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Cadwalader Securities Litigators Claim Decisive Victories


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									Cadwalader Securities Litigators Claim Decisive Victories

September 8, 2004 Cadwalader's Securities Litigators marked the first half of 2004 with a string
of decisive victories resulting in the dismissal of four separate lawsuits of significance to financial
institutions. In the first three cases teams led by Litigation Department Chairman Gregory Markel
and Litigation Partner Ronit Setton obtained dismissals with prejudice. The decisions have
important implications for issuers of equity-linked notes, initial purchasers in Exxon Capital
exchange offers, and loss causation for claims made under Section 10(b) of the Securities
Exchange Act of 1934. In a fourth success a team led by Mr. Markel and Litigation Partner Jason
Halper successfully defended against a preliminary injunction motion designed to enjoin a merger
which led to a voluntary dismissal of a securities class action by plaintiff.

Exxon Capital Exchange Offers

In August, we won the dismissal of all claims in a case brought by bond purchasers against our
clients, NationsBanc Montgomery Securities LLC (now known as Banc of America Securities LLC)
and Prudential Securities, Inc.

Our clients had served as initial purchasers in a private placement of bonds under Rule 144A of the
Securities Act of 1933 which contemplated a future public offering to exchange the notes for
registered securities. This transaction structure is called an Exxon Capital exchange offer. (Exxon
Capital refers to a much relied-upon SEC no-action letter.) Our investment bank clients had no
involvement in the subsequent public offering of registered notes. The bonds in question were
issued by Breed Technologies, Inc. to help finance its acquisition of SRS, a division of AlliedSignal
Inc. During due diligence, AlliedSignal provided Breed and its accountants with financial
information concerning SRS. That information was included in the offering memorandum for the
private placement. Breed later sued AlliedSignal, claiming that the information provided by
AlliedSignal was false. The complaint against our clients alleged that the offering memorandum for
the private placement, as well as the registration statement and prospectus for the exchange
offering, contained misstatements and omissions regarding the financial statements of SRS.

Judge Laura Taylor Swain granted our motion to dismiss all counts, including Sections 11, 12(a)(2),
and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, certain sections of the California Corporate Code, and common law fraud. She held that
although NationsBanc and Prudential participated in, orchestrated, and were initial purchasers of
the sale of unregistered securities, they could not be liable under Section 11 because they were
not "underwriters" of the subsequent sale of registered securities in the exchange offering within
the meaning of the statute. The Court agreed with our position that the private placement and
subsequent public exchange offering should not be considered an “integrated transaction” such
that NationsBanc and Prudential could be deemed underwriters of the exchange offering. The
Section 12(a)(2) claims failed because plaintiffs failed to allege that our clients sold bonds by
means of a prospectus, as is required for liability under that statute. The Court concluded that
since offerings under Rule 144A are by definition non-public, and the private placement and
exchange offering were not integrated, the offering memorandum for the private placement could
not be considered a prospectus. The 10(b) and Rule 10b-5, common law fraud, and California
Corporations Code fraud claims, which had been brought only against NationsBanc, were
dismissed because plaintiffs failed to adequately plead scienter.

Equity-Linked Notes

The court granted, with prejudice, our motion to dismiss a class action claim alleging violations of
Section 11 of the Securities Act of 1933 in connection with our client UBS AG’s ("UBS") issuance
of equity-linked notes. In 2002, UBS had issued equity-linked notes or GOALs related to the
performance of WorldCom, Inc. (now MCI) stock pursuant to a registration statement, prospectus
and prospectus supplement. The amount of the investor’s principal to be repaid at maturity
depended on the performance of WorldCom stock during the term of the notes. Investors would
recover their entire principal investment in cash if WorldCom stock rose or if it fell without closing
below a pre-set protection price during the note term. However, if WorldCom stock fell and also
closed below the protection price at or before maturity of the notes, the investors would recover
only a pre-set number of WorldCom shares.

The prospectus supplement contained, among other things, a chart listing historical WorldCom
stock price information and extensive warnings to GOALs investors regarding the fact that UBS
was not making representations concerning the underlying WorldCom securities. Specifically, it
cautioned that UBS did not know whether WorldCom had accurately disclosed all facts concerning
itself as of the date of the supplement, including those that would affect the accuracy or
completeness of WorldCom’s public filings, the market price of WorldCom shares, or the exchange
rate that would determine the return to GOALs investors. The supplement represented that UBS
had neither participated in the preparation of any WorldCom public filings nor conducted any
inquiry of WorldCom in connection with the offering and disclaimed any representation that publicly
available information about WorldCom was accurate or complete.

UBS issued $19.5 million of these GOALs notes, which matured on a day on which WorldCom
common stock closed below the GOALs protection price. Plaintiffs, a purported class of GOALs

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investors, brought claims against UBS for alleged damages resulting from the loss of their

In their complaint, plaintiffs alleged that UBS violated Section 11 by selling the securities pursuant
to a prospectus that contained WorldCom prices that were artificially inflated as a result of the
alleged fraudulent acts of the former officers and directors of WorldCom. They claimed that the
inclusion of artificially inflated prices itself constituted a material misstatement for which UBS was
strictly liable under Section 11. UBS moved to dismiss the complaint on the basis that plaintiffs
failed to allege an actionable misrepresentation or omission. UBS pointed out that it had accurately
listed historical WorldCom stock prices as reported by legitimate services, and had made no
representation that those prices accurately reflected the value of WorldCom stock.

