A Closer Look at the 2007 Life Sciences Securities Lawsuits

Posted on January 7, 2008 by Kevin LaCroix
In prior posts (most recently here), I noted that even during the two-year lull in securities lawsuits filings that prevailed between mid-2005 and mid-2007, filings against life sciences companies - and pharmaceutical companies in particular - continued more or less unabated. More recently I noted (here) that pharmaceutical companies in the Standard Industrial Classification Code category 2834 represented one of the two most frequently sued categories of companies among the 2007 securities lawsuits. Because of this heightened lawsuit frequency involving life sciences companies, it seems worthwhile to take a closer look at the 2007 life sciences securities lawsuits.

First a word about categorization. For purposes of this post, I am including under the heading "life sciences" any company in either SIC Code series 283 (Drugs) or SIC Code series 384 (Surgical, Medical and Dental Instruments and Supplies). Reasonable minds might differ about whether additional categories should be included, but I decided to go for simplicity here.

Companies within the SIC Code series 283 were particularly hard hit in 2007, especially companies in the 2834 SIC Code (Pharmaceutical Preparations), within which 14 companies were sued in 2007. In addition, two companies in SIC Code 2836 (Biological Products) and one company in SIC Code 2833 (Medicinal Chemical and Botanical Products) were also sued, bringing the total number of companies sued in 2007 from SIC Code Series 283 to 17. These 17 lawsuits compare to eight lawsuits in the SIC Code Series 283 among the 2006 securities lawsuits.

There were four companies sued in SIC Code series 384, including two within SIC Code 3841 (Surgical and Medical Instruments) and two within SIC Code 3845 (Electromedical and Electrotherapeutic Apparatus).

The 21 total lawsuits against companies in these two SIC Code series categories means that lawsuits against life sciences companies represent roughly 12% of the 172 securities lawsuits filed in 2007. (Refer to my prior post here for a description of the data I am using in my analysis). This compares to 34, or slightly less than 20%, of the 2007 securities lawsuits related to the subprime meltdown. As I have said before, the subprime lawsuits were an important factor but by no means the only important factor in the increase of securities lawsuit filings in 2007.

The 2007 securities lawsuits against life sciences companies involved a wide variety of allegations. By far the most common contention is the allegation of unexpected or undisclosed set-backs in the regulatory or clinical trial process, which was raised against nine of the 21 life sciences companies sued. The next most prevalent type of allegation was related to disclosures surrounding product safety (five companies).

Other allegations included slowing sales or missed projections (two companies), misrepresentations regarding product efficacy (one company), disclosure of a criminal investigation (one company), failure to disclose merger-related information (one company), misrepresentations or omissions regarding sales practices (one company), and misrepresentations regarding the status of regulatory approvals (one company).

Of the 21 life sciences companies sued in securities lawsuits in 2007, five are foreign-domiciled, including two from France, and one each from Germany, Switzerland and the U.K.

As I noted in my prior posts regarding pharmaceutical company lawsuits (here), while life sciences companies have proved to be popular targets for plaintiffs' lawyers, they have not always proved to be easy targets. Many of the past securities lawsuits against pharmaceutical companies have been dismissed. The dismissal levels may have something to do with the prevalence of allegations regarding regulatory or clinical trial setbacks. While these setbacks may indeed rock the companies' stock prices, these kinds of setbacks are an almost inevitable attribute of the regulatory and scientific environment in which these companies operate. These risks are often comprehensively disclosed, creating a particular challenge for plaintiffs' attorneys.

While it is far too early to tell how the 2007 securities lawsuits against life sciences companies will fare, it will be interesting to monitor these cases to see how many go forward beyond the motion to dismiss stage.

The Return of the "Club Deal" Antitrust Case: According to news reports (here), plaintiffs' lawyers have filed an antitrust lawsuits against the leading private equity firms and investment banks, alleging that the 13 defendants conspired to fix prices in connection with seven specific private equity "club deals" between 2004 and 2007. In fall 2006, a different set of plaintiffs lawyers had originally filed a complaint in the Southern District of New York raising substantially similar allegations, but they withdrew their complaint after the U.S. Supreme Court handed down its May 2007 opinion, specifying a heightened pleading standard for antitrust cases, in Bell Atlantic v. Twombley. The new plaintiffs' counsel apparently feels they can meet the Twombley standard.

The new complaint, which can be found here, was filed in the District of Massachusetts, and alleges that the large buyout firms conspired to keep acquisition prices low by "clubbing together" rather than competing on large buyout deals. The private equity firm defendants include, for example, Bain Capital, Blackstone Group, KKR, and Thomas H. Lee Partners. The seven specific deals referenced in the complaint include Kinder Morgan, HCA and Freescale Semiconductor. The lawsuit also targets investment banks for the conflicted role they allegedly sometimes play as both advisers to the target companies and as lenders (or even co-investors) to or with the acquirers.

Special thanks to Ned Kirk of the Sedgwick Detert firm for a link to the news reports and for a copy of the Complaint.

