Busted Buyout Lawsuits: A 2007 Trend?

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When the dust finally settles and the reports on 2007 class action filings are being written, one development that should be noted as a contributing factor to the increased filings in the second half of 2007 is the emergence of class action lawsuits based on busted buyouts. Disappointed target companies that have become the target of securities lawsuits following busted buyouts include Radian (about which refer to my prior post here), Harman Industries (prior post here) and United Rentals (prior post here).Now plaintiffs’ lawyers have launched a securities lawsuit against Genesco, as a fallout from the busted merger between Genesco and The Finish Line.

Genesco and The Finish Line had announced on June 18, 2007 (here) that The Finish Line would acquire all of Genesco’s stock for $1.5 billion. Problems ensued, and on September 14, 2007, The Finish Line issued a press release (here) announcing that it had received letters from the UBS entities providing the deal financing to the effect that the entities were "extremely concerned about the deteriorating financial position" of Genesco. The UBS entities also noted that they were "not yet satisfied that Genesco has not experienced a Material Adverse Effect." (A Material Adverse Effect would relieve the acquirer from its obligations under the merger agreement.) The UBS entitles had also asked The Finish Line to "cause Genesco" to provide all financial information required for the entities to "conclude whether a Material Adverse Effect had occurred."

Thereafter, on September 21, 2007, Genesco announced (here) that it had filed a lawsuit in Tennessee Chancery Court "seeking an order requiring The Finish Line, Inc. to consummate its merger with Genesco and to enforce The Finish Line’s rights against UBS under the Commitment Letter for financing the transaction."

On September 28, 2007, The Finish Line announced (here) that it had filed an answer, counterclaim and third-party claim for declaratory judgment in the Tennessee action. Among other things, in its September 28 press release, The Finish Line stated that "it has asked Genesco for certain financial and other information as well as access to Genesco’s Chief Financial Offier and financial staff. However, to date Genesco has not responded and refused to comply with these requests." The announcement also stated that The Finish Line was seeking a declaratory judgment that a Material Adverse Effect had occurred.

In its own response to the lawsuit, UBS not only answered but filed a counterclaim against Genesco for fraud. UBS has also sued both Genesco and The Finish Line in federal court in Manhattan seeking to void its financing commitment letter.

The Tennessee case is scheduled to go to trial on December 10, 2007. A copy of the court’s order identifying the issues for trial can be found here. An exhaustive and interesting analysis of the legal issues in the Tennessee case can be found on the M & A Law Prof blog, here.

Just to provide a cold steel edge to these circumstances, the U.S. attorneys’ office in Manhattan served a subpoena on Genesco. According to Genesco’s November 26, 2007 press release (here), the subpoena "states that the documents are sought in connection with alleged violations of federal fraud statutes." The press release quotes the company’s Chairman and CEO has saying that the subpoena "come on the heels of the baseless fraud allegations made by UBS ten days ago."

Circumstances like these were bound to excite the plaintiffs’ lawyers’ interest, and so it comes as no surprise that on December 5, 2007, the Coughlin Stoia firm announced (here) that it had filed a securities lawsuit in federal court in Tennessee against Genesco and certain of its directors and officers. A copy of the complaint can be found here.

According to the press release, the complaint alleges that:

During the Class Period, defendants made false and misleading statements oncerning Genesco’s business and prospects. As a result of their representations, Genesco was seen as an attractive acquisition target for Foot Locker, Inc. Foot Locker ultimately made an offer and The Finish Line, Inc. and Headwind, Inc., a wholly owned subsidiary of Finish Line, subsequently made an increased offer, based on Genesco’s purported success. When the truth about Genesco’s results began to be revealed, however, Finish Line indicated it would no longer pursue the acquisition. Then, on November 26, 2007, Genesco received a subpoena from the Office of the U.S. Attorney for the Southern District of New York seeking documents related to its merger agreement and in connection with alleged violations of federal fraud statutes. On this news, Genesco’s stock plunged to $25.44 per share on November 27, 2007, almost a 16% drop from the closing price of $30.17 on November 26, 2007, on volume of 2.4 million shares.

