The Associated Press reports that the Class Action Fairness Act will not be voted on in the U.S. Senate this legislative year, becoming the “victim of election-year skirmishing between the two parties.” Proponents of the bill were unable to get enough votes to invoke cloture today after Senate Majority Bill Frist (R.-Tenn.) refused to allow consideration of various unrelated amendments.
The Wonderful World Of Rule 10b5-1
To what extent are individual stock trading plans (entered into pursuant to SEC Rule 10b5-1) helpful in defending against private securities fraud claims? At least one court, the N.D. of Cal. in the Monterey Pasta case, has suggested that the use of a stock trading plan may allow a defendant to negate any inference of fraudulent intent based on his stock sales because the sales were pre-scheduled. As more company executives implement these plans, the issue is likely to gather steam.
The author of The 10b-5 Daily, along with one of his colleagues, has an article on the topic – “Individual Trading Plans Can Help Defend Securities Fraud Claims” – in the most recent edition of Compliance Week (July 7).
Filed under All The News That's Fit To Blog
Senate Debates Class Action Reform
The U.S. Senate finally is debating the Class Action Fairness Act , but its passage may be derailed by unrelated amendments. The Associated Press and Reuters have reports on today’s action.
Quote of note (Associated Press): “Democrats are demanding a vote on raising the minimum wage from the $5.15 an hour to $7 over the next few years. They also want a vote on fighting global warming and on extending an assault weapon ban that is to expire this year. Hawaii’s two Democratic senators are pushing legislation that would recognize native Hawaiians as a governing entity. Republican Sen. Larry Craig of Idaho, with Sen. Edward Kennedy, D-Mass., are trying to add a proposal that would give temporary legal status to undocumented farm workers.”
Filed under All The News That's Fit To Blog
Bank Of America Settles Enron-Related Claims
Bank of America Corporation (NYSE:BAC) announced on Friday the preliminary settlement of the claims brought against the company as part of the Enron securities class action pending in the S.D. of Texas. Bank of America has agreed to pay $69 million. It is the second settlement in the Enron case, following the July 2002 settlement by Arthur Andersen’s international entities.
Bank of America was sued under the Securities Act based on its role as an underwriter for certain Enron and Enron-related debt offerings. According to a press release from the University of California, the lead plaintiff in the case, Bank of America’s payment will be more than 50% of its potential damage exposure.
News coverage of the settlement includes articles from the Associated Press, Bloomberg, and Reuters.
Filed under Enron, Settlement
Appealing a SLUSA Remand
The Second and Ninth Circuits previously have held that a district court’s decision to remand a case that has been removed under the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) is not appealable. In a decision issued this week, the Seventh Circuit has disagreed.
SLUSA generally prohibits the bringing of a securities class action based on state law in state court. The defendants are permitted to remove the case to federal district court for a determination on whether the case is preempted by the statute. If so, the district court must dismiss the case; if not, the district court must remand the case back to state court.
A remand based on a district court’s decision that it does not have subject-matter jurisdiction over a case cannot be reviewed on appeal. In Kircher v. Putnam Funds Trust, 2004 WL 1470350 (7th Cir. June 29, 2004), however, the Seventh Circuit found that this general proposition is inapplicable to a case removed and remanded under SLUSA. The Supreme Court “has observed that a court lacks ‘subject-matter jurisdiction’ only when Congress has not authorized the federal judiciary to resolve the sort of issue presented by the case (or the Constitution forbids adjudication).” In contrast, SLUSA expressly authorized the district court to accept the removal of the Kircher case and “[o]nly after making the substantive decision that Congress authorized it to make [i.e., whether the case was preempted] did the district court remand.” This means that the district court had “no adjudicatory competence to do more,” the Seventh Circuit concluded, not that it lacked subject-matter jurisdiction. Accordingly, a SLUSA remand may be appealed.
Holding: Appeal will proceed to briefing and a decision on the merits.
Quote of note: “Both the second and ninth circuits were mesmerized by the word ‘jurisdiction’ and did not see the difference between a case that never should have been removed and a case properly removed and remanded only when the federal job is done.”
Quote of note II: “Appellate consideration of what amounts to a venue dispute slows things down to little good end, for the state court is competent to address the merits. SLUSA means, however, that one specific substantive decision in securities litigation must be made by the federal rather than the state judiciary. Appellate review of decisions under [SLUSA] will promote accurate and consistent implementation of that statute, at little cost in delay beyond what the authorized removal itself creates.”
Filed under Appellate Monitor
Cryo-Cell Settles
CRYO-CELL Int’l, Inc. (OTC Bulletin Board: CCEL), a Florida-based stem cell banking firm, has announced the preliminary settlement of the securities class action pending against the company in the S.D. of Fla. The case, originally filed in 2003, alleges that there was improper recognition of revenue in the Company’s consolidated financial statements. The settlement is for $7 million, including a payment of $4 million by CRYO-CELL’s former auditors. CRYO-CELL states that the entire amount is covered, minus the applicable deductibles, by insurance.
Filed under Settlement
Moving Slow
In securities litigation, the wheels of justice can move slow. The Associated Press has an article on the securities class action against Cabletron Systems, Inc. in the D. of N.H. The complaint was originally filed in 1997 and alleges that Cabletron artificially inflated its stock price by overstating sales and failing to disclose problems with its products.