Need for Speed: If you not yet seen it, you have to read the Wired Magazine article entitled "The Pedal-to-the-Metal, Totally Illegal, Cross-Country Spring for Glory" (here), which tells the tale of Alex Roy, who is consumed by a passion to recreate Cannonball Run and set the speed record for driving between Manhattan and Santa Monica (a feat Roy accomplished in an astonishing 31 hours and 4 minutes). You have to read it to believe it.

Special thanks to new reader Michael Barker the link to the article.
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A Closer Look at the 2007 Securities Lawsuits

Posted on January 2, 2008 by Kevin LaCroix
The first of the 2007 year-end securities class action reports has already appeared (refer here), with others soon to follow. As I have noted elsewhere (most recently here), the most important securities trend during 2007 was the return of lawsuit filing activity to historical levels, after a two-year lull. But there were numerous other important securities lawsuit trends in 2007, as discussed below.

First, a word about data. My observations about the 2007 securities lawsuits are based on my own tally of the 172 securities lawsuits, which I derived from publicly available data plus information from readers. My tally differs from the numbers that appeared in NERA Economic Consulting's 2007 year-end report (here). NERA counted 198 securities lawsuits through mid-December, and projected 207 lawsuits by year-end. The projected number was not borne out, but NERA's actual year-end number around 200 is materially higher than my own count of 172. NERA undoubtedly has superior data; readers should be aware that I have used my own data for purposes of this post.

The year-end tally of 172 new securities class action lawsuits includes 103 new securities lawsuits that were first filed in the second-half of 2007. This half-year total is virtually identical to the six-month average of 101 that Cornerstone Research noted in its mid-year 2007 securities litigation report (here) for the period from the second half of 1996 through the first half of 2005. In addition, the year-end total of 172 lawsuits represents an increase of 56 cases over the 2006 year-end total of 116, an increase of 48 per cent.

The companies named in securities lawsuits in 2007 represent 80 different Standard Industrial Classification (SIC) Code categories. In a year in which subprime lawsuits were such a significant factor (refer here for my analysis of the 2007 subprime lawsuits), it is hardly surprising that one of the SIC Code categories with the highest number of new lawsuits is SIC Code 6798 (Real Estate Investment Trusts), which had 14 new lawsuits. But SIC Code 2834 (Pharmaceutical Preparations) also had 14 new lawsuits, which is entirely consistent with my frequent observation that while subprime lawsuits are an important part of the 2007 securities lawsuit trends, the subprime lawsuits represent only one of several important trends.

Other SIC Code categories that had significant activity unrelated to the subprime mess include SIC Code category 3674 (Semiconductors), which had seven lawsuits; SIC Code category 3663 (Radio and Telephone Equipment), which had six lawsuits; SIC Code category 7372 (Prepackaged Software), which had five lawsuits; and SIC Code category 4899 (Communications Services) which also had five lawsuits.
26 of the 172 securities lawsuits that were filed in 2007 involved companies domiciled outside the United States. These 26 companies are based in 12 different countries, including China (seven companies); Switzerland (three companies); Bermuda, Canada, France, Hong Kong, Israel and the U.K (each of which had two companies each); and Germany, South Korea, Sweden and Taiwan (each of which had one company each). My detailed analsysis of the securities lawsuits involving Chinese companies can be found here.

Many of the 2007 securities lawsuits involved allegations of misrepresentations in connection with the defendant company's IPO within twelve months of the lawsuit. 29 of the 172 new lawsuits involved IPO allegations. Interestingly, 20 of the 29 lawsuits against IPO companies were filed in the second-half of 2007, which suggests that an increase in the number of cases involving IPO companies was an important part of the increased level of securities litigation activity in the second-half of 2007. In addition, nine of the 29 IPO company lawsuits involved foreign-domiciled companies, so the level of IPO-related activity and the level of foreign-domiciled company activity appears to be correlated to a certain extent.

The 2007 securities lawsuits were filed in 52 different federal district courts. By far the largest numbers of lawsuits were filed in the Southern District of New York, where a whopping 52 of the 172 lawsuits (or about 30%) were filed. The court with the next highest total, the Central District of California, had only 18. Indeed, if the lawsuits filed in the Central, Southern and Northern Districts of California are combined, the total of 32 cases is still far short of the S.D.N.Y. total.

The high number of filings in the S.D.N.Y. is in part attributable to the number of financial services companies that have been sued in Manhattan as a result of the subprime mess. But another important factor in the number of S.D.N.Y. lawsuits is the significant number of lawsuits against foreign domiciled companies. 21 of the 26 foreign-domiciled companies sued in securities lawsuits in 2007 were sued in the S.D.N.Y.

Other courts that had a significant number of securities lawsuits in 2007 include the Southern District of Florida (10); Eastern District of Pennsylvania (6); Northern District of Texas (5); and the Western District of Washington (5).

