Toby and all,
Here's a two part repost on the various class action suits against RAIN from (aol) MF RAIN written by one of that threads premier numbers crunchers. He also happens to be a lawyer:
Subject: Class Actions- Part I
Date: Mon, May 4, 1998 07:52 EDT
From: IdidMrsA
Message-id: <19980207003400.TAA06806@ladder02.news.aol.com>
My goal here is to explain why the class action suits appear to me, at this time, given the information publicly available, to be meritless. That is certainly not to say that they must be completely frivolous, because I don't know all the facts, but, I'm pretty sure I know more of the facts than the class action attorneys do, or, more accurately, I think I'm more interested in getting at the truth than they are when they write the complaints
that are filed in court.
Every class action case has to have a "theory." Although at this point it might appear otherwise, it is not sufficient for a stock to simply have a sudden drop for every class action firm in the country to file a complaint putatively on behalf of all the people who bought shares within a certain timeframe. Usually there needs to be some insider trading or some other element that allows a picture to be painted of deceipt and trickery by management.
The theory of the case against RAIN is this: When RAIN reported its third quarter 1997 results, it did so with an upbeat written release and conference call, both of which included statements by management that they were pleased with the results of each unit and with the sales trends generally. Prior to the release of the earnings report, under the theory of the class action suits, the market may have been appropriately pricing RAIN, but the
statements by management which accompanied the 3Q report were misleading and caused the stock to be mispriced immediately.
Under this theory, it was management's intent to drive up the price (or alternatively, to maintain an artificially high price) in order for key insiders to sell all or most of their shares. Which they did. Brimmer and Robinow in particular sold virtually all of their shares, I think.
The one complaint that I've seen basically hits on the weakness in retail, and that on October 20, when the earnings release and the conference call occurred, management knew (or should have known) that there was a trend of weakness in retail, and also that units in general had big drops of sales as they aged - in essence management knew that it was dealing with nothing but a fad, and the complaint does use that word.
Later, on December 19, according to the complaint, there was a conference call with analysts, in which Robinow stated his comfort with earnings estimates of 25 cents for the quarter. The complaint states, "Defendant Robinow, however, failed to disclose what he then knew about the Company's business-- the Company knew and understood that its older units were generating less revenue and the Company internally anticipated that as units matured, their
revenue would decline."
There are two main allegations then regarding the company's statements: first, that on October 20, 1997 the company was failing to disclose the weakness in retail specifically and in older unit sales generally; and second, that on December 19 the company was falsely stating comfort with earnings projections and failing to reveal that it knew there was a weakness at the older units. The company didn't declare its awareness of this weakness, and the
insiders were able to profitably sell $3.6 million worth of their individually held shares.
Let's start with the October 20, 1997 statements. First, whether the company properly disclosed its awareness that revenues would decline at older units. Well, on October 20, I posted something about that. I don't think I listened to the conference call, I think at most I read the release and read whatever had been posted on this board earlier that evening. Nevertheless my words are not very unclear and were posted within hours of the
announcement: "The Gurnee numbers, combined with what we know on Woodfield, MOA, Disney lead me to think that second year sales at a non-tourist site are going to be down 12+% second year over first. Really, that's got to be expected" Random Thoughts on the Earnings.
It didn't take any time to come to that conclusion, it was based on no special knowledge, it simply, to my thinking was a fact that had been publicly disclosed to me by the company. So, I at least think that the allegation that the company was not disclosing its awareness of second year drops from first year is, well, how do I politely put this.....you know, I can't actually put my thoughts about that into polite language, so I guess I won't try.
Could management have been aware of a decline in retail sales as of October 20? Assuming that RAIN's management was not psychic, it had to be looking at the past to have an idea of what to expect in the fourth quarter and beyond. In the first three quarters of 1996, as a percentage of domestic revenue, retail amounted to 22.11% of sales. In the first three quarters of 1997, as a percentage of domestic revenue, retail amounted to 23.13%. Hmm.....
that's curious, the evidence available to RAIN at the end of the third quarter was that company-wide retail was improving in comparison to restaurant sales. But the complaint says that management was actually aware that retail was declining and was the problem.
