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Federal Judge Shira Scheindlin said Wednesday she would not recuse herself from the more than 1,000 cases involving the allocation of initial public offerings that were consolidated before her in August in the Southern District of New York. Scheindlin rejected a recusal motion by underwriters who questioned the judge’s ownership of stocks, and her adult son’s ownership of stock in one of the 263 companies named in the litigation. She said there was no reason to remove herself, and that she had an affirmative obligation to continue presiding over the cases. The ruling in In re: Initial Public Offering Securities Litigation, 21 MC 92 came just one week before a self-imposed plaintiffs’ lawyers deadline for new suits to be filed in the mushrooming litigation, which was transferred to Scheindlin for discovery and pretrial purposes, as well as the scheduling of test cases as a possible prelude to settlement talks. Excerpts from the decision will be published Tuesday. The suits, the first of which were filed in January, represent the legal fallout from the rampaging market for initial public offerings in the late 1990s that ended with the collapse of share prices across the high-technology landscape. Individual investors allege widespread manipulation of the market for initial offerings. They accuse investment banks of charging institutional clients inflated commissions for IPO shares and requiring that clients buy large blocks of shares on the first day of trading to force a sharp spike or “pop” in the share price. Investors also claim a widespread failure to disclose in the offering prospectuses activities that were designed to inflate the price of the stock, as well as a failure to disclose the compensation of the underwriters. In addition to the 263 companies sued to date, the plaintiffs also name 42 underwriters, including virtually all the major investment houses, and a number of individuals. It was the underwriters, save just a few, who moved for Judge Scheindlin to recuse herself because she was purportedly one of the people damaged by the alleged conspiracy. But in a 63-page opinion, Scheindlin said that an examination of the statute, 28 U.S.C. �455, its legislative history and the case law makes it clear that she should continue to shepherd the cases through their initial phases. Before the cases were consolidated, Scheindlin presided over eight suits involving Internet Capital Group. She told the parties that she had bought and sold her stock in that company in 1999 at a small profit. And when she became aware that she would preside over the IPO litigation in August, she sold, at a small loss, her holdings in the company Breakaway Solutions. In both cases, the judge opted out of membership in the classes, and counsel did not seek recusal. After the defendants in the consolidated cases asked to meet with the judge about potential conflicts, she provided them with disclosure statements. The defendants then questioned the judge’s ownership in Internet Infrastructure Holders, a “basket” of 20 stocks that included InfoSpace.com and Kana Communications. Infospace is not among the named companies in the actions, and the judge did not purchase Kana Communications; she purchased Broadbase Software Inc., which later merged with Kana. “In response to these disclosures, of which I was unaware at the time of the reassignments in August, I immediately sold my stock in Kana Communications and Infospace.com and again waive any interest in pursuing any claims with respect to these purchases,” she said. SON SOLD STOCK Likewise, the judge said, her son sold his interest in the one stock that is involved in the litigation, and waived class membership, after “the Moving Defendants informed me that they had reviewed my adult son’s brokerage statement without his permission or mine.” The “threshold” question, she said, was whether �455 allows a judge to remain in a case if she has “promptly” removed the conflict at the start of the proceeding. The answer, she said, is that courts have long endorsed the practice of continuing to preside if the conflict was removed expeditiously. “Today, courts continue to take steps at the beginning of a case to remove disqualifying interests and continue to preside over a case,” she said. “Recent opinions issued by the Committee on the Codes of Conduct make it clear that this remains an appropriate cause of action.” And the fact that conflicts exist when the court receives the case does not “taint the proceedings,” she said, adding, “In this case, the court has promptly removed any potential conflicts.” “Besides continuing to own stock in two companies that conducted their IPOs during the relevant four-year period (and are not defendants in this actions), the court also holds financial interests in many other publicly traded companies,” she said. “The defendants have failed to establish — and the court does not see — how the outcome of this litigation will have any direct effect on any of the court’s remaining financial holdings.” Moreover, Judge Scheindlin emphasized, “A loss or a win for either side in this case will have no discernible effect on my current portfolio.” The defendants also pointed to comments made by Scheindlin during telephone conversations with the lawyers on the Internet Capital Cases. Scheindlin had said: “All I know is that the broker called and said this is a good stock to buy and I said sure, then the next day she called and said this is a good stock to sell and I said sure. That’s it. Sad to say, very sad to say, I don’t read anything I should read. And that’s the end of it.” MONEY LOST In her opinion Wednesday, Scheindlin gave short shrift to the lawyers’ argument that her comments reflected a potential bias. “These comments only reveal that I was disappointed whenever I lost money — whether it involved IPOs, REITs, oil companies, or other stocks,” she said. “I am certainly not alone when I say losing money is sad.” Scheindlin also pointed to a broader argument that the defense lawyers appeared to make. “On the other hand, if the Moving Defendants argument is that the outcome of this case could affect the public’s perception of the integrity of the stock markets, then any negative effect resulting from these suits will fall equally on all shareholders of all publicly traded companies,” she said. “All judges, either directly or indirectly, in publicly traded companies.” Finally, the judge said there was no merit to a move to recuse under Subsection (b)(1) of the statute, which states that a judge shall recuse herself if she has “personal knowledge of disputed evidentiary facts concerning the proceeding.” The moving defendants “make much ado about my ‘experience’ as an investor in IPOs generally and in several IPO securities identified in the complaints,” she said. The defendants’ “threshold for personal knowledge of disputed facts is so low that any judge who ever received a phone call from a broker recommending an IPO stock — even if that judge did not buy it — would be disqualified.” Melyvn I. Weiss and Ariana J. Tadler of New York-based Milberg Weiss Bershad Hynes & Lerach; and Stanley Bernstein and Robert Berg of Bernstein Liebhard & Lifshitz, also based in New York, are liaison counsel for plaintiffs. Gandolfo V. DiBlasi of New York-based Sullivan & Cromwell is liaison counsel for the defendant underwriters. Jack C. Auspitz of San Francisco-based Morrison & Foerster’s New York office is liaison counsel for the defendant issuers.

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