The 10b-5 Daily

The 10b-5 Daily spans the globe to bring you the latest in securities litigation news. The JoongAng Daily has an interesting article on the political battle in South Korea over whether to permit investors to bring securities class actions against corporations. The current compromise is to allow class actions to be brought against any publicly-traded company, but to delay implementation of the new system until 2004.

Quote of note: “The business community fears that the impact of class-action suits would be devastating. Even though the class-action system would not be applied retroactively, tricky bookkeeping has been a long-established practice here. Indeed, even Shin Jong-ik, a senior official at the Federation of Korean Businesses, recently estimated that between half and 70 percent of Korean firms have been involved in accounting fraud.”

Today’s edition of The Daily Journal (subscription required) has a column by Thomas Klein, a Wilson Sonsini partner, entitled “Shareholders Who Keep Stock Have State Remedy.” The column discusses the recent decision by a divided California Supreme Court in Small v. Fritz Cos. Inc., (Cal. April 7, 2003), in which the court ruled that a stockholder who held his stock, rather than purchased or sold his stock, in reliance on misrepresentations may bring suit for common-law fraud or negligent misrepresentation under California law. To adequately plead these claims, however, the stockholder must (a) plead with particularity; and (b) demonstrate actual reliance on the alleged misrepresentations (the “fraud-on-the-market” theory cannot be used). Note that the actual reliance requirement would appear to make it all but impossible for a plaintiff to bring a class action on behalf of holders.

Quote of note (from the opinion): “In a holder’s action a plaintiff must allege specific reliance on the defendants’ representations: for example, that if the plaintiff had read a truthful account of the corporation’s financial status the plaintiff would have sold the stock, how many shares the plaintiff would have sold, and when the sale would have taken place. The plaintiff must allege actions, as distinguished from unspoken and unrecorded thoughts and decisions, that would indicate that the plaintiff actually relied on the misrepresentations.”

The May 2003 issue of Federal Lawyer (not available online) contains a column by James Fazio entitled “The Motive and Opportunity Test for Pleading Scienter under the Federal Securities Laws: Where Is It Now?” Mr. Fazio, an assistant U.S. attorney in the S.D. of Cal., examines whether motive and opportunity allegations are sufficient to establish a strong inference that the defendants acted with fraudulent intent (i.e., scienter), as required by the PSLRA, and concludes that there is a dispute among the circuits on this question.

Quote of note: “In short, the Second and Third Circuits appear to be the only two circuits in which allegations of motive and opportunity may be sufficient in themselves to show scienter. By contrast, the Ninth Circuit is the only circuit to have expressly rejected it. In the vast majority of circuits in between, there appears to be a trend against categorizing facts for purposes of analyzing whether those facts show scienter and in favor of determining whether the complaint in its entirety raises a strong inference of scienter, regardless of whether any alleged facts fall within any formalistic category, such as motive and opportunity.”