NERA Economic Consulting and Cornerstone Research (in conjunction with the Stanford Securities Class Action Clearinghouse) have released their 2010 midyear reports on securities class action filings. The different methodologies employed by the two organizations have led to different numbers, but the trendlines are the same.
The findings for the first half of 2010 include:
(1) Filings have declined, with a decrease in credit crisis cases being one of the key factors. NERA counts 101 filings (for an annualized total of 202 filings, down from 221 filings in 2009) and Cornerstone counts 71 filings (for an annualized total of 142 filings, down from 168 filings in 2009). For some insight into why NERA has a larger total, see footnote 5 in its report.
(2) The lag time between the end of the class period and the filing date has decreased significantly as compared to the second half of 2009. Cornerstone finds that the median lag time was 25 days, as compared to 112 days in the previous period. NERA finds that the average lag time was 231 days, as compared to 272 days in the previous period. Both organizations conclude that this may be the result of the plaintiffs' bar, having focused in recent years on credit crisis cases, clearing out a backlog of older matters in the second half of 2009 after credit crisis cases began to decline.
(3) NERA also examined the mid-year settlement trends. Notably, the median settlement value was $11.8 million, exceeding 2009’s value of $9 million by almost one-third. The report concludes that this may be driven by a substantial increase in median investor losses - a variable that correlates strongly with settlement size.
Quote of note (Professor Grundfest - Stanford): “The securities fraud litigation wave stimulated by the credit crisis now appears to be history. We have an inventory of cases waiting to be dismissed, settled, or tried, but to borrow a phrase from the current Gulf oil spill crisis, it seems that this flow has largely been capped.”
The scope of the Securities Litigation Uniform Standards Act ("SLUSA"), which precludes certain class actions based upon state law that allege a misrepresentation in connection with the purchase or sale of nationally traded securities, continues to be the subject of litigation. A key issue is to what extent a plaintiff can plead around the preclusive effect of the statute.
In Romano v. Kazacos, 2010 WL 2574143 (2d Cir. June 29, 2010), the Second Circuit considered a pair of state law class actions alleging that Morgan Stanley gave inappropriate retirement advice, which led the plaintiffs to retire early, place their lump sum retirement benefits with Morgan Stanley for investment, and subsequently suffer investment losses. The district court found that SLUSA preempted both actions and dismissed them.
On appeal, the Second Circuit made two key findings.
First, the court held that although a plaintiff is normally the master of his complaint, he "cannot avoid removal by declining to plead 'necessary federal questions.'" Based on this "artful pleading" rule, in a SLUSA case courts can look beyond the face of the complaint to determine whether the plaintiff has "allege[d] securities fraud in connection with the purchase or sale of securities."
Second, SLUSA's "in connection" requirement must be given a broad construction. In the cases at issue, the plaintiffs "in essence, assert that defendants fraudulently induced them to invest in securities with the expectation of achieving future returns that were not realized." Even though the plaintiffs "did not invest in any covered securities for up to eighteen months" after receiving the relevant retirement advice, the court concluded this time lapse was "not determinative here because . . . 'this was a string of events that were all intertwined.'" In sum, the court held that "[b]ecause both the misconduct complained of, and the harm incurred, rests on and arises from securities transactions, SLUSA applies."
Holding: Dismissal based on SLUSA preclusion affirmed.
The U.S. Court of Appeals for the Ninth Circuit has been busy over the past few weeks.
(1) In the Apollo Group case, the court reinstated the $277.5 million verdict obtained by the company's investors. The trial court, in a post-verdict decision, had found that the investors failed to prove loss causation. In particular, the court concluded that the two analyst reports relied upon by the plaintiffs as "corrective disclosures" that led to a stock price decline "did not provide any new, fraud-revealing analysis." Although The 10b-5 Daily suggested that the trial court's decision could lead to an interesting appeal, the actual opinion is quite anticlimactic. In an unpublished memorandum, the court simply held that "the jury could have reasonably found that the [analyst] reports following various newspaper articles were ‘corrective disclosures’ providing additional or more authoritative fraud-related information that deflated the stock price." The D&O Diary has extensive coverage, including a guest commentary.
(2) In In re Cutera Sec. Litig., 2010 WL 2595281 (9th Cir. June 30, 2010), the court joined all of the other circuits that have considered the issue (Fifth, Sixth, and Eleventh) in finding that the PSLRA's safe harbor for forward-looking statements "is written in the disjunctive as to each subpart." As a result, the "defendant's state of mind is not relevant" in determining whether a forward-looking statement is protected from liability because it is accompanied by "sufficient cautionary language." Over the years, The 10b-5 Daily has posted frequently on this issue (most recently here).
(3) Many commentators believed that the U.S. Supreme Court would grant cert in the Trainer Wortham case to address the running of the statute of limitations for securities fraud. As it turned out, the Court took the Merck case instead and issued a decision earlier this year. The Court then remanded the Trainer Wortham case for reconsideration. Back in the Ninth Circuit, in Betz v. Trainer Wortham & Co., Inc., 2010 WL 2674442 (9th Cir. July 7, 2010), the court has decided that it would be better for the district court to consider the statute of limitations issue in the first (or, more accurately, second) instance.
The author of The 10b-5 Daily, Lyle Roberts (Dewey & LeBoeuf), is moderating a Practicing Law Institute audio webcast on the U.S. Supreme Court's recent National Australia Bank decision. The webcast will take place on Friday, July 9 at 1 p.m. ET and CLE credit is available. Click here to register.
In what is shaping up to be a blockbuster term for securities litigation cases, the U.S. Supreme Court will address the issue of primary liability.
On Monday, the Court granted cert (over the objection of the government) in the Janus Capital Group v. First Derivative Traders case. In Janus, the Fourth Circuit found that to establish primary liability it is sufficient for a plaintiff to adequately allege (a) the defendant "participated" in the making of a false statement, and (b) "interested investors would have known that the defendant was responsible for the statement at the time it was made, even if the statement on its face is not directly attributable to the defendant." The defendants argued in their cert peition, apparently with some success, that both prongs of this holding created or exacerbated circuit splits.