Securities Litigation

--$32.5 Million Settlement Approved By Judge In Software Licensing
    Scheme - Emerging Securities Litigation
--Securities Fraud Claims Stated In Purported Stock-Lending Scheme -
      Emerging Securities Litigation
--9th Circuit Rules Firm Has Other Remedies Besides Suing Own Stockholders -
      Emerging Securities Litigation

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from MEALEY'S Emerging Securities Litigation

August 25, 2003

9th Circuit Rules Firm Has Other Remedies Besides Suing Own Stockholders

SAN FRANCISCO -- A company can't sue shareholders for unjust enrichment allegedly obtained from stock exchanged during a merger, a federal appeals court ruled Aug. 13 in a case of first impression (McKesson HBOC, Inc. v. New York State Common Retirement Fund, Inc., No. 02-15301, 9th Cir.; 2003 U.S. App. LEXIS 16544).

(Opinion. Document #57-030825-101Z.)

A panel of the Ninth Circuit U.S. Court of Appeals, writing for the panel, said, "[L]ongstanding principles of corporate law and policies favoring the maintenance of the corporate form are so compelling that we cannot permit McKesson to pierce the corporate veil and obtain a remedy against the shareholders."

At issue was a merger between McKesson Corp., a distributor of pharmaceuticals and health care supplies, and HBO & Co. (HBOC), a health care software company. HBOC allegedly inflated its earnings and, thus, HBOC shareholders were able to exchange overvalued stock for correctly valued McKesson stock. In April 1999, HBOC shareholders swapped each share of HBOC stock for .37 shares of McKesson. Although McKesson was the surviving entity, HBOC shareholders acquired about 64 percent of the post-merger stock.

In July 1999, only three months after the merger, McKesson announced that it had reviewed HBOC's books and learned that HBOC had improperly reported about $50 million worth of sales as revenue and was revising its financial statements accordingly. The stock price of the post-merger company fell.

In the ensuing litigation, McKesson sued its own shareholders, arguing that they had improperly benefited from the HBOC's shaky financial profits and, thus, should be required to disgorge their illicit windfall.

The U.S. District Court for the Northern District of California dismissed the case. The District Court ruled that the exchange price was negotiated in the merger agreement by the corporate officers of both companies and, thus, that the shareholders couldn't be required to "disgorge illegal benefit[s] obtained by the actions of the officers of the corporation."

Affirming, the Ninth Circuit held that an unjust enrichment case is not "absolutely precluded" but that under Delaware state law, five elements are required. One of them, the absence of "another remedy provided by law," was not met, the appeals court ruled.

This story and the complete archive of Mealey's Litigation Reports including related court documents are available online by subscription or on a pay-per-view basis. Go to Mealeys Online.

from MEALEY'S Emerging Securities Litigation

October 27, 2003

$32.5 Million Settlement Approved By Judge In Software Licensing Scheme

WASHINGTON, D.C. -- A federal judge approved a $32.5 million settlement Sept. 30 with a Netherlands-based technology firm, saying the complexity of the case and the possible difficulty of recovering a larger settlement made the current agreement adequate (In re Baan Company Securities Litigation, No. 98-2465 [ESH], D. D.C.; 2003 U.S. LEXIS 17023).

(Opinion on settlement available. Document #57-031027-006Z. Opinion on attorney fees available. Document #57-031027-007Z.)

U.S. Judge Ellen Segal Huvelle of the District of the District of Columbia made her decision six months after overruling a magistrate judge and determining that Baan Co. was subject to personal jurisdiction in the securities fraud action. Her Feb. 22 decision set the ground for the settlement negotiations, which were agreed by both the plaintiff class and the defendants on June 26.

A trial would have taken "at least a month," Judge Huvelle said, and the outcome would be uncertain. Potentially years of post-trial motions could have followed.

Also, since the notice of proposed settlement, no member of the class has objected and only a few have asked to be excluded.

Most important, even if a judgment was rendered, questions remain about whether plaintiffs could collect a judgment or if Baan Co. could absorb a larger judgment.

Shareholders sued Baan and its parent company, Vanenburg, which is privately held by Paul and Jan Baan, for purportedly rigging revenues figures. Baan. sold software licenses to affiliates on consignment, agreeing to buy back unsold licenses. Executives within Baan allegedly recorded consigned licenses as revenues in violation of generally accepted accounting procedures, according to the judge. Baan executives also allegedly reported these inflated revenues on their required 20-F and 6-K forms filed with the Securities and Exchange Commission.

This story and the complete archive of Mealey's Litigation Reports including related court documents are available online by subscription or on a pay-per-view basis. Go to Mealeys Online.

from MEALEY'S Emerging Securities Litigation

September 29, 2003

Securities Fraud Claims Stated In Purported Stock-Lending Scheme

MINNEAPOLIS -- Two broker-dealers and a bankruptcy trustee have stated a claim for market manipulation against several banks, brokers and executives, a federal judge ruled Sept. 8 (James P. Stevenson v. Deutsche Bank AG, et al., No 02-4845, Ferris, Baker Watts, Inc. v. Deutsche Bank AG, et al., No. 02-3682, E*Trade Securities, LLC. v. Deutsche Bank AG, et al., No. 02-3711, D. Minn.; 2003 U.S. Dist. LEXIS 16133).

(Opinion available. Document #57-090929-011Z.)

U.S. Judge Richard H. Kyle of the District of Minnesota granted in part and dismissed in part a motion to dismiss racketeering and securities fraud claims brought against Deutsche Bank AG, Nomura Securities and other brokerages and their corporate officers. The racketeering charges, brought under the Racketeer Influenced and Corrupt Organizations (RICO) Act were dismissed because the Private Securities Litigation Reform Act of 1995 (PSLRA) specifically excepted securities transactions from RICO.

However, Judge Kyle refused to dismiss certain securities fraud and most controlling person liability claims and said the plaintiffs in each case met the heightened pleading requirements of the PSLRA on many of the counts. Judge Kyle's ruling was on three related and overlapping actions.

At issue was the practice of lending thinly traded securities, and those pleadings gave a strong inference of scienter, Judge Kyle said. Thus, the motions to dismiss as far as Section 10(b) and Rule 10b-5 were denied.

"Plaintiffs allege an orchestrated scheme involving a common practice in the securities industry known as securities lending. . . . A typical securities lending transaction involves one party, usually a broker-dealer, loaning securities to another party, usually another broker-dealer, in exchange for cash collateral that slightly exceeds the value of the securities. . . . This cash collateral is 'marked to the market,' so that, as the price for a particular stock rises and falls, cash is delivered to or returned from the lender," Judge Kyle explained.

These charges successfully plead market manipulation, and because the plaintiffs have presented evidence that the defendants acted intentionally, the plaintiffs successfully pleaded scienter, Judge Kyle said.

This story and the complete archive of Mealey's Litigation Reports including related court documents are available online by subscription or on a pay-per-view basis. Go to Mealeys Online.

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