Is Tuesday looking like it may be a slow day? It is not too late to sign up for the webcast of PLI's Securities Litigation & Enforcement Institute 2009 (New York edition). All of the details can be found here.
Lyle Roberts of Dewey & LeBoeuf (the author of The 10b-5 Daily) is co-chairing the program. The outstanding faculty will cover a wide range of topics, including financial crisis litigation, the latest corporate governance litigation issues, case management and settlement techniques, and SEC and DOJ trends. If you cannot make it tomorrow, there also are options for watching it later on the Web or on DVD.
Although it has not received much publicity (perhaps due to the fact that it does not appear on the agency's website), last month the Securities and Exchange Commission filed an amicus brief in the U.S. Court of Appeals for the Second Circuit on the issue of primary vs. aiding-and-abetting liability. The case is the Refco securities class action and the SEC takes dead aim at the Second Circuit's "bright line" test.
Under the "bright line" test, primary liability only exists if the misstatement is attributable on its face to the defendant. In other words, the defendant must have been identified to investors as the maker of the statement. The SEC argues in its amicus brief that public attribution is unnecessary. Instead, a court should be able to find primary liability when the defendant "creates" the statement, even if investors are unaware of the defendant's involvement.
Given the long history of the "bright line" test in the Second Circuit, combined with the Supreme Court's recent emphasis in Stoneridge on the need to establish that investors relied on the defendant's actions, the SEC's legal arguments may not carry the day. The SEC seems prepared for this possibility, arguing that even if the Second Circuit keeps the "bright line" test, it should not be applied to government actions (where a showing of reliance is not required).
Quote of Note: "In the Commission's view, a person makes a false or misleading statement and thus can be liable as a primary violator of Rule 10b-5 when that person creates the statement. A person creates a statement in this context if the statement is written or spoken by him, or if he provides the false or misleading information that another person then puts into the statement, or if he allows the statement to be attributed to him."
Thanks to Securities Docket for the link to the SEC's amicus brief.
When it comes to sharp talk from the bench, Judge James Rosenbaum and the UnitedHealth securities class action is the gift that keeps on giving. The court's latest decision - In re UnitedHealth Group Inc. PSLRA Litig., 2009 WL 2868399 (D. Minn. Sept. 4, 2009) - addresses whether counsel for the attorneys' fees objectors should be paid for their efforts. The court, as part of approving the settlement of the case, reduced the requested attorneys' fees from $110 million to $65 million. However, Judge Rosenbaum was upset (to say the least) at the idea that the objectors should receive the credit.
The court noted that the objectors' filing was late, short, and "presented no facts, offered no law, and raised no argument upon which the Court relied in its deliberation or ruling." The court therefore held that the objectors' counsel, which it described as "remoras" (i.e., suckerfish), were "entitled to an award equal to their contribution . . . nothing."
Holding: Motion for award of fees denied.
Quote of note: "If the Court may be permitted an egregious paraphrase of Winston S. Churchill: Seldom in the field of securities litigation was so little owed by so many to so few."
The U.S. Court of Appeals for the Eighth Circuit does not issue many securities litigation decisions, but it apparently has decided to resolve the few cases it has all at once. For the second time in a week (see here), the court has affirmed the dismissal of a securities class action, although this opinion comes with an interesting twist.
In Horizon Asset Management Inc. v. H&R Block, Inc., 2009 WL 2870505 (8th Cir. Sept. 9, 2009) the court considered whether the plaintiffs had adequately plead a strong inference of scienter (i.e., fraudulent intent) in a case alleging financial misstatements. The opinion contains a few holdings of note:
Internal Investigation - The plaintiffs alleged that the slow pace of the internal investigation once the accounting errors where discovered strengthened the inference of scienter. The court disagreed, finding that it was "prudent" for the company to closely investigate the issue and consult with its independent auditors. Moreover, while the investigation was ongoing, the company publicly disclosed its corporate accounting control weaknesses.
Confidential Witness - The court discounted a statement by a confidential witness that he had been told that senior management was aware of the need for further financial restatements. First, the witness did not state whether his sources had actually spoken with senior management, including the individual defendants, or "merely conveyed hearsay information that was passed along by others." Second, the reliability of the confidential witness was called into question by another, clearly erroneous statement he had made concerning one of the individual defendants.
Corporate Scienter - The plaintiffs argued that even if their complaint did not raise a strong inference of scienter as to the individual officer defendants, the case should still proceed against the company based on the alleged scienter of another one of the company's officers. The court declined to address whether this imputation was proper because the plaintiffs failed, in any event, to establish a strong inference of scienter as to the officer in question.
The Eighth Circuit affirmed the dismissal of the complaint, but also addressed an unusual procedural issue. The district court had consolidated the various securities class actions and derivative cases brought against H&R Block into one case. It then named a lead plaintiff who declined to assert any derivative fiduciary claims in its consolidated complaint. When the derivative plaintiffs asked for reconsideration of the lead plaintiff decision, the district court denied the motion, finding that the proposed claims were "not really derivative claims."
On appeal, the court found that while it was "debatable" whether it was appropriate to have a single plaintiff bring both direct and derivative claims, it was erroneous for the district court to have named a single lead plaintiff who would not pursue the derivative claims the court had previously consolidated. Accordingly, the court reinstated the separate derivative complaints.
Holding: Dismissal of securities class action affirmed. Derivative complaints reinstated.
In the early days of the Private Securities Litigation Reform Act and its new heightened pleading standards, courts regularly dismissed complaints that engaged in "puzzle pleading" (i.e., failed to specify the exact corporate statements that were false and the basis for their alleged falsity). Although plaintiffs quickly learned to be more careful, puzzle pleadings are still sometimes filed and the consequences can be severe.
In In re 2007 Novastar Financial, Inc. Sec. Litig., 2009 WL 2747281 (8th Cir. Sept. 1, 2009), the court considered a complaint against a subprime lender that "over the course of thirty-six pages . . . reproduced, either in their entirety or lengthy excerpts from, nineteen communications-including press releases, SEC filings, and conference call transcripts-issued by Novastar and the individual defendants during the class period that were allegedly false or misleading." What the complaint did not do, however, is give "any indication as to what specific statements within these communications are alleged to be false or misleading."
Although the lead plaintiff identified some specific false statements in his appellate brief, the court found that this did not "excuse" the "failure to comply with the pleading requirements under the PSLRA." The court also agreed with the district court's decision to deny leave to amend, noting that the lead plaintiff "never submitted a proposed amended complaint to the district court, nor did he proffer the substance of such an amended complaint until he filed his appellate brief."
Holding: Dismissal affirmed.
Quote of Note: "[E]ven after the district court dismissed [the lead plaintiff's] complaint and denied his request to amend the complaint, [the lead plaintiff] failed to file a motion under Federal Rules of Civil Procedure 15(a)(2), 59(e), or 60(b), seeking leave to file an amended complaint. As we have noted before, 'the district court [i]s not required to engage in a guessing game' as a result of the plaintiff's failure to specify proposed new allegations."