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Miami lawyer Tracy Nichols remembers the phone call she got from an irate in-house counsel at an investment bank. His bank had underwritten a stock offering that was the subject of a securities class action Nichols was defending. Nichols had filed a motion to transfer the lawsuit, against Kos Pharmaceuticals, from federal court in Chicago to Miami. “He asked me if I had lost my mind,” she said. “He asked, ‘Why would you want to transfer the case from Posner’s circuit to the 11th?’” The in-house counsel was referring to 7th U.S. Circuit Court of Appeals Judge Richard Posner, an influential conservative jurist who sits on a court generally perceived as friendly to business. But Nichols, Holland & Knight’s national practice leader for securities litigation, and other South Florida defense and plaintiff attorneys who litigate securities class actions, say the federal courts of the 11th Circuit are in some ways even friendlier terrain for corporate defendants in securities class action lawsuits than the courts of the 7th Circuit. The 11th Circuit covers Florida, Georgia and Alabama. The New York-based National Economic Research Associates, an arm of consultant Marsh & McLennan, reports that 10 percent of securities class actions filed in the 11th Circuit from 1996 to 2003 were dismissed within two years of filing. Some experts say the dismissal rate approaches 30 percent when a longer period of time after filing is considered. The dismissal rate of 10 percent within two years of filing is tied for second place among all circuits. The highest rate of summary dismissals in securities class actions was in the famously conservative 4th Circuit, covering Maryland, Virginia, West Virginia and the Carolinas, where the rate was 22 percent. Winning summary dismissal is important to defendant companies in such suits because securities class action cases are so expensive to litigate. Few securities class action cases ever make it to trial. Rather than shoulder the expense of extensive discovery and use of experts, defendants who fail to win summary dismissal frequently settle. Nichols said it can cost a defendant hundreds of thousands of dollars in legal costs just to get a case summarily dismissed — and millions if the company has to proceed through discovery. “Ninety-five percent of cases are effectively decided at the motion to dismiss,” said Christian Bartholomew, a partner in the litigation practice group at Morgan Lewis & Bockius in Miami. “Settlement values skyrocket if cases aren’t dismissed.” The climate in 11th Circuit courts is defined by appellate court’s interpretation of a key element of securities class action law — that plaintiffs in securities fraud lawsuits must provide “with particularity” facts giving rise to a “strong inference” that the defendant acted with “the required state of mind.” The required state of mind is known as scienter — intent to deceive. “In the more plaintiff friendly circuits, motive and opportunity in a broad sense are sufficient,” said Maya Saxena, a partner in the Boca Raton office of plaintiff class action giant Milberg Weiss Bershad & Schulman. “In the more defense friendly circuits, you need extremely detailed supporting facts. In the 11th, you need enough facts to establish ‘severe recklessness.’” Saxena cited the 1st Circuit, which covers Maine, Massachusetts, New Hampshire, Rhode Island and Puerto Rico, and the 2nd Circuit, which covers New York, Vermont and Connecticut, as the most plaintiff friendly circuits. She cited the 9th Circuit, which includes California’s Silicon Valley and covers the Pacific Coast and Far West states, as the most defense friendly. “Judges [in the 11th Circuit] want to see something concrete that shows the planning of the fraud — e-mails, notes of meetings, records,” Bartholomew said. “They won’t let plaintiffs get to discovery on the basis of ‘They must have known.’” Paul Geller, a partner at the plaintiff firm Geller Rudman in Boca Raton, unhappily agrees. He contends that the 11th Circuit’s standard for inferring intent to defraud — as set out in the 11th Circuit’s 1999 decision Bryant v. Avado — has “heightened the pleading requirements beyond the intent of Congress.” “Motive and opportunity and damages are not enough [in the 11th Circuit],” Geller said. “What do you have to have? Pictures? You almost need an insider to get to discovery.” “The judges [in the 11th Circuit] feel that if you’re going to accuse somebody of fraud, you have to have more than a bad result and a lot of speculation,” Nichols said. “Plaintiffs have to show the specific business practices that impacted the share prices.” VOLUME STEADY Typically, securities class action lawsuits are brought by investors who claim that a company has provided incomplete, deceptive or fraudulent public disclosures in order to drive up its stock price. Such suits seek damages for losses incurred when the prices collapse. Congress tried to clamp down on such lawsuits when it passed the Private Securities Litigation Reform Act of 1995. The act was intended to establish more demanding, nationally uniform pleading requirements for securities