Former CFO’s Dismissal Motion Denied in Longtop Financial Securities Suit: Longtop Financial Technologies may be unique among U.S.-listed Chinese companies that have been caught up in the wave of accounting scandals and related securities litigation. Unlike many of the others, Longtop did not obtain its U.S.-listing by way of a reverse merger, but instead, in order to obtain its NYSE listing, it went through the full IPO process. Nevertheless, as discussed here, its share price collapsed in April and May 2011 following online research reports critical of the company’s accounting practices.
As detailed here, securities litigation against the company and certain of its directors and officers followed. One of the individual defendants, Derek Palaschuk, the company’s former CFO, moved to dismiss. As detailed in Jan Wolfe’s July 2, 2012 Am Law Litigation Daily article (here), Palaschuk’s motion has now been denied. In a June 29, 2012 opinion (here), Southern District of New York Judge Shira Sheindlin, acknowledging that the online research reports may well have been biased owing to the online analysts’ financial interests as short sellers of Longtop’s stock, nonetheless rejected Palaschuk’s motion.
The motion involved only the CFO and not the company itself, owing to the fact that the company, though it has been served, has not yet entered an appearance in the case. As Wolfe put it in the Litigation Daily post, after reading Scheindlin’s opinion, “we can understand why Longtop might be avoiding U.S. courts.”
Corporate Directors in the Hot Seat: As research by Stanford Law Professor Michael Klausner and others has found, outside corporate directors are only rarely directly held personally liable for their actions as corporate directors. Nevertheless, directors are increasingly “in the thick of it,” according to an interesting article by Philippa Masters entitled “Corporate Directors on the Firing Line” (here) in the latest issue of Corporate Counsel, dated July 9, 2012.
The article opens with an interesting discussion of the recent events that have swamped the beleaguered board at Yahoo (whose members were memorably described by departing Yahoo CEO Carol Bartz as “doofuses”). The article describes how shareholder activists and others are increasingly seeking to hold directors accountable for problems at their companies. As a result of these recent developments, there has been an upsurge in litigation involving corporate directors – for example, in the form of “say-on-pay” litigation and M&A-related litigation, as well as in FDIC failed bank litigation. The article also notes the increased use of such theories as the responsible corporate officer doctrine, to try to hold corporate officials liable.
The article is a little longer than the usual online fare, but I recommend taking a few minutes to read the entire piece. It is wide-ranging and interesting.
Questioning the Theory of Shareholder Value Maximization: One of the currently accepted tenets of corporate oversight is that companies should be managed to best maximize shareholder value. An interesting June 26, 2012 post on the Dealbook blog (here) takes a look at a recent book by Cornell Law School professor Lynn A. Stout, in which the professor questions the shareholder value “myth.” According to Stout, the misleading shareholder valuation theory is the product of misguided analysis from economists and business professors that has been propagated by the “corporate governance do-gooder movement,” as a result of which short term investors like hedge funds have manipulated companies into delivering short-term stock price driven results at the cost of companies’ long run interests.
Stout contends that based on a proper reading of the law, corporate officials are empowered to take a broader range of considerations into account. They might, for example consider the interests of their customers and their employees and may even consider social responsibility. Stout calls for a return to “managerialism,” where executives and directors can run companies without being preoccupied with shareholder value. It is, she contends, in the long run interest of all constituencies that companies move away from short-term strategies and toward consideration of longer range issues.
Evergreen Fund Suprime-Related Securities Litigation Settled: The parties to the subprime-related Evergreen Ultra Short Opportunities Fund Securities have settled the case. According to the parties’ June 29, 2012 stipulation of settlement (here), the parties have agreed to settle the case for a payment of $25 million. The settlement is subject to court approval.
As described in greater detail here, investors first sued the fund, affiliated entities and certain individuals associated with the fund, in a securities class action lawsuit in June 2008. The plaintiffs alleged that, contrary to its marketing materials, the fund was not managed to preserve capital and avoid principal fluctuations, but rather was composed of illiquid, risky, speculative and volatile securities, particularly mortgage-backed securities. The fund ultimately liquidated at a substantial loss to investors. On March 31, 2010, the court entered an order granting in part and denying in part the defendants’ motion to dismiss.
The settlement stipulation does not reveal whether any portion of the $25 million settlement is to be funded with insurance. I have in any event added the Evergreen Fund settlement to my running tally of subprime and credit crisis-related case resolutions, which can be accessed here.
Evolutionary Biology and the Dynamics of Law Firm Management: Readers of The New Yorker magazine will recall an article that appeared in the magazine in March 2012 discussing the writings and research of evolutionary biologist Edward O. Wilson and the theory of altruistic behavior among animals. An amusing June 28, 2012 post on the Adam Smith, Esq. blog (here) takes a look at the biological theories of altruistic and individualistic behaviors to suggest that law firms that develop altruistic group behaviors are more likely to survive and thrive than are firms that built upon aggressive individualism.
Special thanks to loyal reader Matt Rossman for the link to the Adam Smith, Esq. blog post as well as the article above about Professor Stout’s study of shareholder value.