Affymetrix’s recent press release tempering expectations for the upcoming second-quarter financial report, and Wall Street’s reaction to it, have incited at least three class action shareholder lawsuits.
Law firms in New York, Maryland, and Pennsylvania, last week announced the filing of securities class-action lawsuits against Affymetrix.
The firms of Charles J. Piven of Baltimore, Md.; Cauley Geller Bowman Coats & Rudman of New York; and Schiffrin & Barroway of Bala Cynwyd, Pa., released statements late Friday evening to announce filings in the US District Court for the Northern District of California on behalf of all purchasers of the common stock of Affymetrix between Jan. 29 and April 3.
According to the statements, the complaints charge that Affymetrix violated securities law and attempted to conceal a slowdown in its sales.
“Our view is that the cases are without merit and are not unexpected after a drop in stock value,” said Doug Farrell, Affymetrix vice president of investor relations. “Our long-term outlook is unchanged and every bit as optimistic as it has been. We are coming off a two-year run of accomplishments.The whole point is understanding the genome and that is one of the biggest undertakings done by man. That is what gets us excited and takes us to work each day.”
Representatives of the law firms filing complaints did not return calls seeking comment, or declined comment.
The stakes in such actions can be exceedingly high. The milestone for a securities class-action recovery was established in 1999 with a $2.8 billion judgment against Cendant Corp., won by the California Public Employees Retirement System (CALPERS) and two New York-based pension funds. The claims in such an action depend on a complex formula for lost funds, the number of people involved, and on finding a lead plaintiff — one who had the most at stake during the period of time at issue.
Starting the Earnings Season
On Jan. 29 Affymetrix issued a statement entitled “Affymetrix Reports Record Revenue and Profits,” advising that it expected to record product revenue growth of 28 percent for 2003, with the expectation of revenue for the first quarter in the range of between $71 and $73 million.
Then, on April 3, the company issued a statement, “Affymetrix Updates First Quarter,” guiding revenue expectations lower, estimating its revenues for the first quarter to fall within a range of $60-$62 million.
The company’s stock took a sharp plunge on the news, falling from a closing price of $28.00 a share on April 3, to $18.33 at market close on April 4, a 35 percent loss, on paper, of the company’s market capitalization in one day. The stock continued its downward course throughout the week, closing at $17.33 on Friday, April 11.
Previous to Affymetrix’s lower-guidance announcement, GlaxoSmithKline liquidated its stake in the firm, selling 4.7 million shares of Affymetrix stock to end a financial relationship that dated back to the early 1990s, when Affymetrix was spun out of parent Affymax. GSK acquired Affymax — and its stake in Affymetrix — and at one time held as large as a 60 percent stake. The pharmaceutical giant sold its last large holding of Affymetrix stock for upwards of $110 million. According to documents filed with the Securities and Exchange Commission, Glaxo recorded a sale of 500,000 shares on March 19 at an average price of $27.98 per share, and an-other 4.2 million on March 20, at an average price of $26.01 a share. The sale came as investors appeared ready to push Affymetrix’s stock past its 52-week high of $29.93 a share. It went as high as $28 before reversing.
The divesture of its Affymetrix stock was part of the company’s regular review of its equity portfolio, Patty Seif, a GSK spokesperson told BioArray News.
After the Fall Comes the Suits
Shareholder lawsuits, like mushrooms sprouting after a rainfall, often follow a decline in stock price or an earnings shortfall. According to the Stanford Law School securities class action clearinghouse, an online information source that catalogs securities lawsuits like this, some 67 actions have been filed so far this year, compared to 266 last year, and 488 in 2001 — a spike attributed to a large number of lawsuits over IPO share allocations.
Given the current bearish inclination of the securities marketplace, there undoubtedly will be more class-action securities lawsuits filed as companies fail to meet Wall Street expectations.
In this case, the three law firms involved thus far all claim extensive experience in class action securities actions. Two of the firms cite billions of dollars in settlements won. The statements begin the process, heeding a legal need to make a broad announcement, while at the same time asking potential members of the class to call their offices.
The Regulatory Environment
The SEC legislation known as Private Securities Litigation Reform Act of 1995 created a “safe harbor” for the directors and executives of publicly owned companies seeking to make forward-looking statements to investors and analysts about their financial projections. The concept behind the legislation was to allow companies to provide more meaningful information about growth projections with a reduced risk of litigation.
In fact, the legislation overhauled the rules governing securities class action lawsuits and heightened pleading standards, and also gave preference to institutions as lead plaintiff, as the one who had the largest financial interest in the claim being litigated. It also required a party interested in that role to file a certification attesting to a willingness to serve as lead plaintiff, to provide transaction information, and to decline any compensation other than that received as a class member. Under this system, the court appoints a lead plaintiff, who selects the lead counsel.
The Pace of Justice
There is a June 10, 2003 deadline for potential class members to approach the court seeking appointment as lead plaintiff in the action, the law firms’ statements said. Any lawyer or firm can file on behalf of the class, said Jill Fisch, a professor of law at Fordham University.
Going forward, the law firms will likely jockey for the position as lead firm representing the lead plaintiff, and by extension, the class.
Hurdles Before Trial
The next step will undoubtedly be a motion to dismiss by the defendants, said Norman Poser, a professor at Brooklyn School of Law and an expert in securities class actions.
The plaintiff, he said, has to plead facts that would paint a picture of the defendants acting with intent, or with reckless disregard in their behavior, he said. “It’s a Catch-22 situation in that, normally, the plaintiffs don’t have a chance for discovery before the judge has ruled on the motion to dismiss,” Poser said. The California district where this lawsuit has been filed is the “toughest of them all in applying a high standard for the plaintiff to meet — to show facts that people acted with intent,” he added.
Avoiding Litigation Costs
Both professors said that many cases that pass that milestone often are settled to avoid expensive and lengthy processes.
“Suits that were filed in the mid-1990s are only being resolved now,” said Fisch.
The wildcard in this is GSK’s sale of its holding at the height of the current market. And, that was apparent “in hindsight,” GSK’s spokesman said.
Farrell of Affymetrix said its former investor had long engaged in selling down its ownership.
“There is a long history of [GSK] selling off stock over a period of time, it has been a protracted exodus,” he said.
That may be a question that GSK may have to answer again.