Category Archives: All The News That’s Fit To Blog

Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse have released an interim report on federal securities class action filings in 2007. The findings include:

(1) There were 59 filings in the first half of 2007. This represents a slight uptick from the previous six-month period, but is significantly below the post-PSLRA average semi-annual filing rate of 101 (mid-year periods July 1996 through June 2005).

(2) The report suggests two hypotheses for the continued low filing rate: (i) increased government enforcement activity leading to lower incidence of fraud; and/or (ii) a strong stock market with low volatility.

(3) The communication and finance sectors had the most filings.

The New York Law Journal (July 9, 2007 edition) has a special section (subscrip. req’d) on securities litigation and regulation, including articles on merger & acquisition cases related to private equity deals, the recent Billing antitrust decision in the U.S. Supreme Court, and the “changing face” of securities class actions. Two prominent New York securities litigators also have a publicly available “point-counterpoint” on recent judicial developments.

(1) A column on Law.com provides an overview of the recent U.S. Supreme Court cases related to securities litigation.

Quote of note: “While Dura and Tellabs are significant in their own right, their impact may pale in comparison to the Supreme Court’s resolution, to be made in 2008, of Stoneridge Investment Partners LLC v. Scientific-Atlanta, Inc., which squarely puts the theory of “scheme liability” to the test.”

(2) Professor Hannah L. Buxbaum has posted a forthcoming article on the jurisdictional issues raised by “foreign cubed” cases (defined as an action brought against a foreign issuer, on behalf of a class that includes not only investors who purchased the securities in question on a U.S. securities exchange, but also foreign investors who purchased the securities on a foreign securities exchange). The article – entitled “Multinational Class Actions Under Federal Securities Law: Toward a “Fraud on the Global Market” Theory?” – can be downloaded here.

Quote of note: “Multinational class actions invoke particularly strongly the concerns courts and commentators share regarding the over-expansive application of U.S. regulatory law in the global arena. (And, as I have argued, they are likely in the near future to attract the unfavorable notice of foreign governments as well.) Moreover, these claims illustrate particularly clearly the weaknesses of traditional jurisdictional rules.”

The author of The 10b-5 Daily, Lyle Roberts (LeBoeuf Lamb), will be co-moderating a Practicing Law Institute audio webcast on the U.S. Supreme Court’s recent Tellabs decision. The webcast will take place on Wednesday, July 11 at 1 p.m. ET. Bruce Vanyo (Katten Muchin) is the other co-moderator and the panelists are Jerome Congress (Milberg Weiss) and David Graham (Sidley Austin), who represented the parties in the case. CLE credit is available. Click here to register.

The Tellabs decision has been the subject of considerable media and blog commentary.

WSJ Law Blog: Tellabs – Securities Lawyers React

WSJ Law Blog: Supremes Deliver Another Blow to Plaintiffs Securities Bar

WSJ Law Blog: Scalia and Stevens Battle Over Statutory Interpretation

Washington Post: Pro-Business Decision Hews To Pattern of Roberts Court

NYT: Investors’ Suits Face Higher Bar, Justices Rule

Bloomberg: Top U.S. Court Tightens Limits on Shareholder Suits

SEC Actions Blog: The Supreme Court Strikes a Balance Regarding Requirements In Securities Damage Actions

The D&O Diary: Supreme Court Issues Tellabs Opinion

CFO.com: Shareholder Lawsuit Ruling a Boon?

Securities Law Prof Blog: Tellabs v. Makor Issues & Rights

Sixth Circuit Blog: Tellabs Defines “Strong Inference” for Pleading Securities Fraud Under the PSLRA — It Could Have Been Much Worse!

With all of the talk about the U.S. Supreme Court’s most recent securities litigation issues (scienter and scheme liability), it is important to remember that the full impact of the court’s last big decision – the Dura opinion on loss causation issued in 2005 – is still playing out in the lower courts. This year has seen a number of interesting decisions.

(1) In In re Motorola Sec. Litig., 2007 WL 487738 (N.D. Ill. Feb. 8, 2007), the court undertook a comprehensive examination of loss causation in the context of a summary judgment motion. Notably, the court rejected defendants’ argument that under Dura “a securities fraud plaintiff bears the burden, even as a nonmoving party on summary judgment, of proving that its loss was caused by the claimed fraud, and not by the ‘tangle of other factors’ affecting share price.” Instead, the court found that it is the defendant’s burden to show that the decline in share price did not result from the disclosure of information related to the claimed fraud. (The parties settled the case shortly after this decision.)

(2) In Ray v. Citigroup Global Markets, Inc., 2007 WL 1080426 (7th Cir. April 12, 2007), the court addressed an appeal from a grant of summary judgment in a collective action against an investment advisor. The court identified three possible ways “a plaintiff might go about proving loss causation.” First, a plaintiff could demonstrate the “materialization of a risk” – i.e., that it was the facts about which the defendant lied that caused the plaintiff’s injury. Second, a plaintiff could rely on the “fraud-on-the-market scenario” discussed in Dura and show both that the misrepresentations artificially inflated the price of the stock and that the value of the stock declined once the market learned of the deception. Finally, a plaintiff could show that its broker falsely assured the plaintiff that a particular investment was “risk-free.” The court found that the plaintiffs in the instant case had failed to introduce evidence sufficient to go ahead with their suit under any of these approaches.

(3) In Oscar Private Equity Investments v. Allegiance Telecom, Inc., 2007 WL 1430225 (5th Cir. May 16, 2007), the court vacated a class certification order “for wont of any showing that the market reacted to the corrective disclosure.” The court held that the plaintiffs had failed to provide sufficient empirical evidence of loss causation and, therefore, could not take advantage of the “fraud-on-the-market” presumption of reliance.

