A federal court has repelled an attempt to circumvent the Morrison decision through the use of state and foreign law claims. In In re BP P.L.C. Sec. Litig., 2012 WL 432611 (Feb. 13, 2012 S.D. Tex.), the plaintiffs brought claims on behalf of U.S. investors who purchased BP common shares on the London Stock Exchange ("Ordinary Share Purchasers). The claims included federal securities fraud claims, as well as New York common law and English law claims.
The court's analysis hinged largely on the fact that BP's common shares are listed, but not traded, on the New York Stock Exchange (to comply with SEC requirements governing the company's American Depositary Shares program).
(1) Federal securities fraud claims - Following a number of other recent decisions, the court held that the mere fact that BP's common shares were listed on the NYSE did not allow the Ordinary Share Purchasers to bring a federal securities fraud claim. Moreover, the court rejected plaintiffs' additional arguments that it should consider both the U.S. residency of the Ordinary Share Purchasers and the fact that the London Stock Exchange rules "allow trades to occur directly through third-party, U.S.-based market makers." Accepting these arguments would reinstate the old conduct and effect tests and they could not override the key point "that the Ordinary Share Purchasers bought BP ordinary shares on the LSE, the only exchange where BP ordinary shares trade."
(2) New York common law and English law claims – The fact that BP's common shares were listed, but not traded, on the NYSE also helped the defendants in the court's assessment of the state law and foreign law claims, but for an entirely different reason. Under the Securities Litigation Uniform Standards Act of 1998 (SLUSA), a plaintiff cannot bring a class action based on state law fraud claims if the case involves "covered securities." Covered securities are defined, among other things, as securities “listed, or authorized for listing, on the New York Stock Exchange.” There is no requirement that the securities also be traded on the NYSE and the court declined the plaintiffs' invitation to read one into the statute. The court therefore held that the New York common law claims involved covered securities and were precluded by SLUSA. Plaintiffs also argued that the court had jurisdiction over the English law claims based on diversity jurisdiction under the Class Action Fairness Act (CAFA). CAFA, however, excludes claims based on "covered securities" and uses the same definition of that term as SLUSA. Accordingly, the court found that it did not have original jurisdiction over the English law claims.
Holding: Dismissed claims of Ordinary Share Purchasers (but other claims in the case were allowed to proceed).
In the wake of the techology crash (way back at the turn of the century) a number of securities class actions were brought alleging misrepresentations by analysts. A key issue in those cases was whether the fraud-on-the-market theory, pursuant to which reliance by investors on a material misrepresentation is presumed if the company's shares were traded on an efficient market, would apply to analyst statements about a company. In 2008, the U.S. Court of Appeals for the Second Circuit found that the fraud-on-the-market theory applies in this scenario. That said, plaintiffs still have the burden of demonstrating that the analyst statements caused the relevant stock price declines.
Proving once again that securities class actions can last a long time, the District of Massachusetts has issued a decision in an analyst case showing how the reliance and loss causation elements can overlap. In Bricklayers and Trowel Trades Int'l Pension Fund v. Credit Suisse First Boston, 2012 WL 118486 (D. Mass. Jan. 13, 2012) (originally filed in 2003), the court considered whether to preclude the testimony of the plaintiffs' causation expert in a case based on statements by CSFB's analysts regarding AOL.
The defendants argued that the expert's event study was unreliable because it "flouts established event study methodology and draws unreasonable conclusions from the data presented." The court agreed and found that the study improperly (a) cherry-picked days with unusual stock price volatility, (b) overused dummy variables to make it appear that AOL's stock price was particularly volatile on the days CSFB issued its reports, (c) attributed "volatility in AOL's stock price to the reports of defendants analysts when, at the time of the inflation or deflation, an efficient market would have already priced in the reports," and (d) failed to conduct "an intra-day trading analysis for each event day with confounding information (which is, to say, nearly all of them) in order to provide the jury with some basis for discerning the cause of the stock price fluctuation."
Holding: Event study excluded and summary judgment granted to the defendants based on the plaintiffs' failure to raise a triable issue of fact on the element of loss causation.
Quote of note: "For example, [plaintiffs' expert] labels April 18, 2002 as a corrective date, and attributes stock price deflation to the defendants, even though the information released on that day, Deutsche Bank's lowered estimate and price target, was released nine days earlier without any corresponding impact. Plaintiffs may not at the same time presume an efficient market to prove reliance and an inefficient market to prove loss causation. They may not have their cake and eat it too."
The Morrison decision limiting the extraterritorial application of the U.S. securities laws continues to be the subject of extensive judicial, practicioner, and academic commentary. Recent items include:
(1) Professor Hannah Buxbaum has published a paper entitled "Remedies for Foreign Investors Under U.S. Federal Securities Law," in which she discusses Morrison's transaction-based test and explores the possibility of foreign investors suing under U.S. law or participating in the SEC's Fair Funds program.
(2) The American Lawyer describes Morrison as "The Global Securities Case of the Decade (So Far)" (Jan. 20 - subscrip. req'd). The article summarizes the widespread impact of Morrison to date and notes that seven Morrison-related cases are currently on appeal in the Second Circuit alone.
(3) NERA has issued a report, in response to an SEC comment request, on "Cross-Border Shareholder Class Actions Before and After Morrison" (Dec. 2011). The authors conclude that by "reducing expected litigation costs, Morrison eases a deterrent to US listing by foreign issuers and thereby makes the US a more competitive venue for cross-listings, as well as for the volume in cross-listed stocks."
(4) The Harvard Law School Forum on Corporate Governance and Financial Regulation has a post entitled "A New Playbook for Global Securities Litigation and Regulation." The author discusses the rise of alternative forums to the U.S. for global securities litigation.
(5) A Reuters article (Feb. 1) discusses a recent decision in the Vivendi securities litigation confirming that Morrison applies to claims under both the Securities Exchange Act of 1934 (market activity) and the Securities Act of 1933 (offering and sale of securities).