Two Bites At The Apple

In Halliburton II, the U.S. Supreme Court held that defendants can rebut the fraud-on-the-market presumption of reliance at the class certification stage with evidence of a lack of stock price impact.  There are at least two different points, however, when stock price impact might be relevant: (a) the date of the alleged misstatement, and (b) the date of the alleged corrective disclosure.  Is it enough for defendants to provide evidence of a lack of stock price impact as of the date of the alleged misstatement?

In In Re Finisar Corp. Sec. Litig., 2017 WL 6026244 (N.D. Cal. Dec. 5, 2017), the plaintiffs alleged that a December 2010 statement misled investors as to the nature of Finisar’s growth by denying that the company’s revenue increase was the result of an unsustainable inventory build-up by customers.  The complaint also stated that Finisar’s stock price increased after the statement was issued.

At class certification, the defendants presented an expert report demonstrating that any increase in Finisar’s stock price following the alleged misstatement was not statistically significant “when the price is adjusted for general market and industry trading.”  Among other objections, the plaintiffs asserted that the expert report was “flawed insofar as it fails to consider Finisar’s stock price change following the allegedly corrective disclosure” that occurred several months later.  The court acknowledged that for purposes of price impact analysis, many courts have focused on the corrective disclosure date, especially where there may have been offsetting disclosures about the company on the date of the alleged misstatement or the plaintiffs had alleged that the misstatement maintained the stock price at an artificially-inflated level.  (For more on the “price maintenance theory,” see here and here.)

In the instant case, however, the court found that neither of those rationales for focusing on the corrective disclosure date were applicable.  There was no evidence that other information about Finisar had offset any price inflation caused by the alleged misstatement and the plaintiffs were not proceeding on a price maintenance theory.  Under these circumstances, the court found no flaw in the expert analysis “simply because it focuses on the date of the alleged misstatement rather than the date of the alleged corrective disclosure.”

Holding: Class certification denied.

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Credible Complaints

Can the filing of a judicial complaint against a company constitute a revelation of the alleged fraud sufficient to establish loss causation?  In Norfolk Country Retirement System v. Community Health Systems, Inc., 2017 WL 6347726 (6th Cir. Dec. 13, 2017), the court addressed this question in a case alleging that Community Health Systems failed to disclose that it used a system called the “Blue Book” to improperly increase the number of inpatient services provided at its hospitals and overcharge Medicare.  The plaintiffs alleged that this practice was revealed to the market when another healthcare company, Tenet Healthcare, filed a suit against Community.  Community’s stock price subsequently fell by 35%.

The district court held that Tenet’s complaint could not have revealed the truth behind Community’s prior alleged misrepresentations because a complaint can only reveal allegations rather than truth.  On appeal, the Sixth Circuit disagreed that this should be a “categorical rule.”  Instead, each alleged corrective disclosure must be evaluated “individually (and in the context of any other disclosures) to determine whether the market could have perceived it as true.”

In this case, the panel found that “two aspects of the Tenet complaint set it apart from most complaints for purposes of that determination.”  First, following the filing of the complaint, Community’s CEO “promptly admitted the truth of one of the complaint’s core allegations, namely that Community had used the Blue Book to guide inpatient admissions.”  Second, the Tenet complaint included expert analyses that described “the extent to which the Blue Book inflated revenues and exposed the company to liability.”

While the defendants argued that the existence of the Blue Book and Community’s admissions data were publicly available information, the panel concluded that it “quite plausibly came as news to investors” that Community was inflating its inpatient admissions in ways that were clinically improper.  Under these circumstances, the panel found that the plaintiffs had “plausibly alleged corrective disclosures that revealed the defendants’ antecedent fraud to the market and thereby caused the plaintiffs’ economic loss.”

Holding: Dismissal reversed and case remanding for further proceedings.

Quote of note:  “As an initial matter, every representation of fact is in a sense an allegation, whether made in a complaint, newspaper report, press release, or under oath in a courtroom.  The difference between those representations is that some are more credible than others and thus more likely to be acted upon as truth.  Statements made under oath are deemed relatively credible because the speaker typically makes them under penalty of perjury.  And a defendant’s own admissions of wrongdoing are credible because they are statements against interest.  Mere allegations in a complaint tend to be less credible for the opposite reason, namely that they are made in seeking money damages or other relief.  But these are differences of degree, not kind, and even within each type of representation some are more credible than others.  Hence we must evaluate each putative disclosure individually (and in the context of any other disclosures) to determine whether the market could have perceived it as true.”

 

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Cyan Argued

On Tuesday, the U.S. Supreme Court heard oral argument in the Cyan, Inc. v. Beaver County Employees Retirement Fund case, which addresses the preemptive scope of the Securities Litigation Uniform Standards Act of 1998 (SLUSA).   At issue in the case is whether SLUSA divests state courts of jurisdiction over class actions asserting claims arising under the Securities Act of 1933 (e.g., claims alleging a material misstatement in a registration statement).

