In keeping with a recent trend, the Rule Breaker stocks were off a bit today, losing about 2% during the six and a half hours that the market was open for business. Year to date, the portfolio has given almost 20% of its value back to the market fairies.

One of the holdings that has been particularly weak of late is Celera Genomics Group (Nasdaq: CRA), which now trades at $84 a stub, whereas but a mere two and a half months ago, it carried a valuation more than triple its current price. When a stock craters that far, it is not terribly surprising when a class action lawsuit or two appears, and such has been the fate of Rule Breakin' Celera as well.

While it's easy enough to jump in and attack the class actions lawyers who have filed complaints against Celera (I used to practice law myself, so believe me I've got a full array of lawyer jokes at the ready), I'd prefer to start out with a little devil's advocacy instead and explain where the merits in the case just might be, and provide a little explanation of some of the merits of securities class action cases along the way.

Unfortunately I don't have the benefit of writing this with a copy of any of the filed complaints in front of me (if any of the class action lawyers want to send me a copy of their complaints, feel free), but the press releases accompanying the various filings all seem to be about the same. The most recent one available states, "Notice is hereby given that a class action lawsuit was filed... on behalf of all persons who purchased the stock of PE Corporation Celera Genomics Group ("Celera'' or the "Company'') (NYSE: CRA - news) in a secondary offering (the "Secondary Offering'') of Celera common stock conducted by PE Corporation on February 29, 2000....

"The complaint alleges that the registration statement and prospectus issued in conjunction with the Secondary Offering were materially false and misleading in that they failed to disclose that Celera had engaged in discussions with the Human Genome Project (an international research organization supported by the U.S. and U.K. governments, among others) concerning collaborating on completing the map of the human genome and that those discussions had terminated in December 1999 because the Human Genome Project was opposed to Celera's demands for five-year exclusive rights to the data."

Every class action case needs a theory of wrongdoing. Although 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. Typically there needs to be some insider selling or some accounting irregularities to allow a picture to be painted of deceit and trickery by management.

In the Celera matter, while there is no insider selling alleged by management (at least in this press release, the complaint could later be amended to include new facts), the company sold shares of itself to the public through its February 29, secondary offering, and that event is the hook upon which plaintiff's lawyers today hang their hat. The putative plaintiffs in the class are not all shareholders of Celera -- just the purchasers of the secondary offering.

The picture being painted here by the lawyers in question is that there was highly important information available to management which should have been available to purchasers of the February 29, 2000 secondary offering, and that withholding that information from the public was done in order to keep the price of the company artificially high. (The federal courts have largely accepted the efficient markets theory, holding that the market perfectly prices in all public information to every stock every day.)

Had the supposedly negative information about the Human Genome Project discussions been publicly available, so the theory goes, the market certainly would have valued the stock of Celera far lower than it did on February 29, 2000 and Celera would have pocketed less moolah from its secondary offering. The difference between the actual price paid and the real value of the stock -- had all material information been available on February 29 -- is ill-gotten gains for Celera, and should be returned to the purchasers of the secondary. Anyway, that's the theory here.

I might be missing something -- such is often the case as we Fools write our non-expert analyses. As I understand it, however, the class action lawyers are saying that secondary offering purchasers would have valued Celera much lower had they known that discussions with the Human Genome Project had occurred and failed than they actually valued the company mistakenly thinking those discussions had never occurred at all. I'm just not sure that I personally see any significant difference between those two possibilities in the way I would value a company, though more creative minds might come to a different conclusion. I've certainly seen stronger cases that class actions presented -- with the current suits against Microstrategy (Nasdaq: MSTR) coming most quickly to mind as ones that have a very high probability of success for the lawyers and plaintiffs involved.

I don't begrudge the class action lawyers their efforts here. I've seen class action lawyers up close and personal in my previous incarnation as a defense lawyer and I never saw anything immoral in the efforts of anybody I worked against -- and that includes some of the names of the attorneys which have filed so far in the Celera action. Meritless cases certainly exist, but they do not tend to eat up that much of a major company's resources, and Celera is certainly well enough capitalized to defend itself with no real headaches here should the strength of the plaintiff's case be what I understand it to be.

On a general level, the mere existence of a class action case isn't something that an investor should overweight in her investment analysis. Consider the fact that current Rule Breaker holding Amgen (Nasdaq: AMGN) had a class action suit filed against it in 1998. Old Rule Breaker holding Iomega (Nasdaq: IOM) is currently subject to a suit, previous Fool Port holding 3Com (Nasdaq: COMS) successfully defended itself against a suit last year, and America Online (NYSE: AOL) has a settled one in its recent past. In fact this page, maintained by the Stanford Securities Class Action Clearinghouse lists 780 federal court class actions, a number of which I'm sure have some merit, and many more of which I imagine ultimately don't. Nearly one new securities class action suit is filed for every day that the market is open.

I'm not an investor in Celera, but if I were one, I don't yet see the types of things alleged in the press release by the class action attorneys that would alter my evaluation of the company in any way.

Related Links:

  • Dueling Fools, Class Actions Lawsuits, June 10, 1998