fraud class actions. But class action plaintiff lawyers responded by shifting their suits from federal to state courts. So in 1998, Congress enacted the Securities Litigation Uniform Standards Act. That law requires that class actions concerning stock offerings by publicly traded companies be heard in federal court. Since then, congressional conservatives have pushed unsuccessfully for legislation to broaden the scope of securities class actions that could only be filed in federal court. Those efforts have faced concerted opposition since the spate of gigantic Wall Street scandals, such as Enron, Worldcom and Global Crossing. Despite the new laws, the volume of securities class actions in federal court has remained fairly constant. A February 2004 report by NERA shows an average of about 220 federal class actions filed annually over the past five years. There was a spike in 2001, with nearly 500 suits filed. The report attributes that sharp increase to the previous year’s stock market collapse, which prompted many investors to file suits claiming, among other things, unfair initial public offering allocation practices and conflicts of interest by stock market analysts. The Kos class action Tracy Nichols defended was filed by investors in the Miami-based pharmaceutical company in August 1998 in Chicago, where one of the plaintiff companies was based. The plaintiffs alleged that the company misrepresented the market prospects for its new cholesterol reduction drug prior to a secondary stock offering in 1997. When sales of the drug faltered, Kos’ share prices tumbled. Nichols’ decision to request transfer of the case to Miami, where the company was headquartered, proved smart. In May 1999, U.S. District Judge Donald M. Middlebrooks in Miami summarily dismissed the investors’ complaint with prejudice. He held that the plaintiffs’ construction of what Kos was legally required to disclose was overly broad and that the company’s omission of certain information was no indication of deceit. But Judge Middlebrooks went even further. He said the plaintiffs’ pleading was so weak that it was “deliberately indifferent to the lack of factual support for the claims.” On that basis, he sanctioned the plaintiffs by awarding Kos $500,000 in attorney fees and costs. Nichols called the sanctions rare. It’s the highest such award she’s aware of in a securities class action. In July 2002, the 11th Circuit in Atlanta affirmed Middlebrooks’ order, though it remanded the sanctions for fine-tuning. The amount was only slightly reduced. Nichols boasts that her client’s confidence in her judgment was rewarded. “That [in-house counsel] doesn’t question me anymore,” she said. She declined to name the attorney. OPPOSITE OF FRAUD Christian Bartholomew also was successful in getting a high-profile class action securities lawsuit summarily dismissed. It took him just under two years to scuttle an April 2002 case against the officers of Pompano Beach-based Roadhouse Grill. The officers were accused of inflating the stock price of the steakhouse chain by issuing misleading and fraudulent financial statements. In August 2001, one year after a new chief financial officer arrived and went over the books, the company restated almost three years worth of earnings. Share prices fell by half, outside auditors issued warnings, and in early 2002 the company was forced into involuntary bankruptcy. Shareholders filed suit in U.S. District Court in Miami, claiming securities fraud under federal Rule 10b-5 of the 1934 Securities Exchange Act. That rule makes it illegal to give false information — or withhold information so as to falsify statements — in connection with the sale of securities. But courts have long held that securities fraud claims also must satisfy Rule 9(b), which requires that the facts of all fraud claims be stated “with particularity.” To that requirement, the Private Securities Litigation Reform Act of 1995 added the requirement that the facts must give rise to a “strong inference” of scienter. The Roadhouse plaintiffs argued that the restated earnings reports provided adequate details for a fraud claim. And to show that the defendants issued the reports either knowingly or with severe recklessness, the plaintiffs cited testimony by the company’s chief financial officer about how the inaccurate figures had been arrived at and about his conversations with the defendant officers. But Bartholomew disagreed that the pleading contained detailed evidence of fraud. “We argued that [the testimony] showed the exact opposite [of fraud] — that they looked at the books and said ‘Let’s fix it,’” he said in an interview. In March 2004, U.S. District Judge Jose E. Martinez granted Bartholomew’s motion for summary dismissal. He wrote that the complaint lacked the “who, what, when, where and how’ of fraud” and “does not lead to a strong inference of fraud,” but merely indicated “poor business judgment.” PRO-DEFENSE SIGNALS Plaintiff attorney Paul Geller disapprovingly cites other indications of the 11th Circuit’s pro-business stance in securities class actions. One is what he called the 11th Circuit’s “broad reading” of the 1995 reform law’s