April 2013 Newsletter


Shareholder Claims Against Private Equity Firms Survive Summary Judgment

•  Judge Sustains Securities Fraud Allegations Against LHC Group

•  Supreme Court Renders First Opinion on CAFA

•  Pension Funds Pressure Major Financial Institutions to Reform Compensation Clawback Policies

•  On The Record

•  Conferences and Educational Seminars

Shareholder Claims Against Private Equity Firms Survive Summary Judgment

Top U.S. private equity firms will be forced to defend shareholder claims that ten private equity firms operated a cartel to depress prices paid to shareholders in club deal leveraged buyouts (“LBOs”) between 2003 and 2007. The defendants include the most prominent and well-funded private equity firms in the world: Apollo, Bain Capital, Blackstone, Carlyle, Goldman Sachs, KKR, Providence, Silver Lake, TPG, and Thomas H. Lee. Scott+Scott represents the plaintiff shareholders, which include institutional investors and individuals.

The plaintiff shareholders brought two claims challenging numerous transactions between 2003 and 2007. The first claim centers on an overarching agreement to limit competition on club deals during the four year period, resulting in artificially low prices paid by private equity firms to shareholders in dozens of transactions. In denying the private equity firms’ motions to dismiss the shareholders’ antitrust claims under Section 1 of the Sherman Act, U.S. District Court Judge Edward F. Harrington found “sufficient evidence to create a genuine issue as to the existence of an overarching conspiracy.” The court was persuaded by explicit statements in emails by high ranking executives. One such statement read, “KKR has agreed not to jump our deal since no one in private equity ever jumps an announced deal.” The court allowed the first claim to proceed, finding sufficient evidence of an overarching conspiracy to refrain from competing during the go-shop period that followed the public announcements of many of the buyouts at issue.

The plaintiff shareholders’ second claim targets an agreement by Blackstone, Carlyle, TPG, and Goldman Sachs to “stand down,” that is refrain from competing, on HCA, a large hospital operator, after KKR and Bain Capital announced their acquisition of the company in 2006. The Court found sufficient evidence that the private equity firms agreed to refrain from competing on HCA during the 50 day go shop period that followed the announcement of the buyout. The evidence showed that Blackstone, Carlyle, TPG, and Goldman Sachs each promptly “stood down” from making a topping bid on HCA within 48 hours of the commencement of the go shop period. The Court was again persuaded by explicit emails authored by high ranking members of the private equity firms. One Carlyle executive wrote in an email to his colleagues that “KKR asked the industry to stand down on HCA.” In another email, a KKR executive wrote, “Henry Kravis [of KKR] just called to say congratulations and that they were standing down because he had told me before they would not jump a signed deal of ours.”

Christopher M. Burke, a partner at Scott+Scott leading the litigation, stated, “We look forward to presenting this evidence to a jury.”

The case is Dahl, et al. v. Bain Capital Partners, LLC, et al., No. 07-12388-EFH (D. Mass.).

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Judge Sustains Securities Fraud Allegations Against LHC Group

On March 15, 2013, Scott+Scott won an important ruling for plaintiffs that brought suit against LHC Group for violations of the anti-fraud provisions of the federal securities laws. The Honorable James Trimble of the U.S. District Court for the Western District of Louisiana denied the defendants’ motion to dismiss and ruled that securities fraud allegations against LHC Group and its CEO Keith Myers were properly pled. The case, originally filed in June of 2012, alleges that shareholders were damaged when LHC Group made false statements about the company’s improved financial performance and failed to disclose that the improved performance was due to systematic abuses of Medicare reimbursement programs.

LHC Group is a healthcare company that provides a variety of services to its patients, including home healthcare service. Medicare reimburses home healthcare providers like LHC Group for each home visit, with bonuses when certain visit thresholds are met. Prior to 2008, Medicare paid a bonus after ten visits to a home health care patient. Beginning in 2008, however, Medicare changed its bonus policy and began paying bonuses at six, 14, and 20 visits.

During the class period between July 30, 2008 and October 26, 2011, the revenue that LHC Group derived from providing home health care increased dramatically. LHC Group and its CEO Keith Myers told investors that this increase was due to “organic growth” and the acquisitions the Company had made. On April 26, 2010, The Wall Street Journal published an article entitled “Home Care Yields Medicare Bounty” which questioned whether LHC Group and other home health care providers were manipulating the number of in home visits in order to meet the visit thresholds for bonuses.

