Is it the end of private securities litigation? Not yet, but one could hardly tell given some of the fierce reactions to the possibility that The Committee on Capital Markets Regulation, a private group of business leaders and academic experts, may recommend that the SEC limit the ability of private plaintiffs to bring actions pursuant to Rule 10b-5.
The New York Times had a feature article on the "Paulson Committee" (as it is colloquially known because U.S. Treasury Secretary Henry Paulson provided a favorable quote for its initial press release) this past weekend. Although the main focus of the Paulson Committee appears to be examining the effects of the Sarbanes-Oxley Act, an initial recommendation to the Committee from Professor John Coffee that the SEC consider dis-implying a private right of action under Rule 10b-5 (in some or all cases) is garnering the most attention.
Reaction can be found in a New York Times column and posts in Point of Law, Ideoblog, and Securities Litigation Watch. The 10b-5 Daily offered its views on the problem of SEC/private litigation overlap last year.
Two items from around the web:
(1) The Wall Street Journal has an article (subscrip. req'd) today on efforts by Bernstein Litowitz to remove Milberg Weiss as co-lead counsel and re-open the lead plaintiff/lead counsel selection process in the Merck securities litigation. Merck's motion to dismiss the case is currently pending before the court.
(2) Following up on an earlier post in The 10b-5 Daily concerning the British Petroleum derivative suit filed in Alaska state court, the Financial Times has a column (via a reprint in South Africa's Business Day) on the case, the spread of U.S.-style shareholder litigation, and the potential corporate governance effects on foreign companies.
Courts continue to struggle with the question of how to determine the scienter (i.e., fraudulent intent) of a defendant corporation. Should a court examine the collective knowledge of the corporation's employees (collective scienter theory) or should it look to the state of mind of the individual corporate official or officials who made the false or misleading statement (which some courts have found is required under the common law of agency)? As The 10b-5 Daily has noted, between these two positions is a weaker version of the collective scienter theory that allows a plaintiff to establish the scienter of a defendant corporation by showing that a management-level employee of the corporation acted with knowledge or recklessness, even if that employee was not an individual defendant and did not make any alleged false statements.
The weaker version of the collective scienter theory, however, suffers from a lack of judicial uniformity as to exactly which employees can have their state of mind imputed to the corporation. One possible definition can be found in a recent decision - Hill v. The Tribune Co., 2006 WL 2861016 (N.D. Ill. Sept. 29, 2006) - dismissing a securities class action. The court found that a "corporation's scienter is generally limited to being based on knowledge or scienter of a senior officer or director of the corporation, or an employee involved in issuing the alleged misrepresentation." Because the plaintiffs were unable to "adequately allege that those responsible for [Tribune's] SEC filings and press releases recklessly relied on the circulation figures that were provided" by lower-level employees, the court held that the defendant corporation's scienter was not adequately alleged.
The fraud-on-the-market theory states that reliance by investors on an alleged misrepresentation is presumed if the company's shares were traded on an efficient market. But what is an efficient market? The PolyMedica securities litigation has offered a thorough examination of this issue.
In considering class certification, the district court originally held (contrary to most other courts) that an efficient market is simply one in which "market professionals generally consider most publicly announced material statements about companies, thereby affecting stock market prices." On appeal, the U.S. Court of Appeals for the First Circuit rejected this definition in a decision - In re PolyMedica Corp. Sec. Litig., 432 F.3d 1 (1st Cir. 2005) - issued late last year. The appellate court held that an efficient market "is one is which the market price of the stock fully reflects all publicly available information." In other words, the market price must respond "so quickly to new information that ordinary investors cannot make trading profits on the basis of such information."
On remand - In re PolyMedica Corp. Sec. Litig., 2006 WL 2776669 (D. Mass. Sept. 28, 2006) - the district court focused on the expert evidence concerning whether there was a "cause-and-effect relationship, over time, between unexpected corporate events or financial releases and an immediate response in [PolyMedica's] stock price." The plaintiffs' expert provided an analysis demonstrating that PolyMedica's stock price moved in response to significant news events on certain days within the portion of the proposed class period in question, but the district court found that this analysis was insufficient to establish either causation or that the news was reflected "fully" and "quickly" in the stock price. Moreover, the district court found defendants' expert evidence that (1) short selling in PolyMedica stock was difficult and (2) the price of PolyMedica stock exhibited positive serial correlation (the direction in which the stock moved on a given day was a statistically significant predictor of how it would move the next day) was sufficient to suggest that the First Circuit's standard for market efficiency had not been met.
