Shareholder Responsibility - Part 2

MALE VOICE 1: Now we're getting into some more interesting pieces, at least more interesting to me. There are--we have four different scenarios listed here. And in scenario A, if the company is a U.S. company that's traded on a U.S. exchange so you purchase the shares of Enron on the New York Stock Exchange, then there's absolutely no problem with jurisdiction in the United States courts. And you can proceed. And the case moves along with no difficulty whatsoever.

Scenario B, there's also no problems. But this is a U.S. company on a non-U.S. exchange, along the stock exchange. And then again, bringing suit in an American court and wherever the company's located in the United States, the district court will still have no problem with jurisdiction in this scenario B.

Scenario C, again, a non-U.S. company that's traded on a U.S. exchange--so in a case like scenario C, you'll basically have ADRs, American depository, where you have your common shares, that are translated into American depository receipts. And frequently, it's, you know, a five to one ratio, for example. So you'll have five common shares for one ADR. And that's traded as an ADS, an American depository share. And that's traded on a U.S. exchange. And those people will have no difficulty proceeding as purchasers of those ADSs in the United States, still no problem.

No we get to scenario D. You do have some problems. And it's unclear. It depends upon the circumstances as to exactly what's going to happen when you have a non-U.S. company with a non--because that's traded on a non-U.S. exchange. And the courts have come up with two types of tests to determine whether an American court should render subject matter jurisdiction in a situation such as this. And they're called the conducts test and the effects test. And actually, there's an add mixture of the two tests. And that was a case called Itober [phonetic] in the Second Circuit.

Basically, what it comes down to is it depends. It depends upon the degree of effect on U.S. purchasers. It depends upon the degree of conduct in the U.S. The one thing that you could be certain of is that if there is a non-U.S. company and that non-U.S. company has no shares or other securities traded in the U.S., you can't come to America for a resolution. That, you're staying out of.

When you wind up involved in the conducts test and the effects test and the add mixture of the two tests, it actually really does depend upon the facts and circumstances of that specific case to determine whether or not you're going to wind up being able to succeed in American courts.

Very, very recently, the Vivendi decision came down in the southern district of New York. And in that case, there were U.S. shareholders, ADS holders. And that was our client. And he of course had jurisdiction. He had the ability to bring suit to the U.S. court. Then you had an array of shareholders who purchased Vivendi shares on exchanges--I can't remember exactly what countries, but many countries in Europe. And the district court found that many of them were capable of having the claims adjudicated in the U.S. courts but for Germany and Austria.

So it gets kind of strange and kind of complicated. And that's the reason why portfolio monitoring services are not plainly adequate. If you were to go out and set up your own portfolio monitoring service and you did a wonderful job so that there would be no issue as to whether or not you got all the information necessary when the stock price dropped and the press releases came out and other firms filed and whether your securities were covered, you would still have the basic problem of Europeans understanding what your legal rights were.

You would still have to come to a lawyer, probably an American lawyer, to determine whether or not you were defrauded, whether there was the pot at that point of course there's an alleged fraud, whether you were defrauded, whether you have some type of remedy, what the remedy should be. Is there enough at stake? Do you have enough of an interest at stake? Is somebody else going to lead the charge so you don't have to? Is somebody going to lead the charge but the class definition is such that you're not going to participate anyway? You need American lawyers. That's us.

In fact that's what--when Brian Murray went over the Royal Ahold [phonetic] case, that's exactly what happened there. There was a case that went on. And there was a defendant. And the American lawyer, Brian, found a situation in which our client through our portfolio managing was not going to participate or was going to participate to an extent that was substantially lower than every--than he could've participated in because we weren't able previous to that to get a defendant into the case. We were able to bring the defendant in. We got an extra couple of hundred million dollars for the class of which our client participated. You need someone.

This is a partial list of securities class actions against non-U.S. companies in the recent past. And our estimate is about 10 to 15 percent of the class actions are filed against non-U.S. companies. And of course, they're all filed in the U.S. And the Abby National [phonetic], Elan [phonetic], Deutsche Telecom, Daimler Chrysler, Parmalot [phonetic]--Parmalot, wow--Infinion [phonetic], Royal Dutch and Royal Ahold, Ucose [phonetic], and Vandermullen [phonetic], that's just a partial list. There are a bunch more of European companies that have been sued for securities fraud, you know, generally successfully.

