There will be no new posts on The 10b-5 Daily until after August 10.
NERA Economic Consulting has released a study entitled Recent Trends In Shareholder Class Action Litigation: 2009 Mid-Year Update. The study reaches the following notable conclusions:
(1) There have been 127 cases filed in the first half of 2009, on pace for over 250 for the full year. As usual, this is a higher number than reported by Cornerstone, presumably due to differences in counting methodology (see footnote 2 of the NERA report).
(2) The credit crisis continues to dominate the landscape, with approximately 67% of the filings in the first half of 2009 naming at least one financial company as a primary defendant or co-defendant (compared to 50% of filings in 2008).
(3) Median settlement values are holding steady at $8 million.
(4) Following the U.S. Supreme Court's decision in Dura on the pleading of loss causation (April 2005), the dismissal rate for resolved claims appears to have slightly increased.
(5) Securities class actions can take a long time to resolve, making it difficult to accurately assess dismissal rates. Interestingly, the study takes one year's filings - the 238 cases filed in 2000 - and reports on their status. The result: 60% settled, 34% dismissed, 6% pending or abandoned.
The press release accompanying the study can be found here.
The extent to which an alleged "corrective disclosure" needs to have revealed the fraud to investors - thereby establishing the existence of loss causation based on a related stock price decline - continues to bedevil courts. One particular fact pattern that has proven difficult to analyze is when an SEC investigation is announced. Although some post-Dura cases found that loss causation had been adequately plead based on the disclosure of an SEC investigation, a couple of recent cases have gone the other way.
In Maxim Integrated Products, Inc. Sec. Litig., 2009 WL 2136939 (N.D. Cal. July 16, 2009), the court considered whether the company's "disclosures regarding compliance with an SEC investigation, subpoenas from the United States Attorney's office, and the formation of its own Special Committee to investigate options granting practices" were corrective disclosures for the purposes of pleading loss causation. The court concluded that these disclosures were "indicators of risk," but did not adequately reveal the alleged fraud. See also In re Hansen Natural Corp. Sec. Litig., 527 F. Supp. 2d 1142, 1162 (C.D. Cal. 2007).
Holding: Motion to dismiss granted in part and denied in part.
Quote of note: "A reasonable investor may view these disclosures as indicators of risk because they reveal the potential existence of future corrective information. However, they do not themselves indicate anything more than a 'risk' or 'potential' that Defendants engaged in widespread fraudulent conduct. Thus, the court finds that these statements are not corrective disclosures for which Plaintiffs can plead loss causation."
Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse have released a mid-year assessment of federal securities class action filings in 2009. The findings include:
(1) A total of 87 federal securities class actions were filed in the first half of 2009. At this rate, 174 securities class actions will be filed this year, a 22.3 percent decrease from 2008 and an 11.7 percent decrease from the post-PSLRA annual average.
(2) 42 filings in the first half of 2009 were driven by the credit crisis. 15 filings related to Ponzi schemes, with most of these suits brought by investors in Madoff funds.
(3) In 2008, there were 31 filings (13.8 percent) associated with issuers with non-U.S. headquarters, the highest annual total in the post-PSLRA period. The upward trend has continued in the first half of 2009 with 18 filings against issuers with non-U.S. headquarters, or 20.7 percent of the total.
The Securities and Exchange Commission had a ready answer to Senator Bennett's request that the agency look into pay-to-play allegations related to securities class actions: no thanks. Enforcement Action reports that Chairman Schapiro has sent a responsive letter noting, in effect, that the conduct at issue does not fall "squarely" within the agency's jurisdiction.
A few interesting items from around the web.
(1) It is not often that outside directors are forced to contribute to the settlement of a securities class action out of their own pockets. In the Peregrine Systems case in the S.D. of California, however, six outside directors have settled for a total of $55.95 million. AmLaw Litigation Daily has a post on the settlement, but notes that the exact amount being paid by the directors themselves (and whether it is some kind of record) is disputed.
(2) Fox Business reports that the Securities and Exchange Commission has provided a legislative "wishlist" to Congress. Although most of the requests would only have an indirect impact on private securities litigation, the SEC does address the hot button issue of extraterritorial jurisdiction. As stated in the list (No. 15): "Clarify US extraterritorial jurisdiction under antifraud provisions of securities laws, overwriting disparate judicial tests by combining both (effects and conduct). US courts would have jurisdiction over 'conduct occurring outside the United States that has a foreseeable substantial effect within the United States.'"
(3) The Deseret News reports that U.S. Senator Bob Bennett (R - Utah) has sent a letter to the Securities and Exchange Commission asking the agency to widen its "pay to play" investigation to "include law firms and attorneys who end up selected to file securities class-action lawsuits for pension plans that could bring them millions of dollars in fees." Thanks to Securities Docket for the link.
The author of The 10b-5 Daily (Lyle Roberts - Dewey & LeBoeuf) will be participating in a Securities Docket webcast entitled "2009 Mid-Year Review: Securities Litigation and Enforcement."
The webcast is tomorrow (June 9) at 2:00 p.m. ET and there is no cost to attend. The other panelists are Francine McKenna of re: The Auditors, Tom Gorman of SEC Actions, and Kevin LaCroix of The D&O Diary. Register here.
There have been two recent appellate decisions of note.
(1) In In re HealthSouth Corp. Sec. Litig., 2009 WL 1675398 (11th Cir. June 17, 2009), the court addressed the scope of the judicial bar order contained in the partial settlement between HealthSouth and the plaintiffs. The court found that the contractural claims by HealthSouth's former CEO (a non-settling defendant) against the company for (a) indemnification of any amounts he might pay in settlement of his liability to the plaintiffs, and (b) advancement of fees in connection with the litigation, were properly extinguished. (The D&O Diary has a post on the decision that questions the court's policy rationale for barring the advancement of fees claim.)
(2) In Alaska Electrical Pension Fund v. Flowserve Corp., 2009 WL 1740648 (5th Cir. June 19, 2009), the court considered what type of corrective disclosure was necessary to establish loss causation. The defendants argued that "a 'fact-for-fact' disclosure of information that fully corrected prior misstatements" was necessary, while the plaintiffs asserted that it was sufficient to point to disclosures that revealed the "true financial condition" of the company. In a per curiam opinion by a panel that included retired Supreme Court Justice O'Connor, however, the court found that "the true standard lies in the middle." To establish loss causation the "disclosed information must reflect part of the 'relevant truth' - the truth obscured by the fraudulent statements," but the information can leak out over time and a "fact-for-fact" disclosure is not required.
Holding: Reversed and remanded for further proceedings consistent with opinion.