Is “on track” the most dangerous phrase a corporation can use to describe its business? Over the years, there have been a significant number of securities class actions alleging a company’s statement that a regulatory approval process or financial metric was “on track” constituted securities fraud. Defendants typically argue that “on track” is inherently forward-looking (because one cannot know whether something is actually on track until the final results are obtained) and, therefore, protected from liability by the PSLRA’s safe harbor for forward-looking statements. While some courts have held that “on track” cannot be distinguished from the underlying projection and the safe harbor applies, other courts have concluded that “on track” is a statement of present condition.
Another, more recent legal complication, is whether “on track” should actually be assessed as an alleged false opinion subject to the Omnicare standard. In Omnicare, the Supreme Court held (albeit in the context of a non-fraud Section 11 claim) that an opinion is actionable if either (a) the opinion was not genuinely held, or (b) the holder of the opinion omitted material facts about its inquiry into, or knowledge concerning, the opinion.
In Bielousov v. GoPro, Inc., 2017 WL 3168522 (N.D. Cal. July 26, 2017), the court considered whether the CFO’s statement “We believe we’re still on track to make [GoPro’s financial guidance] as well” was a forward-looking statement covered by the PSLRA’s safe harbor. The court held that because the CFO included the phrase “we believe” in his statement, it was a statement of present opinion about “his and GoPro’s existing state of mind.” Accordingly, the PSLRA’s safe harbor did not apply and the statement should be examined under the Omnicare standard.
Holding: Motion to dismiss denied.
With the dog days of summer comes the issuance of statistical reports on securities class actions. ISS Securities Class Actions puts out an interesting report, now updated through 2016, on “The Top 100 U.S. Settlements of All Time.” As it turns out, “all time” is actually from the passage of the Private Securities Litigation Reform Act of 1995 forward, but the report breaks down the settlements by amount, lead plaintiff, lead counsel, claims administrator, and the presence of a financial restatement.
(1) Six of the “Top 100 U.S. Settlements” were in the second half of 2016: Caremark, Genworth Financial, Household Int’l, Band of America, Pfizer, and MF Global Holdings.
(2) The plaintiffs’ firms with the most settlements on the list are Bernstein Litowitz (35 settlements) and Robbins Geller (17 settlements).
(3) Forty-three of the “Top 100 U.S. Settlements” have involved financial restatements.
The U.S. Supreme Court has issued a decision in the CalPERS v. ANZ Securities case holding that the three-year statute of repose for Section 11 and Section 12(a) claims (misrepresentation in a registration statement or prospectus) is not subject to equitable tolling during the pendency of a class action. It is a 5-4 decision authored by Justice Kennedy.
In CalPERS, the Court found that the tolling “is permissible only where there is a particular indication that the legislature did not intend the statute to provide complete repose but instead anticipated the extension of the statutory period under certain circumstances.” In this case, the applicable provision of the Securities Act of 1933 “does not refer to or impliedly authorize any exceptions for tolling.” Indeed, the Court noted, “the text, purpose, structure, and history of the statute all disclose the congressional purpose to offer defendants full and final security after three years.”
The Court rejected the plaintiff’s assertion that the pendency of a class action should create an exception to these basic principles. In key part, the plaintiff argued that “the class complaint puts a defendant on notice as to the content of the claims against it and the set of potential plaintiffs who might assert those claims.” The Court found, however, that using equitable tolling to permit “a class action to splinter into individual suits . . . would threaten to alter and expand a defendant’s accountability, contradicting the substance of a statute of repose.” The Court also disagreed with the plaintiff’s contention that “nonnamed class members will inundate district courts with protective filings,” concluding that this concern was likely “overstated” given the nature of securities class actions. Finally, the Court held that the filing of a class action does not mean that the “actions” of every individual class member have been “brought” for purposes of satisfying the statute of repose.
Holding: Dismissal affirmed.
Quote of note: “The final analysis, then, is straightforward. The 3-year time bar in §13 of the Securities Act is a statute of repose. Its purpose and design are to protect defendants against future liability. The statute displaces the traditional power of courts to modify statutory time limits in the name of equity. Because the American Pipe tolling rule is rooted in those equitable powers, it cannot extend the 3-year period.”
Disclaimer: The author of The 10b-5 Daily filed an amicus brief on behalf of Washington Legal Foundation in support of the defendant. The amicus brief is cited on page 14 of the decision.
If an individual defendant’s stock trading took place pursuant to a pre-determined Rule 10b5-1 trading plan that was entered into before the outset of the alleged fraud, the use of the trading plan may undermine any inference that the trades were “suspicious” for purposes of assessing scienter (i.e., fraudulent intent). As part of this analysis, however, does a court have to accept that the beginning of the class period constitutes the outset of the alleged fraud?
In Harrington v. Tetraphase Pharma., Inc., 2017 WL 1946305 (D. Mass. May 9, 2017), the plaintiffs claimed that the company “knew that the drug they were testing would fail long before that information was released to the public.” The alleged timeline was that the class period began on March 5, 2015, two of the individual defendants entered into Rule 10b5-1 trading plans on March 13, 2015, and the company became aware of the results of its clinical testing as of late April or early May 2015. In assessing the impact of the Rule 10b5-1 trading plans on its scienter analysis, the court noted that the plans “were executed before even Plaintiffs argue that defendants possessed results from the pivotal portion of the [clinical trial].” Accordingly, the court rejected the idea that it was forced to accept, for purposes of analyzing the impact of the trading plans, that the alleged fraud began at the beginning of the class period. Instead, the court concluded that the “reasonable inference from the alleged facts” was that the fraud began after the two individual defendants entered into their trading plans and, as a result, their subsequent trading was not suspicious.