I have noted elsewhere (here) the significance of the number of 2007 securities lawsuits. Another important attribute of the 2007 securities lawsuits is their diversity. More specifically, the increase in 2007 securities litigation activity clearly was driven by a number of factors, not just the litigation activity surrounding the subprime meltdown. Indeed, even if the 34 subprime-related lawsuits (listed here) were withdrawn from the 2007 total, the resulting 138 lawsuits would still represent a material increase over the 116 lawsuits that were filed in 2006. The fact that there were significant numbers of cases aggregated in categories completely isolated from subprime-related issues demonstrates that the story of the renewed securities litigation activity involves far more than just the subprime meltdown.

Finally, one of the other many factors contributing to the renewed level of securities lawsuit activity in 2007 is the outbreak of lawsuits arising from busted buyouts, which I discuss at greater lenghth here.
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A Closer Look at the 2007 Subprime-Related Securities Lawsuits

Posted on December 27, 2007 by Kevin LaCroix
In its 2007 year-end study of securities class action trends (here), NERA Economic Consulting noted that the "sharp increase" in 2007 securities lawsuit filings was "driven in part by litigation related to subprime lending," an observation I have also noted elsewhere. Given the importance of the subprime lawsuit filings to the overall 2007 securities lawsuit picture, it is worth taking a closer look at the 2007 subprime-related securities lawsuits.

As a preliminary matter, it should be noted that I have counted 34 subprime-related securities lawsuits during 2007 (as detailed here), whereas in its year-end report NERA stated that there were 38 subprime-related lawsuits. The difference may be merely definitional, as it became harder to classify cases as the year progressed. NERA may also have superior information, a not unlikely possibility given that my data are derived solely from publicly available sources. In any event, readers should be aware that the analysis in this post is limited to the 34 lawsuits in my tally.

The 34 companies sued in the subprime-related lawsuits represent 15 different Standard Industrial Classification (SIC) Codes. The largest concentration of cases is in the 6798 SEC Code (Real Estate Investment Trusts), which accounted for 11 of the34 cases. Fully 30 of the 34 companies sued fall within the 6000 SIC Code Series (Finance, Insurance and Real Estate).

Another way to look at the companies is by industry, rather than by SIC Code. As might be expected, there are more companies is in the banking/mortgage lending business than any other industry; this group accounted for 12 of the companies sued. Other industry groups with multiple companies represented included residential home builders (5), REITs (5), Bond Insurers (3) and Credit Rating Agencies (2). Other industries represented with one company each include mortgage investment companies, mutual funds, and savings and loans. (The list of companies also includes Freddie Mac, which as a government sponsored entity is hard to classify.)

The subprime-related lawsuits were filed in 15 different federal district courts, with the largest number filed in the Southern District of New York (11). Other courts with multiple filings include the Central District of California (6), Eastern District of Pennsylvania (3) and the Northern District of California (2).

The list of companies sued includes two that are domiciled overseas: UBS (Switzerland) and Security Capital Assurance (Bermuda). One of the subprime-cases - the one involving Security Capital Assurance - involves IPO-related allegations.

The 34 subprime-related lawsuits were filed between February and December 2007, with at least one lawsuit filed in each month during that period. There were two in February, four in March, two in July, eight in August, four in September, two in October, five in November, and four in December.

In other words, the subprime-related lawsuits, while concentrated in the Finance, Insurance and Real Estate SIC Codes, represent a number of different industries. The lawsuits have been filed in a number of different courts, but with a concentration in New York and Los Angeles. The lawsuit filings were spread (albeit somewhat unevenly) throughout the year. These observations seem relevant to any analysis of what the cases might represent within the larger context of securities filing trends.

Mortgage Investigations Face Challenges: A December 27, 2007 Washington Post article entitled "Mortgage Probes Face Big Hurdles" (here) notes that as problems have emerged following the subprime mortgage meltdown, "government subpoenas are flying, investor lawsuits are mounting, and in the nastiest cases, businesses are pointing the finger of blame at one another. "

But despite the almost irrepressible urge to find scapegoats, investigators could face significant hurdles due to the "tangled system" of regulatory authority and oversight. In addition, another consideration that could stymie investigators, and that could be a factor in the many investor lawsuits, is that "many of the assets that tumbled were explicitly marketed as involving borrowers with trouble credit histories, alerting investors that they were high-risk bets."

White Collar Fraud is Not Just Wrong, It's Insane!: Regular readers may recall my prior post (here) about former Crazy Eddie CFO (and convicted felon) Sam E. Antar, who is now making a name for himself warning others about how to spot fraud. A lengthy December 25, 2007 Fortune Magazine article entitled "Takes One to Know One" (here) takes a closer look at Antar. and his current campaign to combat fraud.

The detailed article reviews the Crazy Eddie fraud in depth and explains how Antar has become a roving lecturer on accounting fraud. The article summarizes Antar's strategy for finding fraud as "sustained and disciplined paranoia." He also says that the only safeguards against accounting fraud that work are "stringent disclosure rules for companies and better fraud training for auditors."

Interested readers may want to check out Antar's blog, White Collar Fraud (here), for further commentary from Antar, who signs his blog posts as follows: "Respectfully, Sam E. Antar (former Crazy Eddie CFO and convicted felon)."
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