The D & O Diary : Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

Finally ending a case first filed back in October 2004 and that involved one of the few securities lawsuits to go to trial, the parties to the long-running Apollo Group securities suit have reached an agreement to settle the case for $145 million. This resolution is interesting not only because it concludes a long- running case with a complex procedural history, but also because the settlement amount appears to represent substantially less than the $277.5 million value that observers had placed on the plaintiffs’ January 2008 jury verdict.

District of Arizona Judge James A. Teilborg’s November 29, 2011 order preliminarily approving the $145 million settlement can be found here. The parties’ stipulation of settlement is attached to the November 29 order. David Bario’s December 2, 2011 Am Law Litigation Daily article, in which the settlement was first reported, can be found here.

It would be quite an understatement to say that this case has had a long and complex procedural history.

As detailed in greater length here, plaintiffs filed the suit after the company’s share price declined following the disclosure of a U.S. Department of Education report alleging that the company had violated DOE rules. On September 7, 2004, the company agreed to pay $9.8 million to settle the allegations. News of the settlement first became public on September 14, 2004, but the company’s share price did not actually decline until September 21, 2004, when a securities analyst issued a report expressing concern about the company's possible exposure to future regulatory issues.

On January 16, 2008, a civil jury entered a verdict in favor of the plaintiff class on all counts, awarding damages of $5.55 per share, estimated at the time to represent $277.5 million. Under the verdict, Apollo is responsible for 60 percent of the plaintiffs' losses, former Apollo CEO Tony Nelson is responsible for 30 percent, and former CFO Kenda Gonzales is responsible for 10 percent. The jury verdict is discussed at greater length here.

As discussed in greater length here, on August 4, 2008, Judge Teilborg entered an order (here) granting the defendants’ motion for judgment as a matter of law, based on his finding that the trial testimony did not support the jury’s finding of loss causation. Judge Teilborg’s order vacated the judgment and entered judgment in defendants’ favor.

In its post-trial motion, Apollo argued that the evidence at trial was insufficient to support a finding that the analyst reports represented "corrective disclosure," because they did not contain any new fraud-revealing information. Judge Teilborg found that "the evidence at trial undercut all bases on which [the plaintiff] claimed the (analyst) reports were corrective."　

Accordingly, Judge Teilborg concluded that although the plaintiff "demonstrated that Apollo misled the markets in various ways concerning the DoE program review," the plaintiff "failed to prove that Apollo’s actions caused investors to suffer harm." The court therefore concluded that "Apollo is entitled to judgment as a matter of law."

In a June 23, 2010 opinion (here), a three-judge panel of the Ninth Circuit held that the district court "erred in granting Apollo judgment as a matter of law." The opinion states that "the jury could have reasonably found that the (analyst) reports following various newspaper articles were ‘corrective disclosures’ providing additional or more authoritative fraud-related information that deflated the stock price."

The Ninth Circuit further held that Apollo is not entitled to a new trial and that there is no basis for remittitur (reduction of the verdict). The Ninth Circuit reversed and remanded the case with "instructions that the district court enter judgment in accordance with the jury’s verdict."

The company filed a petition for writ of certiorari to the U.S. Supreme Court. As discussed here, on March 7, 2011, the Supreme Court denied Apollo Group’s petition for writ of certiorari, leaving the Ninth Circuit’s decision standing. The case then returned to the district court for further proceedings.

Upon the case’s return to the District Court, the defendants’ raised a number of issues in connection with the entry of judgment in the case. For example the defendants raised issues with respect to the individual eligibility of class members to secure recovery, the calculation and assessment of damages per claimant and the procedures with respect to claims administration and processing for resolution by the District Court. The defendants also maintained that they are entitled to conduct individual discovery and, potentially, jury or bench trials, to rebut the presumption of reliance on the integrity of the market price with respect to individual class members, among other things.

In light of the potential for these disputes to prolong the case and postpone the ultimate payment of to the plaintiff class, the parties agreed to enter mediation proceedings that ultimately resulted in the settlement of the case.

According to the parties’ settlement stipulation, the settlement amount of $145 million is to be paid by Apollo Group. The settlement stipulation does not mention any payment into the settlement by the individual defendants. The settlement stipulation does not indicate whether any of the $145 million is to be paid or reimbursed by insurance. The stipulation of settlement states that the lead plaintiffs may seek an award from the fund of up to 33.33% of the amount of the fund, plus expenses of $1.875 million. (A one-third fee award would amount to about $48.33 million). Defendants agreed in the stipulation that they will take no position with respect to the fee request.

The apparent gap between the $145 million settlement and the reported $277.5 million value of the jury verdict is hard to figure, especially since both amounts purportedly represented a value of $5.55 per share. In the Am Law Litigation Daily article linked above, defense counsel is quoted as saying that he doesn’t know where the original estimate of the value of the jury verdict came from, particularly given that predicting the number of damaged shares that would actually be claimed would be unknown until the claims process had played out -- particularly given the defenses the defendants asserted to various of the potential individual claims. In other words, the jury verdict may never actually have been worth anything near the reported $277.5 million.

The significance of the settlement may be only that it finally brings an end to this long-running case. On the other hand, the amount and fact of the settlement may stand as a cautionary warning to any securities litigation defendants that are thinking about forcing their case to trial. To be sure, some of the post-PSLRA securities cases that have gone to trial have resulted in defense verdicts (most notably, the JDS Uniphase case, about which refer here). But as reflected in the securities case trial scoreboard maintained by Adam Savett, the current tally of post-PSLRA securities trials stands at 6 wins for plaintiffs, 5 for defendants (assuming that the Apollo Group case is still counted as a plaintiff win, even though it ultimately settled). With that tally, and in light of the magnitude of the Apollo Group post-appeals settlement, any defendant contemplating a trial would have to think hard about the downside of taking their case to the jury. 

Apollo Group has probably more than had its fill of securities class action litigation. The company not only had this case to contend with, but in November 2006, it got hit with an options backdating-related securities class action lawsuit. The options backdating securities case was ultimately dismissed, as reported here. Not only that, but in August 2010, Apollo Group was one of several for-profit education companies hit with shareholder suits in connection with an industry scandal involving student recruiting and student loans. That case remains pending in the District of Arizona, before Judge Teilborg. (The deadline for the plaintiffs to file their amended complaint is December 6, 2012.)

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The jury verdict entered in favor of the plaintiffs in the BankAtlantic subprime-related securities suit has been set aside by the court in a post-trial ruling. On April 25, 2011, Southern District of Florida Judge Ursula Ungaro, in a 112-page opinion (here), granted the defendants’ motion for judgment as a matter of law and indicated that she will enter judgment in defendants’ favor following remaining procedural issues.

BankAtlantic’s shareholders had first sued the company and five of its directors and officers in October 2007. The plaintiffs essentially alleged that the defendants had violated the securities laws through misrepresentations and omissions about the poor or deteriorating credit-quality of BankAtlantic’s land loan portfolio; misrepresentations or omissions of its poor underwriting practices; and misrepresentations and omissions about the adequacy of its loan loss reserves and the accuracy of its financial statements. The claims were divided into two separate alleged damages periods corresponding with declines in the company’s share price on April 26, 2007 and October 26, 2007.

Judge Ungaro had initially granted the defendants’ motion to dismiss  but she denied their renewed dismissal motion after the plaintiffs amended their pleadings (refer here), and the case went to trial. On November 18, 2010, the jury returned its verdict, as discussed here.

As Judge Ungaro summarized the verdict in her April 25 opinion, “the Jury returned a verdict mainly in Defendants’ favor.” The jury found no liability as to any defendant with respect to the first alleged damages period. However, with respect to five alleged misstatements in the second period, the Jury concluded with respect to four alleged misstatements that the company it s former Chairman and CEO had violated the securities laws. The jury also concluded that the company, the Chairman and the company’s CFO violated the securities laws with respect to a fifth alleged misrepresentation.

