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Pleading Requirements Following Enactment of the Private Securities Litigation Reform Act (“PSLRA” or “Reform Act”)

• The PSLRA contains two heightened pleading requirements: First, the complaint must specify each false or misleading statement or omission and explain why each was misleading and, if on information and belief, all facts supporting such belief. Second, it must state "with particularity" facts giving rise to a "strong inference" that defendant acted with the required scienter. 15 U.S.C. § 78u-4(b)(1), (2).

• In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970 (9th Cir. 1999), sets forth the pleading standard for scienter under the PSLRA in the 9th Circuit.

• “[A] private securities plaintiff proceeding under the PSLRA must plead, in great detail, facts that constitute strong circumstantial evidence of deliberately reckless or conscious misconduct.” Id. at 974. “In order to show a strong inference of deliberate recklessness, plaintiffs must state facts that come closer to demonstrating intent, as opposed to mere motive and opportunity.” Id. Rejects motive and opportunity as being alone sufficient.

• To state “all facts” upon which information and belief allegations regarding false and misleading conduct are based means “all facts”: Must identify sources and name names.

• Relying on Conference Report & Veto (Pres. Clinton expressed concern that the PSLRA raised the pleading standard beyond that of the 2d Circuit), the 9th Circuit determined that Congress meant to raise the Second Circuit standard -- as to pleading and liability.

Later in 2000, Comes

Ann Taylor, a/k/a Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000)

• Rejected the “deliberate recklessness” standard

• Concluded “that the PSLRA effectively raised the nationwide pleading standard to that previously existing in this circuit and no higher (with the exception of the ‘with particularity’ requirement [as to scienter, not previously required]).”

• Revived “motive and opportunity” as supporting an inference of scienter, but stated that, “we believe that Congress's failure to include language about motive and opportunity suggests that we need not be wedded to these concepts in articulating the prevailing standard.”

• Determined that Plaintiffs need not reveal the identity of the personal sources of their critical factual allegations.

• Stated that an inference of scienter may arise if defendant: “(1) benefitted in a concrete and personal way from the purported fraud; (2) engaged in deliberately illegal behavior; (3) knew facts or had access to information suggesting that its public statements were not accurate; or (4) failed to check information it had a duty to monitor.” Novak (Ann Taylor), 216 F.3d at 311 (citations omitted).

Then In 2001, Comes

Kalnit v. Eichler, 264 F.3d 131 (2d Cir. 2001) -- affirming the district court’s dismissal for failure to adequately plead scienter regarding a failure to disclose in the context of a merger

• Makes clear that the 2d Circuit’s motive and opportunity test survived the PSLRA: “Before the PSLRA's enactment, we held that, to be adequate, scienter allegations must ‘give rise to a strong inference of fraudulent intent.’ A plaintiff can establish this intent ‘either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness.’” Kalnit v. Eichler, 264 F.3d at 138-39 (citations omitted).

• “In Novak, we concluded that the PSLRA ‘did not change the basic pleading standard for scienter in this circuit.’ Thus, both options for demonstrating scienter, either with motive and opportunity allegations or with allegations constituting strong circumstantial evidence of conscious misbehavior or recklessness, survive the PSLRA. We therefore examine Kalnit's complaint under both methods of establishing scienter.” Id. at 139 (citations omitted).

• “Defendants' recklessness cannot be inferred from the failure to disclose. Further, because plaintiff has failed to demonstrate that defendants had a motive to defraud the shareholders, he must produce a stronger inference of recklessness.” Id. at 143.

• Stronger scienter allegations also need to be made in a case that does not present facts indicating a clear duty to disclose. Id. at 144.

Vast Majority: Scienter Can Be Plead By Reckless Misconduct

• Nine Federal Circuits have addressed the pleading standard for scienter under the PSLRA; the 7th and D.C. Circuits have not yet addressed the issue; the 4th has done so obliquely at best.

• As of the date of this writing, with regard to the continued viability of recklessness as a substantive pleading standard for scienter under the PSLRA, the vast majority of Circuits agree that plaintiffs can adequately plead scienter by setting forth facts raising a "strong inference" of intentional or reckless misconduct. Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999); Press v. Chemical Investment Servs. Corp., 166 F.3d 529 (2d Cir. 1999); In re: Advanta Corp. Sec. Litig., 180 F.3d 525 (3d Cir. 1999); Nathenson v. Zonagen Inc., 267 F.3d 400 (5th Cir. 2001); Helwig v. Vencor, Inc., 251 F.3d 540 (6th Cir. 2001); Fla. State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645 (8th Cir. 2001); City of Phil. v. Fleming Cos. Inc., 264 F.3d 1245 (10th Cir. 2001); Bryant v. Avado Brands, Inc., 187 F.3d 1271 (11th Cir. 1999).

• Nathenson notes that the 4th Circuit “has also apparently reached this conclusion, however obliquely.” Phillips v. LCI Int'l, Inc., 190 F.3d 609, 620-21 (4th Cir. 1999) (stating, “Thus, to establish scienter, a plaintiff must still prove the defendant acted intentionally, which may perhaps be shown by recklessness. …. We have not yet determined which pleading standard best effectuates Congress's intent. Nor need we do so here … .”).

• Recklessness is defined as “conduct which is ‘highly unreasonable’ and which represents ‘an extreme departure from the standards of ordinary care . . . to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.’” Ann Taylor; see also Sundstrand Corp. v. Sun Chem. Corp. (on such standard, next page).

Minority View: Congress Intended to Heighten the Pleading Standards

• “Congress intended to elevate the pleading requirement above the Second Circuit standard requiring plaintiffs merely to provide facts showing simple recklessness or a motive to commit fraud and opportunity to do so. We hold that although facts showing mere recklessness or a motive to commit fraud and opportunity to do so may provide some reasonable inference of intent, they are not sufficient to establish a strong inference of deliberate recklessness.” In re Silicon Graphics, 183 F.3d at 974.

• Motive and opportunity pleadings alone can never satisfy the scienter pleading requirements of the PSLRA. Id., 183 F.3d at 979.

• Silicon cites the same recklessness standard as other circuit courts -- Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1044-45 (7th Cir. ) “a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.” Id. at 977.

• Note: The Ninth Circuit limited Silicon Graphics' holding to a pleading requirement: "Because the PSLRA did not alter the substantive requirements for scienter under §10(b) … the standard on summary judgment or JMOL remains unaltered by In Re Silicon Graphics." Howard v. Everex Sys., Inc., 228 F.3d 1057, 1064 (9th Cir. 2000).