Now the cautionary tales--cautionary tale number one, the Daimler case--interestingly enough, there was no class representative who purchased on a European exchange in the Daimler case. One would think the German company, that would be the case. But guess not. Court refused to certify the class of European exchange purchasers. Case settled for $300 million for only purchases on the New York Stock Exchange. People who purchased elsewhere didn't participate at all.

Later case on behalf of the European purchasers was dismissed as the class was defined to exclude American conduct and effort, a terrible situation all because at the very beginning there weren't enough Europeans who came forward.

Cautionary tale number two, the Vandermullen case--class was defined by lead counsel and lead plaintiff as only ADR purchasers in U.S. And guess where the lead plaintiff purchased, in the U.S., sort of what we were complaining about with the plaintiff allocation that if you're the lead plaintiff you have control over where whatever distribution is going to be, how it's allocated. Well, the lead plaintiff was an American. And all the money went to the U.S. and left out the Europeans.

The volume in Europe was six times that of the volume in America. The case settled in 2006. And the ADR purchasers on the New York Stock Exchange got their recovery. The purchasers in Europe got nothing. That would've been you if you didn't come forward.So if you have people or if your clients or your firm purchased Vandermullen security during whatever that class period was--and I can't tell you off hand--and you purchased Vandermullen shares likely on a European exchange, you certainly didn't come forward because that's what the problem was. And you received no recovery because you did not come forward.

Now you have no excuse. We're telling you about all of this. So you really have to raise your hand and step up to the plate because there really is very little reason not to come and get the money that's available for you.

Now in how to monitor on ongoing cases--well, you could always do it yourself. I mean, there is availability to do it yourself. There are--if you know of a case--and as I said before, much before, there are--when we file a case or whoever files a case is required by law to put out a class notice. And that class notice eventually gets picked up in the company's 10-K and 10-Q, the quarterly and annual SEC filings. And it always gets picked up by Yahoo! Finance or whatever other financial sites there are. If you know what your holdings are, you could go look to see if any news reports come across about the companies that you're investing in. You could find it yourself.

Then Pacer is the court system filings. You could actually go into the U.S. government court website. Most courts now have electronic case filing. You'll see a little parenthesis with the words ECF in it, electronic case filing. And you could go in. And you could track what's going on in a case. And more often than not, you could get the actual filings by the plaintiffs and the defendants. And for a nominal fee--it's really pretty inexpensive--you can go in and retrieve the motion--the defendant's motion to dismiss, plaintiff's opposition to the motion to dismiss.

You can get the complaint. You could see how the class is defined. You could see if you're covered. You could see anything you want to see if you want to go through the effort of doing that. But of course, you do have to go through the effort because, generally speaking, just by going through Pacer, you're not going to be notified when some significant event occurs.

ISS has a website also that is available to its subscribers. Many of you are subscribers to ISS. But this is a special website. It's part of the securities class action service and relatively new. I think it's, you know, six months old. I think it came down in December. They set it up, an ISS proxy website. And it's actually, government analytics I think it's called.

And they will actually email you emails telling you of any new case filings, any significant decisions, the motions to dismiss, class certification decisions, things like that. But that's for all cases that occur in any U.S. court.

Then you could lawyer up. And in that case, the American firms when you lawyer up will monitor your portfolio for you. You provide ISS or Magenta 1 or whatever else, whoever else is out there. Verteris [phonetic] also does this. I think it's actually Verteris does this. And you know, we'll monitor your holdings for you and tell you and call you when something occurs. We pay for the service that you're on. We'll call you. We'll tell you, advise you, and let you make the decision as to what you want to do so that you can avoid the situation of the Vandermullens and the Daimler cases.

And here with American firms, as we said--I guess all of us have said it any number of times--it's free. We get paid by the court at the end of the case dependant upon our negotiation with you a what I would call a nominal fee. Seems like it's got a lot of zeros at the end of it, but it's still a nominal fee.

