A few items from around the web.
(1) The first dismissal in the current wave of China-related securities class actions has occured, but it is difficult to read too much into the decision. In In Re China North East Petroleum Holdings Ltd. Sec. Litig., 2011 WL 4801515 (S.D.N.Y. Oct. 6, 2011), the court concluded that the lead plaintiff had not suffered any economic loss. Within a couple of months after the “final allegedly corrective disclosure” was made, the company’s stock price rose above the lead plaintiff’s average purchase price. The court held that a “plaintiff who foregoes a chance to sell at a profit following a corrective disclosure cannot logically ascribe a later loss to devaluation caused by the disclosure.” The New York Law Journal has an article (subscrip. req’d) on the decision.
(2) The National Law Journal has an interesting interview (free regist. req’d) with the lead defense counsel in a recent civil securities fraud trial. The case was brought by investors against the former CEO of Homestore.com, who had previously plead guilty to related criminal charges. Although the jury found that the former CEO was liable for certain misstatements that caused $46 million in losses, he was not required to pay any damages because other defendants had already paid more than that amount to settle the claims against them.
(3) The D&O Diary has an informative roundup of the U.S. securities class action filing activity through the third quarter of 2011. At the present pace, there will be 205 filings this year, which is just slightly above the post-PSLRA average.
Section 20(b) of the Exchange Act makes it unlawful for a person to effect a securities fraud through another person. Sometimes referred to as the “ventriloquist dummy” statute, it has rarely been invoked in securities cases. In the Supreme Court’s recent Janus decision, however, the Court limited Section 10(b) securities fraud liability to persons who had “ultmate authority” over the alleged false statement. Not surprisingly, Janus has revived interest in Section 20(b) as a potential vehicle for claims against secondary actors.
The New York Law Journal has an interesting column (Sept. 29 – subscrip. req’d) on the potential application of Section 20(b). As a threshold matter, the authors note that “[t]here is so little authority on Section 20(b) that is is not even definitive that it affords a private right of action.” Even assuming that a private right of action exists, plaintiffs will have to demonstrate both the existence of any underlying violation and that “the controlling person ‘knowingly used’ the controlled entity to violate the securities laws.”
The Janus decision holds that for purposes of primary securities fraud liability under Section 10(b) and Rule 10b-5, the “maker” of a statement is the person or entity with “ultimate authority” over the statement. Practicioners have begun to debate over the significance of that holding, including in two recent New York Law Journal columns.
(1) In “Janus Capital and Underwriter Liability Under Section 10(b) and Rule 10b-5” (July 12 – subscrip. req’d), the authors note that pre-Janus there were conflicting lower court decisions over whether underwriters could have primary liability for misstatements in offering documents. The Janus decision, however, “undercut[s] any private right of action as against underwriters” because “the ultimate decision as to whether an offering will proceed, whether to disseminate an offering document, and what the offering document will say rest with the issuer.”
(2) In “U.S. Supreme Court and Securities Litigation” (July 21 – regist. req’d), Professor John Coffee argues that the “ultimate authority” standard may not be as sweeping as it seems. The Janus decision also notes that “in the ordinary case, attribution within a statement or implicit from surrounding circumstances is strong evidence that a statement is made by, and only by, the party to whom it is attributed.” According to Coffee, this language suggests that “implicit attribution” is sufficient to find someone has primary liability for a false statement. Relying on this part of Janus creates another conundrum, however, because it “suggest[s] that the attributed statement creates liability ‘only’ for the person quoted and not the issuer that may knowingly incorporate his false statement.”
The New York Law Journal has two securities litigation columns this week.
(1) In Lower Courts Divided on Standard for Pleading Loss Causation Post-Dura (3/31/11 – subscrip. req’d), the authors discuss the split over whether loss causation is merely subject to notice pleading (FRCP 8(a)(2)) or must be plead with particularity (FRCP 9(b)). The Supreme Court, in its Dura decision, left the issue open and no subsequent judicial consensus has emerged.
(2) In Most ARS Suits Tripped Up By Difficult Pleading Hurdles (3/31/11 – subscrip. req’d), the author examines what has happened to the flurry of securities class actions that were filed in the wake of the 2008 disruption in the market for auction rate securities. Most of the cases have been dismissed for failing to adequately plead various elements of a securities fraud claim, including scienter, loss causation or reliance.
Section 929Y of the Dodd-Frank Act directs the SEC to solicit public comments and thereafter conduct a study to determine the extent to which private rights of action under the antifraud provisions of the federal securities laws should be extended to cover transnational securities fraud. In other words, to what extent is the Supreme Court’s National Australia Bank decision a problem and what, if anything, should Congress do about it?
The SEC solicited comments back in October and the results are now available on the SEC’s website. They make for interesting reading. The commentators include current litigants in cases with extraterritoriality issues, forty-two law professors, the U.S. Chamber of Commerce, the governments of Australia and France, and an individual foreign investor who states that he has “been duped of huge sum of my life long savings by so called private bankers who are affiliates outside USA of US banks.”
Quote of note (Comments by Forty-Two Law Professors): “We differ in our views of private rights of action: some of us have significant doubts about the efficacy of securities class actions, while others believe shareholder litigation rights should be strengthened. Nevertheless, as a group we believe reform efforts should be applied consistently and logically to both domestic and affected foreign issuers, and we therefore support extending the test set forth in Section 929P of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to private plaintiffs.”
A couple of items from around the web.
