The 10b-5 Daily

Bar Orders And Loss Causation

There have been two recent appellate decisions of note.

(1) In In re HealthSouth Corp. Sec. Litig., 2009 WL 1675398 (11th Cir. June 17, 2009), the court addressed the scope of the judicial bar order contained in the partial settlement between HealthSouth and the plaintiffs. The court found that the contractural claims by HealthSouth's former CEO (a non-settling defendant) against the company for (a) indemnification of any amounts he might pay in settlement of his liability to the plaintiffs, and (b) advancement of fees in connection with the litigation, were properly extinguished. (The D&O Diary has a post on the decision that questions the court's policy rationale for barring the advancement of fees claim.)

Holding: Affirmed.

(2) In Alaska Electrical Pension Fund v. Flowserve Corp., 2009 WL 1740648 (5th Cir. June 19, 2009), the court considered what type of corrective disclosure was necessary to establish loss causation. The defendants argued that "a 'fact-for-fact' disclosure of information that fully corrected prior misstatements" was necessary, while the plaintiffs asserted that it was sufficient to point to disclosures that revealed the "true financial condition" of the company. In a per curiam opinion by a panel that included retired Supreme Court Justice O'Connor, however, the court found that "the true standard lies in the middle." To establish loss causation the "disclosed information must reflect part of the 'relevant truth' - the truth obscured by the fraudulent statements," but the information can leak out over time and a "fact-for-fact" disclosure is not required.

Holding: Reversed and remanded for further proceedings consistent with opinion.

Around The Web

A couple of interesting items from around the web.

(1) Will the government's role in the credit crisis limit the scope of private litigation? The Blog of the Legal Times has a post on the long-running securities class action against Fannie Mae pending in D.C. federal court. The defendants have asked to court to order mediation, arguing that the plaintiffs have refused "to acknowledge 'the drastically changed landscape' following Fannie’s government takeover."

(2) The 10b-5 Daily was an avid follower of South Korea's attempts to implement a securities class action system (see here, here, here, and here). As noted when the legislation passed in late 2003, however, the bill imposed significant phase-in and standing requirements that threatened to limit its use. But even a blind squirrel finds a nut once in a while. Securities Docket reports that the first South Korean securities class action is about to go forward.

Overcoming Adversity

It's not over until it's over. Last September, it certainly looked bleak for the defendants in the Oracle securities class action pending in the N.D. of California. The court found that the defendants had improperly withheld evidence and, as a result, the plaintiffs were entitled to adverse inference instructions with regard to the CEO's knowledge of the corporate problems Oracle allegedly failed to disclose.

Last week, however, the court granted summary judgment in favor of the defendants. See In re Oracle Corp. Sec. Litig., 2009 WL 1709050 (N.D. Cal. June 19, 2009). Although the court took the adverse inferences into account in its decision, the plaintiffs failed to demonstrate a genuine issue for trial on other elements of their causes of action. Most notably, the court concluded that the plaintiffs failed to identify sufficient evidence as to loss causation for their non-forecasting claims.

Holding: Defendants' summary judgment motion granted.

Quote of note: "[T]here is an absence of evidence that on March 1 [2001], Oracle revealed previously concealed information about Suite 11i or that analyst reports about the March 1 announcement linked the miss in Oracle's applications earnings to previously disclosed deficiencies with Suite 11i. Plaintiffs' only possible theory for loss causation is that the earnings miss itself revealed the truth about Suite 11i to the market, but plaintiffs cite no case in which an earnings miss alone was sufficient to prove loss causation."

The Safe Harbor At Work

The PSLRA's safe harbor for forward-looking statements has a checkered history in the courts, with some judges refusing to apply it as written. It is therefore worth noting a decision that relies entirely on the safe harbor to dismiss the plaintiffs' securities fraud claims.

In In re Aetna, Inc. Sec. Litig., 2009 WL 1619636 (E.D. Pa. June 9, 2009), the plaintiffs alleged that the health care company told investors it practiced "disciplined pricing" when, in fact, it was aggressively underpricing to bring in new business. The court found that "'disciplined pricing' means that Aetna expects that its pricing will be in line with its projected medical cost trend, a specific measurement of future performance." Accordingly, the statements concerning "disciplined pricing" were forward-looking as defined by the PSLRA.

