The 10b-5 Daily

The battle in the McKesson HBOC securities litigation over whether providing investigatory reports to the SEC and the DOJ constitutes a waiver of attorney-client privilege continues – now in federal court. Last February, the California Court of Appeal held in a case involving McKesson that providing investigatory reports to government entities was a waiver under California law.

Some of McKesson’s former executives have been indicted by the DOJ and also want access to the reports. A federal district court agreed with the California Court of Appeal that the privilege had been waived, but McKesson wants to prevent the reports from going to the shareholder plaintiffs who have brought cases against it in federal court. McKesson appealed the decision and the SEC is supporting the company’s position. The Recorder has an article (via law.com – free regist. req’d) on the recent hearing before the U.S. Court of Appeals for the Ninth Circuit.

Quote of note: “White-collar practitioners are closely watching the case, U.S. v. Bergonzi, 03-10511, because it highlights the collision of civil and criminal prosecutions in cases of alleged corporate wrongdoing. Companies share internal reports in order to win favor with government investigators. But if those reports end up exposing them to liability in securities fraud suits, they may not be as cooperative on the criminal side.”

In the Baxter decision issued in July, the U.S. Court of Appeals for the Seventh Circuit severely limited the application of the PSLRA’s safe harbor by holding that it may be impossible, on a motion to dismiss, to determine whether a company’s cautionary statements are “meaningful.” Baxter may turn out to be influential, but for the moment other appellate courts are continuing to affirm dismissals based on the safe harbor.

In Baron v. Smith, 2004 WL 1847751 (1st Cir. Aug. 18, 2004) the U.S. Court of Appeals for the First Circuit addressed claims based on forward-looking statements in a press release. The court cited the company’s safe harbor language and found that to “the extent that plaintiffs seek to state a claim under the securities laws for a deceptive press release or as an indication that the company omitted material information from its filings, we agree with the district court that the press release contained forward-looking statements, as stated therein, and therefore comes under the protection of the statutory safe harbor.”

Holding: Affirming grant of motion to dismiss.

In a high-profile securities class action brought against Oracle Corp., the U.S. Court of Appeals for the Ninth Circuit has reversed the lower court’s decision to dismiss the case with prejudice. The issue on appeal was whether the plaintiffs had plead a strong inference of scienter (i.e., fraudulent intent) as required by the PSLRA. The decision can be found here and The Recorder has an article (via law.com – free regist. req’d) summarizing the holding.

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 such 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. District courts are split (although the trend appears to be against reviving time-barred claims) and the issue is currently before the U.S. Court of Appeals for the 11th Circuit.

In the midst of this debate, the Wall Street Journal reports (subscrip. req’d) that the SEC has filed an amicus brief in the U.S. Court of Appeals for the Second Circuit arguing that Sarbanes-Oxley did revive time-barred claims. The SEC’s primary argument is that Congress was not required to specifically express its “retroactive intent” and the “natural meaning of the statutory language” supports its position. The underlying case, AIG Asian Infrastructure Fund, L.P. v. Chase Manhattan Asia Limited, et al., alleges Rule 10b-5 violations based on a 1998 purchase of securities.

Addition: In related news, the Legal Intelligencer has an article (via law.com – free regist. req’d) today on a district court decision (from the E.D. of Pa.) that rejects the revival of time-barred claims.