In the Nortel case, which recovered--well, there were two different Nortel cases. But one of the--they actually split about $1 billion apiece. One firm received three percent of the recovery as attorneys' fees, three percent. That's all we got. The class got the rest. And of course, we get reimbursed for our out-of-pocket expenses, which is reasonable. You have full coverage. We do the work. You do the decision making.

This is basically a repeat of what I had just said. You have access to the website, the databases, the articles, and information on our website. You have our confidential review of portfolios and the inventory of securities. That's what you hire us for. I assume in Europe you expect your lawyers to keep your information confidential. We certainly would, as would everybody else who's speaking here today.

We give you the updates on the pending litigations, the settlements, the potential, the cases, the special situations, including SEC settlements. Now you'll see SEC settlements out there. Nobody discussed that. In fact, there's more than SEC settlements. You've seen cases where the New York State Attorney General--well, then Attorney General Elliott Spitzer, who's now rode that into the governorship of New York--made certain settlements with various companies and, you know, and published just what a wonderful job they've all done for shareholders. And they've got millions of dollars back for shareholders.

Generally speaking and, you know, just speaking off the top right now, they do such a wonderful job that when our case follows up alleging the same fraud in a civil action, we generally get whatever they got, add a zero to it. I have no clue as to how they're so successful in getting so little. But they are. And we watch the SEC. And we watch the various attorney generals' settlements. And you know, and we do much better than they are. And basically, you get a lot more money. You do not want to rely on government agencies to get your money back. You won't.

And you know, at the end, it's a repeat. The attorney-client privileged analysis of duties and opportunities, what that means, attorney-client privilege, meaning that our conversations back and forth as your attorneys and you're our clients is an undiscoverable. Nobody will find out exactly what we're discussing. And you know, it's completely privileged.

Basically, this is it. We're done. And I'm certainly happy right now. I'm exhausted. And you're probably exhausted also. However, there may be some questions that are out there. And you know, you have your opportunity now to ask.

MALE VOICE 2: Okay. Thank you very much. We've got time for some questions. Graham, could you do me a favor? And have you got a handheld mike? We'll just wait for the mike coming. It's just coming. It's just lady in the green jumper in the middle. There we go. Thanks.

BARBARA WEST: Hi. I'm Barbara West [phonetic] from ITT. Can you clarify for me, please, frivolous claims? It was mentioned this morning. I have been warned about claims being deemed frivolous and the impact that might have.


MALE VOICE 2: Did everybody catch that question? I'm not sure the mike worked, that it was about frivolous claims the impact it might have. Sorry.

MALE VOICE 1: Earlier this morning--and one of the reasons for the passing of the Private Securities Litigation Reform Act of 1995 is that the lawyers, we, were out of control. We were suing these innocent companies who had no means of defending themselves and basically greenmailing them into huge settlements solely for the purpose of aggrandizing and enriching ourselves. Those were the frivolous claims. How dare we do such dastardly deeds.

Well, there weren't very many in my opinion. However, there were cases that were losses. There are a substantial number of cases that were lost. That claim of frivolous litigation led to the passage of the PSLRA, which required something that's required in no other civil litigation in the United States.

Generally, there's a rule, the Federal Rule of Civil Procedure 8A, which requires a short statement of what you're requesting. And in fact, it gives a sample of your complaint, of what you're supposed to allege in a complaint. And it is a very short complaint. You just have to inform the party, the defendant, what this is all about. That's what it goes on.

After the PSLRA was passed in December of 1995, we no longer had that ability. We had to allege facts and circumstances basically proving our case. And it's consistently getting harder. So while in the past we just had to tell the defendants what was wrong and what we were claiming, now we have to actually prove or provide evidence and in fact prove evidence almost.

And in fact, Brian wrote a law review article that's on our website. Why should you have to plead--put in the complaint--more than you have to prove at trial? Because it was easier to win a trial than it was to get past the defendant's inevitable motion to dismiss.