The jury made a specific finding that one the alleged misrepresentations had caused damages of $2.41. At the time of the verdict there were statements in the press suggesting that this damages measure implied total damages of as much as $42 million.

The defendants moved to have the verdict set aside on a number of grounds. However, in granting the defendants’ motion, Judge Ungaro focused on one specific issue, whether the plaintiffs had presented sufficient evidence of loss causation and damages. Specifically, she addressed the question whether or not the plaintiffs had presented sufficient evidence that the plaintiffs alleged damages were caused by the concealment of risks about the bank’s real estate loan portfolio.

Judge Ungaro granted the defendants’ motion because she found that the plaintiffs’ damages expert had failed to “disaggregate” the effect on the company’s share price decline of the other negative information that was revealed at the same time the supposedly fraudulent information was revealed.

Judge Ungaro found that the Bank announced a “bundle” of negative information including negative information regarding the bank’s “builder land bank” (BLB) loan portfolio and non-BLB loan portfolio. Because the plaintiffs’ damages expert did not provide testimony providing this disaggregation, Judge Ungaro concluded that the plaintiffs’ had failed to produce sufficient evidence at trial of the loss caused by the disclosure of defendants’ misrepresentations and of the damages attributable to the misrepresentations.

Although Judge Ungaro’s conclusion may be stated simply, her April 25 opinion is complex and multilayered, largely as a result of problems arising out of the jury verdict form. The jury verdict from was, according to Judge Ungaro, “lengthy and complex – it was 75 pages long and contained over 150 questions.” As Judge Ungaro noted in her April 25 opinion, the form’s complexity was a result of “the intricate demands of the Reform Act as they applied to this case --- a numerous statement, varying-defendant, Rule 10b-5 class action involving two separate damages periods atop which was layered a varying-defendant Section 20(a) class action.”

It appears that, perhaps as a result of the form’s length and complexity, the jury had problems with the form. As discussed at length in Judge Ungaro’s April 25 opinion, the jury’s specific findings with respect to one of the alleged misstatements on which liability was based were inconsistent. And with respect to other misstatements on which liability had been based, there were no specific damages findings. As a result, the jury’s verdict makes for somewhat messy post-verdict analysis – hence the length and sprawling scope of Judge Ungaro’s opinion ruling on the post trial motions.

I suspect strongly that there will be further proceedings in this case, at a minimum including an appeal to the Eleventh Circuit. The plaintiffs undoubtedly will recall that in the Apollo Group securities lawsuit , in which the court had granted the defendants’ post-trial motion and set aside the jury verdict, the plaintiffs succeeded on appeal in having the post-trial ruling overturned and having the plaintiffs’ verdict reinstated. (The U.S. Supreme Court recently turned down the defendants’ petition for writ of certiorari in the Apollo Group case.)

But in any event, as a result of Judge Ungaro’s ruling, the post-Reform Act securities lawsuit trial scoreboard needs to be revised. Based on information compiled by Adam Savett of the Claims Compensation Bureau, there have been a total of only eleven  securities post-Reform Act lawsuits involving post-Reform Act conduct that have gone to trial. With the adjustments to reflect Judge Ungaro’s April 25 ruling, the scoreboard now stands at Plaintiffs 6, Defendants 5. (A tip of the hat to Savett for having already updated his scoreboard when I went and looked at it this morning.)

Special thanks to the loyal readers who alerted me to Judge Ungaro’s ruling.

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On March 7, 2011, in the latest development in a long-running securities suit that is among the few securities class action lawsuits to go to trial and that had previously resulted in a $277.5 verdict in plaintiffs’ favor, the U.S. Supreme Court denied Apollo Group’s petition for writ of certiorari. As a result, the ruling of the Ninth Circuit reinstating the jury’s verdict will now stand. In addition, as a result of the decision to decline taking up the case, the interesting and arguably important issues the cert petition raised will now not be reviewed by the Supreme Court.

As detailed in greater length here, plaintiffs filed the suit after the company’s share price declined following the disclosure of a U.S. Department of Education report alleging that the company had violated DOE rules. On September 7, 2004, the company agreed to pay $9.8 million to settle the allegations. News of the settlement first became public on September 14, 2004, but the company’s share price did not actually decline until September 21, 2004, when a securities analyst issued a report expressing concern about the company's possible exposure to future regulatory issues.

On January 16, 2008, a civil jury entered a verdict in favor of the plaintiff class on all counts, awarding damages of $277.5 million. Under the verdict, Apollo is responsible for 60 percent of the plaintiffs' losses, former Apollo CEO Tony Nelson is responsible for 30 percent, and former CFO Kenda Gonzales is responsible for 10 percent. The jury verdict is discussed at greater length here.

As discussed in greater length here, on August 4, 2008, Judge James Teilborg of the United States District Court for the District of Arizona entered an order (here) granting the defendants’ motion for judgment as a matter of law, based on his finding that the trial testimony did not support the jury’s finding of loss causation. Judge Teilborg’s order vacated the judgment and entered judgment in defendants’ favor.

In its post-trial motion, Apollo argued that the evidence at trial was insufficient to support a finding that the analyst reports represented "corrective disclosure," because they did not contain any new fraud-revealing information. Judge Teilborg found that "the evidence at trial undercut all bases on which [the plaintiff] claimed the (analyst) reports were corrective."　

Accordingly, the court concluded that although the plaintiff "demonstrated that Apollo misled the markets in various ways concerning the DoE program review," the plaintiff "failed to prove that Apollo’s actions caused investors to suffer harm." The court therefore concluded that "Apollo is entitled to judgment as a matter of law."

In a June 23, 2010 opinion (here), a three-judge panel of the Ninth Circuit held that the district court "erred in granting Apollo judgment as a matter of law." The opinion states that "the jury could have reasonably found that the (analyst) reports following various newspaper articles were ‘corrective disclosures’ providing additional or more authoritative fraud-related information that deflated the stock price."

The Ninth Circuit further held that Apollo is not entitled to a new trial and that there is no basis for remittitur (reduction of the verdict). The Ninth Circuit reversed and remanded the case with "instructions that the district court enter judgment in accordance with the jury’s verdict." The company filed a petition for writ of certiorari to the U.S. Supreme Court.

The basis for the company’s cert petition was basically that if the efficient market hypothesis means anything, then the information about the DoE investigation was fully incorporated into the company’s share price when the news first hit the market on September 14. Either the market did not efficiently incorporate this information, in which case the market for the company’s stock is not efficient and the plaintiffs ought not to be able to rely on the fraud on the market theory to establish reliance, or the market is efficient and the company’s share price simply did not decline at the time of the corrective disclosure.

In a June 28, 2010 guest post on this blog (here), noted securities litigation defense attorney Tower Snow of the Howard Rice law firm articulated the inherent tension between these two positions as follows:

The courts can't rely on the efficient market theory for purposes of creating a rebuttable presumption of reliance for purposes of class certification and then ignore its underpinnings for purposes of evaluating loss causation. Either one embraces the theory or one does not. If one embraces it, then once it is established that the prior disclosures revealed the truth about the allegedly misstated or omitted information, there is nothing left for the jury to decide. The later disclosure, by definition, cannot be corrective, as the market already had absorbed the information. Here, the "corrective" disclosure came out seven days after the information had been previously released. Seven days is an eternity in the financial markets.

