When it comes to securities class actions, many public pension funds make a clear distinction between fulfilling their obvious fiduciary duties – monitoring potential losses and collecting settlement money – and actually filing lawsuits.
Some small and mid-sized funds figure they may never be lead plaintiff, especially in a major case, where a larger institution often holds sway.
So it was with some surprise that the $1.5 billion Oklahoma Firefighters Pension & Retirement System found itself in a position to play a vital role in securities class action against El Paso Corp., which settled for $285 million in August.
“When we first got involved with this case, it was mostly a question of covering ourselves and being a responsible fiduciary. It was strictly about monitoring our stock losses,” said Bob Jones, the fund’s executive director.
“We didn’t think a little fund like ours would ever be lead plaintiff. Now here we are making a big difference with one of the biggest settlements of all time.”
Not that the fund stepped into its new role lightly.
In 2003, Oklahoma’s board adopted a securities litigation policy, setting a loss threshold for case analysis, retaining counsel to monitor its portfolio, and making its trading data available electronically for swifter analysis.
Berman DeValerio began providing monitoring services, calculating potential losses and issuing periodic case recommendations and updates.
“Our relationship with Berman DeValerio’s attorneys strengthened over time,” said Marc Edwards, the board’s attorney. “We were comfortable with them, and confident in the high quality of their work. Moving forward as lead plaintiff simply made sense in this case.”
The Oklahoma fund had no role in the case when it was initially filed in 2002. But two years later, the fund applied for lead plaintiff after El Paso announced that it had overstated its proved oil and gas reserves by 41%.
With Berman DeValerio as counsel, the fund was appointed deputy lead plaintiff, and was later elevated to co-lead plaintiff in 2005.
The fund played an active and vital role throughout the litigation, particularly when it came time for settlement negotiations, said Michael J. Pucillo, the Berman DeValerio partner who directed the case.
Several recent studies have highlighted the power of public fund lead plaintiffs in securities class actions. Cases prosecuted by institutional lead plaintiffs have resulted in higher recoveries, lower attorneys’ fees and improved corporate governance at companies accused of wrongdoing.
“By choosing to participate in this case, Oklahoma protected the retirement assets not only of its 19,000 members but of all investors who were misled by El Paso,” Pucillo said. “By taking a pro-active approach, the fund demonstrated how important it is for smaller funds to get involved.”
The Oklahoma fund also is expected to recoup the expenses it incurred by taking the lead role.
According to the complaint, El Paso materially misrepresented its financial condition, causing its stock to trade at artificially high prices. The plaintiffs alleged, among other things, that the company reported strong “proved” global oil and natural gas reserves.
Proved reserves – defined as those that can be extracted from known fields under existing economic and operating conditions – represent a key metric in assessing an oil company’s future growth.
However, the lawsuit alleged that, the company’s statements of proved reserves were artificially inflated.
On Feb. 17, 2004, the company announced that an independent review of its proved oil and gas reserves revealed that, as of Jan. 1, 2003, El Paso overstated such reserves by 41%, or 3.64 trillion cubic feet. As a result, the company said it would take a pre-tax charge of approximately $1 billion for the fourth quarter of fiscal year 2004.
Following these announcements, the company’s common stock fell 17.6 percent, from a closing price of $8.81 on Feb. 17, 2004, to a close of $7.26 on Feb. 18, 2004.
Under the terms of the settlement, $273 million of the total amount will come from the company and its insurers, and, separately, $12 million from auditors PricewaterhouseCoopers. Notices advising class members of the settlement should be mailed out shortly. A hearing on approval of the settlement is pending.
The case, captioned Oscar Wyatt v. El Paso Corp., was brought in the U.S. District Court for the Southern District of Texas. The class period covers all investors who bought El Paso common stock from Feb. 22, 2000, through Feb. 17, 2004.
*In August 2017, our firm name changed to Berman Tabacco. Case references and content published before that date may refer to the firm under our prior name, Berman DeValerio.