Fall of Company Value - Part 1

MALE VOICE 1: --try to slow down. Okay? I've had judges yell at me, "Slow down." And they speak English. So I don't anticipate that you're going to be able to get through this without telling me to slow down. Alright?

Okay. In the United States, we are capable of suing companies for securities fraud against any company that has securities traded in the United States. So there are non-U.S. companies traded on non-U.S. exchanges that have been subject of a U.S. securities class action.

I'll give you an example. The biggest one out there now is the case against Vivendi, the French--well, it used to be a water company. I'm not sure what they do now. Vivendi is a French company traded primarily on the Paris Bourse and around the world. But they also have about 20 percent of their securities traded on the New York Stock Exchange. Alright? And my client is the representative of the class of those holders of Vivendi ADRs, American depository receipts or American depository shares, whatever you call them--we seem to change names periodically--traded in the United States. Alright?

My client bought about 1,000 shares. There's billions of dollars at stake. My client lost a few thousand dollars. But he represents the 20 percent of Vivendi shareholders, who have purchased through the American exchanges, through the New York Stock Exchange. That's not to say that they're Americans. Don't get that wrong.

In the Ericsson case, a case against Ericsson Telecom, our client is a Belgian, who purposely purchased Ericsson securities on the New York Stock Exchange because he wanted the protections of the American securities laws. And he lost a few million dollars in the trading of the Ericsson securities and the fraud. But he's a Belgian. He did not trade in any of the European exchanges. He paid a double commission to buy his securities in the United States. So I know that that's done. Alright?

In 2004, 29 companies--there were class actions filed against 29 non-U.S. companies in the United States. And you can see the numbers. I don't have the 2008 numbers yet. But it'll be comparable. It'll be the same thing.

For U.S. companies, 80 percent of the class actions in the United States involve securities where the company has other securities trading in European exchanges, which means your clients. Same thing--people want to go global. They want to diversify. So it does affect you one way or the other.

Again, the next item I said already--over $1 billion of $5 billion in settlement funds were left unclaimed by shareholders in 2004. That's the year of the study. I left the study for you. We could review that.

And institutional compliance rate for submitting proof of claim forms--again, the form necessary--all you have to do is fill out the form. If your client is an institution, we generally receive some type of transmission. I'm showing my age when I say a magnetic tape. There are no tapes anymore. It's a transmission into a claims process or a data processing company that handles these things. You show the purchase. You show the date of sale and the amounts and so forth. And we calculate how much was lost due to the fraud.

This is not insurance for market losses. Company stocks go up and go down for a variety of reasons. There are experts that we retain and the defendants retain to show the amount of loss attributable to the fraud, the amount that the security went up in connection with the materially false and misleading statement, and the account that --and the amount that the security went down when the truth was revealed.

Now that's--let's talk about the class period for a second, the term that you hear all the time. The class period is the period of time during which the fraud was extant, was available to the market. It starts with the date of the first statement generally, the first materially false and misleading statement. And it ends when the truth was disclosed and the market reacted and the security price went down. That's the period.

Your clients have to purchase within the class period so that they were affected by the fraud. And they have to hold, generally speaking--there are exceptions--they have to hold until after the truth was disclosed and the price of the stock went down.

Okay. So if your client purchased on--in the class period and sold in the class period--that's called an in-and-out trader--they weren't affected by the fraud because still the--I'll call it the lie--was out there. And it inflated both the purchase and sale price. So your client wasn't hurt by the fraud. We're only interested in the cases where your clients were hurt by the fraud.

Now during that period of time, it's extremely possible that the whole market went down. That's--we're not an insurance policy on a bad investment. Okay? We're an insurance policy against fraud. Okay?

And the last three bullet points are--how much was available in settlements for 2005, '06, and '07? You can see there are billions of dollars at stake.

Next page is just a list of non-U.S. companies who have been involved in securities class actions, Vivendi being the biggest. And Vivendi is going to be--it's supposed to go to trial in September. So the fact's out there. We've survived a motion to dismiss, which is a U.S. procedural motion during which the defendants claimed that there was no legal basis for the claim.

Then we spent millions of dollars and went through millions of pages of documents, in French and in English, trying to prove our claim. The company has to produce the documents to us. And a company like Vivendi is not going to give us a few documents. They give us tens of millions of pages of documents. And we have hundreds of attorneys for a very long time reading through these pages of documents, seeing how they relate to these relevant pages, how they relate to our claims.

Then later on after a lot of other motions, there is--the defendants do something called move for summary judgment. And that motion is where the defendants claim that there were no facts to support our claim. So we have to then go to the judge and prove to the judge that we have sufficient evidence of the fraud to be able to submit it to the jury, to admit the issues to a jury.

And that was heavily litigated. There were more attorneys in the courtroom listening to these motions than are here tonight. If there wasn't $1 million in defense fees booked, billed that night, that day--it went from 9:00 in the morning to about 8:00 at night. The court was open. We took a half an hour off of lunch. And it just--it was astounding. I've never seen so many people building so many hours in one case. If you're a defense attorney, it was a wonderful place to be.