The question before the Court is closely tied to Congress’s intent in enacting SLUSA.  In 1995, Congress passed the Private Securities Litigation Reform Act (PSLRA) to protect corporate defendants from meritless securities class actions.   The PSLRA, however, only applied to federal cases.  To evade the PSLRA’s impact, plaintiffs began filing securities class actions in state court, usually based on state law causes of action.

Congress passed SLUSA to close this loophole.  Due to unclear drafting, however, there has been confusion in the lower courts over whether SLUSA also makes federal court the sole venue for class actions alleging Securities Act claims (which historically enjoyed concurrent jurisdiction in state or federal court).  In Cyan, the parties have put forward three competing interpretations of SLUSA.  The Petitioners (Defendants) contend that SLUSA divests state courts of jurisdiction over class actions asserting Securities Act claims, thereby insuring that those cases must be litigated in federal court.  The Solicitor General maintains that SLUSA permits the removal of class actions asserting Securities Act claims, thereby also allowing those cases to be heard in federal court.  Finally, the Respondents (Plaintiffs) contend that SLUSA did not address class actions asserting Securities Act claims at all, meaning that once in state court they are not removable to federal court.

The parties’ textual arguments require having SLUSA in one hand and a yellow highlighter in the other.  In the end, however, the text of the statute might not end up having much sway over the Court.  The justices expressed varying degrees of frustration in trying to parse through the specific statutory language to reach a result, with Justice Alito, in particular, repeatedly referring to the relevant provisions as “gibberish” and noting that “all the readings that everybody has given to all of these provisions are a stretch.”

Petitioners and the Solicitor General appeared to have more success on the issue of Congressional intent.  Petitioners’ counsel drew an analogy to building a house, suggesting that it was nonsensical to believe that Congress would have barred the front door against the bringing of securities class actions in state court asserting state law claims, while simultaneously leaving the back door open for plaintiffs to bring securities class actions in state court asserting federal law claims.  Moreover, if securities class actions asserting federal law claims go forward in state court, they are not subject to the PSLRA’s procedural protections, a result that Congress presumably wanted to avoid.

Several justices picked up on this theme, with Justice Ginsburg asking Respondents’ counsel “why would Congress want to do that” given that you end up with “the federal claim in state court, and none of those [PSLRA] restrictions apply”?  Similarly, Justice Alito expressed incredulity that Congress would want to bar “a claim in state court under a state cause of action that mirrors the ’33 Act” but then allow “the state court to be able to entertain the real thing, an actual ’33 Act [claim].”  Respondents’ counsel answered that if Congress was concerned about the “evasion of the PSLRA” in securities class actions alleging Securities Act claims, there were “10 different easier ways and more clear ways” that it could have removed the existence of concurrent jurisdiction for those cases (but it did not).  Justices Kagan and Sotomayor appeared sympathetic to that position, with Justice Kagan noting that “Congress did everything it wanted with respect to actions [under the Securities Exchange Act of 1934], which are the lion’s share of securities lawsuits.”

A decision is expected sometime early next year.

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Rites of Confession

When does a company have a duty to disclose hidden wrongdoing?  As many courts have noted, disclosure is not a “rite of confession” and a company does not have a general obligation to tell investors whether some (or all) of its gains are ill-gotten.  Because of an exception that tends to swallow the rule, however, corporate defendants are often disappointed when they attempt to invoke this principle to defeat securities fraud claims.

In In re VEON Ltd. Sec. Lit., 2017 WL 4162342 (S.D.N.Y. Sept. 19, 2017), the court considered whether VEON’s public filings were rendered false or misleading by its failure to disclose that it had violated the Foreign Corrupt Practices Act (“FCPA”) by making, or attempting to make, “millions of dollars in improper payments to Gulnara Karimova, the eldest daughter of the Uzbekistan’s President, in an effort to achieve favorable treatment in Uzbekistan.”  The defendants argued that there was no dispute over the accuracy of VEON’s financial statements (bribery notwithstanding), so the plaintiffs’ claims were “in reality, an improper attempt to enforce the FCPA, which has no private right of action.”

The court agreed that VEON had no general duty to disclose the FCPA violations and that the company’s actual financial reporting was accurate.  The court noted, however, that a “duty to disclose may arise when a company puts the topic of the cause of its financial success at issue.”  Of course, most companies make disclosures about the causes of their financial success.  The court found that VEON’s attribution of its growth in Uzbekistan to things like its “sales and marketing efforts,” without mentioning the bribes, was an actionable misstatement.  Moreover, VEON had made a specific disclosure about owners of telecommunications networks in Uzbekistan enjoying “equal protection guaranteed by law,” which the court held was rendered misleading by the fact that VEON had to pay bribes to operate in the country.  Finally, the court concluded that the facts admitted in VEON’s deferred prosecution agreement with the DOJ made it clear that the company’s statements about having adequate internal controls were false.