Limitations on Pleading Reckless Conduct

• No Pleading of “Fraud By Hindsight” -- Plaintiff must explain why the disputed statement was untrue or misleading when made. In re GlenFed Sec. Litig., 42 F.3d 1541, 1548-49 (9th Cir. 1994) (en banc)). “Corporate officials need not be clairvoyant … .” Novak (Ann Taylor), 216 F.3d at 309.

• “[T]here are limits to the scope of liability for failure adequately to monitor the allegedly fraudulent behavior of others.” Novak (Ann Taylor), 216 F.3d at 309.

• In a nondisclosure case, plaintiff must demonstrate: (1) defendant knew of the potentially material fact, and (2) the defendant knew that failure to reveal the potentially material fact would likely mislead investors. City of Phil. v. Fleming Cos. Inc., 264 F.3d 1245 (10th Cir. 2001); see also Schlifke v. Seafirst Corp., 866 F.2d 935, 946 (7th Cir. 1989)

• Allegations of GAAP violations or accounting irregularities, standing alone, are insufficient to state securities fraud. They must be coupled with facts that the violations/irregularities were from the defendant's fraudulent intent to mislead investors. Novak (Ann Taylor), 216 F.3d at 309; In re Burlington Coat Factory Sec Litig., 114 F.3d 1410, 1417-18 (3d Cir. 1997) ("where plaintiffs allege that defendants distorted certain data … using unreasonable accounting practices, we have required plaintiffs to state what the unreasonable practices were and how they distorted the disclosed data").

• As long as public statements are consistent with reasonably available data, corporate officials need not present an overly gloomy picture of the present and future. If plaintiffs claim defendants had access to contrary facts, they must specifically identify the reports or statements containing this information. Novak (Ann Taylor), 216 F.3d at 309.

Impact of Heightened Standard

Pre-PSLRA: 9th and 2d Cirs. opposite ends of spectrum

• 9th Circuit: General averments of scienter sufficient

• 2d Circuit: Facts supporting a “strong inference” of scienter

• 1st Circuit: Some facts, reasonable inference

• 5th Circuit: Facts to support an inference of fraud

Post-PSLRA: 9th and 2d Cirs. opposite ends of spectrum

• 2d Circuit (& 3d & 11th): Always required strong inference but now facts supporting inference must be plead “with particularity”

• 9th Circuit: From Rule 9(b) to a standard stronger than the 2d Circuit’s

• 1st Circuit: Always required particularity, but sometimes held “reasonable inference” enough

Alleging Motive and Opportunity

• Pre-PSLRA -- the Old 2nd Circuit test:

— Motive & opportunity (even under the old 2nd Circuit test, plaintiff had to allege defendant benefited in a concrete and personal way from the fraud); or

— Facts giving rise to a strong inference of conscious misbehavior or recklessness

• Post-PSLRA -- Three Views

— Motive and Opportunity Is Never Enough -- 9th Circuit

— Motive and Opportunity May Be Sufficient -- 2nd, 3rd Circuits

— Allegations of motive and opportunity may be important to the totality, but are typically not sufficient in themselves to establish a "strong inference" of scienter--1st, 5th, 6th, 8th, 10th and 11th.

— As noted by the 5th and 8th Circuits in their recent opinions, the differences between the Circuits on motive and opportunity may be only one of semantics. “[I]t would seem to be a rare set of circumstances indeed where those allegations [of motive and opportunity] alone are both sufficiently persuasive to give rise to a scienter inference of the necessary strength and yet at the same time there is no basis for further allegations also supportive of that inference. … Whether motive and opportunity allegations will ever alone suffice should in most cases be a moot point.” Nathenson, 267 F.3d at 412.

The Recent Case of City of Phil. v. Fleming Cos. Inc. Summarizes Differing Motive and Opportunity Standards Among the Circuits

• Notes that the circuit courts of appeals are currently split on the question of whether plaintiffs may still use ‘motive and opportunity’ pleadings to demonstrate scienter ... . Two circuits have held that evidence of motive and opportunity to commit securities fraud may still satisfy the requirements for pleading scienter under the PSLRA -- i.e., the 2d and 3d Circuits. City of Phil. v. Fleming Cos. Inc., 264 F.3d 1245, 1261 (10th Cir. 2001).

• “At least one circuit has held that motive and opportunity pleadings alone can never satisfy the scienter pleading requirements of the PSLRA -- i.e., the 9th Circuit. Id.

• “[A]t least two, and arguably three, more circuits have adopted a middle ground between these two approaches, holding that motive and opportunity pleadings are relevant to a finding of scienter, but that they do not constitute a separate, alternative method of pleading scienter. We agree with the middle ground chosen by the First and Sixth Circuits, and arguably by the Eleventh Circuit. These circuits have determined that courts must look to the totality of the pleadings to determine whether the plaintiffs' allegations permit a strong inference of fraudulent intent. Allegations of motive and opportunity may be important to that totality, but are typically not sufficient in themselves to establish a ‘strong inference’ of scienter.” Id. at 1261-62 (citations omitted).

• Note that the 5th Circuit (in Nathenson v. Zonagen Inc.) and 8th Circuit (in Fla. State Bd. of Admin. v. Green Tree Fin. Corp.) have also weighed in on the issue since City of Philadelphia, each adopting the middle ground.

Ann Taylor:

Just the Facts

— “Statement of the [old] standard conceals the complexity and uncertainty that often surround its application.”

— “[D]ifferent courts applying the [old] pleading standard to differing factual circumstances may reach seemingly disparate results”

— “[G]eneral standards offer little insight. . . . It is the actual facts of our securities fraud cases that provide the most concrete guidance . . . .“

The Second Circuit Test

• Really strong motive and opportunity -- e.g., unusual or suspicious stock sales before a surprise announcement that causes a precipitous stock drop

• Deliberate illegal behavior

• Knowledge or access to facts contradicting public statements -- but plaintiffs must specifically identify the reports

• Failure to check facts in face of duty to monitor

• A totality of circumstances approach rather than a bright-line rule

When Have Courts Found A Strong

Inference of Scienter?