Another one of our cases was Turk sellers against a Turkish cell phone company Royal Ahold [phonetic]. Royal Dutch Cell [phonetic] is an interesting case because many of the institutional investors opted out of that case and proceeded individually in the Netherlands under a new law that was passed there. And that was recently affirmed. So many, many dollars were paid out there and is subset left in the United States. Okay?

And others--you've heard of Parmalot [phonetic]. Infinium Technologies [phonetic] is one case where we're co-lead. And we're proceeding there, a lot of companies that you've heard of, that your clients invest in. Okay?

Applicability of U.S. securities class actions globally--there are four different scenarios here. If it's a U.S. company where the security was traded on a U.S. exchange, U.S. securities laws are available. If it was a U.S. company that was traded on a non-U.S. exchange, American laws are available. If it was a non-U.S. company traded on a U.S. exchange, no problem. Now you have the Vivendi type of company, where you have a non-U.S. company traded on a non-U.S. exchange. That still can be subject to American securities laws dependant upon two different tests, the conduct test and the effects test, the conducted effect of the statements in the United States.

I'm going to stop there on that because it's just too complex. It's possible. If you have that situation, call us. We'll look into it.

Every type of security is covered. Most institutions only buy common stock. Convertible debentures, bonds, options, every type of security is affected by securities fraud. They're all available for protection.

But you need somebody to--a plaintiff--to represent every different type of security. So while institutions generally buy bonds and generally buy common stocks, they frequently don't buy preferred securities. And individuals buy a lot of preferred as well as institutions. But individuals do. Somebody has to come forward to represent the preferred, even though a large institution may have lost $20 million, $30 million, $50 million on the common--have to come forward.

And that's a big problem. There are a number of cases that we have. There's one called RAIT Financial, R-A-I-T, where the common stock is fully represented. It survived a motion to dismiss. It's being litigated now. There is no representative for the preferred securities. And that part of the case has been dismissed because, even though the facts are exactly the same, nobody who purchased RAIT preferred has come forward to represent the stock. And we've looked.

And who are the defendants? Pretty much everybody--the company that issued the securities if they're not bankrupt--if they're bankrupt, they're released from all liability; the directors and officers or other control persons--and if they're bankrupt, it's strictly a matter of the directors' and officers' liability insurance and their own personal assets; the auditors if financial statements are involved; and the underwriters, investment bankers, and so forth if an offering is involved.

Who is in charge? The lead plaintiff--somebody with a large loss came forward to represent the whole case--that person's called the lead plaintiff--and then, as I said, a class representative for each individual type of security.

Lead counsel--it shows the lead counsel is the counsel chosen by the lead plaintiff. So in the Ericsson case, our client lost millions of dollars. The client contacted us to file suit. We are the lead counsel in that case. There are other lawyers in the case, who represent class representatives.

We do not get paid--this is not a loser-paid--well, let's do two different things. We don't get paid unless we win. And we advance all litigation costs, right? So in a case two years ago against JDS Uniphase, which was lost at trial, we not only didn't get any fees for the years of work that was put in. We lost millions of dollars worth of expenses litigating the case. That's the cost of doing business. Not happy--we don't lose often. When we do, it's painful. We're not happy with it. But that's the way it is. You lose cases that are good cases. We never charge our clients any fees for anything or reimbursement of expenses. We can't, not in this business.

That was the next page. I'm sort of rushing ahead because I know I've been speaking too much. And I'm trying to get as much in as possible. Alright?

There is no loser-pays rule in the United States. I've already talked about two different things that are different in the United States than Europe. The first one, of course, is it's an opt-out class action that we're looking at here. There are opt-in class actions in the United States. This isn't one of them. Okay? And the second one is there's no loser pay. We don't pay the defense costs if we lose.

How much will the lawyers get? It depends. It depends upon the negotiation with the lead plaintiff. And it depends even there on how much the judge will allow. It's all court approved. It all has to be subject to--you know, you just have to ask the court for your fees and reimbursement of expenses. And you know, you get different amounts dependant upon what the judge thinks and what was negotiated with the lead plaintiff. Generally speaking, in the larger cases, it goes down from 25%, smaller cases, it could go up to 33%.

I'll skip this. This is standard. Next page, 12, this is standard litigation, nothing special, except for the lead plaintiff piece that the judge--since we all vie for running the case, it's a little different. But it doesn't have much of an effect.

I talked about the two different laws. The 1933 act is that strict liability statute for, you know, for offerings. It's a little different. The only real difference between the two is the need for C enter [phonetic]. Was there an intent to defraud?

Now sometimes the '33 act does have that intent element. And that's where the judge will find that the offering sounded in fraud. What that means is that the purpose of the offering was to commit fraud. So it's sort of--it bridges the gap between the two different types of laws.

Different charts on how you calculate damages--basically, damages are calculated by experts. They again are not an insurance policy. When the truth is disclosed and the materially false statement is rectified, it's never that simple. You will get statements like business is bad. The CEO is ill. The dog died. And by the way, we lied about our financials. And then the expert has to go through and separate out what the effect does for each of those statements, not an easy task. It's doable. But it's not easy.

