pitney Bowes Inc., R.H. Donnelley Corp.'s current executives and VeraSun Energy Corp.'s former executives.
Defense lawyers say the plaintiffs bar is grasping at straws amid the recent stock market volatility. "General market swings make it tougher for someone to allege, to prove, and for a judge to believe, that the swing in the stock price was just the revelation of fraud and nothing else," said David Kotler, a Princeton, N.J.-based partner in Dechert's white-collar and securities litigation groups. So plaintiffs lawyers are looking for cases with class periods that pre-date last fall's financial meltdown and stock market volatility. Their search for older corporate missteps also coincides with a steep overall decline in securities class action filings. Federal securities class action filings slid by 22 percent in the first half of 2009, with 87 new cases compared with 112 in the first half of 2008, according to a joint midyear report from the Stanford clearinghouse and Cornerstone Research.
Aside from the challenges of bringing cases with class periods that coincide with last year's market problems, companies are now more careful about public statements that can be tied to securities fraud claims, Kotler said.
DOWN TO THE WIRE
A prime example of the delayed filings is a securities case filed on Oct. 28 against shipping equipment and software maker Pitney Bowes Inc. in Connecticut federal court. The case was filed just one day shy of the two-year statute of limitations for such cases. The class in the case, NECA-IBEW Health & Welfare Fund v. Pitney Bowes Inc., covers buyers of Pitney's common stock between July 30 and Oct. 29, 2007.
The plaintiff, the joint health insurance fund for the National Electrical Contractors Association and the International Brotherhood of Electrical Workers, sued Pitney, current President and Chief Executive Officer Murray Martin and former Chief Financial Officer Bruce Nolop regarding verbal statements, press releases and U.S. Securities and Exchange Commission filings about the company's performance in 2007. The suit claims that the defendants made falsely upbeat assertions about Pitney's future prospects by failing to disclose or misrepresenting facts about business challenges. These facts include declining equipment and software sales to the financial-services sector, a steep drop in revenue in the U.S. mailing segment and internal operating problems. An Oct. 29, 2007, stock-price decline from $42.68 to $36.27 right after the company disclosed weaker than expected earnings prompted the lawsuit.
Private securities fraud cases claiming that a company or individual violated the Securities Exchange Act of 1934 through material misstatements or omissions that influenced a shareholder's stock-buying or stock-selling decisions must be filed within two years of discovery of the violation and five years of the violation. The Sarbanes-Oxley Act of 2002 established these time frames.
The time frames do not apply to cases alleging false and misleading statements in company proxy statements -- materials sent to shareholders for voting on such matters as a proposed merger. Such cases are governed by the Private Securities Litigation Reform Act of 1995 (PSLRA), and they must be filed within one year of discovery or three years of the violation.
Because the plaintiff alleges material misrepresentations in the Pitney case, it filed the suit just before the expiration of the two-year statute of limitations for discovery of the alleged violations.
Defense attorneys weren't listed on the Pitney docket as of press time. In an e-mailed statement, Pitney spokesman Matthew Broder said the company was "not in a position to comment on the shareholder lawsuit." Nolop, who is now chief financial officer of E*Trade Financial Corp., did not return telephone messages left through E*Trade.