As discussed in March 2011 memo from the Jones Day law firm discussing the U.S. Supreme Court’s cert denial in the Apollo Group case (here), the Circuits are split on the question of how soon after a corrective disclosure a stock price decline must occur in order for the loss causation requirement to be satisfied. At least two Circuits – the Second and the Third – have held that the claimant must show that the market immediately reacted. At least three Circuits – the Fifth, Sixth and Ninth – have head that the price decline may occur weeks or even months after the initial corrective disclosure.

In light of the Supreme Court’s refusal to take up the Apollo Group case, this split in the Circuits will remain unresolved. Moreover, the relatively plaintiff friendly standard articulated by the Ninth Circuit remains standing in that Circuit, where so many securities class action lawsuits are filed.

Finally, the Supreme Court’s cert denial means that the Ninth Circuit’s ruling in the Apollo Group case stands. The Ninth Circuit had remanded the case for "entry of judgment in accordance with the jury’s verdict." In other words, the Supreme Court’s cert denial means that the plaintiffs’ verdict in one of the very rare securities cases to go to trial will stand.

The Supreme Court’s cert denial was disclosed with little fanfare, as part of a long list of other rulings at the same time. Looking at the Apollo Group cert denial among the list of rulings might convey the impression that this is no big deal. But actually it is a little surprising. The U.S. Supreme Court has shown an active willingness to take up securities cases, having taken numerous cases up in each of the last few terms. And part of the willingness to take up these cases seemed to involve persistent hostility against securities suits in general. The opportunity to trim a plaintiffs’ victory and to resolve a circuit split certainly seemed to suggest the possibility that the Supreme Court might well grant the cert petition.

In any event, with the cert petition denial, the plaintiffs’ trial victory in this case appears as if it will stand. Even with the recent dramatic narrowing of the plaintiffs’ class in the Vivendi case, the plaintiffs overall are on a bit of a roll when it comes to securities lawsuit trials. The last three securities cases to go to trial (the Homestore case, refer here; the BankAtlantic case, refer here; and the Vivendi case, refer here) have all resulted in plaintiffs’ verdicts.

Trials in these cases are extremely rare, and these recent developments involve a very small percentage of all securities cases. Nevertheless, the plaintiffs’ bar undoubtedly will find this sequence of events, including the cert petition denial in the Apollo Group, to represent heartening developments.  Even with the cert denial in the Apollo Group case, however, there are still a couple of securities cases still pending before the court this term -- the Matrixx Initiative case (refer here) and the Janus Capital Group case (refer here) -- and it remains to be seen how plaintiffs will fare in those cases.　

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Securities lawsuits rarely go to trial, but on February 24, 2011, just three months after the last securities suit trial concluded, a Central District of California rendered a verdict on behalf of plaintiffs against the sole trial defendant, the former CEO of the defunct Homestore company. The jury found that the defendant, Stuart H. Wolff, had violated the federal securities laws in connection with a series of statements the company made in 2001.

A copy of the jury verdict form can be found here. The court’s trial minutes for jury verdict can be found here. The February 25, 2011 press release about the verdict from the lead plaintiff, the California State Teachers’ Retirement System (CalSTRS), can be found here.

As detailed further here, investors first filed a securities class action lawsuit against the company and certain of its directors and officers in December 2001. CalSTRS was named as lead plaintiff in March 2002. Subsequent amended complaints named additional defendants, including the company’s auditor and certain other outside companies and entities.

Essentially, the plaintiffs alleged that the company had engaged in a scheme to create a circular flow of money through a series of roundtrip financial transactions whereby money flowed from Homestore to outside firms and then back to Homestore. Through these transactions, the company allegedly was able to represent itself as a successful and growing company. The company was later forced to restate more than $120 million in revenue.

During the course of the long and complicated procedural history of this case, a number of the defendants were dismissed out of the case, while other defendants, including the company itself, certain individual defendants, and the company’s outside auditor, entered into a series of settlements with the plaintiffs. On January 25, 2011, a civil jury trial commenced against the sole remaining defendant in the case – Stuart H. Wolff, the company’s former Chairman and CEO.

The jury returned its verdict on February 24, 2011. The Special Jury Verdict Form is very detailed and somewhat challenging to interpret. Basically, it appears that of the 22 allegedly misleading company statements on which the plaintiffs relied, the jury concluded ten were materially misleading. Of these, the jury found that Wolff was involved in the preparation of five of the statements, and that his involvement in those statements was knowing or reckless.

The jury also found with respect to four additional knowing or reckless misrepresentations that Wolff was responsible for the person making the statement, and therefore with respect to those four statements Wolff was subject to control person liability.

With respect to the question of damages, the jury found that a number of other company officials as well as Wolff were responsible, but in each case Wolff’s responsibility was 50% or greater. The jury also calculated the per share price inflation that resulted from each misrepresentation for which Wolff was responsible, in several cases calculating the inflation four places to the right of the decimal.

In its press release, CalSTRS said only that "the exact amount of damages is being calculated."

In some respects, the outcome of this jury trial may come as no surprise. In April 2010, Wolff was sentenced to four and a half years in prison after pleading guilty to conspiracy to commit securities fraud in connection with the company’s allegedly deceptive financial reporting. Wolff is incarcerated in the federal penitentiary in Lompoc, California, although he was transferred to facilities in Los Angles for the recent civil trial.

In addition, in December 2010, Wolff reached an $11.9 million agreement with the SEC, settling allegations that he had inflated the company’s reported revenues. As part of that settlement, Wolff did not admit to the SEC’s securities fraud allegations.

In light of these prior developments, the recent jury verdict may not be that surprising. But what is surprising is that the case went all the way to a jury trial at all. Trials in securities class action lawsuits are exceedingly rare, although there have been a rash of jury verdicts in recent months.

According to data compiled by Adam Savett, the Director of Securities Class Actions at the Claims Compensation Bureau, prior to the recent verdict against Wolff in the Homestore case, there had been a total of ten securities class action lawsuits filed after the 1996 enactment of the Private Securities Litigation Reform Act and involving post-PSLRA conduct that have gone to all the way through to jury verdict. In other words, the verdict against Wolff is just the eleventh verdict in a post-PSLRA securities class action lawsuit.

With the plaintiffs’ verdict against Wolff in the Homestore case, the securities class action jury verdict scoreboard (taking into account post-verdict proceedings and reflecting only the current status of post-verdict proceedings) is as follows: Plaintiffs 7, Defendants 4. (The scoreboard is subject to revision pending the outcome of additional proceedings in several of the cases.)

These numbers convey how rare securities lawsuit trials are. It is worth noting that the verdict in the Homestore case is the third in just thirteen months, coming as it does just three months after the verdict in the BankAtlantic case (about which refer here) and thirteen months after the verdict in the Vivendi case (refer here). My friends in the plaintiffs’ bar will undoubtedly be quick to point out that all three of these cases resulted in verdicts for the plaintiffs as well.

The histories of prior securities cases that have gone to trial show that verdicts in these cases are subject to extensive post-trial procedures. Indeed, just last week the Court in the Vivendi case entered an order substantially narrowing the scope (and value) of the plaintiffs’ verdict in that case. In all likelihood, there will be further developments in the Homestore case, particularly given the case’s long procedural history.

In addition to the prospect for post-trial procedural developments, the parties to the Homestore case also face a rather daunting challenge of trying to interpret and calculate the effect of the jury’s findings on damages. The combination the jury’s findings about Wolff’s proportionate level of responsibility and of its findings about the respective levels of per-share price inflation will require, in order to arrive at a precise dollar figure for damages, mathematical calculations approaching in terms of complexity the formulae used for calculating planetary motions.

Best Corporate Law Blogs: I am happy to report that Bschool.com included The D&O Diary in the site’s February 23, 2011 list of the 40 Best Corporate Law Blogs, which can be found here. The selection is all the more rewarding because the list includes so many other blogs that I respect and admire. My thanks to Bschool.com for the selection.　

