Federal judge certifies securities fraud class action, dismisses allegations of 'pay-to-play' agreements with Miss. AG

By Jessica M. Karmasek | Aug 2, 2013

SAN FRANCISCO (Legal Newsline) -- A federal judge certified a securities fraud class action against Diamond Foods Inc., dismissing allegations by the company that two law firms that became class counsel were given the job in exchange for campaign contributions to Mississippi Attorney General Jim Hood.

A number of putative class actions were filed on behalf of investors who purchased Diamond securities. The actions were eventually consolidated and the Mississippi Public Employees' Retirement System, or MSPERS, was appointed the lead plaintiff.

The defendants include Diamond; the company's outside auditor, Deloitte & Touche LLP; and individual defendants Michael J. Mendes, former chairman of the board and president and chief executive officer of Diamond, and Steven M. Neil, former chief financial officer.

MSPERS and the other plaintiffs claim violations of the federal Securities Exchange Act and alleges that false and misleading statements relating to payments were made to walnut growers.

In particular, the shareholders accuse Diamond of purposely underestimating the price of walnuts and inflating share prices. They contend the company did so in an effort to buy Pringles from Procter & Gamble Co.

However, that deal fell through in February 2012 when the fraud was allegedly discovered.

The defendants moved to dismiss the consolidated complaint, which was granted as to Deloitte and denied as to the remaining defendants. MSPERS then moved for class certification.

Diamond filed an opposition to the motion, to which the remaining defendants filed motions for joinder.

Judge William Alsup for the U.S. District Court for the Northern District of California, in his May ruling, found class certification in the case is appropriate.

He shot down the defendants' arguments that MSPERS has not demonstrated it will "adequately represent the interests of the class."

In particular, the defendants challenged the plaintiff's selection of counsel, contending that it was selected pursuant to a so-called "pay-to-play" arrangement in which Hood selected counsel for MSPERS from a short list of firms that made political campaign contributions to him.

Upon motion by MSPERS, attorneys from the law firms of Atlanta-based Chitwood Harley Harnes LLP and San Francisco-based Lieff Cabraser Heimann & Bernstein LLP were appointed as class counsel.

Hood's office, according to court documents, retained 13 firms in total to monitor MSPERS' investment portfolio and investigate potential claims of violations of securities laws related to those investments.

"This order must focus on the issue of whether MSPERS' choice of counsel in this case has betrayed the class in some way," Alsup wrote. "In support of its contention that counsel's political contributions led to their appointment by the Mississippi Attorney General's Office, defendant has submitted a chart of contributions made by Chitwood and Lieff Cabraser to Mississippi Attorney General Jim Hood.

"It does not appear that the law firms or their individual attorneys made contributions to Attorney General Hood after counsel were approved by the Court in June 2012."

The defendants also provided to the court information regarding donations made by the firms to the Democratic Attorneys General Association, or DAGA.

"In this case, it is true, the Court has been concerned that MSPERS is a figurehead and that Attorney General Hood has really controlled it and has used this case as a reward for campaign contributions," Alsup wrote in his 29-page order. "Due to that concern, the Court made special inquiries at two stages: the first was at the time of selection of the lead plaintiff and its counsel and the second was on the instant motion.

"According to plaintiff, contributions made to DAGA cannot be earmarked for specific candidates. Nevertheless, there is a sufficient possibility that at least a portion of these contributions, though made to a national, separate organization, might eventually be provided to Attorney General Hood's political campaigns that they should have been disclosed to the Court."

According to court documents, DAGA indeed provided $850,000 to Hood's 2007 campaign and $550,000 to his 2011 campaign.

"Accordingly, an order issued requiring plaintiff's counsel to submit a statement itemizing all contributions made to DAGA by the law firms or its members from January 2012 to the present and to provide any communications between either law firm and the Mississippi Attorney General's Office concerning any such contribution," Alsup wrote.

"Having reviewed the law firms' submissions, it does not appear that there was any communication between the law firms and Attorney General Hood, or his office, regarding any expectation that the law firms contribute to DAGA or that such contributions would eventually make their way to Attorney General Hood."

The judge made a point to note in his order that absent class members "deserve and are entitled to" the most adequate counsel available.

"Just as a lawyer or judge should not participate where there would be an appearance of impropriety, no one should take on the fiduciary responsibility of class counsel when it might reasonably appear that their selection was based on political campaign contributions rather than merit," he wrote. "If the case is lost, as sometimes happens, then class members will have their claims totally extinguished.

"They should then at least take comfort in the belief that class counsel were adequate to the challenge and should not have to worry that class counsel got the job as a reward for political campaign contributions."

Based on the evidence in this case, Alsup said he was "satisfied" that the class counsel will "adequately and vigorously" represent the absent class members.

"From many other lawsuits, the Court knows the excellent work of counsel at Lieff Cabraser and is confident those counsel will bring to bear the same excellence in this case. While the Court is not equally familiar with the Chitwood law firm, at least the Court can say that their conduct herein has been adequate to date," he wrote. "Moreover, the Chitwood firm has made no contributions to DAGA at all since Jan. 1, 2012.

"Defendant has not advanced a record adequate to torpedo this action based on a pay-to-play theory."

Click here to read Alsup's full order.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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