March 19, 2012 · 6:45 pm

Cornerstone Releases Report on Settlements

Cornerstone Research has released its annual report on securities class action settlements. The notable findings include:

(1) There were 65 settlements in 2011, involving $1.4 billion in total settlement funds. These numbers represent a significant decline as compared to 2010 (86 settlements; $3.2 billion in funds) and are the lowest number of approved settlements and total settlement dollars in more than 10 years.

(2) The average reported settlement amount decreased from $36.3 million in 2010 to $21 million in 2011, substantially below the average of $55.2 million for all post-PSLRA settlements. Among the factors identified by Cornerstone as possibly responsible for the decrease are: (a) the overall drop in filings of traditional securities class actions that began in 2006; (b) a decline in very large settlements (only three over $100 million); (c) a lower average estimated damages in the settled cases; and (d) fewer cases involving accounting allegations or accompanied by SEC actions/derivative actions.

(3) Robbins Geller was the most active firm in 2011, having been involved in 35% of the settled cases.

Quote of Note: “[C]onsidering that the $725 million partial settlement approved in February 2012 in the American International Group, Inc., Securities Litigation matter exceeds 50 percent of the total value of 2011 settlements and that other tentative mega-settlements have settlement approval dates in 2012, it appears likely that the total dollar amount for settlements will return to more typical levels in 2012.”

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March 16, 2012 · 9:50 pm

CIT Settles

CIT Group, Inc. (NYSE: CIT), a New York-based bank holding company that provides commercial financing and leasing products and other services to small and middle market businesses, has agreed to settle the securities class action pending against the company in the S.D. of New York. The case, originally filed in 2008, stems from allegations that CIT and certain of its directors and officers made materially false statements and omissions regarding CIT’s subprime home loans and certain non-guaranteed, private student loans. The settlement is for $75 million. Reuters has an article.

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March 9, 2012 · 9:59 pm

Clear Incentives

Two items on the relationship between investors and their counsel.

(1) The battle over the attorneys’ fees award in the Tyco securities litigation continues. At the heart of the dispute is whether lead counsel was bound by its contractual fee arrangement with the lead plaintiff, which provided for a much lower fee award, or could seek whatever level of fees the court would approve. Forbes has a column on the latest filings in the case.

(2) Judge Jed Rakoff is no stranger to securities litigation and is not known for holding back on his opinions. In City of Pontiac General Employees’ Retirement System v. Lockheed Martin Corp., 2012 WL 546475 (S.D.N.Y. Feb. 21, 2012), the judge took on the common practice of plaintiffs’ firms entering into “monitoring” agreements with institutional investors. Under these agreements, the plaintiffs’ firm (without charge) monitors the investments made by the institution to see if any securities class actions should be brought. If the plaintiffs’ firm recommends that a case be brought and the institution agrees, the plaintiffs’ firm will be the institution’s presumptive choice as counsel. Judge Rakoff noted that the practice “creates a clear incentive for the monitoring firm to discover ‘fraud’ in the investments it monitors,” which would appear to undermine the PSLRA’s goal of discouraging lawyer-driven litigation. Nevertheless, the court approved the proposed lead plaintiff and lead counsel, finding that it appeared that the institution had “the ability to properly exercise [its] role as lead plaintiff” and had affirmed at a hearing on the matter that it would play an active part in the litigation going forward.

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March 2, 2012 · 11:48 pm

What Is Your Domestic Status?

In its Morrison decision, the Supreme Court limited the scope of Section 10(b) claims to “transactions in securities listed on our domestic exchanges, and domestic transactions in other securities.” While determining whether a security is listed on a domestic exchange is a relatively straightforward question (although some plaintiffs have unsuccessfully attempted to complicate it), the Court offered little guidance on what constitutes a “domestic transaction.”

The Second Circuit has tried to provide some clarity. In Absolute Activist Value Master Fund Ltd. v. Ficeto, 2012 WL 661771 (2d Cir. March 1, 2012), the court evaluated “whether foreign funds’ purchases and sales of securities issued by U.S. companies brokered through a U.S. broker-dealer constitute ‘domestic transactions.'” The court concluded that there are two related tests for determining domesticity.

As a threshold matter, the court noted that the purchase or sale of a security normally takes place when the parties become bound to effectuate the transaction. The court held that the same test can be used to determine the locus of the purchase or sale. Based on this reasoning, “it is sufficient for a plaintiff to allege facts leading to the plausible inference that the parties incurred irrevocable liability within the United States: that is, that the purchaser incurred irrevocable liability within the United States to take and pay for a security, or that the seller incurred irrevocable liability within the United States to deliver a security.” Alternatively, a “sale” is defined as a transfer of title and it also is sufficient for a plaintiff to adequately allege that title was transferred within the United States.

