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The trouble started, as it so often does, with a news story. This one, which first appeared in February 2000 on Forbes‘ Web site, was called “MicroStrategy’s Curious Success,” and it detailed how MicroStrategy Inc., a hot company then trading at almost $175 per share, had engaged in some intriguing accounting maneuvers. The astonishing revenue growth reported by MicroStrategy, Forbes noted, seemed to come from a series of “back-scratching” deals signed in a hurry at the very end of fiscal quarters. “How much,” Forbes asked, “do this stock’s fans know about the revenues?” Not as much as they know now. Just a month after the article appeared, MicroStrategy thudded down to earth. The company’s accounting turned out to be even more curious than Forbes had suggested: In March 2000, not long after MicroStrategy shares peaked at $313, the company and its auditors, PricewaterhouseCoopers, announced that MicroStrategy’s finances had been erroneously reported. The restatement that MicroStrategy issued was a revelation: Those amazing revenue increases disappeared, and the $12.6 million in net income that the company had reported in 1999 was transformed into a loss of almost $34 million. On the day of the restatement, the stock lost 60 percent of its value. Investors, as they usually do in these situations, rushed to sue. By December of last year, MicroStrategy had reached an agreement to settle a consolidated securities class action for about $100 million in stocks, bonds, and warrants. In May, PricewaterhouseCoopers added its contribution, agreeing to settle with MicroStrategy investors for $55 million in cash. MicroStrategy was always a sort of paradigm for the new economy. Its founder, Michael Saylor, a flamboyant 30-something, was an apostle of the technology age who, after he became a multibillionaire, pledged to spend $100 million to establish a free online university. His company was no dot-com chimera — MicroStrategy sold sophisticated data mining software and services — with ever more ambitious applications for its products. In a market ruled by irrationality, MicroStrategy, even at its lunatic share price, almost seemed to make sense. Alas, the company’s downfall — by the beginning of August, MicroStrategy was trading at about $3.38 a share — and the shareholder litigation that followed was as paradigmatic as the company’s rise. There were about 200 federal securities class actions filed in 2000, of which more than 40 percent involved high-tech companies; 26 software companies like MicroStrategy were sued. Sixty percent of all of the securities class action complaints alleged accounting fraud (as did the MicroStrategy case), and many of those involved questions of how and when to recognize revenue from complicated new-economy deals, like MicroStrategy’s. Moreover, its hefty combined settlement value of $155 million makes MicroStrategy part of what the Stanford Securities Class Action Clearinghouse has identified as a trend toward larger settlements in these cases. The lead plaintiffs’ lawyers in the MicroStrategy case were classics of the genre — New York’s Milberg Weiss Bershad Hynes & Lerach and Wolf Haldenstein Adler Freeman & Herz. The laws governing securities class action litigation have changed substantially in the last several years, following congressional reforms in 1995 and 1998. But many of the old star players on the plaintiffs’ side continue to dominate the business. The MicroStrategy litigation shows how they’ve adapted to the new rules about which cases to bring and how to seize control of them. If there’s anything proven by the securities suits that have followed the decline of the new economy, it’s that when there’s money to be made, old dogs can learn new tricks. For much of its 11-year history, McLean, Va.-based MicroStrategy was a slow-growing consulting company. Even in the years just before its 1998 initial public offering, MicroStrategy’s business was straightforward: It made its money selling licenses for data-mining software and accompanying services. But after the IPO, the company began making more elaborate deals: contracts for multiple products and services, implementation arrangements, even multiyear communications service relationships. As its business grew more complex, so did its accounting: MicroStrategy was reporting revenue not only from licensing and product maintenance fees, but from these long-term deals as well. Even with new accounting regulations that dictated how revenue for long-term software deals should be allocated over time, determining the amount of revenue to recognize in a given quarter was a complicated question for MicroStrategy, as it was for all of the new-economy companies doing similar business. MicroStrategy’s executives routinely consulted their lead outside accountant, Warren Martin of PricewaterhouseCoopers, a specialist in software accounting who had developed a stable of high-tech clients. In the third quarter of 1999, when the company was putting together a $52.5 deal with NCR Corporation, and in the following quarter, when MicroStrategy made a $65 million deal with Exchange Applications Inc., and an $11 million deal with Primark Corporation, Martin closely advised MicroStrategy, providing advice as the deals were structured. Martin re-examined the contracts when he and the PricewaterhouseCoopers team audited MicroStrategy’s 1999 finances. All seemed rosy: In a Jan. 27, 2000, press release MicroStrategy announced that its 1999 revenues would be $205.3 million, almost double the previous year’s. Chief executive Michael