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For Latham & Watkins partners Peter Wald and Michele Johnson, winning a jury verdict on Thursday for NextGen Healthcare Inc was a once-in-a-lifetime experience in all regards.
To call the claim against their client unusual is vastly to undersell the novelty: It’s been 86 years since a similar claim has gone to a jury, according to Latham. NextGen, formerly known as Quality Systems, was sued by a former board member, Ahmed Hussein, who alleged that if it hadn’t been for fraudulent misrepresentations by company executives, he would have sold millions of shares in early 2012, when the stock price was nearly $50. Instead, Hussein alleged, he held off on selling because of rosy projections -- and lost nearly $400 million when the software company's share price plunged because it retracted its earnings guidance.
Investors can't bring this sort of “holder” claim in federal court after the U.S. Supreme Court's 1975 ruling in Blue Chip Stamps v. Manor Drugs. The justices held that investors can only bring a fraud claim under federal securities law if they have bought or sold shares allegedly tainted by fraud, not if they merely held tainted shares. But holder claims are still viable – if barely -- in California state court under a 2003 state appellate ruling in Small v. Fritz.
Latham highlighted Small v. Fritz's extremely stringent requirements for proving a holder claim in its pretrial brief for NextGen and two executives, including founder Sheldon Razin. The brief argued that Hussein had to prove not just that the company’s alleged misstatements were fraudulent and that Hussein had concrete plans to sell his shares. The investor also had to show that Hussein relied on fraudulent statements when he changed his mind about selling the stock.
As it turned out, the jury never even got to the question of whether Hussein relied on NextGen’s statements because jurors concluded the statements weren’t fraudulent. Wald and Johnson credited witnesses from the company, including Razin, who testified that NextGen's optimistic 2012 reports about in-the-works software sales were made in good faith.
“There was a fundamental change in the market,” Wald said. “We had a coherent theory about what happened.”
Added Johnson: “There was a fraud here, but it was by the plaintiff." Hussein, she said, "had no phone records, no documents, no evidence," to back his claim that he was planning to sell millions of shares before he was dissuaded by optimistic financial reports from the company.
Hussein counsel Stephen Morrissey of Susman Godfrey offered a slightly different take on the jury’s conclusions. Latham’s defense, he said, emphasized that Hussein was a headstrong investor who wasn’t going to be swayed by what he heard from company executives. (Pretrial briefs from both sides depicted a decades-long fight for control between Razin and Hussein, who waged three failed proxy contests before the 2012 statement and another failed takeover bid after the stock drop.) So when jurors found the company’s statements were not misleading, Morrissey said, they may have been signaling that they didn’t believe Hussein was misled, not that there was no fraud.
Morrissey, who noted that his side called three witnesses to testify about Hussein's plan to sell shares, said he plans to ask Orange County Superior Court Judge Glenn Salter for a new trial. Latham’s Wald disputed Morrissey’s alternative analysis of the jury’s conclusions. Jurors, he said, found no fraud, plain and simple.
The circumstances of the trial were almost as unusual as Hussein’s claim. This litigation has been viciously contested since Hussein filed suit in 2013 and the company countersued him for breaching his fiduciary duty as a member of the board. NextGen's counter claim went to a bench trial in 2017. Hussein won and is now in arbitration to recoup his legal fees in that branch of the case.
In 2018, a different Orange County judge granted summary judgment to the company on Hussein’s holder claim. Susman Godfrey appealed, and a state appellate court revived the case in late 2019. The appeals court said the company had shown Hussein’s market sophistication and deep distrust of its leadership, but nevertheless concluded a jury might reasonably conclude from ambiguous evidence that Hussein relied on allegedly fraudulent corporate statements.
Hussein’s litigation was on a fast track under a California law prioritizing suits by plaintiffs over the age of 70, but when COVID-19 hit, all civil litigation was pushed back for months.
As the virus subsided, Salter – the third trial judge to preside over a piece of this case – set a trial date for the fall of 2020. But by then, COVID was spiking again. Latham moved for a continuance, arguing, “This isn’t the right time to be on the wrong side of history.” Only on the eve of trial, with Latham and Susman Godfrey trial teams already set up in Orange County, did the judge grant the delay.
When the trial finally began on July 6, mask mandates had been lifted. The judge ordered the 12 jurors to be socially distanced, but the lawyers were able to present testimony from maskless witnesses and to watch the reactions of maskless jurors.
And then they weren’t: Near the end of the three-week trial, with COVID cases once again spiking, the court re-imposed a mask requirement. Only testifying witnesses were permitted to remove their masks in the courtroom.
Wald, Johnson and Morrissey all told me it was disappointing to be masked for closing arguments, though Wald said it would have been more consequential if the lawyers hadn’t had two weeks to get to know jurors without masks. He said he relied on jurors’ body language to gauge reactions to his closing statement. Johnson said she watched jurors’ eyes.
Morrissey credited cooperation between Susman Godrey and Latham for getting the case to a verdict, albeit one his client didn’t want. “We said, ‘If people can get a case to trial during COVID, we’re the kind of firms that can do it,” he said. “It’s rare to end a trial better friends with your opponents than when you went in.”
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