Plews Shadley Racher & Braun recently scored a significant legal victory in the federal courts when it secured a $4 million settlement in a securities fraud lawsuit. The principal lawyers working on the case were George Plews, John Bridge and Jeffrey Townsend.
Many years ago, the father of Linda Ely and John Gerrard founded the A.J. Gerrard & Company in Chicago. After their father’s death, the Gerrard family inherited 22 percent of the stock in the privately held corporation, but found there was no market for the shares. The officers and directors of the company said they did not want to buy the shares.
However, several months later, the officers and directors offered to buy virtually all of the family’s shares. These corporate insiders said nothing had happened within the company; they simply wanted to buy the stock as long-term investments. The insiders paid the family $2.5 million for the shares and required the family to sign a release of all claims against the insiders.
Twenty months later, the family learned that a large, publicly traded corporation intended to buy all of the company’s stock at a much higher price than the insiders had paid to the family. Concerned that the insiders might have unfairly taken advantage of them, the Gerrard family called John Bridge for advice. John immediately contacted the company, but its attorneys refused to provide any information that might justify the high price per share being paid for the company. Instead, their lawyers said that if the Gerrard family sued, the insiders would seek sanctions and attorneys’ fees, because such a lawsuit would be frivolous.
The Gerrard family discussed the situation with a friend of theirs, John Anderson, who had also recently sold stock to the insiders. Like the Gerrard family, Anderson had released all claims against the insiders when he sold his stock. The release agreements signed by the Gerrard family and Anderson contained venue-selection clauses. The Gerrard family was required to file lawsuits in Augusta, Georgia. Anderson was required to file in Alabama. Anderson retained Alabama counsel to represent him.
John Bridge and George Plews traveled to South Carolina to meet with the Gerrard family and learn more about the facts. They interviewed lawyers in Augusta, Georgia, who might help with local procedural matters. Tommy Tucker was selected and was very helpful in keeping the case moving through the local federal court.
On behalf of the Gerrard family, Plews Shadley Racher & Braun filed a complaint alleging that the corporate insiders had committed securities fraud when they bought the family’s stock at an unfairly low price. The complaint also alleged that the release signed by the Gerrard family was procured by fraud and was not enforceable. Shortly thereafter, Anderson’s lawyers filed a nearly identical complaint in Alabama. The Insiders hired a large, national law firm to seek dismissal of both cases. Unfortunately for Anderson, the federal court in Alabama dismissed Anderson’s case, leaving him with no recourse.
In Georgia, Plews Shadley Racher & Braun lawyers argued that Georgia law, and the circumstances surrounding the Gerrard family’s transaction, were sufficiently different than Anderson’s case, and that the Georgia case should proceed to trial. Chief Judge Dudley Bowen expressed concern about the requirements of the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u-4(b). The PSLRA required the court to dismiss the securities fraud lawsuit unless the Gerrard family could make a strong showing of fraudulent conduct — without conducting any discovery. Plews Shadley Racher & Braun lawyers argued that the insiders’ limited justification for their large profits in just 20 months was not believable. Also, the insiders’ decision to buy the stock shortly before the company was sold suggested that material information had been improperly withheld. Judge Bowen agreed and ordered the insiders to produce their records and sit for depositions.
Jeffrey Townsend took the lead on discovery. Among the thousands of pages of documents produced by the insiders, a single page revealed that they had talked to an investment banker about selling part of the company. When they had talked to him was unclear. The insiders testified that they did not talk to the investment banker until after they had agreed to buy the family’s stock. When the investment banker was located, he testified differently. Under oath, he explained that he had met with the insiders several months before they decided to buy the family stock. The investment banker said he provided the insiders with a report valuing one of the company’s three divisions at more than $10 million. He said he could sell one division quickly at a high price, but the insiders told him to wait. Only after the investment banker’s initial reports did they express interest in buying the family’s stock.
Immediately after the investment banker’s deposition, Plews Shadley Racher & Braun moved for summary judgment and asked the court to find, as a matter of law, that the insiders had withheld material information from the Gerrard family in violation of the securities laws, specifically Securities and Exchange Commission Rule 10b-5 (17 C.F.R. § 240.10b-5). The insiders also moved for summary judgment. For the first time, the insiders admitted that they had met with the investment banker before they decided to buy the family’s stock, but they claimed the information did not affect their decision to buy the shares. A hearing was held in Augusta, and oral arguments lasted from the morning until after dark when Judge Bowen finally took the matter under advisement.
On September 30, 2003, Judge Bowen issued a lengthy decision holding that the family had presented substantial evidence from which a jury could find that the insiders had engaged in securities fraud. Gerrard v. A.J. Gerrard & Co., 285 F.Supp.2d 1331 (S.D. Ga. 2003). A scheduling order then issued for trial. Within days, lawyers for the insiders said they were interested in settling. Mediation was scheduled in New York City. It took place within sight of the devastation caused by the terrorist attacks on the World Trade Center. By the end of the day, the insiders agreed to pay $4 million to the family. This was in addition to the $2.5 million already paid to the family in the original transaction.
The lawyers at Plews Shadley Racher & Braun who worked on this securities fraud case found the successful outcome especially satisfying, because they were able to help a brother and sister preserve the memory of their father and protect the legacy he left for them.
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