Saylor hailed the company’s 16th consecutive quarter of revenue growth. He and MicroStrategy’s management team headed out on a road show to market a secondary stock offering intended to raise almost $1 billion. Then, John Dirks, a San Francisco-based PricewaterhouseCoopers partner, noticed the Forbes article, which questioned the extent of the revenues that MicroStrategy had recognized in the NCR and Exchange Applications deals. Dirks had been working with Martin on an incipient MicroStrategy deal with America Online Inc., and asked to see the contracts Forbes had written about. (MicroStrategy was also citing the PricewaterhouseCoopers audit on the road show.) PricewaterhouseCoopers has contended that at this point its auditors were provided with a different NCR contract from the one that Warren Martin had reviewed in the audit — and that this contract changed how much and when revenue from the NCR deal should have been recognized. (Because the litigation ended with the settlements, MicroStrategy never responded to PricewaterhouseCoopers’ allegations.) Within a week, PricewaterhouseCoopers had assembled an emergency team to re-examine MicroStrategy’s books. On March 20, MicroStrategy and PricewaterhouseCoopers announced the drastic results of the re-audit. That day the company’s stock price fell from about $234 to about $85, before closing at $109. The phones at New York’s Milberg Weiss, meanwhile, were abuzz with angry investors, says partner Steven Schulman. “MicroStrategy’s collapse was historic,” Schulman says. “This was one of the forerunners of the overall collapse of the Nasdaq.” Wasting no time, Schulman filed a class action against MicroStrategy and PricewaterhouseCoopers in the Eastern District of Virginia on March 21. He wasn’t alone. The MicroStrategy class action had all the elements of a blockbuster: a gigantic decline in the stock price; an admission (through the restatement) that the company had committed grave mistakes in its accounting; stock sales by MicroStrategy insiders that could suggest a motive for inflating revenues; an outspoken chief executive who had made disdainful remarks about some accounting regulations. And PricewaterhouseCoopers — which had recommended MicroStrategy’s products to other clients and thus had an alleged motive for boosting the company’s credibility — made for a nice, secure target in case MicroStrategy collapsed entirely. “The bar is very, very high — you have to show the financial misstatements were made with something very near an intent to defraud,” says securities class action lawyer Frederic Fox of New York’s Kaplan Fox & Kilsheimer, who also filed a MicroStrategy complaint. “That said, this was a good case.” It was, in fact, so good that by the end of March 2000 about 25 plaintiffs’ firms had filed securities class action suits against MicroStrategy and PricewaterhouseCoopers.’ As in all securities class actions, the key for the plaintiffs’ firms in the MicroStrategy case was to be named lead counsel. Lead counsel firms do the lion’s share of the work in class actions, and so collect the lion’s share of court-awarded attorneys’ fees. (Typically these fees are in the range of 20-30 percent of the settlement.) When Congress passed securities litigation reform legislation in 1995, one of its intentions was to take control of shareholder class actions away from the law firms that specialized in them, and return it to investors. To that end, Congress enacted procedures for the selection of lead plaintiffs in consolidated securities class actions, insisting that judges appoint lead plaintiffs who, among other criteria, have sustained very significant losses. Congress mandated that lead plaintiffs can select lead counsel firms, subject to court approval. Some judges have interpreted the court approval provision broadly, even auctioning off lead counsel assignments. But most federal district court judges — including T.S. Ellis III, who heard the MicroStrategy case — have permitted the lead plaintiffs they select to pick their lawyers. So the shrewdest of the plaintiffs’ firms in the securities class action bar have taken pains in the last five years to establish relationships with pension funds that, because of the size and diversity of their portfolios, can often stake viable lead plaintiffs’ claims. Milberg Weiss is no exception. As partner Schulman explained in a hearing before Judge Ellis, every month the Local 144 Nursing Home Pension Fund sends Milberg Weiss a record of its transactions, “so that,” Schulman said, “we would be able to monitor their investment portfolios for possible incidents of fraud. This was part of the relationship that we have with the institution, this and others.” As it happened, the nursing home pension fund did own MicroStrategy stock, and had sustained a loss that Milberg Weiss calculated to be $610,000. But to make its lead counsel prospects even stronger, Schulman allied with a frequent colleague, Fred Isquith of Wolf Haldenstein Adler Freeman & Herz, who had managed to snare as a client Atsukuni Minami and his wife, who had lost even more than the pension fund had when MicroStrategy’s stock fell. Fred Fox, representing another individual investor, also joined Schulman and Isquith in their initial motion to install their clients as lead plaintiffs. The motion failed. Faced with a half-dozen competing lead plaintiffs’ motions, Judge Ellis selected Dominick Mazza, the individual plaintiff who appeared to have suffered the largest losses. Mazza, in turn, picked the New York securities class action firm of Pomerantz Haudek Block Grossman & Gross — not