Kathrein on Investor Fraud

Ninth Circuit Finds NASDAQ Listing Material

In a rare case, based solely on a Section 12(a)(2) of the Securities Act of 1933 (the “Act”), 15 U.S.C. § 77l(a)(2) claim, the Ninth Circuit overturned a District Court Opinion finding that an implied promise to list the stock on NASDAQ, in the Final Draft of the Prospectus, was not material. In HOWARD MILLER v.THANE INTERNATIONAL, INC., the Ninth Circuit recites what this author finds to be almost an amusing flip-flop of experts (both of whom I respect) who normally take completely opposite positions in a 10b case where defendants argue that the "reliance" element of fraud cannot be established through the "fraud on the market presumption" in small cap stocks because the markets on which they trade on are not efficient :

Testifying for Thane International, Bradford Cornell, Professor of Finance at the Anderson Graduate School of Management at the University of California, Los Angeles, minimized the importance investors attach to the market in which a company trades, concluding “value derives from the company itself and not where it trades.” He also testified that liquidity is determined by a company’s inherent characteristics,5 not the market on which it trades. He generally regarded listing on the NASDAQ as a cosmetic benefit of secondary importance to investors who focus on a company’s fundamentals.

On behalf of the plaintiff class, Candace Preston, founding member of Financial Markets Analysis, LLC, emphasized the benefits that accompany NASDAQ listing as compared to listing on the OTCBB. She declared that NASDAQ stocks generally enjoy greater liquidity, and thus reduced spreads,6 leading to greater investor returns.7 NASDAQ-listed shares are also exempt from state-by-state “Blue Sky” laws, which require companies offering securities to undergo burdensome registration processes in certain states in addition to the various federal registration requirements. This translates into lower compliance costs, more favorable terms for raising capital, and thus, all things being equal, higher earnings and share prices. NASDAQ-listed shares can also be purchased on margin, i.e. purchased with money on loan from a stockbroker. This can lead, all things being equal, to a larger investor base and higher returns.Wall Street Journal, which further decreases their exposure to potential investors and decreases price transparency. She also explained that NASDAQ listing confers a degree of prestige on a stock because of that market’s more rigorous listing standards.

Preston testified, and Thane International did not dispute, that institutional investors almost universally shun OTCBB stocks, which significantly cuts into the base of demand for those shares (thus depressing their price). Preston also testified that OTCBB stocks are not regularly quoted in financial publications like the

See Thane_International_Ninth_Circuit.pdf. Also of interest to the Plaintiffs' Bar are affirmations of two long held principles. The first being the principle that even literally true statements can be misleading:

[A]n issuer’s public statements cannot be analyzed in complete isolation. “Some statements, although literally accurate, can become, through their context and manner of presentation, devices which mislead investors. For that reason, the disclosure required by the securities laws is measured not by literal truth, but by the ability of the material to accurately inform rather than mislead prospective buyers.” In re Convergent Tech. Sec. Litig., 948 F.2d 507, 512 (9th Cir. 1991) (quoting McMahan & Co. v. Wherehouse Entm’t, Inc., 900 F.2d 576, 579 (2d Cir. 1990)); see also Kaplan v. Rose, 49 F.3d 1363, 1372 (9th Cir. 1994).

The second is that Section 12(a)(2) claims have no scienter element:

“Section 12(a)(2) is a virtually absolute liability provision that does not require an allegation that defendants possessed scienter.” In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 269 (3d Cir. 2006) (internal quotation marks omitted); see also Gustafson v. Alloyd Co., Inc., 513 U.S. 561, 578 (1995) (“It is understandable that Congress would provide [securities] buyers with a right to rescind, without proof of fraud . . . .” ). Moreover, the purchaser need not prove reliance on the misrepresentations. See Gustafson, 513 U.S. at 576, 578.

Loser CEOs, Raking It In

The Washington Post has published an Op Ed by my former colleague, William Lerach on Sunday November 11, 2007.

While William Lerach's actions are not to be ignored, and he is not one to rightfully complain about inequitable distribution of wealth, his observations concerning the abuse of corporate power should be given consideration. As they say, and I say in half jest, "It takes a crook to know a crook."

Link: Loser CEOs, Raking It In.

No Accounting for It, Loser CEOs, Raking It In By William S. Lerach Sunday, November 11, 2007;

"How come I don't get nothin'?"

In light of the massive payoffs that corporations are handing to failing executives -- most recently the ousted chiefs of Merrill Lynch and Citigroup -- that could be the legitimate lament of millions of U.S. workers whose jobs have been sacrificed of late in the name of corporate competitiveness and free trade.

Cleaned up grammatically, that question would probably express the sentiments of many of the 24,000 Merrill employees fired in recent years and the 17,000 Citi employees who are soon to get the ax. Together, former Merrill chief executive E. Stanley O'Neal and former Citigroup chief executive Charles O. Prince have lost more than $20 billion in company money. Yet they left with $360 million in their own pockets.

The American principles of responsibility, accountability and justice require everyone, even corporate titans, to pay a price when they mess up. I've dedicated my career to holding powerful corporations accountable when they victimized innocent people. CEOs such as Enron's Jeffrey K. Skilling, WorldCom's Bernard J. Ebbers and Tyco's L. Dennis Kozlowski all went to prison for their fraud. Now I'm being held accountable for overzealously pursuing these corporate scam artists.

Two weeks ago, I pleaded guilty to a conspiracy charge involving payments made to plaintiffs in lawsuits against major corporations. Under the terms of the plea, which requires court approval, I agreed to pay the government $8 million in fines and penalties and to serve at least one year in federal prison.

But what about accountability for Wall Street CEOs who line their pockets while making stupid decisions that rob shareholders and pensioners of billions of dollars? Recently, corporate boards have been fundamentally misinterpreting the phrase "the buck stops here" -- and handing the bucks over to their miserably performing bosses.

Let's see if I've got this right. To try to boost profits in the new low-interest-rate era, O'Neal and Prince plunged Merrill and Citi into the high-risk world of subprime collateralized debt. The banks peddled billions of dollars of this stuff to pension funds and institutions, pocketing more than a billion in fees for feeding the pigeons. Apparently, Merrill and Citi got stuck with more than $50 billion of the riskiest debt that they couldn't unload on their customers. O'Neal had assured Merrill shareholders that these high-stakes bets would "not add to Merrill's risk profile." And when the subprime fiasco started to unravel, Prince famously said that Citi was "still dancing."

As Merrill and Citi took on these risky assets, their balance sheets ballooned and short-term profits flowed in. O'Neal, Prince and their executive teams crowed about their successes and their risk-management skills while pocketing bigger performance bonuses based on the "profits" and cashing in stock grants and options as the stock prices temporarily advanced. Several top Merrill executives received more than $30 million each in 2006. O'Neal led the pack with $91 million. For cream in his coffee, O'Neal unloaded about 235,000 shares of Merrill stock, pocketing an additional $20 million. At Citi, top executives were given more than $10 million per year, with Prince raking in $25 million. ( Continued )