Corporate Governance

Nacchio Civil Class Action Appeal: Part 1 (Judge Kelly)

By Kevin O'Brien, Daniels College of Business, Denver

On January 16^th, 2008, the Tenth Circuit published its opinion in New England Health Care Employees Pension Fund v. Woodruff, No. 06-1482 , in which several Qwest shareholders brought a class action complaint on July 27, 2001 alleging various federal securities laws violations by employees of Qwest and Arthur Andersen. In a 2 to 1 split decision, the 10th Circuit remanded the case to U.S. District Judge Robert Blackburn to determine whether the $400 million settlement of the class-action case was “fair, reasonable, and adequate” when Nacchio and his CFO were excluded from the settlement. Id. at *15.

Before commenting on the legal merits of the arguments presented by the majority and dissenting opinions in Parts 2 and 3, it is useful to gain perspective on the judge who drafted the majority opinion—namely, Judge Kelly who seemed very sympathetic to the legal merits and fairness issues of Nacchio’s criminal appeal during oral arguments on December 18^th, 2007. In particular, due to the lack of guidance, Judge Kelly expressed concern over the potential insider trading criminal exposure any executive might face when the basis of the undisclosed “material nonpublic information” was a financial prediction similar to Nacchio’s projections to Wall Street.

And consistently and perhaps tellingly, Judge Kelly sided with Nacchio and Woodruff (Qwest CFO) from a fairness standpoint in this civil class action suit. In his December 24th, 2007 post(The Nacchio Appeal: Part 5 (The Prediction) , Professor Jay Brown made the following prediction (3-0 reversal) on this blog related to Judge Kelly and Nacchio’s criminal appeal:

The Tenth Circuit is a relatively collegial place. Dissents are relatively unusual. It is, therefore, likely that the panel will strive to reach a unanimous verdict. Were Judge Kelly deciding the outcome, it would be a reversal on the materiality issue.

Instead of being joined by Judge Holmes and O’Connell in the Nacchio criminal appeal, this time, Judge Kelly was joined by Judge Baldock and Judge Briscoe on this case. Unable to arrive at an unanimous decision, Judge Baldock joined Judge Kelly in the majority decision, while Judge Briscoe wrote a strong dissenting opinion. In his dissent, Judge Briscoe addressed the adverse consequences of the Judge Kelly’s majority opinion to the plaintiffs as follows:

Vacating and remanding, simply to force the district court to combine all of its reasoning and support into one document, would create needless delay in a case that is already over six years old. Id. at *14.

Parts 2 and 3 of this three-part series will address the merits of Judge Kelly’s majority opinion and Judge Briscoe’s dissenting opinion on two distinct legal issues.

Full post as published by The Race to the Bottom on January 19, 2008 (boomark / email).