February 8, 2013 · 11:41 pm
The Vivendi securities litigation continues to lead to interesting decisions. To recap, in 2010 the company lost a trial verdict in a securities class action with potential damages of $9.3 billion. As to who could collect those damages, however, the court found that it was unclear because “certain means of rebutting the presumption of reliance [under the fraud on the market theory] require an individualized inquiry into the buying and selling decisions of particular class members.”
The class action verdict and reliance ruling also had an effect on related cases brought by investors who were not part of the class. In particular, Vivendi was precluded from contesting the elements of a Section 10(b) claim, other than the element of reliance. In one of these individual cases – GAMCO Investors, Inc. v. Vivendi, S.A., 2013 WL 132583 (S.D.N.Y. Jan. 10, 2013) – the court addressed a motion for summary judgment by GAMCO. In opposition to the motion, Vivendi argued that it had raised material questions of fact with respect to GAMCO’s reliance. The court agreed.
(1) Reasonableness – The court found that Vivendi had “presented evidence establishing that [GAMCO] employees privately corresponded and/or met with Vivendi management during the relevant time period.” If GAMCO learned corrective non-public information from these meetings, it could not “claim that it reasonably relied on the market price of Vivendi securities” in making its purchases.
(2) Reliance on Stock Price – GAMCO was a value-based investor that measured Vivendi’s worth by calculating the “amount that an informed industrialist would pay for a company’s assets in a private-market transaction.” Vivendi presented evidence that the impact of the company’s liquidity crisis (i.e., the fraudulently omitted information) on this calculation would have been “minor.” The court found that this evidence was sufficient “to raise a material question of fact as to whether GAMCO would have transacted in Vivendi securities even if it had known its true liquidity condition.”
Holding: GAMCO’s motion for summary judgment denied.
Quote of note: “It is somewhat ironic that GAMCO, a value-based investor, is relying on the fraud on the market presumption, which is grounded on the reliability of the market price that value-based investors spend their lives second-guessing.”
November 19, 2012 · 11:49 am
Summary judgment decisions are usually fact specific and do not provide a lot of insight into how other cases will be decided. The recent decision in In re Federal National Mortgage Association Sec., Derivative, and “ERISA” Lit., 2012 WL 4888506 (D.D.C. Oct. 16, 2012), however, contains some interesting lessons.
The case against Fannie Mae is one of the longest-running securities class actions in the country, with the first complaint having been filed in Sept. 2004. The case arises out of accounting issues that ultimately resulted in a massive restatement. As detailed in the court’s decision, there have been numerous reports and findings of regulators relating to the events in question. During the relevant period, J. Timothy Howard was the CFO of Fannie Mae.
Following prolonged discovery in the case, Howard moved for summary judgment, arguing that the plaintiffs had failed to establish he acted with scienter. The court agreed, finding that despite all of the smoke around Howard’s activities as CFO, there was no evidence of an actual fire. A few key points:
(1) Stretching the Evidence – The court appeared annoyed at what it viewed as the plaintiffs’ attempt to “stich together a patchwork quilt of evidence that they allege presents a disputed issue of material facts as to Howard’s scienter.” The plaintiffs had no direct evidence of Howard’s knowledge of any accounting fraud and, in the court’s view, frequently resorted to overstating the circumstantial evidence.
(2) Outside Reports – The court rejected the plaintiffs’ use of “post-hoc reports and litigation documents, which were uniformly prepared after the relevant events in this case, and some of which were explicitly prepared in preparation for litigation, as ‘evidence’ of Howard’s scienter.” Not only were these materials likely inadmissible, but none of them specifically demonstrated how Howard had acted with scienter.
(3) Relying on Motion to Dismiss Arguments – The plaintiffs argued that the magnitude and duration of the accounting fraud was evidence of Howard’s scienter. The court’s response was (a) “as Shakespeare might have noted: a giant body doth not portend an evil mind,” and (b) “the time for simply presenting allegations that give rise to a strong inference of scienter has long since passed.”
Holding: Individual defendant’s motion for summary judgment granted.
