The author of The 10b-5 Daily, Lyle Roberts (Dewey & LeBoeuf), is participating in a Washington Legal Foundation webcast on the SEC and securities class actions. The webcast will take place on Tuesday, July 29 at 10 a.m. ET. Click here (PDF) for the details.
Addition: An archive of the webcast can be found here.
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Two columns from the New York Law Journal on securities litigation.
(1) In ‘Oscar’: Misinterpretation of Fraud-on-the-Market Theory (July 17 edition – subscrip. req’d), the author discusses a Fifth Circuit decision on class certification. Notably, the court held that loss causation must be established at the class certification stage of a case by a preponderance of all admissible evidence before the plaintiffs can receive the benefit of the fraud-on-the-market presumption. The author argues that the decision, handed down last year, creates an impermissibly high barrier to class certification that other circuit courts have declined to adopt.
(2) In Whither ‘Stoneridge v. Scientific-Atlanta’? Early Results (July 8 edition – subscrip. req’d), the author surveys lower court decisions that have applied the U.S. Supreme Court’s holding on scheme liability. The author argues that the Pugh (7th Cir.) and DVI (E.D.Pa.) decisions suggest courts are inclined to interpret Stoneridge “broadly and dismiss claims against any third parties, regardless of their affiliation with an issuer, who are not alleged to have participated in preparing or disseminating false financial statements or other public statements.”
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While a proposed class representative does not have to possess “expert knowledge” of the case, there are some limits on how clueless it can be. In the Monster Worldwide, Inc. securities class action before the S.D.N.Y., the court has rejected a proposed class representative (a pension fund) that put forward a witness (the co-chairman of the fund) who “did not know the name of the stock at issue in this case, did not know the name of either individual defendant, did not know whether [the pension fund] ever owned Monster stock, did not know if an amended complaint had been filed, did not know whether he had ever seen any complaint in the action, did not know that [a defendant] had moved to dismiss the complaint, and did not know that [the pension fund] had moved for pre-discovery summary judgment.” Following this testimony, the pension fund put forward a second witness who “admitted that he had mostly learned about the substance of the litigation only in the week before his deposition.”
The court rejected the pension fund as a class representative, but approved the appointment of the other lead plaintiff to that role. Despite its concerns that the counsel for the pension fund “may not have fulfilled their professional responsibilities in proposing [the pension fund] as a class representative,” the court nevertheless appointed the firm as class counsel. The New York Law Journal has an article on the decision.
Quote of note (opinion): “The Court will not be a party to this sham. The foregoing events establish beyond a doubt that [the pension fund] has no interest in, genuine knowledge of, and/or meaningful involvement in this case and is simply the willing pawn of counsel.”
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In Berson v. Applied Signal Tech., Inc., 527 F.3d 982 (9th Cir. 2008), the company allegedly misled investors into believing it was likely to perform contracted work. According to the plaintiffs, however, the work had actually ceased pursuant to “stop-work” orders and was not likely to be resumed. On appeal, the U.S. Court of Appeals for the Ninth Circuit reversed the dismissal of the case. A couple of interesting holdings in the decision:
(1) Scienter – The plaintiffs did not allege particular facts indicating that the individual defendants knew about the stop-work orders. Instead, they argued that Applied Signal’s CEO and CFO must have known about the stop-work orders because of the devastating effect of the orders on the corporation’s revenue. The court agreed and found that the stop-work orders “were prominent enough that it would be ‘absurd to suggest’ that top management was unaware of them.” The decision continues a recent appellate trend of finding “must have known” allegations sufficient in situations where the underlying events are deemed to be highly important to the corporation.
(2) Loss Causation – The Supreme Court’s Dura decision left open the question of whether loss causation is subject to a heightened pleading standard. A number of courts have held that notice pleading pursuant to F.R.C.P. 8(a)(2) is sufficient (see, e.g., Greater Penn. Carpenters Pension Fund v. Whitehall Jewellers, Inc., 2005 WL 1563206 (N.D. Ill. June 30, 2005)), while a few others have required pleading with particularity pursuant to F.R.C.P. 9(b) (see, e.g., In re The First Union Corp. Sec. Litig., 2006 WL 163616 (W.D.N.C. Jan. 20, 2006)). The Applied Signal court noted that this is still an open question in the Ninth Circuit, but declined to decide it because the loss causation allegations in the case met the more stringent standard.
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Coca-Cola Co. (NYSE: KO), the world’s largest manufacturer, distributor, and marketer of nonalcoholic beverages and syrups, has agreed to the preliminary settlement of the securities class action pending against it in the N.D. of Georgia. The long-running case, originally filed in October 2000, stems from allegations that company executives artificially boosted Coca-Cola’s revenues by forcing some of the company’s key bottlers to accept hundreds of millions of dollars of excessive beverage concentrate, and that the company falsely represented that the improved financial condition of its key bottlers would lead to substantial revenue growth. The settlement is for $137.5 million.
