Cadwalader’s Securities Litigation Group continued a long-standing series of victories, winning dismissals in several cases in 2006. This brings to 19 the number of cases won by the firm in just two years on behalf of financial institutions, companies and directors and officers on a wide variety of theories that demonstrate the depth and breadth of the group’s knowledge of the securities laws. The 2006 highlights are described below:
In re UTStarcom, Inc. Securities Litigation
In July 2006, plaintiffs voluntarily dismissed a putative class action filed in the U.S. District Court for the Northern District of California against our client Banc of America Securities LLC (“BAS”). Cadwalader Litigation Department Chairman Greg Markel, partner Ronit Setton and associates Amanda Kosowsky, Kathryn Shreeves, Kate Hooker and Daniel Howley represented BAS. The complaint asserted a claim under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against BAS arising from its involvement with UTStarcom, Inc. (“UTStarcom”), a manufacturer and provider of telecommunications systems. It also asserted claims against UTStarcom, certain of its officers and its largest shareholder. Plaintiffs alleged that, based on its analyst’s coverage of UTStarcom, its involvement as an underwriter in UTStarcom securities offerings and its role as a market maker in UTStarcom stock, BAS knew that UTStarcom’s personal access system product in China would be phased out due to the development of 3G technology. Plaintiffs also alleged that BAS was aware of deficiencies in UTStarcom’s infrastructure and accounting controls, inaccuracies in UTStarcom’s financial statements, and improper revenue recognition. We argued that the complaint failed to state a claim against BAS because it did not adequately allege facts giving rise to a strong inference that BAS acted with scienter or sufficiently plead any actionable misstatement or omission by BAS. In addition, we argued that the complaint’s claim of scheme liability against BAS was nothing more than an aiding and abetting claim, which is not actionable under Section 10(b). Prior to the date when BAS’s reply brief was due, plaintiffs decided to voluntarily dismiss their claim against BAS.
Robyn Meredith, Inc., et al. v. Levy, et al.
On July 27, 2006, the U.S. District Court for the District of New Jersey granted a motion to dismiss plaintiffs’ federal securities law claims against our clients, two former officers of DonnKenny, Inc. (“DonnKenny”). Plaintiffs alleged that the defendants violated Sections 10(b), 18 and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) by making material misstatements in connection with the sale to them of a note evidencing DonnKenny’s obligation to pay a portion of the purchase price for certain of plaintiffs’ assets over a period of three years. In particular, plaintiffs alleged that defendants provided false and materially misleading information, including fraudulent DonnKenny public filings in connection with the sale of the note. Partner Martin L. Seidel and associate Elizabeth Butler successfully argued that the note – a non-negotiable promissory note executed in connection with the sale to DonnKenny of certain assets of plaintiffs’ business – did not constitute a “security” under the federal securities laws. The Court agreed, dismissing plaintiffs’ Exchange Act claims and declining to exercise jurisdiction over their common law claims.
Massey v. Merrill Lynch & Co., Inc.
On September 14, 2006, the Seventh Circuit affirmed the Southern District of Indiana’s dismissal of all claims with prejudice against our client, Merrill Lynch & Co., Inc. (“Merrill Lynch”) in Massey v. Merrill Lynch & Co., Inc. Plaintiffs, two former directors of Conseco, Inc., claimed that Merrill Lynch breached its fiduciary duty to, and defrauded, plaintiffs when it provided a fairness opinion to Conseco in connection with its $7.6 billion purchase of Green Tree Financial Corporation (“Green Tree”). According to plaintiffs, Merrill Lynch knew that Green Tree was worth only a fraction of the $7.6 billion purchase price, but nevertheless gave written and oral opinions endorsing the acquisition. The purchase allegedly led to Conseco’s bankruptcy and wiped out the value of plaintiffs’ stock. Plaintiffs argued that their claims were not derivative claims belonging to Conseco because, as directors of Conseco that had borrowed large amounts of money to purchase Conseco stock, they were not “ordinary shareholders.” A Cadwalader Litigation team, consisting of partners Gregory A. Markel and Martin L. Seidel, and associate Kate Shreeves, successfully argued before the Seventh Circuit that plaintiffs’ claims were derivative claims belonging to Conseco, and not to plaintiffs individually. Specifically, the Seventh Circuit agreed with our position that plaintiffs’ claims were “solely derivative claims” belonging to the corporation and that plaintiffs’ status as former directors of Conseco could not change that result. In affirming the lower court’s dismissal of plaintiffs’ claims against Merrill Lynch, the Court noted that “it would be a curious—and unfair— result if, as the plaintiffs argue, corporate insiders were permitted to maintain direct actions that ‘ordinary shareholders’ could not bring. Such a result would provide greater protections to insiders, who presumably have the greatest access to information on the future prospects of a corporation....We are not inclined to create such a bedrock corporate law principals, and instead hold that the plaintiffs must take their proper place in the recovery line along with all other investors.”
