InSecurities: Securities Fraud Roundup 4.28.11

April 28th, 2011. By LucyC

Top Securities Fraud Stories

The securities fraud story that’s got the attention of most folks right now is the Erica P. John Fund v. Halliburton case—which the Supreme Court has been hearing oral arguments on this week. Not because any of us held any Halliburton stock—and not even because it’s related to Halliburton’s liability to asbestos-related lawsuits, though asbestos is a hot topic here at LawyersandSettlements.com. No, this one’s a biggie because it has to do with whether a plaintiff can only obtain class action certification by establishing a preponderance of the evidence that shows that a corporation’s correction of its false statements made its stock price tank thereby screwing its investors.

The Halliburton case is actually from way back in 2002. The plaintiff, Erica P. John Fund, claimed that at the time, Halliburton understated its liability exposure to asbestos-related lawsuits and overstated its revenues—then, came out later correcting those statements at which point Halliburton’s stock price declined. The question at the heart of the matter pertains to loss causation—i.e., the plaintiffs’ ability to link their losses to a particular statement made by the company. After the Halliburton case had initially been thrown out by a Texas federal court—meaning that the court found the plaintiffs did not show causation of loss—an appeals court upheld the decision. And here we are awaiting the Supreme Court’s decision which is sure to have a major impact either way on how securities cases are handled in the future.

So, be that as it may, the theme for this month’s InSecurities column is entitled “In violation of federal securities laws” and you’ll find the specific allegations—chapter and verse—below. So let’s get started with our first securities suit: Rosetta Stone…

Company:                    Rosetta Stone, Inc

Ticker:                         RST

Class Period:                Feb-25-10 to Mar-1-11

Date Filed:                   Mar-31-11

Lead Plaintiff Deadline:  May-30-11

Court:                          Eastern District of Virginia

Madoff Meter:

The Allegations:

Nothing like learning first hand, as Rosetta Stone is finding out. They got hit with a securities lawsuit at the end of March, alleging—everyone sing along—you know the words—”certain of its officers and directors violated federal securities laws.” Very nice. Nothing like a good harmony.

The class period is practically 12 months—from February 25, 2010 to March 1, 2011, inclusive (the “Class Period”). The specific allegations—from the top—are (i) that Rosetta Stone was facing intense competition for its products, including free competitive product offerings; (ii) that the free and lower priced competitive product offerings, not a temporary reduction in advertising, was having a material adverse effect on the Company’s Class Period revenues, particularly U.S. consumer revenues; (iii) that the favorable sales booking numbers Rosetta Stone reported during the Class Period was the result of key retail partners maintaining inventory of the Company’s products well above historic levels; and (iv) that Rosetta Stone’s reported sales bookings and revenues during the Class Period were the product of manipulation.

But of course, the truth comes home to roost eventually, and on February 28, Rosetta Stone announced fourth quarter revenue of $74.3 million, a 5% decrease from the prior year, net income on a GAAP basis of $5.0 million, a decrease of 60% from the 2009 fourth quarter. On this news, shares of Rosetta Stone fell $1.77 to $13.19 per share. Ker plunk. I think this gets a 3 Bernie rating on our trusty Madoff meter.

Next up: 1st Centennial Bancorp…

Company:                        1st Centennial Bancorp

Ticker:                             FECN

Class Period:                    Apr-13-06 to Jan-23-09

Date Filed:                       Apr-19-11

Lead Plaintiff Deadline:     Jun-18-11

Court: —

Madoff Meter:

The Allegations:

Weary investors in 1st Centennial Bancorp filed a securities class action on April 19, in hopes that they may get some of their hard earned dollars back from a less than stellar investment. As the class period runs from April 13, 2006 to January 23, 2009, there could be quite a line-up for payouts.

Here’s the nitty-gritty—during the Class Period, 1st Centennial was a bank holding company for the 1st Centennial Bank (the “Bank”). During that period, the bank misled investors and concealed: (a) the Bank’s exposure to the risky CRE/ADC loan market; (b) mounting loan losses, and (c) the Bank’s loan underwriting and credit administration practices including its non-compliance with prudent banking standard and lending policy.” Any of this sounding familiar?

According to the Complaint, as a result of the alleged misconduct at the Bank, on January 23, 2009 the California Department of Financial Institutions seized the Bank and appointed the FDIC as receiver. That’s never a good thing.

Hardly surprising, the Company filed for bankruptcy on March 25, 2009. The Complaint alleges that the investors began to learn of the Bank’s fraudulent nature of the misdeeds at the Bank in August of 2009 when a material loss review was issued by regulators.

