(1) The Boston Business Journal has an article on securities class action litigation trends. The article suggests that the recent rise in financial restatements may lead to a boom in filings.
(2) The Chicago Tribune provides a lengthy profile of Daniel Fischel, a law professor and leading expert witness in securities cases. Fischel will be testifying on behalf of Enron's former CEO at his criminal trial.
It took ten years, but the U.S. Court of Appeals for the Seventh Circuit has finally issued an opinion that comprehensively interprets the PSLRA's heightened pleading standards. In Makor Issues & Rights, Ltd. v. Tellabs, Inc., 2006 WL 172142 (7th Cir. Jan. 25, 2006) (Wood, J.), the court addressed the following issues:
(1) Pleading of all facts - Although the PLSRA requires a complaint based on information and belief to state "all facts on which that belief is formed," courts generally have held that this requirement should not be applied literally. The Seventh Circuit agreed with the Second Circuit that the relevant question is "whether the facts alleged are sufficient to support a reasonable belief as to the misleading nature of the statement or omission."
(2) Confidential witnesses - In accord with a number of other circuit courts, the Seventh Circuit found that plaintiffs are not required to provide the identify of their confidential sources. It is enough for plaintiffs to describe the sources with sufficient particularity to support the probability that the person would "have access to, or knowledge of, the facts underlying the allegations."
(3) Substantive scienter standard - The Seventh Circuit found that the PSLRA did not raise the substantive scienter standard for securities fraud, which continues to be knowledge or recklessness. (Only the Ninth Circuit has reached a different conclusion.)
(4) Pleading scienter - Under the PSLRA, a plaintiff must plead sufficient facts to create a "strong inference" of scienter or the complaint shall be dismissed. The key issue has been whether motive and opportunity allegations (e.g., insider stock trading), by themselves, can meet this pleading burden. The Second and Third Circuits say yes. The Ninth and Eleventh Circuits disagree. A number of other circuit courts, however, have taken a more holistic approach and require that all of the allegations in the complaint be collectively examined to determine whether the requisite strong inference of scienter is demonstrated. The Seventh Circuit adopted this middle ground, finding that motive and opportunity allegations may be "useful indicators."
(5) Competing inferences - Although the Sixth Circuit has found that the "strong inference" requirement creates a situation in which plaintiffs are only entitled to the most plausible of competing inferences when a court evaluates their scienter allegations, the Seventh Circuit disagreed. Instead, the Seventh Circuit stated that it "will allow the complaint to survive if it alleges facts from which, if true, a reasonable person could infer that the defendant acted with the required intent."
(6) Group pleading for scienter - The Seventh Circuit found that the PSLRA requires a strong inference of scienter to be pled for each defendant. Accordingly, scienter allegations made against one defendant cannot be imputed to other defendants on the theory that the officers of the company acted collectively.
For all of the legal windup, the application of the law to the facts in Makor is surprisingly brief. The district court had found that the plaintiffs failed to adequately allege scienter for any of the defendants. On appeal, the Seventh Circuit held that the allegations concerning marketing, sales, and production information available to the CEO were sufficient to establish a strong inference that he acted with fraudulent intent. The CEO's scienter could then be imputed to the company. As for the other individual defendant, the company's Chairman, the scienter allegations appeared to be of the "must have known" variety, and he only sold 1% of his stock holdings during the class period. Accordingly, the Rule 10b-5 claim against the Chairman was dismissed.
Holding: Affirmed in part, reversed in part. (The court also evaluated whether falsity and materiality was adequately pled for all of the statements and whether the forward-looking statements were protected by the PSLRA's safe harbor, but its holdings on these issues were not dispositive of the overall claims against any of the defendants.) The oral argument in the case can be listened to here - thanks to The PSLRA Nugget for the link.
Bristol-Myers Squibb Co. (NYSE - BMY), a global pharmaceutical company headquartered in New York, has announced a preliminary agreement to settle the securities class action pending against the company in the D.N.J. The background of the case, which was set to go to trial, is discussed in this post from last August.
The settlement is for $185 million. The plaintiffs announced that it is the "largest recovery ever obtained against a pharmaceutical company in a securities fraud case involving the development of a new drug" and that Bristol-Myers has agreed to publicly disclose the clinical study design and the results of clinical trials for every drug it markets. The company, however, was less committal about the non-financial aspects of the settlement, telling the Associated Press that it "already had two Web sites where it discloses clinical trial results."
In 2004, Bristol-Myers paid $300 million to settle a different securities class action relating to alleged financial misstatements.
The National Law Journal has an article on the widening exposure of law firms in securities class actions. Although the Supreme Court's prohibition on aiding and abetting liability in private securities fraud actions has generally shielded law firms, in some cases courts have found that the law firms acted as primary violators. Plaintiffs have added fuel to that fire by arguing that even if a law firm did not make (or substantially participate in) a misrepresentation to the market, it can be held liable as a primary participant in a fraudulent scheme. (For more on scheme liability, see this post.)
This week's Economist has an article (subscrip. req'd.) on the failure of many investors, including institutional investors, to file claims in securities fraud settlements. The article notes that institutional investors may be "violating their fiduciary responsibilities when they do not try to get their money" and could be the subject of "class-action suits to come." An easy prediction - especially since those suits have already been around for a year.
Quote of note: "A study by James Cox, a colleague of Mr McGovern's at Duke, of 118 securities class-action suits between 1995 and 2002, published in the Stanford Law Review last month, concludes that 72% of institutions never claim their full share of the proceeds. Mr Cox offers several explanations: institutions' distaste for a form of litigation that, as they see it, benefits mainly lawyers; low expected gains; and the cost and hassle of claiming."