Bally Total Fitness Holding Corporation Litigation
Cadwalader’s Securities Litigation team marked recent months with three significant victories on behalf of the former Chief Executive Officer of Bally Total Fitness Holding Corporation (“Bally”). One proceeding involved the dismissal of a securities class action suit while two involved the dismissal of individual securities claims.
In re Bally Total Fitness Securities Litigation
In July, a team led by partners Gregory Markel and Gregory Ballard and associates Kate Shreeves, Mollie O’Rourke and Gazeena Soni won the dismissal, without prejudice, of a securities class action lawsuit alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act by, among others, our client, the former Chairman and Chief Executive Officer of Bally. Plaintiff claimed that during the class period Bally and its management misrepresented Bally’s financial results and condition in its SEC filings and press releases and that the accounting policies applied by the company were “aggressive” and violated Generally Accepted Accounting Principles, thereby inflating Bally’s earnings and underlying value.
Judge John Grady of the Northern District of Illinois granted our motion to dismiss the Section 10(b) claim against the former CEO, holding that the complaint failed to adequately plead scienter. The Court agreed with our argument that the allegations regarding the former CEO’s position and duties as a senior executive, his purported access to information by virtue of the position he held, and his background in accounting were insufficient to plead a strong inference of scienter because plaintiffs “cannot rely on a ‘must have known’ theory.’” Judge Grady also found, as we had argued, that the Bally’s Audit Committee’s findings, which plaintiff relied in an effort to place blame on the former CEO, were insufficient to establish scienter because they were “vague and unspecific” and were “simply hindsight conclusions.”
Because plaintiffs did not sufficiently allege a primary violation of Section 10(b), the Court also dismissed plaintiffs’ claims under Section 20(a). The Court also dismissed the Section 10(b) and Section 20(a) claims against the former Chief Financial Officer, and the Section 10(b) claims against the former independent auditors of Bally. Plaintiffs have been given leave to amend the complaint.
Garrison v. Bally Total Fitness Holding Corporation
Also in July, partners Gregory Markel and Gregory Ballard and associate Kate Shreeves successfully defended the former CEO of Bally in a securities fraud action in the U.S. District Court for the District of Oregon. Plaintiff alleged that Bally committed violations of the Oregon Securities Act, breach of contract and common law fraud when it purchased plaintiffs’ health club business in exchange for Bally stock. Plaintiffs also alleged that Bally made materially false representations in its SEC filings and financial statements that inflated the value of the Bally stock at the time Bally acquired plaintiffs’ business, although the breach of contract and fraud claims were dismissed earlier this year.
Magistrate Judge Paul Papak recommended that our motion for summary judgment on the remaining claims be granted. In the course of dismissing the claims, the Court noted that the plaintiffs agreed that after November 17, 2001 they could no longer use or rely upon any representations or warranties provided by Bally in the Stock Purchase Agreement. More importantly, “the parties agreed to the same 18 month expiration period for ‘any and all claims and causes of action’ related to representations and warranties.” In response to plaintiffs’ argument that the parties were not permitted to contractually shorten the statute of limitations for the securities claims, the Court noted that the Oregon Supreme Court has held that parties may contractually limit their rights under the Oregon Securities Law.
Plaintiffs also alleged that the former CEO and former CFO made positive statements about Bally’s financial condition which announced Bally’s inaccurate financial results. The Court held that the General Release signed by both parties unambiguously barred claims arising from the plaintiffs’ stock ownership, including claims brought under the Oregon Securities Law, because “this is the only plausible interpretation that can be given in order to give effect to the plain language of the General Release.”
Fit Tech v. Bally Total Fitness Holding Corporation
In April, Gregory Markel and Gregory Ballard, and associate Kate Shreeves, moved to dismiss another action involving Bally in which plaintiffs asserted claims against our client, the former CEO of Bally, in the District Court of Massachusetts. Bally acquired a group of fitness centers from plaintiffs in March 2002 and plaintiffs brought five claims against our client based on that acquisition. Among the claims was a securities fraud claim, in which plaintiffs alleged that Bally and its management made false and misleading statements in connection with Bally’s financial condition.
Judge Morris Lasker granted the motions to dismiss. The Court agreed with our argument that the Massachusetts courts had no personal jurisdiction over our client. Judge Lasker found that jurisdiction was lacking because there was neither “evidence of [the CEO’s] engagement in any ‘continuous and systematic activity’ in Massachusetts” nor allegations that he transacted business or directed any of the allegedly false statements into Massachusetts.