So now we search around. And we find former employees. Generally, former employees are disgruntled and want to tell us what's going on or current employees who are whistleblowers. Or other facts may be from, you know, competitors sometimes or suppliers or clients of the institution to find out exactly what happened.

In one case up in Minnesota, a disgruntled employee sent us pictures of the CEO's garage, which was loaded with product, the company's product. What was going on? At the end of every quarter because they recognized revenue at the end of the quarter on shipment from the company, not necessarily on payment, he shipped it to his warehouse in his house. Okay. So somebody got upset and sent us that. That was a good thing.

Another case we had in the Athabasca [phonetic] oil region of Canada--they have vast, vast oil deposits up there. They're tar. In other words, they're oil sands. They are thicker than roads. But the problem is there's no effective way to carve them up and melt them down and make them price competitive with Middle Eastern oil. It's just a problem.

This company Solvex [phonetic], you know, put out all sorts of information, you know, bought these leases from the Canadian government, raised hundreds of millions of dollars in European offerings through Deutsche Morgan Greenfeld [phonetic] at that time. And they made a mistake, a serious mistake, and had a beautiful website with their beautiful--if you ever seen a petrochemical plant, they're huge. They're actually--they're pretty when they're not belching smoke. But they're huge.

And they had a beautiful picture on the website. And you wound up with a big mistake that they made. The mistake that they made is they offended the local Indian tribes. Now even though it was in Canada, it was really an Albuquerque, New Mexico, company. So the chief of the local Indian tribe drove down to raise his concerns with them as to the way their people were being treated. They actually beat him up, stole his truck, and shipped him back, you know, to Canada.

So he calls us. And he tells us, "By the way, what they're saying is wrong." What it turned out was they announced that they were in production and so forth. So we hired a geologist to fly up to Canada and to take pictures of the oil plant, which turned out to be a hole in the ground, a truck. And the plant was a competitor's plant. In production meant they dug out one barrel of whatever it was, took a blowtorch to it, and melted it.

So we had that information. We survived the motion to dismiss with pictures by showing the pictures of the plant. Of course, there was no recovery whatsoever. It was an outright fraud. There was no insurance. The company didn't have any money. They--somehow, the hundreds of millions of dollars had evaporated in production costs. There's only a hole in the ground. I don't know where that came from. The Canadian government took back all the oil leases. And you know, that's what we had to show to survive.

Now the CEO of that company to this day insists our litigation was frivolous. So what's frivolous? But we have to prove a lot. I would say--now there's another misconception that occurred at least down in Rome. And that was that these are no-brainers, that anybody could do this business, that 90 percent, at least 90 percent of securities class actions settled. So it isn't a risky business whatsoever.

That isn't true at all. It is extremely difficult to survive a motion to dismiss. I would estimate that approximately 60 percent of the cases that are filed are dismissed by the defendants saying that there's no legal basis for the claims that are being alleged against the company.

We generally don't have a problem with a materially false and misleading statement. We're able to show that they stated A. And then later on, at the end of the class period, the stated B. And one, you know, shows that the other was false. So the false statement is not a problem. The problem again, as Brian went over, was the C-enter element. How do you prove that it wasn't negligence? You have to have some--another case where he was--the CEO was not smart enough to keep his mouth shut and told one of the former employees, "I'm going to drive this stock up to $50 no matter what I have to say."

So you have certain ways to go about doing what you're doing. Certain companies have their own staff of investigators and former Federal Bureau of Investigation investigators and others. We use outsiders that go out and find former employees and interview them. And they're usually very forthcoming and very upset about what went on in the company. And that's where we get our information.

Now since we lose 60 percent of the cases--the whole industry loses. I'm no worse than anybody else here. Since the industry loses because of--not because there was lack of merit but because of the inability to get the evidence in advance of the case, even though you know you're right, the 90 percent figure of the remaining cases is, you know, cast in a different light.

That was a very longwinded answer to a very short question. Sorry.

MALE VOICE 2: Okay. Thank you very much. Do we have any further questions before we break for coffee? If not, Marvin and Brian, I'd like to thank both of you very much for your presentations.