Securities lawsuits rarely go to trial, but on February
24, 2011, just three months after the last securities suit trial concluded, a
Central District of California rendered a verdict on behalf of plaintiffs
against the sole trial defendant, the former CEO of the defunct Homestore
company. The jury found that the defendant, Stuart H. Wolff, had violated the
federal securities laws in connection with a series of statements the company
made in 2001.
A copy of the jury verdict form can be found here.
The court's trial minutes for jury verdict can be found here.
The February 25, 2011 press release about the verdict from the lead plaintiff,
the California State Teachers' Retirement System (CalSTRS), can be found here.
As detailed further here, investors first
filed a securities class action lawsuit against the company and certain of its
directors and officers in December 2001. CalSTRS was named as lead plaintiff in
March 2002. Subsequent amended complaints named additional defendants,
including the company's auditor and certain other outside companies and
entities.
Essentially, the plaintiffs alleged that the company had
engaged in a scheme to create a circular flow of money through a series of
roundtrip financial transactions whereby money flowed from Homestore to outside
firms and then back to Homestore. Through these transactions, the company
allegedly was able to represent itself as a successful and growing company. The
company was later forced to restate more than $120 million in revenue.
During the course of the long and complicated procedural
history of this case, a number of the defendants were dismissed out of the
case, while other defendants, including the company itself, certain individual
defendants, and the company's outside auditor, entered into a series of
settlements with the plaintiffs. On January 25, 2011, a
civil jury trial commenced against the sole remaining defendant in the case
- Stuart H. Wolff, the company's former Chairman and CEO.
The jury returned its verdict on February 24, 2011. The
Special Jury Verdict Form is very detailed and somewhat challenging to
interpret. Basically, it appears that of the 22 allegedly misleading company
statements on which the plaintiffs relied, the jury concluded ten were materially
misleading. Of these, the jury found that Wolff was involved in the preparation
of five of the statements, and that his involvement in those statements was
knowing or reckless.
The jury also found with respect to four additional
knowing or reckless misrepresentations that Wolff was responsible for the
person making the statement, and therefore with respect to those four
statements Wolff was subject to control person liability.
With respect to the question of damages, the jury found
that a number of other company officials as well as Wolff were responsible, but
in each case Wolff's responsibility was 50% or greater. The jury also
calculated the per share price inflation that resulted from each
misrepresentation for which Wolff was responsible, in several cases calculating
the inflation four places to the right of the decimal.
In its press release, CalSTRS said only that "the
exact amount of damages is being calculated."
In some respects, the outcome of this jury trial may come
as no surprise. In April 2010, Wolff
was sentenced to four and a half years in prison after pleading guilty to
conspiracy to commit securities fraud in connection with the company's
allegedly deceptive financial reporting. Wolff is incarcerated in the federal
penitentiary in Lompoc, California, although he was transferred to facilities
in Los Angles for the recent civil trial.
In addition, in December 2010, Wolff
reached an $11.9 million agreement with the SEC, settling allegations that
he had inflated the company's reported revenues. As part of that settlement,
Wolff did not admit to the SEC's securities fraud allegations.
In light of these prior developments, the recent jury
verdict may not be that surprising. But what is surprising is that the case
went all the way to a jury trial at all. Trials in securities class action
lawsuits are exceedingly rare, although there have been a rash of jury verdicts
in recent months.
According to data compiled by Adam Savett,
the Director of Securities Class Actions at the Claims Compensation Bureau,
prior to the recent verdict against Wolff in the Homestore case, there had been
a total of ten securities class action lawsuits filed after the 1996 enactment
of the Private Securities Litigation Reform Act and involving post-PSLRA
conduct that have gone to all the way through to jury verdict. In other words,
the verdict against Wolff is just the eleventh verdict in a post-PSLRA
securities class action lawsuit.
With the plaintiffs' verdict against Wolff in the
Homestore case, the securities class action jury verdict scoreboard (taking
into account post-verdict proceedings and reflecting only the current status of
post-verdict proceedings) is as follows: Plaintiffs 7, Defendants 4. (The
scoreboard is subject to revision pending the outcome of additional proceedings
in several of the cases.)
These numbers convey how rare securities lawsuit trials
are. It is worth noting that the verdict in the Homestore case is the third in
just thirteen months, coming as it does just three months after the verdict in
the BankAtlantic case (about which refer here)
and thirteen months after the verdict in the Vivendi case (refer here).
My friends in the plaintiffs' bar will undoubtedly be quick to point out that
all three of these cases resulted in verdicts for the plaintiffs as well.
The histories of prior securities cases that have gone to
trial show that verdicts in these cases are subject to extensive post-trial procedures.
Indeed, just last week the Court in the Vivendi case entered
an order substantially narrowing the scope (and value) of the plaintiffs'
verdict in that case. In all likelihood, there will be further developments in
the Homestore case, particularly given the case's long procedural history.
In addition to the prospect for post-trial procedural
developments, the parties to the Homestore case also face a rather daunting
challenge of trying to interpret and calculate the effect of the jury's
findings on damages. The combination the jury's findings about Wolff's
proportionate level of responsibility and of its findings about the respective
levels of per-share price inflation will require, in order to arrive at a
precise dollar figure for damages, mathematical calculations approaching in
terms of complexity the formulae used for calculating planetary motions.
Best Corporate Law Blogs: I
am happy to report that Bschool.com
included The D&O Diary in the site's February 23, 2011 list of the 40
Best Corporate Law Blogs, which can be found here.
The selection is all the more rewarding because the list includes so many other
blogs that I respect and admire. My thanks to Bschool.com for the selection.
Read
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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