• Motive: extraordinary, stock sales that are unusual or suspicious in scope or timing

— Stock for stock mergers

• Strong circumstantial evidence

— Significant restatement

— Inherently fraudulent transactions

— Admission, “smoking gun,” whistle blowers

— Improper revenue recognition in the midst of clear indications that revenue was not forthcoming. In re Secure Computing Corp., Fed. Sec. L. Rep. (CCH) ¶91,532, 2001 U.S. Dist LEXIS 13563 (N.D.Cal. 2001); see also Fla. State Bd. of Admin. v. Green Tree Fin. Corp., supra.

• No one factor is ever enough

Particularity: The “All Facts” Requirement

• Pleadings on information and belief must set forth “in great detail, all the relevant facts forming the basis of” the belief -- In re Silicon Graphics, 183 F.3d at 985.

• The “investigation of counsel” ploy

• What does “all facts” mean?

— 2d and 9th Circuits on opposite ends of spectrum

Does “All” Mean “All”?

Silicon Graphics

• “All facts” means “all facts”

• Must plead names of sources, dates, contents of documents, who prepared documents and who reviewed them Id., 183 F.3d at 974.

• See also In re Aetna Inc. Sec. Litig., 34 F.Supp. 2d 935, 942 (E.D.Pa. 1999) (dismissing securities fraud complaint without prejudice due to failure to identify sources: “Congress intended to impose on plaintiffs in securities fraud cases a heightened standard of pleading allegations on information and belief, which can be satisfied by identifying the sources upon which such beliefs are based.”)

Does “All” Mean “All”?

Ann Taylor

• “All facts” means “sufficient facts to support” their beliefs concerning false or misleading statements.

• “Reading “all” literally would produce illogical results that Congress cannot have intended.”

• Would require dismissal where some facts omitted but existing facts supported a convincing inference of fraud.

• “[W]here plaintiffs rely on confidential personal sources but also on other facts, they need not name their sources as long as the latter facts provide an adequate basis for believing that the defendants' statements were false. Moreover, even if personal sources must be identified, there is no requirement that they be named, provided they are described in the complaint with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged.”

Potential Federal Preemption of State Securities and Other Claims

• It may sometimes be advantageous to file securities claims under state law, rather than federal law. Depending on which state’s law applies, advantages may include (a) lesser pleading standards (no PSLRA); (b) no PSLRA stay of discovery pending a ruling on a motion to dismiss; (c) no safe harbors for forward-looking statements; (d) no loss causation requirements, i.e., proof that losses are caused by the fraud rather than general market conditions, etc.; and (e) lesser showing of scienter than 10b-5 requirements.

• Advantages of state v. federal court may also include: (a) no unanimous jury requirement, (b) easier to survive summary judgment, and (c) better allocation law upon a settlement in some states, including California (under federal law and in many state jurisdictions, upon settlement with one defendant, the other defendants may point to the empty chair and reduce their liability by the percentage that the jury awards to the missing defendant; such allocation issues can make settlement with a highly culpable defendant difficult).

• However, be aware of potential federal preemption: There is an open question as to whether the National Securities Markets Improvement Act of 1996 (“NSMIA”) preempts claims under the California securities statutes, other state statutes and state common law. A Ninth Circuit opinion holds that the NSMIA preempts state actions as to “covered securities” -- Myers v. Merrill Lynch & Co., Inc., 249 F.2d 1087 (2001) (adopting the opinion of the district court). A federal district court decision out of New York goes the other way, distinguishing Myers.

• The NSMIA was enacted by Congress to eliminate the need for issuers to comply with disparate Blue Sky registration requirements for securities offerings relating to certain “covered securities.” One confusing aspect of the statute is that it specifically reserves the State’s power to enforce fraud actions, but does not expressly preserve private enforcement actions under state securities statutes or common law. As a result, there is some ambiguity in the case law.

• In Myers v. Merrill Lynch & Co., Inc., 249 F.3d 1087 (9th Cir. 2001), the Ninth Circuit affirmed the holding and agreed with the reasoning of the federal district court, as follows: The plaintiff in Meyers v. Merrill Lynch & Co., Inc., 1999 U.S. Dist. LEXIS 22642 (N.D. Cal. 1999), filed a lawsuit pursuant to sections 17200 and 17500 of California’s Unfair Competition Act. In particular, Myers alleged that defendants violated California’s Unfair Competition Act “by imposing a ‘syndicate penalty bid’ on customers who are likely to flip newly acquired shares immediately following the Offering.” Id. at *3.

• The defendants in Meyers argued that the prohibition set forth in 77 U.S.C. 77r(a)(3) of the NSMIA, as well as Regulation M and Rule 4624 of the National Association of Securities Dealers, preempted state law securities actions. (Regulation M requires individuals imposing penalty bids to comply with certain disclosure and recordkeeping requirements, and Rule 4624 imposes a reporting requirement on the managing underwriter when it proposes to impose a penalty on syndicate members.)

• The district court in Myers held as follows: “The Court finds, based on the express preemption language in the NSMIA and Regulation M promulgated thereunder, that Myers' claims under §§ 17200 and 17500 of the California Business Code are indeed preempted. Myers' allegations that defendants engaged in supposedly ‘unfair’ and ‘discriminatory’ penalty bid practices are preempted by the express language of the NSMIA. Further, the SEC has exercised its congressionally delegated rulemaking authority to craft a regulatory scheme, i.e., Regulation M, to deal with these practices and protect investors from fraudulent or misleading conduct associated with the use of penalty bids. To the extent that Myers alleges that defendants' use of penalty bids to discourage flipping are dishonest, inadequately disclosed, coercive, or misleading, those claims are completely preempted by federal statutes and regulations.” Myers, 1999 U.S. Dist. LEXIS 22642 at *30.

• On the other hand, in Zuri-Invest AG v. NatWest Finance, Inc., 177 F. Supp. 2d 189 (S.D.N.Y. 2001), defendants sought summary adjudication of the plaintiff’s New York state law fraud claims (common law fraud, conspiracy to commit fraud and aiding and abetting fraud) in the context of a Rule 144A private note offering, arguing that such claims were preempted by the NSMIA. The court rejected this argument and held that the NSMIA did not preempt the state common law securities fraud claims.

• In reaching this conclusion, the court noted that there is a general presumption against preemption and that “[t]he presumption that federal law does not preempt a state’s police powers may be overcome only upon a showing that preemption was the ‘clear and manifest purpose of Congress.’ ” Zuri-Invest, 177 F. Supp. 2d at 192 (quoting Medtronic, Inc. v. Lohr, 518 U.S. 470, 485 (1996)).

