Reversal of court desicion allows client to amend securities complaint

David Hildes

Our attorneys achieved a significant litigation victory for one of its clients, investor David Hildes, who lost approximately $25 million when his Harbinger Corporation (Harbinger) stock was exchanged for Peregrine Systems, Inc. (Peregrine) stock pursuant to a materially false registration statement issued by Peregrine. A three-judge panel of the U.S. Court of Appeals for the Ninth Circuit unanimously reversed an earlier district court decision barring Hildes from amending his securities complaint against certain former outside Peregrine directors, allowing Hildes to proceed with his lawsuit.

Hildes initially brought suit against Peregrine’s former auditing firm and others. When he moved for leave to amend his complaint to add claims against Peregrine’s former outside directors, the district court denied Hildes’ motion to amend on the basis that Hildes’ Section 11 claim was futile. The district court reasoned that because Hildes had entered into a voting agreement and irrevocable proxy with Peregrine prior to the registration statement’s effective date, which required that Hildes’ shares be voted in favor of a merger, Hildes’ alleged losses could not have been caused by the false registration statement. Hildes’ sole issue on appeal was whether the district court had erred in denying him leave to amend his complaint to add a Section 11 claim against the outside directors.

The Ninth Circuit reversed, agreeing with our legal team’s arguments that Hildes never made a binding commitment to exchange his Harbinger shares for Peregrine shares prior to the filing of the registration statement. Citing Hildes’ allegations that, if the registration statement had been accurate,  Harbinger’s board would have declared Peregrine in breach of the merger agreement and terminated the merger agreement, which would have terminated the voting agreement and proxy or alternatively, that had the registration statement been truthful, Harbinger’s shareholders would have voted against the merger, the Ninth Circuit held that Hildes had sufficiently alleged that Peregrine’s material misstatements had caused his losses and, therefore, he had stated a potentially meritorious claim.  

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