Trials & Errors

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

Of course, a stint on the witness stand can go awry regardless of how likable the defendants are. With a total of three days on the stand, including a videotaped deposition, Apollo’s Gonzales showed herself a dedicated worker, driving 180 miles a day to finish her college degree when her husband was transferred mid-program, and a parent who took her children on vacation to celebrate their graduations. She also had the chance to explain that part of the reason she chose not to reveal the DoE report was that she found it “very unprofessionally prepared,” full of “inflammatory language” that was based on admittedly incomplete research, and mostly unrelated to actual violations. But thanks to a grueling cross-examination, Gonzales may have harmed Apollo’s case when she told the jury that the company had not wanted the report “tried in the press” and so told investors that a review was ongoing but did not reveal the negative preliminary report. “The jury saw that the defendants themselves said it was a devastating report,” and still didn’t disclose it, says Stephen Basser, a partner with Barrack Rodos & Bacine, lead attorney for the plaintiffs.

The jury’s interpretation of the law also worked against Apollo. The jury “seemed to conflate all the issues down to the question of ‘If I were an investor, would I have wanted to know about this report or not?’” says lead attorney Smith, rather than whether or not the firm had a legal duty to disclose the information. In addition, Smith believes that the jury took an individual investor’s view, rather than that of the institutional investors that held most of Apollo’s stock. That made the difference when the jury had to decide whether or not the 5 percent stock drop on September 21, 2004, was in response to an analyst downgrade issued two days earlier. “A market professional will tell you that if the downgrade were going to move the market, it would have moved it immediately,” says Smith. The jury, however, concluded that the two were linked and found Apollo liable for $5.55 a share, or somewhere between $160 million and $270 million, depending on how many shareholders come forward.

Trail to Trial

If the JDS Uniphase and Apollo Group cases illustrate the uncertainty in going to court, so, too, do the other 20 cases that have gone to trial. The initial allegations are wide-ranging, from inflating revenues before an acquisition to insider trading to failing to disclose bad news, as in Apollo’s case. Defendants and industries also vary. Executives in the telecom, biotech, real estate, and education industries have taken the stand, while auditors were the targets in two cases and a commercial bank in another. The size of alleged damages also runs the gamut, from less than $100 million in six cases to more than $18 billion in the JDS case. And in each case, the defendants all made formal and informal efforts to settle.

What most share, however, is a lead plaintiff in the form of an institutional investor, often a pension or benefits fund, looking for a settlement that would stretch the bounds of both propriety and insurance coverage. (Connecticut Retirement Plans and Trust Funds was the lead plaintiff against JDS Uniphase, for example, while the Policemen’s Annuity and Benefit Fund of Chicago led the charge against Apollo.) When institutional investors get involved, the “settlements are much higher and they’re fully willing to take these cases to trial,” says Blair Nicholas, a partner with Bernstein Litowitz Berger & Grossmann who represented hedge fund Otter Creek Partners in a 2005 trial against Clarent Corp. It’s a trend Nicholas and others predict will only continue. According to Cornerstone, half of the plaintiffs in cases that settled in 2006 were institutional investors, up from 20 percent in 2004.


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