• In interpreting the scope of the NSMIA’s preemption, the Zuri-Invest court noted that subsection (a)(1) of 15 U.S.C. 17r “preempts state laws requiring registration or qualification of covered securities offerings”; “subsection (a)(2) prevents states from imposing, limiting or prohibiting any condition on the use of any offering or disclosure document relating to a covered security”; and “subsection (a) (3) prohibits state regulating authorities from requiring a securities offering to meet any merit qualifications.” Zuri-Invest, 177 F. Supp. 2d at 193.

• The Zuri-Invest court further noted that the Securities Litigation Standards Act of 1998 (“SLUSA”), which was enacted 2 years after the NSMIA, specifically amended the 1933 and 1934 Acts to effectuate the preemption of certain state class actions. This amendment would have been unnecessary had the NSMIA preempted all state securities fraud actions. Zuri-Invest, 177 F. Supp. 2d at 194.

• Moreover, the NSMIA does not amend the saving provisions of the 1933 and 1934 Acts. The Supreme Court, when analyzing a preemption argument in another context has held that “a statute’s failure to amend a saving provision of the 1934 Act showed that ‘Congress did not explicitly prohibit State from regulating takeovers.” Zuri-Invest, 177 F. Supp. 2d at 194 (citing Edgar v. MITE Copr., 457 U.S. 624 (1982).

• For these reasons, the Zuri-Invest court held: “The preemption provisions and saving clause quoted above do not expressly address the NSMIA's preemptive impact on state common law fraud claims for two reasons. First, Congress never intended the NSMIA to displace the right to pursue such claims, as demonstrated by the absence of any civil liability or enforcement provisions. Second, the NSMIA did not amend the saving provisions of either the Securities Act of 1933 or the Securities Exchange Act of 1934 [citations omitted]. Both provisions state that the rights and remedies provided by the federal statutes shall be ‘in addition to any and all other rights and remedies that may exist at law or in equity.’ [citation omitted] The fact that the NSMIA left the 1933 and 1934 Acts' saving provisions untouched is particularly telling as Congress has, in the past, specifically amended these provisions when it deemed it appropriate. … [discusses the PSLRA of 1995 and the Securities Litigation Uniform Standards Act of 1998].” Zuri-Invest, 177 F. Supp. 2d at 194.

• The Zuri-Invest court therefore concluded that there was no express preemption. It further concluded that the requirements for implied preemption did not exist. And, it distinguished Myers by holding that, although the Myers court grounded its holding in terms of express preemption, the holding is more accurately described as an instance of “implied conflict preemption,” i.e. where the proposed result under state law actually conflicts with the substantive result under federal law. Whereas the result sought in Myers would conflict with regulations as to penalty bids, the Zuri-Invest court did not find the same state/federal law conflict in the area of securities fraud in a 144A offering. Instead, the court held that the state and federal schemes are co-existing bodies of law aimed at deterring fraudulent practices.

• Although NSMIA preemption was not before it, the reasoning in Diamond Multimedia Systems, Inc. v. The Superior Court of Santa Clara County, 19 Cal. 4th 1036, 1054 (1999), supports Zuri-Inves. In Diamond, a decision 3 years after the enactment of the NSMIA, the California Supreme Court addressing a preemption argument under SLUSA held: “Far from restricting market manipulation actions to those brought under federal securities law, Congress has chosen both to permit continuance of pending class actions based on misrepresentation or omissions of material fact and use of manipulative or deceptive devices in connection with a purchase or sale of securities and to leave individual actions unrestricted. The suggestion that federal securities law already impliedly preempted all such actions under the Corporate Securities Law ignores this clear congressional recognition that, except to the extent that [] [SLUSA] limits class actions, there is no preemption. Shareholders' rights under state and federal law are cumulative.” Diamond, 19 Cal. 4th at 1046.

• See also Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101, 108 (2d Cir. 2001) (holding that SLUSA and NSMIA apply to variable annuity contracts noting, “SLUSA was passed in 1998 … making federal court the exclusive venue for class actions alleging fraud in the sale of certain covered securities and by mandating that such class actions be governed exclusively by federal law. … SLUSA was also intended to work in concert with NSMIA. Several of SLUSA's provisions, most notably its definition of ‘covered security’…are borrowed from NSMIA.”)

LEAD PLAINTIFF AND LEAD COUNSEL IN THE ENRON SHAREHOLDER LAWSUITS

• By Memorandum and Order of February 15, 2002, Judge Melinda Harmon ruled upon objections to Judge Rosenthal’s December 12, 2001 order of consolidation, as well as on numerous motions for appointment of Lead Plaintiff and Lead Counsel in In Re Enron Corporation Securities Litigation, pending in the United States District Court for the Southern District of Texas, Houston Division.

• In her Memorandum and Order, Judge Harmon declined to follow those cases using a fee bidding auction for selection of Lead Counsel, but instead decided to follow “the PSLRA’s literal directive that after it selects an appropriate Lead Plaintiff, ‘[t]he most adequate plaintiff shall, subject to the approval of the court, select and retain counsel to represent the class.’ ” Memorandum and Order at 40 (citing 15 U.S.C. § 78u-4(a)(3)(B)(v)). “Thus the Court limits its role to a determination whether to approve the Lead Plaintiff’s selection, and only if it decides it cannot will it pursue other options.” Id.

• Judge Harmon declined numerous parties’ requests to appoint multiple Lead Plaintiffs for various diverse groups of common stock, preferred stock and bond holders, finding such appointments unnecessary prior to certification.

• In choosing the Lead Plaintiff, Judge Harmon stated, “As the primary basis for its decision, the Court’s reading of the Lead Plaintiff provisions of the PSLRA, especially §78u-4(a)(3)(B)(ii) (‘the court shall appoint the most adequate plaintiff for the consolidated actions’), leads it to conclude that at this stage the statute authorizes the appointment of one Lead Plaintiff or small cohesive group for a single class.’ ” (Citations omitted.) Memorandum and Order at 62.