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As discussed in an earlier post, the BankAtlantic subprime related securities lawsuit is headed to trial. According to an October 5, 2010 Law.com article (here), jury selection in the case will begin this Friday, October 8, 2010, in federal court in Miami.

The Law.com article suggests the case has become contentious as it has moved forward. Among other things, the article quotes defense counsel as saying that "I’m offended by this case," which he characterizes as "a completely made-up, frivolous claim." Defense counsel reportedly has moved for sanctions against the plaintiffs’ attorney. (The article does not mention that in connection with the motions for summary judgment, Judge Ursula Ungaro granted summary judgment for plaintiffs on the issue of falsity, as to certain of the allegedly misleading statements, as discussed here.)

If the case does proceed to trial it would represent one of one only a very small handful of securities class action lawsuits that have actually made it to trial since the enactment of the PSLRA in 1995.

According to information compiled by Adam Savett, the Director of Securities Class Actions at the Claims Compensation Bureau, since the enactment of the PSLRA, there have only been nine securities class action lawsuits based on post-PSLRA conduct that have actually been tried to a jury verdict. Another seven cases alleging post-PSLRA conduct went to trial but were compromised or otherwise resolved prior to verdict. An additional eleven securities cases have gone to trial post-PSLRA but involved pre-PSLRA conduct.

In other words, if the BankAtlantic case actually does go forward, it would represent only the 28^th case to go to trial since the enactment of the PLSRA, and only the 17^th case since the enactment of the PSLRA involving post PSLRA conduct to go to trial. If the BankAtlantic case actually goes to verdict, it would represent only the tenth securities class action lawsuit to go to verdict post-PSLRA involving post-PSLRA conduct.

For those who are interested to know how the nine post-PSLRA verdicts have turned out, the current tally (taking into account post-verdict proceedings and reflecting only the current status of post-verdict proceedings) is as follows: Plaintiffs 5, Defendants 4. (The scoreboard is subject to revision pending the outcome of additional proceedings in several of the cases.)

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In a terse June 23, 2010 ruling (here), the Ninth Circuit reversed the district court’s post-trial ruling that set aside the $277.5 million jury verdict in the Apollo Group securities class action lawsuit, and remanded the case for "entry of judgment in accordance with the jury’s verdict."

Background

Apollo Group is the parent of the University of Phoenix (UOP), the largest for-profit provider of higher education in the United States. According to the plaintiff's amended complaint (here), in 2003, two former UOP employees filed a False Claims Act action against UOP alleging that UOP received U.S. Department of Education funding in violation of laws specifying the way company educational recruiters may be compensated.

The Department of Education initiated an investigation of the issues raised in the False Claims Act action, and on February 5, 2004, a Department of Education employee issued a "Program Review Report" that accused UOP of violating the Department of Education rules with respect to education employees' compensation. The plaintiff in the securities case alleges that the violations in the report could have resulted in the limitation or termination of Department of Education funding to UOP.

On September 7, 2004, Apollo agreed to pay the Department of Education $9.8 million to settle the program review. The settlement agreement (a copy of which can be found here) specified that Apollo's entry into the agreement did not constitute an admission of wrongdoing or liability. News of the allegations in the Department of Education report first became public on September 14, 2004. The price of Apollo's stock fell significantly on September 21, 2004, when a securities analyst issued a report expressing concern about the company's possible exposure to future regulatory issues. Plaintiff shareholders subsequently initiated a securities class action lawsuit in the District of Arizona.

On January 16, 2008, a civil jury entered a verdict in favor of the plaintiff class on all counts, awarding damages of $277.5 million. Under the verdict, Apollo is responsible for 60 percent of the plaintiffs' losses, former Apollo CEO Tony Nelson is responsible for 30 percent, and former CFO Kenda Gonzales is responsible for 10 percent. The jury verdict is discussed at greater length here.

As discussed in greater length here, on August 4, 2008, Judge James Teilborg of the United States District Court for the District of Arizona entered an order (here) granting the defendants’ motion for judgment as a matter of law, based on his finding that the trial testimony did not support the jury’s finding of loss causation. Judge Teilborg’s order vacated the judgment and entered judgment in defendants’ favor.

Judge Teilborg had held in connection with the parties’ pre-trial cross-motions for summary judgment that the issue whether the analyst reports constituted "corrective disclosure" sufficient to support a finding of loss causation was a question for the jury.

In its post-trial motion, Apollo argued that the evidence at trial was insufficient to support a finding that the analyst reports represented "corrective disclosure," because they did not contain any new fraud-revealing information. Judge Teilborg found that "the evidence at trial undercut all bases on which [the plaintiff] claimed the (analyst) reports were corrective."

Accordingly, the court concluded that although the plaintiff "demonstrated that Apollo misled the markets in various ways concerning the DoE program review," the plaintiff "failed to prove that Apollo’s actions caused investors to suffer harm." The court therefore concluded that "Apollo is entitled to judgment as a matter of law."

The Ninth Circuit’s Opinion

In its June 23, 2010 opinion, a three-judge panel of the Ninth Circuit held that the district court "erred in granting Apollo judgment as a matter of law." The opinion states that "the jury could have reasonably found that the (analyst) reports following various newspaper articles were ‘corrective disclosures’ providing additional or more authoritative fraud-related information that deflated the stock price."

The Ninth Circuit further held that Apollo is not entitled to a new trial and that there is no basis for remittitur (reduction of the verdict). The Ninth Circuit reversed and remanded the case with "instructions that the district court enter judgment in accordance with the jury’s verdict."

Discussion

Given the procedural development of this case so far, there may be no reason to assume that the June 23 ruling by the three-judge panel represents the case’s final stage. The defendants undoubtedly will seek rehearing and/or rehearing en banc, and given the stakes involved, the defendants may well seek Supreme Court review. However, the likelihood of the defendants obtaining rehearing or rehearing en banc, much less convincing the Supreme Court to take up the case, seems like a remote possibility. The defendants may continue to agitate, but they may be running out of options.

With the reinstatement of the plaintiffs’ verdict in this case, and the entry of the jury verdict in the plaintiffs’ favor in the Vivendi case, the securities class action jury trial scoreboard is looking more favorable to plaintiffs.

According to data included in the 2009 NERA year-end securities litigation study (about which refer here), and adjusted for the Ninth Circuit’s opinion in Apollo Group and for the verdict in Vivendi, the securities lawsuit jury verdict scoreboard shows as follow: since the enactment of the PSLRA, there have been 23 securities class action lawsuit that have gone to trial, of which 16 have gone all the way to verdict. Of those 16 cases, nine have resulted in a verdict for the plaintiffs in whole or in part, and six have gone in favor of the defendants.

Data from Adam Savett of the Claims Compensation Bureau (here) show that there have now been nine cases filed post-PSLRA involving conduct occurring after the enactment of the PSLRA that have resulted in jury verdicts or bench decisions at trial. Of these nine, five have gone for the plaintiffs and four have gone for defendants.

Plaintiffs have to be heartened by the Ninth Circuit’s decision in the Apollo Group case. But notwithstanding this development, and for many reasons, trials in securities lawsuits still are likely to remain extremely rare.

A June 23, 2010 Bloomberg article by Thom Weidlich and Emily Heller about the Ninth Circuit’s opinion can be found here.

Special thanks to a loyal reader for providing a copy of the Ninth Circuit’s opinion.

Self-Restraint:  I considered captoning this post "Apollo -- "Oh No!" but thought better of it.

