Thursday, January 10, 2008

Updates and Notes

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More About Foreign Claimants, Foreign Companies: In earlier posts (here and here), I discussed issues arising as a result of foreign litigants suing foreign domiciled companies in securities class action lawsuits in U.S. courts. These issues were involved in a recent opinion in a case pending in the Southern District of New York. In a January 8, 2008 ruling (here), U.S. District Court Judge Denny Chin appointed Luxembourg-based investment company Axxion S.A. Luxembourg as lead plaintiff in the consolidated securities lawsuit pending against GPC Biotech AG, a biotechnology company based in Munich, Germany.

Three sets of plaintiffs had sought to serve as lead plaintiffs. Judge Chin selected Axxion, which through its Akrobat Fund-Value investment fund had spend $3.9 million purchasing 150,000 GPC Biotech shares and which claimed losses of $1.8 million, as having the "largest financial interest in the relief sought." Judge Chin rejected the arguments of the other claimants, who had resisted Axxion’s petition on the grounds that its fund had purchased the shares on the German exchanges. (GPC Biotech’s shares trade both on the Nasdaq and on the Deutsche Bourse.)

In effect, the competing claimants argued that Axxiom’s petition should be rejected because Axxion is an "f-cubed claimant" (a foreign claimant suing a foreign company whose shares the claimant purchased on a foreign exchange.) Judge Chin found (citing the Nortel Networks case) that other courts in the District had previously selected foreign litigants as lead plaintiff to represent both foreign and U.S. investors. He also noted that while the defendants might raise a subject matter jurisdiction defense as to Axxiom, "such a defense would not appear ‘unique’ to Axxiom, as it would appear that many (if not most) of the class members would be foreign investors."

Judge Chin further noted that there is no reason to doubt" the ability of Axxiom to respond to a motion to dismiss raising the subject matter jurisdiction defense. Judge Chin also commented "without prejudicing the issue" that "plaintiffs have alleged individual acts in the United States in furtherance of the alleged fraud." As discussed at length in my prior post (here), the presence of substantial acts in the United States has been held by some other courts to be a sufficient basis to support the exercise of subject matter jurisdiction.

As I noted in my recent analysis of the 2007 securities lawsuits (here), there were 26 securities lawsuits filed in U.S. courts in 2007 against foreign domiciled companies, 21 of them in the Southern District of New York. As a result, the issues surrounding foreign litigants’ claims against foreign domiciled companies is likely to be the subject of a great deal of scrutiny and discussion in the months ahead, particularly in the Southern District. The subject matter jurisdiction issue will also receive a great deal of attention. As I noted in a prior post (here), the jurisdictional issue is also squarely raised in a case now pending before the Second Circuit.

Finally, although Judge Chin did not address the issue in his recent opinion, the presence of a significant number of foreign claimants who purchased their shares on foreign exchanges may raise significant class certification issues. In the Vivendi case (about which refer here), the court excluded certain foreign claimants from the class while including others, and, as discussed here, in the recent Royal Dutch Shell decision (refer here), the court (for reasons based on facts perhaps specific to that case) excluded non-U.S. purchasers from the class and dismissed their claims based on the lack of subject matter jurisdiction. These class certification issues will also be important in the new wave of securities claims filed against foreign domiciled companies.

In any event, it appears that even if foreign jurisdictions have not warmed to U.S. style class action litigation, foreign institutions increasingly are drawn to U.S. courts to attempt to recoup investment losses, even against foreign-domiciled companies. These institutions’ willingness to resort to U.S. courts and to rely about remedies available under U.S. law potentially could drive legal reforms in their own countries, as these foreign seek local alternatives to hold company management responsible. These overseas firms’ willingness to employ U.S. litigation suggests that the U.S. approach to litigation, usually portrayed as a disadvantage to the U.S. in the global financial market competition, may actually have a more complicated impact on U.S competitiveness than some would-be reformers assume.