• Judge Harmon chose the California Board of Regents ($144 million loss), as Lead Plaintiff over the proposed lead plaintiff group of Florida State Board of Administration (“FSBA”) ($325 million loss) and the NYC Funds ($107 million loss) because she found that FSBA and NYC were not the type of cohesive group (with ties not related to the litigation) envisioned by the PSLRA. Memorandum and Order at 72. Judge Harmon also found that neither FSBA nor NYC could defeat the California Board of Regents when viewed individually -- the NYC Funds because it suffered lower losses than the California Board of Regents, and FSBA was specifically deemed an inadequate representative because it purchased numerous Enron shares after public disclosure of the fraud (creating conflicts of interest with the majority of the class who purchased pre-disclosure, with attendant unique defenses against it, such as no reliance, not true of the class in general). These issues against FSBA were more than sufficient to rebut the presumption of FSBA as the most adequate Lead Plaintiff. Id. at 75. Judge Harmon also raised a separate issue concerning FSBA’s adequacy involving the fact that Frank Savage, an Enron Board Member, was employed by Alliance Capital, FSBA’s investment advisor, and that litigation was likely to ensue over Alliance’s investment advice that FSBA purchase Enron stock post-disclosure. The fact that Alliance’s knowledge of Enron’s off-balance sheet partnerships might be imputed to FSBA would raise additional unique defenses to FSBA. Id. at 75-77. Finally, the Court found that FSBA should be statutorily disqualified as a “Professional Plaintiff” having moved for appointment as Lead Plaintiff in thirteen lawsuits over the past five years (although it stated that if the other problems were not present and there were not other qualified applications, it might have waived this problem). Id. at 78.

• The California Board of Regents also won out over the State Retirement Systems Group (“SRSG”) (with aggregate losses of $283 million) due to questions about the SRSG’s cohesiveness as a group and the appearance of having been artificially created by counsel. Memorandum and Order at 80.

• Finally, Judge Harmon acknowledged the “thus far unproven allegations of solicitation of clients by payment and higher fees” by Bill Lerach, but stated that Milberg, Weiss, Bershad, Hynes & Lerach LLP’s submissions stood out in the breadth and depth of their research and insight, and that the Milberg firm is “fully capable of representing Lead Plaintiff and the class.” Memorandum and Order at 81.

• In other matters, a federal bankruptcy judge in New York on February 20, 2002, lifted the automatic stay against Enron Corp., allowing current and former employees who lost their retirement savings, to sue the collapsed energy giant. As reported in the Associated Press, “About a dozen lawsuits alleging Enron violated federal pension rules are being consolidated into a single class action case to be heard in a Houston court. That trial will determine how much the employees as a group would be entitled to as an unsecured creditor. The actual distribution of funds would be decided by the federal bankruptcy court in New York.”

Recent Developments For and Against the Use of Auctions In Choosing Lead Counsel under the PSLRA

• Under the PSLRA, large, institutional investors are presumed to be the most adequate to serve as class representatives. As such, they are to select counsel, subject to court approval. Certain judges believe that the court's oversight role allows them to conduct a bidding process and select counsel themselves.

Criticizing the Use of Auctions -- Third Circuit

• In a ruling by the Third Circuit U.S. Court of Appeals in In re Cendant Corp. Securities Litigation, 264 F.3d 201 (3d Cir. 2001), the Third Circuit upheld a $3.2 billion securities class action settlement against Cendant Corp. and its auditors, Ernst & Young; however, it ordered that a $262 million attorneys' fees award be substantially reduced to no more than $187 million -- possibly less. In so doing, the Third Circuit criticized the use of "auctions" -- pioneered by Northern District Judge Vaughn Walker -- to determine lead counsel in securities fraud class actions, although it did not expressly bar their use in the Third Circuit.

• The Third Circuit stated, "[w]e think that the Reform Act evidences a strong presumption in favor of approving a properly-selected lead plaintiff 's decisions as to counsel selection and counsel retention. When a properly-appointed lead plaintiff asks the court to approve its choice of lead counsel and of a retainer agreement, the question is not whether the court believes that the lead plaintiff could have made a better choice or gotten a better deal. Such a standard would eviscerate the Reform Act's underlying assumption that, at least in the typical case, a properly-selected lead plaintiff is likely to do as good or better job than the court at these tasks. Because of this, we think that the court's inquiry is appropriately limited to whether the lead plaintiff 's selection and agreement with counsel are reasonable on their own terms." 264 F.3d at 276. However, although the court overturned the use of an auction in this case, it did not bar future uses of the process in the Third Circuit, which includes Pennsylvania, New Jersey and Delaware. The Third Circuit is the first federal appellate court in the nation to address this issue; the Ninth Circuit currently has this issue under consideration, as discussed below.

Skeptical of the Use of Auctions -- Third Circuit Task Force on the Selection of Class Counsel

• Chief Judge Edward R. Becker of the Third Circuit convened a Task Force on the Selection of Class Counsel to evaluate the emerging practice of several district court judges throughout the country of selecting class counsel and setting fees through a bidding or auction process, and the subject of selection of class counsel in general. At the time of the writing [January 2002], the Task Force noted “according to research conducted by the Federal Judicial Center, only seven federal judges have utilized auctions in a total of 14 cases.” “The judges who have used the auction procedure are: Judge Vaughn R. Walker, Northern District of California (five cases); Judge Milton I. Shadur, Northern District of Illinois (three cases); Judge William H. Alsup, Northern District of California (two cases); Judge Alfred J. Lechner, Jr., District of New Jersey (twice in In re Lucent); Judge William A. Walls, District of New Jersey (one case); Judge Joan A. Lenard, Southern District of Florida (one case); and Judge Lewis A. Kaplan, Southern District of New York (one case).” In January 2002, the Task Force unanimously made the following conclusions and recommendations:

1. Auctioning class counsel represents a creative and energetic innovation, and the Task Force hesitates to restrict the use of new initiatives at such an early stage of their development. However, the risks and complications associated with a judicially- controlled auction counsel against its use except under certain limited circumstances described in greater detail in this Report.

2. The paradigmatic case in which an auction might be considered is one in which the defendants’ liability appears clear (often as the result of a governmental investigation or an admission of the defendants); the damages appear to be both very large and collectible (thus ensuring a significant number of competing bids); and the lead plaintiff is not a sophisticated litigant that has already retained counsel of its choice through a reasonable, arm’s-length process. Even in a seemingly paradigmatic case, however, there still remains uncertainty based on the limited record before the Task Force that the auction process will maximize net class recovery and ensure the best representation for the class. It has yet to be established that the auction process will save judicial time and resources, given the dictates of Fed. R. Civ. P. 23 and the emerging case law holding that the use of an auction ex ante does not relieve the court of its duty ex post to review the reasonableness of fees sought by class counsel.

