The 10b-5 Daily

There will be no new posts on The 10b-5 Daily until after March 31.

Under the fraud-on-the-market theory, reliance by investors on an alleged misrepresentation is presumed if the company’s shares were traded on an efficient market. Investors are not entitled to the presumption, however, if they are unable to show that the misrepresentation actually affected the market price of the stock. Class certification continues to be an intense battleground on the application of the fraud-on-the-market theory, as evidenced by two recent decisions.

(1) In In re Fannie Mae Sec. Litig., 247 F.R.D. 32 (D.D.C. 2008), the court considered whether it was appropriate to apply the fraud-on-the-market presumption to investors who purchased Fannie Mae stock after the company’s Dec. 2004 announcement that it would engage in a large financial restatement. The plaintiffs argued that additional information about the alleged fraud was released over the next ten months and the class period should extend to Sep. 2005. The court disagreed and held that the Dec. 2004 announcement “severed the link between the alleged misrepresentations and the stock price” and later investors could not “claim a reasonable reliance on Fannie Mae’s financial statements.” Accordingly, the court found that the class period ended in Dec. 2004.

(2) In In re Credit Suisse First Boston Corp. (Lantronix Inc.) Analyst Sec. Litig., 2008 WL 512779 (S.D.N.Y. Feb. 26, 2008), the court considered whether a series of allegedly false analyst statements about Lantronix affected the market price of the company’s stock. The court declined to decide whether the fraud-on-the-market presumption could ever apply to research analyst statements, noting that the issue is currently before the Second Circuit in the In re Salomon Analyst Metromedia Litig. case (see this post for more background). Nevertheless, the court decertified the class based on the plaintiffs’ failure to adequately demonstrate that the analyst statements had: (a) increased Lantronix’s stock price when issued; (b) had an effect throughout the class period; or (c) negatively impacted Lantronix’s stock price when their falsity was revealed to the market.

The March 17, 2008 edition of the National Law Journal has a pair of columns on the impact of the Supreme Court’s recent securities litigation decisions.

(1) In Stoneridge Alters Legal Landscape (subscrip. req’d), the authors recap the decision and argue that the Court’s rejection of “scheme liability” has “profoundly changed” the potential securities fraud exposure of third parties.

Quote of note: “The holding in Stoneridge indicates that all or most of that $7 billion [in Enron-related settlements] probably did not have to be paid, because the banks, even if they acted with full knowledge that they were engaged in a scheme with Enron, had no liability to the investing public under the anti-fraud provisions of the federal securities laws. Note that while the settling banks in Enron paid approximately $7 billion, there remained a number of banks that declined to settle, and that would have faced massive exposure had Stoneridge been decided differently.”

(2) In Courts Interpret Tellabs (subscrip. req’d), the authors examine the post-decision case law and conclude that courts are taking a “more stringent” approach to scienter pleading.

Quote of note: “Of 102 reported decisions reviewed applying Tellabs, 64 reflect dismissals (albeit some with leave to amend). On its face, this (unscientific) survey reflects a dismissal rate higher than historical norms.”

A few items from around the web.

(1) RiskMetrics has released its annual SCAS 50 report of the top 50 plaintiffs’ law firms ranked by the total dollar amount of final securities class action settlements occurring in 2007 in which the law firm served as lead or co-lead counsel.

(2) The Federalist Society has posted an online debate on the Stoneridge decision on scheme liability. Participants include Professor Stephen Bainbridge, Professor Jay Brown, and AEI’s Ted Frank.

(3) Amanda Rose, an incoming Vanderbilt law professor, has issued an interesting working paper on securities class actions. Rose argues that the overdeterrence threat of securities class actions could be mitigated if “policymakers adopt an oversight approach to securities litigation reform by, for example, granting the SEC the ability to screen which Rule 10b-5 class actions may be filed, and against whom.”