Category Archives: Appellate Monitor

In In re Omnicom Group, Inc. Sec. Litig., 597 F.3d 501 (2d Cir. 2010), the company had announced in 2001 that it was placing certain investments into a separate holding company. There was no statistically significant movement in the company’s stock price following the disclosure. In June 2002, however, there was a flurry of negative news reports about Omnicom and the transaction, leading to a stock price decline. In particular, a June 12 article reported on the resignation of the Chair of Omnicom’s Audit Committee and noted concerns about the company’s aggressive accounting strategy.

The lower court granted summary judgment for the defendants based on the plaintiffs’ failure to proffer evidence sufficient to support a finding of loss causation. On appeal, the Second Circuit affirmed on two grounds. First, the June 2002 news reports were not a “corrective disclosure” of the fraud because they failed to provide the market with any new facts. Second, the resignation of the director (and the accompanying negative publicity) was not a “materialization of the risk” that was supposedly concealed by the fraudulent statements. A mere concern over the company’s accounting practices cannot satisfy that standard.

Holding: Grant of summary judgment affirmed.

Quote of note: “The securities laws require disclosure that is adequate to allow investors to make judgments about a company’s intrinsic value. Firms are not require by the securities laws to speculate about distant, ambiguous, and perhaps idiosyncratic reactions by the press or even by directors. To hold otherwise would expose companies and their shareholders to potentially expansive liabilities for events later alleged to be frauds, the facts of which were known to the investing public at the time but did not affect share price, and thus did no damage at that time to investors. A rule of liability leading to such losses would undermine the very investor confidence that the securities laws were intended to support.”

Oral argument in the National Australia Bank case took place this morning. By all accounts, it does not appear that the U.S. Supreme Court is likely to embrace the broad extraterritorial application of the antifraud provisions of the federal securities laws.

Already facing a tough battle, the petitioners could not have been happy to learn that in the Court’s audience were several justices of the Supreme Court of Canada. And whether it was out of deference to their foreign guests, or genuine concern about the policy ramifications of allowing foreign investors access to the U.S. courts, the Court’s questioning was hostile from the start.

A few highlights (based on the official transcript):

(1) The Court appeared uninterested in the petitioners’ suggestion that it might be appropriate to remand the case to the Second Circuit without rendering a decision. Justice Scalia’s verdict: “There is no reason to send it back.”

(2) Justice Ginsburg started out the substantive questioning with what would turn out to be the quote of the day – “[T]his case is Australian plaintiff, Australian defendant, shares purchased in Australia. It has ‘Australia’ written all over it.” The justices pressed this theme repeatedly, with questions about the existence of a United States interest, potential interference with the regulation of foreign securities markets, and the connection between the fraud and the United States.

(3) As for the respondents and the government (which received 10 minutes of argument time), the justices appeared interested in exploring the utility of a bright-line test – i.e., barring any claims based on transactions involving shares of foreign issuers purchased or sold on foreign exchanges. Counsel for the respondents was asked about the effect on Americans who purchased stock on foreign exchanges (J. Stevens) and given a hypothetical wherein the fraudulent conduct took place in the United States and the stock purchase took place overseas (J. Breyer). The government, which advocated a test focusing on whether “significant conduct material to the fraud’s success occured in the United States,” was asked about whether its test was simply too complicated to be workable (C.J. Roberts).

For coverage of the hearing, see SCOTUSblog, the New York Law Journal, and the Associated Press.

As the U.S. Supreme Court gets ready to hear oral arguments in the National Australia Bank case today, here is all the information necessary to set the stage.

The briefs can be found here. The 10b-5 Daily has previously summarized the arguments made by the petitioners (investors) and respondents (corporate defendants). A couple of additional notes:

(1) There has been late supplemental briefing on the issue of whether the Supreme Court should remand the case back to the Second Circuit. According to the petitioners, all of the parties agree that the Second Circuit should not have decided the case on the basis of subject matter jurisdiction. The Second Circuit therefore should have the opportunity to reconsider its decision based on recent relevant Supreme Court decisions. The respondents disagree, arguing that the “jurisdictional label used by the court of appeals made no difference to the outcome of this case” and the real question before the Court is the substantive extraterritoriality issue.

