Risk & Compliance

All the News That’s Fit to Sue

A recent shareholders' lawsuit was based substantially on press reports; ''I haven't seen anything like this,'' says one securities-law expert.
John P. Mello Jr.January 23, 2007

When you dial the New Orleans office of Kahn Gauthier Swick LLC, an automated greeting kicks on: “Thank you for calling Kahn Gauthier Swick, the law firm featured in The New York Times, Wall Street Journal, Washington Post, and other nationally prominent media.”

The greeting seems appropriate given one of the firm’s latest cases — a shareholders’ lawsuit based substantially on press reports. Filed in the Federal District Court for Northern California, the lawsuit claims that the stock price of Pegasus Wireless Corp., a $31 million telecom based in Fremont, Calif., sank from $7.60 to $1.10 a share from August to September of this year following negative reports on the Website Motley Fool and in Barron’s.

“I haven’t seen anything like this,” says Alan Bromberg, an expert on securities lawsuits and a professor at Southern Methodist School of Law in Dallas, “but it doesn’t surprise me.” Press reports, he cautions, are a “much less sturdy platform [for a lawsuit] than statements in reports to shareholders or statements in filings to the Securities and Exchange Commission.”

While the articles did contain some unsavory details about the company — including its officers’ alleged connections to convicted felons and securities fraudsters — these details do not prove that securities laws were violated. Nor does the fact that the firm’s stock tanked, says Jay Ritter, a University of Florida finance professor. “The information in Motley Fool and Barron’s has to be shown to be material information that should have been disclosed,” he adds.

Pegasus did not return calls seeking comment. However, in a press release, the company reiterated that it categorically denied the accusations. As for the lawsuit, KGS partner Lewis S. Kahn maintains that it “isn’t based solely on news accounts. When something comes to light about a fraud, we do as much investigation as we can…to substantiate the allegations.”

At press time, the clock was ticking on the 60-day window for KGS to propose a lead plaintiff — which Kahn was confident would happen.