(1) There have been 255 securities class action filings this year (through Dec. 14), on pace for a 10-year high for "standard" cases.
(2) Credit crisis-related cases made up approximately 50% of the filings, causing a spike in the number of filings against financial sector companies.
(3) Median and average settlement values have held roughly steady at $7.5 million (median) and $29 million (average, excluding settlements over $1 billion).
The press release accompanying the report can be found here.
The U.S. Court of Appeals for the Fourth Circuit has issued its first opinion applying the Tellabs decision on the pleading of scienter (i.e., fraudulent intent). Those who follow the Fourth Circuit's jurisprudence in this area will be unsurprised to learn that the decision creates good law for defendants.
In Cozzarelli v. Inspire Pharmaceuticals, Inc., 2008 WL 5194311 (4th Cir. Dec. 12, 2008), the plaintiffs alleged that Inspire made false statements regarding a drug trial. The court found that in defining the PSLRA's "strong inference" pleading standard for scienter, the Supreme Court "gave that standard teeth, using adjectives like 'cogent,' 'compelling,' 'persuasive,' 'effective,' and 'powerful.'" Moreover, an inference of scienter "can only be strong - and compelling, and powerful - when it is weighed against the opposing inferences that may be drawn from the facts in their entirety."
Based on the facts before it, the court found the inference that any allegedly omitted information about the drug trial was withheld "to protect [Inspire's] competitive advantage" more "powerful and compelling than the inference that defendants acted with an intent to deceive." Moreover, the plaintiffs' motive allegations based on the company's need to raise capital, the CEO's performance-based compensation, and a limited amount of stock sales were "conclusory" and "lack[ed] merit."
The court also joined a number of other circuit courts in holding (a) the signing of allegedly false SOX certifications does not contribute to an inference of scienter, and (b) Section 11 and 12(a)(2) claims that "sound in fraud" must be plead with particularity pursuant to Fed R. Civ. P. 9(b).
Holding: Dismissal affirmed.
Quote of note: "All investments carry risk, particularly in a field like biopharmaceuticals. If we inferred scienter from every bullish statement by a pharmaceutical company that was trying to raise funds, we would choke off the lifeblood of innovation in medicine by fueling frivolous litigation-exactly what Congress sought to avoid by enacting the PSLRA. Furthermore, the fact that some analysts relied on defendants' hopeful statements to speculate-as the analysts admitted they were doing-that Study 109 would succeed adds little to an inference of scienter. Speculation by investors and subsequent buyers' remorse cannot support an Exchange Act suit alone."
Disclosure: The author of The 10b-5 Daily has previously represented the defendants in this case.
SCAS Alert (RiskMetrics) has an article on what the coming year may bring for securities litigators. The main speculation is whether the Democratic majorities in Congress will seek to overturn the Supreme Court's decisions in Central Bank (no aiding and abetting liability) and Stoneridge (limiting scope of "secondary actor" liability).
Quote of note: "Likewise, James Cox, a securities law professor at Duke University, told the SCAS Alert that he expects that Congress would address securities litigation reform after grappling with 'the 800-pound gorilla in the room--the issue of regulatory reform.' He said he had heard that prominent plaintiffs' firms and Senate offices have been working on draft legislation to address Stoneridge."
In Staehr v. Hartford Financial Services Group, Inc., 2008 WL 4899445 (2d Cir. Nov. 17, 2008), the court considered whether the plaintiffs had been put on inquiry notice of their claims based on the "cumulative effect" of news articles, public filings, and lawsuits referring to an industrywide fraudulent scheme. The court found that the news articles mostly did not mention Hartford and were in specialty publications, the company's public filings did not offer enough information about the subject of the fraud, and the lawsuits either did not mention Hartford or were not sufficiently publicized so as to be "reasonably accessible" to an ordinary investor. The New York Law Journal has a column (Dec. 10 edition - subscrip. req'd) on the decision.
Holding: Dismissal based on statute of limitations vacated.
Quote of note (decision): "Given the objective standard for inquiry notice, there is an inherent sliding scale in assessing whether inquiry notice was triggered by information in the public domain: the more widespread and prominent the public information disclosing the facts underlying the fraud, the more accessible this information is to plaintiffs, and the less company-specific the information must be."
The U.S. Court of Appeals for the Ninth Circuit has issued an opinion on pleading scienter that includes new law (sort of) on the issues of collective scienter, SOX certifications, and profit motive.
In Glazer Capital Management LP v. Magistri, 2008 WL 5003306 (9th Cir. Nov. 26, 2008) the Ninth Circuit considered a case based on alleged misstatements in a merger agreement attached to an SEC filing. The district court found that the complaint failed to adequately plead falsity or scienter. On appeal, the Ninth Circuit made the following rulings (among others) regarding scienter:
(1) Collective scienter - The decision appears to open the door for collective scienter arguments in the Ninth Circuit, but it is far from clear on this point. The collective scienter theory holds that it is possible to raise the required inference of scienter about a corporate defendant without doing so with regard to a specific individual defendant. Although there is a published (and an additional unpublished) Ninth Circuit decision that appear to reject the collective scienter theory, in Glazer the panel found that the earlier published decision had "not foreclose[d] the possibility that, in certain circumstances, some form of collective scienter might be appropriate." In the instant case, however, the alleged misstatements were not susceptible to the theory because they were broad legal warranties contained in a single document. Accordingly, the panel did not need to decide whether the collective scienter theory was viable.
(2) SOX certifications/Profit motive - Following precedent from other circuits, the panel found that neither the signing of SOX certifications nor allegations that the individual defendant "was positioned to profit personally from the proposed merger" were sufficient to raise a strong inference of scienter.
Holding: Dismissal affirmed.
Quote of note: "If the doctrine of collective scienter excuses Glazer from pleading individual scienter with respect to these legal warranties, then it is difficult to imagine what statements would not qualify for an exception to individualized scienter pleadings. In fact, because the merger agreement warranted that the company was in compliance 'with all laws,' then under the collective scienter theory urged by Glazer, so long as any employee at InVision had knowledge of the violation of any law, scienter could be imputed to the company as a whole. This result would be plainly inconsistent with the pleading requirements of the PSLRA. We are thus not faced with whether, in some circumstances, it might be possible to plead scienter under a collective theory."