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Tuesday, June 3, 2008

JDS Wins Investor Lawsuit, Bucking a Trend

Kevin Kennedy, JDS Chief Executive
Firm Goes to Trial Rather Than Settling; Bankruptcy Worries

When a company's stock plunges, executives must face angry investors, worried employees and, frequently, shareholder lawsuits claiming managers defrauded investors by hiding bad news.

Many suits get dismissed. Most others end in settlements, as executives seek to avoid billion-dollar verdicts. But JDS Uniphase Corp., a Milpitas, California, maker of communications components, last year took a shareholder suit against it to trial, and won.

Had the company lost, "the worst-case scenario was that the company goes out of business," says Christopher Dewees, the company's chief legal officer. "The more realistic possibility was that we file for bankruptcy."

JDS was a poster child of the dot-com stock bubble. In 1999, shortly after the company was formed by a merger, its stock soared; then it plunged amid the tech implosion. A group of JDS shareholders, ultimately led by a Connecticut pension fund, sued in 2002. The shareholders claimed that JDS failed to disclose information about its deteriorating business, helping to keep the stock buoyant. Meanwhile, plaintiffs alleged, executives cashed out.

Plaintiffs in shareholder suits often calculate requested damages by looking to the fall in a company's market capitalization. JDS's market value had fallen from more than $50 billion to less than $10 billion in two years. One plaintiffs' expert estimated damages as high as $20 billion.

Given the numbers, executives initially thought they would settle. Mr. Dewees, who joined in 2002, says he didn't want to leave the company's fate "in the hands of 12 people you don't know."

The JDS case is one of only four of 2,105 shareholder securities-fraud suits filed since 1995 to be tried to a verdict, according to Stanford University Law School. Two of those were decided for the plaintiffs, and one for the defendant. Of the others, 634 were dismissed, and 879 were settled; the rest are pending.

In late 2002, lawyers for JDS and the lead plaintiff, the state of Connecticut Retirement Plans and Trust Funds, started informal talks about possible settlement positions. But Mr. Dewees says the parties were like "two ships passing in the night." JDS Chief Executive Kevin Kennedy says the company had directors and officers insurance covering up to "a little less than $100 million," but the plaintiffs wanted "much more." Denise Nappier, the Connecticut State Treasurer, declined to comment on the amounts discussed but says in most cases her organization reaches "settlements acceptable to both parties."

By spring 2007, informal discussions and formal mediations had made little progress. JDS executives, with the backing of the board, decided to test the possibility of a trial. The company hired a former federal judge to size up the case, hired consultants to assess the possible jury pool, and presented the case to several focus groups. Mr. Dewees says the results were encouraging. In addition, an earlier three-month investigation by an outside law firm found no wrongdoing, he says.

Last summer, JDS failed to have the case dismissed. "We'd been at this for five years, and we were still having the same conversations with the plaintiffs," says Mr. Dewees. "I thought it was probably time to have a serious talk about trial with the board."

Marty Kaplan, JDS's chairman, says the nine-member JDS board had its "hawks," who wanted to push to trial, and others who preferred to settle. But he says the plaintiffs' demands far exceeded even the largest settlement the board considered, meaning there was no "serious debate" about whether to go to trial.

Still, board members pushed executives to appreciate the consequences of the decision. "They said to me, 'If you're willing to go to trial, you have to be willing to see this company in and out of bankruptcy if the verdict goes against you,' " recalls Mr. Kennedy.

The CEO says the case was a "massive distraction" for executives and directors, though only one independent director was called to testify. "You can't get this back in dollars," he adds. "It took away time with customers, time with employees and time thinking about moving the business forward."

The trial, in Oakland, Calif., lasted four weeks. After about a day and a half of deliberations, the jury returned a verdict in JDS's favor. The plaintiffs decided not to appeal, and a final judgment was entered in March. A person familiar with the case says JDS spent around $50 million in legal fees, though insurers covered much of the tab.

Despite JDS's win, lawyers say the case is unlikely to encourage other companies to seek trials. In January, a Phoenix jury in a securities-fraud suit ordered Apollo Group Inc., the owner of the University of Phoenix, to pay about $280 million to shareholders. Apollo has filed post-trial motions, slated to be heard in August.

By: Ashby Jones
Wall Street Journal; June 2, 2008