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/raid1/www/Hosts/bankrupt/CAR_Public/000204.MBX C L A S S A C T I O N R E P O R T E R Friday, February 4, 2000, Vol. 2, No. 25 Headlines ANALYTICAL SURVEYS: Milberg Weiss Files Securities Lawsuit in IN AOL: Charged of Monopolizing Access to the Internet; Customers Complain ARIZONA STATE: Suit Re IDEA Compliance Does’t Need Joinder of Districts CNA FINANCIAL: Retirees' Lifetime Health Benefits Suit Okayed in IL CRITICAL THEORY: Boalt Hall Law Students Sue for Valuable Time Wasted DOUBLECLICK INC: Online Privacy Dust-Up May Draw Regulators' Eye FEN-PHEN: AHP Seeks to Block Chairman's Testimony HMO: Aetna Is Restating Earnings for 7 Quarters at SEC’s Request LOPEZ, BIZKIT: Sued by Middle-Aged Rockers for "Making Rock Suck" MONARCH DENTAL: Announces Agreement to Settle Securities Lawsuit QUALITY DINING: Emerges from Securities Lawsuit Filed in Indiana------- RAVENSWOOD ELEMENTARY: Settlement Ends 3 Year ADA Case Re CA Students SHIGELLA OUTBREAK: Marler Clark Sues Senior Felix Gourmet Mexican Foods SYKES ENTERPRISES: Burt & Pucillo Files Securities Lawsuit in FL SYKES ENTERPRISES: Cohen, Milstein Files Securities Lawsuit in FL SYKES ENTERPRISES: Milberg Weiss Files Securities Lawsuit in FL SYKES ENTERPRISES: Schiffrin & Barroway Files Securities Suit in FL SYKES ENTERPRISES: Shepherd & Geller Files Securities Lawsuit in FL THE LEVIGNES: Owners Of Mortuary Services To Face Trial Over Embalmings TOBACCO LITIGATION: Industry to Continue Fight to Overturn FL Gag Order TOBACCO LITIGATION: Smokers Testify Posthumously Wrapping up Case * Consequences of Legal Actions: Tax and Attorney’s Fees * Mortgage Insurance Industry Plans a PR Counterattack ********* ANALYTICAL SURVEYS: Milberg Weiss Files Securities Lawsuit in IN ---------------------------------------------------------------- Milberg Weiss Bershad Hynes & Lerach LLP filed on February 2, 2000 a class action lawsuit in the United States District Court for the District of Indiana on behalf of all persons who purchased the common stock of Analytical Surveys, Inc. between October 25, 1999, and January 31, 2000, inclusive. The complaint charges Analytical Surveys and certain of its senior officers with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaint alleges that defendants issued materially false and misleading financial statements during the Class Period. In particular, the complaint alleges that the Company's financial statements violated GAAP and other financial reporting standards by materially overstating the Company's revenues, income and earnings. Contact: at Milberg Weiss Bershad Hynes & Lerach, Steven G. Schulman or Samuel H. Rudman at One Pennsylvania Plaza, 49th Floor, New York, New York 10119-0165, by telephone 1-800-320-5081 or via e-mail: endfraud@mwbhlny.com or visit website at http://www.milberg.com AOL: Charged of Monopolizing Access to the Internet; Customers Complain ----------------------------------------------------------------------- According to The San Francisco Chronicle of February 3, 2000, legal eagles on both coasts are taking aim at America Online, after scores of frustrated customers complained that AOL's latest software blocked them from accessing the Web through rival Internet service providers. First, attorneys sued AOL in federal court in Alexandria, Va., near AOL's Dulles, Va., headquarters, claiming the company violated both state and federal laws and seeking as much as $8 billion in damages on behalf of customers everywhere. AOL is the largest Internet service provider with 21 million users. Critics say the problem occurs if users select AOL 5.0 as their "default" Internet program during installation. Then, some users complain, they no longer can use their other Internet access programs. AOL estimates 8 million users have installed the latest software, Version 5.0, which was released in the fall. By some estimates, 1 in 12 AOL users also has another Internet account, and could potentially be affected. "It is an attempt to monopolize access to the Internet," charged Lloyd Gathings, a Birmingham, Ala., lawyer involved in the suit. "It causes tremendous technical problems (for AOL users)." Now a San Francisco law firm, Girard & Green, is considering filing a similar lawsuit in a California state court on behalf of a Berkeley resident, who had to reformat his hard drive to use another Internet service provider after installing the AOL program. Attorney Dan Girard said the Berkeley resident is checking his system to make sure the AOL software was responsible for the problem. But even if it wasn't, Girard said his firm might sue AOL on behalf of other Californians who have complained the program crippled their alternative Internet accounts. Girard could then ask a judge to deem the suit a class-action case, representing everyone affected. "It is likely there will be multiple cases," Girard said, noting that consumer laws vary from state to state. But America Online spokesman Rich D'Amato said such lawsuits have "no basis in merit or fact." D'Amato said America Online's latest software explicitly asks customers if they want to make AOL their default Internet software when they install the program. And he said it's easy for customers to change the settings back. "We've had only an infinitesimal amount of claims," D'Amato said, insisting that users should still be able to use their other Net accounts after installing AOL 5.0. But dozens of angry users have complained about the program on online message boards, including those on AOL's own service, said David Cassel, an Oakland resident who publishes the AOL Watch newsletter. Windows Magazine's Web site even posed the question: "AOL 5.0: The Upgrade of Death?" And Internet service providers, like Earthlink and Prodigy, have publicly criticized AOL. Earthlink spokesman Kurt Rahn said his company's customer support workers have fielded hundreds, if not thousands, of calls from users who had trouble after installing the AOL software. "It's a fairly wide variety of stuff," Rahn said, "not one thing you can point to." Avoiding Net Trouble Some customers have reported having trouble using their other Internet accounts after installing America Online's latest software, version 5.0. Here's how to avoid problems: If you're installing the upgrade, choose "no" when the program asks you whether you want to make AOL your default software. (Critics say that if you check "yes," the program will change the settings on your computer in such a way that it may be more difficult to use other programs. Whenever you try to access the Web, your PC will automatically start running the AOL program.) If you've already installed AOL 5.0, there is an easy way to change the settings back, according to AOL spokesman Rich D'Amato. In Windows 95 or 98, go to the task bar, move your mouse over the settings option and click on the control panel. Select Internet options, then programs. Check the box next to the option "Internet Explorer should check to see if it is the default browser." Then restart your PC. A box should pop up asking whether to make Internet Explorer your default browser. Check yes. St. Louis Post-Dispatch reports on February 3 that online discussion groups - including some on AOL's own service - show scores of complaints by customers about problems they encountered after AOL's latest software upgrade. According to the report, AOL has said previously that complaints about interference by its software were overblown and the result of customers not understanding that if they click "yes" during installation to allow AOL to become their default Internet browser, AOL largely takes over all the online functions. BIShHOP ESTATE: 9th Cir Tosses Action Against Ex-Trustees In Hawaii ------------------------------------------------------------------ The Ninth Circuit U.S. Court of Appeals has thrown out a class action against ousted trustees of Hawaii's $10 billion Bishop Estate. Led by plaintiff Elizabeth Burgert -- a Hilo woman with two grandchildren attending the Kamehameha School, which the trust runs for native Hawaiians -- the suit alleged that the five trustees dissipated fund assets in violation of the Native Hawaiian Education Act and the Native Hawaiian Health Care Act. A district court dismissed the suit on the ground that those acts do not create a right of action for private plaintiffs. The Ninth Circuit agreed in a Jan. 26 ruling: "There is no language in the text of either statute expressing an intent to confer rights that can be judicially enforced by individual Native Hawaiians," wrote Judge William Fletcher in Burgert v. Bishop Trust, 98-16238. "We find no support in these schemes for the idea that Congress intended private rights of action against any recipients of the federal funds under these statutes." One of the world's richest charitable trusts, the Kamehameha Schools-Bishop Trust was established by the last direct descendent of King Kamehameha I, Princess Bernice Pauahi Bishop. A major force in Hawaiian politics, the trust was rocked by a series of expos s that led to the criminal indictments of two trustees as part of a continuing investigation by the state attorney general. Most recently, a state judge capped future trustees' annual salaries -- which were approaching $1 million apiece -- at $120,000. The class action defense was mounted by lawyers at Honolulu's McCorriston Miho Miller Mukai. The plaintiffs were represented by Joseph Cotchett, at Burlingame's Cotchett, Pitre & Simon. Initial reactions by the defendant trustees focused on Cotchett and his firms' California address, dismissing the suit as an "opportunistic ploy" by - - as then-trustee Lokelani Lindsey put it -- "publicity-hungry carpetbaggers." The Jan. 26 opinion notes that the allegations of misconduct against the trustees are being pursued in other forums. (The Recorder, February 3, 2000) ARIZONA STATE: Suit Re IDEA Compliance Does’t Need Joinder of Districts ----------------------------------------------------------------------- A class action against state entities arising from their alleged failure to implement an IDEA-compliant complaint resolution procedure can proceed without joinder of individual districts, a district court ruled. The parents, representing a class of all school-aged students with known or suspected disabilities and their parents, guardians and/or representatives, alleged that the state of Arizona, through its department of education, failed to implement an adequate complaint resolution procedure in compliance with the IDEA. They charged that while the DOE's complaint resolution procedure facially satisfied the state and federal requirements, the system as implemented failed to meet those requirements and assure FAPE. More specifically, they alleged that complainants were not allowed the opportunity to submit additional information before the DOE reached a final conclusion, failed to ensure identified violations were corrected in a timely manner and failed to award compensatory education to students against whom violations were found to exist. The DOE contended that the four individual school districts where the named plaintiffs attended school were parties who should be joined under Fed.R.Civ.P. 19(a) or, alternatively, that the parents should be made to join the school districts as defendants. The DOE argued that under the rule, complete relief could not be granted in the absence of the individual districts, since any order directing them to force districts to comply with the law would require an additional order requiring compliance by the districts themselves. The parents asserted the litigation challenged the DOE's supervisory authority over the LEAs, regardless of any school district responsibility. Because the named defendants bore ultimate responsibility for assuring compliance with IDEA requirements, the district court ruled the districts did not have to be joined in order to accord complete relief among the existing parties. The court further found any interests held by the districts would not be impaired or impeded by case adjudication in their absence. The court rejected the DOE's argument that its responsibilities under the IDEA were so intertwined with district responsibilities that the court would be unable to provide a meaningful remedy. Any relief granted would not alter the existing duties of the various districts. The court did not reach the parents' alternate argument that joinder was not proper because class actions are generally exempt from the requirements of Rule 19(a). Dunajski by Dunajski v. Keegan, 31 IDELR 76, 99-0353, [D. Ariz. 1999] (Special Education Law Monthly, January 31, 2000) CNA FINANCIAL: Retirees' Lifetime Health Benefits Suit Okayed in IL ------------------------------------------------------------------- Early retirees have successfully blocked a motion to dismiss their breach of contract suit against CNA Financial Corp. based on the company's termination of a "lifetime" health benefit. Vallone et al. v. CNA Financial Corp. et al., No. 98-CV-7108 (ND IL, Nov. 10, 1999). CNA claimed the plaintiffs' failure to exhaust administrative remedies was fatal to their action. However, in denying the company's motion to dismiss, Chicago District Judge James B. Moran held that such exhaustion would have been futile because CNA had inexorably decided to terminate the benefit. The CNA retirement plan required plan participants with benefits disputes to exhaust administrative remedies, i.e., take all internal appeals, before filing suit in the courts. Judge Moran noted that appropriate Seventh Circuit U.S. Court of Appeals case law waives the exhaustion requirements if such appeals are futile. The plaintiffs, headed by Michael J. Vallone, were all employed by the Continental Insurance Co. when they opted to take early retirement in 1991. One of the retirement incentives was a health benefit subsidy known as the Retiree Health Care Allowance. The subsidy was used to off-set the cost of the retirees' health care benefits, and the plaintiffs say the benefit was offered for life. Vallone asserted that he and more than 500 Continental employees took the early retirement package based in large part on the health benefits subsidy. In 1995, Continental merged with CNA and two years later the companies' pension plans merged. In August 1998, the merged plan informed the Continental retirees that the health benefit subsidy was being terminated. Vallone and numerous other early retirees complained either verbally or in writing to the CNA benefits committee, which replied that the benefits were terminated and that no appeal was possible. Vallone and several others followed with the suit at bar, a proposed class action, alleging that CNA breached the contract terms of the Continental early retirement offering by cutting the subsidy. CNA replied with a motion to dismiss the suit for all those who made oral protests to the subsidy termination. The company asserted that early retirement materials referred participants to the documents governing the Continental pension plan. Those documents, the company said, clearly outlined a written administrative appeals process for disputed benefits. Thus, CNA argued, the plaintiffs who made oral protests had failed to exhaust the required administrative remedies under the pension plan. Judge Moran disagreed, noting that plaintiffs who had filed written protests were told that no appeal existed for early retirement benefits disputes, effectively sealing the door to an appeals process and making any such requests to be heard futile. (Pension Fund Litigation Reporter, December 13, 1999) CRITICAL THEORY: Boalt Hall Law Students Sue for Valuable Time Wasted --------------------------------------------------------------------- The Boalt Hall Student Association announced on February 2 that it was filing a class action on behalf of all law students nationwide against critical theory and professors associated with the discredited legal ideology on the grounds that the subject wasted valuable student time which could have been better spent embellishing resumes, interviewing with Palo Alto law firms and day trading Internet stocks. "What a crock," said a Boalt student who asked to remain anonymous. "Why should we deconstruct statutes and cases, when we could be comparing firm investment pools and bonus structures online with Greedy Associates?" Dean Herma Hill Kay said in a prepared statement that while she "understood" the frustrations many students felt in studying critical theory, she was nonetheless dismayed at student demands that the law school be renamed for Ayn Rand and was certain that it would cause alumni objections. (The Recorder, February 2, 2000) DOUBLECLICK INC: Online Privacy Dust-Up May Draw Regulators' Eye ---------------------------------------------------------------- Debates over online privacy have been rekindled with recent reports that Internet ad company DoubleClick Inc. is tracking Web users as they surf. That renewed interest may move the issue closer to resolution than it was in November, when the Commerce Department and Federal Trade Commission held an all-day workshop examining the legal and ethical implications of online profiling. Several public interest groups say they will file a complaint asking the FTC to stop DoubleClick's new Abacus Online Alliance, a service that tracks consumers not just by anonymous digital dog tags called "cookies," but also by name, street address and purchasing habits. The issue is expected to come up at the first meeting of the FTC's Advisory Committee on Online Access and Security. DoubleClick executives reacted swiftly to accusations that its marketing techniques invade people's privacy. Senior vice president Jonathan Shapiro says his company has only one goal in recording which Web pages and Net ads consumers see. "This is about getting the right ad to the right person at the right time," he says. "It's important for users to understand that the only time DoubleClick will actually have personally identifiable information attached to a browser is when the user has volunteered (it) and been given notice and choice." In fact, Shapiro adds, only "a dozen or so" sites out of the 11,500 to which DoubleClick sends advertising are actually tracking users. At the same time, DoubleClick executives acknowledge they hope that as many clients as possible will sign up. Says Privacy Journal publisher Robert Smith: "This is doublespeak from DoubleClick." He objects to the company's definition of "notice and choice." Affiliate sites that help DoubleClick identify surfers by name must post a written notice explaining how the tracking works, Shapiro says. They also must explain that the information will be used to target ads to them, based on their purchasing habits and visits to any of the other DoubleClick sites, he says. In most cases, Shapiro adds, advertisers will post that notice in the very place people hand out their personal information -- at an online order form or registration page, for instance. Shapiro points to DoubleClick's NetDeals.com contest site as an example. What irks DoubleClick's critics is that consumers may be tracked even if they don't see the notices. "The policy has everything that's not of interest to people and nothing that is," Smith says. Consumers concerned about privacy would like DoubleClick and its NetDeals site to tell them that they won't pass that information to others, Smith says. Indeed, DoubleClick's policy says the information won't be shared. Yet the NetDeals site says nothing about how that information might be shared in the future, Smith says. He's further troubled by these words in NetDeals' privacy notice: "We may change this Privacy Policy from time to time. If we do, we will post any changes, so check back here periodically." Smith says that is not enough. "They have undertaken a contract with the customer. . . . They can't change it without actively notifying the customer." There are still more hurdles for the company. Staffers in the office of Sen. Robert Torricelli, D-N.J., say their boss will introduce legislation that would require companies that use cookies to get consumers' explicit consent before tracking their movements. As has been reported in the CAR, a California woman has filed suit against DoubleClick on behalf of consumers who are now being tracked by name and address. The suit charges that DoubleClick's previous statements suggested the company would not track consumers. DoubleClick's Shapiro declined to comment on the suit directly, referring instead to his company's statement regarding the class action. "DoubleClick is absolutely committed to protecting the privacy of all Internet users, and to providing consumers with notice and choice," officials wrote after the suit was filed. (USA Today, February 2, 2000) FEN-PHEN: AHP Seeks to Block Chairman's Testimony ------------------------------------------------- (159 N.J.L.J. 389) Buoyed by a Texas court precedent limiting the testimony that plaintiffs can elicit from chairmen of a corporation they sue, American Home Products is trying to close the door on the remaining litigation over its diet drug fen-phen. The Madison, N.J.-based company succeeded in blocking temporarily the depositions of chairman and CEO Jack Stafford and Dr. Bruce Burlington, AHP's Food and Drug Administration expert, which were scheduled for January 25 in Kerr v. Wyeth-Ayerst Laboratories, 98-07-02570E, a suit on behalf of two Houston women, Berle Dee Kerr and Dora Barton, who claim to have developed valvular heart disorders from using the diet drug. Trial has been set for March before District Court Judge Frederick Edwards, in Conroe, Texas. The depositions were to have taken place in Madison but on January 25, an appellate court in Beaumont, Texas, stayed the depositions while it reviewed a mandamus action filed by AHP's attorney, who argues that the scope of the deposition of Stafford is too broad. On Jan. 19, the Texas Supreme Court held, in In re Alcatel USA Inc., No. 98-1243, that depositions from a corporate chairman could not be taken unless the chairman had "unique or superior knowledge that was unavailable through less intrusive means." In that case, the plaintiff sought to depose Samsung Electronics Co.'s present chairman and a former chairman about Samsung's alleged attempt to steal trade secrets. AHP's lawyer, Paul Stallings, a partner with Houston's Benson & Elkins, argues that Stafford does not have the unique or superior knowledge that Alcatel requires. "These attorneys have tried fen-phen cases before and they have tried them in Houston. Mr. Stafford has never been called," Stallings says. "Suddenly now, they want to plow over old ground with the CEO of the company." But the plaintiffs' lawyer in Kerr, George Fleming, says that Stafford, who has been the chairman of AHP since 1986, "has knowledge that is important to getting to the truth of the case. "Rather than try to hide the truth as to why he continued to sell a dangerous drug when his company knew it was causing injury, we believe Mr. Stafford should take responsibility and answer the questions of fen-phen victims," says Fleming, a partner with Houston's Fleming & Associates. The pharmaceutical company manufactured Redux and Pondimin, half of the diet drug combination fen-phen, which were removed from the market in 1997 when it was revealed they caused valvular heart disease and pulmonary hypertension. Last October, AHP agreed to a $4.85 billion national settlement of the claims of 5.8 million former users of the diet drug. But some unhappy plaintiffs opted out of the settlement and brought individual claims. Peter Bleakley, a partner with Washington, D.C.'s Arnold & Porter who represented AHP in the New Jersey class-action suit, Vadino v. American Home Products, MID-L-425, says if judges allowed chairmen like Stafford to be deposed in these situations, it could open them up to many depositions down the road. "It is a matter of deciding when the door has to be closed," Bleakley says. "For attorneys to be permitted to depose chairmen in these cases could really open the door for them to be questioned in every products liability suit to find out if they put profits ahead of safety." Stafford has never given testimony in a fen-phen case, but the company lost two other recent suits in which he did testify. One was Perez v. Wyeth Laboratories Inc., A-16-98, in which New Jersey's Supreme Court held that Wyeth Laboratories, a division of AHP, can be sued because a massive advertising campaign in the early 1990s failed to warn women of any dangers or side effects associated with the Norplant contraceptive. In October 1999 he testified in an age discrimination case, Jablonski v. American Home Products, MRS-L-1916, in Morris County. There, a 70-year-old former AHP executive was awarded $1.91 million by a jury who found he was fired because of his age. The Madison company dealt with other fen-phen-related problems as a former marketing partner, Interneuron Pharmaceuticals Inc. of Lexington, Mass., sued AHP for withholding data on the potential health risks linked to fen- phen. Like AHP, Interneuron, which had licensed Redux to AHP before Pondimin was recalled in 1997, has also been sued by former fen-phen users. Interneuron's attorney is David Boies, a partner with Boies, Schiller & Flexner of Armonk, N.Y., who represented the federal government in its antitrust suit against Microsoft Corp. (New Jersey Law Journal January 31, 2000) HMO: Aetna Is Restating Earnings for 7 Quarters at SEC’s Request ---------------------------------------------------------------- Aetna, the nation's biggest health insurer, said that it was restating earnings for seven quarters of 1998 and 1999 at the request of the Securities and Exchange Commission. But the commission evidently did not object to accounting arrangements that softened the impact on earnings after Aetna bought Prudential Healthcare last summer. Analysts said the announcement lifted one of several clouds that had depressed Aetna stock, which has declined almost 40 percent the last 12 months. On the New York Stock Exchange, Aetna rose $3.375, or more than 6 percent, to $56.625 on the day the announcement was made. After reviewing a string of acquisitions and sales by Aetna since 1996, the S.E.C. asked the company to change its accounting for the 1997 sale of its mental health managed care unit to Magellan Health Services. The change will reduce after-tax earnings this year by $39 million, or about 25 cents a share -- about 4 percent of projected earnings per share. "This removes one cloud, but there are others," said Joseph A. France, an analyst at Credit Suisse First Boston. Analysts said they were still waiting for signs of a turnaround at the Prudential Healthcare unit, which was expected to lose $175 million in 1999, according to a company projection last fall. Joyce Oberdorf, a spokeswoman for Aetna, said she could not disclose the latest Prudential results before the company reported fourth-quarter earnings on February 8. Aetna is also facing uncertainty over the eventual outcome of several dozen lawsuits that have been filed by customers, doctors and lawyers who specialize in class-action suits.The company said it had agreed to restate earnings for 1998 and the first three quarters of 1999 to reflect a change in accounting for the sale of its Human Affairs International unit to Magellan. Magellan agreed to pay up to $60 million annually for five years to Aetna, if additional customers were shifted to the Human Affairs unit at Magellan. Aetna was booking the $300 million total as operating revenues but government regulators said it should be recognized as a capital gain. Aetna said net income would be reduced by approximately $10 million, or 7 cents a share, in the first and second quarters of 1999, and increased $30 million, or 20 cents a share, in the third quarter. "There was no impact on total net income in 1998," the company said. "The S.E.C. didn't find much of a problem in the way the Prudential deal was being accounted for," said James A. Lane, an analyst at Salomon Smith Barney. When the Prudential Insurance Company of America sold its health care unit, the parent agreed to reinsure Aetna against certain expected future losses. Prudential also paid Aetna $262 million in administrative fees to compensate for money-losing contracts with a number of self-insured employers. Aetna booked the premiums on the reinsurance as expenses, rather than as a reduction in the $1 billion purchase price for Prudential Healthcare. It reported the fees as operating income. The S.E.C. has required only minor changes in the accounting related to Prudential, including an increase in some operating earnings in the third quarter of 1999 and a decrease in the fourth quarter, the company said. "These changes are not projected to be material to the company's future results," it added. Analysts said the company was also relieved that the S.E.C. had not required it to shorten the amortization period for good will it had booked after its $8.9 billion purchase of U.S. Healthcare in 1996. Doing so would have reduced annual earnings. "It is disquieting to have a company restate numbers, but this was by no means the worst-case scenario," said Roberta Walter Goodman, an analyst at Merrill Lynch. She added that it would be difficult to assess any progress in turning around Prudential Healthcare before the first quarter of next year after Aetna's special arrangements with Prudential Life end on Dec. 31. Even then, analysts will lack solid comparisons with the earlier performance of the Prudential unit. Its results were buried in the reporting of its parent, Prudential Life, a mutual insurance company that is not bound by the same rules as publicly traded companies. (The New York Times, February 2, 2000) LOPEZ, BIZKIT: Sued by Middle-Aged Rockers for "Making Rock Suck" ----------------------------------------------------------------- Keith Richards, Chrissie Hynde and surviving original members of the Red Hot Chili Peppers announced on February 2 that they were filing a class action on behalf of all middle-aged rockers against Jennifer Lopez and Limp Bizkit for "making rock suck." Rumors of the lawsuit had circulated for months since Limp Bizkit's performance at Woodstock III, which was widely blamed for the riot following the music festival. The group was later involved in a staged brawl between Extreme Championship Wrestler Axl Rotten and his nemesis Steve Corino, after Corino expressed a musical preference for Carly Simon and the Bee Gees. "Phony rock bad boys are giving us real bad boys a bad name," said Richards before nodding off. The addition of Jennifer Lopez as a defendant was unexpected and led to a tumultuous impromptu press conference late in the day. "This is just more ageist drivel from jealous, over-the-hill, boomer losers," screamed the actress/chanteuse to reporters shortly before her boyfriend and producer Sean "Puffy" Combs shot a process server who was attempting to serve the action. (The Recorder, February 2, 2000) MONARCH DENTAL: Announces Agreement to Settle Securities Lawsuit ---------------------------------------------------------------- Monarch Dental Corporation (Nasdaq: MDDS) announced on February 2 that it has reached an agreement to settle the securities action brought against the Company by a proposed class of shareholders relating to certain alleged acts and omissions in The settlement, which is subject to final documentation and Court approval, does not reflect any admission of liability by the Company and there has been no finding of any violation of the federal securities laws. Monarch has agreed to pay an aggregate of $3.5 million in settlement of all claims in the litigation. The settlement will be fully funded by the Company's insurance policies. As a result, the Company does not expect the settlement to have an adverse impact on the Company's cash flow. Monarch Dental currently manages 193 dental offices serving 20 markets in 14 states. The Company seeks to build geographically dense networks of dental providers primarily by expanding within its existing markets, but also by selectively entering new markets through acquisitions. QUALITY DINING: Emerges from Securities Lawsuit Filed in Indiana------- --------------------------------------------------------- Quality Dining Inc. reports that certain of its executive officers were defendants with the Company in a class action lawsuit filed in the United States District Court for the Northern District of Indiana. The complaint alleged, among other things, that the defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder by failing to disclose various matters in connection with the Company's acquisition, development, financing and disposition of its bagel-related businesses. The putative class period in such action was from June 7, 1996 to May 13, 1997 on which dates the price of the Company's common stock closed at $34.25 and $6.56, respectively. The plaintiffs were seeking, among other things, an award of unspecified compensatory damages, interest, costs and attorney's fees. The Company filed a motion to dismiss the complaint which was granted by the Court on September 28, 1999. The plaintiffs have not filed an appeal and the period for filing an appeal has expired. RAVENSWOOD ELEMENTARY: Settlement Ends 3 Year ADA Case Re CA Students --------------------------------------------------------------------- A federal judge ended a three-year class action suit filed in 1996 against the Ravenswood Elementary School District on behalf of the district's students with disabilities. "This settlement offers the district an unequalled opportunity to create a state-of-the-art service delivery system that can be a model for other districts in California and the country," said Diane Lipton, attorney with the Disability Rights Education and Defense Fund. "There are hundreds, if not thousands of East Palo Altos around the country. Hopefully they are taking notice of this case. Monitoring compliance is extremely lax throughout this state and elsewhere." Lipton, along with Bill Koski of the East Palo Alto Community Law Project and Rony Sagy of Sagy Law Associates filed the case in 1996 on behalf of eight students and others similarly situated charging Ravenswood with violations under IDEA and other federal statutes. (See Emma C. v. Delaine Eastin, et al, 27 IDELR 141, (N.D. Calif. 1997).) The settlement calls for: * A court-appointed monitor to oversee implementation of Ravens-wood's detailed corrective action plan. * Building a coordinated special and regular education system. * Substantial funds for consultation with national experts in literacy. * Bilingual assessments. * Instructional strategies. * Inclusion. * Unlimited funds for compensatory education for students previously denied services. * The district serves the predominately poor African-American, Latino and Pacific-Islander communities of East Palo Alto and Eastern Menlo Park. Settlement with CDE The settlement terms with the California Department of Education has "significant ramifications nationally," according to a statement released by DREDF. In response to this case and pressure from the U.S. Department of Education, CDE is revising its monitoring and enforcement system. "We hope that this case will raise the standard for statewide monitoring of school districts as legally require," said Sagy. "Hopefully this settlement will encourage cooperation between the district, parents and the entire educational community, a crucial step in developing an effective educational system for all children in East Palo Alto." (California Special Education Alert, January 25, 2000) SHIGELLA OUTBREAK: Marler Clark Sues Senior Felix Gourmet Mexican Foods ----------------------------------------------------------------------- A class action lawsuit was filed on February 3 in King County Superior Court against Senor Felix Gourmet Mexican Foods, a California Corporation implicated in the recent Shigella outbreak. The named plaintiffs are Larissa Spafford, Robert B. Spafford, and their two-year-old son, Jasper, of Port Townsend, Washington. Ms. Spafford purchased the dip at a Port Townsend QFC. Both she and her son became ill. According to William Marler, a partner at Marler Clark, the attorneys for the class action, "Ms. Spafford's and her son's symptoms were relatively mild, although they included diarrhea, fever, and stomach cramps. They were very fortunate not to have suffered more severe injury." The Washington State Department of Health has confirmed that at least 30 people in Washington have shown symptoms of shigellosis. Dozens more were sickened in Oregon and California. This number is expected to rise over the next few weeks. Marcia Goldloft, Medical Epidemiologist with the Washington State Department of Health, said, "Shigellosis can be very serious and is highly contagious. People who think they might have been infected should pay close attention to hygiene. Carefully washing your hands could prevent getting a family member sick." This dip was sold under several names, including the above, Trader Joe's 5 Layer Fiesta Dip, and Delicioso 5 Layer Fiesta Dip. It was sold in jars and on seven-inch trays, with a distinctly layered appearance. The list of retailers that carried this product includes the following: Costco, Trader Joe's, Puget Consumers Co-op (PCC), and SAM'S Club. It was also distributed to QFC, Thriftway, Red Apple Markets, Zupan's, and Homegrocer.com, as well as other individual retailers. What is Shigella? The Shigella germ is a family of enteric bacteria that can cause diarrhea in humans. They are microscopic living organisms that thrive in human intestines and are spread through person to person contact. Shigella were discovered over 100 years ago by Japanese scientist Kiyoshi Shiga, for whom they are named. Shigellosis, also known as bacillary dysentery, is the infectious disease caused by the Shigella bacteria. Most who are infected with Shigella develop diarrhea, fever, and stomach cramps starting a day or two after exposure. The diarrhea is often bloody. Shigellosis usually resolves in 5 to 7 days. In some persons, especially young children and the elderly, the diarrhea can be so severe that the patient needs to be hospitalized. A severe infection with high fever may also be associated with seizures in children less than 2 years old. Some persons who are infected may have no symptoms at all, but may be carriers, and still pass the Shigella bacteria to others. Where Does Shigella Come from? The organism is frequently found in water polluted with human feces. Salads (potato, tuna, shrimp, macaroni, and chicken), raw vegetables, dairy products, and poultry are foods commonly listed as sources of Shigella. Contamination of these foods is usually through the fecal-oral route. Therefore, water polluted with human feces and unsanitary handling by food handlers are the most common causes of contamination. An estimated 300,000 cases of shigellosis occur annually in the U.S. and Shigella infections cause an estimated 600,000 deaths per year worldwide. The number of infections attributable to contaminated food is unknown, but as it takes very little Shigella to cause infection, it's probably substantial. Most of these deaths occur in developing countries with poor hygiene and unsafe water supplies. What Are the Typical Symptoms of Shigella? Symptoms include abdominal pain, cramps, diarrhea, fever, vomiting, blood, pus, or mucus in stools, and painful rectal spasms. These symptoms normally manifest one to two days after ingestion. Persons with diarrhea usually recover completely, although it may be several months before their bowel habits are entirely normal. About 3% of persons who are infected with one type of Shigella, Shigella flexneri, will later develop pains in their joints, irritation of the eyes, and painful urination. This is called Reiter's Syndrome. It can last for months or years, and can lead to chronic arthritis and is difficult to treat. Reiter's Syndrome is caused by a reaction to Shigella infection that happens only in people who are genetically predisposed to it. Other long-term health risks include reactive arthritis and hemolytic uremic syndrome (HUS). Infants, the elderly, and those with weakened immune systems are susceptible to the severest symptoms of disease, but all humans are susceptible to some degree. Shigellosis is a very common illness suffered by those with acquired immune deficiency syndrome (AIDS) and other immuno-compromised individuals. How Can a Shigella Infection Be Prevented? Basic food safety precautions prevents shigellosis. Shigella organisms are generally considered fragile and can be killed by heat used in processing or cooking. They do not survive well in acidic foods. People who have shigellosis should not prepare food or pour water for others until they have been shown to no longer be carrying the bacterium. The spread of Shigella from an infected person can be stopped by frequent and careful hand washing with soap and warm water. Additionally, supervised hand washing of all children should be followed in day care centers and in homes with children who are not completely toilet-trained, including children in diapers. When possible, young children with a Shigella infection who are still in diapers should not be in contact with uninfected children. If a child in diapers has shigellosis, everyone who changes the child's diapers should be sure the diapers are disposed of properly in a closed-lid garbage can, and should wash his or her hands carefully with soap and warm water immediately after changing the diapers. After use, the diaper changing area should be wiped down with disinfectant, such as household bleach or bactericidal wipes. Marler Clark has been involved in hundreds of cases involving food-borne illness. These have included the 1993 Jack in the Box E. coli outbreak; the 1996 Odwalla E. coli outbreak; the 1998 Malt-O-Meal Salmonella outbreak; the 1998 Finley School District E. coli outbreak in the Tri-cities, Washington; the 1999 Golden Corral E. coli outbreak in Kearney, Nebraska; the 1999 Sun Orchard Orange Juice Salmonella outbreak in several Western states; and, the 1999 Subway Hepatitis A outbreak in King County. For information and/or a copy of the complaint, please call Julie Stormes at 206/346-1888. Contact: Marler Clark Julie Stormes, 206/346-1888 (The Toronto Star, February 3, 2000) SYKES ENTERPRISES: Burt & Pucillo Files Securities Lawsuit in FL ---------------------------------------------------------------- Burt & Pucillo, LLP filed a securities class action lawsuit on February 1, 2000 in the United States District Court for the Middle District of Florida on behalf of a class of persons who purchased the common stock of Sykes Enterprises, Inc. during the period from April 26, 1999 through January 31, 2000. The complaint alleges that Sykes and key members of management violated the Securities Exchange Act of 1934 and Rule 10(b)(5) by issuing materially false and misleading information concerning Sykes' reported results of operations during 1999. The complaint alleges that Sykes has failed to comply with GAAP with respect to 1999 financial reporting. The Company's stock price fell to a 52- week low of $18.56 after the disclosure that year end results will be delayed due to questions raised by the Company's auditors. For more information on the above mentioned lawsuit, please contact plaintiff's counsel, Michael J. Pucillo at Burt & Pucillo, at 561/835-9400 or 800/349-4612 or law@burt-pucillo.com via e-mail. SYKES ENTERPRISES: Cohen, Milstein Files Securities Lawsuit in FL ----------------------------------------------------------------- Cohen, Milstein, Hausfeld & Toll, P.L.L.C filed a class action lawsuit on February 2, 2000 in the United States District Court for the Middle District of Florida on behalf of all persons who purchased the common stock of Sykes Enterprises, Inc. during the period of April 26, 1999 and Jan. 31, 2000, inclusive. The complaint charges Sykes and certain of its senior officers and directors with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by, among other things, misrepresenting and/or omitting material information. The Complaint charges that Sykes misled investors concerning its expected fourth quarter 1999 and year end results and that Sykes' financial statements were not prepared in accordance with Generally Accepted Accounting Principles. Contact: Daniel S. Sommers by e-mail at dsommers@cmht.com or Robert Smits at rsmits@cmht.com both of Cohen, Milstein, Hausfeld & Toll, P.L.L.C 1100 New York Avenue, N.W., Suite 500 - West Tower, Washington, D.C. 20005, telepheone: 888/240-0775 or 202/408-4600. SYKES ENTERPRISES: Milberg Weiss Files Securities Lawsuit in FL --------------------------------------------------------------- Milberg Weiss Bershad Hynes & Lerach LLP commenced a class action lawsuit in the United States District Court for the Middle District of Florida, Tampa Division, on behalf of all persons who purchased the common stock of Sykes Enterprises, Inc. between October 25, 1999, and January 31, 2000, inclusive. The complaint charges Sykes and certain of its senior officers and directors with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaint alleges that defendants issued a series of materially false and misleading statements concerning the Company's financial condition, revenues and earnings. The complaint further alleges that on February 1, 2000, the Company announced that it would be forced to delay the release of fourth quarter earnings because its audit was "incomplete." In response, the stock fell nearly 33% on unusually large trading volumes of over 11,000,000. For additional information on this matter, please contact, Milberg Weiss Bershad Hynes & Lerach in Boca Raton: Kenneth Vianale or Maya Saxena at 5355 Town Center Road, Suite 900, Boca Raton, Florida 33486, by telephone (561) 361-500, or in New York: Steven G. Schulman or Samuel H. Rudman at One Pennsylvania Plaza, 49th Floor, New York, New York 10119-0165, by telephone 1-800-320-5081 or via e- mail: endfraud@mwbhlny.com or visit website at http://www.milberg.com SYKES ENTERPRISES: Schiffrin & Barroway Files Securities Suit in FL ------------------------------------------------------------------- Schiffrin & Barroway, LLP filed a class action lawsuit in the United States District Court for the Middle District of Florida on behalf of all purchasers of the common stock of Sykes Enterprises from April 26, 1999 through January 31, 2000, inclusive. The complaint charges Sykes Enterprise and certain of its officers and directors with issuing false and misleading financial statements concerning the Company's revenues and earnings. For additional information concerning this lawsuit, please contact Schiffrin & Barroway, LLP (Stuart L. Berman, Esq.) toll free at 1- 888-299-7706 or 1-610-667-7706, or via e-mail at info@sbclasslaw.com SYKES ENTERPRISES: Shepherd & Geller Files Securities Lawsuit in FL ------------------------------------------------------------------- The Law Firm of Shepherd & Geller, LLC filed a class action lawsuit in the United States District Court for the Middle District of Florida on behalf of all individuals and institutional investors that purchased the common stock of Sykes Enterprises, Inc. between April 26, 1999 and January 31, 2000, inclusive. The complaint charges that the Company and certain of its officers violated the federal securities laws by providing materially false and misleading information about the Company's financial condition. As a result of these false and misleading statements the Company's stock traded at artificially inflated prices during the class period. When the truth about the Company was revealed, the price of the stock dropped significantly. For more details on the above mentioned lawsuit, please contact Jonathan M. Stein of SHEPHERD & GELLER, LLC 7200 West Camino Real, Suite 203 Boca Raton, FL 33433 (561) 750-3000, Toll Free: 1-888-262- 3131, E-mail: jstein@classactioncounsel.com or visit website at http://www.classactioncounsel.com THE LEVIGNES: Owners Of Mortuary Services To Face Trial Over Embalmings ----------------------------------------------------------------------- A Texas appeals court ruled the owners of Mortuary Services Company, Mary Levigne and the estate of Robert Levigne, should face a civil trial on charges of improperly embalming human remains. They're charged with transferring remains without authorization to the Pierce Mortuary Colleges Inc., also doing business as the Dallas Institute of Funeral Service. The remains were taken there to be embalmed for training purposes. In 1991, Frederick Bjerke filed a class action suit on behalf of the survivors of loved ones improperly embalmed from 1985 to 1991. He originally sued Pierce, the Lavignes, Dudley Hughes, the Dudley M. Hughes Funeral Company Inc. and subsidiaries. Everyone but the Lavignes filed for bankruptcy and were dismissed from the lawsuit. A lower court dismissed Bjerke's claims and he appealed. The Lavignes were accused of transporting bodies to the Dallas Institute without the families' permission. But the Lavignes said they didn't have any record of transporting the remains of any of the families in this case, so they should not be liable. The Institute acknowledged its records indicate some remains might have been transferred to them by the Lavignes' company. Mary Lavigne admitted as much, but said there was no proof they were the remains of the plaintiffs' family members. The court said Mary Lavigne failed to prove they were not and further ruled that the claims of one set of wronged persons in a class action suit represent all wronged persons, even if they are not present in the specific case. Mary Lavigne said the court abused its discretion by including the remains of any decedent, named or unnamed, in the class action. The court disagreed, saying the matter should be settled at trial. (Frederick Bjerke et al. v. Dudley M. Hughes et al., Texas Ct. App., No. 05-96-00613-CV, 12/30/99.) (Death Care Business Advisor, January 31, 2000) TOBACCO LITIGATION: Industry to Continue Fight to Overturn FL Gag Order ----------------------------------------------------------------------- Facing an upcoming verdict for damages that could reach hundreds of billions of dollars, Big Tobacco wants to assure it can speak out -- before Wall Street does. Industry attorneys and executives, battling a class action suit brought by three sick Floridians, have been muzzled by a gag order that prevents them from talking to anyone -- including their own stockholders -- about the case. If they don't get their message out, they told Circuit Judge Robert Kaye in Miami, the decision could affect stock prices, interest rates on loans and hiring. "We're going to be ... at an enormous disadvantage with some enormous legal problems,'"' Dan Webb, attorney for Philip Morris, argued Tuesday, February 1. "These are publicly held companies. Any, for example, erroneous or misleading reporting that could affect the stock price, we are supposed to have an obligation to go out and correct that immediately. "The impact -- it can be incredible.'"' Kaye turned them down, and attorneys for Big Tobacco, which also argued the gag order is too broad and unconstitutional, said they plan to appeal. The plaintiffs' lawyers want the order to stay in place. The judge imposed it after being concerned a pretrial news conference could affect the fairness of the trial. One defendant, Philip Morris, already has found a way to spread its message and persuade jurors -- through a Web site that debuted in October, plaintiffs' attorney Stanley Rosenblatt argued on February 1. He asked to have the Web site shut down this fall, arguing the company tried to influence the case via the Internet by openly admitting that smoking causes fatal diseases so the jury wouldn't punish tobacco companies as harshly for past lies. Lifting the gag order would encourage "professional spin doctors'"' to distort the verdict, Rosenblatt said. "There's just all kinds of opportunity for mischief,'"' Rosenblatt told the court on February 1. The attorney is suing on behalf of ill smokers around the state, asking for $ 200 billion in damages that could ultimately be dispersed among 500,000 Floridians. The jury is now deciding compensatory damages for the three named plaintiffs. If jurors award damages, they will go on to decide punitive damages for the entire class. The defendants are: R.J. Reynolds Tobacco, Philip Morris, Brown & Williamson Tobacco, Lorillard Tobacco, Liggett Group, the Council for Tobacco Research and the Tobacco Institute. Some Wall Street analysts said that even though they believe the companies will win on appeal, Big Tobacco has reason to worry about the upcoming judgment. "This specific case has had a major impact on all the tobacco stocks,'"' said Bonnie Herzog, tobacco analyst at Credit Suisse First Boston. Though tobacco stocks barely flinched the day the verdict was announced, they declined after an appeals court ruled in September that punitive damages would be distributed in a lump sum. That means the companies, if the jury rules against them, would have to pay all at once, or post a bond at the end of the trial -- which worries investors, Herzog said. Philip Morris, the world's top cigarette maker, was selling shares at about $ 37 each in September, she said. The gag order, however, may have little effect, she said. "The market is going to do what it's going to do,'"' she said. David Adelman, a tobacco analyst with Morgan Stanley Dean Witter disagrees. "I don't think the stock prices would be as depressed as they are now if they weren't under a gag order,'"' Adelman said. "If they could communicate freely there would be more balance to the public perception of the case. You can talk to antitobacco activists if you want, and they make themselves very available. But there is no one out there backing the industry. It's an unbalanced assessment.'"' In these cases, the court must decide whether publicity would corrupt jurors, said Clark Freshman, University of Miami law professor. "The courts usually err on their own side, even if it hurts stock prices,'"' Freshman said. "It's more important to have justice than to have stock prices be protected.'"' (The Miami Herald, February 3, 2000) TOBACCO LITIGATION: Smokers Testify Posthumously Wrapping up Case ----------------------------------------------------------------- Surgery for lung cancer and radiation on a brain tumor left Angie Della Vecchia constantly tired and sick, but she was optimistic she would rally. "I'm mostly in bed all day. I'm tired and vomiting, but I'm hoping that when the treatment is way behind me that I might come back," the New Port Richey housewife testified on Nov. 9, 1998, when she was deposed for a massive lawsuit against Big Tobacco. Seven months later she was dead. On Wednesday, February 2, as the deposition was played in Miami-Dade Circuit Court to the jurors hearing the statewide class action lawsuit against cigarette makers, Della Vecchia's husband, daughter and son wept as they saw her face and heard her voice one more time. When her two-hour video deposition ended, so did the testimony and evidence presented by Stanley Rosenblatt, the lawyer representing more than 500,000 sick Florida smokers and their families. Della Vecchia is the third and final smoker whose life story is being used to represent all class members in the unprecedented trial. On February 7, lawyers for five tobacco companies and two industry organizations could begin calling witnesses and trying to persuade the jury that the nation's five biggest cigarette makers should not be punished for the illness and suffering of the class members. The same jury decided last year that Big Tobacco produces an addictive product that causes emphysema, lung cancer and other illnesses, and lied to the public about its risk. And lawyers for tobacco interests have said they are worried that a lump-sum award for the smokers could be as much as $ 300 billion, potentially crippling the industry. In a calm and steady voice and often smiling, Della Vecchia testified that she started smoking when she was 11, after other children at her bus stop offered her cigarettes. By the time she was 12, she was smoking about 10 cigarettes a day, she said. She would practice in the mirror, blowing perfect smoke rings. "When I started smoking I didn't know anything. I didn't know they were bad for you, that's for sure," she said. "I just saw everyone doing it, and they seemed to be enjoying it, so I did it, too." She recalled television advertisements and how people in them appeared glamorous and seemed to like the taste. In the late 1970s, Della Vecchia and her husband discussed how smoking was bad for their health and decided to quit. Only her husband, Ralph, was successful. A February 1997 visit to the doctor for a sore throat and hoarseness led to her diagnosis of lung cancer. She underwent surgery the following month. But by May of that year, she was smoking again. A tobacco company attorney asked her why she once said her attempts at quitting were "a joke." "It's a figure of speech," she said. "I tried maybe for a couple of hours, and then I lit up." Della Vecchia said she tried the nicotine patch but would take it off at the end of the day and have a cigarette. She tried drugs but had an allergic reaction. "Every day the desire to smoke, it's just there," she said. "It's always on your mind when you smoked as long as I did." By August 1998, she was back up to two packs a day. Then she had a seizure while driving and was diagnosed with a brain tumor. Della Vecchia's husband signed her up as a member of the class-action lawsuit, she said. However, she agreed with a tobacco attorney that people should be held accountable for their own actions. Rosenblatt said her medical treatment cost about $ 162,000; her funeral cost another $ 7,000. And in documents presented to the jury, Rosenblatt showed that Mary Farnan, another of the smoker representatives, has racked up $ 239,000 in medical bills battling lung and brain cancer. Frank Amodeo, the third smoker representative, has accumulated more than $ 43,000 in bills for throat cancer treatment. The six-member jury must award compensatory damages to Della Vecchia, Farnan or Amodeo before it can get to the question of punitive damages. The industry was expected to argue motions for directed verdicts in favor of the defense on Friday, February 4 and to begin its case Monday, February 7, if the judge rules against them. The defendants are: R.J. Reynolds Tobacco Co., Philip Morris Inc., Brown & Williamson Tobacco Corp., Lorillard Tobacco Co., Liggett Group Inc., the Council for Tobacco Research and the Tobacco Institute. Terri Somers can be reached at tsomers@sun-sentinel.com or 954-356-4849. (Sun-Sentinel (Fort Lauderdale, FL), February 3, 2000) z Consequences of Legal Actions: Tax and Attorney’s Fees -------------------------------------------------------- Taxpayers who commence legal actions do so to redress wrongs. Tax consequences of recoveries and the payment of attorney's fees are only secondary considerations. However, these tax aspects cannot be ignored. Certain recent developments relate to the tax aspects of legal actions. There has also been an important development affecting the reporting of payments to attorneys. Ordinary Income Treatment When a taxpayer successfully concludes an action by decision or settlement, the tax treatment of the recovery affects the after-tax amount to be realized. In one recent case, a taxpayer tried unsuccessfully to classify the recovery as a capital gain that would have been taxable at more favorable tax rates than ordinary income (Nahey, CA-7, Nov. 17, 1999). In the case, one corporation sued another corporation for fraud, breach of contract and lost profits that resulted when the computer system it purchased failed to satisfy its data processing requirements. The plaintiff sought damages of more than $ 5 million. During the pendency of the action, the majority shareholder sold his shares to another shareholder. In the allocation of the purchase price to various assets, no value was assigned to the suit because its value was just too speculative. More than six years after the sale, the suit was settled for $ 6 million. If the original plaintiff had recovered the settlement, it would have been taxed as ordinary income because the settlement replaced the corporation's lost income. However, the taxpayer who bought the shares from the majority stockholder to acquire the company argued that capital- gain treatment should result. He reasoned that the origin of the claim was the acquisition of the business. The court rejected the taxpayer's argument. In its view, the sale of the business was only an intermediary step and not the origin of the claim of the suit that gave rise to the recovery. The court distinguished the situation from one in which a legal claim is sold. In such a case, a recovery can be treated as a capital gain. Here, however, the taxpayer saw the case through to settlement. There was simply no logical reason why a mere change in ownership should transform the tax treatment of the recovery in this case. Recovering Attorneys' Fees Taxpayers who prevail against the Internal Revenue Service can recover attorneys' fees if the government's position was not substantially justified and certain other requirements are met. Under the IRS Restructuring and Reform Act of 1998, the authority to award attorneys' fees in tax actions has been expanded. The time from which fees can be awarded has been moved up to the earliest of (1) the date the taxpayer receives the notice of decision from the IRS Appeals Division, (2) the date of the notice of deficiency, or (3) the date of the first letter of proposed deficiency that allows an opportunity for administrative review. The hourly award has been increased to $ 125 an hour (indexed for inflation). For 2000, this has been adjusted to $ 140 an hour. In determining whether the IRS position was substantially justified, the court can take into account whether the government won or lost in an appellate court on a similar issue. Fees can be awarded where a taxpayer makes a qualified offer following administrative review that the IRS rejects, if the government obtains a judgment that is equal to or less than the taxpayer's offer. Delay in Attorney Reporting Rules The Taxpayer Relief Act of 1997 included a new rule requiring businesses to report payments made to attorneys for legal services as well as amounts paid to attorneys for nonlegal services as long as those services are attorney-supervised. Thus, reporting can apply to payments to attorneys with respect to accounting, financial, or property management. Proposed regulations had been set to take effect after Dec. 31, 1999 (Prop. Reg. P 1.6045-5). However, the IRS has delayed the effective date of the regulations for one year (Notice 99-53, IRB 1999-46, 574). The proposed regulations require that all payments to attorneys made in the course of a trade or business must be reported on Form 1099-MISC. There is no dollar threshold. Thus, while payments to independent contractors need only be reported if they total $ 600 or more, any payments to attorneys - independent contractors or otherwise - must be reported. Reporting must be made by the payor of fees. In many cases, this will be insurance companies who pay attorneys' fees as part of settlements or awards. Payors must report payments to attorneys even if legal services were not provided to them. Insurance companies would also have to report payments to attorneys that are then disbursed to clients. In other words, the reporting of payments to attorneys may not necessarily represent income to the attorneys. Since there is computer matching by the IRS of amounts reported on Form 1099 with amounts reported on taxpayer returns, attorneys should use care to avoid triggering an audit. In settlement or award situations, consider requesting two separate checks from payors (one for attorneys' fees and the other payable to the client). This will limit the 1099 reporting of attorneys' fees to amounts retained by the attorney. Where it is not possible to obtain a separate check, attorneys should report the gross amount appearing on the 1099 as income on their return with a subtraction for disbursements to clients or others. An explanation of the subtraction should be attached to the return. (New York Law Journal, December 20, 1999) z Mortgage Insurance Industry Plans a PR Counterattack ------------------------------------------------------ A newspaper columnist calls their service "one of the crummiest deals around." Lawyers accuse more than half of the industry of making kickbacks. A U.S. senator describes its practices as "unethical." Finally, private mortgage insurers are preparing to fight back. Executives at the top mortgage insurers will not say exactly what they plan to do, but late last year their trade group, the Mortgage Insurance Companies of America, retained Porter Novelli, a prominent consumer public relations firm known for its work with Gillette Co., Procter & Gamble, and anti-tobacco activists. You would think the industry has plenty to brag about. It has played a crucial role in the housing finance system. Without its service, many homeowners would have been unable to buy and the nation's financial institutions -- and arguably the government -- would be at greater risk. Private mortgage insurance protects the holder of a loan in case the homeowner defaults. It is usually required when a homebuyer cannot put down 20%. According to the Mortgage Insurance Companies of America, last year the industry insured $189 billion of new mortgages for about 1.45 million homeowners. Indeed, decades ago the media touted private mortgage insurance as a less expensive and simpler alternative to the government's FHA program and hailed Max Karl, founder of Mortgage Guaranty Insurance Corp. and inventor of modern private mortgage insurance, as a housing hero. Mr. Karl died in 1995. A crucial turning point came in the late 1990s, when it was revealed that some borrowers had been paying monthly insurance premiums long after they had built substantial equity in their homes. An uproar led to legislation mandating automatic cancellation once a borrower's equity reaches a certain level and disclosure to the borrower when and how coverage can be canceled. "The mail would pour in from furious people" who tried to get their policies canceled but couldn't, recalled Jane Bryant Quinn, the well-known personal finance columnist. Critics say the insurers dropped the ball. "They were, for many years, collecting premiums from consumers whom they had every reason to know were not real economic dangers," said Kenneth Harney, a syndicated writer who chronicled the battle over the cancellation bill in The Washington Post. "For years they knew about it and did nothing about it. When it became a public matter, they were very slow to come to the reform party." The insurers "did not step to the fore, grab the problem by the horns, and say, 'Let us straighten this out,' " Mr. Harney said. "Instead, they were content to say: 'We are passive players. We are told by our insured customers when they want to cancel.' " However, he added, after being "dragged to the table" the insurers "were ultimately involved in the final fine-tuning" of the cancellation bill, which was passed in 1998 and took effect last year. Ms. Quinn agrees. "When the uproar did start and the issue was in Congress, the insurers were not taking a pro-consumer position. They were very tough on the side of 'We don't need anything,' " she said. "During that period, you didn't get an awful lot of sympathy from the (mortgage insurance) people for what was bothering the consumer." The insurers say they were not to blame, that before the legislation was passed it was the investor's prerogative to decide when a policy could be cancelled and the servicer's job to terminate it. They insist that they supported the cancellation bill from its inception, that they had problems with details of the early drafts but always backed the pro-consumer principles behind it. And they say the publicized estimates of how many homebuyers were overcharged hundreds of thousands, according to some news reports -- were grossly exaggerated. "Out of all that we were portrayed as trying to block the legislation," Mr. Reid said. "in the process the negative impressions occurred with consumers, maybe some Realtors, and the press in general." Frank P. Filipps, chairman of Radian Guaranty in Philadelphia, goes as far to say that the legislation was unnecessary and that Fannie Mae and Freddie Mac, the two largest mortgage investors, could easily have accomplished the same goals without an act of Congress by simply changing their cancellation guidelines. The push for legislation was "a political football," Mr. Filipps said. "It's something that was undertaken in an election year to get press coverage." Indeed, Alfonse D'Amato, who introduced the cancellation bill in the Senate when he was the Banking Committee chairman, attacked the mortgage insurers in the papers. But the cancellation controversy was not the only cause of the mortgage insurers' image woes. Part of the problem stems from the way the service is structured: The consumer pays for it but is not the one covered by the insurance. And the lender, not the consumer, chooses the mortgage insurer. This contrasts sharply with other types of insurance, noted David Graifman, an analyst at Keefe, Bruyette & Woods Inc. For such products as life and auto insurance, the consumer decides whether and how much coverage to buy and can shop around for the best price. But with mortgage insurance, "a lot of people don't realize they need it before they go to the closing table," Mr. Graifman said. "There's no decision to purchase it, no decision about how much to buy." Homebuyers, he said, "probably feel strong-armed by lenders" into buying coverage. The industry enjoyed much more favorable publicity and consumer sentiment in its early days, in part because the companies were forced to be proactive. When Mr. Karl founded MGIC in 1957, mortgage insurance was banned in a dozen states, the legacy of the Great Depression, when collapsing real estate values decimated an earlier generation of mortgage insurers. Mr. Karl traveled around the country, promoting his vision of a more soundly regulated mortgage insurance company and lobbying the states to legalize it. "We had almost a missionary zeal about trying to explain this concept," recalled Leon T. Kendall, who was an officer of MGIC in the 1970s and 1980s. Gerald Friedman, Mr. Karl's nephew and himself a longtime veteran of the mortgage insurance industry, said his uncle and other early leaders were "outspoken advocates of the industry, were on podiums all the time, and were well known." Over the years some mortgage insurers were sold to huge conglomerates like General Electric and American International Group Inc. (United Guaranty's parent), and the industry's focus on promoting the virtues of their product "may have been diminished," Mr. Friedman said. Mr. Reid of United Guaranty insists that he and his contemporaries are just as vigorous about promoting mortgage insurance as their predecessors. He noted that most of the companies have affordable housing initiatives and work with community groups, state housing agencies, or Fannie and Freddie to help low-income families buy homes. "The CEOs dedicate a lot of personal time to doing things that Max Karl did," Mr. Reid said. "If anything, they're even more active." But Mr. Karl's audiences were thrift executives, Realtors, and homebuilders. What the industry arguably lacks today are passionate advocates that speak directly to the consumer. Mr. Kendall, now a finance professor at Northwestern University, said that in Mr. Karl's day the insurers' public image was aided by the savings and loans, which were the chief beneficiaries of the coverage before the rise of the secondary market. The thrifts' loan officers explained and promoted mortgage insurance to the home-buying public, Mr. Kendall said. But the agents that now originate most home loans --mortgage bankers and brokers -- do not hold the loans and therefore have less incentive to endorse it, Mr. Kendall suggested. "When we lost (the S&Ls) we lost our direct line to the consumer." Ironically, the economic boom is another contributing factor to the mortgage insurers' image problem. Though it means the insurers have paid fewer claims than they have in 20 years, it also means that the public has forgotten why it can be worth it to pay premiums. The zeitgeist was expressed in a Philadelphia Inquirer column last year that questioned the need for mortgage insurance: "Foreclosures aren't all that common. And most homes appreciate, so lenders' chances of unloading a foreclosed property for more than the remaining debt are usually pretty good." With such a rosy outlook, it is difficult to imagine that private mortgage insurers paid more than $7 billion of claims in the recession of the late 1980s. The companies absorbed losses that otherwise would have been suffered by banks' and thrifts' insurance funds -- not to mention Fannie and Freddie. "When times are good, everybody thinks these companies are stealing candy from a baby," said Mr. Graifman at Keefe Bruyette. "They forget than in the '80s they were losing loads of money." Perceptions do matter. In recent years the industry has had to contend with competing forms of credit enhancement. There's the "piggyback," or "80/10/10" loan, which combines an 80% first mortgage, with a 10% second mortgage and a 10% down payment. Ms. Quinn said some banks have been marketing piggyback loans to consumers as a better deal than mortgage insurance. "I suspect some of the bad words (about the insurers) are being spread by banks," she said. And a year ago Fannie and Freddie came out with alternative insurance arrangements that allow the homebuyer to purchase less coverage, in exchange for an up-front fee or a higher interest rate -- which the insurers viewed as an incursion on their turf. Mr. Friedman, Max Karl's nephew, is now chairman of FM Watch, a coalition of financial services trade groups formed last year to fight expansion by Fannie and Freddie into business other than buying mortgages -- such as insuring them. When FM Watch made its debut last year, Fannie and Freddie initially depicted the coalition as simply a lobbying group for the mortgage insurers, even though its membership included many other types of companies -- indicating just how unsympathetic consumers have become to mortgage insurers. Kenneth Posner, an analyst at Morgan Stanley Dean Witter & Co., has long argued that consumers' negative dispositions, combined with the threat of competing products, portend slower growth for the mortgage insurance industry. Mr. Posner is not as bearish as he was two years ago, largely because the stocks have become cheaper. "Some of the competitive threats are materializing more slowly than we had expected," he added, noting that Fannie and Freddie's "lowest-cost MI" plans haven't caught on. But the insurers' lack of direct connection to the consumer remains a "challenge" for them, he said. Public sentiment also matters because Congress could pass burdensome legislation, Mr. Friedman said. And a bad-guy image makes the mortgage insurers an easy target for trial lawyers. In December four of the seven companies were served with class actions accusing them of making kickbacks to lenders at the expense of consumers. While legal experts question the merit of these suits, they are at the very least a drain on management time and resources. Sympathetic observers say the Mortgage Insurance Companies of America has kept too low a profile and focused on lobbying rather than on communicating its message to the press and the general public. "In hindsight, Mica probably should have had a national ad campaign or something like that," Mr. Kendall said. The insurers' image problems "started with a couple Congressmen and reporters, and nobody put the fires out." Suzanne Hutchinson, the trade group's executive vice president, noted that last year it sponsored a speaking tour by John Witty, a personal-finance commentator. The group last year also launched a Web site, privateMI.com, which explains the product in clear language. And noting that Fannie Mae's famous television ads cost tens of millions of dollars, Ms. Hutchinson said, "most private corporations don't have the budget to do that." Mortgage insurance companies themselves are reluctant to embark on consumer branding campaigns. "The fact of the matter is that the lender and the investor are our customers," said Curt S. Culver, chairman and chief executive of MGIC. Critics say that line of thinking is at the core of mortgage insurers' public relations problem. "Anyone who does not recognize the centrality of the consumer in today's marketplace will be dead in the water," said David Jeffers, a spokesman for Fannie Mae. Though insurers might protest that theirs is a business-to-business industry, Mr. Jeffers said: "That's irrelevant. Technically speaking, we're a business-to-business enterprise -- probably even more so, because we'll never have any contact directly with the consumer in a transaction. That doesn't preclude us from having to focus, laser-like, on what the consumer wants." (The American Banker, February 2, 2000) ********* S U B S C R I P T I O N I N F O R M A T I O N Class Action Reporter is a daily newsletter, co-published by Bankruptcy Creditors' Service, Inc., Princeton, NJ, and Beard Group, Inc., Washington, DC. Romeo John D. Piansay, Jr., editor, Theresa Cheuk, Managing Editor. Copyright 1999. All rights reserved. ISSN 1525-2272. This material is copyrighted and any commercial use, resale or publication in any form (including e-mail forwarding, electronic re-mailing and photocopying) is strictly prohibited without prior written permission of the publishers. Information contained herein is obtained from sources believed to be reliable, but is not guaranteed. The CAR subscription rate is $575 for six months delivered via e-mail. Additional e-mail subscriptions for members of the same firm for the term of the initial subscription or balance thereof are $25 each. 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