According to the complaint, during the Class Period defendants concealed the following information, which caused their statements to be materially false and misleading: (a) the Company’s stores were not performing well and would not produce the financial results being forecast for the Company; (b) the Journeys stores were performing poorly relative to plan with big same store sales declines; and (c) these poor results would be considered adverse events to potential acquirors, leading to significant share price declines at Genesco.

The Genesco saga clearly has further to run, particularly in light of the Tennessee state court trial that will begin on Monday. But Genesco’s busted deal with The Finish Line is only one of a host of transactions previously announced with great fanfare that are now dead or on life support. The M & A Law Prof blog (which is, by the way, a truly excellent blog) has a comprehensive overview of the status of these busted deals (here), subdivided between the "dead", the "walking wounded" and the "troubled." There may be one or more disappointed target companies on this list (or soon to be added to the list) that may find themselves getting a securities lawsuit as a complement to their woes.

As I noted at the outset, these busted deal securities lawsuits are just one more factor driving the increase in securities lawsuits in the second half of 2007. For more about the second-half 2007 securities lawsuit filing increase, refer here.

Another Qwest Opt-Out Settlement: In a recent post (here), I detailed two significant opt-out settlement in connection with the Qwest Communications securities litigation. In the latest of the Qwest opt-out settlements, on December 5, 2007, the Teacher Retirement System of Texas (TRS) announced (here) that it had entered a $61.6 million settlement with Qwest.

In its press release, TRS said that had it remained in the class its recovery would only have been $1.4 million, implying that it had increased its recovery 44 times by opting out. In explaining the reason it opted out, TRS’s executive director said that "we considered the high attorneys’ fees and the insufficient recovery anticipated from the class action lawsuit and decided to seek damages from Qwest on our own."

A December 6, 2007 Wall Street Journal article entitled "First the Losses, Now Bond-Fund Lawsuits" discussing other lawsuits (other than securities class action lawsuits) can be found here.

As I discussed in my prior post about the Qwest opt-out settlements, Qwest had disclosed in its most recent filing on Form 10-Q that the company had agreed to pay the class action opt-outs a total of $411 million. According to a December 6, 2007 report in the Austin American-Statesman (here), the $411 million amount includes the amount paid in settlement with the Texas fund. As I also noted in my prior post, the $411 million total opt out settlements exceeds the $400 million that Qwest agreed to pay the class.

Subprime Litigation Wave Hits Mutual Fund Family: Add mutual funds to the list of list of kinds of companies that have been hit with the subprime securities litigation wave. According to its December 6, 2007 press release (here), the Lockridge Grindal Nauen law firm has filed a securities class action lawsuit against Morgan Asset Management, Inc., Morgan Keegan & Company, Inc., MK Holding, Inc., Regions Financial Corporation (NYSE:RF), PricewaterhouseCoopers LLP, and certain individuals, officers and directors associated with these entities in the United States District Court for the Western District of Tennessee, on behalf of investors who purchased shares of the Regions Morgan Keegan Select Intermediate Bond Fund ("MKIBX") and Regions Morgan Keegan Select High Income Fund ("RHIIX").

The bond funds referenced has been in the news for its losses as a result of some subprime related investments. According to a December 6, 2007 article (here) on the Morningstar website, the Morgan Keegan Select Intermediate Bond Fund has lost 55% of its value this year, which the Morningstar site comments is "a staggering loss for a bond fund." The site goes on to comment that "The fund lost a bundle on subprime mortgages and then redemptions forced it to sell other holdings under duress, and the net is a horrific loss. It shows that sometimes you really are better off panicking and yanking your money from a troubled fund, because redemptions can make a bad situation even worse."

I have added the Morgan Keegan/Regions Financial lawsuit to my running tally of subprime-related securities lawsuits, which can be found here. With the addition of this new lawsuit, the tally of subprime securities lawsuits now stands at 23, not counting the four subprime related securities lawsuits that have been filed against home construction companies, and the two rating agencies that have also been sued in subprime related securities lawsuits.

Added together, these various categories total 29 subprime-related securities class action lawsuits, all of which have been filed in 2007.