Rules 10b-5(a) and (c) establish securities fraud liability for deceptive devices, schemes, and acts. One issue courts have considered is whether "scheme liability" requires a defendant to have engaged in fraudulent conduct beyond the making of material misrepresentations or omissions (which is specifically prohibited by Rule 10b-5(b)).
In Public Pension Group v. KV Pharmaceutical Co., 2012 WL 1970226 (8th Cir. June 4, 2012), the court found that the only non-conclusory "scheme liability" allegations were based on the defendants' supposed knowledge of misstatements concerning the company's FDA compliance and earnings. The court held that these allegations were deficient, "join[ing] the Second and Ninth Circuits in recognizing a scheme liability claim must be based on conduct beyond misrepresentations or omissions actionable under Rule 10b-5(b)."
Holding: Dismissal affirmed in part and reversed in part.
A key development this week was the Supreme Court's decision to hear the Amgen Inc. v. Connecticut Retirement Plans and Trust Funds case on appeal from the Ninth Circuit. Pursuant to the fraud-on-the-market theory, reliance by investors on a misstatement is presumed if the company's shares were traded on an efficient market that would have incorporated the information into the stock price. The fraud-on-the-market presumption is routinely invoked in securities class actions to justify the grant of class certification because it removes the potential need for individual evaluations of reliance.
At issue in the Amgen case is a circuit split over whether a plaintiff must prove that the misstatement was material to invoke the fraud-on-the-market theory in support of class certification. Three circuit courts (Second, Fifth and, to a lesser extent, the Third) previously have held that this is a required part of the fraud-on-the-market analysis when evaluating whether a class should be certified. The Ninth Circuit joined a decision from the Seventh Circuit, however, in rejecting that position. The court held that materiality is a merits question that does not affect whether class certification is appropriate.
The Amgen case picks up threads from two other recent Supreme Court decisions. In Matrixx, the Court addressed the issue of materiality, but only in the context of what must be plead to survive a motion to dismiss. Meanwhile, in Halliburton, the Court found that a plaintiff does not have to prove loss causation to invoke the fraud-on-the-market presumption, but left open the question of whether the plaintiff must demonstrate that the misstatement had a stock "price impact" (which is often used as a proxy for determining whether the misstatement was material). As a practical matter, if the Court were to find that lower courts should be evaluating whether the misstatement was material in determining whether to grant class certification, it obviously would reinvigorate class certification as a meaningful hurdle in prosecuting securities class actions.
Scotusblog has all of the relevant links, including to the amicus briefs filed in conjunction with the cert petition. The case will be heard next term.
Former executives of Bear Stearns Cos. (now owned by J.P. Morgan Chase) have agreed to a preliminary settlement of the securities class action pending against them in the S.D.N.Y. The case, originally filed in 2008, accuses the executives of misleading investors about the firm's business and financial well-being in the run-up to the credit crisis. The settlement comes after the denial of the defendants' motion to dismiss, but before class certification.
The settlement is for $275 million, making it one of the top 40 largest securities class action settlements since 1995 (as stated in the court filing). According to the Wall Street Journal (subscrip. req'd), however, the executives will not have to make any personal payments. Instead, the settlement amount will come from a $9 billion fund created by J.P. Morgan Chase to cover Bear Stearns-related litigation and other expenses.
The Second Circuit and Seventh Circuit have issued recent notable decisions.
(1) Item 303(a) of Regulation S-K requires issuers to disclose known trends or uncertainties "reasonably likely" to have a material effect on operations, capital, and liquidity. While it has been referred to as the "sleeping tiger" of securities litigation, it may soon be the star of the circus. In Panther Partners Inc. v. Ikanos Communications, Inc., 2012 WL 1889622 (2nd Cir. May 25, 2012), the Second Circuit added to its Item 303(a) jurisprudence, finding that the plaintiffs had plausibly alleged that the company, at the time of its securities offering, "was aware of the 'uncertainty' that it might have to accept returns of a substantial volume, if not all, of the chips it had delivered to its major customers."
Holding: Denial of leave to file an amended complaint (based on futility) reversed.
(2) He's back and so soon! Following up on last month's decision, Judge Easterbrook of the Seventh Circuit has authored another securities litigation opinion. In Plumbers and Pipefitters Local Union 719 Pension Fund v. Zimmer Holdings, Inc., 2012 WL 1813700 (7th Cir. May 21, 2012) (Easterbrook, J.), the court addressed whether the plaintiffs had adequately plead scienter (i.e., fraudulent intent) in a case alleging that the company downplayed the significance of product problems. Among other things, the plaintiffs pointed to the CEO's failure, in response to a question posed during an analyst call, to reveal that the company had received verbal notice from an FDA inspector of "significant objectionable conditions" at one of its plants. The court concluded that the CEO's answer was technically accurate and the "worst one could say about [the] answer is that it was evasive, which is short of fraudulent."
Holding: Dismissal affirmed.