Holding: Motion to dismiss granted (on the basis that the plaintiffs had failed to establish a strong inference of scienter as to any of the defendants).
In its Omnicare decision, the U.S. Supreme Court held that opinions presented in registration statements can be subject to liability under Section 11 of the Securities Act of 1933 if either (a) the opinion was not genuinely held, or (b) the registration statement omitted material facts about the issuer’s inquiry into, or knowledge concerning, the opinion. A key open question, however, is whether Omnicare’s reasoning extends to securities fraud claims brought under Section 10(b) of the Securities Exchange Act of 1934.
While some district courts have held that Omnicare is limited to Section 11 claims, the appellate trend is going the other way. In City of Dearborn Heights Act 345 Police & Fire Retirement System v. Align Technology, Inc., et al., No. 14-16814 (9th Cir. May 5, 2017), the court agreed with a recent Second Circuit decision and found that Omnicare should apply to Section 10(b) claims as well. The court reasoned that both Section 11 and Section 10(b) claims are based on untrue statements of fact and, as a result, the same falsity analysis is warranted.
Holding: Dismissal affirmed.
Among other reforms, the Private Securities Litigation Reform Act of 1995 (“PSLRA”) requires that upon final adjudication of a federal securities action, the court shall include in the record “specific findings regarding compliance” with the federal rule providing that attorneys’ must present accurate and non-frivolous pleadings to the court. If the court finds the rule has been violated, it must impose sanctions on the offending party or attorney.
The PSLRA’s required sanctions review is more honored in the breach than the observance, with federal judges generally declining to provide the specific findings unless prompted by a party. In turn, parties rarely make these requests because they believe there is a slim likelihood of sanctions being imposed. The recent decision in Tai Jan Bao v. Solarcity Corp., 2017 WL 878226 (N.D. Cal. March 6, 2017) illustrates the issue.
In Solarcity, the plaintiffs alleged that the defendants had engaged in an accounting fraud. The court dismissed the complaint based on a failure to adequately plead scienter (i.e., fraudulent intent), but allowed the plaintiffs to revise their pleading. Two more versions of the complaint were dismissed on the same basis, the last dismissal with prejudice. Following the entry of the final judgment, the defendants moved the court to amend its judgment by imposing sanctions, arguing that the complaints lacked any factual basis and the plaintiffs’ counsel had failed to conduct a reasonable inquiry.
The court held that the complaints, although failing to satisfy the PSLRA’s pleading standards, “did not raise the types of objectively baseless and frivolous claims that have been the subject of fee awards.” Moreover, the court found that the plaintiffs’ counsel, by hiring investigators, conducting interviews of former employees, reviewing public documents, and retaining an expert, undertook a reasonable investigation into the dismissed claims.
Holding: Motion to amend the judgment by imposing sanctions denied. (The court also denied the plaintiffs’ request that the defendants pay their attorneys’ fees incurred in opposing the sanctions request.)
Is paying someone else to make a misstatement to investors the same as making the misstatement yourself for purposes of securities fraud liability? Two recent appellate decisions address this question and come to different conclusions based on the specific type of liability alleged.
In In re Galectin Therapeutics, Inc. Sec. Litig., 843 F.3d 1257 (11th Cir. 2016), the corporate defendants retained promoters to “recommend or tout” the company’s stock by writing favorable articles. These articles allegedly contained misstatements that misled the company’s investors. While the defendants “worked in conjunction with the stock promoters,” there were no allegations showing that any defendant told the stock promoters what to say. Under the Supreme Court’s Janus decision, a defendant is only subject to primary securities fraud liability if it has “ultimate authority” over the alleged misstatement. The Eleventh Circuit concluded that merely paying for the articles did not demonstrate ultimately authority over any alleged misstatements made by the promoters and, as a result, the claims against the defendants based on those alleged misstatements must be dismissed.
In West Virginia Pipe Trades Health & Welfare Fund v. Medtronic, 845 F.3d 384 (8th Cir. 2016), the corporate defendants subsidized a number of medical journal articles that allegedly overstated the efficacy and safety of a treatment sold by the company. Rather than assert primary liability for these alleged misstatements, the plaintiffs argued that the corporate defendants were liable as participants in a scheme to mislead investors. Under the Supreme Court’s Stoneridge decision, a plaintiff cannot bring a scheme liability claim based on deceptive conduct that makes its way to investors through a third party’s statements because investors cannot demonstrate that they relied on any acts taken by the company.
Nevertheless, the Eighth Circuit found that the scheme liability claims against Medtronic were adequately plead because, among other reasons, the company had “instructed” the authors of the articles to make the alleged misstatements. According to the court, the plaintiffs would be able to demonstrate that investors had relied upon statements – even though they were made by third parties – because a “company cannot instruct individuals to take a certain action, pay to induce them to do it, and then claim that any casual connection is too remote when they follow through.”
The Galectin and Medtronic decisions are difficult to reconcile. The Supreme Court has made it clear that it wants to severely restrict the ability of private plaintiffs to bring what amounts to aiding and abetting claims for securities fraud. So if the alleged facts are insufficient to establish that the corporate defendant is the maker of the third party statements, should plaintiffs be allowed to use scheme liability to circumvent that restriction? Stay tuned.