The Second Circuit's recent decision affirming the dismissal of a securities class action against JP Morgan Chase is getting some press attention. The New York Law Journal had two columns this week discussing the case.
In "Circuit Gives Guidance to Litigators on Securities Fraud Claims" (Feb. 23 - subscrip. req'd) and "Clarifying Pleading Requirement for Scienter, Materiality Under PSLRA" (Feb. 25 - subscrip. req'd), the authors focus on the court's application of SEC Staff Accounting Bulletin 99 as "persuasive authority" on the issue of materiality. Both columns conclude that the decision is helpful for defendants who can demonstrate that their alleged misstatements are quantitatively immaterial.
In In re Williams Sec. Litig. - WCG Subclass, 2009 WL 388048 (10th Cir. Feb. 18, 2009), the court considered whether the plaintiffs' expert was able to "reliably link the class's losses to the revelation of the alleged misrepresentations." In examining the validity of the expert's methodology, the court also provided its views on the application of the Supreme Court's Dura decision on loss causation.
(1) Although loss causation "is easiest to show when a corrective disclosure reveals the fraud to the public and the price subsequently drops," a "leakage theory that posits a gradual exposure of the fraud rather than a full and immediate disclosure" is permissible under the Dura decision.
(2) To be a corrective disclosure, "the disclosure need not precisely mirror the earlier representation, but it must at least relate back to the misrepresentation and not to some other negative information about the company."
(3) The plaintiffs must be able to demonstrate that the stock price decline was due "to the revelation of the fraud and not to another significant piece of negative information that was released" at the same time.
As to the plaintiffs' expert, the court found that his "leakage theory" failed to adequately identify when the "materialization of the concealed risk" occurred. The expert's alternative theory - that there was a series of corrective disclosures at the end of the class period - was inadequate because he failed to show "that it was the revelation of the fraud, and not other factors, that caused the subsequent declines in price."
Holding: Affirmed district court's exclusion of expert testimony and grant of summary judgment in favor of defendants.
Addition: Note that the plaintiffs did not appeal the district court's rejection of the "constant percentage" method of calculating damages (see here for a discussion of that holding).
Addition: A summary of the case by the defendants' expert can be found here.
There is now an official circuit split over the issue of whether a '33 Act securities class action that is not removable to federal court under the Securities Litigation Uniform Standards Act of 1998 ("SLUSA") is nevertheless subject to the removal provisions of the Class Action Fairness Act of 2005 ("CAFA") (see this post for more background). In Katz v. Gerardi, 2009 WL 18137 (7th Cir. Jan. 5, 2009), the court held, in contrast to the Ninth Circuit, that the '33 Act's general grant of state court jurisdiction is modified by CAFA, which clearly provides for the removal of certain securities class actions not otherwise covered by SLUSA.
Holding: Judgment of district court vacated and remanded for further proceedings.
The parties in the Baxter International securities litigation deserve credit for perseverance. First, there was a dismissal based on the PSLRA's safe harbor for forward-looking statements. Then came a Seventh Circuit decision overturning the dismissal and controversially limiting the application of the safe harbor. That was followed by a denial of class certification, another Seventh Circuit decision upholding the denial, and then the continuation of the case on a non-class basis.
Seven years later, the case is back were it started -- and perhaps, with the benefit of hindsight, never should have left. In Asher v. Baxter Int'l, Inc., 2009 WL 260979 (N.D. Ill. Feb. 4, 2009), the court granted summary judgment to the defendants on the basis that the plaintiffs "failed to indentify any evidence that Baxter's forward-looking financial projections lacked either good faith or a reasonable basis in fact." One more appeal?
Holding: Defendants' motion for summary judgment granted.
Quote of note: "Although the court has gone into great detail analyzing why this evidence fails to meet the plaintiffs' burden of production, the analysis boils down to this: the financial reports and other documents and testimony cited simply do not establish that the defendants ignored relevant information when reaffirming and revising Baxter's financial commitments. Moreover, the commitments were in line with previous years' commitments, which Baxter had met for eight straight years. Although the plaintiffs have identified financial challenges that Baxter faced during 2002, the mere existence of financial challenges does not establish that sales growth is unachievable."
The U.S. Court of Appeals for the Third Circuit has issued two interesting decisions.
(1) The Securities Litigation Uniform Standards Act of 1998 ("SLUSA") pre-empts certain class actions based upon state law that allege a misrepresentation in connection with the purchase or sale of nationally traded securities. In In re Lord Abbett Mutual Funds Fee Litig., 2009 WL 117002 (3rd Cir. Jan. 20, 2009), the court considered whether Congress intended SLUSA to pre-empt the entire case or just the offending state-law claim(s). The court found that that nothing in the language or legislative history of SLUSA "mandate[s] dismissal of an action in its entirety where the action includes only some pre-empted claims." Moreover, interpreting SLUSA in this manner would have little practical effect: "plaintiffs could simply bring two or more actions in order to avoid having all of their claims dismissed - one action with the potentially pre-empted state law claims and one or more with the remaining claims."
(2) In Alaska Electrical Pension Fund v. Pharmacia Corp., 2009 WL 213095 (3rd Cir. Jan. 30, 2009), the court had an opportunity to apply its Merck decision on inquiry notice and the statute of limitations. The court found that "investors are not put on inquiry notice of fraud when, in the context of this case, an apparently legitimate scientific dispute arises between the FDA and a pharmaceutical company." Instead, to find the existence of inquiry notice the court required "some reason to suspect that defendants did not genuinely believe the accuracy of their statements."
A few items of interest from around the web.
(1) Securities Docket has a guest column on group litigation in the United Kingdom and how it contrasts to the U.S. system.
(2) The D&O Diary has an analysis of 2008 securities class actions against life sciences companies.
(3) The New York Law Journal has a column (subscrip. req'd) on the Second Circuit's recent decision holding that an investment advisor does not have standing to bring a securities case in a representative capacity on behalf of its clients. The decision is W.R. Huff Asset Management Co. LLC v. Deloitte & Touche LLP, 549 F.3d 100 (2d Cir. 2008) and the author notes that its reasoning is applicable to the selection of lead plaintiffs in securities class actions.