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/raid1/www/Hosts/bankrupt/CAR_Public/010501.mbx C L A S S A C T I O N R E P O R T E R Tuesday, May 1, 2001, Vol. 3, No. 85 Headlines CISCO SYSTEMS: Plaintiffs Want to Burn Technology Giant With Suit COMPAQ COMPUTER: Wayne Reaud Announces Consumers’ Lawsuits re Warranty COX ARENA: Ticket for Baby Subject of Suit over Bias against the Mother CREDIT CARDS: A Snapshor at Forum While Antitrust Suit Is Still Puzzling DAIMLERCHRYSLER AG: EEOC sues for Transfer for Disabled Workers DOJ: Treasury Employees Special Rates Case Heads To Mediation FBI: African-American Special Agents Settle of Racial Bias Suit FREEMARKETS, INC: Kirby McInerney Commences Securities Lawsuit GENERAL MOTORS: Document Unlocked Reveals and Brings Fury HIGH-INTEREST LENDERS: Green Tree, Long Beach, TMS Mortgage Sued JAPAN, CHISSO: Osaka High Ct Orders To Pay Minamata Mercury Victims LifeUSA HOLDING: Ct Decertifies Case v. Independent Agents over Annuity MERRILL LYNCH: To Pay $16.9 Million To Injury Victims PRICELINE.COM, INC: Wolf Haldenstein Commences Securities Suit in N.Y. QUALCOMM INC: Settled Suit Shows Impact of Giving Employee Stock Options REDIFF.COM: Wolf Haldenstein Commences Securities Suit in New York SANTA FE: Las Vegas Unions File Suit Alleging Violations of WARN SUNBEAM CORP: Stockholders And Arthur Andersen Enter into Agreement TURNSTONE SYSTEMS: Spector, Roseman Commences Securities Lawsuit in CA WINSTAR COMMUNICATIONS: Spector, Roseman Expands Securities Lawsuit ********* CISCO SYSTEMS: Plaintiffs Want to Burn Technology Giant With Suit ----------------------------------------------------------------- Milberg Weiss Bershad Hynes & Lerach's recent assault on Cisco Systems Inc. could be a test case for getting plaintiffs suits back on firm footing in Northern California's federal courts. At least that's one of the theories defense lawyers are floating as they analyze the case against technology darling Cisco. No surprise defense lawyers see the case as flawed at best."It certainly says something about the plaintiffs bar fiscal '01 business plan," said Boris Feldman, a Wilson Sonsini Goodrich & Rosati partner and a leading securities defense lawyer. Defense-side scoffing aside, the Cisco case has the potential to become a bellwether: For the first time, the Valley's biggest company is getting hit for securities fraud and that alone is cause for concern among other technology heavies. And, as defense lawyers point out, a successful case against Cisco would end a losing streak for plaintiffs lawyers."My guess is that they're trying to get some better rulings out of the 9th Circuit," said Shirli Fabbri Weiss, a Gray Cary Ware & Freidenrich securities partner. Plumbers & Pipefitters v. Cisco Systems Inc. alleges the company and key executives violated securities laws by passing on misleading information to investors to inflate the value of the company's stock. The suit further contends that company insiders including CEO John Chambers took advantage of inflated stock prices to reap a total of $ 595 million from personal trades.So far, Cisco hasn't filed an answer to the complaint. And Cisco hasn't yet announced whether it will award the potentially plum piece of litigation work to its longtime chief outside counsel, Brobeck Phleger & Harrison. In the meantime, Brobeck isn't commenting on whether it's talking to Cisco about the suit. The case against Cisco is one of a handful of securities class actions Milberg has filed against tech companies this year. Smaller players like Broadvision Inc. and PlanetRx.com have also been targeted by the firm. Cisco contends the suit is without merit a view echoed by Silicon Valley defense lawyers: "Cisco's one of the great companies in America. They're going through a tough time, but to insist that Cisco has been a fraud for the past 18 months is absurd," Feldman said. But Milberg stands behind its complaint and will likely level more detailed accusations against Cisco in future filings."We have an incentive to bring a case that has merit if we lose, we don't get paid," said Milberg partner Spencer Burkholz. He added that the firm would be sanctioned by the court if its stock-fraud suits lacked merit, and so far, that hasn't happened. When it comes to securities class actions, judges in lower federal courts and the 9th Circuit U.S. Court of Appeals have delivered a series of defense-friendly rulings in recent years.Defense lawyers - capitalizing on the 1995 Private Securities Litigation Reform Act have accused plaintiffs attorneys of relying on the discovery process to prove fraud allegations. The 9th Circuit has sided with the defense in key rulings. As a result, securities class action plaintiffs lawyers have to file detailed complaints up front. To survive a defense motion to dismiss, Milberg's complaint must explain in painstaking detail its allegations of stock price manipulation.And a judge has to buy the argument. The higher pleading standard came from the 9th Circuit's most influential interpretation of the 1995 law. Decided in July 1999, In re: Silicon Graphics Securities Litigation pitted Milberg against defense lawyers at Wilson Sonsini. In that case, a 9th Circuit panel ruled that plaintiffs' filings must illustrate that defendants committed fraud intentionally and recklessly to benefit from an artificially inflated stock price. In other words, "being wrong is not actionable," said James Finberg, a partner at Lieff Cabraser Heimann & Bernstein.The decision made life much harder for plaintiffs lawyers. "The standard now is that you have to have particularized facts showing deliberate recklessness," Finberg said. Gray Cary's Weiss said she sees the Cisco case simply as an attempt to revisit the tougher standards. Weiss herself extracted a key defense ruling from the 9th Circuit earlier this month. In Zeid v. Kimberly, the 9th Circuit applied the same high pleading standard to accounting fraud cases as it does to stock-drop suits. Accounting fraud cases usually occur as a company is restating its financials. Stock-drop suits like the one against Cisco often follow a steep decline in the value of a company's stock on the market. In Cisco's case, the stock hit a high of $ 82 between Aug. 10, 1999 and April 6, 2001 the period covered in the lawsuit. It ended trading last Wednesday April 25 at $ 15.73 a share. Stanford University securities law professor Joseph Grundfest, however, is skeptical the current Cisco complaint will have much impact when it comes to testing the new standards. Grundfest helped craft the 1995 reform act and has worked on both plaintiffs-side and defense cases. "This is not one of the stronger complaints I've seen," said Grundfest. Among other things, he dinged the complaint for citing an article that he thinks will ultimately prove more useful for the defense. Still, the Cisco complaint makes for interesting reading. According to the suit, everyone from market analysts to customers questioned Cisco's growth plans and projections. They informed the company that some of its practices like loaning potentially unstable customers money to buy products could not prop up sales forever.Meanwhile, insiders were selling hundreds of millions in stock, the suit alleges. But juicy tidbits aside, Grundfest said he sees the Cisco case as part of a buckshot strategy by plaintiffs lawyers. They are suing multiple technology companies with hopes of extracting a large settlement from at least one. "They only need a small probability to make it worth their while," Grundfest said. "How much does it cost to write a complaint?" This article previously appeared in The Recorder, an American Lawyer Media publication in San Francisco. (The Legal Intelligencer, April 27, 2001) COMPAQ COMPUTER: Wayne Reaud Announces Consumers’ Lawsuits re Warranty ---------------------------------------------------------------------- Consumers filed two national class action lawsuits against Compaq Computer Corporation alleging the company systematically defrauds consumers through their express warranty procedures and knowingly denies consumers implied warranty rights. The suits affect owners of Compaq iPaq Pocket PC handhelds, iPac computers and Presario computers. The first case, Pope v. Compaq, alleges that Compaq illegally requires consumers to sign release forms anytime a unit is refunded or replaced under Compaq's one-year express warranty. The release forms require customers to swear they will not disclose the problem or remedy or risk forfeiting their property and open themselves up to a potential lawsuit from Compaq. Nowhere in the Compaq express warranty is the signing of the release mentioned or required. The required illegal release reads: "The parties hereto further agree that the terms and conditions created by this Limited Release shall remain confidential. If the releasing parties breach or cause a breach of this Limited Release, it is hereby agreed and understood that Compaq will be entitled to liquidated damages, including not limited to a return of the new Compaq Presario..." "Compaq is not standing behind their products and is attempting to bully its customers into keeping their mouths shut about the problems they are having," spokesman for the plaintiffs Patrick Woodson said. The lawsuit seeks to waive all of the signed releases, force Compaq to abandon this illegal practice and reestablish all of the proper consumer remedies for purchasing defective equipment. "In the course of researching this case, we heard from