Securities Fraud Suits Resurface

Sheri Qualters

The National Law Journal

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.

DIVERTED BY THE DOWNTURN

Lawsuits related to subprime mortgages and financial instruments consumed much of Coughlin Stoia's energy in recent months, but new subprime filings are waning, Rudman said. "We're busy litigating those cases, but not a lot of new ones are being started," Rudman said. "We have [new cases] we've been looking at that we kind of back-burnered for two years."

Rudman said the firm is putting many prior stock drops under the microscope before the statute of limitations runs out. "My list is long," Rudman said.

Several other cases brought by his firm against companies in a range of industries also bump up against the statute of limitations for securities fraud claims. In Steamfitters Local 449 Pension Fund v. Advanta Corp., an Eastern District of Pennsylvania case against the former credit card issuer and current and former executives and officers, the plaintiff claims the defendants concealed customer dissatisfaction with its cash-rewards program and failed to promptly record losses or disclose how credit trends were harming the business. According to the case, unsuspecting investors were harmed by Nov. 27 and 28, 2007, stock drops when the company made delayed disclosures.

Advanta, which filed for bankruptcy protection earlier this month, "does not believe that there is any merit to the allegations," said spokesman Tom Becker.

Allegations in a Southern District of Texas case, Material Yard Workers Local 1175 Benefit Funds v. Men's Wearhouse Inc., stem from the discount menswear retailer's Jan. 10, 2008, stock drop. The plaintiff claims the defendants failed to make several key disclosures in the company's third quarter 2007 and fiscal year 2007 guidance on Aug. 22, 2007: one division's poor sales performance, low sales volume at a recently acquired unit, and significant discounting due to low demand. Men's Wearhouse's lawyer on the case, Gerry Pecht, a partner in Fulbright & Jaworski's Houston office, said he didn't want to discuss details of the case, but he questioned the motives of the plaintiffs lawyers. "It makes you wonder if they're sort of the bottom of the barrel for the plaintiffs bar, given that they're bringing them so late," Pecht said.

Coughlin Stoia also filed three other recent lawsuits alleging that companies' and executives' delayed disclosures of, or misstatements about, company problems harmed investors.

Two involve 2008 stock drops: International Brotherhood of Electrical Workers Local 697 Pension Fund v. Limited Brands Inc., filed in the Southern District of Ohio, against the retail company and current officers and directors, and Gissin v. Endres, filed in the Southern District of New York against former executives and officers of VeraSun Energy Corp., an ethanol producer. Another case against former and current executives of telephone directory company R.H. Donnelley Corp., Local 731 I.B. of T. Excavators and Pavers Pension Trust Fund v. Swanson, covers investors owning stock between July 26, 2007, and the day before the company's May 29, 2009, bankruptcy filing.

And then there is Hochuli v. Delgado, a class action not filed by Coughlin Stoia. In that case, filed on Oct. 23 in the Southern District of Florida against several former directors and officers of the now-defunct Carmel Energy Corp. but not the company itself, the plaintiffs define the class as buyers of the company's securities between Dec. 15, 2007, and Aug. 31, 2008. The plaintiffs claim the defendants misrepresented how they would use money raised from selling stock and failed to hire qualified auditors and securities lawyers that could help Carmel comply with U.S. Securities and Exchange Commission rules for public companies.

The plaintiffs lawyer, Joe White of Boca Raton, Fla.-based Saxena White, said the case is an outlier among securities cases because it involves a company that traded on the over-the-counter bulletin board instead of a national exchange. He also hasn't been able to locate or serve any of the defendants with court papers. In the Southern District of Florida, plaintiffs must serve defendants with court papers within 120 days of filing the case.

Finally, one recently filed case is already dead in the water. The plaintiffs who sued Regions Financial Corp. and current and former officers and directors in the Northern District of Alabama on Oct. 2 voluntarily dismissed the suit on Nov. 13.

In that case, McClellan v. Regions Financial Corp., the plaintiffs claimed the defendants issued a misleading proxy statement for shareholders to vote on Regions' November 2006 acquisition of another Birmingham, Ala.-based bank, AmSouth Corp. The case also made claims against the investment bank that advised Regions on the deal, Merrill Lynch Pierce Fenner & Smith, and the outside auditor for both companies, Ernst & Young.

The plaintiffs lawyer, Joseph Whatley Jr. of Whatley Drake & Kallas in Birmingham, said there's a problem with securities law time limits in cases like Regions, where subprime investments were concealed for years, but he agreed to the dismissal because he's planning to make Delaware law claims against the company.

David Tulchin, a partner at New York's Sullivan & Cromwell who was one of Regions' chief lawyers on the case, said the claims were barred by the three-year statute of limitations under the PSLRA. Tulchin said the plaintiffs lawyer withdrew the suits because he "was facing the reality there was no way around it; it was a case that was really brought too late."

The lawsuit was filed one day before the three-year anniversary of the Oct. 3, 2006, shareholder vote on the acquisition. Tulchin said the official materials sent to shareholders describing the acquisition, called the proxy statement, determines the time limit.

Tulchin also disputed the notion that plaintiffs lawyers have a surplus of potential securities cases for which they had no time during the subprime case boom.

"There are a lot of lawyers on the plaintiffs' side who file a lot of cases where they're sort of taking fliers," Tulchin said. "All that tells [me] is that there aren't any clients. That tells [me] the only people who have an interest in these cases are the lawyers."