Holding: Class certification as to a portion of the proposed class period denied.
Quote of note: "Nothing in [plaintiffs'] analysis tends to show that all reactions to any news event were regularly complete within any given time frame, let alone 'quickly.' . . . It may be true, as [plaintiffs' expert] suggests, that one 'can observe a lot just by watchin,' but Yogi Berra is hardly a competent expert in market efficiency."
The Sarbanes-Oxley Act of 2002 ("SOX") requires the chief executive officer and chief financial officer of a company to certify the accuracy of each periodic report containing financial statements. Plaintiffs often argue that these certifications can support the pleading of scienter (i.e., fraudulent intent) in cases alleging accounting misrepresentations.
In what appears to be the first circuit court opinion to address the issue, the U.S. Court of Appeals for the Eleventh Circuit has held that SOX certifications, by themselves, are not indicative of scienter. In Garfield v. NDC Health Corp., 2006 WL 2883238 (11th Cir. Oct. 12, 2006), the court found that SOX "does not indicate any intent to change the requirements for pleading scienter set forth in the PSLRA [Private Securities Litigation Reform Act of 1995]." Accordingly, a SOX certification "is only probative of scienter if the person signing the certification was severely reckless in certifying the accuracy of the financial statements."
Quote of note: "If we were to accept [plaintiff's] proferred interpretation of Sarbanes-Oxley, scienter would be established in every case were there was an accounting error or auditing mistake made by a publicly traded company, thereby eviscerating the pleading requirements for scienter set forth in the PSLRA."
The BISYS Group, Inc. (NYSE:BSG), a New Jersey-based provider of outsourcing solutions for financial services providers, has announced the preliminary settlement of the two related securities class actions pending against the company in the S.D.N.Y. The cases involve alleged fraud in connection with a series of financial restatements made by the company over the past few years. The settlement is for $66.5 million, of which no more than $25 million will be covered by insurance.
For those readers interested in the collective scienter theory (see this post), the denial of the motion to dismiss in one of the BISYS cases is an example of the application of that theory. The citation for the opinion is In re BISYS Sec. Lit., 397 F.Supp.2d 430 (S.D.N.Y. 2005).
The Association of U.S. West Retirees failed to reduce the attorneys' fees in the shareholder litigation over the U.S. West/Qwest merger, but its challenge to the attorneys' fees request in Qwest's $400 million securities class action settlement has been more successful. In a colorful analogy, the Association stated in its court filing that "lead counsel are the mere jackals to the government's lions, feasting after both the United States Securities Exchange Commission and the United States Justice Department made the kill." The district judge evidently agreed. The Rocky Mountain News reports that in approving the settlement the court reduced the proposed attorneys' fees by $36 million (from $96 million to $60 million). Thanks to Securities Litigation Watch for the link.
For more on U.S. securities plaintiff firms representing foreign investors, here are two articles from The Times and the Evening Standard discussing the City of London's apparently unwitting (initially) role in bringing a derivative lawsuit against British Petroleum's officers and directors in Alaska state court.
Quote of note (The Times): "It is rare for British pension funds to take legal action against the companies in which they invest, but American lawyers are increasingly identifying London as a potential new market for aggrieved investors. Some UK-based companies have expressed concern to The Times that these lawyers are trying to export their no-win, no-fee system to Britain."
Securities plaintiff firms are putting a lot of effort into attracting foreign institutional investor clients. Lies, Damn Lies, & Forward-Looking Statements has a post on the latest "cooperation agreement" between a U.S. firm and a German firm. (The relevant press release can be found here.)
BellSouth Corp. (NYSE: BLS), an Atlanta-based telecommunications service provider, has announced the preliminary settlement of the securities class action pending against it in the N.D. of Georgia. The case was originally filed in August 2002 and alleges various accounting improprieties, including that BellSouth failed to properly write down goodwill associated with its Latin American operations. The proposed settlement is for $35 million.