many dissatisfied customers who are fed up with Compaq's tactics. In one case, a computer owner had to fight with Compaq for more than six months before he could get a product that he could even use and then only if he signed a release requiring him not to discuss his situation," Woodson said. The second case, Albanese v. Compaq, alleges Compaq illegally excludes all implied warranty rights in violation of federal law. United States law allows companies to limit, but not exclude implied warranty rights for products. Compaq's own warranty violates this law by saying "Compaq makes no other warranties express or implied, including any implied warranties of merchantability and fitness for a particular purpose" (iPac handheld warranty). Prohibiting warranties like Compaq's was a major reason Congress passed the Magnum-Moss Act, which states "the implied warranties on consumer products may not be disclaimed if a written express warranty is given." As a leading authority explains, "Feeling that it is deceptive to use an express warranty as a means of disavowing more valuable implied warranties, the Magnuson-Moss Act in its most important provision states that the implied warranties on consumer products may not be disclaimed if a written express warranty is given" (Hawkland Uniform Commercial Code Series by William D. Hawkland, Hawkland Uniform Commercial Code Series by William D. Hawkland). Plaintiffs seek to have the full implied warranty rights of Compaq's customers reestablished. Title 15, Chapter 50 of the United States Code clearly articulates that if Compaq is found in violation of this section, their attempts to limit customers' rights "shall be ineffective for purposes of this chapter and state law." A ruling in the plaintiffs favor would give all of the affected product owners their full four-year implied warranty rights. "These cases are about forcing Compaq to stop shortchanging customers who are getting stuck with defective products," Woodson said. "These are deceptive practices, they are wrong and they need to stop." The two suits were filed in state court in Beaumont, Texas, by the law offices of Wayne Reaud, the law firm of Orgain, Bell, & Tucker and the same legal team who negotiated a $2.1 billion settlement against Toshiba Corporation. Contact: Shipley and Associates (for Wayne Reaud and Orgain, Bell, & Tucker) Patrick Woodson, 512/474-7514 or 512/680-6036 (cell) COX ARENA: Ticket for Baby Subject of Suit over Bias against the Mother ----------------------------------------------------------------------- An attorney who was required to buy a separate ticket for his 7-month-old daughter at the NCAA basketball tournament last month has filed a lawsuit. Joshua Gruenberg filed the Superior Court lawsuit on behalf of his wife, Karen, saying the Cox Arena policy requiring tickets for children regardless of age discriminates against women who are breast-feeding their infants. Gruenberg said his wife couldn't leave their daughter, Sidonie, at home because the baby needs to be breast-fed every one to two hours. The couple paid $85 to buy a ticket from a scalper after security personnel refused to let them enter the arena without a ticket for Sidonie for the March 17 game at San Diego State University. A spokesman with the Division I Men's Basketball Championship said all spectators must have tickets because there is no reliable way to determine the age of children and no standard for determining an age limit. The university and the NCAA are among the defendants named in the lawsuit, which seeks a court order changing the ticketing policy plus attorney fees. It also seeks class-action status for other parents who bought extra tickets for babies that day. (The Associated Press State & Local Wire, April 30, 2001) CREDIT CARDS: A Snapshor at Forum While Antitrust Suit Is Still Puzzling ------------------------------------------------------------------------ Everybody in the credit card industry wants to know why last summer's intense, three-month showdown between the Justice Department and the credit card associations ended not with a bang but a whimper, and several of the most curious and concerned gathered here last week to puzzle it out. Judge Barbara Jones, who presided over the antitrust trial in U.S. District Court for the Southern District of New York, abruptly cancelled closing arguments in October -- apparently signaling that she had heard enough -- and has not said a public word about the case since then. A lot of people who followed the trial or were involved in it are yearning for some closure. Though the matter has receded from headlines, the stakes are still big, and Judge Jones' decision, whenever it comes, could potentially reconfigure the industry along any number of permutations. Among other things, it could force Visa U.S.A. and MasterCard International to let banks work with American Express Co. and Discover Financial Services. At the Credit Card Forum 2001 conference here last week, some of the familiar faces from last summer's courtroom drama gathered to swap theories and rehash some of the arguments in the trial, both for old times' sake and to try to make sense of the judge's loud silence. A few have moved on to new jobs, but many of them gathered nonetheless at the conference, which was sponsored by Thomson Financial Media, parent company of American Banker. Most notably, Melvin A. Schwarz, the Justice Department's chief litigator in the case, has left the government and become a partner in the Washington antitrust group of Dechert, a U.K. law firm previously known as Dechert Price & Rhoads. Since no date is in sight for a decision to be handed down, lawyers and card industry executives have had no choice but to speculate a lot. Circulating theories include: One of Judge Jones' clerks left last fall, and the judge is overloaded with other cases; she wants to see the outcome of the Wal-Mart trial; she is leaning against the government, but still has to sort through all the documents; she favors the government, but will write a very complicated decision. "I would not begin to be able to tell you why" no decision has yet been made, Mr. Schwarz said at the conference. "I have no idea. Federal judges have complete discretion." "He's right -- ditto," said Stephen Bomse, a partner at Heller Ehrman White & McAullife in San Francisco and a longtime counsel for Visa U.S.A., who argued the association's case last summer. Also on the panel were Gary R. Carney Jr., an attorney at Clifford Chance Rogers & Wells LLP who represents MasterCard, and David Balto, who recently left his job as policy director for the Federal Trade Commission for a partnership at White & Case LLP in Washington. Mr. Balto has investigated competitive issues in the payments industry for several years. The only point of agreement among the panelists -- who spent years clashing during the pretrial and trial proceedings -- was that nobody knows why the decision is taking so long. Indeed, the waiting has put stress on everyone: A public relations executive for one company that could be affected by the outcome said recently that her firm has prepared different public statements for every likely outcome, and reviews them every month to make sure they are up to date. With no answers to the judge conundrum, the panelists spent more than an hour debating the familiar issue of whether Visa and MasterCard exert market dominance over the networked payments industry and unfairly restrict competition from American Express, Discover, and others. "There is a tremendous perception by merchants that they have to accept credit cards, that they have no competitive choice," Mr. Schwarz said. Reviving a key piece of evidence from the government's case last summer, he pointed to the introduction of the American Express Blue card, after which Visa and MasterCard renewed their interest in microchip technology, which both associations had investigated and long ago abandoned -- in concert, he contended. "Why didn't smart cards come out earlier?" Mr. Schwarz asked the audience, transformed during the panel into an ad hoc jury. After Blue was launched, Visa and MasterCard renewed their interest in smart cards, "despite the fact that for 20 years they said there wasn't a business case" for the products, he said. If Visa and MasterCard were truly competitors, they would have competed on the smart card front long before the arrival of Blue, Mr. Schwarz said. "That's what competition is about. Sometimes you're forced to do things you don't want to because your competitor is doing it." Mr. Schwarz also brought up the subject of interchange fees, the interbank fees paid by merchants when they accept credit and debit cards. The fees -- which are higher for Visa/MasterCard debit cards than for nonassociation ones -- are the central issue in the pending Wal-Mart lawsuit, which pits the nation's biggest retailers against Visa and MasterCard, but they also came up during the Justice Department trial. Mr. Schwarz argued that because interchange is not transparent to cardholders, and because merchants have no choice but to pay it, the fee represents another testament to the associations' market dominance. "In the last two to three years the interchange was raised 10% to 15%, and merchants still have no choice," Mr. Schwarz said. "That, to a regulator, screams market power." Mr. Balto, who has repeatedly challenged the legitimacy of interchange fees, agreed. "The antitrust question for the court to decide is whether or not you can raise