On January 14, 2011 the FDIC sued the Bank’s officers and directors alleging, among other things, wilful misconduct in causing the Bank’s failure. The Complaint alleges that investors in 1st Centennial securities were damaged as a result of the misconduct. Most likely, yes, how could they not be? We’ll give this a 4 on the Maddof Misconduct Meter.

Onward to American Superconductor Corporation…

Company:                       American Superconductor Corporation

Ticker:                            AMSC

Class Period:                   Nov-2-10 to Apr-5-11

Date Filed:                      Apr-7-11

Lead Plaintiff Deadline:    Jun-6-11

Court:                            District of Massachusetts

Madoff Meter:

The Allegations:

Ok—so who had heard of American Superconductor prior to the securities lawsuit? For the record, this is not the kind of fame Andy Warhol was on about. 

Short version, AMSC provides wind turbine designs and electrical control systems. The company’s quarterly revenues during the Class Period were largely derived from customer Sinovel Wind Group Co. Ltd. (“Sinovel”). The complaint alleges that during the Class Period, defendants violated federal securities laws by misrepresenting and/or failing to disclose that: (a) AMSC was providing Sinovel with shipments in excess of their needs; (b) Sinovel was not paying for certain shipments; (c) AMSC was improperly recognizing revenue on certain shipments to Sinovel; and (d) as a result, AMSC’s revenues were overstated. They must teach this stuff in the hallowed halls of business school because everyone’s singing from the same song sheet right now—either that, or they took a few notes from Halliburton, discussed above.

On April 5, 2011, AMSC announced that Sinovel refused to accept shipments and refused to pay for shipments made during the 2010 fiscal year. The Company also announced it expected its 2010 fourth-quarter and fiscal year earnings would be substantially below previous projections. The following day, shares of AMSC plummeted by more than 42 percent. What’s that crashing sound?

The securities class action covers anyone who purchased AMSC between November 2, 2010 and April 5, 2011.

That’s a 3.5 on the Maddoff meter of misconduct, which we’ll round to a 4. 

And finally, Puda Coal Inc…

Company:                        Puda Coal Inc,

Ticker:                             PUDA

Class Period:                    Nov-13-09 to Apr-8-11

Date Filed:                       Apr-14-11

Lead Plaintiff Deadline:    Jun-13-11

Court:                             Central District of California

Madoff Meter:

The Allegations:

Another obscure firm launched to infamy on the back of its investors. PUDA is facing a securities class action filed on behalf of anyone who purchased its securities from November 13, 2009 to April 8, 2011, inclusive (the “Class Period”).

What did these guys allegedly do? Well, the Complaint alleges violations of the Securities Exchange Act against Puda Coal and its officers and directors for misrepresenting the Company’s ownership interest of the Company’s operating subsidiary Shanxi Puda Coal Group Co. Ltd (“Shanxi Coal.”), and related unauthorized transactions involving Shanxi Coal and Puda Coal’s Chairman Ming Zhao. According to the Complaint, on April 8, 2001 a stock market analyst issued a report claiming that Ming Zhao had secretly engaged in related party transactions in order to “steal” half of Puda Coal’s ownership interest in Shanxi Coal and pledged the other half of the Company’s ownership of Shanxi Coal to Chinese private equity investors (the “Report”). That certainly doesn’t sound legal.

Of course once the word got out Puda stock fell 34% on April 8, 2010. And, shortly thereafter, trading in Puda Coal’s stock was halted before market open. Later that day, Puda Coal issued an announcement admitting that “evidence supports the allegations that there were transfers by Mr. Zhao in subsidiary ownership that were inconsistent with the disclosure made by the Company in its public securities filings.”

I reckon this is worth a 4 the Maddoff Meter as well. 

Top Securities Settlements

 

Ameriprise Financial and its brokerage unit, Securities America Inc are in the news again regarding another preliminary of a securities lawsuit filed by clients who allege they lost roughly $400 million on fraudulent private placements.

According to Reuters, the investors participated in shale gas investments with Provident Royalties LLC and debt sales sponsored by Medical Capital Holdings Inc. The Securities and Exchange Commission has since charged both Provident and Medical Capital with fraud. Oh. Not so good.

The amount of the settlement is $150 million with Securities America paying $80 million, further to a separate agreement in which SA has agreed to pay $70 million. If approved, the settlement would mean a recovery of 40 cents on the dollar, after fees. This settlement was worked out after U.S. District Judge Royal Furgeson in Dallas rejected a deal that would have allowed Securities America to pay only $21 million, or five cents on the dollar. Securities America and Ameriprise had said that Securities America could go out of business if it had to face losses beyond $21 million. Nice try guys.

Tags: 1st Centennial Bancorp, American Superconductor, Ameriprise Financial, Halliburton, Insecurities, loss causation, Madoff Meter, Puda Coal, Rosetta Stone, securities, Securities America, Supreme Court

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