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Explanation of “Ownership” Basis for Restitution


            Reactions to the March 15, 2005 Forum Report’s summary of “ownership” injuries as an alternative to “trading” injuries for Restitution Fund distributions suggests a need for more attention to the issue.


            First, the terms were used to distinguish between two different types of injuries to investors, as follows:


§      “Trading” injuries:  Most investors are accustomed to addressing only the “trading” type of injury, since that is all that can be recovered in civil class actions under the Private Securities Litigation Reform Act of 1995 (“PSLRA”).  Widely applied by an established community of specialized professionals with standardized practices, these class actions are based on securities laws against fraud.  The injury to an investor is viewed essentially as the amount by which his purchase price of securities was inflated by the fraud, measured generally by the price to which the securities drop in the marketplace immediately after the fraud is publicly exposed.


§      “Ownership” injuries:  Damage to the intrinsic value of investment property resulting from management misconduct is often ignored when the property is owned by public investors.  (This may be because there has been no established equivalent of the PSLRA class action process for seeking remedies.  Observations are very different when an enterprise is owned by one or a few investors, whose efforts to recover damage to their property are often vigorous.)  Damage to the owner’s property can result from all kinds of management misconduct, including the fraud that also cheats investors in the price they pay for the investment.


Example of Conduct Causing Both Types of Injury


            An example of how fraudulent conduct generates both “trading” and “ownership” injuries can be seen in CA’s past practice of executing contracts after the end of the period for which the sale revenue was accounted.


            This fraud contributed to false reports that inflated the price investors paid for stock, which is the “trading” injury for which recovery was obtained in the recently settled PSLRA class action.
          But this misconduct also caused significant damage to CA’s business enterprise, independently of the fraudulent pricing of securities.  In addition to the relatively insignificant direct costs of dispatching executives on corporate jets to collect falsely dated signatures, the act of seeking a client’s cooperation in the fraud would have much greater, enduring effects on the company’s ability to generate profits.  Many clients or prospective clients would be offended by the practice and decide not to do business with CA.  And of those who accepted or ignored the practice, it must be assumed that at least some knew that they could demand something – reduced prices or other accommodations – in return for their tolerance.  Similarly, employees or prospective employees who knew about the practice might not want to work for CA, or, worse, might see cooperation as a corrupt career opportunity.  The resulting lost revenues, increased costs, and compromised relationships continue to damage the property of CA investors today, impairing the intrinsic value of their “ownership” interests.


Different Injuries Resulting From Same Misconduct


            It should be understood that the “trading” and “ownership” types of injury are separate, but that they can both result from the same acts.  They can also injure the same investor in different ways, and can of course have different effects on different investors.


            Clearly, an investor who paid a fraudulently inflated price for CA stock may also be injured, additionally, by the impairment of the investment’s intrinsic value.  Another investor, say a current CA shareholder who bought the stock in 1990, would not have been injured by a fraudulently inflated stock price but would have been injured by the damage to his “ownership” interest.


            While the first investor in this example received compensation for the “trading” injury, he has received nothing for the separate and potentially greater “ownership” injury.  And the long-term investor, who may have suffered the most injury, has received nothing at all from the PSLRA class action.


Injuries from Obstruction of Justice


            Regarding injuries resulting from management’s obstruction of justice, it may be legally important that the claims are not based on securities laws – obstruction of a federal investigation is a “racketeering” violation – to establish that distributions of the Restitution Fund should not duplicate the PSLRA class action settlement.


            In any event, it should be noted that the obstruction misconduct continued during a period after the fraud, and, for what is probably the most clearly defined “ownership” injury to investors’ property, may be considered the reason for the government’s imposition of a $225 million penalty to be paid by the corporation.




            Our lack of familiarity with “ownership” injury results from the absence of any practical process to do something about it, in spite of the clear evidence of its importance to investors.  The CA Restitution Fund presents an opportunity to correct this unfair and inefficient marketplace distortion.


            Further comments on this important issue will be welcomed.


GL – 3/22/04



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