Milberg Weiss or Wolf Haldenstein. Judge Ellis, moreover, was skeptical of the plaintiffs’ group. “This group,” he wrote, “retained three law firms to serve as co-lead counsel, [which] suggests the group was merely a diverse collection of plaintiffs assembled by these three firms for the purpose of winning the lead plaintiff role, allowing them to share the lead counsel role.” Nevertheless, when Mazza almost immediately decided (without explanation) to withdraw from the litigation, throwing the lead counsel spot into a second round of competition, Ellis picked Schulman’s and Isquith’s clients to take over as lead plaintiffs. Mostly, Ellis wrote, it was because Isquith’s clients, the Minamis, had, it turned out, actually sustained larger losses than anyone else had, and would be named lead plaintiffs with or without the pension fund. But since the Minamis asserted that they wanted to work with the pension fund — and since Isquith wanted to work with Schulman — Ellis named the Minamis and the pension fund as co-lead plaintiffs and Milberg Weiss and Wolf Haldenstein as co-lead counsel. The litigation proceeded along the well-traveled road of most securities class actions. MicroStrategy and PricewaterhouseCoopers moved to dismiss the suit, asserting that the plaintiffs couldn’t prove the requisite intent to mislead investors. Even as they waited for Ellis to rule, however, MicroStrategy’s lawyer, John Villa of Washington, D.C.’s Williams & Connolly, was negotiating with plaintiffs’ lawyers to settle the case. “The overhang of the lawsuit drove the settlement,” says Villa. “MicroStrategy had a need to resolve it quickly and get on with business.” By the end of October 2000 the cash-strapped company had already reached an agreement to settle the case against it and the individual executives named in the class action. Terms called for the company to put up an $80.5 million unsecured note, $16.5 million in MicroStrategy stock, and 1.9 million warrants. The deal was then valued at about $137 million, but by the time Ellis approved it in July 2001, it had declined to about $100 million, thanks to the company’s ever-shrinking share price. PricewaterhouseCoopers was far more reluctant to settle. The accounting firm, represented by longtime litigation counsel Stephen Sacks of Washington, D.C.’s Arnold & Porter, contended in court that MicroStrategy’s management had deceived its accountants, even backdating contracts to push revenue into earlier quarters. Sacks also raised some more technical defenses about whether PricewaterhouseCoopers had any liability for the informal quarterly reviews it conducted. In the “rocket docket” of Eastern Virginia, the two sides conducted blitzkrieg discovery, exchanging documents and deposing MicroStrategy, PricewaterhouseCoopers, and third-party witnesses. The trial was set for early June, but in May, the two sides agreed to settle the case for $55 million in cash — one of the largest-ever settlements by an accounting firm in a securities class action. Judge Ellis has since approved the deal. Credit Milberg Weiss and Wolf Haldenstein: The firms did well for investors. The most lucrative securities cases today are much more complex than they were 10 years ago, when run-of-the-mill missed-forecast cases inspired congressional reform. Schulman says the cases now are factually stronger than in the old days. “Because of the heavy use of stock option compensation in the new economy, there’s a greater incentive to boost stock prices,” he says. “And auditors and underwriters are much more exposed … because they were dealing with companies without substantial revenues.” Milberg Weiss and Wolf Haldenstein have applied to Judge Ellis for attorneys’ fees of 25 percent of the securities from the MicroStrategy settlement and 30 percent of the cash from the PricewaterhouseCoopers deal. What Ellis will award remains to be seen — and Milberg Weiss has reason to be worried: In the discovery conducted by PricewaterhouseCoopers after the MicroStrategy settlement, the true extent of Local 144 Pension Fund’s losses turned out to be only $80,000 — $530,000 less than the $610,000 Milberg Weiss had claimed when Judge Ellis was selecting lead counsel. Schulman told the judge that the mistake was made by data inputters at the law firm, who erroneously double-counted a stock purchase and missed a sale. The judge accepted his explanation, finding that the mistake was inadvertent and permitting Milberg Weiss to remain co-lead counsel. But Beatie and Osborn, a New York plaintiffs’ firm that had competed with Milberg Weiss for the lead counsel spot in the MicroStrategy case, filed an opposition to Milberg Weiss’ fee application. Citing six other recent securities class actions in which he alleged that Milberg Weiss had overestimated losses or made other omissions in lead plaintiff applications, name partner Russel Beatie, Jr., asked Judge Ellis to deny Milberg Weiss any fees from the MicroStrategy litigation. “Considering that this is Milberg’s seventh misrepresentation of its client’s claims in recent cases and that the correct routine information was in Milberg’s hands early,” Beatie wrote, “deterrence of future conduct is necessary.” In its response, Milberg Weiss countered that in almost every instance, Beatie was citing allegations by defense or competing plaintiffs’ lawyers, not court findings. “Beatie mischaracterizes the facts of the examples which [he] cites,” Milberg Weiss contended. Ah, yes, squabbling amongst plaintiffs’ lawyers. Old economy or new, some things never change.

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