Merger Related Class Action, Class Certified

The court in In re Cooper Companies Inc. Securities Litigation, 2009 WL 32568, 13 (C.D.Cal., Jan. 5, 2009) granted Plaintiffs' Motion for Class Certification according to Rules 23(a) and 23(b)(3).

In re Cooper addressed certification of a class alleging false statements regarding the company's overall business condition and the proper time for a court to address the common reliance element of fraud-on-the-market.

Federal Rule of Civil Procedure 23 sets forth two sets to maintain a class action. First, the proposed class must satisfy the four requirements of Rule 23(a): (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class. FED.R.CIV.P. 23(a).

Second, the party seeking certification must show that the action falls within one of the three subsections of Rule 23(b). In this case, Plaintiffs sought certification pursuant to 23(b)(3), which allows certification where “the court finds that questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy.” FED.R.CIV.P. 23(b)(3).

The original Complaint alleged that defendants issued a series of false statements regarding Cooper’s business condition. Defendants failed to disclose that: (i) Cooper improperly accounted for assets acquired in the Ocular merger, which had the effect of lowering amortization expense; (ii) Cooper’s aggressive earnings guidance reflected the improper accounting for intangible assets and was inflated by the amount of the understated amortization expense; (iii) the merger results touted by defendants were unrealistic; (iv) Ocular channel stuffed its Biomedics products; (v) Cooper’s lack of a competitive product would prevent it from meeting its aggressive growth targets for 2005 and (vi) Cooper and Ocular in fact competed in the two-week lens market.

Analyzing the elements of 23(a), the Court reasoned that: (1) the class’ numerosity was readily apparent given there were thousands of possible members; (2) the major questions in the case-did Cooper misrepresent the condition of the company, and did Defendants know that their statements about the condition of the company were false and misleading-were common to the class members; (3) the class representatives, funds that manage their assets to provide for their workers’ retirements, suffered the same, or greater, losses as the other members of the class and received the same information that other shareholders received; and (4) since the interests of the class representatives were aligned with the rest of the class, and since the class representatives likely had the means and incentives to effectively prosecute the suit, there was little doubt that the class representatives w fairly and adequately represent the interests of the proposed class.

For the second part of the class certification test, 23(b), Defendants attacked the predominance of common reliance. The Cooper Plaintiffs plead the fraud-on-the-market theory by alleging that the Defendants made false overly optimistic financial forecasts and appraisals in analyst calls. These are the types of statements that reasonable investors rely upon when making an investment. It is this common reliance that Defendants argued did not predominate throughout the class.

For example, Defendants argued that officers of Ocular made disclosures and statements prior to the merger that nullified alleged misrepresentations made on a later date by Cooper officials in the merger announcement. The Court dismissed this argument stating: “whether subsequent statements cure any prior omissions or misrepresentations is a question of fact which cannot be appropriately resolved on” a motion for class certification. Unioil, 107 F.R.D. at 621. See also Basic, 408 U.S. at 249 n. 29. FN7

Defendants also argued that certain kinds of investors-short sellers, in-and-out traders, and index holders-are not entitled to the fraud-on-the-market presumption because they cannot show loss causation. Similarly, this argument is misplaced - short sellers may be included in a class at the certification stage. See In re Magma Design Automation Sec. Litig., No. C 05-2394 CRB (N.D.Cal.2007). If Defendants could show that certain proposed class members’ losses were not caused by misstatements, then they should do so at summary judgment or trial. See In re Micron Technologies Inc. Sec. Litig., 247 F . R.D. 627, 634 (D.Idaho)

Finally, Defendants argued that the Ocular shareholders who acquired their Cooper shares in the two companies’ merger should be precluded from membership in the class, or that the Court should deny class certification based upon these individuals’ inclusion. According to Defendants, those individuals allegedly released their claims against Cooper and its officers related to violation of federal securities laws. The question of that settlement’s impact was, again, not one to be determined on a motion for class certification, but on summary judgment or at trial.

Accordingly, the Court ordered certification of the proposed class pursuant to Rule 23(b)(3).
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Intent to Backdate, Causing Slightly Overstated Earnings, Does Not Infer Intent to Defraud

Rosenberg v. Gould, --- F.3d ----, 2009 WL 50721 (11th Cir. Jan 09, 2009).

The district court held, and the 11th Circuit affirmed, that the complaint failed to satisfy the heightened standard for pleading scienter.