In a remarkable series of events, the case was dismissed in 1998 with leave to amend, reassigned several times after the original judge passed away, dismissed again in 2001, reinstated by the 1st Circuit in 2002 (in a well-known opinion), and has since been bogged down in discovery and procedural disagreements. In the interim, Cabletron has gone out of business.
Quote of note: “The two sides are currently waiting for a judge to settle procedural disagreements. Cabletrons lawyers want to know the identity of the shareholders anonymous sources. . . . The shareholders want permission to question under oath several of Cabletrons top executives, a group that hasnt been identified but is expected to include [Craig] Benson [a former Cabletron officer and the current governor of New Hampshire].”
Filed under All The News That's Fit To Blog
Supreme Court To Address Circuit Split on Loss Causation
It turns out that the combination of a clear circuit split, the U.S.’s encouragement, and yet another opportunity to overturn the Ninth Circuit, is irresistible. The Associated Press reports that the Supreme Court has granted the cert petition filed by the defendants in the Dura Pharmaceuticals securities litigation, which should lead to a resolution of the circuit split over what is necessary to adequately plead loss causation in a securities fraud case.
A majority of circuit courts hold that a plaintiff must demonstrate a causal connection between the alleged misrepresentations and a subsequent decline in the stock price to adequately plead loss causation, while a minority of circuit courts hold that a plaintiff merely needs to demonstrate that the alleged misrepresentations artificially inflated the stock price. In Broudo v. Dura Pharmaceuticals, Inc., 339 F.3d 933 (9th Cir. 2003), the Ninth Circuit came down squarely in favor of the minority position.
The court found that loss causation “merely requires pleading that the price at the time of purchase was overstated and sufficient identification of the cause.” Based on this holding, the Ninth Circuit reversed the lower court’s dismissal and remanded the case for further proceedings. The defendants petitioned for a writ of certiorari to the Supreme Court. The U.S. (the SEC and the Solicitor General) later filed an amicus brief in support of the petition, arguing that the case was wrongly decided and the Supreme Court should adopt the majority position. Will it? Stay tuned.
Filed under Appellate Monitor
SLUSA And ’33 Act Claims
There is a growing district court split over whether plaintiffs can bring a securities class action pursuant to the Securities Act of 1933 (“’33 Act”) in state court. As a general matter, claims under the ’33 Act may be brought in federal or state court.
Securities class actions, however, are subject to a number of special rules. The Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) is designed to prohibit the bringing of securities class actions in state court and provides for their removal to federal court. SLUSA only applies to class actions “based upon the statutory or common law of any State.” The drafters were focused on plaintiffs who wanted to avoid the heightened pleading standards of the PSLRA by bringing the equivalent of Rule 10b-5 claims (for which federal courts have exclusive jurisdiction) in state court under state law.
In In re Tyco Int’l, Ltd. Multidistrict Litig., 2004 WL 1403009 (D.N.H. June 21, 2004), the court addressed motions to remand to state court seven of the 47 cases that had been consolidated for pretrial proceedings. The seven cases are all based exclusively on the ’33 Act. The court found that although SLUSA would prohibit the bringing of a securities class action in state court alleging both ’33 Act claims and state law claims, it does not, as a matter of statutory construction, apply to securities class actions based exclusively on the ’33 Act.
Holding: Motions to remand granted.
Quote of note: “SLUSA’s legislative history supports the view that Congress attempted to prevent plaintiffs from circumventing the PSLRA by ‘enact[ing] national standards for securities class action lawsuits involving nationally traded securities,’ rather than by making federal courts the exclusive forum for Securities Act class actions alleging fraud.”
Filed under All The News That's Fit To Blog
Just The Fact(s)
In an unusual opinion, the U.S. Court of Appeals for the Eleventh Circuit has clarified its position on the pleading of scienter (i.e., fraudulent intent) under the PSLRA. The district court in the Scientific-Atlanta securities litigation had denied the defendants’ motion to dismiss, finding that “although individual allegations in the complaint, considered in isolation, may not have given rise to a strong inference of scienter, the allegations created such an inference when viewed collectively.” The defendants petitioned for interlocutory appeal, which the district court certified on the narrow question of whether factual allegations may be aggregated to create the necessary strong inference.
In Phillips v. Scientific-Atlanta, Inc., 2004 WL 1382906 (11th Cir. June 22, 2004) the Eleventh Circuit affirmed the lower court’s ruling. The PSLRA states that the complaint “shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” As a threshold matter, the court noted “the Defendants have largely conceded the narrow, certified question and have attempted to parlay the appeal into a much broader review of the district court.” Under these circumstances, the court had little difficulty joining a number of other circuits in finding that nothing in the PSLRA suggests that scienter may only be inferred from individual facts.
The court also went beyond the certified question and found that scienter must be adequately plead with respect to each defendant and with respect to each alleged violation. In the instant case, however, “Plaintiffs’ complaint sufficiently alleges facts giving rise to a strong inference of scienter on the part of each defendant alleged to have committed each violation of the statute.”
Holding: Denial of motion to dismiss affirmed.
Quote of note: “We believe that the plain meaning of the statutory language compels the conclusion that scienter must be alleged with respect to each alleged violation of the statute. Although the plain language is less compelling with respect to alleging the scienter of each defendant, the statute does use the singular term ‘the defendant,’ and we believe that the most plausible reading in light of congressional intent is that a plaintiff, to proceed beyond the pleading stage, must allege facts sufficiently demonstrating each defendant’s state of mind regarding his or her alleged violations.”
Filed under Appellate Monitor
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