3. The traditional methods of selecting class counsel, with significant reliance on private ordering, are preferable to auctions in most class action cases. In using those traditional methods, however, the court must guard against overstaffing by lawyer groups.

4. Auctions are inconsistent with the goal of the PSLRA, which is to assure that the “most adequate” plaintiff will choose counsel and negotiate a reasonable fee. The PSLRA mandates that class actions are to be client-driven, not court-driven. To the extent that an auction is even permissible under the PSLRA, it should only be conducted if the lead plaintiff’s choice of counsel, or process in choosing counsel, is so infirm as to rebut the presumption that the plaintiff is “most adequate” under the statute, and then only if the alternative candidates for the “most adequate plaintiff” do not appear willing or able to engage in a meaningful search for and negotiation with counsel.

5. Although some ex ante guidance to class counsel is desirable, Rule 23 ultimately requires the court to examine the fairness of the fees requested by counsel at the conclusion of the case. Thus, at best the benefits of an auction appear speculative except that it might provide the courts with an additional benchmark against which to judge the reasonableness of a fee. A percentage fee, tailored to the realities of the particular case, remains superior to any other means of determining a reasonable fee for class counsel. In setting a percentage fee, the court should avoid rigid adherence to a “benchmark.”

6. Courts should require public institutional investors seeking appointment as lead plaintiffs to disclose whether chosen counsel has made contributions to the campaign of any public officials who have authority or substantial influence over the institutional decisionmaker.

In Favor of the Use of Auctions -- California Federal District Court Decisions

• The views expressed by the Court in Cendant regarding the auction process may be contrasted with those expressed in class action securities cases In re Quintus Secs. Litig./ In Re Copper Mountain Networks Secs. Litig., 148 F. Supp. 2d 967 (N.D. Cal. 2001), in an opinion written by U. S. District Judge Vaughn R. Walker, and in In re Network Associates, Inc. Sec. Litig., 76 F.Supp. 2d 1017, 1033-34 (N.D.Cal. 1999), in an opinion written by U.S. District Judge William Alsup.

• In re Quintus Secs. Litig./ In Re Copper Mountain Networks Secs. Litig., 148 F. Supp. 2d 967 (N.D. Cal. 2001). Bids were submitted by various law firms for appointment of lead counsel and for lead plaintiff designation. In deciding whether representation is adequate in a given case, the court must evaluate both the adequacy of the proposed lead plaintiff and the adequacy of the proposed lead counsel: “In considering counsel's bids to represent a class prospectively, the court's role differs from its role in cases involving breaches of duty by trustees and corporate directors. In those cases, the court is simply called upon after the fact to adjudicate an alleged breach that has already occurred. Here the court has both the opportunity and, as a result, the obligation to ensure that the breach never occurs by facilitating the selection of competent counsel at a fair price at the outset of the litigation.”

• In re Network Associates Securities Litigation. On May 21, 2001, U.S. District Judge William Alsup approved a class settlement of $30 million and attorneys’ fees of only 7 percent in the Network Associates, Inc. Securities Litigation, a figure far below the benchmark and one which has been cited as proof that a novel process of requiring firms to bid for class counsel status means more money for class members. As Judge Alsup stated in an earlier opinion reported at In re Network Associates, Inc. Sec. Litig., 76 F.Supp. 2d 1017 (N.D.Cal. 1999), “The lead plaintiff owes a fiduciary duty to obtain the highest quality representation at the lowest price. A submission by Professor Joseph Grundfest of the Stanford Law School in the McKesson case demonstrates that competitive bidding for the lead counsel role tends to reduce substantially the amount of fees awarded and tends to increase the amount of recovery to the class.” 76 F.Supp. 2d at 1033-34 (directing the lead plaintiff to undertake an auction process).

In Favor of Limiting Attorneys’ Fees in Securities Class Actions -- SEC

• Recently, the SEC filed an amicus brief in Cavanaugh v. U.S. Dist. Ct. (in connection with In re Quintus Secs. Litig./ In Re Copper Mountain Networks Secs. Litig.), pending in the Ninth Circuit Court of Appeals in San Francisco, appealing the decision set forth above at 148 F. Supp. 2d 967 (N.D. Cal. 2001), regarding Milberg, Weiss’ appeal of Justice Vaughn Walker’s decision to appoint lead plaintiffs with less expensive lead counsel to pursue claims against Copper Mountain Networks, et al. In its amicus brief, the SEC (through its special counsel Luis de la Torre) sides with Judge Vaughn Walker that the court should facilitate the selection of competent counsel at a fair price at the outset of securities class action lawsuits. The position argued in the amicus brief is a shift in gears for the SEC which has previously taken the position that courts should grant Lead Plaintiffs great deference in their choice of Lead Counsel and the fee arrangement with such counsel. As stated in the brief by Luis de la Torre, “The district court held, correctly in our view, that an applicant’s conduct in dealing with counsel, including a failure to make a meaningful effort in negotiating the counsel fee, can be a basis for a finding of inadequacy.”

PSLRA STAY PENDING MOTION TO DISMISS

In In re Comdisco Securities Litigation, Judge Milton Shadur of the Northern District of Illinois limited the PSLRA’s stay of proceedings in force while a defendant's motion to dismiss is pending. In re Comdisco Sec. Litig., 166 F. Supp. 2d 1260 (N.D. Ill. 2001). At issue was plaintiffs’ request for the individual defendants’ directors’ and officers’ insurance policies (among the initial disclosures required by Rule 26(a)(1)). Disagreeing with a 1996 decision of the Ninth Circuit Court of Appeals staying initial disclosures, Judge Shadur held that disclosure of insurance policies was not stayed by the PSLRA in a broad opinion applicable to all initial disclosures. Id. at 1262. The court held in the alternative that, even if the stay were applicable, the insurance policies would be producible under the PSLRA’s exception to prevent "undue prejudice" to the plaintiffs, applying a balancing test not found in the statutory language. Id. at 1262-63.

