Chapter 9: The Fall, April 1, 2000 - June 30, 2000 - Episode 4Listen to podcast
Hackoff.com Corporation: Grant & Gilding Brings Securities Suit In S.D. NY
Grant & Gilding, LLP filed recently a class action in the United States District Court for the Southern District of New York, on behalf of purchasers of Hackoff.com Corp. (Nasdaq: HOFC) securities during the period between June 30, 1999 and May 30, 2000, inclusive.
The complaint charges the following defendants with violations of Sections 11, 12(a) (2) and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder:
(2) Barcourt & Brotherson Inc.,
(3) First Canadian Bank Corp Ltd.,
(4) Web & Stinger Corporation,
(5) Lawrance Lazard, and
(6) Donna Langhorne.
On or about June 30, 1999, Hackoff.com commenced an initial public offering of 5.00 million of its shares of common stock at an offering price of $15.00 per share.
The complaint alleges that defendants violated the federal securities laws by issuing and selling Hackoff.com common stock pursuant to the June 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 Hackoff.com 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 Hackoff.com stock rocketed upward (a practice known on Wall Street as "laddering") was intended to (and did) drive Hackoff.com’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.
For additional information, contact: Grant & Gilding, LLP through its Client Relations Department: Mary Forn, Joseph Archer, or Millicent Monroe by Mail: P.O. Box 78659, New York, NY 10001-8659 by Phone: 1-888-555-8098 (toll free) or by Email:
Larry reads this on his computer and summons Donna and Aaron Smyth, hackoff’s chief counsel, to his office.
“What the fuck is going on here?” he asks without sitting down. “Donna, why the fuck is your husband suing us? Aaron, what the fuck is this?”
“I don’t know what you’re talking about,” says Donna. “Stop raving.”
Aaron scans the news release on Larry’s screen. “I’ve been wondering when our turn would come,” says Aaron. “They’ve been suing everybody who’s done an IPO in the last two years.”
“What? Who?” says Larry. “What the fuck did we do? This is Donna’s husband’s firm.”
“This is what they do for a living,” says Aaron. “I’m sure Francis isn’t involved; he couldn’t be. He’d have to recuse himself. I’m sure if there aren’t other firms suing us already there will be soon.” He does a search on Larry’s computer. “See, here are two more. And there’ll be others.”
“Aaron, what’s this about?” asks Donna.
“Why don’t you ask your husband?” asks Larry. “Maybe when he kisses you good-bye in the morning he mentions he’s gonna sue your ass today. That would be only polite.”
“Shut up, Larry. Aaron, what is this?”
“I probably should have warned you about this,” says Aaron.
Larry explodes. “You knew this was gonna happen and you didn’t tell us?”
“I didn’t know. But I thought it might.”
“Why don’t you tell us what IT is?” says Donna quietly.
Aaron explains: “All of the class-action firms are suing every company — almost every company — that went public in the last year or so. I’m surprised they didn’t get to us sooner.”
“Have we been served with anything?” asks Larry. He is grim but calm now.
“No,” says Aaron. “It would come to me. They’re just filing a press release in order to get clients for the suit.”
“Is that legal?” asks Larry.
“Of course; it’s how the class action bar works,” says Aaron. “The firms see an opportunity; they file suit; then they try to attract clients.”
“There doesn’t have to be a plaintiff?” asks Larry.
“Eventually,” says Aaron. “That’s why they put out the press release.”
“Okay, okay. That’s all bullshit legal procedure anyway,” says Larry. “What the fuck are they suing us for?”
“Because that’s where the money is,” says Aaron.
“Yeah, I understand that,” says Larry. “I know they want to sue all the deep pockets they can find. No use suing poor people. But WHAT THE FUCK ARE THEY SAYING WE DID? We didn’t pay any secret commissions to anyone.”
“That’s not what they’re saying,” says Aaron. “They’re saying that the customers of the banks, the investment firms, paid secret commissions.”
“So what? So sue Barcourt, I don’t care. Sue Fidelity; sue Semper. I don’t know what those guys are up to. Why are they suing us?”
“Fortunately this is a privileged conversation,” says Aaron, “since you’re having it with your lawyer. You don’t want to be saying those things just anywhere.”
“What do you mean?” asks Larry. “I don’t know what the banks and their clients are up to. Wouldn’t put anything past them. Why’s that my problem? Why are Donna and I being sued?”
“Strict liability,” says Aaron. “You and Donna signed the prospectus, right?”
“Yeah, so?” asks Larry.
“The prospectus says that they got a seven percent commission, right?”
“Yeah, what is this — twenty questions? WHAT ARE THEY SAYING WE DID?”
“The complaint alleges that they got EXTRA commissions from their institutional clients. The extra commissions were in the form of a promise to buy more stock after the IPO and force the price up. You said they only got seven percent. The complaint about you and Donna is that you didn’t reveal in the prospectus that they actually got more.”
“How were we going to ‘reveal’ they got more when we didn’t know it?” asks Larry. “If they were sneaking around behind our backs getting extra commissions, how are we supposed to know? Maybe they did. Wouldn’t put it past them.”
“I wish you’d stop saying that,” says Aaron. “Under strict liability you had an obligation to know the facts before you signed the prospectus so you’re not off the hook just because you didn’t know. That’s not a defense when strict liability applies. And the courts have applied strict liability pretty consistently in cases like this.”
“Is this criminal?” asks Larry grimly.
“This is a civil case,” says Aaron. “I don’t think anyone wants to make it criminal. And strict liability is more a part of civil than criminal law. They just want your money.”
“So, okay, ” says Larry, “let’s calm down and think this through.”
“I am calm,” Aaron points out.
Donna says nothing.