the price without losing volume," he said. "Visa and MasterCard have raised it without substantially losing business, and that shows they have market power." Mr. Bomse, speaking for Visa, countered that the proprietary networks American Express and Discover charge even higher interchange fees than the associations. "Never mind that American Express has a much higher fee and gets a free pass from antitrust laws, while Visa gets sued over and over again," he said. With a weary voice, Mr. Bomse said that he had already litigated and won this issue in the landmark National Bancard Co. (NaBanco) case of 1984, in which the court effectively legalized interchange fees. "I feel like someone in a dream slaying the same dragon over and over again," he said. "Every night, the dragon comes back with more of his cousins." Saying his opponents had an "overly formalistic mind and a competition ax to grind," Mr. Bomse said the government's case is biased against his client and in favor of Amex -- not consumers. "The government does not have the real interest" in pursuing these matters, Mr. Bomse said. "American Express is the driving force," and it persuaded the government to try the case in the first place, he said. Mr. Schwarz flatly denied this. "The government's interest was not that we cared about whether American Express or Discover succeeds." Competitive concerns about Visa and MasterCard are embedded in the structure of the market, which demands the participation of issuers, merchants, and consumers, Mr. Schwarz said. Those conditions already dictate a tight market, he said. "The problem is there are very few networks, and there are not likely to be many more in the future," Mr. Schwarz said. "We have to make sure the existing networks are viable, and that they compete. You now have a lack of competition between 1 and 2, and weakened competition against 3 and 4." The Wal-Mart suit, which will be scheduled pending an appeals court decision that will either uphold or strike down the plaintiffs' class-action status, shows that the associations' market power is so great that they can push around giants like Wal-Mart Stores Inc., he said. "The Wal-Marts of the world normally have the power to tell their suppliers what they would or would not like to buy, but they are forced to take Visa and MasterCard offline debit cards, even when they may not want to," Mr. Schwarz said. Mr. Balto called the Wal-Mart suit "the most interesting case," and said its outcome will determine "what are the kinds of markets Visa and MasterCard can expand in." Lloyd Constantine of Constantine & Partners in New York, the lead counsel for the plaintiffs in the Wal-Mart suit, was not on the panel, but in a telephone interview following it he said his clients and the Justice Department have similar aims. "The belief in the government's and the retailers' case is that if they are successful, there will be a salutatory effect on all of the factors that would create healthy competition," he said. "There are two ways to measure that: price and quality. Certainly, if our case is successful, there will be massive improvement in both." As for interchange fees, Mr. Constantine said the issue is not raised in the Wal-Mart suit except as a measure of damages. But, he warned, "as sure as night follows day, it will be an issue in the future." (The American Banker, April 30, 2001) DAIMLERCHRYSLER AG: EEOC sues for Transfer for Disabled Workers --------------------------------------------------------------- The Equal Employment Opportunity Commission filed suit against DaimlerChrysler AG's Kokomo, Ind., transmission plant in March on behalf of Melinda Young. Young suffered a crushed right arm, which forced her to miss several years of work and left her unable to lift more than five pounds. She requested a transfer from the plant's assembly operation to the factory's inspection department. Although her request was granted, Young alleged she was sent back to assembly because of her restrictions and disability. According to Jamie Prenkert, an EEOC attorney, there was a plantwide understanding of the policy that employees with restrictions were not granted transfers, a practice that violates their collective-bargaining rights. The class-action lawsuit seeks an injunction to stop Chrysler's alleged refusal of such voluntary transfer requests by disabled workers. The suit also seeks to stop Chrysler from engaging in any other employment practice that discriminates on the basis of disability. The EEOC also charges that Chrysler failed to meet record-keeping requirements under the Americans with Disabilities Act and asks for unspecified compensatory and punitive damages. Chrysler expressed surprise at the suit because the company had replied in writing more than a year ago and was waiting for a response, a company spokeswoman said. The EEOC said the suit was filed after efforts to conciliate failed. (Successful Job Accommodations Strategies, April 23, 2001) DOJ: Treasury Employees Special Rates Case Heads To Mediation ------------------------------------------------------------- A federal court judge has referred the long-running special rates case between the Justice Department and the National Treasury Employees Union to a court-sponsored mediation program. The action by Judge Garrett Penn of the U.S. District Court, District of Columbia is the result of the most recent conference with attorneys between the two sides. The issue relates to a 1982 Office of Personnel Management regulation that denied or minimized pay increases for special rates employees. In 1998, a federal judge determined the provision was illegal. Since then, the NTEU and the DOJ have been working to develop a plan for the government to pay back compensation to the 170,000 current and former federal employees affected over a six-year period. NTEU President Colleen Kelley said the union is "interested in engaging in a final, intensive effort to resolve the remaining issues that divide the parties" so the class members can receive the money they are owed. So long as the mediation effort is underway, no action will be taken by the court on the NTEU's request for an order directing the government to comply with a court of appeals ruling that established the government's liability to affected members. Should mediation fail, the NTEU will ask the court to rule on its request. (Federal Human Resources Week, April 23, 2001) FBI: African-American Special Agents Settle of Racial Bias Suit --------------------------------------------------------------- The African-American Special Agents of the Federal Bureau of Investigation ("FBI") announced on April 30 the settlement of a class action began by the Black Agents in 1991. Although wide-spread claims of racial discrimination were brought by the black agents in 1991 and settled in the final days of the Administration of former President George H. W. Bush, the black agents had renewed these claims when the Clinton Administration failed to meet the timetables set forth under the original settlement. The new settlement, reached pursuant to a mediation between the black agents and the FBI ensures that the reforms put in place under former President Bush will be achieved and that a mechanism will exist to compensate black agents who have had their careers harmed by the delays. Under the Agreement, a timetable is established requiring the FBI to reform its selection system for its first and second level supervisors by 2004. Until this new system is in place, agents will have the opportunity to have certain types of claims heard by a neutral mediator. The FBI Director will accept the mediator's decisions unless they lack substantial justification or are clearly erroneous. The lead attorney for the class, David J. Shaffer, stated, "I am pleased that the President and the new Administration are committed to resolving these serious issues at one of the nation's premier law enforcement agencies." Shaffer was lead counsel in a class action on behalf of the African American Agents of the ATF, and he is currently representing the Black Agents of the Secret Service in a class action against that agency filed during the Clinton Administration. Shaffer was "optimistic" that the new Administration would ensure that "federal law enforcement agencies provide an example to the nation" by their own institutional reforms. Copies of the Agreement and further information are available by contacting David J. Shaffer. Counsel for Plaintiffs: David J. Shaffer & Ron Schmidt Contact: David Shaffer, 202-508-4135, or rschmidt@thelenreid.com, or Ron Schmidt, 202-508-4058, or dshaffer@thelenreid.com, both of Thelen Reid & Priest LLP FREEMARKETS, INC: Kirby McInerney Commences Securities Lawsuit -------------------------------------------------------------- Kirby McInerney & Squire (www.kmslaw.com) has been retained to commence a class action on behalf of purchasers of FreeMarkets, Inc. (Nasdaq: FMKT) common stock between July 24, 2000 and April 23, 2001 (the "class period"). The complaint will charge FreeMarkets, as well as its chief executive and chief financial officers, with violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, arising from the dissemination of materially false and misleading financial statements throughout the class period (as detailed below). The complaint will allege that the revenues and earnings reported by FreeMarkets for the second, third and fourth quarters of 2000 were inflated and materially false and misleading, and that such inflated