The 10b-5 Daily

The Sarbanes-Oxley Act of 2002 extends the statute of limitations for federal securities fraud to the earlier of two years after the discovery of the facts constituting the violation or five years after the violation. Although the legislation clearly provides that it “shall apply to all proceedings addressed by this section that are commenced on or after the date of enactment of this Act [July 30, 2002],” left unresolved is whether Congress intended to revive claims that had already expired under the earlier one year/three years statute of limitations.

A growing majority of district courts has held that these claims must be dismissed. The U.S. Court of Appeals for the Second Circuit agrees. In In re Enterprise Mortgage Acceptance Co., LLC, Sec. Litig., 2004 WL 2785776 (2nd Cir. Dec. 6, 2004), the court, which combined a number of cases presenting this issue into one decision, held that Congress did not clearly provide or intend for retroactive application of the new statute of limitations. Accordingly, the court declined to revive any previously time-barred claims. (Note that this issue is also currently before the Eleventh Circuit.)

Holding: Dismissals affirmed.

Addition: In reaching its decision, the Second Circuit took judicial notice of the amicus brief filed by the SEC in the AIG Asian Infrastructure case, which urged the court to hold that Sarbanes-Oxley revived previously time-barred claims. The court rejected the SEC’s position and noted that the SEC was not entitled to any deference on the issue given that the new statute of limitations is only applicable to private actions, and not to SEC enforcement actions.

Two circuit court opinions were issued last week affirming dismissals based on the plaintiffs’ failure to adequately plead that any false or misleading statements were made.

In the 8th Circuit case, In re Amdocs Ltd. Sec. Litig., 2004 WL 2735530 (8th Cir. Dec. 2, 2004), the court held that the “bespeaks caution” doctrine rendered Amdocs’ statements about its customer demand immaterial as a matter of law because the statements were accompanied by warnings of market erosion.

In the 4th Circuit case, Nolte v. Capital One Financial Corp., 2004 WL 2749867 (4th Cir. Dec. 2, 2004), the court held that the plaintiffs had failed to adequately allege that Capital One’s management did not believe its stated opinions about the sufficiency of the company’s reserves and computer infrastructure. Moreover, the plaintiffs could not rely on a memorandum of understanding with federal regulators that required Capital One to make prospective changes to its business to establish that the company’s past practices were deficient.

Insider stock sales are often used by plaintiffs to establish that the individual defendants had a motive to artificially inflate the company’s stock price. As a general matter, however, courts have held that insider stock sales cannot create an inference of fraudulent intent if the defendants only sold a small percentage of their overall holdings.

In its recent decision in Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226 (9th Cir. 2004), the Ninth Circuit purported to discover an exception to the rule. Larry Ellison, the CEO of Oracle, was alleged to have sold only 2.1% of his holdings during the class period, but that amounted to almost $900 million in proceeds. The court held that “where, as here, stock sales result in a truly astronomical figure, less weight should be given to the fact that they may represent a small portion of the defendant’s holdings.” But is that a sensible exception?

The Delaware Court of Chancery, which addressed the exact same stock sales in its recent summary judgment decision in In re Oracle Corp. Derivative Litigation, C.A. No. 18751 (Del. Ch. Dec. 2, 2004), appears to disagree. The court found that “however wealthy Ellison is and however envious that may make some, the fact remains that Ellison sold only 2% of his Oracle holdings. Ellison remained the person with more equity at stake in Oracle than anyone anywhere. Plaintiffs continually emphasize the nearly $1 billion that he made on the sale, but ignore the roughly $18.9 billion in equity that he lost in the ensuing share price collapse.” In other words, a billion dollars in stock sales may be significant for most people, but not necessarily for everyone.

Addition: The Delaware Court of Chancery’s decision can be found here. Thanks to Adam Savett for the link.

The respondents’ brief has been filed in Dura Pharmaceuticals v. Broudo, the loss causation case currently before the U.S. Supreme Court. Amicus briefs in support of Broudo’s position have been filed by the National Association of Shareholder and Consumer Attorneys, the New Jersey Department of the Treasury and its Division of Investment, and the Regents of the University of California (links will be posted when available).

Oral argument is set for January 12, 2005. The question presented is: “Whether a securities fraud plaintiff invoking the fraud-on-the-market theory must demonstrate loss causation by pleading and proving a causal connection between the alleged fraud and the investment’s subsequent decline in price.”