Although Oracle has had its hands full fighting off securities litigation, including a recent setback when the U.S. Court of Appeals for the Ninth Circuit reversed the lower court's dismissal of the federal securities class action brought against the company, things may be looking up. Reuters reports that Oracle has obtained a dismissal of the shareholder derivative suit brought against the company's officers in Delaware Chancery Court. The facts and accusations in the Delaware case reportedly "mirror" those in the federal securities class action.
In the wake of recent corporate scandals, European courts have become flooded with individual shareholder suits. A Bloomberg article discusses the Deutsche Telekom litigation in Germany, where 2,100 claims have been filed by 754 law firms. Last February, the company delivered 8 tons of paperwork in response to the complaints. All of this has European courts and legislators contemplating whether they should permit shareholders to file securities class actions.
Quote of note: "Countries from the Netherlands to Finland have changed their laws or are considering changes to permit investors and consumers to file multi-party complaints. The goal is to help cope with shareholder suits and product liability cases that can attract thousands of plaintiffs."
Quote of note II: "'Europe wasn't litigious until about five years ago, but then we started to get Americanized,' says Paul Bowden, a 49-year-old partner at the law firm of Freshfields Bruckhaus Deringer in London. 'Consumer associations have become more powerful and willing to push lawsuits, and there is a growing number of small law firms with young, ambitious lawyers who have learned a lot from the U.S.'"
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 - click here for the petitioners' brief).
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."
Addition: The amicus brief filed by the National Association of Shareholder and Consumer Attorneys and two other public interest organizations can be found here.
The Court of Chancery of Delaware has issued an opinion on the interaction between the PSLRA's discovery stay and 8 Del. C. Sec. 220, which allows shareholders to inspect certain books and records of a corporation. In Cohen v. El Paso Corp., 2004 WL 2340046 (Del. Ch. Oct. 18, 2004), the court addressed whether the discovery stay in effect in a federal securities class action brought against El Paso preempted the court from hearing Cohen's Sec. 220 action.
Although the court conceded that Cohen's complaint relied on similar facts to those forming the basis of the federal securities fraud claims, it found that nothing supported El Paso's assertion that Cohen was attempting to aid the class action plaintiffs. Moreover, the records sought by Cohen did not "pertain directly to a federal securities law claim asserted in a pending federal action," but rather to "state law claims of waste, mismanagement and breach of fiduciary duty." The court therefore held that the PSLRA did not "operate to preempt or otherwise interrupt Cohen's Sec. 220 action."
Holding: Motion to stay or dismiss denied.
Quote of note: "Neither the PSLRA nor SLUSA prevents a state court from considering a books and records demand, or similar state corporate law claims, merely because one of the parties to the state action is protected by a PSLRA automatic discovery stay in an unrelated federal securities class action."
Addition: An open question (or so it would appear) is whether El Paso might have more success arguing to the federal judge presiding over the securities class action that he/she should stay the Section 220 action pursuant to SLUSA, which states that "a court may stay discovery proceedings in any private action in state court, as necessary in aid of its jurisdiction, or to protect or effectuate its judgements, in an action subject to a stay of discovery pursuant to [the PSLRA]."
Thanks to Jesse Weiss for sending the opinion to The 10b-5 Daily.
On the heels of its $250 million settlement with the SEC last month, Qwest Communications is apparently in negotiations to settle the securities class actions pending against the company. An article in the Rocky Mountain News states that Qwest and the California State Teachers' Retirement System, which is acting as lead plaintiff, have recently engaged in a mediation. One analyst quoted in the article suggests that any settlement under $500 million would be a "net win for Qwest." In any event, it would be less than the "billions of dollars" in damages that lead counsel was reported to be seeking.
According to a feature article (free regist. req'd) in the Atlanta Journal-Constitution, the legal bills related to Enron's bankruptcy are close to $1 billion.
Quote of note: "When Enron Corp. emerges from bankruptcy by year's end, there won't be much wealth left for those who invested in the once high-flying company. By most estimates, Enron's creditors will likely receive 20 cents on the dollar, while shareholders probably won't get a cent. But don't worry about the lawyers, accountants and other advisers who've feasted on Enron's Chapter 11 case. Their court-approved fees are expected to reach $995 million."
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. (Links to Dura's brief and various amicus briefs can be found here.)
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. (Click here for the most recent post.) 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.'"
Two interesting articles related to the WorldCom securities litigation:
(1) The Wall Street Journal reports (subscription only) on Bear Stearns' surprising decision to go to trial in Alabama state court over claims that it misled The Retirement Systems of Alabama (RSA) in connection with the sale of bonds from a WorldCom subsidiary. Citigroup, JPMorgan Chase, and Bank of America have already settled with RSA for $111 million.
Quote of note: "One reason Bear may be willing to have its day in court: The pension fund isn't seeking punitive damages, which are intended to punish the defendant and to discourage repeat behavior, so its exposure is capped at $16.2 million. And unlike Citigroup, Bear Stearns isn't named in the massive class-action suit that has been filed in New York by WorldCom stockholders and bondholders. So it doesn't have to worry that an award against it in Alabama will negatively affect its position in that suit."
(2) An article in the November 2004 SCAS Alert has more background on the story. The article discusses the recent decision by the U.S. Court of Appeals for the Second Circuit to overturn the district court injunction that blocked RSA from pursuing its state court lawsuit. Judge Cote presides over the federal securities class action pending against WorldCom and others in the S.D.N.Y. and had ordered the Alabama court to delay its trial until 60 days after a verdict in the federal case. The Second Circuit found that a federal court has no protectable interest in being "the first court to hold a trial on the merits."
Quote of note (SCAS Alert article): "Traditionally, few institutional investors have litigated their claims in state court. The practice has become more common in the past two years. Last year, pension funds in Ohio and California opted out of a federal class action against AOL Time Warner to bring state court claims. Federal class counsel have argued that investor recoveries typically occur sooner and are more certain in federal court. Defense lawyers also have tried to discourage state litigation, preferring to negotiate a single federal class settlement that would cover all investors."
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.
The 11th Circuit and 2nd Circuit are continuing to ponder whether the Sarbanes-Oxley Act of 2002, which extended the statute of limitations for securities fraud claims, revived claims that were time-barred prior to the Act's passage. Meanwhile, a growing majority of district courts are holding that these time-barred claims must be dismissed. In the past two months, three courts have come to this conclusion: Zurich Capital Mkts. v. Coglianese, 2004 WL 2191596 (N.D. Ill. Sept. 23, 2004); Zouras v. Hallman, 2004 WL 2191031 (D.N.H. Sept. 30, 2004); Milano v. Perot Systems Corp., 2004 WL 2360031 (N.D. Tex. Oct. 19, 2004). Given that the frequency of these cases is bound to decrease over time, the appellate courts better act quickly if they plan to reverse the tide.