Crystallex International Corporation -
Lead counsel in class action appointed
Crystallex International Corporation
KRY
Shares issued 34,000,000
1998-12-09 close $0.85
Wednesday Dec 9 1998
THREE AGAINST CRYSTALLEX
by Stockwatch Business Reporter
While Crystallex executives have been intermittently wooing shareholders with
roadshow stops in the US and Canada, organizing a Special Meeting
scheduled for December 21 at which they propose to have the exercise price of
substantially all of their options reduced, and otherwise attending to business,
US class action suits against the company have been quietly wending their
way through the legal system. On November 16, an amended consolidated
complaint was filed against Crystallex and lead counsel was appointed. In this
instance, lead counsel consists of three New York law firms: Rabin & Peckel;
Milberg Weiss Bershad Hynes & Lerach; and Lieff Cabraser Heimann &
Bernstein.
"This is not a complicated case," says Steven Fineman of Lieff Cabraser. "It
will probably take a year and a half." His time estimate is slightly under the
lower end of the typical range suggested by Leo Desmond whose Florida law
office is one of the smaller firms involved in the action against Crystallex. "A
class action like this can take from two to five years," Mr. Desmond says.
Whatever the time frame, a great deal of legal paper-work, directed and farmed
out to participating firms by lead counsel, will be generated, all of it coming
with a price tag. "Class actions are expensive," Mr. Desmond notes. "They can
cost millions of dollars."
While this may not be a complicated case, talk of the legal procedures may
have non-lawyers reaching for a bottle of extra-strength headache relief as
quickly as lawyers reach for their calculators. Even in the US where class
action suits are much more prevalent than in Canada, the process can be a
nightmarish drawn out battle of attrition. If, as is the situation with Crystallex,
several law firms file complaints, these will be consolidated and a lead plaintiff
appointed by the court. According to Mr. Desmond, the lead is generally given
to the firm representing the group with the largest financial stake in the matter.
It isn't unusual, however, to have multiple firms appointed as lead counsel.
Once an amended consolidated complaint is filed, there is typically a 30 day
period for the company to respond, with extensions readily given. "There is
always a response," says Mr. Fineman. "There will be a formal pleading which
either denies or acknowledges the complaint. Generally, the response will
acknowledge certain things--the corporate address and things like that--and
deny all the substantive allegations." Mr. Fineman expects a response from
Crystallex before the end of the month. There may be a 'to and fro' of responses
and replies taking anywhere from 45 or 60 days up to 6 months or longer.
Usually the defendant will file a motion to dismiss, which will then be litigated.
At some point, perhaps contemporaneous with other developments, discovery
will begin. The plaintiffs will make documentary requests, issue interrogatories,
take depositions, issue subpoenas, and so on in an effort to gather evidence to
support their complaint. The defendants will use the same discovery process to
examine the plaintiffs. "Some time within the next two or three months, we'll
probably file for certification," Mr. Fineman says. "Defendants typically
oppose certification." That means more legal work and, of course, more costs.
"It's at the discretion of the court whether a class is certified," Mr. Desmond
says. "A main point is that joinder has to be impracticable." This is generally
the case in a securities class action where shareholders are geographically
diverse. The cost of individual litigation is also a consideration; the cost of
seeking redress may be prohibitive to an individual small shareholder. Such
litigation may only make financial sense as a class action suit in which the
court, acting almost like a fiduciary on behalf of the class, awards a
contingency percentage of whatever judgment might be obtained to the
lawyers. If the class is certified, notice must then be issued to all class members,
giving them the opportunity to opt out or participate. "At this point, there's no
way of telling how many members there may be in the class," Mr. Desmond
says. "There could be thousands. Crystallex has quite a following. They're
almost cult-like." Cult-like or not, everyone purchasing shares within the
specified class action period, with the exception of the officers of the company
or those associated with Crystallex, would be an eligible member of the class.
Following all this, a court date will be requested, but most class action suits in
the US never go to trial. At any point in the process, the suit can be abandoned
or the company, Crystallex in this instance, could offer a settlement. If an
acceptable settlement was offered prior to class certification, an application
would be made to have a settlement class certified, another possible wrinkle.
"We don't expect a settlement any time soon," Mr. Fineman states. He does,
however, expect a successful conclusion and, given the fact that none of the
firms representing the plaintiffs will be paid unless they win, there is certainly
an incentive for them to proceed with vigour.
Securities class actions in the US have the advantage of a principle of law with
respect to "a fraud on the market". An attempt was recently made in Canada to
introduce this in connection with the Bre-X class action but it was disallowed
by the judge as a principle of US law that was not applicable in Canadian
jurisprudence. In very simple terms, the notion of a fraud on the market is
rooted in the 'efficient market theory' which maintains that the price of a stock
at any given time reflects all of the available information regarding the
company. If it subsequently comes to light that not all of the information
regarding the company was available to the market or that some of the
information was false, incomplete, or misleading, the potential exists for a class
action suit. Under this principle, it does not have to be shown that an individual
relied upon information obtained directly from the company in making his or
her investment decision. Instead, reliance may be inferred or presumed from
the market's assessment of the information available. According to Mr.
Desmond, this actually reflects how most people invest.
Regardless of whether a "fraud on the market" is an accepted legal principle
here, Canadian shareholders and shareholders from any other country, for that
matter, would still be eligible members of the class action if it is certified. What
that might mean in dollar terms if the action is successful is anyone's guess.
"You can't get blood out of a stone," Mr. Desmond admits, after raising the
issue of Crystallex's cash burn rate. "But at that point, it's a collection issue."
Eric has KRY contacted you to be their lead counsel! Seeing how you had a great knowledge of South American Law, I'm sure that the Shareholders of KRY would be getting there monies worth having you play Matlock Cochrane for a few days in New York.
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