NEW YORK, March 5, 2007 (PRIME NEWSWIRE) -- By a decision dated March 2, 2006, Judge Nicholas G. Garaufis vacated a Magistrate Judge's appointment of Lead Plaintiff and Lead Counsel in the securities fraud class action arising out of massive improper backdating of options at Comverse Technology, Inc. (Pink Sheets:CMVT) (In re Comverse Technology Inc. Sec. Litig., 06 CV 1825 (NGG)(RER) (E.D.N.Y.)). According to a complaint filed by the SEC, from 1991-2002, senior officers of the Company repeatedly "cherry picked" option grant dates when the Company's stock was trading at a relatively low market price, and then fabricated paperwork to cover up the selection process. Additionally, beginning in 1999, Defendants created a "slush fund" of backdated options issued to fictitious employees which were then awarded to actual employees at later dates.
The disclosure in March 2006 of the pervasive option backdating, and improper accounting thereof, caused Comverse's market capitalization to fall by over $1 billion. Comverse's CEO, Kobi Alexander promptly fled to Namibia, where he faces an extradition request by the U.S. government.
In his decision, Judge Garaufis determined that institutional investors represented by Pomerantz Haudek Block Grossman & Gross LLP, should be appointed Lead Plaintiff and Lead Counsel respectively. A Magistrate Judge had appointed Plumbers and Pipefitters National Pension Fund ("P&P") represented by Lerach Coughlin Stoia Geller Rudman and Robbins LLP.
Judge Garaufis' Order is of particular import given its extensive analysis of the application of the Supreme Court's ruling in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005) to Lead Plaintiff motions. In Dura, the Supreme Court held that a plaintiff cannot plead loss causation by merely alleging that a defendant's fraud artificially inflated the purchase price of a company's stock. Rather, a plaintiff must prove that company's stock later declined upon the revelation of the fraud (or materialization of risk) to the market.
The appointment of Lead Plaintiff hinges on determination of which movant has the "largest financial interest." Private Securities Litigation Reform Act, 15 U.S.C. Sec. 78u-4(a)(3)(B)(1). Whereas the Magistrate Judge focused on the fact that P&P sustained the largest transactional "losses" for its Comverse investments, Judge Garaufis held that the proper focus should have been the largest "recoverable losses." Op. at 13. At issue was how to handle losses P&P had sustained on shares it purchased during the class period, but sold prior to any corrective disclosures. While P&P had significant losses on such "in and out" transactions, Judge Garaufis held that "it is clear under Dura and its progeny (that) any loses that P&P may have incurred before Comverse's misconduct was ever disclosed to the public are not recoverable, because those losses cannot be proximately linked to the misconduct at issue in this litigation." Op. at 8.
The Court further reasoned that even though the disclosure/loss causation question was a "factual issue," its consideration at the Lead Plaintiff motion stage was necessary: "(W)here (as here) it is clear from the face of the pleadings that most of P&P's losses were suffered before any alleged corrective disclosure, the court would be abdicating its responsibility under the PSLRA if it were to ignore that issue at this stage." (Op. at 9). The Court thereupon appointed the institutional investors represented by Pomerantz, observing that, compared to P&P, they held more Comverse shares on the corrective disclosure date, and sustained greater losses on shares sold after that date.
As Patrick V. Dahlstrom of Pomerantz noted, "This is a very important decision. It significantly clarifies the standards for appointment of Lead Plaintiffs in securities fraud class actions. The decision reinforces the growing recognition that Courts must conduct some analysis of the facts regarding disclosure of the wrongdoing, and eliminate those losses that are clearly not recoverable, in determining which movant has the largest financial interest in the litigation."
More information on this and other class actions can be found on the Class Action Newsline at www.primenewswire.com/ca