In the instant case, the plaintiffs merely had alleged that the transactions took place within the United States. The court found that more factual allegations related to irrevocable liability and/or transfer of title were necessary and could include “facts concerning the formation of the contracts, the placement of purchase orders, the passing of title, or the exchange of money.” Because the complaint had been filed pre-Morrison, and based on the plaintiffs’ representations that they could provide such factual allegations if required, the court granted them leave to amend.

Holding: Dismissal affirmed in part and reversed in part.

Quote of note: “[R]ather than looking to the identity of the parties, the type of security at issue, or whether each individual defendant engaged in conduct within the United States, we hold that a securities transaction is domestic when the parties incur irrevocable liability to carry out the transaction within the United States or when title is passed within the United States.”

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February 20, 2012 · 10:28 pm

The Importance of Being Listed

A federal court has repelled an attempt to circumvent the Morrison decision through the use of state and foreign law claims. In In re BP P.L.C. Sec. Litig., 2012 WL 432611 (Feb. 13, 2012 S.D. Tex.), the plaintiffs brought claims on behalf of U.S. investors who purchased BP common shares on the London Stock Exchange (“Ordinary Share Purchasers). The claims included federal securities fraud claims, as well as New York common law and English law claims.

The court’s analysis hinged largely on the fact that BP’s common shares are listed, but not traded, on the New York Stock Exchange (to comply with SEC requirements governing the company’s American Depositary Shares program).

(1) Federal securities fraud claims – Following a number of other recent decisions, the court held that the mere fact that BP’s common shares were listed on the NYSE did not allow the Ordinary Share Purchasers to bring a federal securities fraud claim. Moreover, the court rejected plaintiffs’ additional arguments that it should consider both the U.S. residency of the Ordinary Share Purchasers and the fact that the London Stock Exchange rules “allow trades to occur directly through third-party, U.S.-based market makers.” Accepting these arguments would reinstate the old conduct and effect tests and they could not override the key point “that the Ordinary Share Purchasers bought BP ordinary shares on the LSE, the only exchange where BP ordinary shares trade.”

(2) New York common law and English law claims – The fact that BP’s common shares were listed, but not traded, on the NYSE also helped the defendants in the court’s assessment of the state law and foreign law claims, but for an entirely different reason. Under the Securities Litigation Uniform Standards Act of 1998 (SLUSA), a plaintiff cannot bring a class action based on state law fraud claims if the case involves “covered securities.” Covered securities are defined, among other things, as securities “listed, or authorized for listing, on the New York Stock Exchange.” There is no requirement that the securities also be traded on the NYSE and the court declined the plaintiffs’ invitation to read one into the statute. The court therefore held that the New York common law claims involved covered securities and were precluded by SLUSA. Plaintiffs also argued that the court had jurisdiction over the English law claims based on diversity jurisdiction under the Class Action Fairness Act (CAFA). CAFA, however, excludes claims based on “covered securities” and uses the same definition of that term as SLUSA. Accordingly, the court found that it did not have original jurisdiction over the English law claims.

Holding: Dismissed claims of Ordinary Share Purchasers (but other claims in the case were allowed to proceed).

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February 12, 2012 · 11:17 pm

Have Their Cake And Eat It Too

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.”

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February 3, 2012 · 8:55 pm

Catching Up With Morrison

The Morrison decision limiting the extraterritorial application of the U.S. securities laws continues to be the subject of extensive judicial, practicioner, and academic commentary. Recent items include:

(1) Professor Hannah Buxbaum has published a paper entitled “Remedies for Foreign Investors Under U.S. Federal Securities Law,” in which she discusses Morrison‘s transaction-based test and explores the possibility of foreign investors suing under U.S. law or participating in the SEC’s Fair Funds program.

(2) The American Lawyer describes Morrison as “The Global Securities Case of the Decade (So Far)” (Jan. 20 – subscrip. req’d). The article summarizes the widespread impact of Morrison to date and notes that seven Morrison-related cases are currently on appeal in the Second Circuit alone.

(3) NERA has issued a report, in response to an SEC comment request, on “Cross-Border Shareholder Class Actions Before and After Morrison” (Dec. 2011). The authors conclude that by “reducing expected litigation costs, Morrison eases a deterrent to US listing by foreign issuers and thereby makes the US a more competitive venue for cross-listings, as well as for the volume in cross-listed stocks.”

(4) The Harvard Law School Forum on Corporate Governance and Financial Regulation has a post entitled “A New Playbook for Global Securities Litigation and Regulation.” The author discusses the rise of alternative forums to the U.S. for global securities litigation.

(5) A Reuters article (Feb. 1) discusses a recent decision in the Vivendi securities litigation confirming that Morrison applies to claims under both the Securities Exchange Act of 1934 (market activity) and the Securities Act of 1933 (offering and sale of securities).