“If these guys lied to us and got us in trouble and it’s a civil case, then we ought to be able to sue them for everything WE get sued for, plus more for our trouble. PLUS if they stole extra commissions, they were stealing from the company AND from me and Donna as shareholders. So we ought to be on the OTHER side of this suit.”
“I have bad news,” says Aaron. “I’d have to check, but I think the underwriting contract with them says that WE hold THEM harmless and indemnify them for any trouble they get into under the contract.”
“What?” says Larry. “We signed that? No-fucking-way!”
“You signed it,” says Aaron.
“You didn’t tell me not to,” says Larry. “What kind of shit is this? We signed a contract that says they can steal and we get nailed? I don’t fucking believe it.”
“I don’t think the courts would let them enforce that against us,” says Aaron. “It’s not that bad. But it can make it very hard for us to collect any damages from them.”
“Call them and tell them we’re suing them,” says Larry. “Do it right now. Tell these fuckers that they lied to us and they have hurt our shareholders and we’re gonna sue their asses. Tell them we’re gonna join the other side of the class action.”
“Why are we doing this?” asks Aaron.
“Because we want them to agree right away to waive that bullshit about us indemnifying them and to agree that every fucking cent of damages comes from them and not from us. That we’re not gonna stand for this bullshit.”
“I’ll ask them about indemnification but I don’t think this is going to be a big deal. That’s why I’m not all that upset about it.”
“Seems like a big-fucking-deal to me,” says Larry. “What do you mean it isn’t a big deal? Look, I know how to handle them. They’re a bunch of crooks and they’re trying to pull us in. In criminal court, they’d know we were gonna turn state’s evidence and cop a plea. They wouldn’t try to screw us unless they were gonna shoot us if we talk or something. And those pussies aren’t gonna shoot anyone. So we tell them we’re turning them in.”
“Do you have evidence that they did these things?” asks Aaron. “Wait, I’m not sure I want to know that. Don’t answer.”
“I already told you I don’t know what the fuck they did. But these lawyers who’re suing them don’t know anything either and that doesn’t stop them. Why should it stop us? And they don’t know what we know and don’t know. They probably don’t even know whether some of their salesmen did this shit or not. Probably some did, but who knows? All I want is for them to do what’s right and agree to indemnify us. So call them.”
“Larry, I think I should call the D&O carrier first,” says Aaron. The “D&O carrier” is the insurance company which has underwritten the company’s Directors and Officers Insurance, the policy which protects against shareholder suits.
“Are we covered for shareholder suits under D&O?” asks Donna.
“Should be,” says Aaron. “That’s why I don’t think it’s such a big deal.”
“Are we covered as individuals?” asks Larry. “Is this really something we just let them worry about?”
“Well,” says Aaron. “There could be a public policy question of whether individual officers should be reimbursed…”
“Then we’re not covered,” says Larry.
“I said ‘could be’. I don’t think there will be. But there is also a retainage — really a deductible — so it costs the company something. And there is a limit to our coverage.”
“How much?” asks Larry. “What’s the deductible? What’s the limit? Are you through with the bad news on our so-called coverage?”
“I think the retainage is 600K,” says Aaron. “I’ll have to look at the policy. And I think the limit is twenty million per incident…”
“It is,” says Donna, “any more would’ve cost more and we’re paying almost half a million a year for coverage as it is. And there IS more bad news. We file a claim, we watch the premium go up. This is insurance.”
“Twenty million per incident total?” asks Larry. “Or twenty million for each of us and another twenty million for the company?”
“Have to look at the policy,” says Aaron. “But I still wouldn’t worry.”
“You wouldn’t worry because you’re not being sued,” says Larry. “Come to think of it, why aren’t you being sued? You signed the fucking prospectus too.”
“Professional courtesy,” says Donna. “Lawyers don’t sue lawyers.”
“My signature was in my capacity as secretary,” says Aaron, ignoring Donna. “I wasn’t certifying that the prospectus is correct, only that it had been properly okayed by the Board. You know,” he continues, “I bet the only reason you guys were named is to make sure the D&O carriers are fully on the hook. You guys don’t have deep pockets — deeper than you had but not that deep — like the bankers. But D&O carriers always settle, so why not sue you and collect from them?”
“They ALWAYS settle?” asks Larry. “Doesn’t make sense. I got a friend used to be a district attorney. Then he got a job advising car dealers. Told’em ‘Never settle. You settle you’re gonna be a mark for whoever comes along.’ So these guys are pros; how can they always settle? They got our premiums. Why do they wanna pay out any claims?”
“They always settle,” repeats Aaron. “They settle and then they raise your rates. You’re right: the more they settle, the more cases the class action bar brings. But the more cases there are, the more they raise rates. So every year there’s more money flowing through the class action system and a fair share of it sticks to the hands of the D&O carriers.”
“Bullshit,” says Larry. “I don’t mean ‘bullshit, you’re wrong’; you’re probably right. I mean are we supposed to put up with this bullshit? We won’t let’em settle; we’ll fight.”
“No you won’t,” says Aaron.
“Whaddaya mean? Of course I will. You ever know me to duck a fight?”
“You won’t fight this one. They wanna settle, and if you don’t settle, they’re off the hook and it’s all your case. You pay damages. You pay for the rest of the defense. You know your pockets ARE a lot deeper than they were before the secondary. You wanna give all that back?”
“Just because I got some money doesn’t mean I’m gonna play defense all the time,” says Larry. “Go ahead and call the D&O carrier. Get that out of your system. Find out if they’re going to claim it’s ‘poor public policy’ to protect Donna and me. And then don’t forget to call fucking Barcourt and tell them unless they waive that indemnity crap we’re going over to the other side of the suit. We’ll help the sharks eat ‘em.”