Holding: Motion to dismiss granted in part and denied in part.

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On Track Betting

Is “on track” the most dangerous phrase a corporation can use to describe its business? Over the years, there have been a significant number of securities class actions alleging a company’s statement that a regulatory approval process or financial metric was “on track” constituted securities fraud.  Defendants typically argue that “on track” is inherently forward-looking (because one cannot know whether something is actually on track until the final results are obtained) and, therefore, protected from liability by the PSLRA’s safe harbor for forward-looking statements.  While some courts have held that “on track” cannot be distinguished from the underlying projection and the safe harbor applies, other courts have concluded that “on track” is a statement of present condition.

Another, more recent legal complication, is whether “on track” should actually be assessed as an alleged false opinion subject to the Omnicare standard.  In Omnicare, the Supreme Court held (albeit in the context of a non-fraud Section 11 claim) that an opinion is actionable if either (a) the opinion was not genuinely held, or (b) the holder of the opinion omitted material facts about its inquiry into, or knowledge concerning, the opinion.

In Bielousov v. GoPro, Inc., 2017 WL 3168522 (N.D. Cal. July 26, 2017), the court considered whether the CFO’s statement “We believe we’re still on track to make [GoPro’s financial guidance] as well” was a forward-looking statement covered by the PSLRA’s safe harbor.  The court held that because the CFO included the phrase “we believe” in his statement, it was a statement of present opinion about “his and GoPro’s existing state of mind.”  Accordingly, the PSLRA’s safe harbor did not apply and the statement should be examined under the Omnicare standard.

Holding: Motion to dismiss denied.

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Top 100 Settlements

With the dog days of summer comes the issuance of statistical reports on securities class actions.  ISS Securities Class Actions puts out an interesting report, now updated through 2016, on “The Top 100 U.S. Settlements of All Time.”  As it turns out, “all time” is actually from the passage of the Private Securities Litigation Reform Act of 1995 forward, but the report breaks down the settlements by amount, lead plaintiff, lead counsel, claims administrator, and the presence of a financial restatement.

Highlights:

(1) Six of the “Top 100 U.S. Settlements” were in the second half of 2016: Caremark, Genworth Financial, Household Int’l, Band of America, Pfizer, and MF Global Holdings.

(2) The plaintiffs’ firms with the most settlements on the list are Bernstein Litowitz (35 settlements) and Robbins Geller (17 settlements).

(3) Forty-three of the “Top 100 U.S. Settlements” have involved financial restatements.

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CalPERS Decided

The U.S. Supreme Court has issued a decision in the CalPERS v. ANZ Securities case holding that the three-year statute of repose for Section 11 and Section 12(a) claims (misrepresentation in a registration statement or prospectus) is not subject to equitable tolling during the pendency of a class action.  It is a 5-4 decision authored by Justice Kennedy.

In CalPERS, the Court found that the tolling “is permissible only where there is a particular indication that the legislature did not intend the statute to provide complete repose but instead anticipated the extension of the statutory period under certain circumstances.”  In this case, the applicable provision of the Securities Act of 1933 “does not refer to or impliedly authorize any exceptions for tolling.”  Indeed, the Court noted, “the text, purpose, structure, and history of the statute all disclose the congressional purpose to offer defendants full and final security after three years.”

The Court rejected the plaintiff’s assertion that the pendency of a class action should create an exception to these basic principles.  In key part, the plaintiff argued that “the class complaint puts a defendant on notice as to the content of the claims against it and the set of potential plaintiffs who might assert those claims.”  The Court found, however, that using equitable tolling to permit “a class action to splinter into individual suits . . . would threaten to alter and expand a defendant’s accountability, contradicting the substance of a statute of repose.”  The Court also disagreed with the plaintiff’s contention that “nonnamed class members will inundate district courts with protective filings,” concluding that this concern was likely “overstated” given the nature of securities class actions.  Finally, the Court held that the filing of a class action does not mean that the “actions” of every individual class member have been “brought” for purposes of satisfying the statute of repose.

Holding: Dismissal affirmed.

Quote of note: “The final analysis, then, is straightforward. The 3-year time bar in §13 of the Securities Act is a statute of repose.  Its purpose and design are to protect defendants against future liability.  The statute displaces the traditional power of courts to modify statutory time limits in the name of equity.  Because the American Pipe tolling rule is rooted in those equitable powers, it cannot extend the 3-year period.”

Disclaimer:  The author of The 10b-5 Daily filed an amicus brief on behalf of Washington Legal Foundation in support of the defendant.  The amicus brief is cited on page 14 of the decision.

 

 

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