financial results caused FreeMarkets' stock to trade at artificially-inflated prices. The action will seek to recover losses suffered by individual and institutional investors who purchased FreeMarkets' stock during the class period, excluding the defendants and their affiliates. Specifically, the complaint will allege that FreeMarkets improperly recorded revenues from a large client in the second, third and fourth quarters of 2000, thereby inflating the company's actual revenues, earnings and stock price. As the complaint alleges, FreeMarkets induced a client to employ FreeMarkets' services by granting that client low-cost warrants - valued at $95.5 million - to purchase FreeMarkets' stock. The client paid FreeMarkets approximately$10 million during the class period for its services, which $10 million FreeMarkets recorded as revenue. The Securities and Exchange Commission, however, has ruled that these payments should be regarded as payment forthe warrants, rather than revenue. Absent an appeal, as FreeMarkets revealed on April 23, 2001, FreeMarkets will amend its financial statements to eliminate all the revenue it had received from the client during the class period. FreeMarkets' stock, which had traded above $85 per share during the class period, fell to $9.30 on April 24, 2001. Contact: Kirby McInerney & Squire, LLP Ira Press, Esq. Orie Braun 212/317-2300 Toll Free: 888/529-4787 obraun@kmslaw.com GENERAL MOTORS: Document Unlocked Reveals and Brings Fury --------------------------------------------------------- For nearly 30 years the auto maker has fought to keep a damaging document out of court. Now that it is on the record, the damages awarded in vehicle-fire lawsuits have been staggering. How much should General Motors Corp. spend to keep people from burning to death in fiery crashes? In a memo nearly 30 years ago, a young GM engineer, Edward C. Ivey, suggested that the answer was: Not much. With a couple of simple calculations, Ivey estimated that these fiery deaths were costing GM only about $ 2 per vehicle--the implication being that it was not enough to justify the expense of changing the vehicles' design. Ivey didn't know it at the time, but he was planting a legal time bomb. In the years that followed, a platoon of GM lawyers fought successfully to exclude the Ivey memo from scores of vehicle-fire lawsuits. They did it by convincing judges the document was merely the idle musings of a novice engineer. There was contradictory evidence, but they kept it locked tight. Now the memo and GM's stealth tactics have been revealed in court, and from the furious response of judges and juries, GM may have brought more grief on itself by not producing it in the first place. A Georgia judge berated GM for scheming "to defraud and mislead several courts, to thwart and obstruct justice and to enjoy the ill-gotten gains of likely perjury." And in a Los Angeles case that drew heavily on the Ivey affair, GM in 1999 suffered a then-record verdict of $ 4.9 billion (later reduced and now on appeal). GM says it has behaved properly at all times. "I don't believe anybody has ever misled a court or even misled opposing counsel," said Richard W. Shapiro of Snell & Wilmer, one of the firms representing GM. In the world of civil litigation, the Ivey memo has attained the status of a "smoking gun" due as much to GM's unceasing efforts to suppress it as for what it actually says. The Ivey saga illustrates the extraordinary lengths to which big companies may go to keep damaging documents away from juries and the public, behavior which also has been seen in litigation involving cigarette makers, drug manufacturers and defense contractors. But the strategy can backfire if the documents and the companies' deceptions eventually come to light. The Ivey story also reflects the potential conflict between a lawyer's most basic obligations: to win for the client, and to avoid using deceptive means to mislead judges and legal adversaries. In seeking to avoid giving opponents valuable ammunition, many attorneys, including from the most prominent firms, increasingly seem to resort to tactics that "might once have been seen as absolutely forbidden," said Stephen Gillers, a New York University law professor. If there is even a feeble excuse for withholding information, "we're going to do it and take that risk," the thinking goes, because "that's what clients expect." Legal warfare over the Ivey memo has all but overshadowed some of the most emotionally wrenching of all personal injury cases--involving people who were maimed or burned alive in crashes they might have survived, or even walked away from, but for fires fed by leaking gasoline. For auto makers, the danger of such cases is extreme, because juries that put the blame on unsafe designs are quick to send a message. "The American public says it's worse to die from being burned to death than being crushed to death," said Brian O'Neill, president of the Insurance Institute for Highway Safety. If a person burns to death in an otherwise survivable crash, "that's a prescription for a very large award." Ivey Said Price Can't Be Placed on a Life Ed Ivey, 54, who declined to be interviewed, is GM's director of chassis engineering. He signed on after high school, training first at the General Motors Institute and going on to the University of Michigan. In 1972, two years after earning his master's in engineering, Ivey was assigned to the advance design group at GM's Oldsmobile division, which took the lead on fuel system design. For one of his assignments, Ivey prowled through a junkyard, examining wrecked cars to see which fuel systems held up best. And in June 1973, he wrote his combustible memo. Dominating the dry, page-and-a-half analysis were two calculations leading to the same bottom line: The financial rewards of designing safer fuel systems would be minimal for GM. In the first computation, Ivey estimated that burn fatalities were costing GM about $ 2.40 per car. In the second, he found that avoiding future deaths would be worth $ 2.20 to GM for each new model. In his computations, Ivey used $ 200,000 for the value of a human life--a figure that easily could anger jurors, but that actually came from a government study. The memo offered no recommendations. And it closed by acknowledging the crassness of the exercise. "It is really impossible to put a value on human life," Ivey wrote. "This analysis tried to do so in an objective manner but a human fatality is really beyond value, subjectively." James E. Butler Jr., a Georgia plaintiffs attorney, has described the document as a "let 'em burn" memo. Others--including some GM foes--see it as more nuanced, or as just plain confusing. Another plaintiffs lawyer said the Ivey report would have "melted into history" but for GM's ferocious battle to suppress it. The Ivey memo is "a meaningless document," said GM attorney Shapiro. It "has been blown so out of proportion by plaintiffs lawyers, it's absurd." Why, then, did GM treat it as radioactive? The company had seen what similar documents had done to rival Ford. During the late 1970s, Ford suffered a series of eye-popping verdicts involving fire-prone Pinto compacts, as juries reacted to documents showing Ford had placed profit over safety. At GM, the Ivey memo began triggering alarms in 1981, when the firm launched a massive effort to collect and analyze records it might have to disclose in fuel-fire cases. In November of that year, GM lawyers called in Ivey to talk about his memo. If he had prepared it on his own, and it went no further than his desk, GM could argue it had no probative value and should be excluded from evidence. But Ivey's statements, as summarized by one of the lawyers, Don Howard, were not completely helpful. Eight years had passed, and although Ivey was no longer certain who had given the assignment, he remembered doing it "for Oldsmobile management," with the idea of seeing "how much Olds could spend on fuel systems." And although Ivey was not sure about the distribution list, he named several key engineers he believed had gotten copies. "Obviously," Howard wrote, "Ivey is not an individual whom we would ever, in any conceivable situation, want to be identified to the Plaintiffs, . . . and the documents he generated are undoubtedly some of the potentially most harmful and most damaging were they ever to be produced." Ivey was debriefed a second time by GM lawyers in 1983. William Kemp, one of the lawyers, took handwritten notes, which included the phrase: "Purpose: how much money could we spend on each car to prevent it." And more ominously: "Did not do it on his own." This interview came at a crucial stage, as the Ivey memo for the first time had been produced to a plaintiff. By accident or on purpose, it was included in a box of documents sent to Darrel Peters, the lawyer for Thomas Swanic, who had suffered 3rd-degree burns and lost an arm in a fiery crash. When GM lawyers interviewed Ivey that August, he was a month from having his deposition taken in the Swanic case. Then, before he had to testify, a settlement was reached. Despite the resolution of the Swanic case, Peters was intrigued by the Ivey memo. But like other GM documents, it was covered by a protective order that barred him from sharing it with others. So Peters did what he thought was the next best thing. Over beers at a legal conference in Washington, he tipped off a handful of plaintiffs lawyers handling fuel-fire cases. He told of a hot document, and how to identify it