February 12, 2012 · 11:17 pm
In the wake of the techology crash (way back at the turn of the century) a number of securities class actions were brought alleging misrepresentations by analysts. A key issue in those cases was whether the fraud-on-the-market theory, pursuant to which reliance by investors on a material misrepresentation is presumed if the company’s shares were traded on an efficient market, would apply to analyst statements about a company. In 2008, the U.S. Court of Appeals for the Second Circuit found that the fraud-on-the-market theory applies in this scenario. That said, plaintiffs still have the burden of demonstrating that the analyst statements caused the relevant stock price declines.
Proving once again that securities class actions can last a long time, the District of Massachusetts has issued a decision in an analyst case showing how the reliance and loss causation elements can overlap. In Bricklayers and Trowel Trades Int’l Pension Fund v. Credit Suisse First Boston, 2012 WL 118486 (D. Mass. Jan. 13, 2012) (originally filed in 2003), the court considered whether to preclude the testimony of the plaintiffs’ causation expert in a case based on statements by CSFB’s analysts regarding AOL.
The defendants argued that the expert’s event study was unreliable because it “flouts established event study methodology and draws unreasonable conclusions from the data presented.” The court agreed and found that the study improperly (a) cherry-picked days with unusual stock price volatility, (b) overused dummy variables to make it appear that AOL’s stock price was particularly volatile on the days CSFB issued its reports, (c) attributed “volatility in AOL’s stock price to the reports of defendants analysts when, at the time of the inflation or deflation, an efficient market would have already priced in the reports,” and (d) failed to conduct “an intra-day trading analysis for each event day with confounding information (which is, to say, nearly all of them) in order to provide the jury with some basis for discerning the cause of the stock price fluctuation.”
Holding: Event study excluded and summary judgment granted to the defendants based on the plaintiffs’ failure to raise a triable issue of fact on the element of loss causation.
Quote of note: “For example, [plaintiffs’ expert] labels April 18, 2002 as a corrective date, and attributes stock price deflation to the defendants, even though the information released on that day, Deutsche Bank’s lowered estimate and price target, was released nine days earlier without any corresponding impact. Plaintiffs may not at the same time presume an efficient market to prove reliance and an inefficient market to prove loss causation. They may not have their cake and eat it too.”
January 6, 2012 · 10:16 pm
Does the fact that an individual defendant’s stock trading took place pursuant to a pre-determined Rule 10b5-1 trading plan undermine any inference that the trades were “suspicious”? Courts continue to grapple with this issue in evaluating the existence of scienter (i.e., fraudulent intent) in securities fraud cases.
(1) In In re Novatel Wireless Sec. Litig,, 2011 WL 5873113 (S.D. Cal. Nov. 23, 2011), the court reviewed insider trading claims brought as a part of a securities class action. Defendants argued that several of the challenged trades were inactionable because they had been made pursuant to Rule 10b5-1 trading plans. The court noted, however, that “each defendant entered new or amended 10b5-1 plans . . . that contained accelerator clauses that called for immediate sales.” Because the “improper use of 10b5-1 trading is evidence of scienter,” the court found that a genuine issue of material fact precluded summary judgment on the insider trading claims.
(2) In The Mannkind Sec. Actions, 2011 WL 6327089 (C.D. Cal. Dec. 16, 2011), the court evaluated whether the plaintiffs had adequately pled motive based on a “suspicious” stock sale by one of the individual defendants. The defendant pointed out that the sale was only 10.5% of his holdings and “was made pursuant to a pre-determined 10b5-1 trading plan, and was identical to another 10b5-1 trading sale made 11 months earlier.” The court concluded that the timing of the sale “appears suspicious.” The plaintiffs’ failure to rebut the contention that the sale had been made pursuant to a Rule 10b5-1 trading plan, however, meant that the sale could not “provide support for Plaintiffs’ pleading of scienter.”
March 18, 2011 · 11:52 pm
And now for something a bit technical (but still important). The federal securities laws have statutes of repose (suit barred after a fixed number of years from the time the defendant acts in some way) and statutes of limitations (establishing a time limit for a suit based on the date when the claim accrued). Does the existence of a class action toll the statute of repose for a federal securities claim?
