The 10b-5 Daily

Oral argument in Dura Pharmaceuticals v. Broudo, the U.S. Supreme Court case on loss causation, has been set for January 12, 2005. Broudo’s brief is due in a couple of days and will be posted when available on the web.

An opinion from the U.S. Court of Appeals for the District of Columbia from earlier this year has an interesting holding for securities fraud defendants. In Howard v. S.E.C., 376 F.3d 1136 (D.C.Cir. 2004), the court examined a charge against the director of a broker-dealer for aiding and abetting a Rule 10b-9 violation (prohibited representations in connection with certain offerings). An element of a Rule 10b-9 claim is scienter (i.e., fraudulent intent). The court found that in the absence of red flags warning the director of the illegality in question, the director was entitled to rely on the advice of counsel and this reliance was evidence that he had not acted with scienter.

Holding: SEC order imposing sanctions vacated with respect to certain charges.

Quote of note: “[R]eliance on the advice of counsel need not be a formal defense; it is simply evidence of good faith, a relevant consideration in evaluating a defendant’s scienter.”

Quote on note II: “All the SEC can say is that Howard should have known what the legal requirements of Rule 10b-9 were and that he violated the disclosure laws by failing to reveal what he should have found out, but did not. At best this amounts to a finding of negligence; at worst it is liability without fault.”

The 10b-5 Daily has been following the up-and-down fortunes of the Class Action Fairness Act over the past year. The legislation applies some of the reform concepts in the PSLRA and SLUSA to all class actions. Notably, class actions meeting certain jurisdictional criteria would have to be heard in federal court.

With Republicans gaining seats in the Senate in this month’s election, the Legal Times reports (via law.com – free regist. req’d) that the Class Action Fairness Act may finally get a floor vote. The timing, however, is still up in the air.

Quote of note: “If supporters want such legislation to pass during the lame duck period, [Stanton Anderson, head of the U.S. Chamber Institute for Legal Reform] and his team must persuade appropriators to attach the legislation to their spending bills, something they are often reluctant to do. Otherwise, they’ll have to wait for the new Congress. ‘If the decision is made to have riders, then we want to be at the top of the list,’ he says. The urgency, adds Stanton, comes from not knowing for sure what will be on the legislative calendar next year. One thing that worries him: A drawn-out fight over the Supreme Court. ‘If there’s a Supreme Court nomination,’ he says, ‘then that will suck up everybody’s time and energy.'”

By declining to issue shares on a U.S. stock exchange, a foreign company may believe it is avoiding the risk of having a securities class action brought against it in a U.S. court. Not necessarily. An example is the Vivendi Universal securities class action currently pending in the S.D.N.Y. Vivendi is a French corporation and the plaintiffs are foreign investors who purchased their stock on foreign stock exchanges. Nevertheless, the plaintiffs have brought suit for violations of U.S. securities laws.

In a recent decision (In re Vivendi Universal, SA Sec. Litig., 2004 WL 2375830 (S.D.N.Y. Oct. 22, 2004)), the court has confirmed that it has subject matter jurisdiction over the claims. The general standard in the Second Circuit is that a court may exercise jurisdiction over securities claims asserted by foreigners if: “a) there was conduct in the United States that directly caused the foreigners’ losses and (b) such conduct was more than ‘merely preparatory’ to a securities fraud conducted elsewhere.” In this case, the court found that Vivendi’s CEO and CFO had “moved their operations to New York and spent at least half their time managing the company from the United States during a critical part of the class period.” The court held that this was sufficient to conclude that the U.S.-based conduct was integral to the alleged fraud.

The New York Law Journal has an article (via law.com – free regist. req’d) on the decision.