specifically enough that GM would have to produce it. In no time, GM realized that the word was out, and quickly identified Peters as the source. GM hauled Peters before the Michigan judge who had presided in the Swanic case, and the judge ordered him to pay about $ 8,500 in sanctions for violating the protective order. "I have always worn that as a badge of honor, frankly," Peters said recently. David J. Bennion, a San Jose lawyer for Cheryl Burton, who had been seriously burned in the crash of a Chevette, was the first to benefit from Peters' actions. GM balked at Bennion's request for the memo, but eventually had to turn it over. And in September 1984, Ivey had his deposition taken in the Burton case, the first of many times he would be forced to testify. But Ivey's memory was nearly a blank. In his interviews with GM lawyers, he seemed to recall many things. Now he remembered almost nothing. "I don't know why I prepared" the analysis, Ivey testified. He could not recall anyone telling him to do it, and believed no one had. He could not recall who read it, and thought probably no one had. Beginning with the Burton case in '84, the forgetful Ivey has testified at least 20 times. Each time, the who, what and why of his memo have been lost down a memory hole. For 15 years, Ivey's recollections for the GM lawyers would remain a well-kept secret. And with no other evidence on the record, GM lawyers had an easy time using Ivey's testimonies to persuade judges that the memo should be excluded. "Mr. Ivey has testified that he did not disseminate the document to anyone," according to one GM motion, nearly identical to dozens of others it would file. "It was rather, simply an individual intellectual exercise performed on his own. . . . Thus, the document has no relevance in this case." Shapiro, the GM lawyer, recently told The Times he saw no inconsistency between the sworn testimonies of Ivey and his prior statements to company lawyers. In the '81 interview with Howard, Ivey merely had "offered a few speculations. 'I may have done this,' or 'I may have done that,' " Shapiro said. When witnesses "have to go on the record, they're more careful," he said. "They're not prone to speculate or guess." >From 1983, when Darrel Peters first obtained the Ivey memo, until 1998, plaintiffs had to settle or try their cases without it. In the meantime, they kept chipping at the wall. In December 1992, a Georgia judge, weary of obstructive tactics by GM, ordered it to produce a host of records--including "any and all documents discussing, mentioning, referring to, or otherwise dealing with" the Ivey memo. GM produced plenty of records, but the Ivey-related documents weren't among them. Company lawyers told the court they had turned over all records "kept in the ordinary course of business." James Butler, the plaintiffs lawyer, told the judge that GM was using weasel-words to defy his order. "We're back to the same old Mickey Mouse gamesmanship," Butler said at a hearing. "It's the use of semantics to continue hiding evidence." GM lawyer Philip E. Holladay Jr., from the big Atlanta firm of King & Spalding, assured the court it wasn't so. "Judge, there's not a single document that has been withheld," Holladay said. "In fact, General Motors has produced everything they've got in response to the court order." The Georgia case had been filed by the parents of Shannon Moseley, 17, who died in the flaming wreck of a GM pickup. GM's stonewalling did not prove fatal to the Moseleys' case: In February 1993, the jury awarded them $ 105 million (the verdict was overturned on appeal, and the case eventually settled). Plaintiffs nearly breached the wall a few months later, in Cameron vs. GM. For the first time, GM acknowledged that some Ivey-related papers did exist. But these documents were privileged, GM said, because they involved confidential attorney-client communications. With a series of delaying tactics GM succeeded in keeping the documents hidden until the case was settled and the matter dropped. The Ivey-related documents would not be pried loose for another four years. Judge Asked GM to Produce Documents The pivotal showdown came in a Florida case involving 13-year-old Shane McGee, who died of burns suffered in a fire in his family's '83 Olds wagon. In 1997, the McGees asked GM to produce all Ivey-related documents. GM lawyers twice replied that there were none. Later, they amended their answer to state that they were "not aware of any documents which specifically pertain to" the Ivey memo. The McGee lawyers informed the judge, Arthur J. Franza, that GM previously had acknowledged the existence of such documents in the Cameron case. In December 1997, with the McGee trial in progress, Franza ordered GM to produce the documents for his inspection. In response to the order, a GM attorney appeared in court but without the documents, claiming GM officials had refused to give them to him. Franza was irate. GM, he thundered, wasn't "big enough to thumb its nose at the court," or "to obstruct justice or conceal evidence." Produce the documents or face severe sanctions, he warned. GM then produced the papers, including the Howard and Kemp documents, for Franza's review. The judge ruled that the documents, and the Ivey memo, could be placed before the jury. Several weeks later, the McGee jury ordered GM to pay $ 33 million in damages. For GM, things soon would get worse. A Georgia judge, Gino Brogdon, unleashed a scalding attack on GM and its lawyers for their "recklessly inaccurate misstatements and misrepresentations." For Brogdon, the last straw was GM's defiant response to his order to turn over 81 boxes of records. GM produced 71 boxes, saying the difference was that it had repacked the papers in sturdier boxes. But GM failed to mention that it had eliminated 2,300 pages, making "a unilateral decision to remove documents and conceal its decision to violate the order." Brogdon's ruling came in a wrongful death case that ultimately was settled. But in another ruling before the settlement, Brogdon reviewed the tangled history of the Ivey affair. GM Is Appealing the Verdicts in Latest Cases Ivey's memory loss, he declared, was "bizarre, disturbing and likely in violation of his oath." And GM--by concealing Ivey's original recollections--"did obstruct and impede the due administration of justice." But Brogdon found no proof of a "criminal nexus" between Ivey's memory loss and the conduct of GM lawyers. "The record is simply void of any evidence that GM or its lawyers took some specific action" to induce Ivey to forget, Brogdon wrote. "Only Ivey knows what in fact caused him to scarlet his story." The fallout intensified in Los Angeles in 1999, when jurors in Anderson vs. GM ordered the company to pay $ 4.9 billion in damages to six burn victims, whose Chevy Malibu caught on fire when a drunk driver plowed into it, causing the fuel tank to explode. The plaintiffs argued that the fuel system of the Malibu was defectively designed. And they used the Ivey memo and the Howard and Kemp documents to portray GM as callous and deceitful. GM has appealed the McGee and Anderson verdicts, claiming, among other things, that the judges erred in allowing the Ivey-related documents. GM foes say if the verdicts are upheld, that still won't even the score. Over the years, they say, GM was able to cut the cost of settlements and judgments by deceiving the courts about Ivey. "Casting all ethics aside for the moment," GM lawyers "have managed it superbly," said Butler, the plaintiffs lawyer. "They've saved General Motors hundreds of millions of dollars." (Los Angeles Times, April 30, 2001) HIGH-INTEREST LENDERS: Green Tree, Long Beach, TMS Mortgage Sued ---------------------------------------------------------------- Two local attorneys have filed class-action lawsuits against three companies in the mortgage-lending industry, claiming the companies prey on those who can least afford it. The lawsuits were filed by attorneys Mitch Taylor and Richard Bell on behalf of customers of Green Tree Financial Services, Long Beach Mortgage Co. and TMS Mortgage Inc., which until recently did business as The Money Store. "People are stuck into loans that they'll probably never pay back," said Shelly Sheehy, development director at the Rural Housing Institute in Wilton. Sheehy's organization conducted a study that led to the litigation, finding that high-interest, out-of-state lenders like the three companies appeared to have targeted the state's poor and minority communities. "We were astounded to find out that Green Tree ... had the largest percentage of the market in Muscatine County," she said. The lawsuit against Green Tree and its parent company, Conseco Financial Services Corp., was filed on behalf of Thomas and Susan Luttenegger of Burlington. Their 1997 loan contract included a 4 percent origination fee, a $200 processing fee, a $6 courier fee and a $4.95 credit report fee. State law limits fees to 1 percent of real estate loans, and doesn't authorize courier fees or charges for credit reports, according to the lawsuit. A second lawsuit, filed on behalf of Timothy and Tammie Gardin of Burlington, alleges California-based Long Beach Mortgage charged a $2,385 loan origination fee, a $165 underwriting fee, a $40 overnight fee, $250 for title insurance and a $250 closing fee. Iowa law doesn't permit such charges, the lawsuit claims. A third lawsuit, filed on behalf of Gina Edwards of Mount Pleasant and Jose and Zina Rios of Burlington, seeks