(2) If amicus filings are a contest, the win goes to the respondents. There are three amicus briefs filed in support of the petitioners and fourteen amicus briefs filed in support of the respondents (including three separate briefs from the governments of France, Australia, and the United Kingdom).

For pre-argument coverage, see The Times (London), National Law Journal, and (most comprehensively) SCOTUSblog.

Supreme Court Justice Sandra Day O’Connor may be retired, but she is not done creating securities law. Last year, she sat with the Fifth Circuit by designation and wrote an opinion on loss causation. In February, it was the Sixth Circuit and her opinion concerns the scope of the Securities Litigation Uniform Standards Act (“SLUSA”), which precludes certain class actions based upon state law that allege a misrepresentation in connection with the purchase or sale of nationally traded securities.
In Demings v. Nationwide Life Ins. Co., 2010 WL 364335 (6th Cir. Feb. 3, 2010), the Sheriff of Orange County Florida brought a class action on behalf of all public employers who sponsor � 457 deferred-compensation plans alleging that Nationwide implemented a scheme under which it improperly received revenue-sharing payments from mutual funds and mutual fund advisors that should have gone to the plan participants. The district court found that the case was precluded by SLUSA because the substance of the sheriff’s claim was a covered class action alleging that “Nationwide misrepresented a relationship with mutual fund advisors, or, at a minimum, failed to disclose material facts about the relationship.”
On appeal, the sheriff argued that his suit was subject to SLUSA’s “state actions” exception, which exempts certain suits brought by states, political subdivisions thereof, and state pensions plans from SLUSA’s preclusive effect. By its plain terms, however, the state actions exception only applies to a covered entity that brings an action “on its own behalf.” Although the sheriff might be a “political subdivision,” his complaint sought to bring an action on behalf of the deferred-compensation plan. In the absence of any allegation that the sheriff had the authority to bring an action as the plan, the district court was entitled not to consider that possibility. Moreover, the “state actions” exception requires the members of the proposed class to be “named plaintiffs . . . that have authorized participation, in such action.” The sheriff was attempting to bring a class action on behalf of a prospective class of unnamed sponsors of deferred-compensation plans.
Holding: Affirmed dismissal based on SLUSA preclusion.

The respondents have filed their brief in the National Australia Bank case pending before the U.S. Supreme Court. The case concerns the extraterritorial application of the antifraud provisions of the federal securities laws. Links to all of the briefs filed to date, including the extensive amicus submissions, can be found here.

The respondents argue that the Exchange Act does not contain any language “that clearly expresses an affirmative intention of Congress to apply the statute extraterritorially.” In the absence of this language, there is a presumption against extraterritoriality that the Court should apply.

Moreover, acts of Congress should be interpreted to be in conformity with international choice-of-law provisions absent any contrary statement. Based on the law of nations in 1934 (when the Exchange Act was enacted), “Congress must be presumed to have intended that transactions on foreign exchanges must be governed by foreign law.” The extraterritorial application of Section 10(b) to foreign transactions also would improperly supplant the substantive laws and remedies that already exist in foreign countries.

Finally, the Court has previously held that because the private right of action under Section 10(b) is judicially created it should be subject to practical limitations. The threat to the sovereign authority of other nations posed by the extraterritorial application of the statute is significant and warrants the limitation of Section 10(b) actions to persons who purchased or sold securities in the United States.
For a summary of the petitioners’ arguments, see this earlier post.

One of the very first posts on this blog, way back in May 2003, was about the Halliburton securities class action settlement. Who knew what was to come? The judge recused himself, the settlement was eventually rejected, the lead plaintiff switched counsel, and the court declined to certify a class.

Now, nearly eight years after the case was originally filed, the U.S. Court of Appeals for the Fifth Circuit has issued an opinion affirming the denial of class certification. In The Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Co., 2010 WL 481407 (5th Cir. Feb. 12, 2010), the court considered whether the plaintiffs had adequately demonstrated the existence of loss causation. Based on Fifth Circuit precedent, the plaintiffs were required to show “(1) that an alleged corrective disclosure causing the decrease in price is related to the false, non-confirmatory positive statement made earlier, and (2) that it is more probable than not that it was this related corrective disclosure, and not any other unrelated negative statement, that caused the stock price decline.”

