A few more boulders have been thrown on the plaintiffs' rocky road to recovery in the consolidated (former) class action case, In re Initial Public Offering Securities Litigation.  This case involves more than 300 issuers and 55 underwriters in more than 1100 original actions filed as early as January 2001 alleging IPO abuses (spinning, laddering, excessive compensation, and analyst conflicts) that were all consolidated in the Southern District of New York in Judge Shira Scheindlin's court.  First, the claims had to survive a motion to dismiss, and Judge Scheindlin denied in part that motion, keeping alive most IPO claims but dismissing claims relating to secondary offerings and mergers and acquisitions.  Judge Scheindlin also dismissed some claims under Section 11 brought by plaintiffs who sold stock above the offering price.  Judge Scheindlin revisited the question of dismissal after the Supreme Court opinion in Dura Pharmaceuticals and dismissed claims involving the "Pop and Performance" scheme of issuing knowingly low earnings estimate in order to give investors a pleasant surprise later. (Interestingly, the Supreme Court of the United States denied certiorari on that dismissal on Monday.)

Along the way, Judge Scheindlin approved two settlements:  (1) the issuers and individual officer defendants guaranteed recovery of one billion dollars by agreeing to pay plaintiffs the difference between underwriter recovery and $1B, if any; and (2) J.P. Morgan Chase settled claims in April 20006 for $425 million, pending court approval.  These settlements are a little more unsettled today!  Much more below the fold (maybe too much):

In October 2004, Judge Scheindlin certified the class by analyzing six "focus cases": Corris Corp., Engage Technologies, Inc., Firepond, Inc., IXL Enterprises, Inc., Sycamore Networks, Inc., and VA Linux Corp.  This determination was vacated yesterday by the Second Circuit, denying class certification.  The court stated that Judge Scheindlin erred in applying a "some showing" standard of proof for Rule 23's four requirements of numerosity, commonality, typicality and adequacy of representation.  The court acknowledged that it was fashioning a new standard as "our Court has been less than clear as to the applicable standards for class certification and. . . we have used language that understandably led Judge Scheindlin astray."  In addition, applying the court's new standard, commonality is not proven as to reliance because as a matter of law "the market for IPO shares is not efficient."  The Second Circuit remanded for further proceedings, but not further inquiries into certification, which it resolved.

So, lots of questions now as to the future of these lawsuits.  Without the class action mechanism, individual investors may bring lawsuits (if not bound by arbitration agreements), but finding representation for smaller claims will be difficult.  In talking to a reporter today, I heard that word on the street is that an individual plaintiff would find it hard to find an attorney if the plaintiff's claims were under $1 million.  So, tack that up to a $1 million deductible before any compensation for losses due to fraud.  And remember the fate of Donald Sturm, who chose to individually arbitrate his analyst conflict case and was provided no remedy for losing $900 million on Jack Grubman's tainted advice.

Is there compensable fraud?  Although the Second Circuit never expresses an opinion as to the ultimate question, the opinion seems to be fairly disparaging of Judge Scheindlin's denial of motions to dismiss.  In describing the December 2003 order, the court states that Judge Scheindlin "held that it was fair to infer dissipation of the inflated price over time in a manipulation case, notwithstanding the Second Circuit's intervening decision in Emergent Capital (citation omitted)."  The very question presented asked whether the class certification question can be answered without delving into the merits of the underlying case, and the Second Circuit seems to answer that a court must delve into those merits, and then does.

Finally, remember that many of the allegations in the Master Allegations were the subject of the record-breaking April 2003 Global Settlement of Analyst Conflict of Interest engineered by Eliot Spitzer, the DOJ and the SEC.  In the settlement, ten major Wall Street investment banks and analysts Jack Grubman and Henry Blodget settled allegations of improper IPO allocation practices.  The allegations focused on analyst conflicts, but two of those banks, Credit Suisse First Boston and Salomon Smith Barney (now Citigroup) were also charged with IPO spinning.  At the same time as the Global Settlement was finalized, these banks entered into the Voluntary Initiative Regarding Allocations of Securities in "Hot" Initial Public Offerings to Corporate Executives and Directors.  Recall also the prolonged prosecution of Frank Quattrone for obstructing justice in relation to spinning charges of allocating hot IPO shares to hedge fund managers in return for excessive fees on unrelated trades.  So, we have another example of regulators and prosecutors seeing a widespread industry practice they view as abusive and criminal, investigating and strong-arming targets into a settlement, but the victims of those abuses can find no relief in civil litigation either because of structural hurdles, procedural or substantive.  Is this an area of "overcriminalization" or "undercivilization"?

UPDATE:  Some links:  NYT, WSJ, Law.com, and the opinion (via Law Blog).

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