Early reports from today's Supreme Court oral argument in Merrill Lynch v. Dabit (see post below) suggest that the Second Circuit may be reversed. The justices evidently were skeptical that Congress, in passing SLUSA, meant to allow holders to bring a securities class action in state court, while forcing purchasers and sellers to bring the same case in federal court. Dow Jones Newswires (via wsj.com - subscrip. req'd) and the Financial Times (via MSNBC.com) have articles, while the Wall Street Journal's Law Blog gets a first-hand report from a law professor who attended the hearing.
Quote of note (Financial Times): "Justice Stephen Breyer said he was worried that permitting such suits in state court would allow investors to circumvent the limits imposed by federal securities laws on purchaser and seller suits. Mr. Breyer said nothing would stop them from proceeding in state court, simply by filing their suits as holders rather than sellers. Justice Ruth Bader Ginsburg asked: 'Why would Congress with respect to this category want there to be a more plaintiff-friendly rule than it put in place for the purchaser-seller?'"
Media interest in Merrill Lynch v. Dabit, the SLUSA case being heard by the U.S. Supreme Court today, has been muted. Nevertheless, there are some good Internet sources on the case. Scotusblog provides an in-depth preview of the oral argument. The Wall Street Journal's new Law Blog also has a post.
Motions for reconsideration are rarely successful, but loss causation issues may be an exception given the need to interpret the Supreme Court's recent Dura decision. In In re Royal Dutch/Shell Transport Sec. Litig., 2005 WL 3359695 (D.N.J. Dec. 12, 2005), the court had held, based on Dura, that investors who purchased securities during the class period, but did not subsequently sell the securities, could not adequately plead loss causation. Therefore, those investors could not join the putative class.
On reconsideration (and after the case was reassigned to another judge), the court found that Dura "neither expressly nor implicitly mandates that the subject securities be sold in order for a plaintiff to have suffered cognizable loss." The court also found that the PSLRA did not require such a sale to bring a securities fraud action and that it would be against public policy to judicially create this requirement.
Holding: Motion for reconsideration granted.
Quote of note: "Nothing in Dura indicates that the Supreme Court intended to overrule the established precedent permitting holding plaintiffs to maintain actions for securities fraud, to call into question the statutory scheme by creating a sell- to-sue requirement, or to undermine relevant policy concerns without any analysis. Moreover, Dura's holding was limited to rejecting the Court of Appeals for the Ninth Circuit's standard for pleading loss causation and economic loss in a securities fraud action, which had required only an allegation of inflated purchase price because of a misrepresentation; the Supreme Court expressly stated that it did not 'consider other proximate cause or loss-related questions.' Accordingly, Dura cannot be read to require both purchase and sale of the subject securities."
Tenet Healthcare Corp., the second-largest U.S. hospital chain, has announced the preliminary settlement of the securities class action pending against the company in the C.D. of Cal. The case was originally filed in 2002 and alleges that Tenet made false or misleading statements about Medicare payments and other issues.
The settlement is for $215 million, including $1.5 million in personal payments from two former officers. Tenet's insurers will contribute $75 million. A related state court derivative case is also being resolved. Bloomberg has an article on the settlement.
The respondent's brief in Merrill Lynch v. Dabit, the first of two SLUSA cases that will be heard by the Supreme Court this term (see post below), can be found here. The following entities have filed amicus briefs in support of Dabit's position: the National Association of Shareholders and Consumer Attorneys and AARP, IJG Investments Limited Partnership and Iriys Guy, Phillip Goldstein and Bulldog Investors, and New York. Oral argument is scheduled for next Wednesday.
When you're hot, you're hot. The Securities Litigation Uniform Standards Act of 1998 (SLUSA) will be the subject of a second U.S. Supreme Court argument this year following the granting of certiorari in the Kircher v. Putnam Funds Trust case. The question presented is whether a party may appeal a district court's decision to remand a case to state court pursuant to SLUSA. There is currently a circuit split between the Second and Ninth Circuits (not appealable) and the Seventh Circuit (appealable) on this issue. Scotusblog reports that the case will be heard in April. (The 10b-5 Daily's discussion of the underlying Seventh Circuit opinion can be found here.)
In-House Counsel has an overview of the recent trends in court decisions on director and officer liability insurance coverage. In particular, the article addresses the increasing number of cases in which alleged misrepresentations in the insurance application (usually involving financial information that a company is forced to later restate) have led insurers to rescind their policies.
Quote of note: "The remedy of rescission is a response to corporate fraud. The very reason corporations seek outside directors is to attempt to pre-empt any such fraud. Proliferation of the rescission remedy as to innocent directors and officers will discourage qualified outside directors from accepting such positions, thereby increasing the very conduct the rescission remedy seeks to discourage."
Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse have released a report on federal securities class action filings in 2005. The findings include:
(1) The overall number of securities class actions filed in 2005 decreased more than 17%, falling from 213 filings to 176 filings. This year's filing rate is nearly 10% below the post-PSLRA historic average. Moreover, the alleged investor losses associated with the cases decreased significantly.
(2) Filing activity declined in the technology and communications sectors (down 32% from 2004). The consumer non-cyclical sector (e.g., biotechnology, commercial services, cosmetics, food, healthcare products) gave rise to the most securities class action litigation.
(3) There was a substantial increase in the number of securities class actions alleging misrepresentations in financial reporting (from 78% in 2004 to 89% in 2005) and false forward-looking statements (from 67% in 2004 to 82% in 2005).
The authors of the report suggest that the decrease in overall filings may be the result of the large majority of suits related to the boom-and-bust cycle of the late 1990s-early 2000s having already been filed, improvements in corporate governance, and less stock market volatility.
The joint press release announcing the report can be found here.