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

The December 19 edition of the New York Law Journal has a special section (regist. req’d) on securities litigation and regulation. The special section includes articles on scheme liability, scienter and summary judgment, the demand requirement in derivative cases, and the use of asset protection devices in SEC enforcement cases.

The lead article on scheme liability under subsections (a) and (c) of Rule 10b-5 is of particular interest. The article discusses the district court split over whether secondary actors who did not prepare or substantially participate in preparing corporate financial misstatements can still be held liable for them as scheme participants. The issue currently is before the First and Ninth Circuits.

Quote of note: “Recently, plaintiffs have aggressively pursued scheme theories of liability against secondary actors under subsection (a) and/or (c) in cases involving major accounting scandals such as Homestore, Lernout & Hauspie, Parmalat, and Enron. In those cases, plaintiffs allege that secondary actor defendants – who did not make the misleading financial statements and disclosures – are liable under subsections (a) and/or (c) for knowingly or recklessly participating in “schemes” with insiders that allowed the companies to misstate their financial condition. A threshold question presented in these cases is whether a secondary actor who participates in a scheme to generate false financial results, but does not itself participate in generating the company’s financial statements, can be held liable under Rule 10b-5.”

Two legal columns of interest:

(1) Forbes has a column on the lead plaintiff contest in the Refco securities class action.

(2) The New York Law Journal has a column (regist. req’d) discussing the effect of the SEC’s new offering rules on the liability for misstatements in registration statements or prospectuses/oral communications soliciting a sale.

As of last year, about 70 Chinese companies were listed on U.S. stock exchanges. Accordingly, U.S. securities litigation is a topic of interest for these companies and their domestic regulators. Legal Week has an article on the pending visit to China of a prominent plaintiffs’ securities lawyer.

MarketWatch reports that the Oracle derivative settlement has received court approval. Under the original terms of the settlement, the CEO of Oracle agreed to pay $100 million to charity on behalf of the company, while the company was to pay $22.5 million in legal fees to plaintiffs’ counsel. The proposed settlement came under criticism, with the court expressing concern over the fact that Oracle, the presumed beneficiary of the settlement, would be paying the legal fees. The approved settlement provides that the CEO of Oracle will make both payments.

Fortune has an article on Supreme Court nominee Judge Samuel Alito’s record in business cases. The article briefly discusses a securities class action decision that was favorable for the defendant company.

Quote of note: “In a shareholder class action suit brought against Burlington Coat Factory after its stock price plummeted, Alito’s opinion came down on the side of the company, but in a nuanced way. ‘It suggests that he’s not particularly hostile to securities plaintiffs and many judges are,’ says David Hoffman, who teaches corporate law at Temple University.”

As a general matter, claims under the ’33 Act may be brought in federal or state court and cannot be removed. There is a continuing split, however, over whether the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) created a removal exception for ’33 Act securities class actions (e.g., misstatements in a prospectus) brought in state court. The Second Circuit says that it did, but other courts have disagreed. In the latest decision on the issue, Lowinger v. Johnston, 2005 WL 2592229 (W.D.N.C. Oct. 13, 2005), the court found that removal pursuant to SLUSA was proper.

The October 21 edition of the New York Law Journal has a roundup (regist. req’d) of recent decisions on the applicability of the SLUSA discovery stay provisions to parallel state court derivative actions. The authors find that the trend in the case law is against imposing a discovery stay in this situation, but it is worth noting that there has been some recent contrary authority that is not discussed in the article.

Quote of note: “Thus, of the eight cases analyzed, [six] denied a stay of discovery in the derivative action, frequently with the proviso that the discovery would not be shared with the federal securities action. One stayed discovery based upon the derivative action counsel’s stated intent to share the fruits of that discovery with the federal securities action. Only one stayed discovery despite the absence of evidence of collusion and where the derivative complaint was filed a year before the federal securities complaint.”

The U.S. Chamber Institute for Legal Reform released a study and related article this week on securities class action litigation. The lead author on both papers is Anjan V. Thakor, a professor at the Olin School of Business at Washington University in Saint Louis.

(1) “The Economic Reality of Securites Class Action Litigation,” a study done in conjunction with Navigant Consulting, finds that large institutional investors generally break even from their investments in stocks impacted by fraud allegations because the losses resulting from ill-timed purchases of inflated shares of one company are, over time, largely offset by financial gains generated from well-timed sales of inflated shares of a different company. As a result, institutional investors are often overcompensated as the result of securities fraud litigation. Less diversified investors (i.e., individual investors) are at greater risk of losing money as the result of securities fraud because they lack the natural “hedge” of institutional investors.

(2) “The Unintended Consequences of Securities Litigation” examines the financial impact of securities litigation on defendant companies and their stock holders. The article finds that the mere filing of a securities class action lawsuit on average results in a 3.5% drop in the defendant company’s equity value. Moreover, the economic losses to a defendant company caused by securities fraud litigation are likely to far exceed the gains to the plaintiffs (especially for smaller companies).

The study and article can be found here. Securities Litigation Watch has a number of posts discussing the study (which uses settlement data from SCAS).

In this interview with the Toronto Globe and Mail, the CEO of Deloitte Touche wonders whether investors are asking too much of company auditors.

Quote of note: “He said investors expect a level of detail that audits are not designed for, and expect a certification to assure the company’s financial health when it simply is meant to attest to the accuracy of the financial statements, based on information provided by the company. Auditors are now being held responsible for failing to detect outright fraud perpetrated by several company insiders who go to great lengths to hide their illicit activity, he said.”

The author of The 10b-5 Daily has an op-ed in The National Law Journal this week on the overlap between the SEC’s Fair Funds program and private securities litigation.