Earlier this year, The 10b-5 Daily reported that the plaintiffs’ motion for class certification had been assigned to a special master, who recommended that the court deny class certification because of concerns that plaintiffs’ lead counsel had engaged in improper conduct when it paid a former Coca-Cola employee to provide the plaintiffs with stolen company documents. The court appears to have rejected the special master’s recommendation in conjunction with its preliminary approval of the settlement.
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UnitedHealth Group, Inc. (NYSE: UNH), a Minnesota-based diversified health and well-being company, has announced the preliminary settlement of the securities class action pending against it in the D. of Minn. The case, originally filed in 2006, stems from allegations that UnitedHealth misrepresented and omitted material facts regarding its stock options backdating practices.
The settlement is for $895 million and will fully resolve all claims against the company and its current officers and directors. The WSJ Law Blog has a post on the settlement and notes that it is by far the largest options backdating class action settlement to date.
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Whether a plaintiff can establish the scienter of a defendant corporation based on the collective knowledge of the corporation’s employees, commonly referred to as the “collective scienter” theory, is a topic that is getting increased attention in the courts. The author of The 10b-5 Daily wrote a New York Law Journal column (with a colleague) on collective scienter earlier this year.
The main case discussed in that column was decided by the Second Circuit last week. In Teamsters Local 445 Freight Division Pension Fund v. Dynex Capital, Inc., 2008 WL 2521676 (2nd Cir. June 26, 2008), the court drew a distinction between the pleading and proving of corporate scienter. Although to prove corporate liability “a plaintiff must prove that an agent of the corporation committed a culpable act with the requisite scienter, and that the act (and accompanying mental state) are attributable to the corporation,” the court found that at the pleading stage a plaintiff is only required to create a strong inference that “someone whose intent could be imputed to the corporation acted with the requisite scienter.” This pleading burden can be met “with regard to a corporate defendant without doing so with regard to a specific individual defendant.” The court went on to hold, however, that the generic allegations of knowledge and motive in the complaint failed to meet this standard.
Practitioners, especially in the defense bar, are likely to find the decision disappointing. First, the court did not address what type of factual allegations would be sufficient to find the existence of a strong inference of corporate scienter (in the absence of sufficient factual allegations concerning an individual defendant). The only hint is a quote from the Seventh Circuit’s decision in Tellabs II discussing a hypothetical in which “General Motors announced that it had sold one million SUVs in 2006, and the actual number was zero.” Although General Motors now knows one situation to avoid, that fact pattern offers limited guidance for the lower courts. Second, the court provided no legal basis for its announced pleading standard (other than the citation to Tellabs II) and did not address the growing circuit split on this issue.
Disclosure: The author of The 10b-5 Daily submitted an amicus brief in the Dynex Capital case on behalf of the Washington Legal Foundation.
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There will be no new posts on The 10b-5 Daily until after June 30.
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The jurisdictional issues surrounding “foreign cubed” cases – i.e., an action brought against a foreign issuer, on behalf of a class that includes not only investors who purchased the securities in question on a U.S. securities exchange, but also foreign investors who purchased the securities on a foreign securities exchange – continue to be a hot topic. In In re Astrazeneca Sec. Lit., 2008 WL 2332325 (S.D.N.Y. June 3, 2008), the court addressed a proposed class in which 90% of the members were foreigners who purchased on foreign exchanges.
Under the conduct test for subject matter jurisdiction, the plaintiffs needed to adequately allege that (a) the defendants’ conduct in the U.S. was more than merely preparatory to the fraud, and (b) the defendants’ actions in the U.S. “directly caused losses to foreign investors abroad.” Although the court held that the plaintiffs adequately alleged “several of the fraudulent misrepresentations took place in the United States,” the court was unwilling to apply a global fraud on the market presumption and find that the foreign purchasers relied on the U.S.-based conduct when deciding to acquire the stock. Accordingly, the court dismissed the action as to foreign purchasers on foreign exchanges.
Holding: Motion to dismiss granted (both on jurisdictional and, more generally, pleading grounds).
Quote of note: “The Securities Exchange Act does not address the question of extraterritorial reach. The Second Circuit has not yet given guidance on whether the fraud-on-the-market theory should apply to foreign countries. In the absence of clear authority in favor of a global fraud-on-the-market theory, this Court declines to adopt such a theory.”
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The recruitment of foreign institutional investors to act as lead plaintiffs in U.S. securities class actions is a well-established practice. An interesting look into how these clients are obtained can be found in a breach of contract action recently filed by a plaintiffs’ firm against the lawyers it hired as “independent contractors” to develop international clients.
The agreement between the parties, which is an exhibit to the answer and counterclaim, stated that the lawyers would receive monthly compensation and 10% of any fees the plaintiffs’ firm earned in cases where a client obtained by the lawyers acted as lead plaintiff (with a deduction for the monthly compensation). The action arose when the lawyers decided to terminate the agreement after a few months and become associated with a different plaintiffs’ firm.
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