In the Merck case, a unanimous U.S. Supreme Court (with two concurrences) has found that the investors' securities fraud claims are not barred by the statute of limitations. In making that determination, however, the Court has significantly changed the relevant legal landscape.
The statute of limitations for private federal securities fraud claims provides that a case "may be brought not later than the earlier of (1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation." Under the "discovery" clause, courts frequently have found that the statute of limitations begins to run once a plaintiff is on "inquiry notice" of the possibility (or probability) that a fraud has occurred. At issue in the Merck case was whether, as held by the Third Circuit, a plaintiff needs evidence of scienter (i.e., fraudulent intent) before inquiry notice is triggered.
As a threshold matter, the Court found that the statutory words could be read "as referring to the time a plaintiff actually discovered the relevant facts." Nevertheless, based on longstanding judicial precedent, "'discovery' as used in this statute encompasses not only those facts the plaintiff actually knew, but also those facts a reasonably diligent plaintiff would have known." The facts that must be known to the plaintiff, however, are the "facts constituting the violation." Scienter, as "an important and necessary element" of a securities fraud claim, clearly meets this definition. A plaintiff therefore must have discovered (or have been able to discover) scienter-related facts before the statute of limitations begins to run.
The Court rejected the "inquiry notice" standard, however, as inconsistent with the "discovery" rule. To the extent that the term "'inquiry notice' refers to the point where the facts would lead a reasonably diligent plaintiff to investigate further, that point is not necessarily the point at which the plaintiff would already have discovered facts showing scienter or 'other facts constituting the violation.'" In sum, the "discovery" limitations period "begins to run once the plaintiff did discover or a reasonably diligent plaintiff would have 'discover[ed] the facts constituting the violation' -- whichever comes first." The Court concluded that whether the plaintiff was on "inquiry notice" or failed to undertake "a reasonably diligent investigation" is not relevant to the analysis.
Turning to the case at hand, the Court agreed with the Third Circuit that the publicly-available information related to Merck's alleged fraud did not reveal facts indicating scienter. Therefore, the statute of limitations was not triggered more than two years before the filing of the complaint and the plaintiffs' suit was timely.
Holding: Judgment affirmed.
Notes on the Decision
(1) The Court is vague - perhaps deliberately so - on the question of exactly what quantum of evidence concerning scienter is sufficient to constitute discovery of the necessary facts. In various spots, the decision refers to "facts showing scienter" and "facts indicating scienter," but then also notes that the PSLRA requires a plaintiff to plead facts demonstrating a "strong inference" of scienter.
(2) The Court declined to decide whether there are other facts necessary to support a private securities fraud claim, beyond "facts showing scienter," that a plaintiff must have discovered (or have been able to discover) to trigger the running of the statute of limitations. Are facts concerning a plaintiffs' reliance or loss causation among the facts that constitute "the violation"?
(3) For defense counsel who are concerned about the Court's rejection of the inquiry notice standard, there may be some cold comfort in the fact that the decision could have been even more aggressive. Justice Scalia's concurrence (joined by Justice Thomas) argues that under a proper reading of the statute the limitations period should only start upon the plaintiffs' "actual discovery" of the facts constituting the violation.
It was settlement week in the world of securities class actions. No sooner did RiskMetrics release its SCAS 50 for 2009, which ranks plaintiffs firms by their total settlement amounts, when many of the contenders started making bids to be on next year's list.
The SCAS 50 "lists the top 50 plaintiffs' law firms ranked by the total dollar amount of final securities class action settlements occurring in 2009 in which the law firm served as lead or co-lead counsel." At the top of the list is Coughlin Stoia Geller Rudman & Robbins, which brought in $1,580,599,000 on 34 settlements.
Perhaps inspired by the SCAS 50, the rest of the week saw a number of significant settlements in cases both old and (relatively) new.
(1) Tyco International Ltd. and its TyCom subsidiary entered into a preliminary settlement of a securities class action pending in the D. of N.J. The case, originally filed in 2003, stems from a July 2000, $2.2 billion IPO by Tyco of TyComís common stock, and is based on allegations that the registration statement and prospectus relating to the offering contained misstatements and omissions regarding TyComís undersea-cable business. The settlement is for $79 million.
