Trials & Errors

As two recent securities lawsuits illustrate, there are no guarantees when you go to court.

JDS Uniphase, on the other hand, had the deck stacked against it from the start. The trial took place in liberal and diverse Oakland, California, close to JDS Uniphase’s headquarters, which meant that the jury would most likely be hostile to business. Getting the defendants to connect with a jury could also be a challenge, as former CEO Jozef Straus had a thick Hungarian-Slovak accent that made him difficult to understand. Plus, there were those niggling hints of insider trading that made the executives look bad no matter what may have actually transpired. CFO Muller sold $35 million worth of stock months before it lost 99 percent of its value; other former executives made hundreds of millions selling the stock before it tanked.

“Those are the things you would look at and think were important but in the end didn’t matter,” says Adam Savett, head of securities class-action services for RiskMetrics.

What did matter? JDS Uniphase lead attorney Jordan Eth, a partner at Morrison & Foerster LP, credits his win to the credibility of his defendants. “They came across as they were: hardworking veteran execs, one of whom was a co-founder, who had spent their careers building up companies.”

The company’s basic defense was that none of the executives foresaw the collapse of the telecom industry that brought down JDS’s stock starting in late 2000, and therefore did nothing improper by not warning shareholders (or by selling their own stock). Muller’s turn on the stand allowed him to show appropriate passion for his former company — he “loved” his job at JDS Uniphase — and drop a mention of an altruistic retirement pursuit, helping low-income youth go to college. He also had a chance to turn on the charm, poking fun at himself as the “company worrier.”

As to the insider trades, the defense highlighted that Muller’s sales represented less than 20 percent of his total holdings, and that he’d had a practice of selling in the same month in previous years. “The fact that people kept to their previous practices is what you’d actually expect, rather than being suspicious,” says Eth. No doubt the jury was also sympathetic to the reasons that Muller stated for selling: he wanted to diversify his holdings, since more than 90 percent of his net worth at the time was in JDS Uniphase stock, and plan for his impending retirement, since JDS didn’t have a retirement plan or retiree health benefits.

When it came to defending JDS Uniphase’s 2001 $45 billion write-off, executive presence was crucial, as well. “Tony [Muller] showed that he did a conscientious job by having processes set up and people he relied on, at the controller level and below,” says Eth. The defense also called the former chair (and a current member) of JDS Uniphase’s audit committee, Bruce Day, who “fortified the impression that the finance organization was thoughtful about what they did, and sought advice when presented with complicated issues,” including how to handle the write-off with the Securities and Exchange Commission. “It’s easy for people who are sophisticated to think juries are not,” adds Eth, “but this case shows that you can explain yourself and they will listen.”


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