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It looked like a cocktail party, only in a courthouse. Forty-some lawyers milled about in an Alexandria, Va., courtroom one day in June, talking shop and offering speculation about what Eastern District Judge T.S. Ellis would be looking for in a new lead counsel and plaintiff — his first selections had already bailed out — to represent shareholders in the securities fraud suit against MicroStrategy Inc. One of those jockeying for the pole position was a lawyer in a wrinkled metallic-blue suit. His pants were too short, showing off his yellow, blue, and black socks and shoes that closely resembled work boots. A Cuban Montecristo protruded from another lawyer’s front jacket pocket as he stood in front of the podium. During the recess, he talked about hunting in Botswana while looking out the courtroom window at the rain. The litigators in private securities fraud cases are an incestuous crew, by their own admission. The judges and courts may change, but the faces on the plaintiff securities lawyers remain the same. Although the Washington metropolitan area hasn’t traditionally been a hot spot for securities work, that’s swiftly changing as more and more technology companies in the region mature, offer stocks to employees and the public, and risk the vagaries of the market. That means more work for local securities firms such as D.C.’s Cohen, Milstein, Hausfeld & Toll. Andrew Friedman, a partner in the firm, has handled several securities cases and anticipates playing a significant role in the MicroStrategy case. Like many others, Friedman’s firm saw MicroStrategy become a litigation target earlier this year when the company announced that, because of accounting irregularities, it would be forced to restate rosy quarterly profit and revenue reports from 1998 and 1999. Friedman won’t talk about the specifics of why he thinks MicroStrategy is a good case for plaintiffs. But as an experienced litigator in the complex securities arena, he outlined what he’s learned in the past decade. “The linchpin of a good plaintiff case is fraud,” Friedman says. “It’s not negligence and it’s not malpractice. It’s fraud, the misrepresentation of material facts. The bigger the lie, the better.” He says that plaintiffs’ lawyers often lose sight of this basic tenet as they become obsessed with the amount of potential damages or the flightiness of a target company’s chief executives. It’s easy for lawyers to fall into those traps as they try to breathe life into the endless paper trails involved in the cases, he says. But long before he enters a courtroom or files suit, it is that paper trail that Friedman walks. Most securities cases begin with severe market fluctuations and irate shareholders who have lost money. They have often done their own due diligence on the companies, providing a starting point for Friedman. “They are usually asking why last week everything was all right and this week their stock has lost most of its value,” says Friedman. His firm doesn’t approach clients, Friedman says, but when they do call, he begins researching SEC filings, wire and analyst reports, and looking into how much contact the company has had with the media. “How often the companies speak with the press and how often they tout significant events becomes very significant in these cases,” Friedman says. One of the biggest cases Friedman worked on where predictions made in the press were a factor involved Centrust, Florida’s largest savings and loan association. The S&L was taken over by the government in 1990 after its risky junk bond investments fell through. The press portrayed Centrust as a bastion of wealth, basing its coverage on financial statements and predictions by officers. But behind closed doors, its business was failing — and Centrust was not disclosing the pertinent bad news to investors. In the end, the case against Centrust settled, with Friedman’s clients receiving about $15 million. Friedman says another signal of potential fraud is when corporate insiders sell significant amounts of stock before the release of unfavorable news. “It’s not good for an executive to have sold 100,000 shares before a misstatement is made,” Friedman says. That was the case in the Lincoln Savings and Loan Association debacle. At many key points, officers would sell before public admissions of problems or financial restatements, indicating they had prior knowledge not shared with outside investors. The case settled for $250 million. However, many securities cases are dismissed or thrown out at summary judgment, Friedman says, because courts find that plaintiffs have failed to prove that fraud was involved in a company’s downfall. This is particularly true in cases against fledgling technology companies, which can be the victims of sudden shifts in the market that leave their products, future plans, and stock in the dumps. Because of the Private Securities Legislation Reform Act of 1995, which placed high hurdles before plaintiffs in stock fraud cases, there are built-in incentives for defendants not to settle before the summary judgment stage, Friedman says. Automatic stays of discovery and other procedural bars have kept plaintiffs at bay until courts consider the evidence under the PSLRA standard. Of course, most of those cases that make it past summary judgment eventually settle. “Most lawyers will tell you they have less than one case a year that goes to trial,” Friedman says. The toughest cases are what Friedman calls projection cases, where plaintiffs must present a jury with an estimate of what a stock would have been worth but for the alleged fraud. “Unless there is evidence that [the defendant] knew that earnings would be lower, it’s difficult to convince a jury that a statement was false,” Friedman says.

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