State’s top 2 public retirement systems take lead in lawsuits

Michael Wickline

LITTLE ROCK — Arkansas’ two largest public retirement systems are lead plaintiffs in federal class-action securities lawsuits over investments in companies for which the systems estimate they lostmore than $7 million.

The Arkansas Teacher Retirement System is the lead in a suit filed in California in March 2007 against Accredited Home Lenders Holding Co. of San Diego, and another filed in New York in February 2007 against OpenwaveSystems Inc., said Tony Gelderman of New Orleans, an attorney for the New York-based law firm Bernstein Litowitz Berger & Grossmann LLP.

The Arkansas Public Employees Retirement System is the lead in a suit filed in California in 2005 against Brocade Communications Inc., which is a technology firm in San Jose, and several of its officers and directors.

The suits claim firms in which the systems invested engaged in wrongdoing, such as backdatingstock options to company officials or engaging in fraudulent practices.

Issues in the cases include the amount of the systems’ losses and the amount of damages to be awarded. The systems haven’tdetailed the damages they’re seeking, but they emphasize that the damages don’t necessarily equal their financial losses.

The development of cases involving the systems stems in part from officials deciding several years ago to hire law firms to monitor the systems’ investments. The firms work on a contingency fee basis.

The move was encouraged by Gov. Mike Beebe when he was Arkansas’ attorney general. The attorney general’s office, he said, doesn’t have the expertise of the “big-time, white-collar securities fraud” law firms.

“I suggested to both retirement systems they had a fiduciary duty to pursue this,” Beebe said. “They were under an obligation to at least pursue the options of getting money back if they were defrauded or if they were monetarily injured.”

The systems have been involved not only in the three class-action suits but also in an array of litigation over corporate practices, a field of litigation that one system official described as an expanding arena. More participation may be expected in light of one system’s recent decision to hire even more law firms to do such work.

ACCREDITED

In the Accredited case, the suit was filed on behalf of purchasers of Accredited Home Lenders Holding Co. securities between Nov. 1, 2005, and March 12, 2007, according to a report to the teacher system from the Bernstein firm.

A federal judge appointed the Arkansas teacher system as the lead plaintiff in this case because it claimed the largest loss of any investor that sought appointment as lead plaintiff, Gelderman said.

The system’s losses totaled about $5 million, Gelderman said.

Accredited is a subprime lender. Bernstein’s report said Accredited repeatedly emphasized in public statements that it was better than its peers at reducing the risks of subprime lending by using conservative and disciplined underwriting policies.

But the company engaged in a fraudulent scheme to artificially inflate its loan volume and reported earnings and income, the Bernstein report said.

The company’s stock, having traded at more than $50 per share for much of the Nov. 1, 2005-March 12, 2007 period, closed at $3.97 the day after the period, the report said.

The system owned 273,460 shares of Accredited as of Nov. 1, 2005, after its investment managers began purchasing thestock in 2004, and ultimately sold 406,640 shares on Jan. 25, 2007, said Christa Clark, chief legal counsel for the teacher system.

Given the drop in the stock price and the number of shares outstanding, damages are likely to be in the hundreds of millions of dollars for those owning shares in the company, Gelderman said.

A spokesman for Accredited said the company has a policy of not commenting on pending litigation.

OPENWAVE

The suit against Openwave contends the developer of software products and services for the wireless telecommunications industry improperly backdated options grants to its executives, the Bernstein report said.

Between 2000 and 2006, Openwave concealed this from shareholders and incorrectly accounted for its stock-option compensation expense and accumulated deficit, the report said.

On Dec. 1, 2006, Openwave admitted it had backdated the stock options grants and that it was required to take additional charges of $182 million to restate its earnings and accumulated deficit for fiscal 2000-2005, the report said.

The Arkansas teacher system was appointed by a federal judge to be lead plaintiff because it was able to most adequately represent the interests of class members, Gelderman said.

The period involved in this lawsuit is Sept. 30, 2002-Oct. 26, 2006. The teacher system’s losses from investments in Openwave during that period were about $1.3 million, Gelderman said.

The amount of damages will be the subject of expert testimony, Gelderman said.

A spokesman for Openwave Systems didn’t return telephone calls seeking comment.

BROCADE

A Texas law firm last month announced a $160 million settlement of a 2005 suit against Brocade, its officers and directors.

Brad Beckworth, an attorney for the Daingerfield, Texas, law firm of Nix, Patterson & Roach LLP, said the Arkansas system lost more than $1 million investing in the company’s stock over several years.

Federal rules bar him from disclosing what the system is seeking in damages, he said.

He has said he hopes a judge will approve the settlement this fall.

WILLIAMS

Those are not the first cases involving the systems. Clark said the teacher system has collected $575,000 so far from an earlier class-action lawsuit settlement of $311 million against Williams Companies of Tulsa.