About Cadwalader's Securities Litigation Team
Led by nationally-recognized attorneys, Cadwalader’s securities litigation team handles significant disputes arising out of virtually every kind of corporate transaction, from hotly-contested mergers and acquisitions to nationwide shareholder class action suits to high-profile government investigations and enforcement actions. In addition to many of the world’s leading financial institutions, we represent major corporations in a variety of industries, boards of directors, corporate officers, and high net worth individuals. Among recent “bet-the-company” matters in which Cadwalader has played a prominent role are litigation relating to Enron, World Com, Tyco, Adelphia, AIG, Martha Stewart Living Omnimedia, Healthsouth, Bally, the Williams Companies, McKesson-HBOC, the Wall Street research and IPO investigations, Hollinger, MassMutual, the Lipper investment partnerships and many others.
Our securities litigators are held in high esteem by independent commentators, including the Chambers Guides to Leading Lawyers that recognizes them for their “ability to attract Wall Street’s most important financial entities” and for their “prowess in behind-the-scenes negotiations to achieve results for clients without resorting to costly litigation.” Other researchers that have recognized Cadwalader litigators as leaders in their field include The Best Lawyers in America, The Best Lawyers in New York, LawDragon, Best of US, Who’s Who of American Law, The International Who's Who of Commercial Litigators, The International Who's Who of Business Lawyers, and New York Super Lawyers. They frequently comment on legal issues for the Wall Street Journal, CNBC, Bloomberg TV, Bloomberg Radio, New York Times, Time, Newsweek and the Associated Press as well as author articles for leading publications such as The National Law Journal, the New York Law Journal, the Securities Litigation and Regulation Reporter, the Securities Regulation Law Journal, and others.
With 35 attorneys, our securities litigation team is also able to draw on the resources of the firm’s 130-member Litigation Department to further supplement their substantial courtroom experience as well as experience in all aspects of dispute resolution in state and federal cases throughout the United States and in England, and in proceedings before administrative and regulatory agencies and international tribunals. They routinely supervise and manage large, complex cases and frequently work with technical consultants, experts and other counsel to efficiently and effectively further the interests of our clients. The firm is committed to continually exploring state-of-the-art technologies to help our attorneys organize and manage discovery and trial materials, design exhibits and communicate with our clients. As appropriate, attorneys in the Litigation Department join with the Firm’s attorneys experienced in other disciplines in order to provide the most comprehensive representation.
Shareholder and Class Action Suits
Our litigators represent clients in shareholder class actions, often following public offerings or events that are claimed to impact the price of securities, derivative suits, customer disputes, and a wide variety of other cases, including those mentioned above. They have handled class action litigations on behalf of a wide range of clients across industries, including issuers, underwriters, and auditors, and are expert at dealing with the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company and Investment Advisors Acts of 1940, and related federal and state laws. In addition, they have represented numerous officers and directors accused of securities law violations in state and federal shareholder class actions cases involving alleged violations of Sections 5, 11, 12 and 15 of the Securities Act of 1933 and Sections 10(b) and 16(b) of the Securities Exchange Act of 1934, among others.
Corporate Control Litigation
In concert with our leading corporate advisors, our litigators regularly advise clients in the range of corporate control matters, including friendly and contested acquisitions, tender offers and proxy contests; consent solicitations; mergers; stock and asset purchases; joint ventures; and recapitalizations. They have represented both acquirers and targets in the M&A arena and have particular expertise counseling clients on their general defensive posture and preparedness in the event of control or takeover contests, including analyzing charter provisions, state takeover statutes, shareholder rights plans and strategic and financial structural defenses, as well as developing appropriate responses to specific takeover threats.
With some of the foremost authorities on issues of corporate governance, the group regularly provides counsel to management, directors and shareholders of leading businesses on the complete spectrum of business, securities and corporate governance matters, including contests for corporate control, affiliate transactions, buyout proposals, directors’ oversight, fiduciary duty and liability issues, shareholder agreements, and succession planning. They also counsel buyers and sellers, as well as lenders, accounting firms and financial advisors, as to claims concerning breach of contract, fraud and misrepresentation, indemnification, and purchase price and post-closing adjustments.
Regulatory Matters and Internal Investigations
With the increasing scrutiny of, and oversight by, the government and government agencies, our team handles SEC investigations and enforcement actions, as well as those by other federal governmental and regulatory agencies, state securities agencies and SROs. Our cases often include situations implicated by or potentially implicated by the federal bankruptcy laws, and special internal investigations on behalf of audit committees and boards of directors to investigate suspected wrongdoing, to assist officers and directors in fulfilling their fiduciary duties, to address threatened or pending litigation, and to deal with government or agency investigations. Our services extend to the development of internal compliance programs and policies and procedures for a wide variety of businesses to assist them in conducting their operations in a manner consistent with ethical and legal standards and to avoid the threat of litigation.