Medtronic, Inc. (NYSE: MDT), a Minneapolis-based medical technology company, has announced the preliminary settlement of the securities class action pending against the company in the D. of Minnesota. The case, originally filed in 2008, stems from allegations that the company and certain of its officers made materially false statements regarding the extent to which revenue from one of its products, the Infuse bone graft, depended on applications not approved by the FDA (i.e., "off-label" uses).
The settlement is for $85 million. Reuters has an article. The 10b-5 Daily previously has posted about the court's decision to certify the proposed class over the defendants' objection that the plaintiffs could not adequately represent the class "because of alleged misrepresentations counsel made in the Amended Complaint regarding the testimony of the confidential witnesses."
With that bold claim, do you have some availability on Thursday, April 26 to participate in a continuing legal education (CLE) program in New York or view a live webcast? It is not too late to sign up for PLI's Handling a Securities Case: From Investigation to Trial and Everything in Between. 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, all while following a hypothetical case from the initial investigation through trial. There will even be a panel on ethical issues, for those in need of ethics credits.
Hope to see you there.
As part of the Dodd-Frank Act, the Securities and Exchange Commission (SEC) was asked to solicit public comment and evaluate whether private litigants should be permitted to bring actions in the United States based on transnational securities frauds. In practical terms, the SEC was charged with examining whether the Supreme Court's Morrison decision, which limits Section 10(b) claims to domestic securities transactions, should be legislatively overturned or modified.
The SEC's study has been released and it contains a number of interesting items, including an analysis of the post-Morrison case law, a detailed review of the public comments, and a summary of the studies that have examined the capital markets impact of the Morrison decision. The SEC's overall conclusion, perhaps not surprisingly, is that the position it took in Morrison was correct as a matter of public policy (even if the Court rejected it on legal grounds). In Morrison, the SEC argued that the court should retain the preexisting conduct and effects tests for extending Section 10(b) private actions to transnational securities frauds, but limit the conduct test to situations where the plaintiff can demonstrate "that the plaintiff’s injury resulted directly from conduct within the United States." The SEC's approach arguably would have the benefit of "serv[ing] as a filter to exclude those claims that have a closer connection to another jurisdiction and, thus, are more appropriately pursued elsewhere." That said, the SEC also concedes that a more limited "conduct test" would still have the disadvantages of permitting "foreign investors [to] receive remedies that their governments have determined not to provide" and possibly "requiring a fact-intensive inquiry involving burdensome discovery. . . to determine if the alleged U.S. conduct constituted a direct cause of the overseas injury."
In response to these concerns, the SEC proposes a tweak and suggests alternatives for Congress to consider. The tweak is to make the conduct and effects tests available only to U.S. investors. While that still might require costly discovery to determine the scope and impact of the U.S. conduct, it alleviates some of the international comity problems created by allowing foreign investors, who engaged in foreign securities transactions, to bring suit in the U.S.
Alternatively, the SEC proposes that Congress "supplement and clarify" the Supreme Court's domestic transaction test in one or more of the following ways:
(1) Permit investors to bring Section 10(b) private actions based on transactions in any security that is of the same class of securities as those registered in the U.S., irrespective as to where the transaction took place. The idea is that companies who have registered shares in the U.S. have chosen to expose themselves to Section 10(b) liability, although the proposal also would have the obvious effect "of a return to U.S. courts of so-called “foreign-cubed” class actions – i.e., private class actions brought by foreign investors suing foreign issuers involving transactions on foreign exchanges."
(2) Create a Section 10(b) right of private action that can be brought "against: (i) securities intermediaries located within the United States when they defraud a client in connection with any securities transaction (i.e., foreign or domestic); and (ii) foreign securities intermediaries when they are reaching into the United States to provide securities investment services for a U.S. client and commit fraud against that client in connection with any securities transaction." The proposal is designed to close a "void" created by the domestic transaction test, wherein investment advisors can defraud their clients in connection with foreign securities transactions without fear of Section 10(b) liability.
(3) Create a "fraud-in-the-inducement" exception to the domestic transaction test, wherein investors can bring a Section 10(b) private action if they can demonstrate they were in the U.S. at the time they were induced to purchase or sell securities in reliance on a false or misleading statement, even if the transaction took place outside of the U.S. This proposal is another version of limiting the conduct test to U.S. investors, although the SEC suggests that it is narrower because the investors would need to demonstrate actual reliance, as opposed to basing their claims on a presumption of reliance created by the "fraud-on-the-market" theory.
(4) The Second Circuit recently clarified that a domestic securities transaction is one where "irrevocable liability was incurred or title was transferred within the United States." The SEC criticizes that approach, arguing that it may "serve as a roadmap for overseas fraudsters to structure transactions to avoid Section 10(b) private liability" by ensuring that key actions are taken outside of the country. Instead, the SEC suggests, Congress could "clarify that, in the case of off-exchange transactions, a domestic securities transaction occurs if a party to the transaction is in the United States either at the time that party made the offer to sell or purchase, or accepted the offer to sell or purchase."
But will Congress have any interest in pursuing a legislative reversal or modification of the domestic transaction test for Section 10(b) private action liability? Stay tuned.
(1) The Securities Litigation Uniform Standards Act ("SLUSA") precludes certain class actions based upon state law that allege a misrepresentation in connection with the purchase or sale of nationally traded securities. In determining what is meant by "in connection with," the Supreme Court has held that it is sufficient that the alleged misrepresentation "coincide" with a covered securities transaction. The circuit courts have had difficulty, however, in expanding upon this requirement to form a consistent standard (see, e.g., decisions from the Second Circuit, Sixth Circuit, and Seventh Circuit). In Roland v. Green, 2012 WL 898557 (5th Cir. March 19, 2012), the U.S. Court of Appeals for the Fifth Circuit waded into this jurisprudence in a set of cases arising from an alleged Ponzi scheme. After a lengthy analysis of the legal and policy considerations, the court held that the "best articulation of the 'coincide' requirement" is that the fraud allegations must be "more than tangentially related to (real or purported) transactions in covered securities." In the instant cases, the court found that the relationship between the alleged fraud, which centered around the sale of certificates of deposit, and any transactions in covered securities was too attenuated to trigger SLUSA preclusion.
(2) Under the federal securities laws, investors cannot bring "holders" claims alleging that deceit caused them to hold their shares, which they would have sold had they known the truth. These claims are permitted, however, under the laws of many states. In Anderson v. Aon Corp., 2012 WL 1034539 (7th Cir. March 29, 2012) (Easterbrook, J.), the plaintiff brought a holders claim under California law. The U.S. Court of Appeals for the Seventh Circuit found that it was impossible for a retail investor in a security traded on an efficient market to ever establish that the company's failure to disclose information led to any damages. Once the information was disclosed, "the price of [the company's] stock would have fallen before [the plaintiff] could have sold." As a result, the "fraud (if there was one) just delayed the inevitable and affected which investors bore the loss." Without being able to demonstrate that he could have shifted his loss to a different investor had the company disclosed the information earlier, the plaintiff could not establish causation.