There has been a considerable amount of media and blog coverage of the Dabit decision. Here is a partial roundup:
Media – Articles can be found in Bloomberg, the Financial Times, the New York Times, and the Washington Post.
Blog – Commentary, with some emphasis on the federalism implications of the decision, can be found on Concurring Opinions, Conglomerate, and PointofLaw.com.
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It turns out that sometimes you can tell what the justices are thinking by the questions they ask. As was predicted by some observers following oral argument in the Dabit case, the U.S. Supreme Court has held that the Securities Litigation Uniform Standards Act (“SLUSA”) pre-empts state-law class actions brought on behalf of persons who were induced to hold (but not purchase or sell) securities. The 8-0 decision authored by Justice Stevens resolves a circuit split between the Second Circuit and the Seventh Circuit on the issue.
SLUSA preempts certain class actions based upon state law that allege a misrepresentation in connection with the purchase or sale of nationally traded securities. The primary goal of SLUSA was to prevent plaintiffs from using state law claims to avoid the heightened pleading standards imposed on federal securities class actions. The issue before the Supreme Court in Dabit was the meaning of SLUSA’s “in connection with” requirement.
Dabit is a former Merrill Lynch broker who filed a class action in federal court claiming, under Oklahoma state law, that Merrill Lynch breached its fiduciary duty to its brokers by disseminating misleading analyst research. Dabit asserted that this practice caused the brokers to hold onto overvalued securities too long and lose commission fees when their clients took their business elsewhere. The Second Circuit found that Dabit’s claims were not pre-empted by SLUSA to the extent that he “alleged that brokers were fraudulently induced, not to sell or purchase, but to retain or delay selling their securities.”
The Supreme Court previously had held that only purchasers and sellers of securities have standing to bring a private securities fraud action pursuant to Rule 10b-5. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975). In Dabit, however, the Court clarified that its earlier decision to limit the potential plaintiffs in Rule 10b-5 cases was based on policy considerations, not on an attempt to define the phrase “in connection with the purchase or sale.” Indeed, the Court has generally “espoused a broad interpretation” of that phrase, holding that “it is enough that the fraud alleged ‘coincide’ with a securities transaction – whether by the plaintiff or by someone else.”
The Court found that this broad interpretation must have been known to Congress when it drafted SLUSA and used the “in connection with” language. Given that “class actions brought by holders pose a special risk of vexatious litigation,” it would be “odd, to say the least, if SLUSA exempted that particularly troublesome subset of class actions from its pre-emptive sweep.” Moreover, allowing state class actions brought by holders “would give rise to wasteful, duplicative litigation” if parallel state court (holders) and federal court (purchasers) class actions were brought based on the same facts.
Holding: Judgment vacated and case remanded for further proceedings consistent with opinion.
Quote of note: “The holder class action that respondent tried to plead, and that the Second Circuit envisioned, is distinguishable from a typical Rule 10b–5 class action in only one respect: It is brought by holders instead of purchasers or sellers. For purposes of SLUSA pre-emption, that distinction is irrelevant; the identity of the plaintiffs does not determine whether the complaint alleges fraud ‘in connection with the purchase or sale’ of securities. The misconduct of which respondent complains here—fraudulent manipulation of stock prices—unquestionably qualifies as fraud ‘in connection with the purchase or sale’ of securities as the phrase is defined in Zandford, 535 U. S., at 820, 822, and O’Hagan, 521 U. S., at 651.”
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The possibility that a number of companies have been backdating stock option grants to increase their value was the subject of a Wall Street Journal feature article (subscrip. req’d) this past weekend. The article notes that the practice “while not illegal in itself, could result in false disclosure.” As a result, a company may be “vulnerable to an allegation of securities fraud.” For some blogosphere commentary, see this post from Truth on the Market.