Judge Denise Cote of the Southern District of New York held that given UBS’s accurate recitation
of historical prices for WorldCom securities, accompanied by extensive cautionary language,
Plaintiffs could not support a Section 11 claim. In so holding the Court implied that an issuer of
equity-linked notes can rely on disclaimers that it had done no due diligence on the equity issuer
and that it did not stand behind the accuracy of the representations made by the equity issuer to
avoid liability for misstatements or omissions of the equity issuer. With adequate disclaimers and
risk factors, the case implies for equity linked notes that as long as statements of available public
information are accurately described, such as the WorldCom stock prices set forth by UBS, there
should be no liability for the note issuer.

The decision has important implications for the due diligence obligations of derivative securities
underwriters. If a financial institution could be held liable under Section 11, despite its accurate
recitation of available public information regarding the underlying issuer, the financial institution
issuer would be effectively obligated to perform due diligence on the issuer of the underlying
security. Because, among other things, the cost of such an undertaking would be prohibitive, and
the risks great, a decision allowing plaintiffs’ suit to proceed would have operated as a tremendous
disincentive to issuing equity-linked investment securities such as GOALs.

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Loss Causation

In an important case relating to loss causation for claims made under Section 10(b) of the
Securities Exchange Act of 1934, a Cadwalader team won dismissal with prejudice of a securities
class action lawsuit on behalf of client QLT Inc., a Vancouver-based manufacturer of
pharmaceuticals, and several of its former officers.

Plaintiffs were purchasers of QLT stock who alleged that QLT issued false and misleading
information to the public concerning the market size and sales projections for Visudyne, a novel
treatment for eye disease that was approved by the FDA on April 12, 2000. After approval, QLT
issued a press release estimating the potential market for the drug. Initial sales were strong. On
December 13, however, QLT revised its fourth quarter 2000 sales forecast (originally issued in
October 2000) of $40-$50 million downward to $36-38 million due to unexpected problems
related to reimbursement. The company's stock price plummeted the day after this announcement.

The suit claimed that QLT had withheld knowledge relating to delays in Medicare reimbursement
approval for Visudyne, as well as a smaller than publicized market for the drug. Plaintiffs contended
that these alleged misstatements inflated the price of QLT's stock, and sought relief under Section
10(b) for the losses that they incurred due to their purchases of QLT shares during the class period
(between August 1, 2000 and December 14, 2000).

Ultimately, the case was dismissed by Judge Sidney Stein because the plaintiffs could not establish
a causal link between any actionable representation and their losses. Noting the price drop of
QLT's stock resulted from the revision of the fourth quarter sales forecast and not to any alleged
misrepresentation pertaining to market size, Judge Stein ruled that the revised forecast was "clearly
an intervening cause that superseded any direct effect of the alleged exaggeration... regarding the
size of market" for the drug. Thus, plaintiffs failed to adequately allege loss causation. In addition,
because plaintiffs could not point to any misrepresentations or omissions in the initial fourth quarter
sales forecast and were unable to adequately plead scienter, they did not have a cognizable 10(b)
claim. In denying plaintiffs' subsequent motion for reconsideration, the judge found that his opinion
was consistent on the loss causation issue with the Second Circuit's recent decision in Emergent
Capital Investment Mgmt. LLC v. Stonepath Group, Inc.

Threat to Merger Defeated

In July, we successfully defeated a preliminary injunction motion brought on behalf of a class of
stockholders of our client, Group 1 Software, Inc. (“Group 1”) seeking to enjoin a proposed merger
between Group 1 and Pitney Bowes. The Court’s denial of the preliminary injunction motion
permitted the merger to close on schedule and given the views of the Judge on plaintiff’s small

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likelihood of success on the merits, forced the Plaintiff to voluntarily dismiss its action against all of
the defendants with prejudice.

In April 2004, the Group 1 Board of Directors approved a transaction between Group 1 and Pitney
Bowes Inc. (“Pitney Bowes”) pursuant to which a wholly-owned subsidiary of Pitney Bowes would
acquire all the outstanding common stock of Group 1 for a cash price of $23 per share. After the
Board’s approval of the proposed merger, Group 1 filed a Preliminary Proxy Statement with the
Securities and Exchange Commission (“SEC”) and subsequently filed with the SEC and mailed to
its stockholders Proxy Statement, advising stockholders of the proposed merger.