One final observation about the GPC Biotech case is that it embodies a number of important 2007 litigation trends. First, as noted above, a significant factor in the 2007 uptick in securities lawsuit filings is the increased incidence of lawsuits in the Southern District of New York against foreign-domiciled companies, of which the GPC Biotech lawsuit is one example. Second, GPC Biotech is in the 2834 SIC Code (Pharmaceutical Preparations), which as I noted here was one of the SIC Code categories with the greatest number of 2007 filings.

In many ways, the GPC Biotech lawsuit is emblematic of a number of important trends that emerged in 2007, in particular because the case does not in any way relate to the subprime meltdown. As I have noted before, even though the subprime litigation wave was clearly an important 2007 development in connection with securities litigation, it was only one of several important factors at work during the year.

Tracking Subprime Lawsuits: In discussing (here) the 2007 year-end securities lawsuits analysis of NERA Economic Consulting, I noted that NERA’s count of 2007 subprime-related securities lawsuits filings and my own count (here) diverged. I have now had the opportunity to confer and compare notes with NERA, as a result of which I was able to identify the differences between our tallies. Based on these discussions, I have added three additional subprime-related securities class action lawsuits to my running tally: BankAtlantic Bancorp (here), First Home Builders of Florida (here), and Merrill Lynch/First Republic (here).

As a result of these additions, my current tally of subprime-related securities lawsuits (including lawsuits against the credit rating agencies and subprime-related lawsuits against residential construction companies) now stands at 37.

Very special thank to NERA, and especially to Svetlana Starykh, for the willingness to confer and to share information.

Accounting Discipline: According to a January 9, 2008 CFO.com article (here), the International Helsinki Federation of Human Rights must shut down as a result of its finance manager’s six-year embezzlement of $1.8 million. The finance manager apparently embezzled the funds to "support his mistress."

The Federation’s mission had been "to protect and strengthen civil society groups that monitor and report on human rights issues from a non-partisan perspective." Unfortunately, the Federation’s funds were put to some decidedly different uses. According to the news reports, "the mistress reportedly gambled away up to $7,000 a week at poker and told the finance executive she needed $44,000 to open a hair salon. She also spent some of the money for breast augmentation and a nose job."

The finance manager told the court that he would not have agreed to finance the woman's operations had he known about them ahead of time. (The news reports do not reveal what he thought about them afterwards, though.)

Apparently the finance manager regarded these transfers of cash as a loan transaction; he told the court that the woman had promised him she would pay him back from a large inheritance she expected.

The finance manager, age 43, has been sentenced to three years in jail; the woman, age 31, was sentenced to two years.

All of which is just a reminder of the importance of internal accounting controls for entitles of all sizes and types. It is perhaps an idle thought, but I do wonder how much financial fraud has its origins in some kind of marital infidelity or sexual indiscretion. Admittedly, it would be a difficult thing to try to underwrite...

What He Said: During the time that I have been blogging, I have felt within me an essay developing that would describe what it is like to blog and what the advantages and disadvantages are. My friend Mark Herrmann, who is one of the co-authors of the Drug and Device Law Blog (here), has gone ahead and delivered himself of the very essay I might have written, if I were as articulate as Mark. The essay, published in the National Law Journal, can be found here. He wrote it, now I don’t have to.

By the way, if you have any involvement with life sciences companies, the Drug and Device Law Blog is indispensible.
Hat tip to the Delaware Corporate and Commercial Litigation Blog (here) for the link to the NLJ article.

Last Chance: The early registration discount for the 2008 PLUS D & O Symposium expires January 11, 2008 at 5:00 p.m. CST. The registration materials and schedule can be found here. As I have previously noted, I will be co-chairing this year’s Symposium with Chris Duca from Navigators Pro. We are proud of the program we have put together. The speakers include former SEC Chairman William Donaldson, who will be the keynote speaker, and the panelists include, among many luminaries, SEC Enforcement Division Director Linda Chatman Thomsen.

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