The court found that the plaintiffs had failed to meet this standard based on the corrective disclosures they identified. The corrective disclosures either failed to indicate that any prior statements were misleading or the plaintiffs’ expert was unable to adequately demonstrate that a particular corrective disclosure, as opposed to other negative news about the company, more probably affected the stock price.

Holding: Denial of class certification affirmed.

Quote of note: “Plaintiff asks us to draw an inference that the June 28, 2001 press release corrected prior allegedly false estimates of asbestos reserves merely because those reserves changed. But a company is allowed to be proven wrong in its estimates, and we can discern no indication from the June 28, 2001 press release that Halliburton’s prior asbestos reserve estimates were misleading or deceptive.”

Courts can be skeptical about statements from confidential witnesses. One way to express that skepticism is to wonder why, if the witness knows so much about what went on at the company, he or she is unable to provide details about the alleged fraud.
In Konkol v. Diebold, Inc., 2009 WL 4909110 (6th Cir. Dec. 22, 2009), the defendants allegedly had access to internal financial reports demonstrating the falsity of their public statements. These reports included, as described by confidential witnesses who worked at the company, days sales outstanding reports and revenue scorecards.
In evaluating whether the confidential witness allegations contributed to a strong inference of scienter, the court reiterated its previous holding that statements from confidential witnesses should be �discounted,� especially when there is a lack of information about the witnesses in the complaint. Moreover, the court noted that �because the investors had confidential witnesses who provided generalized statements about the reports, one would reasonably expect those witnesses to be able to provide more details about the reports and to be able to specifically connect them to the Defendants.� In the absence of this specific information, the court declined to credit statements from the confidential witnesses about the fraudulent scheme being �openly known� or taking place at a �high level� within the company.
Holding: Dismissal affirmed.

A couple of items related to the National Australia Bank case. The case is pending before the U.S. Supreme Court and concerns the extraterritorial application of the antifraud provisions of the federal securities laws. Oral argument has been scheduled for March 29, 2010.
(1) The petitioners have filed their merits brief. In their brief, the petitioners argue that the “express terms” of Section 10 of the Exchange Act create subject matter jurisdiction for securities frauds involving the “use of any means or instrumentality of interstate commerce or of the mails” and there is no extraterritorial limitation. Moreover, any issues of foreign relations law or international comity can be addressed by the adoption of the “conduct” test suggested by the SEC and Solicitor General: �the scheme involves significant conduct within the United States that is material to the fraud�s success.�
(2) The National Law Journal has a column (subscrip. req’d) noting that the Supreme Court and Congress are on a “collision course” regarding the question of extraterritorial application. While the Court considers the National Australia Bank case, the House of Representatives has just passed the “Wall Street Reform and Consumer Protection Act” containing a provision similar to the conduct test urged by the petitioners (but arguably even broader because it does not contain the “materiality” requirement). Under Section 7216 of H.R. 4173 – an earlier version of the provision was discussed here – jurisdiction exists if there is “conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors.” Whether the Senate will embrace this provision remains to be seen.

When it comes to securities litigation, all of today’s action was in the U.S. Supreme Court.

First, the Court granted cert in the National Australia Bank case (over the objections of the DOJ and SEC) and will review the extraterritorial application of the U.S. securities laws. Bloomberg and Securities Docket have coverage of the decision. Interestingly, Justice Sotomayor recused herself from considering the cert petition.

Second, the Court heard arguments in the Merck case on when the running of the statute of limitations is triggered in securities fraud cases. According to press reports (which the oral argument transcript would appear to confirm), the justices seemed disinclined to overturn the Third Circuit’s ruling and find that the plaintiffs’ claims are barred by the statute of limitations. Exactly what the Court will hold is sufficient to begin the two-year “discovery” period, however, remains to be seen. The briefs filed in the case can be found here.