Quote of note (Oscar Private Equity): “The plaintiffs’ expert does detail event studies supporting a finding that [the company’s] stock reacted to the entire bundle of negative information contained in the 4Q01 announcement, but this reaction suggests only market efficiency, not loss causation, for there is no evidence linking the culpable disclosure to the stock-price movement. When multiple negative items are announced contemporaneously, mere proximity between the announcement and the stock loss is insufficient to establish loss causation.”

A few items of interest:

(1) With Vigour and Zeal has a post, including a link to a related article in Legal Week, on the filing of derivative actions in U.S. courts against non-U.S. companies.

(2) WSJ Law Blog has coverage of a humorous D. of Minn. decision denying the motion to dismiss in the UnitedHealth securities class action. As noted in the comments to the post, however, the defendants presumably were not amused by the court’s heavy reliance on a pleading standard repudiated by the U.S. Supreme Court two weeks ago.

(3) And just in case you cannot get enough of the Stoneridge case, Best In Class has a post on some chatter that appears to have arrived a bit late.

Addition: Regarding the D. of Minn. decision, an alert reader points out that the court subsequently issued an amended opinion reflecting the change in the law (but reaching the same result).

According to an article in the Washington Post this weekend (which has been picked up by a number of other media outlets), the suspense is over. The SEC reportedly has asked the Solicitor General to file an amicus brief in support of the investor plaintiffs in the Stoneridge (a.k.a. Charter Communications) case on scheme liability that will be heard by the U.S. Supreme Court next term.

Two notes:

(1) Although some reports have suggested that the amicus brief will be filed in support of Enron’s investors (and the original Washington Post article is not very clear on this point), that appears unlikely unless, as advocated by the attorneys for Enron’s investors, the Supreme Court decides to hear the Enron and Stoneridge appeals together.

(2) Presuming the amicus brief is filed, it will be interesting to see if the SEC/Solicitor General deviates in any way from the earlier position on scheme liability taken by the SEC in a 9th Circuit case.

Just when you thought it was safe to read about something else on this blog, here are a few more pieces on the Stoneridge (a.k.a. Charter Communications) case pending before the U.S. Supreme Court.

(1) The Harvard Law School Corporate Governance Blog has a post with further speculation (see here) about whether Justice Alito could be the deciding vote. The post also discusses how the granting of cert in the related Enron’s banks case might alter the outcome.

Quote of note: “[I]f the Court grants review in Credit Suisse [the Enron’s banks case], it could well mean that Chief Justice Roberts and Justice Alito are inclined to take a narrow view of primary liability, and that The Chief Justice will be in a position to assign the opinion to a wavering Justice Alito. If Credit Suisse is granted, look for the case to be a 5-4 decision, with liability under Section 10(b) not extended to vendors and investment bankers, even where they know the transaction is a sham and will be used to effect a financial fraud.”

(2) The Los Angeles Times ran an editorial on Wednesday urging the SEC to support the investor plaintiffs in the Stoneridge and Enron’s banks cases.

Quote of note: “So far, the SEC has remained silent. But with its mandate to ‘maintain fair, orderly and efficient markets and facilitate capital formation,’ the SEC is uniquely suited to speak out when legal interpretations undermine confidence in the stock market’s fairness.”

(3) Meanwhile, the Washington Examiner has an op-ed urging the SEC to take the opposite position.

Quote of note: “The SEC’s support, expressed through a U.S. government friend-of-the-court brief in Stoneridge, would well tip the balance in the Supreme Court. For the sake of our capital markets and American shareholders, let’s hope the commission does the right thing. The SEC’s mission of ‘investor protection’ cannot be achieved by further empowering plaintiffs’ lawyers.”

The battle to win the hearts and minds of the American people (or at least the SEC) on the issue of scheme liability, which is currently before the U.S. Supreme Court in the Stoneridge (a.k.a. Charter Communications) case, shows no signs of slowing down. This week has seen three publications of note:

(1) In its Tuesday edition, the Wall Street Journal had a feature article (subscrip. req’d) on the pressure being put on the SEC to side with the plaintiff investors.

Quote of note: “[A plaintiffs attorney] won the support of aspiring Democratic presidential candidate and former plaintiffs lawyer John Edwards, who said: ‘I urge the SEC to fulfill its historic mission of protecting investors. Silence, or even worse, siding with fraud participants, would be a betrayal of that mission.'”

(2) The Wall Street Journal also has an op-ed (subscrip. req’d) in today’s edition urging the SEC to support the defendant corporations.

Quote of note: “Unfortunately, we cannot be certain why the Supreme Court has taken the case, or if it will do the right thing. While Chief Justice John Roberts and Justice Stephen Breyer have spoken of the need for judicial modesty, both have recused themselves from the case. All the more reason for Treasury and the SEC to stand firm and ask the solicitor general to urge the Supreme Court to keep liability circumscribed.”

(3) Finally, the Legal Times has an op-ed, written by attorneys who represent investors in a scheme liability case against Enron’s banks, urging the Supreme Court to adopt a broad interpretation of the relevant statutes.

Quote of note: “At bottom, Section 10(b) and Rule 10b-5 have long proscribed any scheme or artifice to defraud, as well as any conduct that operates as a fraud on investors. Enron’s banks worked hand-in-hand with Enron to design and implement sham transactions with the sole purpose of hiding debt and generating fake revenue. If that’s not participating in a scheme to defraud, what else can we call it?”