What happened in the respective fourth quarters? In 1996, RAIN's retail was 23.41% of domestic sales, a little bit higher than the first three quarters or 1996 (though lower than the seasonally strongest third quarter itself), as one might expect for the Christmas season, and very close to the first three quarters of 1997. So, logically, one might think that management could expect vaguely similar results in 4Q '97. What happened though was that
retail came in at 20.03% of restaurant sales.
Let's look at that number another way. From 3Q to 4Q '97 despite the fact that it opened five more restaurants and had the Chistmas season working for it, RAIN's total retail sales improved only 7%. RAIN's total restaurant sales improved 28%. Now I ask you, no, really, I ask the class action lawyers, how exactly was RAIN to know on October 20 that retail was going to plummet over the next two months, yet restaurant sales would hold up?
There is no way, that I see, looking at any set of numbers, to have been able to tell that, and to tell you the truth, the drop is so out of line with every other quarter that I can't figure out how it happened even after the fact.
So, the October 20 allegations are, I think, nonsense. Nevertheless, there is the indisputable fact that insiders sold a lot of their shares. Berman didn't apparently sell any, and some of the other insiders sold a pretty small percentage of their shares, but still... for the class action plaintiffs (and their attorneys) that's what we in the business call "a good fact".
Moving forward to the December 19 Robinow statements, I'm sure anyone who read the December 19 Dow Jones piece is aware that any allegation that Robinow failed to disclose that the Company knew and understood that its older units were generating less revenue would seem to be... well, a complete lie. I don't know how else to put this, but that's just mendacity, that's prevarication, that's falsehood, that is, (and interestingly my thesaurus actually
lists this) a whopper.
I mean, those of course were virtually the actual words of the Dow Jones article - "don't look at the revenues, look at the earnings; we expect double digit sales declines second year over first." How anyone would have the gall to sign their name to such ....look, I'm going to get myself in trouble if I keep going on with this, so, hey, I don't know that anybody would be lying just to try to make themselves some money off of this situation,
but seriously, guys, if you're reading this, hold yourselves to at least one-twelfth the standard to which you're claiming to hold the company's written disclosures. (And keep in mind that Rule 11 sanctions actually do get granted every once in a while before filing that Amended Complaint.)
The retail numbers answer also why Robinow's statement on December 19 makes at least a little sense. The numbers available a couple of days before December 19 (and RAIN has those daily point of sales systems, but the numbers probably aren't compiled in detail and thoroughly reviewed on an hourly basis) might have indicated that RAIN was in a gray area on making pre-split .25 cents. But the expectation had to be, "There's going to be a last minute
Christmas surge. Our retail numbers are trailing last year's, but the numbers play out over time, so people must be doing their shopping at the last minute this year." The restaurant numbers weren't bad at all, and there can't be any last minute rush at a restaurant to make up for earlier in the quarter weakness, but retail is just a different story.
RAIN, I think, wouldn't have done any conference call (if that's what it was) if it weren't trying to support the bond offering, so in this case RAIN made its own bad luck, but I would guess that if you could look at the daily figures for that time, it would show that RAIN was in a gray area where .25 was going to come through with a reversion to the mean on retail sales. (If retail had improved 28% company-wide 4Q from 3Q as restaurant sales did,
RAIN would have made .25.) Instead, retail kept going the other way, and that's what explains the final result.
Look, there may be other facts out there of which we're not aware, and I'll admit to having looked at this as a RAIN supporter, but I am technically a purchaser during the class period, and therefore someone who in theory stands to benefit from a successful class action suit. But I'm more interested in figuring out what really happened here than in the possibility that four years from now I'll get a dollar a share back on what I purchased between
October 20 and January 6, and if I thought there was any evidence that anybody at RAIN was guilty of manipulating anything, I'd be happy to say so.
