Monday Madness

Two interesting decisions from this past Monday.

(1) Just when it looked like the U.S. Supreme Court would never again reject a securities litigation cert petition, it turned down the Apollo Group case. The Ninth Circuit’s decision exacerbated a circuit split and presented an important loss causation issue. So why didn’t the Court grant cert? Perhaps securities litigation fatigue has set in.

Quote of note (Jones Day memo): “The five circuits that have addressed the timing of the loss are divided. The Second and Third Circuits have held that a securities-fraud plaintiff must demonstrate that the market immediately reacted to the corrective disclosure. Conversely, the Fifth, Sixth, and Ninth Circuits have held that the price decline may occur weeks or even months after the initial corrective disclosure. By denying certiorari in Apollo Group, the Supreme Court left this split unresolved.”

(2) Yet another cautionary tale about the use of confidential witnesses in securities class actions was issued by a court in the N.D. of Illinois. In City of Livonia Employees’ Retirement System v. Boeing Co., Civil Action No. 09 C 7143 (N.D. Ill. March 7, 2011), the court granted Boeing’s motions to dismiss for failure to state a claim and fraud on the court. In their second amended complaint, the plaintiffs had added allegations providing details about a confidential witness and the basis for this witness’ supposed knowledge of Boeing’s misconduct. The court expressly relied on these new allegations in finding that the plaintiffs had adequately plead scienter. After discovery began, however, it turned out that the confidential witness denied being the source of the allegations in the complaint, denied having worked for Boeing, and claimed to have never met plaintiffs’ counsel until his deposition. The court was not amused.

Quote of note: “If these facts were disclosed while the dismissal motions were pending, the court would not have concluded that the confidential source allegations were reliable, much less cogent and compelling. The second amended complaint would have been dismissed, possibly with prejudice, as insufficient under the PSLRA. It matters not whether, as plaintiffs argue, [the confidential witness] told their investigators the truth, but he is lying now for ulterior motives. The reality is that the informational basis for [the confidential witness allegations] is at best unreliable and at worst fraudulent, whether it is [the confidential witness] or plaintiffs’ investigators who are lying.”

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