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January 27, 2012 · 11:26 pm

The Little Birdy Sings A Different Tune

The use (and sometimes abuse) of confidential witnesses in securities cases is a contentious issue. Prior to full discovery, what remedy does the defendant have if a confidential witness was misquoted in the complaint? One possibility, recently approved by the Second Circuit, is to allow the witness to be deposed prior to the filing of a motion to dismiss. A recent decision from the D. of Minn. suggests another possible tactic, although the defendants were ultimately unsuccessful.

In Minneapolis Firefighters Relief Assoc. v. Medtronic, Inc., 2011 WL 6962826 (D. Minn. Dec. 12, 2011), the court considered the issue of class certification prior to the completion of discovery. In opposition to certification, the defendants argued that the plaintiffs could not adequately represent the class “because of alleged misrepresentations counsel made in the Amended Complaint regarding the testimony of the confidential witnesses.” The defendants presented the court with declarations from thirteen of the fifteen confidential witnesses cited in the complaint. In their declarations, the witnesses took issue with how they were quoted, ranging from complaints about the plaintiffs’ interpretation of their statements to an assertion by one witness that the statements attributed to him were “fabrications.”

The court found that “the inquiry Defendants urge the Court to undertake – whether Plaintiffs misrepresented what the confidential witnesses said – is premature.” In particular, the court noted that “[c]ounsel-drafted declarations are not a substitute for deposition testimony” and it declined to come to any conclusion about the conduct of plaintiffs’ counsel until discovery was complete. The court therefore found that the plaintiffs were adequate class representatives and granted class certification.

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January 20, 2012 · 11:31 pm

Compare and Contrast

NERA Economic Consulting and Cornerstone Research (in conjunction with the Stanford Securities Class Action Clearinghouse) have released their 2011 annual reports on securities class action filings.

The findings for 2011 include:

(1) Cornerstone finds that there were 188 filings (compared with 176 filings in 2010), while NERA finds that there were 232 filings (compared with 241 filings in 2010). (For some insight on why NERA has a larger total, see footnote 2 of the NERA report, which discusses its counting methodology. Also, NERA’s report came out in December, requiring it to use a projected number for December’s total filings.) Both reports agree that cases against listed Chinese companies and M&A cases have driven a significant portion of the filing activity. Meanwhile, credit crisis cases have dwindled (Cornerstone – 3 filings; NERA – 11 filings).

(2) Cornerstone has an interesting new analysis on the probability of a securities class action advancing through different stages of litigation. The analysis, using filings from 1996 to 2011, finds that prior to the filing of a motion to dismiss, 9% of cases were voluntarily dismissed and 16% were settled. Of the remaining 75% of cases, 32% were dismissed, 35% were settled, and 8% reached a ruling on summary judgment or beyond. The report also breaks down these numbers by circuit and year.

(3) NERA provides some settlement statistics and finds that, even excluding large settlement outliers, there was a substantial decline in average settlement values — from $40 million in 2010 to $31 million in 2011. The median settlement value was $8.7 million, which was less than the 2010 all-time median settlement value of $11 million, but still the third highest on record.

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January 13, 2012 · 8:13 pm

Ample Assistance

A few months ago, this blog noted an unusual lead plaintiff decision. A S.D.N.Y. court dismissed the lead plaintiff from a securities class action brought against Smith Barney Fund Management and Citigroup Global Markets because, after six years of litigation, it was revealed that the entity had not actually purchased the securities at issue. So what happened to the case?

All is revealed in the court’s most recent order (In re Smith Barney Transfer Agent Litig., 2011 WL 6318988 (S.D.N.Y. Dec. 15, 2011)), along with some new twists and turns. The court decided to reopen the lead plaintiff selection process. The applicants included a new proposed lead plaintiff group associated with the former lead counsel for the case, as well as one of the unsucessful lead plaintiff applicants from back in 2005. As a group, the applicants associated with the former lead counsel had the largest financial interest in the relief sought. The court found, however, that “[p]laintiffs who moved for lead plaintiff appointment within sixty days of the original notice are entitled to priority over plaintiffs who only moved within sixty days of the order dismissing the prior lead plaintiff.” Accordingly, the court selected the original applicant to handle the case.

Quote of note: “In appointing new lead counsel, this Court is mindful that [former lead counsel] served . . . for over six years. But it is investors – and not their lawyers – who are the focus under the PSLRA. And the Court would not have been confronted with this situation if [former lead counsel] had investigated their client’s holdings in 2005. In any event, this Court has every confidence that [former lead counsel] will provide ample assistance to new lead counsel consistent with their professional responsibilities to their clients and their obligations as officers of the Court.”

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