The court then applied the safe harbor and held that the statements were protected from liability. First, Aenta's statements concerning its commitment to "disciplined pricing" were immaterial corporate puffery. Second, the company's risk factors specifically warned investors "that profitability could be affected by Aetna's 'ability to forecast . . . costs' and 'there can be no assurance regarding the accuracy of medical cost projections assumed for pricing purposes." The court found this was meaningful cautionary language that rendered the statements inactionable. Finally, the court noted that "there is still uncertainty" as to whether a forward-looking statement is protected by the safe harbor based on immateriality or meaningful cautionary language if a plaintiff adequately pleads that the defendant had actual knowledge of the falsity of the statements (see the Third Circuit's recent Avaya decision). In this case, however, the plaintiffs failed to meet that pleading burden.

Holding: Dismissed with prejudice.

Two From The NYLJ

The New York Law Journal has had two recent columns on securities litigation topics.

(1) In "Revisiting the Limitations Period For Securities Fraud" (June 10 edition), the authors discuss the Supreme Court's decision to hear the Merck case.

Quote of note: "Doing away with inquiry notice entirely would solve much, if not all, of the existing confusion. However, the Supreme Court's view of the competing policy issues is likely to inform its decisions regarding whether to keep inquiry notice and, if so, in what form, and whether to impose upon investors an actual duty to investigate and if so, what consequences follow a failure to do so. Reading the tea leaves, the Court is likely to reaffirm that the limitations period commences only after actual or imputed discovery of the facts, and may well formulate broad guidance for inquiry notice that provides an incentive to investigate fraud at an early stage, and imposes a duty to investigate, failing which imputed knowledge would bar claims."

(2) In "Pay-to-Play Reform: What, How and Why?" (May 21 edition), the author examines alleged abuses in the retention of plaintiffs' counsel in securities class actions. Among other items, he notes the recent judicial criticism of "portfolio monitoring."

Quote of note: "Ultimately, the dividing line here probably should be between institutional investors that have an active in-house counsel and those that do not. In the latter case, the law firm effectively controls the client, and thus the problems that the PSLRA sought to end with its lead plaintiff reform resurface again. But when there is a competent house counsel who makes the litigation decisions, the provision of monitoring services should not be viewed as questionable or disqualifying."

Marvell Technology Settles

Marvell Technology Group Ltd. (NASDAQ: MRVL), a Santa Clara-based developer of of storage, communications and consumer silicon solutions, has announced the preliminary settlement of the securities class action pending against the company in the N.D. of California. The case was filed in 2007 and relates to Marvell’s historic stock option granting practices.

The settlement is for $72 million. According to the helpful Securities Class Action Services tracking chart, it is the fourth-largest settlement of an options backdating class action (the top three, in order, are UnitedHealth Group, Brocade, and Mercury Interactive).

Intervening Events and Phantom Stocks

The U.S. Court of Appeals for the Second Circuit has held that where there has been a market-wide downturn in a particular industry, a plaintiff must plead facts which, if proven, would show that its loss was caused by the alleged misstatements as opposed to intervening events. How to determine the existence of a "market-wide downturn," however, is an open question.

In In re Moody's Corp. Sec. Litig., 2009 WL 435323 (S.D.N.Y. Feb. 23, 2009), the defendants argued that the plaintiffs' losses were caused by the subprime crisis, not Moody's alleged misstatements concerning its credit ratings. However, the court found that there was no market-wide downturn in the credit-ratings industry. Although Moody's stock price declined by 28.8% during the class period, the stock price of McGraw-Hill (the parent company of Standard & Poor's, Moody's biggest competitor) fell only 1.7%. The court also found that Standard & Poor's stock price rose 2.5% during the same period - which was strange, because Standard & Poor's is not a publicly traded entity and has no published share price.

Not surprisingly, the defendants moved for reconsideration, citing two factual errors related to the court's "market-wide downturn" analysis. First, the defendants noted that the court had apparently confused the Standard & Poor's 500 Financials Index with the company itself, leading to the erroneous conclusion that Standard & Poor's stock price had not declined. Second, the defendants argued that the court should have examined the comparative decline in stock prices from the date of the first corrective disclosure, rather than the entire class period. When measured in that manner, the stock price for Moody's dropped by 38%, while the stock price for McGraw-Hill dropped by 28%.

The court, however, declined to change its decision (see In re Moody's Corp. Sec. Litig., 2009 WL 1150281 (S.D.N.Y. April 29, 2009)). McGraw-Hill's stock price, which had been the basis for the court's original determination that there was no market-wide downturn, suddenly came under more judicial scrutiny. While not appearing to disagree with the defendants' contention that the decline should be measured from the first corrective disclosure, the court found that it was unclear whether the drop in McGraw-Hill's stock price was actually related to the performance of its Standard & Poor's subsidiary. In addition, the court noted that Moody's "other primary competitors are both private companies with no published stock price," which left the court without a basis for comparison. The court concluded that "the question of causation is reserved for trial."