Rough road to recovery
Criminal charges, bankruptcy impede securities fraud class-action case
By: Douglas Levy in News Stories October 15, 2010
October 15, 2010
As E. Powell Miller and Marc L. Newman can attest, pursuing a classaction lawsuit involving securities fraud can become difficult when the company being sued files for bankruptcy.
Naturally, Newman said, “it limits the source of available proceeds to fundva settlement.”
But there were other arduous elements for the attorneys when they helmed a recent suit against a private equity firm and upper management at defunct auto supplier Collins & Aikman Corp.
First was strife between Heartland Industrial Partners and former Collins & Aikman CEO David A. Stockman, as the latter was suing the former for his firing in May 2005, following allegations of accounting schemes to inflate stock value.
“There was a big power struggle,” Newman said, “not just plaintiff versus defendant, but the defendants were fighting among themselves, and that always makes it much more difficult for us to settle.”
As well, Stockman was facing federal criminal prosecution for allegedly misleading Collins & Aikman investors when he was CEO. He was indicted in 2007, when Miller and Newman’s securities fraud class-action suit was pending. But two years later, the charges against Stockman were dismissed – and the securities fraud suit was still pending.“That emboldened him,” Miller said, adding that he’s never had a criminal law matter such as this transpire within a case he was handling.
Indeed, at a status conference at U.S. District Court for the Eastern District of Michigan, where Gerald E. Rosen required all parties to appear, Miller said the other defendants were congratulating Stockman upon his arrival.
“When we got the indictment dismissed, it sent a message to everyone, including Judge Rosen and plaintiff’s counsel, that a more intensive look at the evidence would lead to a different result,” said Andrew B. Weissman, of Washington, D.C.-based Wilmer Cutler Pickering Hale and Dorr LLP, who served as co-counsel for Stockman. “We were moving in that direction when we settled the case; we’d completed discovery and were drafting our papers for summary judgment.”
But, Newman said, just because Stockman wouldn’t face criminal sanctions, “that doesn’t mean he didn’t commit civil fraud.”
He added, “It’s a different standard; our theory is, we don’t have to prove beyond a reasonable doubt in a civil case, just a preponderance of the evidence, which is a much lower standard.”
Miller said the fact that Stockman’s reputation was at stake following his dismissed indictment meant the former CEO wasn’t going to cave in – even if Heartland and the other former Collins & Aikman executives were open to settlement talks.