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According to January 29, 2010 reports in the New York Times (here) and on Bloomberg (here), the jury in the long-running securities class action lawsuit against Vivendi has resulted in a verdict against the company on all 57 of the plaintiffs' claims. However, the jury also found that the two individual defendants, former Vivendi CEO Jean Marie Messier and former Vivendi CFO, were not liable. According to published reports, damages (with prejudgment interest) could be as much as $9 billion.  

This case involved the financial impact on the company from the $46 billion December 2000 merger between Vivendi, Seagram’s entertainment businesses, and Canal Plus. The plaintiffs contended that as a result of this and other debt-financed transactions, Vivendi experienced growing liquidity problems throughout 2001 that culminated in a liquidity crisis in mid-2002, as a result of which, the plaintiffs contend, Vivendi’s CEO Jean-Marie Messier and CFO Guillaume Hannezo were sacked.

The plaintiffs contended that the between October 2000 and July 2002, the defendants misled investors by causing the company to issue a series of public statements "falsely stating that Vivendi did not face an immediate and severe cash shortage that threatened the Company's viability going forward absent an asset fire sale. It was only after Vivendi's Board dislodged Mr. Messier that the Company's new management disclosed the severity of the crisis and that the Company would have to secure immediately both bridge and long-term financing or default on its largest credit obligations." 

Additional background regarding the case and the plaintiffs’ allegations can be found here.

As reflected in data compiled by Adam Savett on the Securities Litigation Watch (here) since the enactment of the PSLRA in 1995, a total of nine securities class action lawsuits (counting Vivendi) have been tried to verdict. Of those nine, and after all post verdict motions and appeals, defendants have prevailed in five and plaintiffs have prevailed in four. Among the cases in which plaintiffs have prevailed is the Household International securities class action trial, which on May 7, 2009  resulted in a plaintiff’s verdict on the issue of liability (about which refer here.). Damages are also to be determined later in that case.

Though plaintiffs have prevailed in the Vivendi trial, at least as to their claims regarding the company, this case undoubtedly has much further to go. Not only will there be post-verdict motions and further proceedings regarding damages, but there almost certainly will be subsequent appeals. Indeed, Vivendi has already indicated that it would appeal if the verdict were unfavorable. Among other things, the case presents significant jurisdictional issues, particularly with respect to the claims of certain foreign domiciled investors. These issues are now pending before the Supreme Court in the National Australia Bank case.

But the bottom line is that the two securities class action cases that have gone to the jury in the last 12 months have resulted in verdicts in plaintiffs’ favor, a development the plaintiffs' bar will certainly tout as significant .

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As noted in a prior post (here), trial in the Vivendi securities class action lawsuit began last week in the Southern District of New York. Thanks to the AmLaw Litigation Daily (here), the transcript of the opening arguments in the case are available here. The opening statements make for some interesting reading in and of themselves, and there are already a number of critical observations that may be made about this case.

Background

This case involves the financial impact on the company from the $46 billion December 2000 merger between Vivendi, Seagram’s entertainment businesses, and Canal Plus. The plaintiffs contend that as a result of this and other debt-financed transactions, Vivendi experienced growing liquidity problems throughout 2001 that culminated in a liquidity crisis in mid-2002, as a result of which, the plaintiffs contend, Vivendi’s CEO Jean-Marie Messier and CFO Guillaume Hannezo were sacked.

The defendants in the case include the company, Messier and Hannezo. The plaintiffs contend that the between October 2000 and July 2002, the individual defendants misled investors by causing the company to issue a series of public statements "falsely stating that Vivendi did not face an immediate and severe cash shortage that threatened the Company's viability going forward absent an asset fire sale. It was only after Vivendi's Board dislodged Mr. Messier that the Company's new management disclosed the severity of the crisis and that the Company would have to secure immediately both bridge and long-term financing or default on its largest credit obligations."

Additional background regarding the case and the plaintiffs’ allegations can be found here.

A prior SEC enforcement proceeding against the company and the two former officers resulted, according to the SEC’s December 23, 2002 press release (here), in "Vivendi's consent to pay a $50 million civil money penalty. The settlements also include Messier's agreement to relinquish his claims to a €21 million severance package that he negotiated just before he resigned his positions at Vivendi, and payment of disgorgement and civil penalties by Messier and Hannezo that total over $1 million."

The Opening Statements

The lawyers making the opening statements on October 6, 2009 were: for the plaintiff class, Arthur Abbey of the Abbey, Spanier Rodd & Abrams firm; for Vivendi, Paul Saunders of Cravath, Swaine & Moore; for Messier, Micheal Malone of King & Spaulding; and for Hannezo, Martin Perschetz of Schulte, Roth & Zabel. The available transcript covers only the statements on the first day of trial, and does not include Perschutz’s opening argument, which took place the morning of the trial’s second day, so I have not discussed his opening argument below.

In his opening statement, Abbey tried to reduce the case to three points:

Number one, we are going to show you that Vivendi had growing problems during 2001 and the first half of 2002...and the problems that they had were with a thing called liquidity. Number two, they didn't tell the truth about those problems....And the third thing that we will prove is that in the middle of 2002, the truth about Vivendi's liquidity condition finally came out, and when that happened, unfortunately for my clients, the stock price fell and the investors that we represent suffered great losses. In a nutshell, that is why we are here today--a growing problem, failing to tell the truth, and then, like every lie, it finally comes out.

The overall theme of the plaintiffs’ case is that the defendants portrayed the company one way publicly, but another way internally:

Publicly, and I can’t stress this enough, defendants portrayed Vivendi as strong, healthy, and growing. They continuously downplayed the risks, the warnings, and they told the investing public how successful Vivendi was and would be in the future. But inside the company, behind the closed doors at Vivendi, the defendants were acknowledging a far different truth.

Among other things, Abbey referred to a "book of warnings" Hannezo supposedly compiled for the new CEO after Messier’s departure from Vivendi, which Abbey characterized as a collection of documents showing various forewarnings and admonitions Hannezo had send Messier and others about the company’s growing liquidity risks. Abbey read to the jury one note that Hannezo wrote to Messier at the end of 2001 following a meeting Hannezo had had with the rating agencies, in which Hannezo said "he felt like he was sitting in the death seat of a car that was accelerating in a sharp turn, and he didn't want it to all end in shame." Abbey emphasized that while Hannezo had been communicating these warnings internally, they were not communicated to investors.

Abbey also argued in his opening that the company was under pressure to meet EBIDTA goals, and he further argued that the company was only able to report that it had met these goals by using, accounting adjustments (Abbey cited internal Vivendi documents referring to "accounting magic"), particularly "purchase accounting." Abbey told the jury that Vivendi never told investors the significant impact purchase accounting had on Vivendi’s reported results. He argued further that while use of accounting adjustments allowed the company to continue to report that it had met EBIDTA goals, the noncash adjustments did not help the company with its liquidity problems.

In support of the plaintiffs’ contentions, Abbey also referred to documents the company had filed in its severance dispute with Messier, in which the company supposedly said that Messier had driven the company "to the brink" yet had failed to disclose the problems to the company’s board.

Saunders, on behalf of Vivendi, argued that, contrary to the plaintiffs’ allegations about the company’s supposed liquidity problems, the company always had enough cash and credit to pay its bills, and in fact did pay all of its bills. He also argued that, contrary to the plaintiffs’ arguments that the defendants had misled investors, the company never had to restate its financials, even after new management came in. Saunders also emphasized that within days of his arrival, the new CEO completed a financing of over $1 billion, which, Saunders argued, demonstrated that even at the peak of the supposed crisis the company had sufficient resources (including credit) to pay its bills.

Saunders also argued that far from representing anything sinister, the company’s use of "purchase accounting" was only entirely appropriate, it was in fact required as a result of the three-way merger.

