Web Notes: Backdating, Subprime, "F-cubed" Claimants, and More

Thanksgiving is nigh, but big things are still happening. The Apple options backdating derivative complaint has been dismissed, AIG has been sued in a subprime-related derivative lawsuit, the Non-U.S. claimants were excluded from the Royal Dutch Shell Class, a leading plaintiff’s lawyer had some interesting things to say about subprime lawsuits, and a disappointed busted buyout target company has been sued by its own shareholders, of all things. Interested? Read on.

Apple Backdating Derivative Lawsuit Dismissed: In a recent post (here), I noted that U. S. District Judge Judge Jeremy Fogel dismissed the Apple backdating securities lawsuit, with leave for the plaintiff to refile the complaint as a derivative lawsuit. However, before that plaintiff refiles, its lawyers will want to read Judge Fogel’s November 19, 2007 opinion (here) in the previously pending derivative lawsuit against Apple (as nominal defendant) and several of its directors and officers. Judge Fogel has granted the defendants' motion to dismiss. While the dismissal was with leave to amend, it was hardly on terms that would cheer the plaintiffs’ hearts.

Judge Fogel first considered the plaintiffs’ federal law claims, on the theory that the court’s jurisdiction depends on the existence of a viable federal claim. Judge Fogel found that the plaintiffs’ Section 14(a) claims were barred by the applicable three year statute of limitation. He did allow the plaintiffs leave to amend the Section 14(a) claims, but admonished them that they should not amend the claims unless the wrongful acts alleged took place after July 30, 2003, and he further noted that "greater specificity would likely strengthen the claim considerably."

Judge Fogel next held that the five-year statute of limitations was applicable to the plaintiffs’ Section 10(b) claims, but he also found that the plaintiffs had tried to bootstrap earlier option grants by alleging that the financial misstatements caused by earlier grants were perpetuated in later financial statements. He found that this "combination" was insufficient, and that because the Section 10(b) claims depend on "such a combination, it will be dismissed." He allowed plaintiffs leave to replead the Section 10(b) claims but only as to wrongful acts that occurred on or after June 30, 2001.

The judge then went on to consider whether the plaintiffs had adequately alleged scienter. He found that the complaint is "characterized by conclusory, general and non-individualized assertions as to all Defendants." He found that plaintiffs "must provide more detailed allegations giving rise to a stronger inference of scienter on the part of each defendant." He then went on and noted that the plaintiff’s "scheme liability" allegations are subject to the pending Stoneridge case (about which refer here) and in any event were dismissed because they reflected "insufficient allegations that the various defendants’ contributions to the overall scheme had a deceptive purpose and effect."

Because the plaintiffs had not yet established a valid federal claim and therefore established federal jurisdiction, Judge Fogel did not reach the plaintiffs’ state law claims. He did, however, note that the defendants "appear to raise a number of valid arguments with respect to these claims, and plaintiffs may wish to amend the claims accordingly."

Judge Fogel’s rulings, particularly those regarding the statute of limitations issues, might well be instructive to other courts and other litigants involved in other options backdating cases. However, Judge Fogel has once again indulged in his infuriating practice of issuing his opinions "not for citation." As I previously noted here, this regrettable practice does a disservice to all litigants and every other court.

One other backdating note is that on November 19, 2007, U.S. District Judge Joel Pisano dismissed (here) the options backdating derivtive lawsuit pending against Bed Bath & Beyond (as nominal defendant) and several of its directors and officers on the grounds of the New York state court's prior dismissal (refer here) of the same claims. More about Judge Pisano below...

The Apple and Bed, Bath & Beyond dismissals have been added to the running tally of options backdating dismissals, denials and settlements that I am maintaining and that can be accessed here.

Special thanks to Robert Benjamin of the Kaufman, Borgeest & Ryan firm for the link the Apple derivative opinion.

