Maverick Fund, L.D.C. v. Comverse Technology, Inc.
2011 U.S. Dist. LEXIS 74601
E.D.N.Y2011Background
- Seven hedge funds (Maverick) sue Comverse and officers for 10(b), 18, 20(a) and NY law; opt-out from $225M Class Action settlement; alleged stock option backdating and GAAP misstatements from 1991–2006; officer defendants include Alexander, Kreinberg, Sorin, Friedman, Hiram, Oolie; New Management Defendants Dahan and Aronovitz joined in 2007; claims rely on backdating, earnings manipulation, and restatement disclosures.
- Comverse accounted for stock options under APB 25 but allegedly expensed none of the in-the-money portions; misstatements and omissions included backdating and false GAAP accounting disclosures; extensive restatements and DOJ investigations followed, with material public disclosures beginning March 14, 2006.
- CAC Defendants (Friedman, Oolie, Hiram) signed backdated grant documents; Alexander controlled grant process; Sorin drafted backdated documents; New Management Defendants reassured markets in 2007 about restatement progress.
- Plaintiffs allege that 2007 statements were forward-looking; earlier statements allegedly misrepresented present facts; disclosures post-2006 partially revealed fraud; stock trades occurred through 2007 before restatement.
- Defendants moved to dismiss all Exchange Act and negligent misrepresentation claims; court denied most aspects but granted PSLRA safe harbor-related dismissal for 2007 statements.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Plausibility of Exchange Act claims | Maverick alleges misstatements and omissions with scienter and loss causation | Sophistication and trading negate reliance and causation | Plaintiffs' Exchange Act claims plausible; fraud-on-the-market applies; loss causation shown. |
| Reliance and fraud-on-the-market | Maverick relied on market prices and public disclosures | Sophisticated investor cannot rely; truth-on-market defense may apply | Fraud-on-the-market presumption applicable; reliance adequately pled; truth-on-market defense not yet established. |
| Rule 9(b) specificity | Plaintiffs identified statements, speakers, times, and reasons | Need more precise purchase/sale dates and prices | Rule 9(b) satisfied at pleading stage; specifics of each trade not required at this stage. |
| PSLRA safe harbor | 2007 statements are not protected because they stated present facts | Present-focused portions are forward-looking and protected | Dismissal granted for 2007 statements to the extent based on 2007 claims; pre-2006 claims unaffected. |
| Negligent misrepresentation (pre-2007 vs 2007 statements) | Pre-2007 statements may support negligent misrepresentation; 2007 statements are non-factual | 2007 statements are forward-looking and not actionable; pre-2007 still contested | Not time-barred for 2007 statements; 2007 statements non-factual; claims against certain parties limited. |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (plausibility standard for pleading a claim)
- Ganino v. Citizens Utilities Co., 228 F.3d 154 (2d Cir.2000) (reliance and scienter requirements in §10(b) cases)
- Basic Inc. v. Levinson, 485 U.S. 224 (U.S. 1988) (fraud-on-the-market theory for reliance in efficient markets)
- Tellabs, Inc. v. Makor Issues and Rights, Ltd., 551 U.S. 308 (U.S. 2007) (strong inference of scienter standard for PSLRA)