Recent Safe Harbor Issues

The Safe Harbor Broadly Construed

• Ehlert v. Singer, 245 F.3d 1313 (11th Cir. 2001) (complaint alleging a failure to disclose that software was obsolete and not being upgraded was dismissed: because the prospectus was forward-looking, the safe harbor applied; in addition, the prospectus contained meaningful cautionary language)

• Harris v. Ivax, 182 F.3d 799, 805-07 (11th Cir. 1999) (classifying the statement "the challenges unique to this period in our history are now behind us" as a forward-looking statement; noting that an entire section of a prospectus may qualify as a forward-looking statement even though it contains a statement of current conditions; "a material and misleading omission can fall within the forward-looking safe-harbor")

• In re Advanta Corp. Sec . Litig., 180 F.3d 525, 535-36 (3d Cir. 1999) (finding entire statement forward-looking)

• Congress intended safe harbor determinations to be made on motions to dismiss. See 15 U.S.C. @ 78u-5(e) (instructing courts to consider "any cautionary statement accompanying the forward-looking statement" upon a motion to dismiss based on the safe harbor provisions)

Statement is Forward-Looking if:

• Language of futurity

-- Truth or falsity can only be tested by future events

-- Past or present tense not dispositive

• Statements about past performance often preface or provide assumptions underlying forward-looking

Corporate Governance Issues In Connection

With Securities Class Action Settlements

• Corporate governance provisions are appearing in an increasing number of securities settlements.

• Courts have required the appointment of independent counsel to advise the corporation on the propriety of the derivative settlement and its benefit to the corporation, especially in the context of a joint settlement of a derivative and securities class action.

• In re Oracle Secs. Litig., 829 F.Supp. 1176 (N.D.Cal. 1993). In a case involving the joint settlement of a class and derivative action, Judge Vaughn Walker denied approval of the derivative settlement (and, therefore, of the class action conditioned thereon) and required Oracle to “retain independent counsel having no prior relationship with the corporation or the individual defendants” before it would approve any derivative settlement. The court found that dual representation of the corporation and the individual defendants in the settlement context placed defense counsel in an untenable position, and that the corporation needed “independent counsel, unencumbered by potentially conflicting obligations to any defendant officer.” Id. at 1189.

• In re Cendant Corp. Securities Litigation, 264 F.3d 201 (3d Cir. 2001). The court addressed the corporate governance provisions of the settlement. One objector to the settlement had argued that those provisions, including a requirement that a majority of Cendant's board of directors be independent, were made by sacrificing a larger financial settlement. The argument was that governance provisions benefit future stockholders rather than class members. Although the Third Circuit ruled that this contention had "intuitive pull," it sided with the district court, and held that Cendant may have readily agreed to the changes to help restore its tarnished image.

Recent PSLRA Statistics Regarding Lawsuits and Settlements

• Six years after Congress enacted legislation to quell frivolous securities fraud suits, the number filed in 2001 has set an all-time record at 487 suits filed, over twice as many as in the second highest year, 1998, of 236 lawsuits filed.

• According to figures by the Stanford Law School Securities Class Action Clearinghouse, 306 of the 487 lawsuits filed in 2001 involved IPO allocation claims alleging fraud in the handling of IPO’s during the heyday of the e-commerce economy.

• The allocation suits began after a series of reports in the Wall Street Journal detailed Securities and Exchange Commission and Justice Department investigations into whether banks offered lucrative stocks to preferred customers in exchange for higher commissions or promises to buy more shares at set prices in the aftermarket, thereby driving up the stock price.

• On about January 2, 2002, in In re Initial Public Offering Antitrust Litigation, 01 CIV. 2014 (WHP) (SDNY), plaintiffs filed a Consolidated Class Action Complaint containing allocation claims, alleging that ten underwriter defendants (controlling approximately 90% of the market in 1999-2000) conspired to require from customers consideration in addition to the underwriters’ discount for allocations of shares of IPO’s in certain technology-related companies and to inflate the aftermarket prices for such securities, in violation of Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, and state antitrust laws. As alleged, the companies did not sell their IPO shares directly to the public, but rather to underwriters, which required such additional consideration and required customers to agree, in order to obtain the IPO shares, to make “tie in purchases” of such securities in the aftermarket at levels above the respective IPO prices. As further alleged, in order to obtain IPO shares, customers had to place bids for and/or purchase quantities of securities in the aftermarket at prices above the IPO price in order to inflate the after-market prices of IPOs -- a practice known as “laddering.” These factors and the defendants’ increasing effectiveness allegedly began to inflate the trading volume and prices of the securities by substantial amounts. Between 1981 and 1996, the average price increase on the first day of trading of equity IPOs was approximately 8%. As alleged, through defendant’s implementation of their anticompetitive agreement, the average price increase on the first day of trading was in excess of 60% and during 1999-2000 was in excess of 70%.

• Generally the number of filings in recent years matches or exceeds the annual number before the PSLRA. However, suits have been dismissed at a greater pace since 1995, rising from an average of approximately 12% in the five-year period preceding the enactment of the PSLRA to an average of approximately 26% in the five-year period following enactment of the PSLRA.

• An average of approximately 38% of all cased involved accounting fraud in the five years preceding the passage of the PSLRA. That average increased to approximately 52% of all cased filed in the five years following enactment of the PSLRA.

• In addition, the number of financial fraud cases involving earnings restatements has also increased -- from approximately 9% of all class actions in the five-year period preceding the enactment of the PSLRA to approximately 19% in the five-year period following enactment of the PSLRA. In recent years, cases involving restatements continue to be on the rise.

• Revenue recognition issues are often involved in accounting fraud actions.

• According to National Economic Research Associates (NERA), its study shows that average settlements for securities class action cases has risen sharply, from pre-PSLRA levels of $8.4 million to $13.3 million in the post-PSLRA period (excluding the $3.525 billion Cendant settlement in 2000 -- $3.185 billion in the common equity settlement and $340 million in the Prides settlement).

• The New York Times reported in an article on August 3, 2001, that average settlements have likewise increased from about $12.9 in 1999 to $14 million in 2000 -- also excluding the Cendant settlement. Prominent settlements include the $259 million 3Com settlement, the $200 million Rite-Aid settlement, and the $220 million Waste Management settlement.

• The likelihood that a company will be sued by shareholders has climbed to a mind-boggling 57.5 percent, according to NERA.