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A recent district court decision discusses whether a lead plaintiff should be required to disclose its confidential sources as part of the discovery process. The court in In re CIGNA Corp. Sec. Litig., 2006 WL 263631 (E.D.Pa. Jan. 31, 2006) held that the defendants were entitled to the names of all individuals known by the plaintiff to have relevant knowledge, but the plaintiff was not required to specifically identify the confidential sources relied upon in the complaint. The court did note, however, that it would consider revisiting its decision if the defendants were presented with an overwhelming list of names.
Quote of note: “Of course, the recent identification of ‘Deep Throat,’ whose provision of information to the Washington Post led to the infamous Watergate scandal, also reminds us of the value of the free flow of information in a democratic society without fear of disclosure or retribution. However, as the D.C. Circuit’s decision in the case of Judith Miller shows, the ability to avoid disclosing a confidential informant is not absolute; in most instances there is indeed a balancing test. How should the optimal balance be determined in this case?”
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Oral argument in the Kircher case before the U.S. Supreme Court will be held on April 24. The case addresses whether a party may appeal a district court’s decision to remand a case to state court pursuant to the Securities Litigation Uniform Standards Act of 1998.
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The U.S. Chamber Institute for Legal Reform has released a paper entitled Securities Class Action Litigation: How is the System Working Ten Years After Enactment of the Private Securities Litigation Reform Act? The paper surveys various statutory, judicial, and policy issues that have arisen in this area of the law.
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In its Dura decision, the Supreme Court left open the question of whether loss causation is subject to a heightened pleading standard. The court assumed, without deciding, “that neither the [Federal Rules of Civil Procedure] nor the securities statutes impose any special further requirements in respect to the pleading of proximate causation or economic loss,” and applied the notice pleading requirements of F.R.C.P. 8(a)(2). Following Dura, several courts have concluded that notice pleading is sufficient (see, e.g., Greater Penn. Carpenters Pension Fund v. Whitehall Jewellers, Inc., 2005 WL 1563206 (N.D. Ill. June 30, 2005)).
A contrary view can be found in the recent decision in In re The First Union Corp. Sec. Litig., 2006 WL 163616 (W.D.N.C. Jan. 20, 2006). The court noted that the Supreme Court had “expressly declined to consider whether loss causation must be pled with particularity.” Based on pre-Dura circuit court decisions finding that F.R.C.P. 9(b)’s particularity standard is applicable to loss causation and the fact that “the Fourth Circuit has held that every element of a common law fraud action must be plead with particularity,” the court decided that the plaintiffs needed to satisfy the heightened pleading standard.
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The Association of U.S. West Retirees is continuing its campaign against the attorneys’ fees being paid out in various settlements related to Qwest’s securities litigation (U.S. West and Qwest merged in 2000). Although the organization failed to reduce the attorneys’ fees in the shareholder litigation over the U.S. West/Qwest merger, it is back again, with some new colorful analogies, to challenge the attorneys’ fees request in Qwest’s recent $400 million securities class action settlement.
Quote of note: “‘It is all too obvious that lead counsel are the mere jackals to the government’s lions, feasting after both the United States Securities Exchange Commission and the United States Justice Department made the kill,’ [counsel for the Association of U.S. West Retirees] wrote. But ‘unlike the jackal, they seek the lion’s share’ of the settlement.”
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Following up on his Wall Street Journal editorial from a few weeks ago, Professor Moin Yahya (University of Alberta) is debating Professor Larry Ribstein (University of Illinois) on whether short selling plaintiffs are engaged in illegal conduct. PointofLaw.com has all the action.
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Dr. David Tabak of NERA Economic Consulting has written a working paper on the relationship between risk disclosures and damages in securities class actions. CFO.com has an article discussing the paper.
Quote of note (CFO.com): “Given the increasing potential for shareholder lawsuits, Tabak believes that top managers should give greater weight to the option of revealing the possibility of bad news before it becomes a certainty. The realization of such perils as an adverse interest-rate movement, a product failure, or an impending government probe ‘could easily lead to a large decline in a company’s stock price’ — a greater decline, he asserts, than what would have occurred earlier if the company had merely disclosed the probability that an event would take place.”
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