Under what is known as American Pipe tolling, “the commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class who would have been parties had the suit been permitted to continue as a class action.” American Pipe & Construction Co. v. Utah, 414 U.S. 538, 554 (1974). The Supreme Court found that its rule was “consistent both with the procedures of [Federal Rule of Civil Procedure] 23 and with the proper function of limitations statutes.” Id. at 555. In a later case, however, the Supreme Court also found that federal statutes of repose are not subject to equitable tolling. Lampf, Pleva, Lipkind, Prupis & Pettigrow v. Gilbertson, 501 U.S. 350, 364 (1991). In attempting to reconcile these two cases, the majority of lower courts have concluded that American Pipe tolling applies to statutes of repose for federal securities claims because it is based on FRCP 23 and, therefore, is a type of legal (as opposed to equitable) tolling.
In Footbridge Ltd. Trust v. Countrywide Financial Corp., 2011 WL 907121 (S.D.N.Y. March 16, 2011), however, the court strongly disagreed with this analysis. The court addressed claims subject to the ’33 Act’s one-and-three-year limitations and repose provision that were brought more than three years after the relevant acts. The plaintiffs argued that the repose period was tolled by certain class actions asserting similar claims. The court concluded that “nowhere in American Pipe does the Court read the text of [FRCP] 23 as having embedded within it language that creates a class action tolling rule.” In the court’s view, American Pipe tolling is best understood as a judicially-created rule based on equitable considerations and, as a result, cannot extend a statute of repose. The court granted defendants’ motion for summary judgment.
Whether other courts will agree with the Footbridge decision remains to be seen. The potential impact of the ruling, however, is significant, especially in light of how long it can take a securities class action to get through the class certification stage (although securities fraud claims have a longer, five-year statute of repose). Could it lead to more individual suits?
June 25, 2009 · 10:20 pm
It’s not over until it’s over. Last September, it certainly looked bleak for the defendants in the Oracle securities class action pending in the N.D. of California. The court found that the defendants had improperly withheld evidence and, as a result, the plaintiffs were entitled to adverse inference instructions with regard to the CEO’s knowledge of the corporate problems Oracle allegedly failed to disclose.
Last week, however, the court granted summary judgment in favor of the defendants. See In re Oracle Corp. Sec. Litig., 2009 WL 1709050 (N.D. Cal. June 19, 2009). Although the court took the adverse inferences into account in its decision, the plaintiffs failed to demonstrate a genuine issue for trial on other elements of their causes of action. Most notably, the court concluded that the plaintiffs failed to identify sufficient evidence as to loss causation for their non-forecasting claims.
Holding: Defendants’ summary judgment motion granted.
Quote of note: “[T]here is an absence of evidence that on March 1 , Oracle revealed previously concealed information about Suite 11i or that analyst reports about the March 1 announcement linked the miss in Oracle’s applications earnings to previously disclosed deficiencies with Suite 11i. Plaintiffs’ only possible theory for loss causation is that the earnings miss itself revealed the truth about Suite 11i to the market, but plaintiffs cite no case in which an earnings miss alone was sufficient to prove loss causation.”
April 21, 2009 · 10:59 pm
Under the “true financial condition” theory, a plaintiff can adequately allege loss causation by citing a corrective disclosure that reveals the company’s true financial results and condition, even if the disclosure does not directly reveal any alleged misrepresentations. Although the theory has been applied by some courts at the motion to dismiss stage (most notably by the 9th Circuit in its Daou decision), it has failed to gain wide acceptance. Courts have been particularly skeptical at the proof stage of a case, where the plaintiff bears the burden of producing evidence demonstrating a link between a corrective disclosure, public awareness of a misrepresentation, and a drop in the company’s stock price (see, e.g., the Flowserve decision from the N.D. of Tex.)
In In re Retek Inc. Sec. Litig., 2009 WL 928483 (D. Minn. March 31, 2009), the court considered and rejected the true financial condition theory on a summary judgment motion. Noting that even the plaintiffs’ expert witness “concedes that until the original complaint was filed, there was no disclosure such that the market became aware that Retek had committed improper or fraudulent practices regarding those four ventures,” the court found that there was insufficient evidence demonstrating that the disclosures about Retek’s financial condition revealed the truth about the alleged misrepresentations to the public.
Holding: Defendants’ motions for summary judgment granted.