Subprime Litigation Wave Hits AIG: The outward-expanding wave of subprime-related litigation has now hit the insurance industry. According to news reports (here and here), on November 20, 2007, a shareholder filed a derivative lawsuit against AIG (as nominal defendant)and several of its directors and officers. The complaint apparently alleges that AIG improperly concealed the extent of its exposure to subprime mortgage crisis, and contains claims for breaches of fiduciary duties, unjust enrichment, and other charges.

The news articles report that the complaint alleges that the defendants had "claimed that AIG’s portfolio was so sufficiently diversified that the mortgage market would have to reach ‘Depression proportions’ before negatively impacting the company. AIG was not as invulnerable as defendant claimed, however." The complaint reportedly goes on to allege that "while defendants were directing AIG to issue improper statements concerning its exposure to the subprime mortgage crisis, they were also directing AIG to repurchase over $3.7 billion of its own shares at artificially inflated prices. Even worse, certain defendants sold their personally held shares while in possession of material nonpublic information for over $6 million in proceeds."

The complaint alleges that AIG’s results were hurt by $1.4 billion in losses in AIG’s investment portfolios and mortgage insurance business.

The new lawsuit is significant because it represents the first subprime-related D & O claim in the broader insurance industry. Given the recent news from other companies in the insurance sector (as, for example, with Swiss Re, refer here) there may well be more claims to come in the insurance sector. But even more importantly, it seems increasingly likely that the subprime wave will continue to expand, even beyond insurance and the financial services industry generally, to encompass an even broader range of companies. An example of this risk outside the financial services sector may be seen in the recent problems reports at General Motors (about which refer here). Given the remarks of the leading plaintiffs’ lawyer reported below, this possibility appears to loom even larger.

"F-Cubed" Claimants Out of Royal Dutch Shell Securities Case: As I noted in an earlier post (here), a critical question arising with increasing frequency is the jurisdiction of U.S courts for foreign litigants' securities claims against foreign companies. This question is presented in its starkest form with the so called "F-Cubed" claimants (foreign domiciled claimants who bought their shares of a foreign company on a foreign exchange, for further discussion of which refer here). In the context of a U.S. class action, the question is whether or not these claimants should or should not be included within the plaintiff class.

In a November 13, 2007 decision (here), Judge Joel Pisano of the federal court in New Jersey held that "Non-U.S. Purchasers" should not be included in the class for the Royal Dutch Shell securities class action lawsuit, and dismissed their claims on the ground of lack of subject matter jurisdiction. It should be noted for purposes of this discussion that Royal Dutch Shell is a Dutch corporation with headquarters in the Netherlands, and co-defendant Shell Transport and Trading Company is a U.K. corporation with headquarters in the U.K.

The "Non-U.S. Purchasers" consisted of "persons or entities who purchased their shares on exchanges outside of the United States and at the time of such purchase were residents or citizens of, or were created in or under the laws of any jurisdiction other than the United States." The question whether or not these person should be included in the class was particularly important in the Royal Dutch Shell case because "a great majority of the securities traded during the Class Period were traded on foreign exchanges and by the Non-U.S. Purchasers." In order to address the question, Judge Pisano appointed a Special Master, whose findings he adopted in his November 13 opinion.

In adopting the Special Master’s findings, Judge Pisano clearly was influenced by the $352.6 settlement that Shell had entered in the Amsterdam Court of Appeals in the Netherlands, with a Dutch foundation specifically formed to represent the non-U.S. purchasers’ interests. (Refer here for background regarding the Dutch settlement.) Judge Pisano specifically noted that the Dutch settlement agreement is conditioned on whether the U.S. court exercised subject matter jurisdiction over the non-U.S. purchasers.

The parties had agreed that the U.S. court’s jurisdiction over the non-U.S. purchasers depended on whether the defendants’ conduct occurred with the U.S. Essentially (I am simplifying here) because the court (adopting the Special Master’s findings) found that "the genesis of all of the original disclosures relevant to the investing public was in Europe," and the court concluded there was insufficient conduct in the U.S. to support the exercise of extraterritorial jurisdiction.

