Noteworthy Settled Case: In re The Mills Corporation Securities Litigation
Background of the Case
From 2000 to 2005, The Mills Corporation (“Mills”), an owner and developer of “shoppertainment” centers throughout the United States and in Europe, publicly reported the financial results of an apparently rapidly growing, highly-profitable company. Between 2000 and 2004, Mills’ publicly-reported net income increased nearly 700%, from $34.4 million to $232 million, and its Funds From Operations (FFO) – a key metric used by investors to evaluate Real Estate Investment Trusts (REITs), such as Mills – more than doubled, increasing from $105.3 million to $260.5 million. Mills’s common stock price also rose dramatically during the this period, increasing from $26 per share at the end of 2001 to more than $63 per share by the end of 2004, an increase of more than 140% in just three years.
On October 31, 2005, Mills announced that its third quarter 2005 results would be “substantially below expectations” and its third quarter conference call would be delayed to “allow the Company additional time to evaluate the accounting for several items in its third quarter results.” Shortly thereafter, on November 9, 2005, Mills issued a press release reporting its financial results of the quarter ended September 30, 2005, and the nine months ended September 30, 2005, which included declines in net operating income, FFO and net income. These announcements resulted in significant declines in the prices of Mills common and preferred stock.
Then, on January 6, 2006, Mills announced that it would restate its financial statements for 2000 through 2004, and for the first three quarters of 2005, and the company estimated that the restatement would be in the range of $25 million over this time period. On August 10, 2006, however, Mills announced that it would be filing a restatement that would, at a minimum, reduce the company’s previously-reported net income for the years 2003 through 2005 by $210 million and would reduce its shareholders’ equity as of September 30, 2005 by $295 million. Mills also announced on August 10, 2006, that the projected costs on its key development project – Meadowlands Mills, which had been described as the company’s “crown jewel” – would be approximately $2.0 billion, an increase of $800 million over what had been publicly projected in August and November 2005. With the August 10 disclosures, the prices of Mills common stock and preferred stock fell precipitously, causing hundreds of millions of dollars of losses for investors.
Prosecution of the Case
Beginning on or about January 20, 2006, class action complaints were filed against Mills and certain of its affiliates, executives and directors. By Memorandum Order entered June 1, 2006, the court appointed the Iowa Public Employees’ Retirement System (“IPERS”) and the Public Employees’ Retirement System of Mississippi (“MPERS”) as co-lead plaintiffs (“Lead Plaintiffs”) and approved their selection of the law firms of Barrack, Rodos & Bacine and Bernstein Litowitz Berger & Grossmann LLP as co-lead counsel (“Lead Counsel”).
On behalf of Lead Plaintiffs and the class, we undertook a vigorous and extensive prosecution of the case. In addition to reviewing materials in the public domain relating to Mills and the restatement of its financial statements, along with our co-lead counsel, we conducted our own investigation, which included retaining a private investigation firm, consulting with a practitioner in the REIT industry, consulting with accounting and auditing experts, and interviewing people with knowledge about what occurred within Mills. After the filing of a consolidated complaint and a follow-on amended complaint on behalf of Lead Plaintiffs, which added as defendants Mills’ outside auditor, Ernst & Young LLP (“E&Y”), and its primary joint venture partner, the so-called KanAm Group and certain of its affiliates, the defendants moved to dismiss the amended complaint. On April 16, 2008, the court denied defendants' motions to dismiss in their entirety. Immediately after the court issued this order, we embarked on a multi-phased prosecution of the case.
First, we began a massive discovery program, which began in earnest in early July 2008. Lead Counsel reviewed and analyzed millions of pages of documents produced by Mills and the other Defendants, using a state-of-the-art database service to help us manage, code and categorize the documents. This labor-intensive process required thousands and thousands of hours by lawyers at both of the Lead Counsel firms, with some assistance from attorneys at other plaintiffs’ firms. This intensive document review allowed us to start depositions in September 2008. We also discussed the scope of the production with defendants’ counsel and filed motions to compel to obtain the full scope of documents that we needed from Mills, its executives and directors, E&Y, the KanAm entities, and various third parties. In the course of this discovery effort, we deposed former Mills employees, certain KanAm representatives, and E&Y personnel concerning its audits of Mills and its joint ventures with KanAm.