Addition: Note that yesterday the U.S. Supreme Court denied cert in the Gilead case, foregoing an opportunity to bring some clarity to the issue of what is necessary to adequately plead loss causation. SCOTUSBlog has links to all of the cert papers.
March 18, 2009 · 9:28 pm
The plaintiffs in the Enron litigation have had a tough time establishing a viable theory of liability against the bank defendants. The first setback was the Fifth Circuit’s reversal of the district court’s grant of class certification. The appellate court held that the banks had not made any actionable omissions because they “did not owe plaintiffs any duty to disclose the nature of the alleged transactions.” Later, the Supreme Court’s Stoneridge decision severely limited the scope of scheme liability by imposing a strict reliance requirement in fraud-on-the-market cases. The Court also declined to address the plaintiffs’ related appeal from the Fifth Circuit decision.
Given the enormous potential damages at stake, however, the plaintiffs were not ready to throw in the towel. In In re Enron Corp. Sec., Derivative &”ERISA” Lit., 2009 WL 565512 (S.D. Tex. March 5, 2009), the plaintiffs attempted to restructure their theory of liability against the bank defendants to avoid the impact of the two adverse decisions. The plaintiffs argued that the banks’ “Enron-related market activity in addition to the deceptive transactions” gave rise to a duty to disclose to Enron’s investors or the market as a whole. The district court disagreed. On summary judgment, the district court held (a) the “mandate rule” precluded plaintiffs from relitigating whether they had adequately demonstrated a duty of disclosure, and (b) even if they were not barred by the mandate rule, the plaintiffs had failed to establish the fiduciary relationship between the banks and the plaintiffs necessary to find a duty of disclosure.
Holding: Summary judgment motion of bank defendants granted.
February 10, 2009 · 10:10 pm
The parties in the Baxter International securities litigation deserve credit for perseverance. First, there was a dismissal based on the PSLRA’s safe harbor for forward-looking statements. Then came a Seventh Circuit decision overturning the dismissal and controversially limiting the application of the safe harbor. That was followed by a denial of class certification, another Seventh Circuit decision upholding the denial, and then the continuation of the case on a non-class basis.
Seven years later, the case is back were it started — and perhaps, with the benefit of hindsight, never should have left. In Asher v. Baxter Int’l, Inc., 2009 WL 260979 (N.D. Ill. Feb. 4, 2009), the court granted summary judgment to the defendants on the basis that the plaintiffs “failed to indentify any evidence that Baxter’s forward-looking financial projections lacked either good faith or a reasonable basis in fact.” One more appeal?
Holding: Defendants’ motion for summary judgment granted.
Quote of note: “Although the court has gone into great detail analyzing why this evidence fails to meet the plaintiffs’ burden of production, the analysis boils down to this: the financial reports and other documents and testimony cited simply do not establish that the defendants ignored relevant information when reaffirming and revising Baxter’s financial commitments. Moreover, the commitments were in line with previous years’ commitments, which Baxter had met for eight straight years. Although the plaintiffs have identified financial challenges that Baxter faced during 2002, the mere existence of financial challenges does not establish that sales growth is unachievable.”
January 28, 2009 · 10:09 pm
Global auditing firms are often organized as a professional services organization of member firms, with a different member firm operating in each country. As a result of this structure, courts have often found that the global umbrella entity cannot be liable for the fraudulent activities of a member firm. In the Parmalat securities litigation, however, the court declined to dismiss the claims against Deloitte Touche Tohmatsu (“DTT”). The court found that the plaintiffs had sufficiently alleged a principal-agent relationship between DTT and its Italian member firm that conducted Parmalat audits.
In In re Parmalat Sec. Litig., 2009 WL 179920 (S.D.N.Y. Jan. 27, 2009), the court considered the issue again on summary judgment, with the same result. The court found: (a) the U.S. Supreme Court’s decision in Stoneridge did not foreclose vicarious liability for a principal based on the acts of its agent, and (b) there was sufficient evidence that “DTT exercised substantial control over the manner in which the member firms conducted their professional activities,” including “in the specific context of the Parmalat engagement.” The court also declined to dismiss the control person liability claims against DTT and Deloitte & Touche LLP (Deloitte’s U.S.-based member firm).
The WSJ Law Blog has a post on the decision.
Holding: Deloitte defendants’ motion for summary judgment denied.
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