The Royal Dutch Shell opinion stands in arguable contrast to the recent Vivendi class certifications decision in which some (but not all) of the non-U.S. Vivendi purchasers were included within the class (about which refer here).

The importance of the Dutch settlement’s existence to the outcome in the Royal Dutch Shell case also presents an interesting question – would the outcome have been the same if there were no existing alternative vehicle for relief of the Non-U.S. purchasers?

In any event, while the Royal Dutch Shell class decision represents an important development in the evolving issue of U.S. court’s jurisdiction over foreign shareholders’ claims against foreign companies, it is important to note that the decision was very fact specific. Because of the decision’s fact dependency, it is unlikely to control other courts, although it does represent a procedural model and a compelling summary of the relevant legal considerations.

Finally, it should be noted that Judge Pisano later affirmed that his November 13 opinion represents a final judgment, and it is therefore appealable to the Third Circuit. So there may yet be more to be heard on this issue in this case.

Subprime: What’s Happening Now: As noted above, the subprime wave is already expanding outward, but the plaintiffs’ lawyers may just be getting started. According to recent news reports (here), Patrick Coughlin of the Coughlin, Stoia, Geller, Rudman & Robbins firm, has declared subprime the "top priority." The article quotes Coughlin as saying that subprime is "really everything and the only thing now." The news article reports that the firm had "already filed 25 mortgage-related complaints against investment banks, mortgage lenders, and others, and it expects to bring about 15 more cases." The firm is considering bringing on more lawyers.

And speaking of the Coughlin Stoia firm, I recently noted (here) that the increased securities litigation activity in the second half of 2007 is due in large part to the sudden increased activity of the firm, a fact that is corroborated in the recent news reports. The article quotes Coughlin as saying "we have filed more cases in the last three or four months than we filed in the previous year."

So much for the supposed "permanent shift" to a lower level of securities lawsuit filings.

Adding Injury to Insult: In an earlier post (here), I commented on United Rental’s litigation efforts and threats to try to compel Cerberus Capital Management to honor its agreement to acquire United Rentals. It now appears in addition to United Rental’s lawsuit against Cerberus, on November 20, 2007, certain United Rentals shareholders initiated a purported securities class action lawsuit. According to the plaintiffs’ attorneys’ press release (here), the plaintiffs allege that the company and its directors and officers violated the federal securities laws by "failing to disclose that, several weeks after the Merger Agreement was signed, Cerberus contacted [United Rentals] and expressed concern about its ability to proceed with the merger given the changes in the credit and financial markets." The plaintiffs allege that the failure to disclose these facts misled investors and caused United Rental’s shares to trade at artificially inflated prices.

While I have previously speculated that the buy-out bubble bust would provoke litigation, I confess I never anticipated the possibility of securities lawsuits by the shareholders of the disappointed target company. But there certainly are no shortage of these kinds of situations around these days, and hyperactive plaintiffs’ lawyers could well create an entire category of lawsuits like this one.

The purport of the allegations suggests a keen dilemma for company managers who are trying to hold a floundering merger together; the plaintiffs’ allegations suggest that at the very time that managers are engaged in fraught negotiations to salvage the deal, they should be publicly disclosing the challenges confronting the merger’s completion.

The problem here is that the deal fell apart, which event management was trying to prevent – there would have been no injury if the deal went through, and whatever chance there was to salvage the deal would not have been advanced if management had been issuing press releases every day about the ebb and flow of the discussions.

I feel like throwing a flag on this lawsuit. Unsportsmanlike conduct, unnecessary roughness, piling on. But that doesn't mean there won't be more cases like this one, I suppose.

UPDATE: Adam Savett of the Securities Litigation Watch blog points out that a buyout bust up previously resulted in a securities class action lawsuit in connection with the failed Harman Interational buyout. I actually discussed the Harman lawsuit in an earlier post, here. So, does two lawsuits constitute a trend?