Saunders conceded that the company did have difficulties during the class period, but largely as a result of the September 11 tragedy and the following decline in economic activity (particularly at the company’s theme park properties). In that regard, he compared Vivendi’s stock price decline to the stock graphs of companies that the plaintiffs’ own expert had said were comparable, and that the stock graphs were virtually indistinguishable.

Finally, Saunders explained the two individuals’ departures from the company as a result of disagreements over the strategic steps the company should take in response to the business challenges it was facing, including a dispute between the board and Messier over whether Vivendi should sell its heirloom French water utility business.

Malone, arguing on behalf of Messier, contended that the plaintiffs’ case depended entirely on discrete "snippets" take out of context from a wide variety of documents, but that when the statements were put back in context, they show only the ordinary activities of business people struggling to deal with day to day business challenges. Malone emphasized the case is not about whether or not the company had problems or even about whether or not there were errors of judgment, but only about whether or not there had been an intentional effort to mislead investors.

Malone also emphasized that when Messier exercised stock options at the end of 2001, he invested all of the proceeds in Vivendi shares, and even took out a bank loan to buy additional shares. Messier also invested his entire April 2002 bonus in Vivendi shares, and indeed, within days of leaving Vivendi, Messier invested even more in Vivendi shares. Malone argued that Messier never sold a share, and that when Vivendi’s share price collapsed, no individual lost more than Messier.

Observations

Though the transcript only represents the arguments of counsel and not the actual presentation of evidence, a number of themes clearly emerge.

First, this case will be complex and will require the jury to grapple with a host of daunting technical terms and concepts. Just in his opening, Abbey referred to EBIDTA; purchase accounting; debt service; noncash earnings; nonoperational accounting entries; free cash flow; liquidity; and dividends. Saunders referred to negative cash flow; generally accepted accounting principles; and market capitalization. Malone referred to options exercises; hedging and hedging transactions; and tax advantages.

It is not that juries are incapable of figuring out these kinds of things. The problem is that these kinds of things put an enormous burden on the lawyers, the witnesses and the court to keep things clear; to avoid letting the trial get bogged down in technical minutiae; and making sure the jury it neither confused nor bored to death.

Second, much has been made (for example, here) of the fact that this Vivendi case is so unusual because it is the first "f-cubed" case to go to trial – that is, it involves claims against a foreign-domiciled company by foreign claimants who bought their shares on foreign exchanges. Whatever else might be said about whether or not f-cubed cases ought to be heard in U.S courts, it is clear just from the attorneys’ opening statements that there are serious challenges involved in attempting to put on one of these cases in a U.S. court. All of the lawyers wrestled with problems, for example, involving currency conversions and language translations. Abbey in particular seemed to experience embarrassment and discomfort using French names and phrases. The lawyers also warned that much of the testimony and many of the documents are in French for which the jury would be given English translations.

In addition, the opening statements also showed the complications that will arise from differing accounting systems, different account practices and standards, and different accounting conventions.

Third, all of the lawyers’ opening statements underscore the problems any plaintiff would face when large unrelated but material events – such as the 9/11 tragedy and the dot-com crash – happened at the same time as the supposed events of which the plaintiffs were complaining. Abbey tried to anticipate these issues and explain the plaintiffs’ theory of how these events should be understood in the context of the plaintiffs’ case. The defense counsel, for their part, showed that the defendants will argue that the challenges the company faced can only be understood within the context of these external events, which are, the defense counsel contend, among the root causes of the company problems involved in the case.

The parallel to the challenges facing the plaintiffs in the current round of subprime and credit crisis-related cases is unmistakable. The plaintiffs in these more recent cases will face the same challenge of attempting to explain how company-specific rather than marketplace-wide developments led to the defendant companies’ problems.

The final observation from a reading of the transcript is that the trial of a complex matter like a class action securities case is an elaborate, time-consuming, pain-staking exercise that could quickly become mind-numbingly tedious. Just judging from the opening statements, the jury could be in for a very long slog. One can only imagine how the jurors’ hearts sank when they heard Messier’s counsel tell them in his opening statement that "this trial will go on for months."

Nor will the verdict of this jury bring an end to this matter. Not only will there likely be further proceedings in this case, but as a result of the court’s class certification ruling in this case excluding Austrian and German investors from the plaintiff class, this case may only be the first of the trials in this matter. As reported in an October 7, 2009 article in the Telegraph (here), the defendants could face a "second trial" brought on behalf of European investors excluded from the plaintiff class in the Southern District of New York. (Hat tip to the 10b-5 Daily, here, for the Telegraph article link).

In my earlier post about the Vivendi trial, I noted how rare trials are in securities class action lawsuits. In an October 8, 2009 post (here) on his Enforcement Action blog, Bruce Carton (also the author of the Securities Docket blog), interviewed Adam Savett of the Securities Litigation Watch blog. In the brief interview, hosted on the Enforcement Docket site, Savett reviews statistical data regarding the prior securities cases that have gone to trial, and discusses why trials in these cases are so rare. He also discusses the significance of the presence of the f-cubed claimants.

They’re a Page Right Out of Hist-oh-Ree: Even allowing for the fact that The Flintstones show was set in the Stone Age, the program advertisement linked below still seems deeply primitive. Clearly, prehistoric peoples had a longer attention span, as the commercial seems almost movie-length compared to its more modern counterparts.

And even allowing for the time lapse since those long ago days, the advertisement’s politically incorrect premise and tobacco-related message seem vestiges of a culture completely unrelated to our own.

Finally, the way that Fred and Barney are sneaking around together and hiding from their wives, you do start to wonder whether the final line in the show’s theme song lyrics implied more than might originally have been suggested.

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In a rare case in which a securities suit is actually going to trial, on Monday a jury was empanelled in the Vivendi securities class action lawsuit pending in the Southern District of New York. An October 5, 2009 New York Times article summarizing the background of the case can be found here. A more detailed description of the case can be found here.

The Vivendi trial is unusual in another respect – it involves the claims of so-called "f-cubed" claimants, as detailed in an October 5, 2009 AmLaw Litigation Daily article by Andrew Longstreth (here). That is, the case involves claims by foreign shareholders of a foreign domiciled company who bought their shares on foreign exchanges.

However, because of March 22, 2007 class certification rulings by Southern District of New York Judge Richard Holwell, the class on whose behalf the claims are asserted does not include all potential f-cubed claimants. That is, though the class includes claimants from France, England and the Netherlands, it does not include investors from Austria and Germany.

As the AmLaw Litigation Daily article notes, plaintiffs’ lawyers, who are keenly interested in bringing claims in U.S. courts on behalf of foreign investors, will be watching this case closely.

As noted in a prior post (here), the question of the extraterritorial application of the U.S. securities laws is a current hot topic that could well wind up before the U.S. Supreme Court this term. In addition, as noted here, subject matter jurisdiction over the claims of f-cubed claimants is one of the issues addressed in financial reform legislation recently introduced in Congress.

The Vivendi case is actually the second securities class action lawsuit to go to trial this year. As detailed here, on May 7, 2009, a jury in the Northern District of Illinois entered a mixed verdict in the plaintiffs’ favor in the Household International securities suit.

As reported on the Securities Litigation Watch blog (here), only 21 cases (prior to Vivendi) have gone trial since the 1995 enactment of the PSLRA. Only seven of the 21 cases (including the Household International case) that have gone to a verdict involved conduct that occurred after the PSLRA was enacted. Accounting for post trial motions and appeals (and post-appeal trials), with respect to the seven cases, the current scoreboard standings show three wins for the plaintiffs and four for the defendants.