(1) Professor John Coffee has a New York Law Journal column (Jan. 20 – subscrip. req’d) on the upcoming year in securities litigation. The column discusses the Halliburton and Matrixx cases pending in the U.S. Supreme Court, as well as the New York AG’s suit against E&Y for “allegedly assisting Lehman to cosmetically redecorate its balance sheet.”
Quote of note: “[T]he [Matrixx] case poses the first opportunity in over 20 years for the Court to reconsider or rephrase its basic standard for materiality. Even a modest redefinition of that standard will destroy forests to print the law review articles and practitioner commentaries that will predictably follow. The road to Hell is paved with good intentions and law review articles.”
(2) Whether securities class actions benefit shareholders is a perennial debate. In a recent study published in the Financial Analysts Journal, two professors from Maastricht University (Netherlands) conclude that it is a mixed picture, depending on whether the case is based on a violation of the duty of loyalty (e.g., illegal insider trading) or the duty of care (e.g., known lack of internal controls). While in the short run “the filing of a class-action lawsuit is a materially adverse corporate event,” the authors conclude that cases based on violations of the duty of loyalty are more likely over the long run to lead to positive management and governance changes and a higher stock price.
Quote of note: [Perhaps predictably, commentators chose to read the study’s mixed results in different ways, which led to an amusing post from Bruce Carton.] “I saw the follow headlines about a week apart: 1. ‘Study Shows Benefits of Securities Class Actions’ (January 7, 2011); 2. ‘Securities Class Actions Mostly Punish Shareholders, Study Finds’ (November 30, 2010). Sure, different studies can reasonably reach different conclusions about the benefits or harm of securities class actions … but these articles are about the same study!!! As the fellas say on ESPN’s Monday Night Countdown, ‘C’Mon Man!'”
(1) If you are not willing to walk away, you are not negotiating effectively. Charles Schwab appears to have proven that adage correct in its settlement of the securities class action pending against the company in the N.D. of California. On November 8, Charles Schwab announced that it was terminating the deal because it would allow federal securities class members residing outside of California to bring certain state law claims against the company. On November 18, however, the parties informed the court that the deal was back on. Charles Schwab will continue to pay $235 million, as had been contemplated all along, but the federal securities class members residing outside of California will have to opt out of the settlement if they want to pursue related claims. The court reportedly is close to approving the new deal.
(2) San Diego State may want to issue a revised press release. As it turns out, the university did jump the gun when it announced that it would be the recipient of funds from a cy pres award in the Apple options backdating settlement. Ted Frank, at the Center for Class Action Fairness, has successfully pressured the parties into making those funds available, at least in the first instance, to class members. He is now pushing the court to refuse preliminary approval until the settlement guarantees that the class gets all of the settlement funds.
A couple of cases have taken an unexpected turn.
(1) Last April, Charles Schwab Corporation announced the preliminary settlement of the securities class action pending against the company in the N.D. of California. The case relates to the marketing and sale of a bond fund. Just as the settlement was headed for final approval, however, Schwab has decided to invoke the termination provision in the settlement agreement and proceed to trial. The issue is whether the settlement, despite Schwab’s belief that it provided a global resolution, allows federal securities class members residing outside of California to bring certain state law claims against the company. The D&O Diary has a post with all the details.
(2) Last month, the U.S. Supreme Court asked the government for its views on the Omnicare cert petition. The question presented was whether the heightened pleading standard of FRCP 9(b) should be applied to ’33 Act claims (i.e., strict liability/negligence claims based on misstatements in a prospectus or registration statement) that “sound in fraud.” The plaintiffs, however, did not wait to find out the government’s position. They have dismissed the cert petition and evidently will pursue their remaining claims back in district court.
A few items from around the web.
(1) Section 929Y of the Dodd-Frank Act directs the SEC to solicit public comments and thereafter conduct a study to determine the extent to which private rights of action under the antifraud provisions of the federal securities laws should be extended to cover transnational securities fraud. In other words, to what extent is the Supreme Court’s National Australia Bank decision a problem and what, if anything, should Congress do about it? The SEC has issued its request for comments, which are due by February 18, 2011.
(2) The New York Law Journal has a column (Oct. 27 – subscrip. req’d) on a recent Second Circuit securities decision. In MF Global, the court evaluated the scope of the bespeaks caution and loss causation defenses. The 10b-5 Daily’s summary of the decision can be found here.
(3) Good news – the plaintiffs firms in the Gildan Activewear case are sufficiently diverse to settle the matter. Last month, the judge issued an unusual order (after a preliminary settlement had already been reached) requesting that the firms make every effort to assign a diverse team to the case. The WSJ Law Blog reports that the judge has issued a new order clarifying that he “did not mean to be critical of the firms’ diversity efforts or staffing of the case.”
A couple of items from around the web.
(1) Professor John Coffee has a New York Law Journal column (Sept. 17 – subscrip. req’d) on the impact of the National Australia Bank (NAB) decision on SEC and private actions. The column discusses a factual scenario in which a U.S.-based stock promoter defrauds U.S. investors in a transaction that is consummated overseas. Post-NAB, the U.S. investors cannot bring an action under Section 10(b)/Rule 10b-5, but “they could sue in the United States based on a cause of action under foreign law.”
(2) The American Lawyer has an article on an unusual order (to say the least) issued in the Gildan Activewear securities class action. Although lead counsel was appointed two years ago and the parties have entered into a preliminary settlement, the court instructs the two plaintiffs firms to “make every effort” to assign at least one minority and one woman to the case. The order states that this is warranted because the class has thousands of members “arguably from diverse backgrounds” and it is “therefore important to all concerned” that lead counsel also be diverse.