(2) In the HealthSouth securities litigation, the UBS defendants settled with shareholders and bondholders for $217 million and E&Y settled with bondholders for $33.5 million (after settling with shareholders for $109 million last year). The case, originally filed in June 2003, stems from allegations that the defendants materially misrepresented the company's earnings by failing to disclose the impact of certain changes in Medicare reimbursement on the company's profits. According to a Bloomberg article, these are the final settlements in the litigation and bring the total for shareholders to $601 million and for bondholders to $228.5 million.
(3) Charles Schwab Corporation announced the preliminary settlement of the securities class action pending in the N.D. of Cal. The case, originally filed in 2008, relates to Schwab's marketing and sale of a bond fund and was scheduled to go to trial in May. The settlement is for $200 million.
In In re Omnicom Group, Inc. Sec. Litig., 597 F.3d 501 (2d Cir. 2010), the company had announced in 2001 that it was placing certain investments into a separate holding company. There was no statistically significant movement in the company's stock price following the disclosure. In June 2002, however, there was a flurry of negative news reports about Omnicom and the transaction, leading to a stock price decline. In particular, a June 12 article reported on the resignation of the Chair of Omnicom's Audit Committee and noted concerns about the company's aggressive accounting strategy.
The lower court granted summary judgment for the defendants based on the plaintiffs' failure to proffer evidence sufficient to support a finding of loss causation. On appeal, the Second Circuit affirmed on two grounds. First, the June 2002 news reports were not a "corrective disclosure" of the fraud because they failed to provide the market with any new facts. Second, the resignation of the director (and the accompanying negative publicity) was not a "materialization of the risk" that was supposedly concealed by the fraudulent statements. A mere concern over the company's accounting practices cannot satisfy that standard.
Holding: Grant of summary judgment affirmed.
Quote of note: "The securities laws require disclosure that is adequate to allow investors to make judgments about a company's intrinsic value. Firms are not require by the securities laws to speculate about distant, ambiguous, and perhaps idiosyncratic reactions by the press or even by directors. To hold otherwise would expose companies and their shareholders to potentially expansive liabilities for events later alleged to be frauds, the facts of which were known to the investing public at the time but did not affect share price, and thus did no damage at that time to investors. A rule of liability leading to such losses would undermine the very investor confidence that the securities laws were intended to support."
While the Supreme Court considers the National Australia Bank case, the lower courts continue to issue rulings that explore the extraterritorial application of the U.S. securities laws.
In In re European Aeronautic Defence & Space Co. ("EADS") Sec. Litig., 2010 WL 1191888 (S.D.N.Y. March 26, 2010), the plaintiffs alleged that the defendants mislead investors about production delays in the Airbus A380 super-jumbo aircraft. EADS is a Dutch company and its shares are traded exclusively on European exchanges. Three depository banks, however, have issued unsponsored American Depositary Receipts ("ADR's") in EADS shares. The putative class consisted of U.S. residents who had purchased or otherwise acquired EADS common stock.
The court applied the conduct and effects tests to determine the existence of subject matter jurisdiction. As to whether sufficient conduct had taken place in the U.S., the court held that (a) EADS's holding of investor meetings in the U.S., and (b) the participation of U.S. analysts in EADS earnings conference calls, were "incidental to the alleged fraud." Nor could the plaintiffs satisfy the effects test, despite their limitation of the putative class to U.S. residents. The court found that the "putative class acquired its EADS shares in Europe and any losses were suffered on foreign exchanges." The fact that some class members may have acquired shares as ADRs was insufficient, standing alone, to establish a "substantial" U.S. effect. Finally, the court also noted that EADS could successfully argue forum non conveniens, having demonstrated that France, the Netherlands, and Germany (where a number of U.S. investors had already brought individual actions against EADS) were adequate alternative fora.
Holding: Motion to dismiss granted.
Quote of note: "The Complaint is a narrative of the peril Americans face when they invest abroad. It is understandable that [lead plaintiff] would seek the robust protections of federal securities laws in a United States court. But a court of limited jurisdiction lacks the authority to hear every grievance that arises overseas. On this record, [lead plaintiff] will have to pursue its claims where it purchased shares - Europe."