Credit Suisse Subprime Suit DIsmissed on Jurisdictional Grounds: In a topically related development that also took place in the Southern District of New York yesterday, on October 5, 2009, Judge Victor Marrero released his opinion (here) explaining his prior September 28, 2009 dismissal, on the grounds of lack of subject matter jurisdiction,  of the subpime securities class action lawsuit that had been filed against Credit Suisse and certain of its directors and officers.

As described in greater detail here, the plaintiffs had alleged that the defendants misrepresented the company's financial condition by failing to disclose schemes to overstate assets, underestimate risk, hide subprime exposure, and ignore weaknesses in risk management and internal controls. The risk management and internal control allegations referred to the criminal prosecution of two former U.S.-based Credit Suisse employees, Julian Tzolov and Eric Butler, in connection with their sale of securities to customers of the bank, about which refer here.

In considering the sufficiency of the court's subject matter jurisdiction over the case, Judge Marrero divided the question between the claims of foreign-domiciled claimants who bought their shares in the foreign-domiciled claimants on a foreign exchange (the "f-cubed" claimants) and the claims of claimants who had bought ADRs on the NYSE. Approximately 4.1% of investors had bought their investment through ADRs on the NYSE.

Judge Marrero concluded that the court did not have jurisdiction over the f-cubed claimants,  observing that the plaintiffs "have not adequately alleged or otherwise demonstrated that hte fraudulent schemes...were concocted or masterminded in the United States." He found further that the allegedly misleading statements had originated abroad, and the wrongful acts alleged in the United States (even the alleged criminal misconduct of the two former Credit Suisse employees) fail to satisfy the conduct test for the exercise of jurisdiction over the claims of foreign claimants.

Judge Marrero also held that the court lacked subject matter jurisdiction over the claims of investors who bought ADRs on the NYSE, holding that he could not conclude that the plaintiffs "have demonstrated the required effects on United States investors." This latter result appears largely to be due to "lack of information" and "lack of briefing" on the plaintiffs' part. (Among other things, the amended complaint neglects to specify the domicile of the proposed lead plaintiffs who had bought ADRs on the NYSE.)

Judge Marrero allowed the plaintiffs 20 days to file a motion in which to attempt to show why allowing the plaintiffs to amend their complaint would not be futile.

The contrast between the events yesterday in the Southern District of New York courthouse involving these two cases could not be more stark. On the one hand, a jury is being empanelled with respect to the claims of the f-cubed claimants in the Vivendi case, which appears likely to head to a verdict. Yet in the same courthouse, Judge Marrero issued an opinion in whch he concluded that the court lacked subject matter over the claims of the f-cubed claimants. To be sure, this stark difference between the way the two cases have fared in the courthouse may simply be a reflection of underlying differences between the cases. Nevertheless, the contrast is stark.

Special thanks to a loyal reader for providing a copy of the October 5 opinion.

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On May 7, 2009, a jury in the Northern District of Illinois entered a mixed verdict finding in plaintiffs’ favor on several counts in the Household International securities fraud securities class action lawsuit, a long-running case with overtones of the current subprime meltdown. Background regarding the case can be found here.

The verdict form the jury entered (which can be found here) is quite complex and very detailed. The jurors were asked to make specific findings with respect to 40 allegedly false and misleading statements. The jury found in favor of the defendants with respect to 23 of the statements. However, the jury found in favor of the plaintiffs with respect to 17 of the statements. Table A to the verdict form identifies and assigns a number to each of the 40 statements.

As detailed in by Adam Savett of the Securities Litigation Watch blog (here), the jury found that all four defendants acted recklessly with respect to the 16 statements on which the jury found in favor of plaintiffs. In addition, with respect to an additional statement (Statement No. 14), two defendants (Household and former Chairman and CEO William Aldinger) were found to have acted knowingly, one defendant (Gary Gilmore, the former Vice-Chair of Consumer Lending was found to have acted recklessly, and one defendant (David Schoenholz, the former CFO and COO) was found not liable.

With respect to the recklessly misleading statements, the jury assigned 55% of the responsibility to Household; 20% to Aldinger; 20% to Schoenholz; and 10% to Gilmer.

The jury found that from March 23, 2001 (the date of Statement No. 14, with respect to which two of the defendants were found to have acted knowingly), the allegedly misleading statements inflated Household’s share price by as much as $23.94.As the class period progressed, however, the amount of inflation the jury found changed; it ranged between $23.94 a share and negative $4.66 a share. (Negative share inflation is a puzzling concept that I am sure will have to be sorted out at a later date.)

The available record does not explain how these findings will translate into damages. However, as discussed in press coverage at the time the trial commenced (here), the case was bifurcated with liability issues to be tried first and damages to be tried later if necessary. Apparently there will be further proceedings, based on the jury’s findings in the initial phase, the fix the amount of damages.

Significance for Current Subprime Cases?: The verdict in the Household case arguably has significance with respect to many of the cases filed in connection with the current subprime litigation wave. Even though the Household case was initially filed in 2002, it involved allegations in connection with representations about residential real estate lending practices.

In their complaint, the plaintiffs had alleged that during the class period, the defendants concealed that Household "was engaged in a massive predatory lending scheme." The plaintiffs had alleged that Household "engaged in widespread abuse of its customers through a variety of illegal sales practices and improper lending techniques." Household also reported "false statistics" that were intended to "give the appearance that the credit quality of Household’s borrowers was more favorable that it actually was." The plaintiffs allege that the "defendants’ scheme" allowed them "to artificially inflate the Company’s financial and operational results."

In the third quarter of 2002, the company took a $600 million charge and restated its financial statements for the preceding eight years, and in October 2002, the company announced that it had entered into a $484 regulatory settlement regarding its lending practices. On November 14, 2002, the company announced that it was to be acquired by HSBC Holdings. (In recent months, HSBC’s results have been significantly affected by losses in the subprime mortgage portfolio it acquired in the Household deal and its chairman has publicly admitted that "with the benefit of hindsight, this is an acquisition that we wish we had not undertaken.")

Securities Lawsuit Trials Are Very Rare: Trials in subprime related securities class action lawsuits are extremely rare. According to data compiled by the Securities Litigation Watch (here), only 21 cases have gone to trial since the PSLRA was enacted in 1995. Only seven of those 21 cases involved conduct that occurred after the PSLRA’s enactment.

Two recent high profile securities class action trials involved JDS Uniphase and Apollo Group. As noted here, on November 27, 2007, the jury in the JDS Uniphase trial returned a defense verdict. The Apollo Group trial initially resulted in a January 2008 plaintiffs’ verdict and an award of $277.5 million in damages, but as detailed here, on August 4, 2008, the judge granted the defendants’ motion for judgment as a matter of law, which set aside the jury verdict. A detailed discussion of the two cases can be found here.

Not only are verdicts susceptible to post-trial motions, but they are also susceptible to reversal on appeal, as happened in connection with the defense verdict in the Thane International case, where the Ninth Circuit overturned the jury verdict on appeal and ordered a new trial (about which refer here). The retrial in the Thane case resulted in a defense verdict.

With the inclusion of the Household International verdict and adjusting for the post-trial motion in the Apollo Group case and the post-appeal verdict in Thane, the scoreboard for the seven post-PSLRA trials – as adjusted for post-trial proceedings--  now stands at three wins for the plaintiffs and four for the defendants.

Analysis: While there are further procedures yet to go, the verdict in the Household case nevertheless represents a significant development. The subprime overtones in the case and the defendants’ connection to financial giant HSBC guarantee that the verdict will be very high profile, and it could well cast a shadow over the many other more recently filed cases where questionable lending practices are involved. It is unlikely that many other litigants will be encouraged to push their cases to trial, but the settlement potentially could influence settlement discussions in the other cases.