This case addressed whether a complaint alleging that a CEO (and the company) who granted and received backdated options in 2000 and 2001, and overstated earnings between 2004 and 2006, satisfied the heightened standard for pleading scienter, under section 10(b), of the Securities Exchange Act, 15 U.S.C. § 78j(b).
The Private Securities Litigation Reform Act of 1995 imposed a heightened standard for pleading scienter. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 127 S.Ct. 2499, 2504, 168 L.Ed.2d 179 (2007). A plaintiff must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). “An inference of scienter must be more than merely plausible or reasonable-it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, 127 S.Ct. at 2504-05.

The court reasoned that intent can not be inferred merely because backdating is inherently intentional. Further, any inference that the CEO knew that backdated options in 2000 - 2001 led to overstated earnings several years later was not as compelling as the competing inference that he was unaware that the options had affected financial statements several years later. In support of its conclusion, the court pointed out that the impact on the financial statements was only 0.5 percent of revenue in 2004 and 0.17 percent of revenue in 2005. “The de minimis change in the financial statements did not amount to a glaring “red flag” that would have put the CEO on notice that he was overstating earnings when he announced the quarterly results.” Rosenberg, 2009 WL 50721, 4 (11th Cir. Jan. 9, 2009). The complaint it rested “on speculation and conclusory allegations.” NDC Health, 466 F.3d at 1265, 1266 (quoting Hoffman v. Comshare, Inc. (In re Comshare Inc. Sec. Litig.), 183 F.3d 542, 533 (6th Cir.1999)).

The 11th Circuit affirmed the district court’s dismissal of the shareholders’ complaint with prejudice. ...continue

Sprint Customer? Read on.

A proposed settlement has been reached in the early termination fee class action against Sprint, Nextel and/or Sprint/Nextel. The use of a flat-rate early termination fee (ETFs, not to be confused with Exchange Traded Funds) allegedly violates the Federal Communications Act and consumer protection law of the United States and individual states. Though Sprint/Nextel has denied any liability or wrongdoing, it has agreed to settle the claims under the terms of the Settlement Agreement.

What you need to know:
1) Did you enter into a wireless contract with Sprint between July 1999 and December 2008?
2) During that time, did you cancel your account and were charged an ETF? If so, and you can provide proof, you can receive $90.
3) If you did not cancel due to the ETF, you can receive $35.

You can find all necessary information here. The claim form is easy to fill out and takes no more than 5 minutes. ...continue

The SEC Adopted FINRA’s Limitations on Motions to Dismiss, Expect More Securities Arbitrations

The SEC adopted FINRA’s recommendation to limit motions to dismiss before an investor presents his or her case. Under the new rule, if a party brings a dispositive motion before the claimant has presented, it can only be granted on three grounds: the parties have settled in writing, there is a factual impossibility, or a party doesn’t file a claim within six years of the events at issue.

The Wall Street Journal reported that FINRA proposed the new rule in response to repetitive filings of dispositive motions that raise the cost of arbitration for retail investors. In adopting FINRA’s rule, the SEC has undoubtedly reduced costly motion practice and paved the way for investors to have a hearing of their case on the merits. For more on the rule itself, click here and here.

According to solo practitioner, John Castro, Esq., “the economic downturn and recent corporate scandals, like Madoff, have already increased the amount of investor arbitration claims. It’s even apparent on the New York State Bar Association's listserv; attorneys are sending referrals and asking me advice more and more frequently. This new rule will only add to the number of securities cases brought before an abitrator.”

The SEC approved the rule on Dec. 31, 2008, but FINRA spokesman Brendan Intindola explained that FINRA will publish a regulatory notice within 60 days of the SEC's approval, and the rules rule’s effective date will be 30 days after publication of the notice. ...continue

SEC Sides With Executives Despite Institutional Investors' Efforts To Rein In Compensation

According to a recent Wall Street Journal article, unions and pension funds are attempting to harness executive compensation through shareholder proposals and resolutions. The funds argue that despite shareholders losing millions, executives incur little or no personal monetary loss and often maintain their high salaries, bonuses, and lucrative severance packages.

Charlie Tharp, executive vice president for policy at the Center on Executive Compensation, maintains that compensation decisions are best left to corporate directors: "It would be unwise to usurp the duty of the board to represent the interests of all shareholders rather than the interests expressed by one group of shareholders."

The corporations are resisting the recent push and have successfully persuaded the SEC (in all its infinite wisdom) to block shareholder voting on the proposals that would limit executive pay. To be sure, shareholders are anticipating more support from the SEC once the Obama administration takes the helm. Until then, it's business as usual:

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