In response to The Wall Street Journal article, the U.S. Senate Finance Committee initiated an investigation. On October 3, 2011 the Senate Finance Committee released a report which concluded that “[t]he home health care therapy practices identified . . . at best represent abuses of the Medicare home health program. At worst, they may be . . . defrauding the Medicare home health program at the expense of taxpayers.” The report also cited an email from CEO Keith Myers about the need to increase the number of therapy visits performed by LHC in order to hit the bonus thresholds.

Judge Trimble ruled that the allegations in the complaint were more than allegations of mismanagement and sufficiently stated claims for securities law violations. In addition, the Court found that the plaintiff adequately pled that it was damaged by the reduction in stock price that resulted after the release of the Senate Report.  

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Supreme Court Renders First Opinion on CAFA

The U.S. Supreme Court delivered its first opinion on the Class Action Fairness Act of 2005 (“CAFA”), affirming federal courts’ jurisdiction to adjudicate class actions where damages for the class exceed $5 million. Sections 1332(d)(2) and (5) of CAFA provides that “district courts shall have original jurisdiction” over class actions if, among other things, the “matter in controversy exceeds the sum or value of $5,000,000.” To determine the amount in controversy for jurisdictional purposes, “the claims of the individual class members shall be aggregated,” with class members defined as “persons (named or unnamed) who fall within the definition of the proposed or certified class.” §§1332(d)(1)(D) and (d)(6). As the Supreme Court explained, CAFA requires that the district court assess its jurisdiction, by “adding up the values of the claim of each person who falls within the definition of…[the] proposed class” and determining whether such amount exceeds $5 million. The opinion, captioned The Standard Fire Insurance Company v. Knowles, 568 U.S. __ (2013), was delivered for the Supreme Court by Justice Breyer on March 19, 2013.

The respondent-plaintiff originally filed the proposed class action in Arkansas state court. The plaintiff alleged that the defendant insurance company had unlawfully failed to include a general contractor fee when making homeowner’s insurance loss payments. The plaintiff claimed that the conduct caused damages to “hundreds, potentially thousands” of proposed class members, but filed a stipulation stating that the class would not seek damages exceeding $5 million. Pointing to CAFA, defendant sought to remove the case to federal court. The U.S. District Court for the Western District of Arkansas held that the “sum or value” of the “amount in controversy” would, in the absence of the stipulation, have exceeded $5 million. The court, however, found that plaintiff’s stipulation as to the lower amount of damages was sufficient to defeat its jurisdiction under CAFA and remanded the case back to state court. Defendant appealed to the Eighth Circuit Court of Appeals, which declined to hear the appeal. The Supreme Court granted Defendant’s subsequent petition for certiorari.

The Court vacated the district court’s decision and remanded the case for further proceedings. The Court held that the plaintiff’s stipulation as to damages—filed prior to certification of the case as a class action—could only bind himself as a party to the action. A pre-certification stipulation, however, could not bind absent class members. The stipulation could not effectually reduce the value of the putative class members’ claims because the plaintiff “lacked the authority to concede the amount-in-controversy issue for the absent class members.” Thus, the court concluded, the district court erred in finding that the non-binding stipulation overcame an evidentiary showing that the $5 million criteria had already been met.

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Pension Funds Pressure Major Financial Institutions to Reform Compensation Clawback Policies

On March 14, 2013, financial institutions Capital One Financial Corporation and Wells Fargo & Co. agreed to significant expansions of their policies of taking back incentive compensation from executives who are found to have committed misconduct. Capital One and Wells Fargo now join other major financial institutions in modifying their compensation “clawback” provisions. Clawback provisions are internal rules set by companies to govern the circumstances in which a company will take back bonus or other incentive-based pay that is given to executives that have acted improperly.

Changes to clawback provisions by major financial institutions were not internally driven. Rather, these changes were the result of the efforts of a group of New York City pension funds, comprised of the New York City Employees’ Retirement System, New York City Teachers’ Retirement System, New York City Police Pension Fund, New York City Fire Department Pension Fund, and the New York City Board of Education Retirement System (the “New York City Pension Funds”). Beginning as late as 2011, the New York City Pension Funds selectively petitioned large banks, asking the banks to expand their clawback rules, which generally only allowed boards to take back bonus compensation if an executive was found to have committed intentional or gross misconduct.

