A few interesting items:
(1) What is Judge Sonia Sotomayor's record in securities class actions? Two notable Second Circuit decisions in which she has participated are Dabit (later unanimously overturned by the Supreme Court) and In re IPO Securities Litigation.
(3) The American Lawyer has an article on the lead plaintiff/lead counsel decision in a securities class action brought against Merrill Lynch. The court was highly critical of the "portfolio monitoring" services provided by the lead counsel candidates.
The U.S. Supreme Court is going to address when the running of the statute of limitations is triggered in securities fraud cases, but not in the case many observers expected.
Last year, the Court asked the Solicitor General to weigh in on the cert petition filed in the Trainer Wortham (9th Cir.) case. When the Solicitor General finally did so this spring, however, it suggested that the Merck (3rd Cir.) case would be a clearer test of the statute of limitations issue. The Court apparently agreed and granted cert in the case yesterday.
The official question presented in Merck is:
The Court will hear the case in the term starting October 5, 2009. A summary of the Third Circuit's decision can be found here.
When a district court within the Fourth Circuit dismisses a securities class action, it usually stays dismissed. But past performance is no guarantee of future results. In In re Mutual Funds Investment Litig. 2009 WL 1241574 (4th Cir. May 7, 2009), the U.S. Court of Appeals for the Fourth Circuit has reversed the dismissal of a market timing case brought against Janus Capital Group. Moreover, the decision contains some significant legal holdings.
(1) Pleading of Loss Causation - While the Fifth Circuit recently held that loss causation is only subject to notice pleading, the Fourth Circuit is standing tough. The court reaffirmed that, pursuant to Fed. R. Civ. P. 9(b), loss causation must be plead with particularity.
(2) Making of a Misrepresentation - To satisfy the fraud-on-the-market theory, the defendant must have made "a misrepresentation that is public and attributable to the defendant." There is an ongoing circuit split over how to evaluate whether a statement can be attributed to a particular defendant. Some courts (e.g., the Second and Eleventh Circuits) have adopted a "bright line" rule requiring that the misstatement must be attributable on its face to the defendant. Other courts (e.g., the Ninth Circuit) have concluded that substantial participation in the making of the misstatement is sufficient.
The Fourth Circuit declined to fully adopt either approach, instead offering this compromise: it is sufficient for a plaintiff to "alleg[e] facts from which a court could plausibly infer that interested investors would have known that the defendant was responsible for the statement at the time is was made, even if the statement on its face is not directly attributable to the defendant." Applying its new standard to the instant case, the court found that Janus Funds investors would have attributed to Janus Capital Management, the investment advisor to the funds, "a role in the preparation or approval of the allegedly misleading prospectuses. " Janus Funds investors would have been unlikely to come to the same conclusion about Janus Capital Group, however, which was the parent company of the investment advisor.
(3) Scheme Liability - The court found that it did not have to separately evaluate the possible existence of scheme liability. Under Stoneridge, "the existence of a fraudulent scheme does not permit a plaintiff to avoid proving any of the traditional elements of primary liability, such a scienter and reliance." Since the court had already evaluated these elements in connection with the misrepresentation claims, it did not have to go any further.
Holding: Reversed and remanded.
Texas billionaire Sam Wyly has suffered another setback in his long-running battle to obtain documents related to the Computer Associates securities class action. (The 10b-5 Daily has posted about the litigation over the years - see here, here, and here.) In a decision issued last week, the New York Court of Appeals found that Wyly, as an "absent" class member in the Computer Associates case, does not enjoy a presumptive right of access to the files held by plaintiffs' counsel upon the termination of representation. Moreover, in his federal court challenge of the Computer Associates settlement, Wyly had failed to demonstrate a "legitimate need" for these files and it was appropriate for the state court to defer to the federal court's determination on this issue.
The New York Law Journal has an article on the decision. In the article, Wyly's counsel notes that his client's federal court challenge of the Computer Associates settlement is currently on appeal and Wyly "will pursue the relevant documents there." Stay tuned.
The big news from late last week was the jury verdict for the plaintiffs in the Household International securities class action. Originally filed in 2002, the complaint alleged that Household engaged in a "massive predatory lending scheme" that led to a $600 million financial restatement. The jury found that the defendants acted at least recklessly as to 16 different statements made to the market, causing Household's stock price to be artificially inflated. The trial will now move on to the damages phase.
As just the seventh securities class action based on conduct that took place after Dec. 1995 (i.e., after the passage of the PSLRA) to go to a trial verdict, the Household case is getting a lot of attention. Here are some links:
Beazer Homes USA, Inc. (NYSE: BZH), a Georgia-based homebuilder, has announced the preliminary settlement of the securities class action pending against the company in the N.D. Ga. The case, originally filed in March 2007, was one of the first subprime cases and stems from disclosures related to the company's loan origination practices.
The settlement is for $30.5 million and is being funded by the company's insurers. The D&O Diary has a comprehensive post on the settlement, including links to many of the key court documents.
In Institutional Investors Group v. Ayaya, Inc., 2009 WL 1151943 (3rd Cir. April 30, 2009), the U.S. Court of Appeals for Third Circuit has issued a comprehensive opinion that addresses a number of important pleading topics.
(1) Safe Harbor for Forward-Looking Statements - Whether the first prong of the PSLRA's safe harbor, which states that a defendant shall not be liable with respect to any forward-looking statement if it is accompanied by "meaningful cautionary statements," insulates the defendant from liability for false statements made with actual knowledge of their falsity is an open issue (see this post). The Third Circuit found that Avaya's cautionary language was "extensive and specific." In particular, the company had warned against the adverse effects of "price and product competition," which was exactly what the plaintiffs asserted "was responsible for Avaya's missing its projections." The court declined, however, to decide whether the cautionary language on its own was sufficient to avoid liability, instead finding that the plaintiffs had, in any event, failed to adequately plead actual knowledge of the projections' falsity.
(2) Confidential Witnesses - The Third Circuit considered whether, as some courts have held, the Tellabs decision requires a court to discount allegations attributed to confidential witnesses. The court found that its earlier decision on the issue remained good law. To wit, confidential witness allegations must be evaluated by examining "the detail provided by the confidential sources, the sources' basis of knowledge, the reliability of the sources, the corrobative nature of other facts alleged, including from other sources, the coherence and plausibility of the allegations, and similar indicia." The statements should only be "discounted" if they are "found wanting with respect to these criteria."
(3) Holistic Approach to Scienter Allegations - As predicted by The 10b-5 Daily following the Tellabs decision (see note 3 in this post), the Third Circuit found that it can no longer allow plaintiffs to plead scienter by either alleging facts establishing motive and opportunity or by alleging facts that constitute evidence of reckless or conscious behavior. Instead, all of the plaintiffs' scienter allegations must be considered collectively. (Along the same lines, the court rejected the Ninth Circuit's recent embrace of a dual inquiry in which scienter allegations are evaluated individually and then, if insufficient on their own, collectively.)
Holding: Reversed in part, affirmed in part, and remanded.
Quote of note: "Our conclusion that 'motive and opportunity' may no longer serve as an independent route to scienter follows also from Tellabs's general instruction to weigh culpable and nonculpable inferences. Individuals not infrequently have both strong motive and ample opportunity to commit bad acts-and yet they often forbear, whether from fear of sanction, the dictates of conscience, or some other influence. It cannot be said that, in every conceivable situation in which an individual makes a false or misleading statement and has a strong motive and opportunity to do so, the nonculpable explanations will necessarily not be more compelling than the culpable ones. And if that is true, then allegations of motive and opportunity are not entitled to a special, independent status."