After about a decade of litigation, a federal judge absolved the former chief executive officer of of having to pay any damages to shareholders, even though a jury found misstatements attributed to him that plaintiffs’ attorneys maintained caused at least $46 million in losses.

The case was among the few shareholder cases to have made it to trial and hinged on a provision of the Private Securities Litigation Reform Act (PSLRA). In an Aug. 30 final judgment, U.S. District Judge Ronald Lew in Los Angeles concluded that shareholders “shall take nothing” from Stuart Wolff, who previously had paid nearly $12 million to the U.S. Securities and Exchange Commission in a related case.

Wolff’s attorney, Howard Privette, a partner in the Los Angeles office of Paul Hastings, talked to The National Law Journal about the case — and discussed the challenges of representing a client in a civil action who pleaded guilty to criminal charges arising from the same allegations.

Nancy Fineman, a partner at Cotchett, Pitre & McCarthy, of Burlingame, Calif., who was trial counsel for the lead plaintiff, the California State Teachers Retirement System, said her client chose not to appeal the judgment so that shareholders could start receiving their payouts from the previous settlements.

She defended the verdict, despite its lack of damages. “That, in my mind, doesn’t take away from the fact that there was a finding of liability,” she said. “Even if we’d gotten a $1 billion judgment against him, he probably couldn’t pay it. It was important to send a message to CEOs that they are going to be held responsible.”

The remarks below have been edited for length and clarity.

The National Law Journal: This case dates way back to the dot-com era. What was

Howard Privette: If you go back to the 1998-2000 time frame, Homestore was one of the leading success stories of the early Internet. The idea behind it was bringing the real estate industry online. Its core business was, and is still is, essentially a vehicle by which [real estate agents] can connect with the community and help them sell houses, basically. It ultimately, as things went along, grew beyond that. The company’s name now is Move Inc.

NLJ: After the dot-com bust, numerous shareholder lawsuits were filed against, as was an action by the U.S. Securities and Exchange Commission and a criminal investigation by the U.S. attorney’s office in L.A. What did these cases allege?

H.P.: The basic contention was that the company hadn’t accounted properly for certain advertising transactions. That was the core of it. Beginning early in the year 2000, along with virtually all the other tech companies — and Internet companies in particular — Homestore’s stock started falling pretty dramatically. When we were at trial, the plaintiffs put on an expert witness giving various different estimates, and the top-end estimate was $1.25 billion.

NLJ: Wolff was the last in the government’s criminal case to either plead guilty or go to trial. He was convicted in 2006, but his conviction was reversed. He later pleaded guilty to criminal charges and was sentenced in 2010 to more than four years. How did this affect your case going to trial?

H.P.: I think the only aspect that really came in was the fact that Mr. Wolff had pleaded guilty and that several other executives had also pleaded guilty. I don’t know if the jury picked up on it, but Mr. Wolff was accompanied in court by [U.S.] marshals. He is in custody right now.

I don’t think going into the civil case with a guilty plea is ever helpful. But obviously, we all knew a lot about the case, both sides did, so I think perhaps what it enabled was a focus on the things that should be at issue in the civil case. The plaintiffs shortened up their case. They focused really hard on that guilty plea and tried to leverage that into a big result.

NLJ: How did you counter that?

H.P.: The key thing was to focus on the facts. We really looked at the civil case as the focus — what, if anything, should he really be liable for? The plaintiffs’ class action covered almost two years. The time frame for Mr. Wolff’s guilty plea, and the entire focus of the government’s investigation and the resolution of other executives’ [cases], was on a much narrower time frame. A large part of the case from our perspective was not letting the plaintiff blur everything together. Our real focus was to make sure the jury focused on the facts and the evidence and got to the right result.

NLJ: On Feb. 24, a jury found that Wolff had committed securities fraud as it pertained to some, but not to all, of the alleged misstatements. What was the ultimate verdict?

H.P.: The plaintiffs were required to identify what they said were the misstatements. And then they had to go question by question: If it was a misstatement, was Mr. Wolff responsible for it in terms of the person who made the statement? Or, on a control-person liability theory, did he control somebody who made the statement?

Ultimately, what happened was that the plaintiffs started with 22 statements. By the time we got through the jury answering all the questions, they were down to a much smaller number of five of those statements that were anything that losses could be properly assessed against.

NLJ: But actual damages weren’t clear from the verdict. Why not?

H.P.: The jury verdict was not the end of the case by a long shot. There were motions back and forth that had to put through the grist mill of the law to determine what it really meant. What it meant at the end of the day was there was no financial liability by Mr. Wolff. They were asked — and this is one of the interesting legal issues — with loss causation as an element, was there evidence that any of this had caused the stock price to drop? If so, by how much? And then they were asked, ‘If you find the stock price drop was caused by any of this, then go back and parse that out.’ For each of these statements that you found was a misstatement, how much was the stock drop attributed to that statement?

NLJ: Ultimately, it was agreed that Wolff was responsible for about $45.7 million in losses. But the judge found that those losses were offset by $121.4 million already paid to shareholders by other defendants in the case. So your client paid no damages from this verdict, correct?

H.P.: That was the ultimate result. The bottom line was if you take what the jury gave you, the most Mr. Wolff could have been liable for in dollars was $46 million. But the PSLRA requires that be offset by those prior settlements, and that’s well over $121 million. The bottom line is, the judgment reflects that the shareholder class was more than fully compensated for the losses attributable to Mr. Wolff, according to the jury.

NLJ: This hasn’t been litigated much because so few shareholder cases go to trial, right?

H.P.: There’s little in terms of precedent on how practically to put this before a jury. The special jury verdict form was complicated. There was a lot of give and take, and the judge ultimately had to step in and make decisions about what that form was going to look like. A lot of legal questions went into that, and into the jury instructions, that had never been dealt with before. And as far as I’m aware, there’s no case where it’s got to the point where you’re dealing with the offset, or the reduction, of the verdict or judgment.

NLJ: Could this case then be cited in future trials involving shareholder disputes?

H.P.: It could be a precedent for future cases if and when other people get to trial and they’re looking for precedent, like we were doing. There are so few of these cases — really, a half dozen you could look at. What does a special verdict form look like? How do you set it up? To the extent there are future trials of securities class actions, this is one of the cases people will look at.

NLJ: It seems as though more shareholder cases are going to trial. Why is that?

H.P.: A lot of people are very concerned that these cases are too complicated or there’s a natural bias by a jury in favor of a plaintiff against a corporate defendant. So, I think some of those concerns led people to settle these cases. As time goes on, in the few trials you’ve seen, I think you’re not seeing those kinds of biases coming out. And this is the perfect example of that.

We went into this with a top plaintiffs’ law firm, very good trial lawyers, representing a top institutional investor, who got to tell the jury at every turn that they represent teachers and we had an ex-CEO who pleaded guilty. Think about how that’s going to play to a jury.

I was very gratified the jury was able to focus on the facts and the evidence and didn’t hand the plaintiffs in my mind an unfair and improper huge victory. They really parsed it out and in this case got the right result.

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