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CA Forum Report
Review of Restitution Fund Issues
At an informal March 9, 2005 meeting with the Administrator of
the CA Restitution Fund,
Kenneth R. Feinberg, and in subsequent exchanges of comments, members of
the
Forum’s Panel – Professors
Lucian Arye Bebchuk of Harvard Law School,
Stephen J. Choi of NYU Law School,
Merritt B. Fox of Columbia Law School, and
Jeffrey N. Gordon of Columbia Law School – and other invited
representatives of investor interests responded to Mr. Feinberg’s request
for the CA Forum’s review of issues to be considered in his preparation of a
“Plan” for distribution of the $225 million Fund.
The following investor and public policy issues are summarized
below:
Restitution for Owners
Size of Investment
Notification
I. Distribution based on ownership
rather than trading
Mr. Feinberg reported that he had initially contemplated a Plan
for the Restitution Fund’s distribution that simply duplicated the
allocations established for the recent CA settlement of class action
securities fraud claims. At the conclusion of the meeting, though, he
requested suggestions for a practical alternative based instead on who owned
CA stock and was injured by the impairment of its intrinsic investment value
resulting from illegal management conduct.
A distribution based on “ownership” injury, rather than on
“trading” injuries resulting from the fraudulently inflated pricing
addressed in securities class actions, was supported by these arguments:
- The
illegal conduct specified in the Deferred Prosecution Agreement (“DPA”)
included acts that were not covered by securities laws, and for which no
remedy was or is available through conventional class action claims
governed by the Private Securities Litigation Reform Act of 1995 (“PSLRA”).
-
Investors injured by trading at fraudulently inflated prices have been
compensated in the recent class action, and have accepted that settlement
of their claims.
-
Investors injured by the damage to the intrinsic value of the business
enterprise in which they own stock have not received any
compensation.
Panel members Fox and Gordon expressed views which, with some
differences, supported the establishment of a date of ownership prior to the
full disclosure of management misconduct, since anyone acquiring CA stock
after that date would be paying a price which was discounted to reflect the
value impairment. While recognizing the reality of gradual revelations of
misconduct, practical considerations suggested the use of a single date
which could be considered adequate “rough justice.” Whether a single date
or series of dates is used, and whether it should be immediately prior to
the September 22, 2004 announcement of the DPA settlement or before the
beginning of the period established for the settled class action, would
necessarily be based on the Administrator’s judgment of the relevant facts.
Mr. Feinberg had also expressed concern that any alternative
“ownership” basis for his Plan of distribution must be administratively
practical. Based on post-meeting discussions with ADP and others familiar
with investor identification and communication processes, it was confirmed
that ownership on a specified date can be determined from the same
registrar, custodian and brokerage records that are routinely used to
establish stock purchase and sale transactions in a securities class
action. The process could in fact be much simpler if, for example, the Plan
is based on holders as of the record date for CA’s last annual meeting of
shareholders so that notifications can be made by restoring the list of
investors who received proxy statements.
II. Differentiation based on size of
investment
Most of the meeting’s participants believed that it would be
unfair to discriminate against shareholders based simply on size of
investment.
Arguments for limiting or proportionally reducing allocations to
larger shareholders were based on the theory that larger shareholders have a
greater ability to collect information and influence management, and should
therefore be considered partially responsible for the failure of oversight
that ultimately required government intervention. The consideration of
proportionally reduced distributions was also encouraged by the example of
the currently proposed “Global
Research Analyst Settlement,” although that provision was based on the
more widely accepted theory that larger purchasers have access to more
information resources which could have reduced their reliance on any
defendant analyst’s recommendation.
The general view, though, was that there is no real empirical
support for assuming that larger investors are in a better position to
detect or discourage management misconduct. We should therefore treat them
as being injured the same as any small investor, in proportion to the number
of shares held.
III. Notification of shareholders
Reference was made to the concerns expressed by several CA
shareholders about the absence of notices from the company or brokers about
the Restitution Fund.
It should be assumed that the Administrator’s Plan will include
effective provisions for notifying shareholders who may be eligible for
distributions, and that the process for court review and approval of the
Plan will also follow conventional procedures for comment and a public
fairness hearing.
¨¨¨
Questions and comments concerning the Restitution Fund,
including more details about the Forum’s review of issues, will be welcomed.
Everyone contributing to this program – including the
Administrator, the Forum Panel members, the invited representatives of
investor interests and each of the Forum participants who presented
questions or comments – is to be thanked for helping to define standards
which will shape our evolving capital markets.
GL – 3/15/05
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