Citing the improper banking practices, both intentional and negligent, that led to the recent financial crisis, the New York City Pension Funds targeted major banks to raise the bar for clawback rules. Specifically, the New York City Pension Funds sought reforms, including encouraging banks to clawback compensation tied to improper behavior regardless of whether the behavior causes “material” losses to the bank, holding supervisors responsible for foreseeable improper conduct of a subordinate, and increasing accountability by supporting public disclosure when executive compensation is recouped.

Ultimately, many major banks agreed to expand their clawback rules, with Capital One, Citigroup Inc. and Wells Fargo all agreeing to adopt policies that allow their respective boards of directors to claw back incentive pay from any executive that causes “serious financial or reputational harm” to their companies, through either their own actions or their failure to supervise. Capital One agreed to publicly disclose all recouped executive compensation, so long as the underlying event has already been disclosed to investors. Separately, Goldman Sachs Group Inc. and Morgan Stanley have agreed to clarify and expand on their respective clawback provisions, with Morgan Stanley hinting that it would include failure to supervise a subordinate as a basis for future clawbacks.

Such reforms significantly expand on the banks’ previous clawback rules and help to ensure that bank executives do not personally profit when they engage in improper or unethical behavior, even when such behavior results in profits for their employer. Moreover, these reforms increase public awareness of misconduct and encourage banks to be part of the solution by actively punishing misconduct. Tougher clawback provisions should also put executives on notice that playing by the rules is in the best economic interest of all.

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On The Record

“The law itself is on trial quite as much as the cause which is to be decided.”

Source Unknown

Harlan F. Stone,
United States Supreme Court Chief Justice

DOD: 4/22/1946

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Conferences and Educational Seminars


April Events in the USA


+April 11-12, 2013

New England States government Finance Officers’ Association (NESGFOA)

The Conference Center at Waltham Woods

Waltham, MA


The New England States Government Finance Officers’ Association promotes and  

encourages a closer relationship among those engaged in finance in the municipal, state and federal service. The conference provides discussion, analysis and solutions under the laws existing in the New England states to public officials whose responsibilities and duties involve addressing state and municipal problems. The conference also offers educational programs and training especially important to public finance officials and employees during pension reform. This year’s topics will include healthcare reform.


+April 17-19, 2013

The 54th California Municipal Treasurers Association Annual Conference (CMTA)

Paradise Pier Hotel and Conference Center

Anaheim, CA.


The California Municipal Treasurers Association Annual Conference is one of the profession’s longest running state conferences, bringing together almost 150 puclic sector treasurers and finance professionals throughout California who meet in an educational format to discuss treasury and financial management strategies, improve skills and address the tough challenges they face today.


+April 17-19, 2013

Council of Institutional Investors (CII)

Capital Hilton Hotel

Washington, D.C.


CII is the “Voice of Corporate Governance.” This event brings together leading pension trustees, board chairs, executive directors, investment officers, investment consultant, attorneys and money managers from around the country for in-depth educational content and extensive networking opportunities. The conference provides attendees with a comprehensive overview of the public pension fund landscape, with in-depth, interactive discussions on asset allocation, investment strategies, manager selection, trustee issues and governance issues. This year’s conference is entitled, “Eye on Investors”.


+April 18-19, 2013

31st Native American Finance Officers’ Association Annual Conference (NAFOA)

Opryland Convention Center

Nashville, TN


The two day conference will feature 28 sessions and exciting keynotes focused on investing in Indian country, policy affecting tribes, accounting updates and economic development opportunities. Hear from leading industry experts and tribal leaders on strategies for financial success. Sessions support professional growth of attendees. Earn up to 14 continuing education credits


+April 18-20, 2013

Annual IBEW Construction and Maintenance Conference

Hyatt Regency Capitol Hill Conference Center

Washington, D.C.


The Construction and Maintenance Conference anticipates a record numer of delegates at this year’s conference. This conference precedes the National Building and Construction Trades Annual Legislative Conference.


