The Wall Street Journal reports that there may be a settlement in the IPO allocation cases. Although it is not entirely clear from the press coverage, it appears that the parties are contemplating a global settlement (including issuers and underwriters) for less than $700 million. A settlement at this level would be a significant drop from the amounts being considered prior to the Second Circuit's decision to deny class certification in some representative cases. Additional coverage can be found in the AmLaw Daily and Bloomberg.
"Foreign-cubed" cases are actions brought against a foreign issuer, on behalf of a class that includes not only investors who purchased the securities in question on a U.S. securities exchange, but also foreign investors who purchased the securities on a foreign securities exchange. These cases raise a number of jurisdictional issues.
In Morrison v. National Australia Bank Ltd., 2008 WL 4660742 (2nd Cir. Oct. 23, 2008), the court considered whether it should exercise subject matter jurisdiction over the claims brought by the foreign purchasers of the bank's ordinary shares (the lower court had dismissed the domestic purchasers' claims on other grounds). The court declined to impose a "bright-line ban" on foreign purchaser claims, expressing concern that "securities cheaters . . . should not be given greater protection from American securities laws because they carry a foreign passport or victimize foreign shareholders."
Instead, the court applied its existing "conduct test" for subject matter jurisdiction. Under the conduct test, the plaintiffs needed to adequately allege that "activities in this country were more than merely preparatory to a fraud and culpable acts or omissions occurring here directly caused losses to investors abroad." The court found that this test was not met: "the fact that the fraudulent statements at issue emanated from NAB's corporate headquarters in Australia, the complete lack of any effect on America or Americans, and the lengthy chain of causation between [the false numbers communicated to NAB by its U.S. subsidiary] and the statements that reached investors - add up to a determination that we lack subject matter jurisdiction."
Holding: Dismissal affirmed (note that the Second Circuit did not address a related issue that was recently raised in a S.D.N.Y. case - whether the fraud-on-the-market theory is applicable to foreign purchasers).
Quote of note: "[W]e are leery of rigid bright-line rules because we cannot anticipate all the circumstances in which the ingenuity of those inclined to violate the securities laws should result in their being subject to American jurisdiction. That being said, we are an American court, not the world's court, and we cannot and should not expend our resources resolving cases that do not affect Americans or involve fraud emanating from America. In our view, the 'conduct test' balances these competing concerns adequately and we decline to place any special limits beyond the 'conduct test' on 'foreign-cubed' securities fraud actions."
The latest application of the Tellabs decision on the pleading of scienter (i.e., fraudulent intent) comes from the U.S. Court of Appeals for the Eleventh Circuit. In Mizzaro v. Home Depot, Inc., 2008 WL 4498940 (11th Cir. Oct. 8, 2008), the court considered two controversial issues.
Confidential Witnesses - The court declined to embrace the Seventh Circuit's position that statements by confidential witnesses should be "heavily discounted." On the other hand, the court acknowledged that there were reasons to be "skeptical of confidential sources cited in securities fraud complaints," including that there are no harsh consequences if a witness lies to a plaintiff's attorney. The court concluded: "Confidentiality . . . should not eviscerate the weight given if the complaint otherwise fully describes the foundation of the confidential witness's knowledge, including the position(s) held, the proximity to the offending conduct, and the relevant time frame."
Collective Scienter - The court agreed with the Fifth Circuit's position that a defendant corporation's scienter is determined by looking "to the state of mind of the individual corporate official or officials who make or issue the statement . . . rather than generally to the collective knowledge of all the corporation's officers and employees acquired in the course of their employment." (For more on the circuit split over collective scienter, see this post.) The plaintiffs did "not argue that any Home Depot officials were responsible for the company's financial statements other than the named individual defendants." Accordingly, the court found that it "need not pursue this issue further."
Holding: Dismissal affirmed.
Quote of note: "To begin with, we indulge at least some skepticism about allegations that hinge entirely on a theory that senior management 'must have known' everything that was happening in a company as large as Home Depot, which operates over 2000 stores. The amended complaint, therefore, must at least allege some facts showing how knowledge of the fraud would or should have percolated up to senior management. The amended complaint does not come close to accomplishing that task. In particular, [plaintiff's] 'must have known' theory fails because the alleged amount of the fraud is wholly speculative, the type of fraud alleged would be very difficult for senior management to detect, [plaintiff] alleges no suspicious stock sales by management, and Home Depotís 2004 overhaul of its RTV processing system does not suggest knowledge of widespread fraud."
Centene Corporation requires all insider stock transactions by its senior executives to be executed under pre-authorized Rule 10b5-1 stock trading plans. That policy turns out to have been helpful in obtaining the dismissal of a securities class action against the company.
In Elam v. Neidorff, 2008 WL 4587310 (8th Cir. Oct. 16, 2008), the Eighth Circuit reviewed the dismissal of the securities class action against Centene and certain individual officers. The plaintiffs argued that scienter (i.e., fraudulent intent) was demonstrated, among other things, by insider stock sales during the class period. The court, however, found that the stock sales could not support an inference of scienter because they were (a) done pursuant to Rule 10b5-1 trading plans, and (b) represented only a small portion of each seller's overall holdings. Interestingly, the court discussed the terms of the trading plans, suggesting that the trading plans were publicly disclosed. (For more on this issue and related posts, click here.)
Holding: Dismissal affirmed (for failure to adequately plead falsity and scienter).
Securities Docket has an interview with Professor Adam Pritchard (U. Mich. Law) on his proposal that corporations opt-out of the current securities class action system by limiting potential investor damages to the disgorgement of the defendants' gains. The post also includes links to Pritchard's expanded Cato Supreme Court Review article on the subject and his model shareholder proposal.
Quote of note: "My guess is that no company will buy on to it unless it gets past the SEC first, in response to a no-action letter attempting to exclude the proposal as inconsistent with federal law. Iíll concede that the chances of ultimate success are probably less than 50%, but I donít see a big downside from trying."
Bridgestone Corp. (PINKSHEETS: BRDCF), a Japanese tire manufacturer, has reached a settlement in the securities class action pending against it in the M.D. of Tennessee. The case, originally filed in January 2001, stems from allegations that Bridgestone disseminated false and misleading statements to conceal the existence of defects in a model of tires manufactured by the company. The court granted preliminary approval of the settlement on September 30, 2008.
The settlement is for $30 million. The 10b-5 Daily has previously posted about collective scienter issues in the case.
As a general matter, claims under the Securities Act of 1933 ("'33 Act") may be brought in federal or state court. Some federal courts, however, have held that the Securities Litigation Uniform Standards Act of 1998 ("SLUSA") creates a removal exception for '33 Act securities class actions involving "covered securities" (i.e., securities sold on a national exchange) that are brought in state court. But, you might ask, what about '33 Act securities class actions that do not involve covered securities?
Ask and you shall receive an answer. In New Jersey Carpenters Vacation Fund v. Harborview Mortgage Loan Trust, 2008 WL 4369840 (S.D.N.Y. Sept. 24, 2008), the court considered whether the removal provision of the Class Action Fairness Act of 2005 ("CAFA") applied to a '33 Act securities class action involving large, mortgage-related bond offerings. The plaintiffs alleged that there were misrepresentations in the offering documents. The court concluded that (a) CAFA applies to all securities class actions except those specifically excluded by the statute; and (b) the exceptions in CAFA for class actions relating to covered securities, corporate governance, and security-related rights and duties were intended to ensure that CAFA did not encroach upon SLUSA and were inapplicable in the instant case. Accordingly, the court held that "[s]ince CAFA's main provision trumps [the '33 Act's jurisdiction provision], and no exception applies, remand of the case must be denied."
Holding: Plaintiff's motion to remand denied. (Note that the Ninth Circuit reached the opposite conclusion in Luther v. Countrywide Home Loans Servicing LP, 533 F.3d 1031 (9th Cir. 2008) earlier this year.)
One of the most convoluted securities class actions ever may finally have come to an end (barring a successful appeal). The court has declined to certify the class in the case pending against Halliburton in the N.D. of Texas since 2002. According to a Law360 article (subscrip. req'd), the basis for the court's decision was the failure of the plaintiffs to establish loss causation.
Over the years, the Halliburton case has seen four amended complaints, two changes in lead counsel, the recusal of the original judge, and the judicial rejection of a proposed settlement. That's a long way to go to get to a denial of class certification.
Does the fraud-on-the-market presumption, pursuant to which reliance by investors on a material misrepresentation is presumed if the company's shares were traded on an efficient market, apply in suits alleging misrepresentations by analysts (and other non-issuers)?
The U.S. Court of Appeals for the Second Circuit was poised to answer that question in 2004, but Citigroup's settlement of the claims against it in the WorldCom litigation rendered its appeal moot. Based on the order granting the appeal, issued a day after the agreement to settle was reached, it appeared that the court was inclined to limit the reach of the fraud-on-the-market presumption. Four years later, before a completely different panel, the plaintiffs' bar has a significant win on the same issue.
In In re Salomon Analyst Metromedia Litigation, No. 06-3225 (2nd Cir. Sept. 30, 2008), the court found that nothing in Basic, the Supreme Court case creating the fraud-on-the-market presumption, limited the presumption's application to misrepresentations by issuers. Indeed, the "logic" of the Basic decision, which is based on the economic theory that share prices reflect all publicly available information in an efficient market, suggests "it does not matter, for purposes of establishing entitlement to the presumption, whether the misinformation was transmitted by an issuer, an analyst, or anyone else."
In the alternative, the defendants argued that to establish the materiality of the misrepresentations, and thereby invoke the fraud-on-the-market presumption, the plaintiffs had the burden of proving that the misrepresentations had a quantifiable effect on the company's stock price. The court disagreed, holding that inherent in the fraud-on-the-market theory is the presumption that material misrepresentations have an effect on stock price. Therefore, it was the defendants' burden to rebut the presumption by demonstrating the absence of a price impact.
A couple of notes on the decision:
(1) The Second Circuit cited the Supreme Court's recent Stoneridge decision in support of its holding. In Stoneridge, however, the Court found that the fraud-on-the-market presumption was inapplicable to the non-issuer defendants based on the fact that their "deceptive acts" were not communicated to the public. The issue of the scope of the fraud-on-the-market presumption was not squarely before the Court. Moreover, the Court expressed grave reservations about expanding securities fraud liability, something the Second Circuit's decision arguably does.
(2) The Second Circuit brushed aside the defendants' arguments concerning the expansion of liability (see full quote below), but offered an interesting codicil in a footnote. The court noted that "the identity of the speaker may be significant, because a court may determine that the reasonable investor would only rely on misrepresentations made by some speakers, but not by others."
Holding: Vacate order of class certification and remand for further proceedings (including providing the defendants with an opportunity to rebut the presumption of a price impact).
Quote of note: "Defendants worry that if no heightened test is applied in suits against non-issuers, any person who posts material misstatements about a company on the internet could end up a defendant in a Rule 10b-5 action. The worry is misplaced. The law guards against a flood of frivolous or vexatious lawsuits against third-party speakers because (1) plaintiffs must show the materiality of the misrepresentation, (2) defendants are allowed to rebut the presumption, prior to class certification, by showing, for example, the absence of a price impact, and (3) statements that are 'predictions or opinions,' and which concern 'uncertain future event[s],' such as most statements made by research analysts, are generally not actionable."