Abstract:
How and when do courts determine that corporate disclosures are actionable under the federal securities laws? The applicable standard is materiality: would a (mythical) reasonable investor have considered a given disclosure important. As I establish through empirical and statistical testing of approximately 500 cases analyzing the materiality standard, judicial findings of immateriality are remarkably common, and have been stable over time. Materiality's scope results in the dismissal of a large number of claims, and creates a set of cases in which courts attempt to explain and defend their vision of who is, and is not, a reasonable investor. Thus, materiality provides an ideal lens through which to examine courts' understanding of behavioral psychology and how the insights of that discipline should inform legal decision making.

Significantly, judges have shifted from standards-based to bright-line tests over time, increasingly imposing on investors a duty to behave in economically rational ways in response to corporate disclosures, or risk losing the benefit of legal protections from securities fraud. From this shift, I derive a duty to act as a rational shareholder, attaching to every investor in the public capital markets. Because experimental evidence suggests that women and minorities have different financial risk preferences than white men, courts' applications of this duty may result in privileging white, male investors at the expense of all others. Finally, the very existence of a duty attaching to mere share ownership has the potential to significantly change the way we evaluate those corporate governance models which assume shareholder passivity.

I haven't read this paper yet, but Professor Solum's recommendation is worth more than mine anyhow. And from the abstract, this paper seems likely to be relevant.

From the balance sheet, their accounts receivable is quite a bit lower, suggesting they got a lot of their cash from collecting on accounts - not from new sales.  Of course, that is supported by their income statement where we continue to see both product and service sales slipping.  It would be nice to know how much of those sales are stuff already in the pipeline versus new customers (if any).  Anyway, despite any claims otherwise, it looks like their UNIX business is not generating any income or cash.  I also noted on their balance sheet that they apparently sold off about $1M of their computer and equipment assets (at least, it was taken off the books).  That represents about 1/3 of their starting balance for that.  I can only guess that is a sizeable chunk of their assets.

On the flip side, they also took care of a lot of liabilities, especially accounts payable.  This includes a bunch they owed attorneys for the past year.  I find it interesting that they are now on this $2M every couple months payment plan.  I wonder who set that up - SCO or BSF et al wanting their money.  Anyway, it does look like about $3.5M per quarter in legal expenses, so about $14M this year?

So, even though they brought in a lot of cash from collecting AR they paid a bunch out to clear their AP.  And looking at their cash flow statements, it is clear operations was a cash outflow for them.

I've seen reports that they are down to 160 or so employees - in other words, more cuts.  With that and looking at the financial statements, it looks to me like they are on a path to winding down their operations.  Despite the apparent dreams of McBride to create a software powerhouse, it certainly looks like they are on a path to becoming a litigation shell company.

I was going to call in to the CC but was unable to make it.  The couple questions I would have liked asked were:

1. They have indicated Legend is not expected to generate new business.  It appears they are losing existing business as well.  Given that many are predicting they will run out of cash in only a few more quarters and they have not revealed any plans to bring in new revenue, can they comment on why anyone predicting their pending bankruptcy would be wrong?

2. From their 10K and other statements, they had 200 employees, 193 of which were working in their UNIX divisions.  That leaves 7 committed solely for SCOsource.  I also noted they spent about $2M on SCOsource last year that was not legal fees.  Could they explain what the employees devoted to SCOsource are doing and what they've spent $2M on? (as I haven't seen anything out of them that would have required $2M)