The New York Law Journal (Sept. 28) has two columns on securities litigation topics. A subscription is required to view the columns online.
(1) In "DOJ Backs 'Scheme Liability' in Third-Party Class Actions" the authors provide a preview of the upcoming Stoneridge (a.k.a. Charter Communications) case in the U.S. Supreme Court. The column summarizes the history of the case and discusses the arguments presented in the DOJ's amicus brief.
Quote of note: "The U.S. Department of Justice's endorsement of scheme liability for third parties may result in a pyrrhic victory for the plaintiff class action bar given the stark impact that its proposed reliance test would have upon many scheme liability claims. Scheme liability, according the solicitor general's view, would only apply to defendants whose misconduct was directly relied upon by the allegedly defrauded investor and not to other, potential deep-pocket defendants who allegedly participated in a broader scheme to defraud."
(2) In "'Oscar': Nearing the End of Fraud-On-Market Theory?" the author argues that the Dura decision on loss causation has led courts to question the continuing efficacy of the fraud-on-the-market theory. The author discusses the Fifth Circuit's denial of class certification in Oscar Private Equity (a short summary and link to the decision can be found here) and concludes that it may be a harbinger of things to come.
Quote of note: "[T]he Fifth Circuit seems to have accepted the Supreme Court's challenge, and has significantly chipped away at the validity of the fraud-on-the-market theory by barring use of the presumption at the class action certification stage. In so doing, it has invoked the logic of Justice White's Basic dissent. Based on Oscar and other appellate decisions, it seems as though the repudiation of the fraud-on-the-market theory will continue and Justice White's opinion will sometime soon become the law of the land."
The Wall Street Journal reports that the SEC will hold a roundtable early next year on the topic of shareholder litigation. The roundtable is being held in response to a letter (along with discussion questions) from six prominent law professors petitioning the agency to examine the topic. It also comes in the wake of a series of reports, including from The Committee on Capital Markets Regulation and Bloomberg/Schumer, that have discussed the potential negative impact of shareholder litigation on the U.S. financial markets.
Quote of note (WSJ): "The SEC roundtable, as it appears so far, will address the law professors' concerns, including who bears the cost of paying for attorneys fees in securities lawsuits, the role insurance plays in indemnifying companies or individuals, the percentage of investors who file claims and collect portions of settlements, and how the economics of a settlement change when the defendant is a third party."
As predicted by some observers, Chief Justice Roberts is rejoining the Stoneridge (a.k.a. Charter Communications) case after initially recusing himself. The speculation is that he has sold the securities that caused the conflict of interest. Justice Breyer remains recused, however, setting up the possibility of a split decision. Coverage can be found in SCOTUSBlog, the Blog of Legal Times, and the WSJ Law Blog.
Quote of note (SCOTUSBlog): "If the Court were to divide evenly, 4-4, on Stoneridge, the result would simply be to affirm the Eighth Circuit decision without an opinion. The Court might then seek another test case in which to address the underlying legal question. A major Enron case, California Regents v. Merrill Lynch, et al. (docket 06-1341), raises the same issue; that case apparently is being held to await the outcome of the Stoneridge case."
NERA Economic Consulting has released a study entitled "Recent Trends In Shareholder Class Action Litigation: Filings Stay Low and Average Settlements Stay High - But Are Those Trends Reversing?" The study reaches the following notable conclusions:
(1) The number of filings have increased, with 76 new filings through the first half of 2007. The projected annual total of 152 would be a 12% increase over last year.
(2) The average settlement value during the first half of 2007 (excluding settlements over $1 billion) hit a new high of $30 million. There is evidence, however, that this trend may reverse direction based on a decline: (i) in the investor losses associated with recent filings; and (ii) in the prevalence of accounting allegations in recent filings.
(3) Eight of the top ten settlements of all time have resolved in 2006 or 2007, or are pending. Tyco's announced preliminary settlement of $2.975 billion would be the largest amount ever paid by a single settling defendant.
The problems in the subprime mortgage market have led to extensive litigation. The Washington Post had an article this week on the topic. Meanwhile, The D&O Diary has been keeping a running tab on subprime-related securities class actions.
Quote of note (Washington Post): "A consortium of investors is going after the collapsed Bear Stearns hedge funds. Home buyers, shareholders and investment banks have filed suits against more than a dozen mortgage lenders. A working group at the Securities and Exchange Commission is examining accounting and disclosure issues, as well as stock sales earlier this year by executives at companies that since have been ensnared by the subprime mess."
Motive is in the eye of the beholder. Many courts have found that the sale of stock by corporate insiders just before the announcement of bad news is "suspicious" and can contribute to an inference of scienter (i.e., fraudulent intent). In a decision from earlier this summer, however, a federal district court came to the exact opposite conclusion. The court's apparent theory was that if the defendants had committed a fraud, they surely would have done it better.
In In re Hutchinson Technology Inc. Sec. Litig., 2007 WL 1620805 (D. Minn. June 4, 2007), three of the individual defendants sold stock a month before dramatically lowering the company's finanical projections. The court found that "it would have been in [the defendants] interests to put off the disclosure of that bad news as long as possible, because the closer the release of the bad news followed on the heels of their stock sales, the more suspicious those sales would have appeared." The fact that the defendants did not delay the release of the news, according the the court's reasoning, removed any suspicion from the stock sales.
Holding: Motion to dismiss granted (with prejudice).
Delphi Corp. (PINKSHEETS: DPHIQ), a Michigan-based automotive parts manufacturer, has announced the preliminary settlement of the securities class action pending against the company in the E.D. of Michigan. The case, originally filed in 2005, stems from Delphi's financial restatement and subsequent bankruptcy.
The global settlement covers both ERISA and securities class action claims and has a total potential value of $342 million. The securities class action portion is as follows: "the class of purchasers of Delphi's debt securities will receive an allowed claim and the class of purchasers of Delphi's equity securities will receive an allowed interest in the combined amount of $204 million in Delphi's Chapter 11 case as well as approximately $90 million in cash from other defendants and insurance carriers." For the allowed interest in the Chapter 11 case, the investors will receive the "same treatment as Delphi's general unsecured creditors." Bloomberg has an article on the settlement.