Last week while traveling I read an article in the NYT about possible securities fraud lawsuits against Research in Motion (RIM, the BlackBerry folks), quoting many of our favorite law professors.  I find the possibility of a lawsuit interesting because I am researching recent attempts to sue firms for bad business planning under the guise of something else.  These lawsuits may take the form of a derivative suit for failing to monitor badness (Caremark -- Duty of Loyalty) or securities fraud (you failed to disclose how bad your plan was and how it might lead to badness).  The RIM problem seems to be the latter.

First of all, there are two RIM securities fraud problems.  The first is a lawsuit filed in May 2011; the second is the predicted lawsuit relating to June 2012. Both would be based on a similar problem -- delays in rolling out a new version of the BlackBerry, and statements made while officers may have known that delay was likely.

The first case, Stabile v. RIM, 11 CIV 3615, seems to rest on some shaky ground.  First, loss causation will be tricky.  The May 2011 case has to allege that price drops on specific dates in March and April were the result of revelations of truth.  But, the price had been continually dropping since February 18, from almost $70 to $23 by August.  (Now, it is $7.25).  So, proving that the declining price was being artificially propped up is difficult.  These "air out of the balloon" fraud cases have not done so well on loss causation.

Second, the fraudulent statements are very hard to pinpoint.  Multiple times the complaint uses this awkward language to state its claim:

The true facts, which were known by defendants but concealed from the investing
public during the Class Period, were as follows:

(a) the Company failed to inform investors that its aging product line and inability
to introduce new products to the market was negatively impacting the Company's business and
margins;

(b) due to execution issues, product delays, and lackluster product launches,
defendants knew that shipments of Blackberry smartphones would be down and inventory would be up. . . .

 

"True facts" should be followed by a fact, not by "the Company failed to inform investors."  But, I think that this drafting quirk highlights the fact that the case really isn't about false facts and true facts.  It's about bad facts that pretty much everybody knew.  You can look around you and see iPhones, version 12 or whatever.  The "false statement" charges, then, seem to take two forms in the specific allegations.  One, that the company's issuance of press releases with optimistic, and true, figures for one quarter, necessarily supported a higher price and required simultaneous release of true facts about future quarters to make the good, albeit true, numbers adequately disclosed.  Also, the issuance of negative facts with a simulataneous emphasis of prior good facts was misleading to investors because it downplayed negative, albeit disclosed, information.  The second type of charge is that forward-looking information turned out to be wrong and perhaps the speaker knew it was wrong at the time it was given.  However, some of the forward-looking information is actually puffery (and not labeled as forward-looking, like earnings projections), but is included as well.  For example:

"With strong results and momentum from our recent product introductions, as well as growing excitement from our partners and customers around upcoming smart phone, tablet, software and service offerings, we are setting the stage for continuing success."

Those statements seem hard to challenge.

As for a potential 2012 case, the claims remain to be made or seen.  From the NYT article, it seems that a lawsuit would have to be based on the new CEO's sunny comments like these:

I appreciate all of the interest on our next-generation platform and I promise, I promise to you that the whole company is laser-focused on delivering on time and exceeding your expectation.

We’re making good progress, and I’m committed to sharing the progress with everyone right up until the launch later this year.

Shareholders in RIM are upset because RIM seems to have lost the smartphone wars, even though it held the first-mover position for quite awhile. And the leagues of die-hard BlackBerry fans of today may find they are the Betamax users of the 21st century. But suing over that disappointment is tough.

Securities | Bookmark

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8345157d569e201676878dc61970b

Links to weblogs that reference Securities Fraud, Puffery and Research in Motion: