/raid1/www/Hosts/bankrupt/CAR_Public/000713.MBX               C L A S S   A C T I O N   R E P O R T E R

               Thursday, July 13, 2000, Vol. 2, No. 135


AIRPORT POLLUTANTS: Underwriter's Lawyers to Conclude Tucson Case in AZ
ANNTAYLOR STORES: 2nd Cir Vacates Dismissal; Remands Securties Suit
BANK OF NY: Former VP Pleasded Guilty for Russian Money Laundering
COCA-COLA: Judge Restricts Lawyer's Solicitations in Employee Bias Suit
INMATES LITIGATION: States Can Use Prisoners' Income for Incarceration

LIFE INSURERS: Suit Says Low Income Uneducated Blacks Were Targeted
LIQUOR TAX: Ct Rejects Motion to Set Aside Proceeds; Cert Issue Pending
MAGNOLIA HI-FI: Failure to Inform Lessor Award Not Cause of Malpractice
POWER OUTAGES: App. Ct Affirms Board Does Not Have Primary Jurisdiction
REZULIN: Cases Centralized in Southern District of New York

SUNDSTRAND CORP: Pension Benefits Miscalculation Suit Dismissed in IL
TOBACCO LITIGATION: Company Atty. Urges Jury Not to Make Huge Punitive
TOBACCO LITIGATION: Firms Say 154 Bil Damages Would Bankrupt Makers
TOBACCO LITIGATION: Firms Suggest Settlements; PM Calls $75M Fair
TOBACCO LITIGATION: Judge Says Jurors Should Not Award Crippling Fine

TOBACCO LITIGATION: MS $102 Mil Wrongful Death Suit Rejected
TOBACCO LITIGATION: Reynolds Attorney Says Smokers Want to Stop Sales
TOBACCO LITIGATION: State Laws Limit Damages against Industry
TORONTO HYDRO: Late Payment Fees Put Canadian Munis in Court
WACHOVIA NATIONAL: Settles ERISA Violations Suit in N.D. Alabama

* More Insurers, Plaintiffs Explore Mediation To Resolve Claim Disputes
* Senate Panel Moves Bill to Curb Class-Action 'Forum Shopping'


AIRPORT POLLUTANTS: Underwriter's Lawyers to Conclude Tucson Case in AZ
Lawyers representing a former Tucson Airport underwriter were expected to
conclude their case in the Pima County, Ariz., Superior Court, arguing that
the company's policy did not cover time-delayed injuries that occurred when
clients' industrial pollutants seeped into local aquifers around the

According to a courtroom source, Associated Aviation Underwriters (AAU)
lawyers maintained that in addition to protection from several exclusions
in the policy, their coverage was limited to crashes or explosions at the
airport, and was not intended to cover slow, gradual injuries. An AAU
spokesman would not comment on the case.

Attorneys for the 1,618 plaintiffs are seeking $ 23.2 million plus interest
as part a 1984 suit brought by the citizens after local aquifers were found
to have dangerously high concentrations of trichlorethylene, which the
Environmental Protection Agency classified as a "possible or probable"
cancer-causing agent in humans. TCE, an industrial degreaser, was used by
many airport on-site contractors from the 1950s to 1970s and "discharged
directly to surface soil," according to an EPA report.

The city and the airport authority settled with the citizens in 1989,
allotting $ 35 million in damages to be paid by three airport insurance
companies that had policies in force when the aquifer was polluted. Two of
the insurance companies, U.S. Aviation Underwriters and Lloyds of London,
eventually paid $ 11.8 million of the damages, but AAU refused to deliver
the balance of the $ 35 million settlement. A separate settlement with
Hughes Aircraft brought $ 86 million for the plaintiffs.

Plaintiff attorney Fred Baron anticipated the case could set precedents in
airport law. "I don't know if there's ever been an airport [insurance]
policy decided over pollution," Baron said, adding that regardless of the
impending court opinion, expected in a few weeks, the case would probably
reach the state supreme court.

The litigation is renewing attention on the massive EPA-managed groundwater
cleanup effort underway at the airport, initiated in 1987 and not expected
to be complete until 2020. In addition to ongoing efforts, the federal
government in March issued a new cleanup order, naming four "settling
defendants," including the Tucson Airport Authority, as responsible for
decontaminating the shallow aquifers and soil around the airport. According
to the EPA, the latest cleanup measures will take 20 years to complete and
cost the settling parties anywhere from $ 7.6 million to $ 25.6 million.

Airport spokesman Fred Brinker said community relations in the face of such
a massive toxic cleanup have not been a problem, in part due to the
airport's up-front tact with the citizens. Brinker said monthly meetings
with a "unified community advisory board" in addition to the attitude of
"we didn't do it, but we're going to fix it," have paid off.

Brinker said the airport should be well equipped to pay for the latest
efforts as well. The Air Force, itself responsible for a separate cleanup
project south of the airport, recently sent the airport authority $ 35
million for the aquifer and soil decontamination. Brinker said the
authority put $ 29 million of that money in a trust fund.

But despite Air Force funding, the effects of dealing with a Superfund site
at the airport have been financially draining. Brinker estimated the
airport has spent around $ 10 million for legal representation on toxic
tort, insurance company suits and legal fees "to deal with the EPA."
Brinker said, "With an annual budget of $ 20 or $ 30 million, we're
spending $ 1 million a year on environmental things." He added some advice
for potential airport owners: "Don't build your airport on a Superfund
site." (The McGraw-Hill Companies, Inc., Airports(R), July 11, 2000)

ANNTAYLOR STORES: 2nd Cir Vacates Dismissal; Remands Securties Suit
In 1996, plaintiffs-appellants filed this securities fraud class action,
alleging violations of sections 10(b) and 20(a) of the Securities Exchange
Act ("the 1934 Act") and Rule 10b-5 promulgated thereunder. In two opinions
issued in 1998, the district court dismissed both the original complaint
and the plaintiffs' amended complaint pursuant to Fed. R. Civ. P. 12(b)(6)
and 15 U.S.C. 78u-4(b)(3)(A) for failure to plead with sufficient
particularity facts supporting a strong inference that the defendants had
acted fraudulently. See Novak v. Kasaks, 997 F. Supp. 425 (S.D.N.Y. 1998)
("Novak I") (dismissing original complaint); Novak v. Kasaks, 26 F. Supp.
2d 658 (S.D.N.Y. 1998) ("Novak II") (dismissing amended complaint). On
appeal, appellants contend that the district judge erred in granting the
defendants' motions to dismiss.

In light of Second Circuit precedent and the provisions of the Private
Securities Litigation Reform Act ("PSLRA"), the second circuit court holds
that the district court erred in: (1) concluding that the plaintiffs had
failed to plead sufficient facts to support a strong inference of
fraudulent intent; and (2) imposing an exceedingly onerous burden on the
plaintiffs with respect to their obligation to plead facts with
particularity. We see no persuasive alternative grounds for upholding the
district court's dismissal of the complaint. Accordingly, the circuit court
vacates the judgment of the district court and remand for further
proceedings consistent with these determinations. In addition, the circuit
court judges instruct the district court to allow the plaintiffs to replead
to the extent they wish to do so in light of this opinion.


On April 25, 1996, plaintiffs Carol Novak and Robert Nieman brought this
action on behalf of all purchasers of the common stock of the AnnTaylor
Stores Corporation between February 3, 1994, and May 4, 1995 (the "Class
Period"). In their complaint, the plaintiffs named two groups of
defendants: (1) the AnnTaylor defendants, both the corporation itself --
which, through its wholly-owned subsidiary, defendant AnnTaylor, Inc., is a
specialty retailer of women's clothing, shoes, and accessories -- and
several officers at the highest level of management; and (2) the Merrill
Lynch defendants, a group of entities and individuals that collectively
held a dominant share of AnnTaylor stock and sold a significant fraction of
their holdings during the Class Period.

The complaint -- in both its original and amended forms -- essentially
alleges that, during the Class Period, the defendants made, or controlled
others who made, materially false and misleading statements and omissions
concerning the financial performance of AnnTaylor, primarily by failing
properly to account for millions of dollars of inventory. According to the
plaintiffs, the defendants knowingly and intentionally issued financial
statements that overstated AnnTaylor's financial condition by accounting
for inventory that they knew to be obsolete and nearly worthless at
inflated values and by deliberately failing to adhere to the Company's
publicly stated markdown policy. The following facts are taken largely from
the plaintiffs' complaint.

The plaintiffs' specific allegations focus on AnnTaylor's so-called "Box
and Hold" practice, whereby a substantial and growing quantity of
out-of-date inventory was stored in several warehouses during the Class
Period without being marked down. Internal company documents ("Weekly
Reports") -- distributed at regular Monday morning merchandise meetings in
which the AnnTaylor defendants participated -- distinguished between
regular inventory and "Box and Hold" inventory.

According to the complaint, these reports demonstrated that: (1) much of
the "Box and Hold" inventory was several years old and thus unlikely to be
sold at full price, if at all; and (2) the levels of such inventory grew
significantly during the Class Period, from about 10% to about 34% of total
inventory. However, AnnTaylor's public financial statements did not
distinguish between types of inventory, nor did AnnTaylor write off any of
the "Box and Hold" inventory during the Class Period, allegedly in
violation of Generally Accepted Accounting Principles ("GAAP") that
required markdowns under these circumstances. Instead, the defendants made
or caused to be made a series of positive statements to the public about
the status of AnnTaylor's inventories, describing them at various points
during the Class Period as "under control," "in good shape," and at
"reasonable" or "expected" levels; stating that "no major or unusual
markdowns were anticipated"; and attributing rising levels of inventory to
growth, expansion, and planned future sales.

The plaintiffs contend that this course of conduct amounts to securities
fraud. Had AnnTaylor taken appropriate write-downs, they argue, the
company's earnings would have been substantially lower than reported. Thus,
the AnnTaylor defendants' alleged deception painted too rosy a picture of
the company's current performance and future prospects and kept the
company's stock price at an artificially high level during the Class
Period. According to the amended complaint, during this time,  many
AnnTaylor executives demanded that [the individual AnnTaylor] defendants .
. . end the Box & Hold practice as it made no business sense and was
growing out of control.

Defendants' response . . . was that AnnTaylor could not "afford" to
eliminate or write-down the Box & Hold inventory because doing so would
"kill" the Company's reported financial results and/or profit margins and
damage the Company on "Wall Street."

Ultimately, the defendants were forced to publicly acknowledge serious
inventory problems -- i.e., that inventories were too high and liquidation
would result in much lower fiscal 1995 earnings than expected -- at which
point AnnTaylor stock prices fell precipitously, to the plaintiffs'

On July 1, 1996, in response to these allegations, the defendants moved to
dismiss the action, and on August 16, 1996, the district judge granted a
motion by the defendants to stay all discovery pending a ruling on the
motions to dismiss pursuant to 15 U.S.C. 78u-4(b)(3)(B).

On March 10, 1998, the district court issued an opinion and order granting
the defendants' motions to dismiss the complaint. See Novak I, 997 F. Supp.
at 426. The court concluded that "the fatal defect in the complaint lies in
its allegations of scienter." Id. at 430. Specifically, the plaintiffs had
"fail[ed] to plead facts giving rise to a strong inference of fraudulent
intent" in that they did not "allege with sufficient specificity that . . .
defendants . . . were aware that much of their inventory was worthless or
seriously overvalued, or were reckless as to whether that was the case."
Id. at 430-31. According to the district court, in order to meet the
pleading requirement, the plaintiffs needed to identify the confidential
sources of their information, see id. at 431-32, include written
documentation of the "Box and Hold" practice in their complaint, see id. at
432, and allege facts showing that the Merrill Lynch defendants actually
knew about "Box and Hold," see id. at 434.

On April 9, 1998, the plaintiffs filed an amended complaint. The defendants
thereafter served motions to dismiss. On November 9, 1998, the district
court dismissed the plaintiffs' amended complaint with prejudice. See Novak
II, 26 F. Supp. 2d at 660. In the district court's view, the amended
complaint failed to remedy the defects of the original one, including lack
of particularity in pleading, unnamed sources, and lack of specific
evidence of the Merrill Lynch defendants' knowledge of the "Box and Hold"
practice. See id. at 660-62. In addition, the district court found "that it
would be futile to permit further amendment" of the complaint and thus
dismissed it with prejudice. Id. at 663. This appeal followed.

The plaintiffs subsequently reached a settlement with the Merrill Lynch
defendants and withdrew the appeal as against them.

Accordingly, the second circuit's discussion pertains solely to the claims
against the AnnTaylor defendants. In particular, the judges do not reach
the question of control-person liability under 20(a) of the 1934 Act, since
this claim pertains primarily to the Merrill Lynch defendants. The second
circuit court is not concerned with 20(a) liability as to the AnnTaylor
defendants because they are also alleged to be primary violators under the
1934 Act, who may be held directly liable under 10(b).

          [Original Text of Second Circuit's] DISCUSSION

We review de novo a district court's order dismissing a complaint on the
pleadings and accept as true all facts alleged in the complaint. See
Stevelman v. Alias Research Inc., 174 F.3d 79, 83 (2d Cir. 1999) (citing
Chill v. General Elec. Co., 101 F.3d 263, 267 (2d Cir. 1996)). In this
case, we are called upon to decide principally whether the district court,
in assessing the sufficiency of the pleadings, applied appropriate
standards in light of our precedents and the provisions of the PSLRA and
whether it erred in concluding that the plaintiffs had failed to state a
claim. We must also decide whether, even if the district court erred, there
are alternative grounds for affirming the dismissal of the plaintiffs'
10(b) claims.

I.  Sufficiency of the Pleadings

The landscape of securities fraud litigation has been transformed in
recent years by the passage of the PSLRA. This case requires us to
determine the impact of two provisions in this legislation on the
pleading standard for scienter and the required degree of particularity
in pleading in this circuit.

A.  The PSLRA and Anti-Fraud Provisions in Federal Securities Laws

Section 10(b) of the 1934 Act, 15 U.S.C. 78j(b), and Rule 10b-5
promulgated thereunder, 17 C.F.R. 240.10b-5, prohibit fraudulent
activities in connection with securities transactions. Section 10(b)
makes it unlawful [t]o use or employ, in connection with the purchase or
sale of any security . . ., any manipulative or deceptive device or
contrivance in contravention of such rules and regulations as the
Commission may prescribe as necessary or appropriate in the public
interest or for the protection of investors.

15 U.S.C. 78j(b). Rule 10b-5 specifies the following actions among the
types of behavior proscribed by the statute: To make any untrue statement
of a material fact or to omit to state a material fact necessary in order
to make the statements made, in the light of the circumstances under which
they were made, not misleading . . . . 17 C.F.R. 240.10b-5.

In order to state a claim under these provisions, a complaint must allege
that the defendants acted with scienter. See, e.g., Chill, 101 F.3d at 266.
This scienter requirement for a private action under Rule 10b-5 has been
firmly established for at least a generation. See Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 193 (1976) (holding that no "private cause of
action for damages will lie under 10(b) and Rule 10b-5 in the absence of
any allegation of 'scienter' -- intent to deceive, manipulate, or
defraud"); Lanza v. Drexel & Co., 479 F.2d 1277, 1301 (2d Cir. 1973) (in
banc) ("Other cases in this circuit clearly indicate that 'facts amounting
to scienter, intent to defraud, reckless disregard for the truth, or
knowing use of a device, scheme or artifice to defraud' are essential to
the imposition of liability.") (quoting Shemtob v. Shearson, Hammill & Co.,
448 F.2d 442, 445 (2d Cir. 1971)). This case pertains not to the scienter
requirement itself, but rather the pleading requirement for scienter in the
securities fraud context. Prior to the passage of the PSLRA, we had decided
that, in order to state a claim for securities fraud, plaintiffs had to
allege facts giving rise to "a strong inference of fraudulent intent."
Acito v. Imcera Group, Inc., 47 F.3d 47, 52 (2d Cir. 1995).

In addition to pleading scienter, it is well-established that a
securities fraud complaint must also plead certain facts with
particularity in order to state a claim. Fed. R. Civ. P. 9(b) requires
that, whenever a complaint contains allegations of fraud, "the
circumstances constituting fraud . . . shall be stated with
particularity." See also Chill, 101 F.3d at 267 (noting that "the actual
fraudulent statements or conduct and the fraud alleged must be stated with
particularity") (internal citations omitted). "[A] complaint making such
allegations must '(1) specify the statements that the plaintiff contends
were fraudulent, (2) identify the speaker, (3) state where and when the
statements were made, and (4) explain why the statements were fraudulent.'"
Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994)
(quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir.

In 1995, Congress amended the 1934 Act through passage of the PSLRA. See
Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109
Stat. 737 (codified at 15 U.S.C. 77k, 77l, 77z-1, 77z-2, 78a, 78j-1, 78t,
78u, 78u-4, 78u-5). Legislators were apparently motivated in large part by
a perceived need to deter strike suits wherein opportunistic private
plaintiffs file securities fraud claims of dubious merit in order to exact
large settlement recoveries. See H.R. Conf. Rep. No. 104-369, at 31 (1995)
(noting "significant evidence of abuse in private securities lawsuits,"
including "the routine filing of lawsuits against issuers of securities and
others whenever there is a significant change in an issuer's stock price,
without regard to any underlying culpability of the issuer," and "the abuse
of the discovery process to impose costs so burdensome that it is often
economical for the victimized party to settle"), reprinted in 1995
U.S.C.C.A.N. 730, 730.

In order "to curtail the filing of meritless lawsuits," the PSLRA imposed
stringent procedural requirements on plaintiffs pursuing private securities
fraud actions. See id. at 41. This case concerns two of these provisions in
particular. First, the statute requires that, [i]n any private action
arising under this chapter in which the plaintiff may recover money damages
only on proof that the defendant acted with a particular state of mind, the
complaint shall, with respect to each act or omission alleged to violate
this chapter, state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind.

15 U.S.C. 78u-4(b)(2) (emphasis added) [hereinafter "paragraph (b)(2)"].
Second, the statute requires that, [i]n any private action arising under
this chapter in which the plaintiff alleges that the defendant--

(A) made an untrue statement of a material fact; or

(B) omitted to state a material fact necessary in order to make the
     statements made, in the light of the circumstances in which they
     were made, not misleading;

the complaint shall specify each statement alleged to have been
misleading, the reason or reasons why the statement is misleading, and,
if an allegation regarding the statement or omission is made on
information and belief, the complaint shall state with particularity all
facts on which that belief is formed.

15 U.S.C. 78u-4(b)(1) (emphasis added) [hereinafter "paragraph (b)(1)"].
In addition, 21D(b)(3)(A) of the PSLRA requires courts to dismiss
complaints that fail to meet the pleading requirements of paragraphs
(b)(1) and (b)(2). See 15 U.S.C. 78u-4(b)(3)(A). We must determine the
impact of these new requirements in order to decide whether the
plaintiffs in this case have pleaded sufficient facts with enough
particularity to state a claim under the 1934 Act.

B. The Pleading Standard for Scienter

1.  The Second Circuit's Pre-PSLRA Pleading Standard

We can easily summarize the pleading standard for scienter that prevailed
in this circuit prior to the PSLRA:

[P]laintiffs must allege facts that give rise to a strong inference of
fraudulent intent. "The requisite 'strong inference' of fraud may be
established either (a) by alleging facts to show that defendants had both
motive and opportunity to commit fraud, or (b) by alleging facts that
constitute strong circumstantial evidence of conscious misbehavior or

Acito, 47 F.3d at 52 (quoting Shields, 25 F.3d at 1128 (internal
citations omitted). However, this statement of the standard conceals the
complexity and uncertainty that often surround its application. This
difficulty in application stems, at least in part, from the "inevitable
tension" between the interests in deterring securities fraud and deterring
strike suits. See In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 263 (2d
Cir. 1993). As a result, different courts applying the pleading standard to
differing factual circumstances may reach seemingly disparate results. See
id. at 264. Nevertheless, we discern some basic patterns in our case law
under 10(b) and Rule 10b-5 that help to provide substance to the general
language of the standard itself.

We described the type of motive and opportunity required to plead
scienter under our pre-reform standard as follows: Motive would entail
concrete benefits that could be realized by one or more of the false
statements and wrongful nondisclosures alleged. Opportunity would entail
the means and likely prospect of achieving concrete benefits by the means

Shields, 25 F.3d at 1130. Plaintiffs could not proceed based on motives
possessed by virtually all corporate insiders, including: (1) the desire to
maintain a high corporate credit rating, see San Leandro Emergency Med.
Group Profit Sharing Plan v. Philip Morris Cos., Inc., 75 F.3d 801, 814 (2d
Cir. 1996), or otherwise sustain "the appearance of corporate
profitability, or of the success of an investment," Chill, 101 F.3d at 268;
and (2) the desire to maintain a high stock price in order to increase
executive compensation, see Acito, 47 F.3d at 54, or prolong the benefits
of holding corporate office, see Shields, 25 F.3d at 1130. Rather,
plaintiffs had to allege that defendants benefitted in some concrete and
personal way from the purported fraud. This requirement was generally met
when corporate insiders were alleged to have misrepresented to the public
material facts about the corporation's performance or prospects in order to
keep the stock price artificially high while they sold their own shares at
a profit. See, e.g., Stevelman, 174 F.3d at 85; Goldman v. Belden, 754 F.2d
1059, 1070 (2d Cir. 1985). Accordingly, in the ordinary case, adequate
motive arose from the desire to profit from extensive insider sales.

Plaintiffs could also meet the pre-PSLRA pleading standard by alleging
facts that constituted strong circumstantial evidence of conscious
misbehavior or recklessness on the part of defendants. Intentional
misconduct is easily identified since it encompasses deliberate illegal
behavior, such as securities trading by insiders privy to undisclosed and
material information, see Simon DeBartolo Group, L.P. v. Richard E.
Jacobs Group, Inc., 186 F.3d 157, 168-69 (2d Cir. 1999), or knowing sale of
a company's stock at an unwarranted discount, see Schoenbaum v.
Firstbrook, 405 F.2d 215, 219 (2d Cir. 1968) (in banc).

Recklessness is harder to identify with such precision and consistency.
In 1978, when we first held that recklessness suffices to plead scienter
under 10(b) and Rule 10b-5, we defined reckless conduct as: at the least,
conduct which is "highly unreasonable" and which represents an extreme
departure from the standards of ordinary care . . . to the extent that the
danger was either known to the defendant or so obvious that the defendant
must have been aware of it."

Rolf v. Blyth, Eastman Dillon & Co., Inc., 570 F.2d 38, 47 (2d Cir. 1978)
(quoting Sanders v. John Nuveen & Co., 554 F.2d 790, 793 (7th Cir. 1977))
(ellipsis in original). Similarly, we later noted that "'[a]n egregious
refusal to see the obvious, or to investigate the doubtful, may in some
cases give rise to an inference of . . . recklessness.'" Chill, 101 F.3d at
269 (quoting Goldman v. McMahan, Brafman, Morgan & Co., 706 F. Supp. 256,
259 (S.D.N.Y. 1989)) (ellipsis in original).

However, these general standards offer little insight into precisely what
actions and behaviors constitute recklessness sufficient for 10(b)
liability. It is the actual facts of our securities fraud cases that
provide the most concrete guidance as to the types of allegations
required to meet the pre-PSLRA pleading standard in this circuit.

According to these cases, securities fraud claims typically have sufficed
to state a claim based on recklessness when they have specifically alleged
defendants' knowledge of facts or access to information contradicting their
public statements. Under such circumstances, defendants knew or, more
importantly, should have known that they were misrepresenting material
facts related to the corporation. Thus, for example, the pleading standard
was met where the plaintiffs alleged that the defendants made or authorized
statements that sales to China would be "an important new source of
revenue" when they knew or should have known that Chinese import
restrictions in place at the time would severely limit such sales. See
Cosmas v. Hassett, 886 F.2d 8, 12 (2d Cir. 1989).

Similarly, the pleading standard was met where the plaintiffs alleged
that the defendants released to the investing public several highly
positive predictions about the marketing prospects of a computer system
to record hotel guests' long-distance telephone calls when they knew or
should have known several facts about the system and its consumers that
revealed "grave uncertainties and problems concerning future sales of"
the system. Goldman, 754 F.2d at 1063, 1070.

Under certain circumstances, we have found allegations of recklessness to
be sufficient where plaintiffs alleged facts demonstrating that
defendants failed to review or check information that they had a duty to
monitor, or ignored obvious signs of fraud. Thus, the pleading standard was
met where the plaintiff alleged that the defendant, his broker,
consistently reassured the plaintiff that the investment advisor
responsible for the plaintiff's portfolio "knew what he was doing" but
never actually investigated the advisor's decisions to determine "whether
there was a basis for the [defendant's] assertions." Rolf, 570 F.2d at
47-48. Similarly, the pleading standard was met where the defendant
allegedly included false statements in SEC filings despite "the obviously
evasive and suspicious statements made to him" by the corporate officials
upon whom he was relying for this information and despite outside counsel's
recommendation that these statements not be included. SEC v. McNulty, 137
F.3d 732, 741 (2d Cir. 1998).

At the same time, however, we have identified several important
limitations on the scope of liability for securities fraud based on
reckless conduct. First, we have refused to allow plaintiffs to proceed
with allegations of "fraud by hindsight." See Stevelman, 174 F.3d at 85.
Corporate officials need not be clairvoyant; they are only responsible
for revealing those material facts reasonably available to them. See
Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978). Thus, allegations that
defendants should have anticipated future events and made certain
disclosures earlier than they actually did do not suffice to make out a
claim of securities fraud. See Acito, 47 F.3d at 53.

Second, as long as the public statements are consistent with reasonably
available data, corporate officials need not present an overly gloomy or
cautious picture of current performance and future prospects. See
Stevelman, 174 F.3d at 85; Shields, 25 F.3d at 1129-30. Where plaintiffs
contend defendants had access to contrary facts, they must specifically
identify the reports or statements containing this information. See San
Leandro, 75 F.3d at 812 ("Plaintiffs' unsupported general claim of the
existence of confidential company sales reports that revealed the larger
decline in sales is insufficient to survive a motion to dismiss.").

Third, there are limits to the scope of liability for failure adequately to
monitor the allegedly fraudulent behavior of others. Thus, the failure of a
non-fiduciary accounting firm to identify problems with the
defendant-company's internal controls and accounting practices does not
constitute reckless conduct sufficient for 10(b) liability. See Decker v.
Massey-Ferguson, Ltd., 681 F.2d 111, 120 (2d Cir. 1982). Similarly, the
failure of a parent company to interpret extraordinarily positive
performance by its subsidiary -- specifically, the "unprecedented and
dramatically increasing profitability" of a particular form of trading --
as a sign of problems and thus to investigate further does not amount to
recklessness under the securities laws. See Chill, 101 F.3d at 269-70.

Finally, allegations of GAAP violations or accounting irregularities,
standing alone, are insufficient to state a securities fraud claim. See
Stevelman, 174 F.3d at 84; Chill, 101 F.3d at 270. Only where such
allegations are coupled with evidence of "corresponding fraudulent
intent," Chill, 101 F.3d at 270, might they be sufficient.

We now examine to what extent these lessons from our prior case law have
survived the recent reform of the securities laws.

2. Implications of the PSLRA for the Pleading Standard for Scienter in
    this Circuit

Courts have disagreed on the proper interpretation of the
new pleading requirement imposed by paragraph (b)(2) in light of the text
of the PSLRA and its legislative history. They have generally come to one
of two conclusions:

(1)  The statute effectively adopts the Second Circuit's pleading standard
for scienter wholesale, and thus plaintiffs may continue to state a claim
by pleading either motive and opportunity or strong circumstantial evidence
of recklessness or conscious misbehavior. See In re Advanta Corp. Sec.
Litig., 180 F.3d 525 (3d Cir. 1999); Press v. Chemical Invest. Servs.
Corp., 166 F.3d 529, 538 (2d Cir. 1999) (dicta); Rubinstein v. Skyteller,
Inc., 48 F. Supp. 2d 315, 320 (S.D.N.Y. 1999) (following Press).

(2) The statute strengthens the Second Circuit's standard by rejecting
the simple pleading of motive and opportunity. See Bryant v. Avado
Brands, Inc., 187 F.3d 1271, 1283 (11th Cir. 1999); In re Silicon
Graphics Inc. Sec. Litig., 183 F.3d 970, 979 (9th Cir. 1999); In re
Comshare, Inc. Sec. Litig., 183 F.3d 542, 550-51 (6th Cir. 1999); Novak
I, 997 F. Supp. at 430; In re Glenayre Tech., Inc. Sec. Litig., 982 F.
Supp. 294, 298 (S.D.N.Y. 1997); In re Baesa Sec. Litig., 969 F. Supp.
238, 241-42 (S.D.N.Y. 1997).

Our own review of the text and legislative history leads us to a middle
ground. We conclude that the PSLRA effectively raised the nationwide
pleading standard to that previously existing in this circuit and no
higher (with the exception of the "with particularity" requirement). At
the same time, however, we believe that Congress's failure to include
language about motive and opportunity suggests that we need not be wedded
to these concepts in articulating the prevailing standard. We are led to
these conclusions by the considerations that follow.

In order to gauge the implications of paragraph (b)(2), we apply familiar
canons of statutory construction. We look first to the text of the statute.
If that language is plain and its meaning sufficiently clear, we need look
no further. See Connecticut Nat'l Bank v. Germain, 503 U.S. 249, 254
(1992). Only if the text of the statute is not unambiguous do we turn for
guidance to legislative history and the purposes of the statute. See
Dowling v. United States, 473 U.S. 207, 218 (1985). Applying these
principles, we conclude that the enactment of paragraph (b)(2) did not
change the basic pleading standard for scienter in this circuit.

In this case, our interpretive task begins and ends with the text of the
statute. In drafting paragraph (b)(2), Congress specifically incorporated
this circuit's "strong inference" language to define the pleading standard
for securities fraud cases. Compare 15 U.S.C. 78u-4(b)(2) (requiring
plaintiffs to "state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind"), with
Acito, 47 F.3d at 52 ("[P]laintiffs must allege facts that give rise to a
strong inference of fraudulent intent."). We agree with the Third Circuit
that this "use of the Second Circuit's language compels the conclusion that
the Reform Act establishes a pleading standard approximately equal in
stringency to that of the Second Circuit." In re Advanta Corp., 180 F.3d at
534. Cf. United States v. Johnson, 14 F.3d 766, 770 (2d Cir. 1994) (finding
that Congress's use of "substantially identical language" to that of an
earlier statute "bespeaks an intention to import" judicial interpretations
of that language into the new statute).

Given the absence of ambiguity in the statutory text, no resort to
legislative history or the purposes of the PSLRA is required. In any
event, there is nothing in these sources that would alter our conclusion.
As far as the general purposes of the PSLRA are concerned, Congress plainly
sought to impose a stricter nationwide pleading standard and did so. But
this purpose does not require raising the standard above that of this
circuit, particularly in light of the explicit Congressional recognition
that our pre-PSLRA standard was the most stringent in the nation. See H.R.
Conf. Rep. No. 104-369, at 41. "In many jurisdictions, adoption of a
'strong inference' standard will substantially heighten the barriers to
pleading scienter, a result Congress expressly intended. Moreover, even in
jurisdictions already employing the Second Circuit standard, the additional
requirement that plaintiffs state facts 'with particularity' represents a
heightening of the standard." In re Advanta Corp., 180 F.3d at 534.

Meanwhile, in our view, as is so often the case with legislative history
generally, the legislative history of the PSLRA contains "conflicting
expressions of legislative intent" with respect to the pleading
requirement. Id. at 533. For example, while the Conference Committee
rejected language from the Senate bill that would have adopted the Second
Circuit rule wholesale, including language about motive and opportunity and
recklessness, see H.R. Conf. Rep. No. 104-369, at 41 & 48 n.23, the Senate
Committee reporting the bill stated that it was proposing not "a new and
untested pleading standard that would generate additional litigation," but
rather "a uniform standard modeled upon the pleading standard of the Second
Circuit." S. Rep. No. 104-98, at 15 (1995), reprinted in 1995 U.S.C.C.A.N.
679, 694 (noting that courts interpreting the proposed "strong inference"
pleading standard might find Second Circuit case law "instructive").

When all is said and done, we believe that the enactment of paragraph
(b)(2) did not change the basic pleading standard for scienter in this
circuit (except by the addition of the words "with particularity").
Accordingly, we hold that the PSLRA adopted our "strong inference"
standard: In order to plead scienter, plaintiffs must "state with
particularity facts giving rise to a strong inference that the defendant
acted with the required state of mind," as required by the language of the
Act itself. Although litigants and lower courts need and should not employ
or rely on magic words such as "motive and opportunity," we believe that
our prior case law may be helpful in providing guidance as to how the
"strong inference" standard may be met. Therefore, in applying this
standard, district courts should look to the cases and factors discussed in
Section I.B.1 above to determine whether plaintiffs have pleaded facts
giving rise to the requisite "strong inference." These cases suggest, in
brief, that the inference may arise where the complaint sufficiently
alleges that the defendants: (1) benefitted in a concrete and personal way
from the purported fraud, see supra at [page 14-15]; (2) engaged in
deliberately illegal behavior, see supra at [page 15]; (3) knew facts or
had access to information suggesting that their public statements were not
accurate, see supra at [page 16-17]; or (4) failed to check information
they had a duty to monitor, see supra at [pages 17-18]. We now turn to the
complaint in this case to determine whether the plaintiffs have met their
burden to plead scienter.

3. Strong Inference of Fraudulent Intent on the Part of the AnnTaylor

The district court concluded that the plaintiffs had failed to plead
facts giving rise to a strong inference of the defendants' fraudulent
intent, as required to state a claim under 10(b). We disagree.

According to the complaint, the AnnTaylor defendants knew at all relevant
times that the Company had serious inventory problems that they sought to
disguise by adopting the "Box and Hold" scheme. By refusing to mark down
inventory they knew to be "worthless," "obsolete," and "unsalable," the
defendants acted "intentionally and deliberately" to artificially inflate
AnnTaylor's reported financial results. They discussed the need to mark
down inventory but refused to do so because that would damage the Company's
financial prospects. Further, in approving the inventory management
practices of "Box and Hold," the defendants knowingly sanctioned procedures
that violated the Company's own markdown policy, as stated in the Company's
public filings. In doing so, they caused those filings to be materially
misleading in that the disclosed policy no longer reflected actual
practice. Lastly, despite knowledge of the true reasons for rising
inventory levels, the defendants made repeated statements to the investment
community either offering false reassurances that inventory was under
control or giving false explanations for its growth. In short, the
Complaint alleges that the defendants engaged in conscious misstatements
with the intent to deceive. There is no doubt that this pleading satisfies
the standard for scienter under Hochfelder, and the requirement of the
PSLRA that plaintiffs state facts with particularity that give rise to a
strong inference of the required state of mind.

In the end, we believe that the district court applied the correct
standard but erroneously found that this standard was not met on these
pleadings. According to the district court, the scienter requirement can be
satisfied by pleading either "conscious recklessness" -- i.e., a state of
mind "approximating actual intent, and not merely a heightened form of
negligence" -- or "actual intent." Novak I, 997 F. Supp. at 430. This was
an accurate statement of the law. However, the district court believed that
the facts pleaded by the plaintiffs supported nothing more than an
inference that the managers of AnnTaylor disagreed over matters of business
judgment, such as the valuation of inventory and the timing of markdowns.
See Novak II, 26 F. Supp. 2d at 660. This was incorrect as a matter of law.
When managers deliberately make materially false statements concerning
inventory with the intent to deceive the investment community, they have
engaged in conduct actionable under the securities laws.

C. Particularity of the Facts Pleaded

The district court also found the facts pleaded by the plaintiffs
insufficiently particularized, in large part because they did not reveal
the identity of the personal sources of their critical factual
allegations. We disagree with the district court's reasoning and
accordingly vacate and remand for further proceedings consistent with the
discussion that follows.

As discussed above, Rule 9(b) has long required plaintiffs in securities
fraud cases to state "the circumstances constituting fraud . . . with
particularity." The PSLRA imposed an additional requirement: whenever
plaintiffs allege, on information and belief, that defendants made material
misstatements or omissions, the complaint must "state with particularity
all facts on which that belief is formed." 15 U.S.C. 78u-4(b)(1). This
requirement plainly applies in this case. In numerous places in their
complaint, the plaintiffs allege, based on information and belief, that the
AnnTaylor defendants made materially misleading statements or omissions.
Most importantly, they allege that the defendants made false statements
concerning the value of inventory because "Box and Hold" merchandise was
"unsalable," "obsolete," and "nearly worthless," and its "actual value was
nearly zero." In order to survive at this stage, the complaint must state
with particularity sufficient facts to support the belief that the "Box and
Hold" inventory was of limited value, and accordingly that the defendants'
positive public statements concerning inventory growth were false and

The district court concluded that the plaintiffs had failed to meet these
particularity requirements, in substantial part because they failed to
reveal their confidential sources for some of the facts on which their
belief in the essential worthlessness of the "Box and Hold" inventory was
based. See Novak I, 997 F. Supp. at 431-32; Novak II, 26 F. Supp. 2d at
660-61. The lower court found the plaintiffs' allegations in this respect
at worst "conclusory, unsupported and inflammatory," and at best "based
upon reports by . . . anonymous 'former employees'" who should have been
identified by name. Novak II, 26 F. Supp. 2d at 661. The district court's
reasoning and conclusions were flawed in several respects.

For one thing, the complaint provides specific facts concerning the
Company's significant write-off of inventory directly following the Class
Period, which tends to support the plaintiffs' contention that inventory
was seriously overvalued at the time the purportedly misleading statements
were made. Specifically, the plaintiffs allege that: (1) in AnnTaylor's May
1995 reporting of its first quarter fiscal 1995 results, the company
"admitted to analysts that its inventories were too high" and that
"inventory liquidation" would follow; (2) in AnnTaylor's July 29, 1995 10-Q
filed with the SEC, it "admitted that the decrease in the Company's gross
profit percentage was attributable to 'increased cost of goods sold as a
percentage of net sales, primarily resulting from markdowns'"; and (3) a
January 22, 1996 Weekly Report showing that even six months after the Class
Period, substantial amounts of "Box and Hold" inventory still dated from
1993 and 1994, which supports the inference that inventory during the Class
Period was similarly dated. Thus, the complaint identifies with
particularity several documentary sources that support the plaintiffs'
belief that serious inventory problems existed during the Class Period

We recognize that the complaint does not state with particularity every
fact upon which this belief was based, since it is apparent that there
were also personal sources who were not specifically identified. However,
plaintiffs who rely on confidential sources are not always required to name
those sources, even when they make allegations on information and belief
concerning false or misleading statements, as here.

First, there is nothing in the caselaw of this circuit that requires
plaintiffs to reveal confidential sources at the pleading stage. The
defendants rely heavily on Segan v. Dreyfus Corp., 513 F.2d 695 (2d Cir.
1975), in which we held that a plaintiff's complaint was insufficiently
specific and rejected the argument that further disclosure would, among
other things, identify a confidential informant. See id. at 696. But in
Dreyfus, we held only that the plaintiff had to plead additional facts,
not that the plaintiff was required to reveal the name of the informant.
See id. ("A suit charging fraud may not be based on facts so secret that
the defendants cannot be told what they are.") (emphasis added). Some
district courts in this circuit have on occasion stated that Rule 9(b)
requires plaintiffs in securities fraud cases to allege the "sources that
support the alleged specific facts," e.g., Blanchard v. Katz, 705 F. Supp.
1011, 1012 (S.D.N.Y. 1989); Crystal v. Foy, 562 F. Supp. 422, 425 (S.D.N.Y.
1983), but in no case have they dismissed a complaint for failure to
identify confidential sources.

Second, while paragraph (b)(1) may compel revelation of confidential
sources under certain circumstances, such circumstances are not
necessarily present in this case. The defendants point to district court
decisions outside this circuit that hold or imply that the PSLRA
generally requires plaintiffs to include the names of their confidential
sources. See In re Silicon Graphics Inc. Sec. Litig., 970 F. Supp. 746, 763
(N.D. Cal. 1997); In re Aetna Inc. Sec. Litig., No. CIV. A. MDL 1219, 1999
WL 354527, at *4 (E.D. Pa. May 26, 1999). However, this rule is based on a
misreading of the legislative history of the PSLRA. Specifically, the court
in Silicon Graphics relied primarily on the hyperbolic statements of
legislators attempting (unsuccessfully) to amend the proposed Act to
lighten plaintiffs' pleading burden. See Silicon Graphics, 970 F. Supp. at
763-64. In fact, the applicable provision of the law as ultimately enacted
require plaintiffs to plead only facts and make no mention of the sources
of these facts. See 15 U.S.C. 78u-4(b)(1).

More fundamentally, our reading of the PSLRA rejects any notion that
confidential sources must be named as a general matter. In our view,
notwithstanding the use of the word "all," paragraph (b)(1) does not
require that plaintiffs plead with particularity every single fact upon
which their beliefs concerning false or misleading statements are based.
Rather, plaintiffs need only plead with particularity sufficient facts to
support those beliefs.(1) Accordingly, where plaintiffs rely on
confidential personal sources but also on other facts, they need not name
their sources as long as the latter facts provide an adequate basis for
believing that the defendants' statements were false. Moreover, even if
personal sources must be identified, there is no requirement that they be
named, provided they are described in the complaint with sufficient
particularity to support the probability that a person in the position
occupied by the source would possess the information alleged. In both of
these situations, the plaintiffs will have pleaded enough facts to support
their belief, even though some arguably relevant facts have been left out.
Accordingly, a complaint can meet the new pleading requirement imposed by
paragraph (b)(1) by providing documentary evidence and/or a sufficient
general description of the personal sources of the plaintiffs' beliefs.

Thus, we find no requirement in existing law that, in the ordinary
course, complaints in securities fraud cases must name confidential
sources, and we see no reason to impose such a requirement under the
circumstances of this case. "The primary purpose of Rule 9(b) is to
afford defendant fair notice of the plaintiff's claim and the factual
ground upon which it is based." Ross v. Bolton, 904 F.2d 819, 823 (2d
Cir. 1990). This purpose, which also underlies paragraph (b)(1), can be
served without requiring plaintiffs to name their confidential sources as
long as they supply sufficient specific facts to support their
allegations. Imposing a general requirement of disclosure of confidential
sources serves no legitimate pleading purpose while it could deter
informants from providing critical information to investigators in
meritorious cases or invite retaliation against them.

We express no view as to whether the plaintiffs' allegations in this case
were sufficiently particularized. Instead, we remand to the district court
with instructions to: (1) allow the plaintiffs to replead in light of our
discussion above; and (2) reconsider the particularity of the plaintiffs'
pleadings in light of the proper standards.

II.   Alternative Grounds for Dismissal

Appellees argue that we still may affirm the district court's dismissal
because: (1) appellants have not adequately alleged that statements made by
securities analysts can be attributed to the AnnTaylor defendants; and (2)
the alleged false and misleading statements made during the Class Period
are not actionable in any event. We reject both arguments.

Under the law of this circuit, plaintiffs may state a claim against
corporate officials for false and misleading information disseminated
through analysts' reports by alleging that the officials either: (1)
"intentionally foster[ed] a mistaken belief concerning a material fact"
that was incorporated into reports; or (2) adopted or placed their
"imprimatur" on the reports. See Elkind v. Liggett & Meyers, Inc., 635
F.2d 156, 163-64 (2d Cir. 1980). This was plainly the case here. The
plaintiffs alleged that the AnnTaylor defendants both made misstatements
that were later incorporated into analysts' reports and subsequently (at
least implicitly) adopted the contents of those reports. These allegations
were sufficiently detailed to meet the pleading threshold because generally
the circumstances of the statements -- including dates and participants --
were particularized. See Acito, 47 F.3d at 51.

Moreover, the types of statements the defendants are alleged to have made
or adopted are actionable. While statements containing simple economic
projections, statements of optimism, and other puffery are insufficient,
see, e.g., Friedman v. Mohasco Corp., 929 F.2d 77, 79 (2d Cir. 1991),
defendants may be liable for misrepresentations of existing facts, see In
re Prudential Sec. Inc. Ltd. Partnerships Litig., 930 F. Supp. 68, 74-75
(S.D.N.Y. 1996). Here, the complaint alleges that the defendants did more
than just offer rosy predictions; the defendants stated that the inventory
situation was "in good shape" or "under control" while they allegedly knew
that the contrary was true. Assuming, as we must at this stage, the
accuracy of the plaintiffs' allegations about AnnTaylor's "Box and Hold"
practices, these statements were plainly false and misleading.


For the foregoing reasons, we hold, first, that: (a) in order to plead
scienter in securities fraud cases, plaintiffs must "state with
particularity facts giving rise to a strong inference that the defendant
acted with the required state of mind"; and (b) the plaintiffs here pleaded
sufficient facts to establish a strong inference of fraudulent intent on
the part of the AnnTaylor defendants. Second, we hold that the district
court erred, under the circumstances of this case, by requiring the
plaintiffs to reveal the names of their confidential sources in order to
meet the particularity requirements of the PSLRA. On remand, we instruct
the district court to: (a) permit the plaintiffs to replead; and (b)
evaluate their pleadings anew in light of our interpretation of these
requirements. Finally, we see no alternative grounds for affirming the
district court's dismissal of the plaintiffs' complaint. Accordingly, the
judgment of the district court is vacated and the case remanded for further
proceedings consistent with these rulings.

1Paragraph (b)(1) is strangely drafted. Reading "all" literally would
produce illogical results that Congress cannot have intended. Contrary to
the clearly expressed purpose of the PSLRA, it would allow complaints to
survive dismissal where "all" the facts supporting the plaintiff's
information and belief were pled, but those facts were patently
insufficient to support that belief. Equally peculiarly, it would require
dismissal where the complaint pled facts fully sufficient to support a
convincing inference if any known facts were omitted. Our reading of the
provision focuses on whether the facts alleged are sufficient to support a
reasonable belief as to the misleading nature of the statement or omission.
Vacated and Remanded.

(The case is: Carol Novak, Robert Nieman, Joseph Desena, On Behalf Of
Themselves And All Others Similarly Situated, Plaintiffs-Appellants -V.-
Sally Frame Kasaks, Paul E. Francis, Joseph R. Gromek, Anntaylor Stores
Corporation And Anntaylor, Inc., Defendants-Appellees, Merrill Lynch &
Company, Merrill Lynch, Pierce, Fenner & Smith Inc., Merrill Lynch Capital
Partners, Inc., Ml Ibk Positions, Inc., Merchant Banking L.P. No. Iii,
Kecalp, Inc., Gerald S. Armstrong, James J. Burke, Jr., Defendants. B E F O
R E : Walker, Leval, And Pooler, Circuit Judges.)

BANK OF NY: Former VP Pleasded Guilty for Russian Money Laundering
A former Bank of New York employee was sentenced to two weeks in prison and
five months of house arrest after she pleaded guilty to charges related to
a $7 billion Russian money-laundering case brought by federal prosecutors
in Manhattan. The employee, Svetlana Kudryavtsev, pleaded guilty in March
to accepting illegal payments and lying to federal agents. Lucy Edwards, a
former bank vice president and a longtime friend of Ms. Kudryavtsev, has
pleaded guilty along with her husband, Peter Berlin. The couple have
described leading a complex money-laundering scheme. (The New York Times,
July 12, 2000)

COCA-COLA: Judge Restricts Lawyer's Solicitations in Employee Bias Suit
A federal judge Tuesday placed restrictions on attorney Willie Gary's law
office and the clients he represents in the Coca-Cola racial discrimination
case. The order by U.S. District Judge Richard Story came after another
group of plaintiffs' attorneys in the lawsuit accused Gary's firm of
illegally soliciting fee agreements from Coke workers affected by the
class-action case.

Story's order did not address whether Gary's firm violated any court rule.

Tricia C.K. Hoffler, an attorney in Gary's Florida law office, said "that
is very important because we have maintained all along that we have
operated in a very ethical, appropriate and professional manner and did not
violate any rules, regulations, court orders or laws." But the other side
disagreed about the meaning of the telephone conference hearing held
Tuesday before Story's order.

"The court did not rule on the issue of past conduct, concentrating instead
on future conduct," said attorney Cyrus Mehri, whose team brought the
allegations against Gary's firm. "We are pleased that the court drew a firm
line in the sand, upheld the rule of law and is imposing certain
appropriate restrictions."

In an order agreed to by both groups of attorneys, the judge prohibited
Gary's firm and its Coke clients from:

   -- Soliciting or entering into any fee agreements or providing legal
       services about the case at this time to the 2,000 members of the

   -- Soliciting class members to not participate in the case.

   -- Communicating with class members about the "substance of this
       lawsuit." But if communications are initiated by a class member,
       Gary's firm can discuss certain individual issues, including "the
       possibility of representation."

   -- Communicating with any class member "either directly or
       indirectly through public statements or otherwise regarding the
       settlement in principle which has been reached in this case."

Terms of that settlement are not expected to be released until late
October, after they are finalized between Coca-Cola and the group of
plaintiffs' attorneys led by Mehri. "The judge's order will allow class
members to have a full and fair opportunity to make decisions based on the
complete record in due course," Mehri said.

After the settlement terms are announced, class members can accept them or
" opt out" and pursue their own individual monetary claims against Coke. At
that time, they can also hire an attorney of their choosing, including
Gary's firm.

Hoffler, of Gary's office, said the court is "merely confirming what we
have been doing all along. It's business as usual for us. From our
standpoint, we feel vindicated by the judge's order, which we consented to.
It's welcome for the judge to set the parameters." Hoffler said similar
parameters already govern Mehri's legal team.

The court did not rule on the validity of existing agreements between
Gary's firm and some Coke workers. Instead, the judge ordered Gary's firm
to provide him with a confidential list of class members who have already
signed fee agreements with his firm. Gary represents at least eight
plaintiffs who are suing Coke. (The Atlanta Journal and Constitution, July
12, 2000)

INMATES LITIGATION: States Can Use Prisoners' Income for Incarceration
States can not only leverage prisoners' income to pay for victim
restitution, but they may also use the funds to pay for the cost of
incarceration, the Ninth Circuit U.S. Court of Appeals said Tuesday.

In a ruling that is part of ongoing class-action litigation, a three-judge
panel held that a Washington state law deducting 35 percent of prisoners'
outside income, including pension plans, did not violate the law.

The Ninth Circuit has already said that such statutes are constitutional.
Tuesday's opinion, Wright v. Riveland, 00 C.D.O.S. 5681, clarifies the
sources of prisoner income that states may attach.

San Diego U.S. District Judge Barry Moskowitz, sitting by designation,
wrote the unanimous decision and was joined by Judge Harry Pregerson and
Senior Judge David Thompson. "What we were looking for was to get the
statute upheld -- to make prisoners responsible for the damages and injury
they've caused," said Douglas Carr, an assistant attorney general in
Washington. "In the main, it was a very good opinion."

Enacted in 1995, the Washington law is part of a national trend to make
criminals more responsible for the costs of their actions. Some states,
including Minnesota and Michigan, have enacted similar laws.

Lawyers representing the prisoners are turning now to the Washington
Supreme Court, where a concurrent suit has been far more successful for the
plaintiffs and their families than federal court. "The litigation is far
from over," said Chris Youtz, a partner at Seattle's Sirianni & Yuotz,
whose firm was appointed to represent the prisoners by U.S. District Judge
Franklin Burgess, after the judge was flooded with pro se filings. "The big
issue now is what's going to happen in the state Supreme Court," Youtz

In the lower court, Burgess upheld the thrust of the statute but ruled that
federal benefits could not be attached, including Social Security and
veterans' benefits. Carr said the ruling had little effect on the statute
and that the state did not contest it.

Washington's 35 percent deduction is divided three ways: 5 percent goes
toward victim restitution, 10 percent is placed in a prisoner savings
account and 20 percent is applied toward the cost of incarceration.

The Washington law was amended in 1997 to cap annual per prisoner
deductions to roughly the $23,000 cost of housing an inmate for a year. In
California, the cost is about $25,000.

Mike Rustigan, a criminal justice expert at San Francisco State University,
called the ruling "an interesting development." "In effect, it's what the
Chinese do, where they put someone before the firing squad and make the
parents pay for the bullet," Rustigan said. Rustigan said the public is
increasingly favoring not only victims' rights, but prisoner
responsibility. "There's a move in this direction. It would be highly
popular with the public, " he said.

Moskowitz wrote that the Washington statute was indeed punitive, but held
that the fines weren't grossly excessive under the Eighth Amendment. The
case was remanded to district court to decide a minor issue. "It was a good
result for the state," Carr said. (The Recorder, July 12, 2000)

LIFE INSURERS: Suit Says Low Income Uneducated Blacks Were Targeted
Four life insurance companies were accused of civil rights violations, some
for more than 40 years, in a class action lawsuit filed Tuesday in U.S.
District Court.

Attorneys claimed Fannie Beverly, 80, and Martha W. Wildridge, 79, both of
Acadia Parish, and other blacks across the United States were charged
higher insurance premiums that provided fewer benefits than policies for

Union National Life Insurance Co., United Insurance Company of America and
UNITRIN Inc. - also known as Trinity Universal Insurance Company - and
Security Industrial Insurance Company were named as defendants in the case.

Plaintiffs' attorneys maintained the defendants targeted "the low income"
and "uneducated" blacks for policies that required premiums that were
exorbitant in relation to the actual death benefits. Donald Cravins Jr.,
one of the plaintiffs' attorneys, said the policies are virtually worthless
for the consumers. "Some of these policies built up little cash value over
the years," he said. "Some of them only had a death benefit of $100."
Cravins said some policies cost 33 cents a week, which would add up to more
than $1,000 over the course of 60 years.

While traditional whole life insurance policies provide an increasing death
benefit over the life of the policy, the complaint alleged that the
insurance companies "prohibited or discouraged" their agents from selling
ordinary life insurance policies to blacks.

The current policies hold little to no value to the plaintiffs once the
premiums exceed the death benefit, the complaint said.

Cravins said there is reason to believe the practice went on at these
companies for more than 40 years. After World War II, it was common for
insurance companies to offer similar policies to blacks, however the
practice was abandoned in the early 1980s, he said. But while the practice
was changed to accommodate new policies, some companies didn't update the
older policies, Cravins said.

Cravins said Beverly and Wildridge began paying their premiums in their
20s, but the children of some policyholders could be victims, too. "A lot
of those folks are still living and their heirs are still living," he said.
"A lot of the children took over the policies after the parents passed on."

Because the companies were licensed in Louisiana and the Southeast, Cravins
said the number of plaintiffs might be incalculable. "We'll have to wait to
see," he said. (The Associated Press State & Local Wire, July 12, 2000)

LIQUOR TAX: Ct Rejects Motion to Set Aside Proceeds; Cert Issue Pending
A Cook County Circuit Court judge last week refused to grant a temporary
restraining order to set aside liquor tax revenues in response to a lawsuit
challenging last year's increase in the tax.

Judge Alexander White rejected the motion to set aside roughly $10 million
to $12 million of tax proceeds because he has not yet determined whether
the lawsuit should be awarded class action status.

A ruling on class action status could come as soon as late this month. The
lawsuit was filed by an Evanston resident who challenged the hike in the
state's liquor tax hike approved by lawmakers last year The tax was
increased along with other levies to help generate money for Gov George
Ryan's $12 billion public works program.

White previously ruled in favor of the resident's individual claims, and
placed 90 cents that the plaintiff had paid in taxes for a liquor purchase
into a protest fund.

The state expects to collect $80 million from the liquor tax for just-ended
fiscal 2000. Rating agency analysts said the tax itself represents only a
small portion of the new revenues raised to boost general fund coffers.
(The Bond Buyer, July 12, 2000)

MAGNOLIA HI-FI: Failure to Inform Lessor Award Not Cause of Malpractice
Washington court of appeals affirmed a lower court ruling which dismissed
the legal malpractice case of three members of a class action suit against
their law firm. The appellants argued that they were not informed of the
consequences of their claim being filed as a class action; the appeals
court determined they failed to provide sufficient evidence of damages.
Frank et al. v. Law Offices of Clinton Fleck, P.S., No. 45243-6-I (Wash.
Ct. App., June 5, 2000).

Albert Frank, David Robbins, and Thomas Porter were three former employees
of Magnolia Hi-Fi. The three filed an uncompensated overtime lawsuit
against Magnolia, and the Law Offices of Clinton Fleck advised them to
proceed as a class. Although the men felt their individual claims were
larger than the other class plaintiffs', they consented because Clinton
Fleck assured them they would receive an individual damage determination.
Approximately 400 current and former Magnolia employees joined the class
action suit.

Clinton Fleck negotiated a settlement with Magnolia under which each class
member's damages were determined according to a presumption of overtime
hours based on their employee classification and not on the actual hours of
uncompensated time each employee worked. The plaintiffs objected to the
terms, but believed they had no choice but to accept.

The plaintiffs then filed a legal malpractice suit against Clinton Fleck,
alleging that the firm had failed to fully explain their class action
status and the fact that they may have had to take a reduced damages sum.
The trial court granted Clinton Fleck's summary judgment motion, finding
that the firm had "no duty to notify of an alleged conflict of interest and
even if there was a duty, there was no issue of genuine fact as to any
damages." Frank, Robbins and Porter appealed.

The plaintiffs claimed that they provided ample evidence for the conclusion
that they "would have done better on their own as opposed to a part of a
class." The declarations made before the appeals court, however, contained
only statements of opinion that the court could find no support for in the

The plaintiffs noted the testimony of Kurt Bulmer, their standard of care
expert, who asserted that "the plaintiffs' actual number of unpaid overtime
hours worked greatly exceeded the number allocated to them under the
formula in the settlement."

Bulmer failed to present the court with evidence supporting this statement.

The court also found that Clinton Fleck gave the plaintiffs the opportunity
to support their claim that they would have won more money if they had
settled outside of the class action suit by sending any supporting
documents to the firm, but the appellants failed to do so.

Because the plaintiffs failed to present specific facts to support a
conclusion that they were damaged by joining the class, the appeals court
affirmed the trial court's order granting summary judgment to Clinton

Counsel for appellants were Thomas G. Batson, attorney at law, and Philip
S. Wakefield, both of Seattle.

Counsel for respondent was Patrick N. Rothwell of Abbott, Davis, Rothwell,
Mullin & Earle, also of Seattle. (Professional Liability Litigation
Reporter, July 2000)

POWER OUTAGES: App. Ct Affirms Board Does Not Have Primary Jurisdiction
Where plaintiff-class seeks damages for electric-service outages due to
defendant-electric company's negligence, and the Board of Public Utilities
has already investigated the matter and has ordered measures to prevent a
recurrence, the trial court's decision that the Board does not have primary
jurisdiction over plaintiff's actions is affirmed; certain questions about
the provision of safe and adequate electric service are within the Board's
exclusive jurisdiction, whereas customer damage claims against defendants
for the negligent failure to provide such service are not, and while the
Board's findings about whether defendants satisfied the regulations and
complied with its orders could be probative of whether they had been
negligent they are not determinative of the issue.

In these actions, consolidated as one class-action lawsuit, plaintiffs
sought damages from GPU, Inc., and related entities for electric-service
outages arising from high demand during a weeklong heatwave in July 1999.
Plaintiffs attributed the outages to defendants' negligence in operations,
maintenance and planning for a predictable event. Defendants moved without
success to dismiss in favor of the primary jurisdiction of the Board of
Public Utilities. Defendants argue here that the Board must consider
plaintiffs' claims before a court does, in order to preserve the integrity
of its oversight functions. Plaintiffs and the Board as amicus disagree.
The Board asserts that it has finished its investigation of the power
outages and has ordered appropriate measures to prevent a recurrence. It
declares that trial of this case in the Law Division will not prejudice the
Board or the public interest as long as any new issue within its exclusive
jurisdiction is referred to it. No such issue is presently identified.
Defendants also argue that plaintiffs have no right to a jury trial of
their claims. Held: The Law Division judge properly retained jurisdiction
over these claims, rather than defer to the Board. Future developments may
require reference of certain issues to the Board, but not at present.

The Board found that "there is not a prima facie case demonstrating that
overall GPU provided unsafe, inadequate or improper service to its
customers." However, the Board did consider the outages "significant,"
because up to 105, 000 of defendants' 988,000 customers were without power
on the same day during the period. It believed that "GPU can improve its
reliability -- from its decision-making process down to and including its
maintenance program, record-keeping, and restoration performance -- and
achieve measurable results for improved reliability." It further believed
that "GPU also must re-examine its workforce adequacy." The order contained
numerous provisions for defendants to improve maintenance, operations,
planning and work force development, with the Board to monitor " on an
ongoing basis" defendants' compliance with this and prior orders. Some of
the provisions required that defendants complete the work or furnish a
report or plan by specific dates. The BPU did not regard the Law Division
action as inconsistent with its own needs and functions, as long as the
court remained "mindful of areas as they develop in which the Board's
expertise may be necessary."

The May 1, 2000, order stated, in pertinent part:

We believe that by issuing this Order, monitoring GPU's compliance, and
continuing to establish reliability standards, this Board is appropriately
exercising its essential jurisdiction over this utility concerning outages
and assuring that the utility provides reliable power to the public.... GPU
will have to comply with any and all requirements that are the result of
the reliability study now underway. We believe that in the circumstances
herein this is the soundest use of the Board's resources, the approach best
suited to our duty to the public to regulate utilities. We are confident
that in the Superior Court litigation, the parties and the Court will be
mindful of areas as they develop in which the Board's expertise may be
necessary. (Emphasis supplied.)

In that light, and because of its general finding that defendants had not
provided unsafe, inadequate or improper service, the Board saw no reason at
this juncture to take further action. Thus, the Board declined to exercise
any "primary jurisdiction."

The Law Division judge characterized primary jurisdiction as posing the
question of whether the complaints presented issues "that require the
special competence of an administrative agency." He found they did not
because the issues were "whether GPU acted reasonably in supplying
electricity and whether (GPU) breached their duty to their customers," and
those issues "do not involve the interpretation of the tariff, nor do they
concern the rates and regulations of the electricity industry nor the
interpretation thereof."

In addition, in the context of rejecting the motion that defendants made to
dismiss for failure to exhaust administrative remedies and have since
abandoned, the judge found that the Board's expertise was "not critical"
for addressing the "basic concepts of negligence" that will govern this
case, and that the court could not override the Board's articulated
disinclination to " resolve the damage claims in this particular matter."

The judge added that he was retaining jurisdiction to "give those who have
been damaged an even-sided forum to resolve ... those claims." Where the
Board has issued its opinion finding it had fulfilled its statutory
responsibilities and there was no current prospect of identifying an issue
that would suggest it ought to retain jurisdiction, those findings are
entitled to deference.

The agency has the authority to interpret its enabling legislation, and the
discretion to determine the scope of its mandate and the means needed to
fulfill it. "The grant of authority to an administrative agency is to be
liberally construed to enable the agency to accomplish the Legislature's
goals," Gloucester Cty. Welfare Bd. v. State Civil Serv. Comm'n, 93 N.J.
384, 390 (1983), and the agency's construction of its enabling act " will
prevail" if not plainly unreasonable, Merin v. Maglaki, 126 N.J. 430, 437
(1992). When such a "quasi-legislative" decision reflects "agency
expertise," the court must "accord due deference to the policy views of the
agency." In re Bergen County Bd. of Chosen Freeholders, 172 N.J. Super.
363, 369 (App. Div. 1980).

The Board is not asserting its prerogative of statutory interpretation of
areas the Legislature declared to be within its exclusive jurisdiction due
to its special expertise but rather asserts a factual conclusion -- the
events in issue raise only ordinary questions of negligence, the type no
participant in this appeal argues are within its special expertise. The
Board's assessment that judicial jurisdiction does not currently appear to
infringe on its statutory mandate merits the type of deference the above
authorities recommend.

The Board's present position accords with the extant case law on primary
jurisdiction. Primary jurisdiction is defined as the circumstance in which
a court declines original jurisdiction and refers to the appropriate body
those issues which, under a regulatory scheme, have been placed within the
special competence of an administrative body. The doctrine is related to
the practice of requiring the exhaustion of administrative remedies.

In primary jurisdiction, the case is properly before the court, but agency
expertise is required to resolve the questions presented; by contrast, when
a court relies on exhaustion, it is saying that the case ought to have been
brought before the administrative agency in the first place. One purpose of
primary jurisdiction is to allow an agency to apply its expertise to
questions that require interpretation of its regulations. The other main
purpose of primary jurisdiction is to preserve uniformity in the
interpretation and application of an agency's regulations. The general test
for when a court should defer to an agency's primary jurisdiction is:
deference is appropriate only if "to deny the agency's power to resolve the
issues in question" would be inconsistent with the "statutory scheme" that
vested the agency "with the authority to regulate (the) industry or
activity" it oversees. United States ex rel. Haskins v. Omega Inst., Inc.,
11 F. Supp.2d 555, 561 (D.N.J. 1998).

The factors to be considered in deciding whether to invoke the doctrine
include whether the matter at issue is within the conventional experience
of judges; 2) whether the matter is peculiarly within the agency's
discretion, or requires agency expertise; 3) whether inconsistent rulings
might pose the danger of disrupting the statutory scheme; and 4) whether
prior application has been made to the agency. Boldt v. Correspondence
Management, Inc, 320 N.J. Super. 74, 85 (App. Div. 1999).

But, primary jurisdiction cannot be invoked when the claim is outside the
agency's jurisdiction, or when the remedy for such a claim is outside the
agency's power. In Brooks v. Public Serv. Elec. & Gas, 1 N.J.A.R. 243,
243-44 (1981), the petitioner, a customer of the utility, filed a court
action claiming damages for the utility's negligence in failing to restore
electric service within a reasonable time following a hurricane and in not
notifying him. The court transferred the matter to the Board, on the ground
that the Board had jurisdiction "of a dispute concerning 'the supplying or
nonsupplying of power.'" Id. at 243-44. The Board transferred it to the
Office of Administrative Law as a contested case.

The administrative law judge found that the Board lacked statutory
authority "to decide common law tort actions in any respect," that the
Legislature could not constitutionally grant such authority by statute, and
that any tariff would be " constitutionally defective" to the extent that
it was "found to control, by its terms, the determination of a common law
tort action." Id. at 244-46. The question of the utility's duty should be
resolved by the common law and a jury, rather than by N.J.A.C. 14:3-3.9's
standards for providing and restoring service and the coordinate tariff
provisions. Id. at 246.

Those principles would be no different if the case were a class action,
because the amount of damages that the utility might have to pay could not
defeat " constitutional jury trial rights." Ibid. Defendants attempt to
distinguish Brooks as involving a singular, simple negligence claim that
did not implicate Board standards or policy because, unlike in the cases
before the court, the plaintiff made no assertions about the utility's
systemwide facilities or operations. An inquiry into the operational,
construction or maintenance mistakes that deprived one customer of electric
service perhaps may be different in nature, not just in scope, from an
inquiry into how such mistakes deprived many customers of electric service.
Nonetheless, as Brooks indicates, the nature of a plaintiff's claim is not
diluted simply because there are many plaintiffs with such claims. When a
claim presents some issues that are within an agency's special expertise
and others which are not, the proper course is for the court to refer the
former to the agency, and then to apply the agency's findings or
conclusions to its determination of the remaining issues. The federal
courts have addressed whether a court should allow an agency that has
primary jurisdiction to proceed first. When the issue is how to apply a
regulation, it is appropriate for a court to "postpone such a decision to
allow an administrative agency to make the initial decision" when doing so
will serve the purposes of primary jurisdiction, which generally are the
"(u) niformity of regulations and the use of the expert and specialized
knowledge of the agency." Shell Oil Co. v. Nelson Oil Co., Inc., 627 F.2d
228, 232 (Temp. Emer. Ct. App.), cert. denied, 449 U.S. 1022 (1980). Even
when primary jurisdiction applies, the doctrine does not confer exclusive
jurisdiction on an agency, with the attendant effect of limiting cognizable
remedies to those within the agency's authority. On the contrary, a court
can consider all judicial remedies, including damages, that are beyond the
agency's authority; a legislative intent to defeat them will be inferred
only if the Legislature has "explicitly limited the availability of that
remedy or relief." Boldt, 320 N.J. Super. at 87.

In terms of this case, these authorities suggest that certain questions
about the provision of safe and adequate electric service are within the
Board's exclusive jurisdiction, whereas customer damage claims against
defendants for the negligent failure to provide such service are not. The
Board's findings about whether defendants satisfied the regulations and
complied with its orders could be probative of whether they had been
negligent, but not determinative of the issue. Because the Board's findings
would not control, the Board did not have exclusive "primary" jurisdiction
over these damage claims. Indeed, the Board lacked authority to consider
the remedy of damages at all. The Legislature did not explicitly provide
that the Board's lack of authority to award damages had the effect of
divesting plaintiffs of that remedy. This lack of the Board's authority is
an additional reason these claims belong in a court. No controlling
principle suggests that the court was compelled to let the Board's
investigation proceed first, but that question is moot because the Board
has now declared its task concluded and did so during the pendency of this

Held: The Board did not enjoy primary jurisdiction, or exclusive
jurisdiction, over this damage action for ordinary negligence. On the
remand, the Law Division judge is to grant intervenor status to the
attorney general and the ratepayer advocate. R. 4:33. Both have expressed a
keen desire to follow this matter on remand. Issues may arise on the remand
that could trigger a legitimate desire on the part of defendant or amici to
pursue a renewed application for transfer of discrete issues for
consideration by the Board under the doctrine of primary jurisdiction. Any
such application for transfer to the agency will be for the Law Division
judge to consider within the contours of case law discussed and the issues
that emerge on the remand. The Law Division judge must decide in the first
instance just what weight and validity to give the Board's findings and
conclusions in its May 1, 2000, order. The matter at the moment is too
abstract and novel to provide the judge with any more precise guidance.

Finally, turning to whether plaintiffs have the right to a jury in a civil
trial, that right is guaranteed only for causes of action at law, not at
equity. Plaintiffs are entitled to a jury trial in this action at common
law for money damages. Affirmed. (Muise v. GPU, Inc., A-2393-99T2;
Appellate Division; opinion by King, P.J. A.D.; decided and approved for
publication June 14, 2000. Before Judges King, Carchman and Lefelt. On
appeal from the Law Division, Monmouth County. Judge Chaiet. DDS No.

Digested by Steven P. Bann (The slip opinion is 36 pages long.) For
appellant GPU, Inc. -- Douglas S. Eakeley (Lowenstein Sandler; Eakeley,
Peter L. Skolnik and Gavin J. Rooney of counsel). For respondents -- Frank
S. Gaudio and Gerhard P. Dietrich (Miller & Gaudio and Daller Greenberg &
Dietrich; Gaudio, Dietrich, Scott C. Arnette and Alison R. Rohmer of
counsel). For amicus curiae: Board of Public Utilities -- Susan J.
Vercheak, Deputy Attorney General (John J. Farmer Jr., Attorney General;
Andrea M. Silkowitz, Assistant Attorney General, of counsel); Division of
the Ratepayer Advocate -- Gregory Eisenstark, Deputy Ratepayer Advocate
(Blossom A. Peretz, Ratepayer Advocate; Eisenstark and Diane Schulze,
Assistant Deputy Ratepayer Advocate, on the brief); Elizabethtown Water
Company, Edison Water Company and Liberty Water Company -- Wilentz, Goldman
& Spitzer (John A. Hoffman and Christine D. Petruzzell on the brief);
Minning/Elio's -- Eichen, Cahn & Parra, and Lombardi & Lombardi (Daniel
Epstein and Scott Telson on the brief); National Association of Water
Companies -- Norris, McLaughlin & Marcus (Walter G. Reinhard on the brief);
New Jersey Utilities Association -- LeBoeuf, Lamb, Green & MacRae (Stephen
B. Genzer and Colleen A. Foley on the brief). (New Jersey Law Journal, July
3, 2000)

REZULIN: Cases Centralized in Southern District of New York
A number of cases brought against Warner-Lambert and its subsidiary
Parke-Davis Corp. regarding the drug Rezulin have been consolidated in U.S.
District Court for the Southern District of New York, centralized for the
convenience of the parties and witnesses, and for purposes of a just,
efficient litigation. In re Rezulin Products Liability Litigation, MDL No.
1348 (J.P.M.L., June 9, 2000).

The pending cases were transferred to the New York federal court by the
Judicial Panel on Multidistrict Litigation.

JPML Chairman John F. Nangle noted, "Given the geographic dispersal of
constituent actions and potential tag-along actions, no district stands out
as the geographic focal point for this nationwide docket. Thus we have
searched for a transferee judge with the time and experience to steer this
complex litigation on prudent course. By centralizing this litigation in
the Southern District of New York before Judge Kevin Thomas Duffy, and
experienced transferee judge for multidistrict litigation, we are assigning
this litigation to a seasoned jurist with a low caseload."

Due to the fact that numerous class action and individual lawsuits have
been filed in several federal courts alleging liver damage and death
resulting from ingestion of Rezulin, Warner-Lambert's Type II diabetes
drug, the attorneys for Amparo Magdalena filed their petition for
centralization on March 29, 2000. Magdalena sued Warner-Lambert Co. and its
Parke-Davis division in the U.S. District Court for the Central District of
California the day before. Several other suits were filed by patients who
took Rezulin. The petition for centralization stated that transfer of the
federal actions to one forum will promote convenience, justice and
efficiency. Centralization will prevent an undue imposition upon witnesses
by avoiding duplicative discovery requests, the attorneys stated.

The complaints alleged common issues of fact involving the defendants'
purported negligence and strict liability in marketing and manufacturing
Rezulin. All plaintiffs further contended that the defendants acted
intentionally in misrepresenting the drug's safety, according to the

Magdalena's attorneys sought transfer of the cases to the U.S. District
Court for the Central District of California or to the Southern District of
Ohio where another Rezulin products liability case is pending. The
attorneys advised the JPML that the federal judges of the Central District
of California are experienced in managing complex litigation. They also
recommend U.S. District Judge Sandra S. Beck of the Southern District of

Magdalena's counsel further attempted to dissuade the JPML from
centralizing the litigation in the U.S. District Court for the District of
New Jersey, where the defendants are headquartered. The attorneys argued
that transfer to a forum where the plaintiff resides "recognizes the keen
interest that the plaintiffs have in directing their own litigation and
will permit the named plaintiffs to remain active in the prosecution of
their claim."

Attorneys for the plaintiffs in two class actions filed a second petition
for centralization, Jones v. Warner-Lambert Co., No. 00cv798 (N.D. Ala.,
2000), and Huston et al. v. Warner-Lambert Co. et al. , No. 00cv856 (N.D.
Ohio, 2000). The Huston and Jones attorneys urged the JPML to transfer the
cases to the Northern District of Ohio because the actions are brought on
behalf of a nationwide class of consumers. A central location that is not a
congested metropolitan area would be most convenient for the majority of
counsel, they claimed.

The attorneys specifically recommended centralization before U.S. District
Judge Patricia A. Gaughan of the Northern District of Ohio. Alternatively,
they suggested the litigation be transferred to the Northern District of
Alabama. (Pharmaceutical Litigation Reporter, July 2000)

SUNDSTRAND CORP: Pension Benefits Miscalculation Suit Dismissed in IL
U.S. District Judge Philip G. Reinhard of the Northern District of Illinois
has dismissed an ERISA class action brought by former executives of
Sundstrand Corp. over the alleged miscalculation of their pension benefits.
The judge found the calculations were correct because the company
considered multiple forms of compensation. White et al. v. Sundstrand Corp.
et al., No. 98 C 50070 (N.D. Ill., May 23, 2000).

The plaintiffs, headed by William R. White, are one-time executives of
Sullair Corp., which Sundstrand acquired in 1984. Sullair established the
plaintiffs' pension plan in 1981, and it was subsequently merged into
Sundstrand's retirement plan. The terms of the Sullair plan based benefits
calculations on "average compensation," and utilized Federal Insurance
Contributions Act-taxable compensation as the litmus test for what
constituted "compensation" for the plan's purposes.

In alleging that Sundstrand violated the Employee Retirement Income
Security Act (ERISA) by miscalculating their benefits, the plaintiffs
asserted that directors' fees, mortgage interest payments and relocation
expenses should have figured into the plan's calculations. Judge Reinhard
found the defense to "have produced uncontroverted evidence that Sundstrand
recalculated the pension benefits of all eligible participants to include
such payments."

Sullair had made profit-sharing payments in the years prior to its
acquisition, and the plaintiffs asserted that these payments should have
been treated as "compensation" by the plan. Judge Reinhard noted that this
issue was taken by the claimants to the plan's appeal review committee,
which determined that profit-sharing did not constitute compensation under
the 1981 plan, but would be treated as such pursuant to the plan as amended
in 1984. "Plaintiffs have not shown how the Appeal Review Committee's
decision could be viewed as unreasonable," wrote the court.

The plaintiffs' next challenge went to the plan's calculation of the rate
that it used to offset the participants' monthly benefits by their
interests in the company's employee stock ownership plan. The executives
contended that the ESOP offset amount should have been calculated with an
immediate annuity rate, rather than the deferred annuity rate utilized by
the plan.

Judge Reinhard found the plaintiffs failed to meet their burden of showing
that the plan's decision was "downright unreasonable." "Plaintiffs have not
produced any evidence refuting the plan actuaries' position that use of an
immediate annuity rate penalizes the long-term Sullair employee," he wrote.
"A desire to protect long-term employees is consistent with the goals of
any pension plan."

The court also rejected the executives' contention that the defendants
breached their fiduciary duties under ERISA by failing to implement the
plan solely in the interests of the participants and by failing to comply
with statute's disclosure and reporting requirements. The judge found the
relief sought in this count to mirror that sought in the first. "That
plaintiffs were unsuccessful with their denial of benefits claims under
ERISA, Sec. 1132(a)(1)(B) does not make their breach of fiduciary duty
claim under Sec. 1132(a)(3) viable," he said.

Lead plaintiff White asserted that the defendants had initially granted his
request that profit-sharing would be considered in the calculation of his
benefits, and then reversed that decision after he asked that the same
adjustment be made for all eligible participants. White argued that this
constituted a retaliation violative of ERISA, Section 510.

Judge Reinhard, however, held that the record presented no indication that
White or any other plaintiff exhausted any administrative remedies with
respect to a retaliation claim, and barred the claim on that basis.
(Corporate Officers and Directors Liability Litigation Reporter, July 3,

TOBACCO LITIGATION: Company Atty. Urges Jury Not to Make Huge Punitive
A tobacco company attorney urged jurors Wednesday not to make sick Florida
smokers instantly rich with a huge punitive damage award in a landmark
class-action case against the industry. ''They can become instant
millionaires as a bonus above and beyond fully compensating them for their
injuries,'' Dan Webb said in closing arguments. ''In many ways, the future
of my client Philip Morris and its employees and its stockholders rest in
your hands.''

Webb, who also is the lead attorney for five cigarette makers, doesn't want
jurors to award punitive damages at all, but he suggested $75 million to
$300 million as a framework for jury consideration rather than the smokers'
request for $123 billion to $196 billion. On Tuesday, Webb had called those
numbers ''a death warrant'' for the industry. The request ''will destroy
each of these companies, not once, but 10 times over.'' With half of U.S.
cigarette sales, Philip Morris Inc. is being asked to pay the most money
among the five tobacco companies.

Another Reynolds attorney, Jim Johnson, told jurors Wednesday that the ill
smokers and their attorney, Stanley Rosenblatt, won't be satisfied unless
they close the five major cigarette companies. ''(The smokers') ultimate
answer is to put Reynolds and the other defendants out of business,''
Johnson said. ''Clearly the only behavior change which would really satisfy
Mr. Rosenblatt and the witnesses he presented is to stop the sales of

Reynolds cannot pay a substantial award because its current debts outpace
its ready cash, he said. ''Like many individuals, Reynolds is living
paycheck to paycheck.''

If the jury awarded $75 million, the average sick smoker would receive
about $150 if split among 500,000 people a mid-range estimate of the number
of smokers who could be eligible. If the jury granted the smokers' request
for $196 billion, they would each receive almost $400,000.

The companies have argued that they should not be required to pay any more
than their combined net worth of $15.3 billion, the difference between
their assets and liabilities.

Attorneys for Brown & Williamson Tobacco, Lorillard Tobacco and Liggett
Group were to give their closing arguments later Wednesday and Thursday.
The jury could get the case by the end of the week.

The six jurors already have decided during the two-year trial that the
industry makes a deadly, defective product and has awarded $12.7 million in
compensatory damages to the three representative smokers. The jury must now
decide how much to award in punitive damages, which are intended to punish
and deter misconduct.

The industry's key defense is that it has changed its ways since states
began suing in 1994, and that the $257 billion national settlement with the
states is enough to pay.

The case the first smokers' class-action lawsuit to go to trial is the
gravest financial threat to the industry since the state settlements. Any
decision will be appealed and could take at least two years to move through
Florida's courts.

Under Florida law, a punitive damages verdict cannot put a company out of
business and judges are required to reduce any award that would. In
addition, some tobacco states in recent months have passed laws to protect
the companies from having to post a ruinous amount of money while they
appeal. (AP Online, July 12, 2000)

TOBACCO LITIGATION: Firms Say 154 Bil Damages Would Bankrupt Makers
The US tobacco industry would go bankrupt if forced to pay out the 154
billion dollars in damages sought by Florida plaintiffs in a landmark case,
a defense attorney said on Tuesday. "If you award only six billion dollars,
Philip Morris is gone, it's destroyed, because that is our current value,"
a lawyer for the US number one cigarette manufacturer, Dan Webb said.

A day earlier, Stanley Rosenblatt asked the trial jury to award the 154
billion dollar sum, having suggested 122 billion dollars as the minimum
payment and 196 billion dollars the maximum compensation.

The class action is on behalf of some 500,000 to 700,000 people in Florida
who are sick with smoking-related illnesses.

Specifically, Rosenblatt asked that US number one cigarette manufacturer
Philip Morris -- which has around 50 percent of the market -- be forced to
pay between 75 billion and 118 billion dollars. But, said Webb: "That
amount will destroy each of these companies, not once, but 10 times over.
"He (Rosenblatt) doesn't seek truth, he does not seek fairness, he only
seeks money," he added, noting that 13,000 people employed worldwide by his
company would lose their jobs. "A large punitive damage award will have a
devastating impact on Philip Morris stockholders. The companies won't be
able to compete any more in the marketplace," he added.

The tobacco firms were convicted in July 1999 in the first class-action
suit against Big Tobacco to go to trial, after being found guilty of
knowingly selling products that caused illnesses to users.

The jury ruled that cigarette makers Philip Morris, RJ Reynolds, the
Liggett Group, Lorillard Tobacco and Brown and Williamson should be held
liable for producing a lethal product that harmed smokers, and rejected a
request from the tobacco firms to establish a limit on penalties.

But according to Webb, his company's conduct in business had changed in the
last three years. "Those conclusions were based on the conduct of the
past," he said.

"Philip Morris has changed, it is not engaged in the conduct that you
condemned in your first verdict on phase one," he said. During final
arguments on Monday, Rosenblatt had attempted to demonstrate that the
tobacco companies acted in bad faith, even though they had created a youth
smoking prevention program in 1998.

The program was part of the 246 billion dollar settlement agreement between
the 50 states and US tobacco companies, which were being sued for the
health costs states incurred to treat smokers' illnesses.

The lawyer pointed out that while Philip Morris spent 100 million for the
prevention program -- "peanuts" -- the company had spent six billion on
advertising. He also criticized the tobacco companies' CEOs for failing to
apologize for their actions.

A Florida law outlaws damage awards that would force firms to go out of
business. However, Judge Robert Kaye last week rejected a request from the
tobacco firms to limit penalties to 15 billion dollars.

A verdict is expected in the penalty phase of the case by the end of July.
(Agence France Presse, July 12, 2000)

TOBACCO LITIGATION: Firms Suggest Settlements; PM Calls $75M Fair
The nation's leading cigarette maker would rather pay millions than
billions if a jury decides the tobacco industry should pay punitive damages
in a case involving up to 700,000 sick Florida smokers.

Attorney Dan Webb, who represents Philip Morris Inc., doesn't want jurors
to award punitive damages at all. But he suggested during closing arguments
Tuesday that $75 million would be ''a fair amount'' for his company, based
on ready cash and the percentage of customers living in Florida.

The amount would average to $150 per person if split among a mid-range
estimate of 500,000 sick smokers covered by the landmark class-action
lawsuit. Philip Morris is being asked to pay the most money among the five
tobacco companies.

The companies have argued that they should not be required to pay any more
than their combined net worth of $15.3 billion, the difference between
their assets and liabilities. The smokers have asked for $123 billion to
$196 billion, with a suggested amount of $154 billion. ''That's a request
for a death warrant for each of these five companies,'' said Webb, the lead
tobacco attorney in the case. ''That amount will destroy each of these
companies, not once, but 10 times over.''

The four other tobacco companies R.J. Reynolds Tobacco, Brown & Williamson
Tobacco, Lorillard Tobacco and Liggett Group were to give their give
closing arguments Wednesday and Thursday. The jury could get the case by
the end of the week.

The six-member jury already has decided that the industry makes a deadly,
defective product and awarded $12.7 million in compensatory damages to the
three representative smokers. The jury must now decide how much to award in
punitive damages, which are intended to punish and deter misconduct.

The key tobacco defense is that the industry has changed its ways since
states began suing in 1994, and that $257 billion in settlements with the
states is punishment enough.

The case the first smokers' class-action lawsuit to go to trial represents
the gravest financial threat to the industry since the settlements. Any
decision will be appealed and could take at least two years to move through
Florida's courts.

Under Florida law, a punitive damages verdict cannot put a company out of
business, and judges are required to reduce any award that would. In
addition, some tobacco states in recent months have passed laws to protect
the tobacco companies from having to post a ruinous amount of money while
they appeal.

            PM Says $75 Million Punitive Would Be Fair

If a jury must impose punitive damages on the tobacco industry, $75 million
would be a fair payment for industry-leading Philip Morris Inc. rather than
the $75 billion to $119 billion share sought by smokers, a company attorney

The amount suggested in closing arguments Tuesday by attorney Dan Webb
would average $150 per person if split among a mid-range estimate of
500,000 sick Florida smokers covered by the landmark class-action lawsuit.

Applying a different equation, Webb noted the industry would owe $2
trillion if each smoker received an average $4 million in compensatory
damages based on the three cases decided so far. Punitive damages would be

Webb said his $75 million figure would be "a fair amount" for Philip
Morris, whose Marlboro brand commands 36 percent of the U.S. market, based
on ready cash and the percentage of customers living in Florida.

Attorneys for Winston-Salem-based R.J. Reynolds Tobacco Co.,
Greensboro-based Lorillard Tobacco Co. and two other companies were to
deliver their closing arguments Wednesday and Thursday after Webb completes
his remarks. The jury may get the case late this week.

Smokers' attorneys asked for $123 billion to $196 billion Monday to punish
the nation's five biggest tobacco companies for decades of deception. (The
Associated Press, July 12, 2000)

TOBACCO LITIGATION: Judge Says Jurors Should Not Award Crippling Fine
Jurors in a landmark tobacco lawsuit should only award damages which the
industry could currently afford to pay, the judge said on July 11, defusing
a call by the plaintiffs' attorney for cigarette manufacturers to pay up to
$ 196 billion in damages.

Tobacco analysts greeted Judge Robert Kaye's instruction with relief.
Martin Feldman of Salomon Smith Barney said: "If the jury awarded a
giga-digit number against the industry, Judge Kaye would have a duty to
reduce it to a manageable amount."

Tobacco industry representatives argued during the Engle class action that
the industry could afford no more than Dollars 15.3 billion, rather than
damages in the range of $ 123-196 billion, which Stanley Rosenblatt, the
plaintiffs' lawyer, called for on Monday.

Mr Feldman said a $ 15 billion award would be "a shock to the general
public but a relief to the industry".

Making his closing arguments in the class action in Miami, Dan Webb, an
attorney for Philip Morris, said a multi-billion dollar punitive damages
award would be "a death warrant" for US tobacco companies. Damages of
Dollars 75m would be more appropriate, he said. (Financial Times (London),
July 12, 2000)

TOBACCO LITIGATION: MS $102 Mil Wrongful Death Suit Rejected
A jury rejected a $102 million wrongful death suit Wednesday filed against
a tobacco company by the widow of a longtime smoker who died of lung
cancer. Kay Nunnally had claimed in her lawsuit against R.J. Reynolds
Tobacco that her late husband, 37-year-old Joseph Lee Nunnally, developed
the cancer in 1987 after smoking cigarettes from the time he was a child.
The jury received the case late Tuesday after attorneys for Reynolds and
Nunnally, of Southaven, completed their closing arguments. ''Nobody made
him smoke,'' Reynolds' attorney Mike Ulmer said of Joseph Nunnally in his
closing argument. ''He had a right to choose and that's what this case is
all about.''

A defense expert witness, Dr. George Seiden of Shreveport, La., a
psychiatrist, had testified that his experience and review of Nunnally's
medical records led him to believe that Nunnally knew the hazards of
smoking and could have stopped smoking if he had felt motivated to do so.

Kay Nunnally's attorney, Charles Merkel, said the company's focus on
profits blinded company officials to the fact that they sold a dangerous
product. ''Greedy, selfish and uncaring that's what their actions have
demonstrated,'' Merkel told the jury. ''The bottom line, net profit, is the
only thing R.J. Reynolds understands.''

In Florida, jurors are considering whether to levy a punishing punitive
award against five tobacco companies on behalf of hundreds of sick smokers
in the state in a landmark class-action suit. The jury has already awarded
three representative smokers $12.7 million in compensatory damages. (AP
Online, July 12, 2000)

TOBACCO LITIGATION: Reynolds Attorney Says Smokers Want to Stop Sales
The true intent of sick Florida smokers is to stop the sale of cigarettes
with a steep punitive damage verdict, and that wouldn't be hard with R.J.
Reynolds, a company attorney said Wednesday in closing arguments.

Attorney Jim Johnson told jurors that the ill smokers and their attorney,
Stanley Rosenblatt, won't be satisfied unless they close the five major
cigarette companies. "(The smokers') ultimate answer is to put Reynolds and
the other defendants out of business," Johnson said. "Clearly the only
behavior change which would really satisfy Mr. Rosenblatt and the witnesses
he presented is to stop the sales of cigarettes."

Reynolds cannot pay a substantial award to 300,000 to 700,000 smokers
covered by the landmark lawsuit because its current debts outpace its ready
cash, he said. "Like many individuals, Reynolds is living paycheck to

Philip Morris attorney Dan Webb earlier Wednesday asked jurors not to make
those covered by the first smokers' class-action trial instantly rich with
a big verdict. "They can become instant millionaires as a bonus above and
beyond fully compensating them for their injuries," he said. "In many ways,
the future of my client Philip Morris and its employees and its
stockholders rest in your hands."

Webb doesn't want jurors to award punitive damages at all, but he suggested
$ 75 million to $300 million as a framework for jury consideration rather
than the smokers' request for $123 billion to $196 billion.

In remarks Tuesday, Webb called those numbers "a death warrant" for the
tobacco industry. The request "will destroy each of these companies, not
once, but 10 times over."

Webb based his suggested range on Philip Morris' cash on hand and
inventory, but not requiring any layoffs or sale of factory and equipment.

If the jury awarded $75 million, the average sick smoker would receive
about $150 if split among 500,000 people - a mid-range estimate of the
number of smokers who could be eligible. If the jury granted the smokers'
request for $196 billion, they would each receive almost $400,000.

The companies have argued that they should not be required to pay any more
than their combined net worth of $15.3 billion, the difference between
their assets and liabilities.

Attorneys for Brown & Williamson Tobacco, Lorillard Tobacco and Liggett
Group were to give their closing arguments later Wednesday and Thursday.
The jury could get the case by the end of the week.

The six-member jury already has decided during the two-year trial that the
industry makes a deadly, defective product and awarded $12.7 million in
compensatory damages to three representative smokers. The jury must now
decide how much to award in punitive damages, which are intended to punish
and deter misconduct.

The key tobacco defense is that the industry has changed its ways since
states began suing in 1994, and that $257 billion in settlements with the
states is enough to pay.

The case represents the gravest financial threat to the industry since the
settlements. Any decision will be appealed and could take at least two
years to move through Florida's courts.

Under Florida law, a punitive damages verdict cannot put a company out of
business, and judges are required to reduce any award that would. In
addition, some tobacco states in recent months have passed laws to protect
the tobacco companies from having to post a ruinous amount of money while
they appeal. (The Associated Press State & Local Wire, July 12, 2000)

TOBACCO LITIGATION: State Laws Limit Damages against Industry
Florida and several tobacco-producing states have passed laws designed to
protect the tobacco industry in case of a crippling verdict in the Florida
class-action smokers' trial. In Florida, defendants who appeal a verdict
generally must post the full award as bond while appealing damages. But
these new laws cap the bond that tobacco companies would have to post
during appeals.

State legislators and the tobacco industry say the laws protect companies
from certain bankruptcy. But anti-tobacco forces say the caps unfairly
shield cigarette makers and violate the Constitution by failing to respect
court decisions from other states.

Following is a list of state caps on the bond cigarette makers would have
to post during appeals:

       - Florida: $100 million or 10 percent of the companies' net
          worth, whichever is lower.

       - Georgia: $25 million.

       - Kentucky: $100 million.

       - North Carolina: $25 million.

       - Virginia: $25 million.

TORONTO HYDRO: Late Payment Fees Put Canadian Munis in Court
A class action lawsuit against Toronto Hydro is underway in the Ontario
Superior Court of Justice, claiming that the municipal electric utility,
and other munis in Ontario, charged electric customers late payment
penalties on unpaid bills, which amounted to usurious illegal rates of
interest over nearly 20 years. The claim in the lawsuit is for a total of
$350 million, which is the plaintiff s estimate of the losses by all
electric utility customers in Ontario due to MEU charges since 1981.

The court case is Jonathan Griffiths vs. Toronto Hydro. In the plaintiff s
statement of claim, it is alleged that unpaid utility bills were subject to
monthly late payment fees of 5 percent or 7 percent of the amount charged,
equivalent to annual rates of interest in excess of 60%, which is illegal
under the Criminal Code of Canada.

Toronto Hydro is being sued as a representative of other Ontario MEUs,
which have also allegedly charged illegal interest rates. The plaintiff
indicated that it "brings this action under the Class Proceedings Act,
1992, on behalf of a plaintiff class consisting of all persons who (a). are
or were customers of any municipal electric utility in Ontario which is a
member of the defendant class and (b). paid or have been charged for any of
such municipal electric utilities late payment penalties at any times after
April 1, 1981."

In its defense, Toronto Hydro notes that it was regulated by Ontario Hydro,
which approved its rates, before the electric industry restructuring of
1999. Since mid-1999, Toronto Hydro has been regulated by the Ontario
Energy Board. Toronto Hydro admitted it had used late payment charges on
unpaid bills, as well as prompt payment discounts, but denied that they
amounted to a criminal rate of interest under law. Toronto Hydro now
charges only 1.5 percent on unpaid bills.

A Toronto Hydro representative indicated that the claim is not yet
certified as a class action lawsuit, and that the Municipal Electric
Association of Ontario is undertaking the defense with Toronto Hydro. (The
Electricity Daily, July 12, 2000)

WACHOVIA NATIONAL: Settles ERISA Violations Suit in N.D. Alabama
Wachovia National Bank N.A., as the successor to the trustee of an employee
stock ownership plan, has agreed to pay millions to the plan to end
litigation accusing the trustee of breaching fiduciary duty under the
Employee Retirement Income Security Act of 1974 in connection with a stock
purchase. Herman v. South Carolina Nat'l Bank. (Bank & Lender Liability
Litigation Reporter, June 29, 2000)

* More Insurers, Plaintiffs Explore Mediation To Resolve Claim Disputes
     Oldwick N.J. (BestWire) - In this litigious society, where lawsuits
can take years to inch their way through clogged court dockets, more
plaintiffs and insurers are exploring mediation in hopes of reaching a
speedy resolution to claims disputes.

This process, a form of alternative dispute resolution, can save time,
expense and angst for all concerned, its advocates say. But industry
representatives point out that mediation is only one tool for settling
disputes and, if it is to succeed, requires a skilled referee and a
willingness on the part of both sides to give and take at the bargaining

"The biggest benefit of mediation for us is it helps us get to a point of
conclusion short of trial," said Lee Bennett, senior vice president and
claim general counsel for St. Paul Cos., an insurer that provides
commercial and medical-malpractice coverages. "Assuming the other party is
rational, we end up with an indemnity payment that is fair and reasonable
vs. having people stay on a trial track, which is a lot more expensive and

From the insurers' standpoint, mediation has played a significant role in
helping to reduce court time and the hours generated by insurers' attorneys
for settling claims, said Loretta L. Worters, spokeswoman for the Insurance
Information Institute, New York. Chubb Group of Insurance Cos., Warren,
N.J., has tried to assess the savings that successful mediations can mean
to its bottom line, but it has yet to come up with a firm figure, said
Michael Marchio, director of claims. "Obviously, it's cheaper because you
do not incur the costs of attorneys for years and years," he said. "But
it's awfully difficult to calculate."

The Insurance Information Institute breaks down tort costs this way: for
the average dollar spent, 24 cents go to litigants for economic losses; 22
cents go to cover their pain and suffering; 16 cents go to the claimant's
lawyer; 14 cents go to defense costs; and 24 cents go to administrative
costs. While only 2% of liability claims are settled by court verdicts,
these verdicts have a disproportionate influence on liability costs,
Worters said. "The number of lawsuits that go to trial have such a large
impact because the size of the settlement is so large," she said.

One of the crucial steps in paving the way to a successful mediation is
choosing the right mediator from a roster of attorneys or judges, said
Diane Kalan, assistant vice president, claims, for SCPIE Indemnity Co.,
Century City, Calif., which specializes in medical-malpractice coverage.
"The wrong mediator can actually lead parties away from resolution," said
Kalan, who has participated in several mediations in recent years. "The
mediator takes the case apart and shows its weaknesses," Marchio said.
"It's more in-your-face-and done in a more direct, open fashion than in a
court of law." As a result, each side can gain a better understanding of
the other's position, thus helping to smooth the way toward possible
settlement, he said.

A chief goal of any good mediator is to gain the confidence and trust of
all the players, said John B. Bates Jr., chairman of practice development
for Jams, a San Francisco-based provider of alternative dispute-resolution
services. Bates, an attorney who began specializing in mediation more than
10 years ago, has handled everything from mass medical-malpractice claims
in Illinois and New York with a $2 million settlement, to class-action
business disputes in Missouri, yielding a $100 million settlement. He
claims a 90% success rate in his mediations. One successful outcome
involved several hundred plaintiffs who were suing a physician in Southern
California. The doctor specialized in phalloplasty, or penile enhancement,
which included the severing of a pelvic ligament and liposuction to add
fat. "He was running this operation where he was doing 10 to 15 of these
procedures a day, and a number of plaintiffs said they were severely
injured and deformed," Bates said.

Besides the large number of plaintiffs and the battery of lawyers
representing them, the parties also included multiple insurance carriers,
because various companies had been writing the doctor's medical-malpractice
policies over the course of several years, Bates said. "So you've got
lawyers, competing carriers, a doctor who wants all this to go away and a
court that would love to get rid of these cases," Bates said. "If you tried
each case, imagine how expensive this would be for the carriers." Bates
devised a strategy.

First, he met with the plaintiffs' lawyers and got them comfortable with
him as mediator and the process he planned to follow. Then he hit the first
major hurdle: Plaintiff lawyers wanted to know the insurance policy limits,
which were envisioned to be in the multimillions of dollars. "I had to find
out what the carriers would be willing to do should the exposure
significantly exceed their policy limits--something they'd been unwilling
to convey to the plaintiff lawyers," Bates said. There were issues about
how much insurance money was available, agreed Joseph Manning, an attorney
with Marshall, Dennehey, Warner, Coleman and Coggin in Livingston, N.J.,
which was representing one of the plaintiffs in the case. "We weren't
looking at a bottomless pit here," he said. "We had to put on some
controls." Bates won an agreement from the carriers on that front, and the
process advanced.

The next step was to find a way to give the carriers an idea of what their
exposure was. Bates had each plaintiff submit his medical records along
with financial information if he had a wage-loss claim. Then each plaintiff
had to fill out a short questionnaire. "Because the defense wanted to know
the worst-case exposure, I suggested to them that I would visit with each
plaintiff and coach him, along with his lawyer, so he could make the
absolutely best presentation to them," Bates said. These coaching sessions
often lasted a couple hours or longer, depending on the "psychological and
emotional aspects of that case," he said.

The mediator, each plaintiff and his attorney then appeared before the
defense attorneys and made their presentations. Bates went through 300 of
those sessions. Each plaintiff's presentation was evaluated and an
allocation figured out. "Ultimately, all the insurance was used," Bates
said, noting that each plaintiff received something and even the lowest
settlement was enough to pay for corrective surgery. "And the carriers were
way ahead of the game, because they avoided the cost of 300 problematic
trials and the risk of getting into litigation with their own insured," he

This mediation--conducted in person and over the telephone--took about nine
months, a long time in a business that often can wrap up
medical-malpractice or commercial insurance cases in an intensive day or
two. But it's nowhere near the estimated five years that it would have
taken these hundreds of cases to come to trial. Furthermore, Bates noted,
"we got closure-there were no appeals. And the plaintiffs could keep
everything private and confidential. The alternative was a public trial."
Manning found that the plaintiffs "needed to vent, and the mediation
process allowed them to tell their story."

Manning has frequently represented plaintiffs in mediations over claims
disputes, and he thinks the approach is gaining ground. More plaintiff
attorneys are open to mediation because it removes some of the unnecessary
fighting that goes on in litigation, he said. Also, the insurers he has
dealt with "are willing to engage in mediation if it has a chance of being
productive," Manning said. "They analyze it on a case-by-case basis. You
have to have the will to participate on both sides. Insurance companies are
receptive to mediation if they recognize they have exposure." But when they
don't, they see no need to participate. Insurers enter into mediation with
the perception that they will wind up paying something, unless they believe
they can obtain "some absolutely definite verdict" in court, said Bennett
of St. Paul Cos.

In the reinsurance realm, the popularity of mediation as a
dispute-resolution tool seems to be growing as well. In February, the New
York-based insurance law firm of Mound, Cotton & Wollan recognized the
increasing demand for mediation services by forming its Reinsurance
Mediation Group. The firm's principals thought the time was ripe to make
the move because reinsurance is becoming more of a legal battleground, they
said. (BestWire, July 11, 2000)

* Senate Panel Moves Bill to Curb Class-Action 'Forum Shopping'
Legislation to shift many interstate class-action lawsuits to federal from
state courts has made its way through the House of Representatives, but a
parallel bill may have a tough time when it reaches the Senate floor.

President Clinton and many other Democrats oppose the measure. The House
has passed the Interstate Class Action Jurisdiction Act, H.R. 1875, and the
Senate Judiciary Committee has passed the Class Action Fairness Act, S.
353. Now, S. 353 can be considered by the full Senate. However, it is
expected to be a "tough fight" in the Senate, said Ken Schloman, Washington
counsel for the Alliance of American Insurers. Sens. Joseph Biden Jr.,
D-Del., and Patrick Leahy, D-Vt., have indicated they will filibuster
against the legislation, a tactic to delay a vote and line up more
opposition. The legislation is designed to stop "shopping" by plaintiffs
for the most favorable state judges and courts for interstate cases, said
Monte Ward, federal affairs representative for the National Association of
Mutual Insurance Companies.

The legislation also would protect plaintiffs from getting the short end of
settlements--preventing lawyers from pocketing millions of dollars while
the plaintiffs receive little or nothing. But congressional observers said
the same situation exists in federal courts, so this provision may be of
little significance.

The bill also faces a squeeze by the Senate legislative calendar, Ward
said, because Senate Majority Leader Trent Lott, R-Miss., has said the
Senate will concentrate on appropriations bills in the weeks ahead. Fewer
than 40 legislative days remain before Congress adjourns in October.

It will break in late July and August for the Democratic and Republican
national conventions and summer vacations. The Alliance said approval of S.
535 by the Judiciary Committee reflects the findings of a survey conducted
by the Insurance Research Council, which found that 70% of consumers
surveyed support reform of class-action litigation. Class-action litigants
are among the few categories that can't seek to have their cases moved to
federal courts. Overall, the legislation would reduce costs in the legal
system without reducing substantive rights of litigants, the Alliance said.

Namic, in a position document, said the "proliferation of questionable
class-certification standards in state courts has created an unfair system
that enables plaintiffs' attorneys to use class action to achieve a desired
result because of the intolerable settlement pressures faced by defendants
after a class is certified." The "big winners" are the plaintiffs' lawyers,
Namic added. Some opponents of the bill fear it would hinder suits against
tobacco and gun companies, for example, because federal courts aren't as
eager the hear such cases as are state courts. (BestWire, July 12, 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. Theresa Cheuk, Managing Editor.

Copyright 1999.  All rights reserved.  ISSN 1525-2272.

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