The 10b-5 Daily

UnitedHealth Settles

UnitedHealth Group, Inc. (NYSE: UNH), a Minnesota-based diversified health and well-being company, has announced the preliminary settlement of the securities class action pending against it in the D. of Minn. The case, originally filed in December 2006, stems from allegations that UnitedHealth misrepresented and omitted material facts regarding its stock options backdating practices.

The settlement is for $895 million and will fully resolve all claims against the company and its current and former officers. The WSJ Law Blog has a post on the settlement and notes that it is by far the largest options backdating class action settlement to date.

The GM Paradigm

Whether a plaintiff can establish the scienter of a defendant corporation based on the collective knowledge of the corporation's employees, commonly referred to as the "collective scienter" theory, is a topic that is getting increased attention in the courts. The author of The 10b-5 Daily wrote a New York Law Journal column (with a colleague) on collective scienter earlier this year.

The main case discussed in that column was decided by the Second Circuit last week. In Teamsters Local 445 Freight Division Pension Fund v. Dynex Capital, Inc., 2008 WL 2521676 (2nd Cir. June 26, 2008), the court drew a distinction between the pleading and proving of corporate scienter. Although to prove corporate liability "a plaintiff must prove that an agent of the corporation committed a culpable act with the requisite scienter, and that the act (and accompanying mental state) are attributable to the corporation," the court found that at the pleading stage a plaintiff is only required to create a strong inference that "someone whose intent could be imputed to the corporation acted with the requisite scienter." This pleading burden can be met "with regard to a corporate defendant without doing so with regard to a specific individual defendant." The court went on to hold, however, that the generic allegations of knowledge and motive in the complaint failed to meet this standard.

Practitioners, especially in the defense bar, are likely to find the decision disappointing. First, the court did not address what type of factual allegations would be sufficient to find the existence of a strong inference of corporate scienter (in the absence of sufficient factual allegations concerning an individual defendant). The only hint is a quote from the Seventh Circuit's decision in Tellabs II discussing a hypothetical in which "General Motors announced that it had sold one million SUVs in 2006, and the actual number was zero." Although General Motors now knows one situation to avoid, that fact pattern offers limited guidance for the lower courts. Second, the court provided no legal basis for its announced pleading standard (other than the citation to Tellabs II) and did not address the growing circuit split on this issue.

Disclosure: The author of The 10b-5 Daily submitted an amicus brief in the Dynex Capital case on behalf of the Washington Legal Foundation.

Break In The Action

There will be no new posts on The 10b-5 Daily until after June 30.

Global Fraud On The Market

The jurisdictional issues surrounding "foreign cubed" cases - i.e., an action brought against a foreign issuer, on behalf of a class that includes not only investors who purchased the securities in question on a U.S. securities exchange, but also foreign investors who purchased the securities on a foreign securities exchange - continue to be a hot topic. In In re Astrazeneca Sec. Lit., 2008 WL 2332325 (S.D.N.Y. June 3, 2008), the court addressed a proposed class in which 90% of the members were foreigners who purchased on foreign exchanges.

Under the conduct test for subject matter jurisdiction, the plaintiffs needed to adequately allege that (a) the defendants' conduct in the U.S. was more than merely preparatory to the fraud, and (b) the defendants' actions in the U.S. "directly caused losses to foreign investors abroad." Although the court held that the plaintiffs adequately alleged "several of the fraudulent misrepresentations took place in the United States," the court was unwilling to apply a global fraud on the market presumption and find that the foreign purchasers relied on the U.S.-based conduct when deciding to acquire the stock. Accordingly, the court dismissed the action as to foreign purchasers on foreign exchanges.

Holding: Motion to dismiss granted (both on jurisdictional and, more generally, pleading grounds).

Quote of note: "The Securities Exchange Act does not address the question of extraterritorial reach. The Second Circuit has not yet given guidance on whether the fraud-on-the-market theory should apply to foreign countries. In the absence of clear authority in favor of a global fraud-on-the-market theory, this Court declines to adopt such a theory."

The Business Of Getting Business

The recruitment of foreign institutional investors to act as lead plaintiffs in U.S. securities class actions is a well-established practice. An interesting look into how these clients are obtained can be found in a breach of contract action recently filed by a plaintiffs' firm against the lawyers it hired as "independent contractors" to develop international clients.

The agreement between the parties, which is an exhibit to the answer and counterclaim, stated that the lawyers would receive monthly compensation and 10% of any fees the plaintiffs' firm earned in cases where a client obtained by the lawyers acted as lead plaintiff (with a deduction for the monthly compensation). The action arose when the lawyers decided to terminate the agreement after a few months and become associated with a different plaintiffs' firm.

Around The Web

A few items of interest from around the web.

(1) Professor Michael Perino's paper finding that investors may have been damaged in cases where Milberg Weiss improperly compensated the lead plaintiff has some critics. Ideoblog has a comment and response with the author (here and here).

(2) Forbes has an article on "collusive settlements" in securities litigation.

(3) Bruce Carton, the founder of Securities Litigation Watch, is back with a new blog on securities litigation and enforcement. Readers of The 10b-5 Daily will want to add Unusual Activity to their favorites list.

Going To Trial

The Wall Street Journal had an article in yesterday's edition on the JDS Uniphase securities class action trial. The article discusses how the inability to reach a settlement forced the company to risk bankruptcy by taking its chances with a jury.

Quote of note: "Marty Kaplan, JDS's chairman, says the nine-member JDS board had its 'hawks,' who wanted to push to trial, and others who preferred to settle. But he says the plaintiffs' demands far exceeded even the largest settlement the board considered, meaning there was no 'serious debate' about whether to go to trial."

Brocade Settles

Brocade Communications Systems, Inc. (NASDAQ: BRCD), a California-based data center networking and services company, has announced the preliminary settlement of the securities class action pending against the company in the N.D. of California. The case, originally filed in May 2005, stems from allegations that Brocade failed to correctly account for its stock-based compensation.

The settlement is for $160 million. The WSJ Law Blog has extensive coverage of the settlement, including relevant links.