The American Lawyer (September 2007) has a feature article (including a sidebar and a timeline) on the twists and turns in the securities litigation surrounding Biovail Corporation. Biovail is Canada's largest publicly traded drugmaker and has been both defending itself in a securities class action and prosecuting a case against short-sellers of the company's stock. The company's use of information gathered in the securities class action (which was subject to a protective order) in its other case has gotten the company and its counsel into trouble with the court.
Quote of note: "By the end of 2003, Biovail stock was trading below $25. The drop could be explained, at least in part, by Biovail's poor performance. In October 2003 the company issued an announcement of disappointing third quarter results, which sent the stock downward. But [the Chairman of Biovail] suspected that there was something else going on. As Biovail's share price continued to languish through 2004, he came to believe that short-sellers were waging a campaign of disinformation to make sure the share price never recovered."
Two recent appellate decisions of interest:
(1) In Central Laborers' Pension Fund v. Integrated Electrical Services, Inc., 2007 WL 2367776 (5th Cir. August 21, 2007), the court addressed the pleading of scienter under the Supreme Court's recent Tellabs decision. Notably, the court found that (a) the confidential witness allegations lacked sufficient detail supporting their reliability (although the court stopped short of suggesting that the plaintiffs should provide the names of the witnesses), (b) the argument that the stock trading of one of the defendants was non-suspicious because he traded pursuant to a Rule 10b5-1 plan was "flawed" because the plan was put into effect during the class period, and (c) an inference of scienter cannot be drawn from a Sarbanes-Oxley certification unless the person signing the certification had reason to know or should have suspected that the financial statements contained misrepresentations. The court concluded that the "allegations read in toto do not permit a strong inference of scienter."
(2) In Employers-Teamsters Local Nos. 175 & 505 Pension Trust Fund v. Anchor Capital Advisors, 2007 WL 2325079 (9th Cir. August 16, 2007), the court considered whether a lead plaintiff decision can be appealed following the dismissal of the underlying case. A group of public pension funds had unsuccessfully moved to serve as lead plaintiff. The lower court subsequently granted the defendants' motion to dismiss the case. The appointed lead plaintiff declined to file an amended complaint and instead requested that the individual uncertified actions be dismissed with prejudice. The pension funds moved to appeal the earlier lead plaintiff decision, but the appellate court held that because the pension funds never filed their own complaint or intervened in the pending action, they were merely "potential class members in a potential class action suit" and had no standing to bring an appeal.
Two more items regarding the Stoneridge (a.k.a. Charter Communications) case on scheme liability:
(1) Although Chief Justice Roberts and Justice Breyer initially recused themselves from the case because of personal stockholdings, the New York Law Journal reports that they may be back in time for the argument (scheduled for October 9, 2007). Under a new federal law, the justices could sell their stockholdings and, because the sale was done to resolve a conflict of interest, defer any capital gains tax. The article speculates that Chief Justice Roberts may have rejoined a case earlier this year, the day before oral argument, by resolving a conflict through a stock sale.
Quote of note: "'The justices who recused are - I don't want to use the term - business-friendly,' said Stephen Bainbridge, who participated in a brief that opposed the investors' broad liability theory. But Mr. Bainbridge, a professor at UCLA School of Law, said the Court can be especially unpredictable in securities cases, because the justices and their law clerks are 'institutionally incompetent' to resolve complex securities cases. 'I would never count the chickens before they hatch,' he said."
(2) The WSJ Law Blog has a post on the large number of amicus briefs that have been filed in the case.
Quote of note: "At final count, about 30 'friend of the court' briefs (aka amicus briefs) were filed with the court in Stoneridge, which asks whether shareholders can sue to hold third parties ó e.g., investment banks, accountants and law firms ó liable for a companyís fraud. Itís a 'startling' number of friend-of-the-court briefs for a securities-law case, says Tom Goldstein, a Supreme Court practitioner at Akin Gump, not involved in the case."
The long wait is over and everyone will be at least slightly disappointed. After significant public and private debate, the Solicitor General has submitted an amicus brief in support of the corporate defendants in the Stoneridge (a.k.a. Charter Communications) case on scheme liability.
The government's legal argument appears to be something of a compromise position. The brief states that the Eighth Circuit erred to the extent it held that "non-verbal deceptive conduct is somehow beyond the reach of Section 10(b)." Instead, the plain language of the statute makes it clear that it reaches "all conduct that is 'manipulative' or 'deceptive,'" in whatever form.
