Securities Litigation, Enforcement, And White-Collar Criminal Defense Quarterly Newsletter, Winter 2008

In This Issue

Our first edition of the Securities Litigation, Enforcement, and White-Collar Criminal Defense ("SLEW") Quarterly Newsletter begins with a report on our trial win in California in In re JDS Uniphase Corporation Securities Litigation, a class action in which the plaintiffs sought $20 billion in damages. Next, we discuss the acquittal of our client in a criminal matter in Massachusetts, and lessons for similar cases. We then assess what the SEC will be focusing on in 2008, and review privilege issues to keep in mind when responding to government inquiries. We follow with a discussion of major Supreme Court holdings in securities litigation, including the decision just a few weeks ago in Stoneridge. We then turn to China and describe our work for China-based companies and the unique resources we can bring to bear in such cases. We close with a report on our recovery, as a court-appointed receiver, of over $174 million for bilked investors.

JDSU Trial Victory: Jury Finds in Favor of Defendants Across the Board

Article By Timothy Blakely

Conventional wisdom holds that when push comes to shove, defendants in a securities class action will not risk trial. This is especially true if the case involves: (1) billions of dollars in shareholder losses; (2) hundreds of millions of dollars of stock sales by directors and officers; (3) complicated accounting issues; (4) a restatement; (5) a pension fund plaintiff; and (6) bet-the-company damages. The deck is supposedly so stacked against defendants that these cases cannot be won, and no company will risk trying. Not so fast.

A Morrison & Foerster team led by Jim Bennett, Jordan Eth, and Terri Garland recently went to trial in a case that combined every one of those ingredients and won across the board.

The case, In re JDS Uniphase Corporation Securities Litigation, arose out of the telecom meltdown of 2001. During that industry collapse, JDSU-a fiberoptic telecommunications components provider-saw its stock price fall from more than $140/share in the spring of 2000 to less than $10/share by mid-2001, a market cap loss of approximately $90 billion. In the wake of the telecom industry's collapse, JDSU wrote down its goodwill by $40 billion (the largest write-down of goodwill to that date) and its inventory by more than $270 million. Predictably, a lawsuit soon followed.

The Lead Plaintiff, the State of Connecticut Retirement Plans and Trust Funds, alleged that four former JDSU executives saw the downturn coming months before it arrived and misled investors about demand for JDSU products while selling JDSU stock worth more than $500 million. The Lead Plaintiff also alleged that JDSU "cooked its books" by overstating its goodwill and inventory, and that JDSU filed misleading registration statements in connection with significant mergers. The Lead Plaintiff claimed $20 billion in damages under a number of federal securities laws, including Sections 11 and 12 of the Securities Act, and Sections 10(b), 14, and 20A of the Securities Exchange Act.

Morrison & Foerster, which represented JDSU and three of the former executives, successfully narrowed the case through discovery and motion practice, and the case went to trial in Oakland, California, in October 2007. After a four-week trial, and testimony from more than 40 witnesses (including eight experts), a nine-person Oakland jury returned a complete defense verdict after two days of deliberations.

What does this result teach companies and executives faced with similar claims? There are many lessons learned, but three stand out:

First, raw populism does not necessarily dictate outcomes. Jurors take their responsibilities seriously. They will be convinced by facts, not name calling, and it is not enough for plaintiffs to allege that "greedy" executives "dumped" their stock on an unwitting public. Jurors will also pay close attention to the individual defendants themselves, rather than caricatures based on their wealth.

Second, to preserve trial as a winnable option, defendants faced with securities claims should begin planning early so that: (1) long-term positions are not compromised for tactical gains; and (2) affirmative evidence is preserved and pursued so that it can be presented at trial. Even though settlement is still by far the most likely outcome of a securities fraud class action, effective preparation for trial can allow defendants to negotiate from a position of strength.

Third, what sometimes seems like unimportant pretrial wrangling can make a huge difference at trial (and in negotiating a settlement). The deposition of a third party; the motion to compel that pins down an evasive answer; the request for admission that eliminates a claim; the interview of an alleged "confidential witness"--all these activities contribute to shaping the eventual outcome, and all should be undertaken purposefully with that goal in mind.

To be sure, class action securities claims can present great risk to defendants, and not every case can be won at trial. The recent jury verdict for plaintiffs in the Apollo Group securities trial illustrates this point. If the JDSU trial teaches anything, however, it is that companies and individuals accused of securities fraud need not roll over in the face of meritless claims no matter how aggressively pled or litigated.

Timothy Blakely is an associate in the firm's San Francisco office and was on the JDSU trial team.

Washington, D.C. Criminal Defense Team Wins Acquittal For Client In Case In Which Other Defendants Pled Guilty

Articel By Afam Hoffinger

In May 2007, a trial team from our Washington, D.C. office, led by Adam Hoffinger, won an acquittal for Melissa Vaughn, a former sales executive of EMD Serono, the U.S. division of Swiss-based life sciences company, MerckSerono. United States v. John Bruens, Mary Stewart...