• As cited by the Court in In re Rite Aid Corp. Securities Litigation, 146 F. Supp. 2d 706 (E.D.Pa. 2001), according to an outside expert -- Columbia University law professor John C. Coffee Jr. -- a recent study shows that settlements since 1995 of securities class actions have recovered between 5.5 percent and 6.2 percent of the class members' estimated losses. The judge In re Rite Aid Corp. Securities Litigation said he agreed with Coffee -- who praised the approximately $193 million cash and stock settlement as one of the largest and one of the highest percentage recovery of losses. Since the Rite Aid shareholders lost an estimated $2 billion, he said, their recovery is about 65 percent better than the average settlement. Judge Dalzell also found that the shareholders "could not realistically ever collect anything approaching $2 billion in damages." Pushing for more might push the company into bankruptcy, Dalzell said, and "no rational plaintiff would push Rite Aid into that condition, because to do so would, quite literally, kill the goose that once laid golden eggs and may, some day, do so again."

Insurance Industry Trends Regarding Settlements

• According to recent press articles, insurance companies which write policies covering directors and officers are bracing for catastrophic losses in 2002 based on the raft of securities lawsuits filed in 2001.

• The New York Times reported in an article on August 3, 2001, that there is a developing trend among insurers issuing directors’ and officers’ liability policies to adopt a co-insurance system requiring co-payments of around 15% to 25%, or more, from their corporate clients in order to offset costs associated with securities and shareholder lawsuits.

• These insurers hope to discourage settlements the insurers view as too freely entered into by companies that treat their insurance coverage as free money.

• Not all insurers intend to adopt the change to co-insurance. Others may instead charge higher premiums. But some of the largest directors’ and officers’ liability insurers, A.I.G. and Chubb, with over a third of the market, state they intend to make the change.

• Requiring co-insurance is viewed by some as a return to the allocation system of the early 1990’s when directors and officers policies did not cover the entities as well, so that upon settlement, the entity and the insurer were required to allocate the settlement payment.

Recent Settlements Involving Accountants

• As reported in the Wall Street Journal on March 4, 2002, Arthur Andersen LLP recently agreed to pay $217 million to settle all pending litigation related to its audits of the Baptist Foundation of Arizona, whose collapse in 1999 led to the largest-ever Chapter 11 bankruptcy filing by a nonprofit organization and cost its investors (consisting of some 13,000 elderly persons) about $600 million. Arizona's Corporation Commission and attorney general's office filed suit against Arthur Andersen LLP last year alleging that Andersen’s auditors played a role in the financial fraud by the Baptist Foundation of Arizona during the late 1990s; the litigation, which sought investor restitution of as much as $600 million, charged that Andersen aided and abetted securities fraud and ignored warning signs. Arizona's attorney general alleged that the foundation had turned into a Ponzi scheme, and that Andersen missed signs the foundation was a fraud.

• In re MicroStrategy, Inc. Sec. Litig., 150 F. Supp. 2d 896 (E.D.Va. 2001), PricewaterhouseCoopers agreed to pay $55 million to settle a class action. A number of MicroStrategy shareholders had filed the suit against the blue-chip accountancy firm, accusing it of defrauding them when it signed off on an audit of the software maker. In late March 2000, MicroStrategy had said that it would restate its 1998 and 1999 results, and instead of the profits the company had previously reported, the company was actually losing money. In April 2000, the company announced that the SEC was investigating the way it recorded revenues. The SEC has been putting the large accounting firms under increasing scrutiny. Last year, the SEC required accounting firms performing audits to disclose any consulting contracts the firms may have signed with the businesses they were auditing, reasoning such contracts could tempt accounting firms to go easy on clients during an audit. According to the Washington Post, plaintiffs in the case against PwC alleged that the firm made money by selling MicroStrategy's software, and that it also mulled setting up a business with its client.

• Two companies, Cendant and Sunbeam, had to restate their earnings after SEC reviews. Ernst & Young paid $335 million to settle claims brought by Cendant's shareholders (In re Cendant Corp. Securities Litigation, 109 F. Supp. 2d 235 (D.N.J. 2000), aff’d, 264 F.3d 201 (3d Cir. 2001), and Arthur Andersen agreed to pay $110 million to shareholders suing over its work for Sunbeam.

Refusal to Approve Class Action Settlement

Based on Bar Order That Was Too Broad

• In re Rite Aid Corp. Securities Litigation. The U.S. District Court for the Eastern District of Pennsylvania refused to approve a $193 million settlement in a class action shareholders' suit against Rite Aid Corp. after finding that its "bar order" was too broadly worded and would improperly limit the rights of several former top executives who were not included in the settlement.

• But federal Judge Stewart Dalzell of the U.S. District Court for the Eastern District of Pennsylvania also strongly suggested that he would approve the settlement once the bar order was modified. The bar order came under attack by three former executives, who said it prejudices their rights by prohibiting them from pursuing claims they may have against the company. The three former executives who objected to the settlement lost their jobs in the wake of revelations that Rite Aid had grossly overstated its income and earnings. Rite Aid was hit with a slew of lawsuits soon after its March 1999 announcement of disappointing earnings. Rite Aid stock plummeted from $37 to $23, losing more than $3.7 billion in market capitalization in one day. In October 1999, Rite Aid announced that its 1997, 1998 and 1999 financial statements would have to be restated, resulting later that month in a $500 million reduction of Rite Aid's previously represented pretax earnings. An internal audit was begun, and its report faulted the executives for "serious breaches of their fiduciary duties," both before and after the lawsuits were filed. In the settlement, Rite Aid agreed to pay $43.5 million in cash -- nearly all of its available insurance -- as well as at least 20 million shares of Rite Aid common stock promised to be worth at least $149.5 million and possibly more if the stock performs well in the immediate future. Rite Aid also promised to cooperate with the plaintiffs as they pursued their remaining claims against the nonsettling defendants -- the three executives and the auditing firm KPMG.

• Turning to the objections to the bar order, Judge Dalzell found problematic the fact that the bar order was "not reciprocal." "We find it proper that to the extent the non-settling defendants are barred from bringing related actions against the released parties, part of the consideration for this bar must, for reasons of fairness, be a similar bar to claims against the non-settling defendants by the released parties." The extent of that reciprocity, Dalzell said, will be limited by Rite Aid's promise in the settlement to assign its claims against the former executives to the plaintiffs. Dalzell said that while that fact "may well swallow up some of the benefit of reciprocity, but if it does, then our sense of fairness is not offended." Judge Dalzell sided firmly with the executives in holding that the bar order should not include the executives' potential defamation claims against Rite Aid. But, on perhaps the most important aspect of the bar order, Dalzell sided with Rite Aid and held that the bar order may validly prohibit the former executives from suing for indemnification.

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