(1) If you are not willing to walk away, you are not negotiating effectively. Charles Schwab appears to have proven that adage correct in its settlement of the securities class action pending against the company in the N.D. of California. On November 8, Charles Schwab announced that it was terminating the deal because it would allow federal securities class members residing outside of California to bring certain state law claims against the company. On November 18, however, the parties informed the court that the deal was back on. Charles Schwab will continue to pay $235 million, as had been contemplated all along, but the federal securities class members residing outside of California will have to opt out of the settlement if they want to pursue related claims. The court reportedly is close to approving the new deal.
(2) San Diego State may want to issue a revised press release. As it turns out, the university did jump the gun when it announced that it would be the recipient of funds from a cy pres award in the Apple options backdating settlement. Ted Frank, at the Center for Class Action Fairness, has successfully pressured the parties into making those funds available, at least in the first instance, to class members. He is now pushing the court to refuse preliminary approval until the settlement guarantees that the class gets all of the settlement funds.
A couple of cases have taken an unexpected turn.
(1) Last April, Charles Schwab Corporation announced the preliminary settlement of the securities class action pending against the company in the N.D. of California. The case relates to the marketing and sale of a bond fund. Just as the settlement was headed for final approval, however, Schwab has decided to invoke the termination provision in the settlement agreement and proceed to trial. The issue is whether the settlement, despite Schwab's belief that it provided a global resolution, allows federal securities class members residing outside of California to bring certain state law claims against the company. The D&O Diary has a post with all the details.
(2) Last month, the U.S. Supreme Court asked the government for its views on the Omnicare cert petition. The question presented was whether the heightened pleading standard of FRCP 9(b) should be applied to '33 Act claims (i.e., strict liability/negligence claims based on misstatements in a prospectus or registration statement) that "sound in fraud." The plaintiffs, however, did not wait to find out the government's position. They have dismissed the cert petition and evidently will pursue their remaining claims back in district court.
There is a circuit split on the issue of primary vs. aiding-and-abetting liability. Under the "bright line" test adopted by the Second Circuit, primary liability for securities fraud (as opposed to aiding-and-abetting liability, which is not available in private actions) only exists if the alleged misstatement is attributable on its face to the defendant.
Other circuit courts, however, have applied a more relaxed standard. The Fourth Circuit has found that it is sufficient for a plaintiff to adequately allege that (a) the defendant "participated" in the making of the misstatement, 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." Earlier this year, the Supreme Court granted cert in that case - Janus Capital Group v. First Derivative Traders - and presumably will resolve the circuit split.
In the interim, the Fifth Circuit has issued a decision expressly agreeing with the Second Circuit and adopting the "bright line" test. In Affco Investments 2001 LLC v. Proskauer Rose, L.L.P., 2010 WL 4226685 (5th Cir. Oct. 27, 2010), the court considered whether a law firm could have primary liability based on its provision of tax opinions that were alleged to be part of a fraudulent scheme. The company that promoted the scheme informed investors that "several major national law firms" had vetted the investments. Although plaintiffs claimed to have relied on the tax opinions, the court found that they failed to allege "that they ever saw or heard any Proskauer work product before making their decision, nor do they explicitly allege that the promoters identified Proskauer as one of the 'major national law firms.'" Accordingly, the plaintiffs "failed to show reliance on Proskauer" and the law firm could not be a primary violator.
Holding: Dismissal affirmed.
Quote of note: "Knowing the identity of the speaker is essential to show reliance because a word of assurance is only as good as its giver. Clients engage 'name-brand' law firms at premium prices because of the security that comes from the general reputations of such firms for giving sound advice, or for winning trials. Specific attribution to a reputable source also induces reliance because of the ability to hold such a party responsible should things go awry."