safe harbor provision for companies’ forward-looking statements. The 1995 act shields forward-looking statements from liability if they are accompanied by “meaningful cautionary language” or if plaintiffs suing on the basis of the statements fail to show they were made with “actual knowledge” that the statements were fraudulent. In 1999, the 11th U.S. Circuit Court of Appeals ruled in Harris v. Ivax that news releases issued by generic-drug maker Ivax, which plaintiffs alleged were fraudulent, were within the law’s safe harbor even though the releases included a mix of fact and speculation. In other circuits, courts have held that statements of fact are not protected. Another, more recent signal is the 11th Circuit’s June 2003 decision to hear an appeal of a district court’s denial of Lawrenceville, Ga.-based Scientific Atlanta’s motion for summary dismissal in a securities class action case filed in the Northern District of Georgia. It will hear the appeal before the case proceeds to discovery and trial. Geller said that’s unusual because such appeals usually are stayed until trial. His interpretation is that the 11th Circuit judges in Atlanta are going out of their way to protect the company from having to choose between settling the case or absorbing the cost of discovery and trial. “The typical thing is to proceed to discovery after the dismissal fails,” he said. “But the judges know that those cases would settle and the shareholders would get their money.” PLAINTIFF VICTORY Still, there are plaintiffs in the 11th Circuit who get their securities class actions past the summary judgment stage. Maya Saxena and former Milberg partner Kenneth Vianale were lead counsel for shareholders who sued Boca Raton-based Sensormatic Inc. and its officers and directors in April 2001. The plaintiffs alleged that the electronic security device company had overstated earnings to drive up share prices in late 2000 in an effort to lure a buyer. When that failed, the individual defendants allegedly dumped their shares before the company issued a “bad news” announcement in spring 2001. In their motion for summary dismissal, Sensormatic defense counsel Mark Bideau and Lorie Gleim, partners at Greenberg Traurig in West Palm Beach, called the case “fraud by hindsight.” They argued that the plaintiffs failed to describe with any detail the practices that produced the allegedly fraudulent statements. But Saxena and Vianale provided to the court Sensormatic documents that overstated the earnings, other documents to which the defendants had access that undercut those statements, and detailed records of the insiders’ stock sales. In June 2001, U.S. District Judge Daniel T.K. Hurley denied the defendants’ motion to dismiss. He said the plaintiffs had pleaded “a classic fact pattern giving rise to a strong inference of scienter.” In July 2003, in the midst of discovery, the defendants agreed to a settlement of $4.95 million. Saxena called Judge Hurley’s ruling an example of the 11th Circuit’s “reasonable middle ground” for pleading standards, in comparison with the standards of other circuits. But Hurley shot down Saxena in a subsequent case. Saxena represented shareholders of Boca Raton-based Eclipsys in a lawsuit filed in July 2002 against the medical software manufacturer and its officers. The plaintiffs alleged that the company had used fraudulent accounting practices to inflate share prices in the summer and fall of 2001. Then, before corrected estimates were issued and share prices collapsed, the officers allegedly dumped their stock holdings. The main evidence cited by the plaintiffs to infer accounting fraud was the assertions of several mid-level Eclipsys executives, supplemented by an assortment of forward-looking company statements, U.S. Securities and Exchange Commission documents and news releases. In their motion for summary dismissal, defense counsel Stanley Wakshlag and Samantha Kavanaugh, shareholders at Akerman Senterfitt in Miami, argued that none of the asserted facts were particular enough. “Even the amounts of allegedly improperly recorded revenue or ‘creatively’ recorded expenses are left undefined,” they wrote. Last fall, Judge Hurley agreed, summarily dismissing the case for lack of particularity. He wrote that “none of [the plaintiffs'] sources have provided … the specific ‘who, what, when, where and how’ of even one accounting violation.” Hurley granted the shareholders leave to file an amended complaint, which they did. But that was dismissed last month, on particularity and other grounds. This second order of dismissal gave the shareholders leave to further amend their complaint. But Saxena said she and her clients have decided against doing so. The standard in the circuit for getting past summary judgment is so tough, she said, it forces law firms to make some unpalatable cost-benefit decisions. “We think we demonstrated that the officers relied on insider information,” she said. “But the court’s particularity standard shut us out. We could appeal and invest more resources. But you have to balance the implications for your law firm’s business.”

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