The advantages of the U.S. system--I won't tell you the disadvantages. That you can figure out on your own. The advantages--there are such things as class actions. They are available. There is a jury system. The jury system is only an advantage in the sense that neither side knows what a jury is going to do. These are extremely complex cases. Some might argue that they're too hard for the jury. Some might argue that they're too hard for the lawyers. Okay? They're heavy duty accounting cases and things--when you talk about billions of dollars in fraud, whether it be Adelphia Communications or Worldcom, it's never simple. It doesn't mean it wasn't evil, it wasn't wrong. It's just not simple. So the jury system makes both sides more amenable to cleaning this thing up at some point.

There's no--the contingent fees--as I said, contingent fees and costs are an advantage for us. Nobody has to pay us. You can't find a plaintiff who's going to pay the millions to have us litigate. It's just not happening. There's no loser-pays rule.

Extensive discovery--there is a presumption of reliance. I didn't mention reliance when I mentioned the 10B5 action before, the fraud action, because there's a presumption that in an efficient market--and that's defined by statute--not by statute, but by case law. Don't forget. We're a common law system, not a civil law system, as you are in Spain.

There's a presumption that under certain circumstances, a statement in certain types of companies will be--in an effective market will be incorporated into the price of the security. And there are different loss and damages definitions and calculations. Okay.

I'm going to try to wrap this up very quickly now because I know I'm going too long. And I think what--there were three different ways for your clients to participate. The first way is, of course, many clients want to be the lead plaintiff. If they've lost millions of dollars and they know they've lost it--I mean, we have all of our pension funds, Arkansas teachers, Ontario teachers, New York State teachers. I was just with New York State Teachers Retirement System. They lose $20 million, $30 million, $40 million for each one of these frauds. It's a lot of money. But these are managing trillions of dollars. That's--you don't buy tens of thousands of stocks. You buy, you know, a reasonable amount of stock for that amount. If one is a victim of fraud, they're going to lose millions. The same is true in Europe. Okay?

Consider some of them want to lead the case. They want to be in control of the case. They want us to explain to them what's going on every step of the way and ask their opinion about how to proceed, explain the facts to them. We're more than happy to do that, satisfy the client.

The second is consider opting out. When you have that type of loss, your client has that type of loss, a lot of times you want to opt out of the case and proceed independently still as a contingency fee and, you know, the expenses, everything the same. But frequently, if you opt out, we can get more than the class will get. We will piggyback on top of the class but get more. It sort of saves money in certain ways. And it's a smart way to proceed.

At least monitor the ongoing cases. Know what you're looking for. Alright? And make a decision. And make a decision specifically in those instances where no class representative has come forward. Don't just--there is things as statute of limitations and things like that. If you don't do anything, the opportunity to do something will just evaporate. So make a decision. And come forward if there's no other way to get some compensation back.

It isn't onerous to be a class representative. It's relatively easy. You keep informed. We cover all costs. It's not hard for your clients to do. And they could do some good.

In the Williams Company cases, we settled for--couple years ago--$311 billion I think we settled for. My client represented a security from Merrill Lynch called a fee line pack. It's a combination debt-equity instrument that I don't think anybody understood how it was actually going to behave. You know, they come up with these instruments. People buy them. They try to explain them. And I take that position.

What is that? You can't get a straight answer because nobody understood what it was. But they sold over $1 billion of it three weeks before the truth was disclosed in a multi-year class. And the only person to come forward was my client, who bought on the offering 100 shares of this thing and sold it the day after the news was announced and lost $125, which was essentially the brokerage commission. And he got back--I think it was something like $40 million for the class.

People got $40 million. Now it--don't think of $40 million versus $1 billion. It isn't the case. We didn't lose the whole $1 billion. That's the--that's what was floated. I don't remember what the loss due to the fraud for those securities was. But it was a substantial recovery. And it was only because he happens to be a friend of mine who called me and said, "I've lost money. I've lost money." How much did you lose, Gary? $125. It was meaningful to him. And we got $40 million back. Okay?

And just ensure the least you do for your clients is tell them to fill out the proof of claim form. Put the form in. We don't get any money back. You won't make any money. But at least the client will get some money out of this. Okay?

Let me do a quick pop-through here. I could go on for hours. I think I'll lose everybody if I do that. There is one other thing we get in many of these settlements is corporate reforms, what we call therapeutics. We make the company change their rules of running the company. You don't think we can do that? We do. We make them form an audit committee, a more independent board, other things like that, corporate ethics officer, compensation committees, nominating and corporate governance committees. We make the corporate--a lot of the smaller companies, smaller--they could still be a $1 billion company--are run like it's a corner grocery store. They don't really have corporate governance in place. We make them put that in place. Okay? It's helpful to the ongoing company.

I'm going to stop. I think, you know, I'm presenting a lot of information. Everybody's going to have different questions. At least, I hope you will. Others will comment. At the end, I believe you're going to have the opportunity to ask questions. I love questions. Ask me all the questions privately, publicly, any way you want. Thank you.