Second, on August 15, 2008, we filed a motion for class certification seeking (i) to certify the action as a class action, (ii) to certify Lead Plaintiffs and certain other named plaintiffs as class representatives, and (iii) to certify Lead Counsel as class counsel (the “Class Motion”). Defendants made two primary arguments in response to the Class Motion. First they argued that the class should not include any purchasers of Mills’s preferred stock, because, as their supporting expert affidavits contended, the preferred stock did not trade in an efficient market. Thus, defendants argued, plaintiffs could not invoke the fraud-on-the-market theory of reliance. Second, defendants contested the end of the class period. E&Y asserted that the claims against E&Y could not continue after the statement made by Mills in an SEC filing of January 6, 2006, that told investors they should no longer rely upon any of Mills’s prior financial statements or upon E&Y’s audit opinions. The remaining defendants argued that the class period should not extend past Mills’s SEC filing of February 23, 2006, which had spawned a number of analyst reports, some of which had emphasized that investors were essentially “flying blind” by that point.
We countered defendants’ experts with an expert of our own, and worked closely with the expert in first preparing an opening report on these issues, and later a rebuttal report after we had reviewed the defendants’ expert reports. In addition to submitting and reviewing expert reports, we also deposed the defendants’ experts, obtaining significant information that we presented to the court in further support of the class motion.
Third, Lead Plaintiffs, through Lead Counsel, engaged in settlement talks with Mills, which involved the preparation of mediation statements, damages analyses and a series of talks and mediation sessions before former Judge Daniel Weinstein. On November 12, 2008, the day before oral argument was to be heard on the class motion, after full day mediation and information sessions on April 2, July 23, and November 10, 2008, Lead Plaintiffs reached a $165 million settlement with Mills . Thereafter, while the documents related to the settlement with Mills and its affiliated defendants were finalized, we continued to prosecute the claims of the class against E&Y and the KanAm defendants.
On February 26, 2009, the court heard argument on the class motion as it related to E&Y and the KanAm defendants. At the conclusion of the hearing, the court stated that (a) Lead Plaintiffs had met their burden to establish the appropriateness of certifying a class through August 10, 2006, and (b) the court would grant the class motion. On March 31, 2009, the court issued a written Order and Memorandum Opinion granting the class motion.
On April 1, 2009, after Lead Plaintiffs, through Lead Counsel, had engaged in extensive discussions with E&Y in mediation sessions before Judge Weinstein on December 8, 2008 and March 18, 2009, and through a series of further discussions, Lead Plaintiffs and E&Y agreed to a settlement that obligated E&Y to pay $29.75 million to settle the claims against it. Thereafter, after Lead Plaintiffs, through Lead Counsel, engaged in discussions with the KanAm defendants in mediation sessions before Judge Weinstein on December 10, 2008 and April 14, 2009, and through a series of further discussions, Lead Plaintiffs reached a settlement with the KanAm defendants – the sole remaining defendants – to dismiss the claims against them for an $8 million payment.
The Settlements Achieved in the Case
Lead Plaintiffs recovered over $200 million for the benefit of the class. As noted above, the three settlements resulted in the largest securities law class action recovery ever achieved in Virginia. As noted above, the settlements were reached in three phases:
On November 12, 2008, Lead Plaintiffs reached a settlement with the Mills defendants to dismiss claims against Milss, the company’s former executives and directors, its underwriters and successors, in exchange for a payment of $165 million for the benefit of the class. The Stipulation of Settlement provided for the $165 million to be paid in three installments, the last of which was made on July 31, 2009. All of the payments included interest from February 1, 2009. The total payments resulting from the Mills settlement equaled $166.2 million.
On April 1, 2009, Lead Plaintiffs reached a settlement with Mills’ former auditor, Ernst & Young LLP, to dismiss claims against E&Y and other related persons and entities in exchange for a payment of $29.75 million.
On May 11, 2009, Lead Plaintiffs reached a settlement with the KanAm defendants to dismiss claims against them in exchange for a payment of $8.0 million.
In granting final approval of the settlements, Judge O’Grady recognized the significant amount of work Lead Counsel undertook on behalf of Lead Plaintiffs and the class in developing and prosecuting the claims against the defendants, stating that “[e]ven a cursory review of the docket sheet indicates the extent to which Class Counsel has developed this case. Lead Plaintiffs ultimately filed three complaints, overcoming motions to dismiss and pursuing the action through to class certification against three groups of sophisticated defendants over the course of three years.” Judge O’Grady found that the Lead Plaintiffs – IPERS and MPERS – had performed a valuable service in leading and supervising the prosecution of the case, and that Lead Counsel had shown themselves to be “very experienced and skilled in the field of securities litigation.” Finally, Judge O’Grady noted that private securities class actions like the Mills case “work to provide a benefit beyond the confines of this particular Class.” A copy of the court's December 23, 2009 opinion and order is here. For more information about the settlements, including a copy of the notice of settlements, click here.