The way that plaintiffs might try to use the Household verdict in the current litigation can be clearly discerned in the statement from Patrick Coughlin, whose firm Coughlin Stoia Geller Rudman & Robbins represented the plaintiffs in the Household case. Coughlin states that “The jury’s verdict is a victory for the million of Americans suffering as a result of deceptive predatory lending practices and a victory for all investors fighting for greater corporate transparency, honesty and integrity. “

Andrew Longstreth of AmLaw Daily has a May 7, 2009 article about the Household verdict, here.

Securities Litigation Update: On Friday May 8, 2009, I will be participating in a webinar sponsored by Advisen in which Advisen’s finding regarding 1Q09 securities lawsuit filings will be discussed. The hour-long webinar, which is free, will begin at Noon EDT. Registration for the webinar is available here. Advisen’s report on first quarter filings can be accessed here.

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A rare jury trial has commenced in a long-running securities lawsuit that resonates with overtones of the current subprime mortgage meltdown. On March 30, 2009, Northern District of Illinois Ronald Guzman began empanelling a jury in the securities class action lawsuit styled as Lawrence E. Jaffee Pension Plan v. Household International, Inc., a case that has been pending since August 2002. Background regarding the case can be found here.

According to the plaintiffs’ consolidated amended complaint (here), the case was brought on behalf of all persons who acquired Household International securities between October 23, 1997 and October 11, 2002. The plaintiffs contend that during the class period, the defendants concealed that Household "was engaged in a massive predatory lending scheme."

According to the complaint, Household "engaged in widespread abuse of its customers through a variety of illegal sales practices and improper lending techniques." Household also reported "false statistics" that were intended to "give the appearance that the credit quality of Household’s borrowers was more favorable that it actually was." The plaintiffs allege that the "defendants’ scheme" allowed them "to artificially inflate the Company’s financial and operational results."

In the third quarter of 2002, the company took a $600 million charge and restated its financial statements for the preceding eight years, and in October 2002, the company announced that it had entered into a $484 regulatory settlement regarding its lending practices. On November 14, 2002, the company announced that it was to be acquired by HSBC Holdings. (In recent months, HSBC’s results have been significantly affected by losses in the subprime mortgage portfolio it acquired in the Household deal and its chairman has publicly admitted that "with the benefit of hindsight, this is an acquisition that we wish we had not undertaken.")

The defendants in the lawsuit include Household International and its mortgage finance subsidiary, Household FInancial Corporation, and Household’s former CEO and CFO, as well as one other former individual officer of the company, as well as the former company’s former directors. The company’s offering underwriters were also initially named as defendants, but they were later dismissed from the case (refer here). The plaintiffs also reached a prior settlement with the company’s former auditor, Arthur Anderson.

According to news reports (here), Judge Guzman has bifurcated the case into two parts, with a damages phase to follow the initial liability phase, which is expected to last four weeks, if the initial phase results in a finding of liability.

As most readers undoubtedly are aware, jury trials in securities class action lawsuits are extremely rare. According to data compiled by Adam Savett at the Securities Litigation Watch (here), only 20 cases have gone to trial since the PSLRA was enacted in 1995. Six of those 20 cases involved conduct that occurred after the PSLRA’s enactment.

Two recent high profile trials involved JDS Uniphase and Apollo Group. As noted here, on November 27, 2007, the jury in the JDS Uniphase trial returned a defense verdict. The Apollo Group trial initially resulted in a January 2008 plaintiffs’ verdict and an award of $277.5 million in damages, but as detailed here, on August 4, 2008, the judge granted the defendants’ motion for judgment as a matter of law, which set aside the jury verdict. A detailed discussion of the two cases can be found here.

With the adjustment for the post-trial motion in the Apollo Group case, the jury verdict scoreboard for the six post-PSLRA cases now stands at three each for the plaintiffs and defendants, as explained in my post regarding the Apollo Group post trial motion.

As for the question why this case is going to trial when so many others settle, there undoubtedly are many factors but one may be the "billion-dollar price tag" that news reports suggest that plaintiffs have put on the case.

A March 30, 2009 AmLaw Daily article discussing the case can be found here.

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The $277.5 million jury verdict in the Apollo Group securities lawsuit caused a great sensation at the time it was returned in January 2008 (as discussed here). The verdict heartened plaintiffs’ attorneys and it served as a counterweight to the defense verdict in the virtually contemporaneous JDSU Uniphase securities lawsuit trial (which is discussed here).

But on August 4, 2008, Judge James Teilborg of the United States District Court for the District of Arizona entered an order (here) granting the defendants’ motion for judgment as a matter of law, based on his finding that the trial testimony did not support the jury’s finding of loss causation. Judge Teilborg’s order vacated the judgment and entered judgment in defendants’ favor.

The Apollo Group securities lawsuit involved alleged misrepresentations and omissions relating to a February 6, 2004 “Program Review” in which a Department of Education representative discussed the company’ potential violation of DoE rules. News of the allegations in the Program Review first became public on September 14, 2004, but the company’s share price did not react. Apollo’s share price fell significantly on September 21, 2004, when a securities analyst issued a report (the “Flynn reports”) expressing concern about the company’s possible exposure to future regulatory issues.

Judge Teilborg had held in connection with the parties’ pre-trial cross-motions for summary judgment that the issue whether the Flynn reports constituted “corrective disclosure” sufficient to support a finding of loss causation was a question for the jury

In its post-trial motion, Apollo argued that the evidence at trial was insufficient to support a finding that the Flynn reports represented “corrective disclosure,” because they did not contain any new fraud-revealing information. Judge Teilborg found that “the evidence at trial undercut all bases on which [the plaintiff] claimed the Flynn reports were corrective.”

Accordingly, the court concluded that although the plaintiff “demonstrated that Apollo misled the markets in various ways concerning the DoE program review,” the plaintiff “failed to prove that Apollo’s actions caused investors to suffer harm.” The court therefore concluded that “Apollo is entitled to judgment as a matter of law.”

Judge Teilborg then went on to consider conditionally Apollo’s motion for a new trial, as a precaution against the possibility that the appellate court could reverse the grant of judgment as a matter of law. He found that “none of the reasons cited by Apollo warrant a new trial in the case” and so the court conditionally denied Apollo’s motion for a new trial.

The possibility of significant post-trial developments in the Apollo case is something I expressly suggested at the time of the jury verdict, and, indeed the case still has a great deal farther to run procedurally, with additional opportunities for even further developments in the case.

In the interim, the post-trial disposition in the Apollo Group case alters the mix of securities lawsuit trial outcomes. According to data from the Securities Litigation Watch (here), six post-PSLRA cases (including Apollo Group) have gone to verdict, with three of the verdicts in favor of the plaintiffs and three in favor of defendants, although on November 26, 2007, the Ninth Circuit reversed and remanded the defense verdicts in the Thane International case (about which refer here). With the vacatur of the plaintiff’s verdict in the Apollo Group case, the securities lawsuit jury verdict scoreboard now stands evenly distributed, three each for plaintiffs and defendants – subject to further procedural developments.

As for the significance of this development, it may be hard to say definitively until all proceedings are complete, but the verdict’s vacatur can’t be encouraging for plaintiffs’ lawyers. This development together with the defense verdict in the JDS Uniphase trial would seem to argue pretty compellingly in favor of avoiding jury trials and seeking pretrial resolution

One practical significance of the vacatur of the Apollo jury verdict is that it removes any suggestion that the jury’s verdict represents a finding of fraud sufficient to trigger the fraud exclusion in the company’s D&O insurance policy. This undoubtedly represents significant relief to the company and the other defendants, in addition to the sense of vindication the company likely feels following the court's ruling.

The company’s August 5, 2008 press release about the Judge Teilborg’s ruling can be found here. A detailed summary of the Apollo Group securities case, including links to pleadings, can be found here.

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