At least one prominent commentator has suggested that the reason for the accumulation during late 2009 of a significant number of belated securities suits, where the filing date came well after the proposed class period cut-off date, is that plaintiffs lawyers are "trying to fill the litigation pipeline by bringing older lawsuits that weren’t attractive enough to file" as subprime- related cases mounted during earlier periods.
The further suggestion was that "these lawsuits are more likely to be dismissed and can be characterized as lower quality claims."
Whether or not the belated cases in general are or are not likelier to be dismissed, and even whether or not the cases are "lower quality claims," at least one of the first of the belatedly filed cases recently survived a motion to dismiss, suggesting that at least some of the belated cases could represent serious claims exposures
As discussed at greater length here, Ambassadors Group was first sued in a securities class action lawsuit in July 2009. The complaint, filed in the Eastern District of Washington, purported to be filed on behalf of persons who bought company stock during the period February 8, 2007 to October 23, 2007. In other words, the initial filing date came some 21 months after the proposed class period cut-off date.
Ambassadors is in the business of providing student travel trips, primarily to middle school students. The plaintiffs alleged that the defendants had omitted to disclose that in December 2006, the mailing list company from which Ambassadors purchased its middle school names list ended its relationship for undisclosed reasons. Ambassadors purchased a replacement middle school names list from a different company.
On October 22, 2007, when the company released poor financial results, among the reasons given was the unexpected underperformance of the replacement mailing list. The company’s share price declined 44% on the poor financial news.
The plaintiffs alleged that the defendants’ statements during the class period were materially misleading because the company knew as early as summer 2007 that response rates were poor and had known in late 2006 that it had lost access to a key mailing list. The defendants moved to dismiss.
The June 2, 2010 Ruling
In a June 2, 2010 order (here), Judge Justin Quackenbush denied defendants’ motions to dismiss as to the July 24, 2007 statement of the company’s Executive Vice President that the company’s was launching its 2008 marketing campaigns, which were "similar in timing and delivery as previous years."
Plaintiffs had argued that this statement was "simply untrue" because the 2008 marketing campaign was note similarly in delivery to previous years, owing to loss and subsequent replacement of the mailing list, which represented 90% of the company’s marketing leads and 45% of the company’s business.
The court concluded that the plaintiffs’ complaint "pleads sufficient facts, that when taking as true, create a genuine issue of material fact regarding whether the 2008 campaign was not, in fact, similar to delivery in previous years."
However, Judge Quackenbush found that the defendants’ remaining statements on which the plaintiffs sought to rely were "general and vague" and constituted puffery and therefore could not serve as a basis of liability.
In finding that the plaintiffs had sufficiently alleged scienter, Judge Quackenbush found, in reliance on the "core functions" doctrine, that the company’s mailing campaign was "so integral to the operations of [the company that knowledge thereof cannot be denied by senior executives." The company’s CEO and Executive Vice President were also alleged to have sold over $4 million of their personal holdings in company stock between May and August 2007. The court noted that the insider trading was the subject of an SEC investigation.
Judge Quackenbush went on to observe that:
Ambassadors is a small company. There is no reasonable argument that the Defendants were not aware of the mailing list issue. The core operations inference in this case is a strong one, as the Middle School names list accounted for 45% of the marketing leads for Ambassadors. The inference is strengthened by the allegations of the confidential witnesses, the SEC investigation, and the stock sales.
The Company’s CEO and CFO each separately moved to dismiss the claims against them on the grounds that they themselves were not alleged to have made the allegedly misleading statements. After reviewing case law relating to the "group pleading" doctrine, Judge Quackenbush rejected the two individual defendants’ separate dismissal motions, observing that:
Corporate officers, however, may not stand idly by as investors and analysts, upon whose recommendations other investors rely, are mislead [sic]. Corporate exeutiveship often carries with it substantial financial remuneration, but with such remuneration comes duties and obligations to the company and its stockholders that must not be ignored, as the economic catastrophes befalling the company in the past two years have harshly illustrated. Affirmative steps are required to prevent fraud or to even merely clarify when a statements veers into a dangerous grey area. [The CFO] may not cloak himself in his silence and avoid liability for the misleading statements of his co-defendants made to public stock analysts during a conference call at which he was present.
A single ruling arguably represents little from which to try to make any generalizations about the belated cases as a group. Moreover, there may be those who might want to argue that this case is going forward on the basis of a single seemingly neutral statement about the initiation of the marketing campaign.
Some observers might also note that Judge Quackenbush’s ruling is heavily dependent both on the "core functions" doctrine and the "group pleading" doctrine, the applicability of both of which under the PSLRA have been the subject of considerable debate.
Nevertheless, the case did survive the initial dismissal motion. The time lag between the class period ending date and the initial filing date was irrelevant to the court’s decision. The dismissal motion ruling suggests that at least some of the belated failings will survive dismissal motion rulings and that the mere fact that a case was belatedly filed may not necessarily mean that the case will be unable to overcome initial pleading thresholds.
It is interesting to note that in his discussion of the responsibility of corporate officers to prevent fraud, Judge Quackenbush invoked both concerns about executive compensation and about the possible role of corporate officials in the financial crisis, suggesting a judicial context within which the activities of corporate officers may be viewed, even in the absence of allegations that the officers whose conduct is at issue received disproportionate compensation or contributed to the financial crisis.
The suggestion is that the popular outrage growing out the financial crisis may inform judicial decision-making, even in cases that seemingly do not directly involve the financial crisis.
One final observation is that, whatever the reason for the increase in belated securities class action lawsuit filings, and whether or not they represent "poorer quality claims," the plaintiffs’ lawyers continue to file them, as I noted in my recent discussion of recent securities lawsuit filing trends, here.
Special thanks to a loyal reader for sending me a copy of the Ambassadors Group decision.