damages from The Money Store and its parent company, First Union Corp., over similar claims. Sheehy said such lenders often cater to borrowers that more established banks turn away. Several states, including Illinois, are considering legislation specifically targeting such companies. Attorneys for the mortgage companies did not return calls last week seeking comment. (The Associated Press State & Local Wire, April 30, 2001) JAPAN, CHISSO: Osaka High Ct Orders To Pay Minamata Mercury Victims ------------------------------------------------------------------- The Osaka High Court on April 27 overturned a ruling exonerating the central and prefectural governments in the Minamata mercury poisoning tragedy and ordered compensation to surviving plaintiffs of a lawsuit filed 19 years ago. It was the first time a high court has held the central government and the Kumamoto prefectural government responsible for Minamata disease. The compensation of 319.5 million yen ($2.6 million) will also come from Chisso Corp., the company responsible for discharging mercury into Minamata Bay in the prefecture in the 1950s. Chisso was ordered to pay 51 of the 58 plaintiffs and the governments will compensate 45. That translates into payments of up to 8.5 million yen per plaintiff. The Osaka District Court in July 1994 ordered Chisso to pay damages totaling 276 million yen to the plaintiffs and their family members, but said the governments were not responsible for the disaster. That changed last Friday April 28, when Presiding Judge Takaaki Okabe ruled the governments were aware in November 1959 that a Chisso plant was discharging toxic mercury compounds into Minamata Bay, but failed to implement measures under the Water Quality Conservation Law and other regulations to block the plant's waste. Therefore, Okabe said, the governments violated the laws. "This is an epoch-making decision in the long history of Minamata disease," a lawyer for the plaintiffs said. "We have spent a lot of time questioning witnesses from the administration at the time of the poisoning so that we could prove the responsibility of the governments. We are grateful the court has acknowledged our efforts." The lawsuit, one of many concerning Minamata disease, was filed in 1982 by victims and their families who lived in Minamata and later moved to the Kansai region. But 21 of the 59 original plaintiffs died as the court proceedings dragged on. Families took over for the dead plaintiffs, although one of the deceased had no relatives, leaving 58 plaintiffs. Plaintiff Toshiyuki Kawakami, 76, said: "We have been able to fight for the duration of 19 years because of help from our supporters. It is not just a victory of the plaintiffs." Kawakami was born into a fishing family in Minamata. His mother showed severe symptoms of Minamata disease, prompting neighbors to avoid the family, he said. Kawakami himself had suffered headaches and other symptoms but said he couldn't admit he had the same disease that befell his mother. Like the other plaintiffs in the lawsuit, Kawakami was not recognized by the government as a Minamata disease victim. But the high court said patients may be certified as Minamata victims "as long as they meet certain conditions-such as having shared daily meals with family members, at least one of whom is officially certified as a Minamata disease patient-even if they have only sensory disabilities." Judge Okabe rejected the state's argument that patients cannot be official Minamata disease victims unless they match a certain set of criteria. "The state failed in its recognition and judgment of Minamata disease," Okabe said. Minamata disease, confirmed as mercury poisoning in 1956, paralyzes the nervous system. It killed hundreds and disabled thousands who consumed mercury-tainted marine products from Minamata Bay. The disease became internationally known through the chilling photos of American Eugene Smith. Many people suffering Minamata disease symptoms have been denied government certification as Minamata patients, which would have entitled them to various medical and financial help. April 27's decision on the criteria for determining Minamata disease patients will likely press the government to change the way patients are assessed, observers said. Environment Minister Yoriko Kawaguchi said in a statement, "The fact that the court did not recognize the state's contentions was a very severe ruling against the government." (Asahi News Service, April 28, 2001) LifeUSA HOLDING: Ct Decertifies Case v. Independent Agents over Annuity ----------------------------------------------------------------------- In re LifeUSA Holding, Inc., PICS Case No. 01-0470 (3d Cir. March 5, 2001) Garth, J. (13 pages). The court decertified a class action alleging that independent agents selling an annuity engaged in pre-sale fraud and misconduct, because the annuity was not sold according to uniform sales materials and presentations, and therefore common questions of law or fact did not predominate over questions affecting only individual members. Class decertified. Plaintiffs filed suit against defendant LifeUSA Holding Inc. alleging that independent LifeUSA agents engaged in pre-sale fraud and misconduct by misrepresenting the terms of the "Accumulator" annuity issued by LifeUSA. The district court granted plaintiffs class certification pursuant to Fed.R.Civ.P. 23. LifeUSA appealed. Although the district court's grant of class certification was based on plaintiffs' allegations of the pre-sale marketing of the Accumulator, the Third Circuit noted that plaintiffs had since "shifted their emphasis from pre-sale fraud and misconduct in connection with the sale and marketing of the annuities, to post-sale fraud and misconduct[.]" The court reviewed the district court's decision to grant class certification on the basis of plaintiff's pre-sale allegations. The court concluded that the district court erred in finding that plaintiffs' pre-sale claims satisfied the predominance requirement of Rule 23. Here, unlike In re The Prudential Ins. Co. of America Sales Practice Litig., 148 F.3d 283 (3d Cir. 1998), the sales materials and sales presentations used by the agents were not uniform or standardized. In addition, the agents in Prudential were career agents who worked exclusively for Prudential, while the agents who sold the Accumulator were independent agents. Therefore, the court decertified the class. However, because plaintiffs consistently asserted post-sale misrepresentations regarding the interest paid under the Accumulator, the court remanded "to the [d]istrict [c]ourt for consideration of those claims and if applied for by the plaintiffs for consideration as to whether these post-sale claims comply with Rules 23(a) and (b)[.]" (Pennsylvania Law Weekly, April 23, 2001) MERRILL LYNCH: To Pay $16.9 Million To Injury Victims ----------------------------------------------------- Under a $16.9 million settlement announced April 27, dozens of injury victims will be at least partially reimbursed after their compensation funds were allegedly looted last year. Wall Street giant Merrill Lynch had been one of six financial services firms named in a lawsuit alleging that more than $100 million in payouts had been mishandled and later lost. Settlement Services Treasury Assignments, a company that had been sold by Merrill in 1991, was accused of using the bonds in the 1990s as collateral that was lost when that company failed to repay loans. A Merrill spokesman said his company had no connection to Settlement Services at the time of the alleged mishandling. Merrill Lynch admits no wrongdoing as part of the settlement. "Although we sold this business 10 years ago and did not have any involvement in the actions that led to the recent problems, we thought it was appropriate to resolve this matter quickly without further litigation and to ensure that these individuals receive the payments they need," Merrill spokesman Bill Halldin said. The bonds had generated the interest being used to pay living expenses for roughly 200 sufferers of workplace injuries, car wrecks or medical mistakes. Last November, the checks stopped coming to the victims, leading to the discovery of the alleged mishandling. "Merrill Lynch is stepping up at this time and doing the right thing by being part of the solution rather than the problem," Marc Seltzer, a lawyer for the plaintiffs, told the Los Angeles Times. The settlement does not affect a spate of existing class action suits against several other blue-chip defendants also accused of losing the bonds, including Bank of America Corp., Wells Fargo & Co. and Bear Stearns Cos. The agreement still needs Los Angeles Superior Court approval. The settlement calls for the company to pay $7.9 million to the plaintiffs and advance as much as $9 million more to keep payments coming through year's end. The latter money will be returned to Merrill if the plaintiffs succeed in winning payments from the other defendants. (The Associated Press State & Local Wire, April 28, 2001) PRICELINE.COM, INC: Wolf Haldenstein Commences Securities Suit in N.Y. ---------------------------------------------------------------------- Wolf Haldenstein Adler Freeman & Herz LLP announces that it filed a class action lawsuit in the United States District Court for the Southern District of New York, on behalf of purchasers of Priceline.com, Inc. (Nasdaq: PCLN) between March 29, 1999 and March 14, 2001, inclusive, against defendants Priceline, certain of its officers and