+April 21-24, 2013

National Building and Construction Trades Annual Legislative Conference (BCTC)

Washington Hilton

Washington, D.C.


The National Building and Construction Trades Conference offers the building trades unions to unite in one location to network, share information regarding many aspects of union business: from union organizing, contract negotiations, fiduciary responsibilities, Taft Hartley fund issues, media matters as well as legislation. This is one of the largest and most comprehensive union conferences where participants include new union members as well as the international presidents of unions in several of the building trades.


+April 21-24, 2013

69th Annual Southern Conference on Teacher Retirement (SCTR)

Westin Hotel

St. Louis, MO


This year’s Southern Conference on Teacher Retirement will be hosted by the Public School and Education Employee Retirement Systems of Missouri (PSRS/PEERS). The SCTR. The Southern Conference on Teacher Retirement has a long history of providing excellence in education for teacher retirement systems across the southern states. Topics include changes in benefit structures and investment strategies and challenges facing teacher retirement systems. The annual conference provides an educational and interesting program with daily networking activities.


+April 28- May 1, 2013

National Institute for Pension Administrators Annual Forum (NIPA)

The Cosmopolitan Hotel and Conference Center

Las Vegas, NV


The National Institute of Pension Administrators (NIPA) is a national association representing the retirement and employee benefit plan administration profession. It was founded with the idea of bringing together professional benefit administrators and other interested parties to encourage greater dialogue, cooperation and educational opportunities. NIPA’s goal is to improve the quality and efficiency of plan administration. From its beginning in 1983, the founding concepts and specific purpose of NIPA is to educate and train plan administrators.”


Government Finance Officers’ Association Conferences


+April 4-5, 2013

Kentucky Government Finance Officers’ Association (KYGFOA)

Crowne Plaza Hotel

Louisville, KY 



+April 10-12, 2013

New York State (NYSGFOA)

Albany Marriott Hotel

Albany, NY



 +April 14-17,2013

Government Finance Officers’ Association of Texas (GFOAT)

Renaissance Austin at the Arboretum

Austin, TX



+April 14-16, 2013

Texas Municipal League

Austin, TX



+April 17-19, 2013

Iowa Municipal Finance Officers’ Association (IMFOA)

Des Moines Holiday Inn-Airport

Des Moines, IA



+April 17-19, 2013

Utah Government Finance Officers’ Association (UGFOA)

Hilton Garden Inn

St. George, UT



+April 17-19, 2013

Wisconsin Government Finance Officers’ Association (WGFOA)

Brookfield Suites Hotel

Brookfield, WI



+April 19, 2013

Maryland Government Finance Officers’ Association (MDGFOA)

BWI Airport Marriott

Linthicum, MD



+April 25, 2013

Connecticut Government Finance Officers’ Association of Connecticut (GFOA-CT)

Anthony’s Ocean View Conference Center

New Haven, CT



+April 28-May 1, 2013

Pennsylvania Government Finance Officers’ Association (GFOAPA)

Penn State Conference Center

State College, PA



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Scott + Scott LLP is a nationally recognized law firm headquartered inConnecticut with offices in New York City, Ohio and California. The firmrepresents individual as well as institutional investors who have suffered from corporate stock fraud. Scott+Scott has participated in recovering billions of dollars and achieved precedent-setting reforms in corporate governance on behalf of its clients. In addition to being involved in complex shareholder securities and corporate governance actions, Scott+Scott also has a significant national practice in antitrust, ERISA, consumer, civil rights and human rights litigation. Through its efforts, Scott+Scott promotes corporate social responsibility.

Scott+Scott’s PT+SM System is the firm’s proprietary investment portfolio tracking service. Carefully combining the firm’s proprietary computer-based portfolio monitoring software with Scott+Scott’s hands-on approach to client  relations is a proven method for institutional investors and their trustees to successfully

  • Monitor their investment portfolios  
  • Identify losses arising from corporate fraud    
  • Consider what level of participation any given situation requires   
  • Recover funds obtained on their behalf through investor litigation action  

To obtain more information about Scott+Scott’s PT+SM services or to schedulea presentation to fund trustees, fund advisors or asset managers, please contact:    David R. Scott + Toll Free: 800.404.7770     email: drscott@scott-scott.com + UK Tel: 0808.234.1396