The amount collected is 75 percent of the system’s claim.

The teacher fund was a co-lead plaintiff along with a teacher system in Ontario, Canada.

The litigation filed in 2002 in the U.S. District Court for the Northern District of Oklahoma was against The Williams Companies Inc., certain of its directors and officers, its auditor and its underwriters on behalf of a class of investors who purchased Williams securities between July 24, 2000, and July 22, 2002.

The lawsuit centered on the company’s accounting of and public statements about complex energy trades.

DERIVATIVE SUITS

The teacher system also is plaintiff in two shareholder derivative lawsuits.

These are suits instituted by a shareholder of a corporation on behalf of the corporation, according to Bernstein’s report. They differ from a general securities class-action lawsuit, which seeks a monetary recovery to be distributed directly to the class members rather than to the corporation, said Gelderman.

Clark said the teacher system files derivative suits so it will benefit as a shareholder from the increase on the corporate balance sheet. The system would like to impose changes at the company level as part of the settlement to help make the company operate better, she said.

One such suit was filed in August 2006 in Massachusetts on behalf of Progress Software Corp. against company officers and directors. The system is the sole plaintiff. It seeks “many millions of dollars” in damages, Gelderman said.

The defendants harmed the company and its shareholders by granting and receiving hundreds of thousands of Progress stock options that the company has admitted were back-dated or manipulated, resulting in windfall profits to the recipients, Berntein’s report said.

The company has admitted that executives participated in misconduct and knew of the proper accounting rules that should have applied to the options but failed to apply them, the report said.

Officials for Progress Software Co. didn’t return phone calls seeking comment.

The other shareholder derivative lawsuit was filed on behalf of the teacher system and three other public funds for the benefit of Calabasas, Calif., Countrywide Financial Corp. against the company’s board of directors.

In May, a federal judge in Los Angeles ruled this suit should go to trial.

It alleges that Countrywide directors and officers failed toprovide enough oversight of the lender and misled shareholders about the company’s true financial state. Countrywide Chairman and Chief Executive Angelo R. Mozilo and 13 other current and former top executives are defendants in the complaint.

In January, Countrywide agreed to sell itself to Charlotte, N.C.-based Bank of America Corp. for about $4 billion in stock.

Countrywide has been the target of shareholder and consumer lawsuits since last summer’s housing crash.

Officials for Countrywide didn’t return telephone calls seeking comment.

Paul Doane, the system’s executive director, said the system doesn’t have information about its losses from the investments involved in the two derivative cases.

THE LAW FIRMS

The teacher system hired Bernstein in 2003.

The public employees system hired the Nix firm and three other firms in 2004. The other firms are Cohen, Milstein, Hausfield & Toll of Washington, D.C.; Kiel & Goodson of Texarkana; and Patton, Halton, Roberts & Greer of Texarkana, Texas.

Their contingency fee basis includes no upfront fees for the firms. Judges determine how much the firms are paid, off icials for both systems said.

The Bernstein firm was hired after the teacher system issued a request for proposal and interviewed three firms, Clark said. The public employees system hired the four firms after soliciting more than a dozen proposals and interviewing six firms.

In April, the teacher system authorized Clark to seek up to three more firms for securities class-action monitoring. The request for proposals is expected to be issued in mid-July.

“It is believed, from a fiduciary standpoint, that having a broader monitoring and reporting effort is desirable,” Doane told the trustees in a memo.

It’s not expected to increase the amount of litigation the system is involved in as lead plaintiff but “will best insure complete coverage of this expanding arena,” he said.

SIDE BENEFITS

After the public employees system hired the firms to monitor its investments, partners in three of the firms donated to Arkansas elected officials who sit on the retirement system boards.

The donations included $18,000 to state Auditor Jim Wood, $15,000 to Treasurer Martha Shoffner and $13,000 to her predecessor, Gus Wingfield, all Democrats.

The lawyers and trustees said last year that there’s no link between the donations and the contracts.

SIZE OF SYSTEMS

Although $7 million in losses is a lot of money, it’s not much compared with the systems’ total assets. The two systems have more than $16 billion in investments. The value of the teacher system investments was $10.9 billion of as March 31, according to its latest report. The public employees system’s assets were $5.6 billion.

A lot of people are banking on the systems doing as well as possible. The teacher system includes 69,226 working members who are paid an average annual salary of $31,645 and 25,611 retirees who are paid annual benefits of $485 million, according to actuary Gabriel Roeder Smith & Co of Southfield, Mich. The public employee system includes 43,630 working members paid an average salary of $29,855 and 22,409 retired members receiving average annual benefits of about $11,000, said the actuary.

Front Section, Pages 1, 9 on 07/06/2008

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