directors, and its underwriters. The case name and index number are Buddy and Eileen Dukeman v. Priceline.Com, Inc. (01-CV-3590). A copy of the complaint filed in this action is available from the Court, or can be viewed on the Wolf Haldenstein Adler Freeman & Herz LLP website at http://www.whafh.com. The complaint alleges that defendants violated the federal securities laws by issuing and selling Priceline common stock pursuant to the March 30, 1999 IPO without disclosing to investors that some of the underwriters in the offering, including the lead underwriters, had solicited and received excessive and undisclosed commissions from certain investors. Specifically, the complaint alleges that in exchange for the excessive commissions, defendants allocated Priceline shares to customers at the IPO price. To receive the allocations (i.e., the ability to purchase shares) at the IPO price, the underwriters' brokerage customers had to agree to purchase additional shares in the aftermarket at progressively higher prices. The requirement that customers make additional purchases at progressively higher prices as the price of Priceline stock rocketed upward (a practice known on Wall Street as "laddering") was intended to (and did) drive Priceline's share price up to artificially high levels. This artificial price inflation enabled both the underwriters and their customers to reap enormous profits by buying stock at the IPO price and then selling it later for a profit at inflated aftermarket prices. Contact: Gregory M. Nespole, Esq., George Peters or Fred Taylor Isquith, Esq., 800-575-0735, classmember@whafh.com QUALCOMM INC: Settled Suit Shows Impact of Giving Employee Stock Options ------------------------------------------------------------------------ A recent settlement entered into by Qualcomm Inc. and a group of more than 800 employees illustrates the potential problems that may arise from providing stock options to workers. This form of incentive compensation has resulted in numerous lawsuits over the past several years, with claims ranging from discrimination to breach of contract. If you have implemented such a program or are considering such, you should carefully reveiw the litigation trends in this area. Qualcomm Settlement The class-action lawsuit brought against San Diego-based Qualcomm stemmed from allegations by former employees that they were denied lucrative stock options when the company sold its wireless division in 1999. As a result, the workers maintained, their unvested stock options were "illegally taken from them." Under the settlement, Qualcomm has agreed to pay $ 11 million in damages to more than 800 former employees to end the suit. A hearing to approve the settlement has been scheduled for April. Growing Popularity of Stock Options This class action is only one of many cases currently being litigated that focus on company-provided stock options. In 1992, only about one million American workers received stock options as part of their compensation. Today, that number has increased to between seven and 10 million. Many employers realized they could attract the best workers in a tight labor market by offering stock options in addition to traditional compensation. This is especially true for many high-tech start-up firms that might pay lower salaries but could offer employees stock options that may be very valuable in the future. A stock option gives an employee the right to purchase a certain number of shares of company stock at a specific price within a designated period. At that time, if the company's stock price is trading higher than the option (or "strike") price, the employee can realize an immediate profit upon exercising the option. Stock options create the possibility of extra compensation for employees if the stock's value increases, but they also create special liability concerns for employers. Increase in Litigation The number of workers suing their current or former employers over stock option issues has been increasing rapidly. The suits implicate a variety of state and federal claims, including discrimination, fraud, misrepresentation, breach of contract, and violations of securities law. The lawsuits usually arise after an employee has been discharged. Many of these employees allege that they were fired because the employer did not want their options to vest. The Ninth Circuit has suggested (in an unpublished decision construing Massachuesetts law) that such a firing might violate an employer's duty of good faith and fair dealing. In Fleming v. Parametric Technology Corp., the court stated that "where an employee has earned a right to a benefit which is contingent upon his being employed at some later date, the employer cannot terminate him for the very purpose of depriving him of that benefit." Practical Tips To avoid this type of litigation, employers would be wise to include terms in employment contracts detailing what happens to options on termination (with or without cause). The contract should also address stock options on an employee's death or disability retirement. Many companies have switched to option plans that offer earlier vesting and have moved away from "cliff vesting" (in which the entire grant is vested at one time on the completion of a certain period of employment). This helps prevent employee charges that the company was trying to avoid vesting. For example, if an employee will earn 5,000 options over a four-year period, the employer might award the first 25 percent after one year and then offer monthly vesting for the next three years. Confusion surrounding the terms of the stock option agreement is a common source of litigation. You should ensure that employees are not inundated with paperwork, that the various documents do not contradict one another, and that the employees understand the agreement. A lawsuit may arise if a brief, written summary of the plan appears to offer a more generous deal than the plan actually provides. In some cases, employees have claimed that the failure to disclose limitations contained in the (usually voluminous) grant document constitutes misrepresentation of the plan terms. Employees who have been lured away from good jobs with promises of stock options have begun to sue their employers when the expected wealth fails to materialize. While fraud may be difficult to prove because the worker would have to show that the employer knowingly made false statements, he or she may be able to establish fraudulent misrepresentation. Or, if the employee can show that the employer made promises it should have known were false and he or she suffered damages as a result, the company may find itself defending a negligent misrepresentation lawsuit. Thus, you would be wise to avoid making promises that you may later be unable to keep. "Claw-back" provisions also are generating increased litigation. A "claw-back" term in an option contract provides that an employee will forfeit any gain realized from an option if he or she subsequently violates a noncompete agreement. The outcomes of these cases often depend on the jurisdiction. In California, such a provision could not be enforced against the employee, but under New York law, an employee may forfeit any profit realized under the option if he or she began working for a competitor while a noncompete agreement is in effect. Finally, you should note that a merger or acquisition can lead to lawsuits over stock options. Some plans require acceleration of the option upon sale or merger of the company. That could lead to shareholder suits against the board of directors for diluting the value of the company's shares or, if the options are not accelerated, the employees may sue for breach of contract. To reduce the risk of such litigation, you should consider including a provision in your option plans that would accelerate options only when there is either a merger or acquisition and the employee loses his or her job or has a reduction in duties. Such provisions should carefully define what constitutes a triggering transaction -- whether it is a merger, acquisition, or other change of control. Conclusion These are just a few of the types of lawsuits that have resulted from the proliferation of stock options in recent years. Stock options are likely to remain popular, even though they may be less lucrative than in the past. You should discuss strategies to reduce the potential for litigation in this area with your company's attorneys. (California Employment Law Letter, March 19, 2001) REDIFF.COM: Wolf Haldenstein Commences Securities Suit in New York ------------------------------------------------------------------ Wolf Haldenstein Adler Freeman & Herz LLP announces that it filed a class action lawsuit in the United States District Court for the Southern District of New York, on behalf of all purchasers of Rediff.com India Ltd. American Depositary Shares (Nasdaq: REDF) between June 14, 2000, and April 4, 2001, inclusive, against defendants Rediff, certain of its officers and directors, and its lead underwriters. The case name and index number are Bhasin v. Rediff.com India Ltd. (01-CV-3593). A copy of the complaint filed in this action is available from the Court, or can be viewed on the Wolf Haldenstein Adler Freeman & Herz LLP website at http://www.whafh.com. The complaint alleges that defendants violated the federal securities laws by issuing and selling American Depositary Shares pursuant to the June 14, 2000 IPO without disclosing to investors that Rediff's Internet