In my opinion these suits are not what class action litigation was meant to do. It's fantastic that we have these open markets, where information is to be shared with the shareholders, and there's this effective private system to enforce laws that our government doesn't have the resources to enforce for us. But class actions aren't meant to serve as partial puts for every decline in a stock's price caused by some market reaction. If retail sales
had come in as a normal percentage of restaurant sales, and by normal you can use any percent you want - first three quarters of '97, third quarter of '97, fourth quarter of '96, whatever, in fact retail sales could have been slightly below any of those figures, and RAIN still could have made .25 (.245 rounded up to .25 anyway).
Nevertheless, these suits will persist, and, in the next chapter I'll explain why even if the above explains the truth, the whole truth and nothing but the truth, RAIN still is not guaranteed to actually get out of the suits without paying a settlement. Unless.....
Next: Wag The Dog
Subject: Wag the Dog
Date: Mon, May 4, 1998 07:56 EDT
From: IdidMrsA
Message-id: <19980207003800.TAA18223@ladder03.news.aol.com>
Why does a dog wag its tail?
Shareholder class action lawsuits are started by attorneys who want to make money, they are not started by plaintiffs in any real sense of the word. These attorneys control the action, make the decisions on what theories to pursue, what settlements to make, and whether to keep pursuing a case which seems "winnable" even if it does not seem just, and there are many more of those cases, especially in the class action arena, than you might
suspect.
Because the dog is smarter than the tail.
Until recently, it was not easily possible to be an individual investor who was totally informed about the daily goings on of a stock. It is now of course, and many of the readers of this are very aware of every public statement made by RAIN, the effect those statements had on various shareholders, on themselves, and on the general market. Up until now though, attorneys have been able to find whatever plaintiffs best fit their plans, and were
free to take litigation in whatever direction they wanted, because, quite simply, there weren't potential plaintiffs out there who were better informed than the attorneys as to what had really happened.
If the tail were smarter than the dog,
But what if, going forward, class action plaintiffs actually knew something about the public disclosures? What if the lead plaintiffs were individuals who had daily followed the news on the stock- the analysis, the public information, the whole story, and were actually those investors who could make the most persuasive claim that they were in touch with all of the information that was available in the market. What if some of the plaintiffs
were, in a word, Fools?
The tail would wag the dog.
If you purchased RAIN stock between October 21, 1997 and January 6, 1998, there are attorneys out there who are currently claiming to be involved in protecting your legal interests. They are also asking for your help, as they are looking to sign up as many plaintiffs as possible before March 16.
It is highly unlikely that those attorneys in fact are passionate about the truth in this matter. It is highly likely that they are passionate about collecting the largest fee possible for themselves, and, as a necessary consequence, recovering some money for the plaintiff class whether it is truly entitled to any recovery or not.
If you purchased shares during the class period, you have several choices at the moment. You can sit idly by, and recover whatever you end up recovering, an amount which in any event will not approximate anything similar to the drop in RAIN's price between January 6 and January 7. You can be a willing accomplice in the strategems of the class action attorneys by being a named plaintiff and doing what your attorneys tell you to do, you can opt out
of the class, either out of a desire not to participate in something you feel is not right, or because you wish to pursue a private action against the company.
Or you could do something else, something that has really probably never been done before. You could participate in the lawsuit by contacting the various plaintiffs' attorneys and communicating with them your concerns, should you have any, with the complaints they are filing. If they do not respond to your concerns, you could petition the court to be one of the lead plaintiffs, and, when your day comes, you can instruct your lawyers as to your
thoughts about the case. There is a sense in which lawyers are meant to respond to the wishes of their clients, though not all attorneys are aware of that little technicality. You could participate in the lawsuit with the purpose of seeing a just result arrived at, whatever that result might be, rather than merely being out to get whatever money you could.
In that sense of course, you would be protecting the real interests of the class of shareholders, as well as the interests of the company. A company in which you may very well still be part owner.
(end reposts)
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