Nevertheless, the government argues that the Eighth Circuit correctly upheld the dismissal of the complaint based on the plaintiffs' failure to adequately plead reliance and loss causation. The plaintiffs allege "only that the backdating of the contracts assisted Charter in mischaracterizing the payments from [its business partners] as revenue (and thus inflating its operating cash flow in its financial statements)." The "critical point" is that it was Charter's misrepresentation of its cash flow, not the allegedly deceptive conduct of its business partners, on which the plaintiffs relied in purchasing their shares. The presumption of reliance created by the fraud-on-the-market theory also is unavailable to the plaintiffs, the government argues, because it applies only to public misrepresentations and the complaint "does not identify any public statements or actions" by the business partners. Finally, the brief states that for "many of the same reasons" the complaint fails to adequately allege that the conduct of the business partners caused the plaintiffs' losses.
A few additional notes: (1) SCOTUSblog has a summary of the filing and additional coverage can be found on the WSJ Law Blog and the Blog of the Legal Times; (2) many (if not all) of the briefs in the case, including the briefs of the corporate defendants filed today, are available on the DU Sturm College of Law Corporate Governance site; and (3) the Stoneridge docket reveals that oral argument in the case has been scheduled for October 9, 2007.
Quote of note (SG's brief - citations omitted): "More fundamentally, Congressís unwillingness to recognize a private right of action for aiding and abetting suggests that this Court should be loath to create the functional equivalent of such a right of action itself. Such an action would upset the deliberate balance struck by Congress. Insofar as petitioner and its amici advance various policy arguments in favor of broad liability for secondary actors, there are ample policy arguments to the contrary (some of which apparently struck a chord when Congress last expressly addressed the issue). In any event, all of those policy arguments 'are more appropriately addressed to Congress than to this Court.'"
The Wall Street Journal has an editorial (subscrip. req'd) on the amicus brief filed by Congressmen Frank and Conyers in the Stoneridge case. The newspaper is critical of the congressmen's decision to have a law firm that does lobbying work for plaintiffs lawyers write the brief.
Quote of note: "We trust the Supreme Court Justices, who are due to hear Stoneridge arguments as early as October, will notice the provenance of Mr. Frank's legal wisdom."
Two articles from last week:
(2) The Wall Street Journal Law Blog reports that Milberg Weiss and Lerach Coughlin have been sued in a class action based on the kickback allegations in the Milberg Weiss indictment. The suit is being brought on behalf of former class members in several lawsuits in which Milberg Weiss acted as lead counsel. A copy of the complaint can be found here. Legal Pad has more on the allegations in the case.
Quote of note (The American Lawyer): "Nor is there a new Milberg on the horizon. After several years, and several key court rulings, the PSLRA's goal of forcing plaintiffs to allege highly specific allegations appears to be working, according to both plaintiffs and defense lawyers. That makes a firm model based on filing lots of actions harder to maintain, since plaintiffs cases are more prone to dismissal. A handful of major players in the practice-Bernstein Litowitz and Grant & Eisenhofer, for example-file the major cases that Milberg did at its peak, but don't bring the bevy of smaller cases that Milberg also did."
The first circuit court opinion to extensively apply the Tellabs decision has arrived and it contains a number of interesting holdings. Given that the opinion comes from the U.S. Court of Appeals for the Seventh Circuit and is authored by Judge Easterbrook, that will come as no surprise to any regular reader of this blog.
In Higginbotham v. Baxter Intern., Inc., 2007 WL 2142298 (7th Cir. July 27, 2007), the court addressed the impact of Tellabs on the use of confidential witnesses. Noting that the Supreme Court has required plaintiffs to plead an inference of scienter that is both cogent and at least as compelling as any opposing inference that can be drawn from the alleged facts, the court found that "anonymity frustrates that process." In particular, the failure to name sources "conceals information that is essential to the sort of comparative evaluation required by Tellabs," because the court is unable to fully evaluate the reliability of the witnesses. Accordingly, allegations from confidential witnesses must be "discounted" in determining whether a plaintiff has plead a strong inference of scienter and that discount will usually be "steep."
The court went on to find that the plaintiffs had failed to plead a strong inference of scienter. In addition to discounting the statements of confidential witnesses, the court also poked holes in a number of other alleged inferences of scienter put forward by the plaintiffs. Notably, the court found that allegations of a publicly-announced antitrust investigation, stock sales by two company managers, and the company's failure to disclose a fraud at its Brazilian subsidiary as soon as management was informed of its possible existence were insufficient to meet the plaintiffs' pleading burden.
Holding: Dismissal affirmed.
Quote of note: "It is hard to see how information from anonymous sources could be deemed 'compelling' or how we could take account of plausible opposing inferences. Perhaps these confidential sources have axes to grind. Perhaps they are lying. Perhaps they don't even exist."
Quote of note II: "Prudent managers conduct inquiries rather than jump the gun with half-formed stories as soon as a problem comes to their attention. Baxter might more plausibly have been accused of deceiving investors had managers called a press conference before completing the steps necessary to determine just what had happened in Brazil. Taking the time necessary to get things right is both proper and lawful. Managers cannot tell lies but are entitled to investigate for a reasonable time, until they have a full story to reveal."