business had been experiencing difficulty with its e-mail software and that it was known that many significant advertising contracts would terminate by December 2000. Specifically, the complaint alleges that Rediff had stated in the Prospectus that there were significant restrictions on the use of funds obtained from the IPO. Rediff failed to disclose that it intended to invest in speculative securities and falsely represented that it would conservatively apply the funds received through the IPO when in fact it would not. Additionally, Rediff misled purchasers to believe that Rediff would have significant cash reserves for the foreseeable future and falsely stated in the Prospectus that one of its directors, Richard Li, was a graduate of Stanford University. Contact: Gregory M. Nespole, Esq., George Peters, Fred Taylor Isquith, Esq., all of Wolf Haldenstein Adler Freeman & Herz, 800-575-0735, classmember@whafh.com SANTA FE: Las Vegas Unions File Suit Alleging Violations of WARN ---------------------------------------------------------------- Santa Fe's union woes continue. Four Las Vegas unions recently filed a class-action lawsuit against the Santa Fe Hotel and Casino alleging that the company violated the Worker Adjustment and Retraining Notification Act (commonly referred to as "WARN") by conducting a mass layoff last October without providing 60 days' notice. The suit seeks to recover back pay and benefits for more than 1,200 workers. This suit is just another in a series of actions brought by unions against the hotel. In July 2000, the National Labor Relations Board (NLRB) held that the company unlawfully refused to allow employees to handbill at two of its entrances and pursued trespass citations against off-duty workers who participated in the handbilling. On a positive note, an administrative law judge found that the Culinary Union had failed to prove that a collective bargaining agreement existed with the Santa Fe, and the NLRB recently denied the union's effort to appeal that decision. The Santa Fe, formerly owned by the Santa Fe Gaming Corporation, was purchased by Station Casinos, Inc., last August. Organizing campaign halted. The Operating Engineers Local 501 recently withdrew its petition to represent 25 engineers at the Boulder Station in Las Vegas. On February 12, the union filed a petition with the NLRB, the first step in scheduling a representation election, and a hearing was set for March 26. According to Mike Chavez, the agent in charge of the NLRB's Las Vegas office, the union withdrew the petition and "indicated that they didn't want to proceed further at this time." The union does not currently represent any Boulder Station or Station Casinos employees. Union, hospital reach agreement. Catholic Healthcare West (CHW), which owns the two St. Rose hospitals in Henderson, has entered into an agreement with the California Nurses Association that allows the company's nearly 900 nurses to discuss and seek union representation "without harassment, discouragement, or threats from management." The agreement also bans mandatory antiunion meetings and one-on-one conversations about representation between nurses and supervisors. Although CHW has stated that it prefers to remain a nonunion employer, vice president Lori Aldrete stated: "If an organizing campaign does occur, we want it to occur in an environment of dignity and respect for our employees." (Nevada Employment Law Letter, April, 2001) SUNBEAM CORP: Stockholders And Arthur Andersen Enter into Agreement ------------------------------------------------------------------- Common stock class plaintiffs and Arthur Andersen LLP announced that they have entered into a settlement agreement resolving the claims asserted by the common stock class plaintiffs against Arthur Andersen LLP in In re Sunbeam Securities Litigation, No. 98-8258-Civ-Middlebrooks. Claims in the suit related primarily to certain allegedly fraudulent financial reporting and accounting practices under former Sunbeam management led by Al Dunlap. Settlement of this matter is without admission of fault or liability by Arthur Andersen. Under the agreement, which must be approved by the Court, Arthur Andersen will pay $110 million in settlement of the common stock class action claims. "We are pleased to be able to resolve this matter. Even though we believe we had very strong defenses to the claims asserted by the class, the firm made this business decision to allow us to apply resources and management time to our core business of providing value to our clients," said Andrew Pincus, General Counsel of Arthur Andersen. "We are gratified to resolve this matter with Arthur Andersen. The settlement represents an excellent result for the class. The litigation continues against former management of Sunbeam, including Al Dunlap and Russell Kersh, and trial is scheduled for January 14, 2002," said Merrill Davidoff, M. Richard Komins, Robert Kornreich, and Abraham Rappaport, plaintiffs' co-lead counsel. Contact: Mike Hatcliffe of Arthur Andersen LLP, 312-931-3546; Plaintiffs' co-lead counsel, Merrill Davidoff of Berger & Montague, P.C., 215-875-3084, M. Richard Komins of Barrack, Rodos & Bacine, 215-963-0600, Abraham Rappaport of Milberg Weiss Bershad Hynes & Lerach LLP, 561-361-5000, Robert Kornreich of Wolf Popper LLP, 212-759-4600 TURNSTONE SYSTEMS: Spector, Roseman Commences Securities Lawsuit in CA ---------------------------------------------------------------------- The law firm of Spector, Roseman & Kodroff, P.C. announces that a class action lawsuit has been commenced in the United States District Court for the Northern District of California against defendant Turnstone Systems, Inc. (NASDAQ:TSTN - news), and certain of its officers and directors, on behalf of purchasers of the stock of Turnstone during the period from June 5, 2000 through January 2, 2001, inclusive (the "Class Period"), including those who acquired their shares in connection with Turnstone's secondary offering on September 26, 2000. The complaint charges Turnstone and certain of its officers and directors with violations of the Securities Exchange Act of 1934. Turnstone is a provider of technology for the digital subscriber line ("DSL") service industry. Turnstone's first and primary product, the Copper CrossConnect CX100, enables telephone access providers to remotely evaluate, manage, and control the DSL connections within the telephone routing system, permitting identification of copper lines which are suitable for DSL and making installation and maintenance of DSL on those lines cheaper and easier. Turnstone's customer base consists almost entirely of Competitive Local Exchange Carriers, or "CLECs." The complaint alleges that contrary to defendants' representations during the Class Period, Turnstone's CX100 product was fraught with problems, including blown capacitors, malfunctioning chips, and inaccurate calibration of the CX100. As a result, and contrary to the representations in the Registration Statement/Prospectus, the CX100 product was unreliable, inaccurate and inefficient in deploying DSL services to Turnstone's customers. Moreover, Turnstone's key customers were returning the product as a result of the malfunctioning of the CX100. After the market closed on January 2, 2001, Turnstone issued another press release warning investors that its 4thQ '00 revenue would be "substantially below" market estimates because its CLEC customers had cancelled and reduced their orders. As a result, the Company announced revenue of $26 million to $28 million for the 4thQ '00, 37% lower than consensus market analyst estimates. In the same press release, the Company also disclosed that it expected to take a$ 13.0 to $15.5 million charge to increase its inventory reserves and bad debt reserves, thus causing Turnstone to forecast an operating loss of $12 million to $14 million for the quarter. Contact: Spector, Roseman & Kodroff, P.C., Philadelphia Robert M. Roseman, 888/844-5862 WINSTAR COMMUNICATIONS: Spector, Roseman Expands Securities Lawsuit ------------------------------------------------------------------- The law firm of Spector, Roseman & Kodroff on April 27 announced that the class action on behalf of Winstar Communications Inc., investors (Nasdaq: WCIIQ) will be expanded to include investors who purchased Winstar securities in the period from June 2000 to April 2, 2001. The complaint names Winstar, William Rouhana, Richard Uhl and Nathan Kantor as defendants. The complaint alleges that the defendants made material misrepresentations and omissions of material facts concerning the company's business performance during the relevant time. According to the complaint, throughout the relevant time period, defendants repeatedly assured investors that the company was performing well, that the company was enjoying strong growth and that it was well-funded to follow its growth-oriented business plan through the first quarter of 2002. At the same time, however, the complaint alleges that the defendants knew or recklessly disregarded that Winstar was overstating revenues and assets. In April 2001, contrary to prior representations, Winstar announced that it was halting its expansion and laying off thousands of employees. The company has delayed the filing of its annual Report on Form 10-K with the SEC and its stock price has collapsed. The lawsuit was filed in the United States District Court for the Southern District of New York. Contact: Robert M. 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