Plaintiff, as a purported class representative, brought an action in the Circuit Court for Prince
George’s County, Maryland, alleging that the Group 1 directors breached their fiduciary duties to
Group 1 stockholders in approving the merger. Specifically, Plaintiff alleged that the Group 1
Directors breached their fiduciary duty of care because (i) Group 1 did not conduct a formal
auction to sell the company; (ii) Group 1’s CEO lacked experience and Board authority to negotiate
with Pitney Bowes; (iii) the $23 per share merger consideration was inadequate; and (iv) Group 1’s
financial advisor was not independent because it was to receive a significant fee only if the merger
closed. Plaintiff also asserted that the Group 1 Directors breached their fiduciary duty of loyalty
because they obtained for themselves in the Pitney Bowes transaction three “benefits” that were
not shared by other Group 1 stockholders. Finally, Plaintiff alleged that the Group 1 Directors
violated their fiduciary duty of disclosure by omitting certain information concerning the merger from
the Proxy Statement. In connection with these claims, Plaintiff sought, among other things, a
preliminary injunction to enjoin the stockholder vote on the merger.

In response to Plaintiff’s due care allegations, we argued that the Group 1 Board of Directors acted
on an informed, good faith basis in approving the Pitney Bowes proposed merger, and that: (i)
Group 1 was not required to conduct an auction; (ii) Group 1 already had conducted a pre-merger
market check; (iii) Group 1’s CEO was qualified and did have authorization from the Group 1 Board
of Directors to conduct negotiations with Pitney Bowes; and (iv) the $23 per share price was
adequate, representing a premium of approximately 40% over the price of Group 1’s common
stock on the day before the transaction was announced.

We also successfully argued that Plaintiff’s allegations did not implicate any loyalty concerns.

Finally, in response to Plaintiff’s disclosure allegations, we argued that the alleged omissions were
immaterial as a matter of law, and, in any event, the Definitive Proxy Statement contained all the
facts that Plaintiff alleged should have been disclosed.

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    The Court denied Plaintiff’s motion for a preliminary injunction from the bench following an
    evidentiary hearing, including the presentation of live testimony,1 and allowed the stockholder vote
    on the merger to proceed. The Court held that Plaintiff had failed to prove that it was likely to
    succeed on the merits of its breach of fiduciary duty claims and that the denial of a preliminary
    injunction would cause no injury to Plaintiff. Shortly after the Court denied the preliminary injunction
    motion, the stockholders of Group 1 voted overwhelmingly to approve the merger, the merger
    closed, and Plaintiff dismissed all of its claims against all of the defendants with prejudice.

    About Cadwalader's Securities Litigators Team

    Led by some of the nation’s most respected corporate and securities litigation, Cadwalader
    regularly provides counsel to management, directors and shareholders on a wide range of business
    and corporate matters. Expert at dealing with the Securities Act of 1933, the Securities Exchange
    Act of 1934, the Investment Company and Investment Advisors Act of 1940, proxy litigation, and
    state law claims, our litigators represent clients in shareholder class actions, derivative suits,
    customer disputes, and a wide variety of other cases. We also counsel clients concerning their
    disclosure obligations under the federal securities laws. Recent cases handled by the Department
    include the representation of numerous companies and their officers and directors accused of
    securities law violations in state and federal shareholder class actions and of various defendants in
    cases involving alleged violations of Sections 5, 11, 12 and 15 of the Securities Act of 1933 and
    Sections 10(b) and 16(b) of the Securities Exchange Act of 1934.

    We are involved in major representations in virtually all of the most high profile securities and
    corporate litigations and regulatory investigations, such as those involving Enron, Tyco, WorldCom,
    Adelphia, the IPO allocation/laddering cases, the Wall Street research and IPO investigations, and
    the criminal and regulatory investigations of the mutual fund industry, McKesson-HBOC, The
    Williams Companies and the Lipper investment partnerships.

    Our litigators also have substantial experience in dealing with disputes arising out of virtually every
    kind of corporate transaction -- friendly and unfriendly tender offers, proxy contests, consent
    solicitations, mergers, stock and asset purchases, joint ventures and recapitalizations. In
    connection with such transactions, we counsel buyers and sellers, as well as lenders, accounting
    firms and financial advisors, as to claims concerning breach of contract, fraud and
    misrepresentation, indemnification, and purchase price and post-closing adjustments.

    We regularly advise clients regarding their general defensive posture and preparedness in the event
    of control or takeover contests, including analyzing charter provisions, state takeover statutes,

1   Mr. Markel and Mr. Halper participated in expedited discovery and conducted the evidentiary hearing which included, inter
    alia, testimony from Group 1’s lead investment banker.

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shareholder rights plans and strategic and financial structural defenses, as well as developing
appropriate responses to specific takeover threats.

In addition, we handle special investigations on behalf of audit committees and boards of directors
to investigate suspected wrongdoing, to assist officers and directors in fulfilling their fiduciary
duties, to address threatened or pending litigation, and to deal with government or agency
investigations. Our services extend to the development of internal compliance programs and
policies and procedures for a wide variety of corporations to assist them in conducting their
business in a manner consistent with ethical and legal standards and to avoid the threat of litigation.


If you have any questions regarding the foregoing decisions or our practice, please do not hesitate
to contact Gregory Markel at 212 504 6112 or at greg.markel@cwt.com, or Ronit Setton at
212 504 6130 or at ronit.setton@cwt.com, or Jason Halper at 212 504 6605 or at

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