NERA Economic Consulting and Cornerstone Research (in conjunction with the Stanford Securities Class Action Clearinghouse) have released their 2012 midyear reports on securities class action filings. As usual, the different methodologies employed by the two organizations have led to different numbers, although they generally agree that the number of filings is holding steady.
The findings for the first half of 2012 include:
(1) NERA counts 116 filings and Cornerstone counts 88 filings (NERA treats actions filed in different circuits, but against the same defendant, as separate filings - see FN 2 of the report). Cornerstone views this as a slight decrease in total filings, down 6 percent from both the first half and second half of 2011, while NERA finds it in line with historical averages.
(2) Both NERA and Cornerstone agree that there has been a decline in M&A-related filings and, correspondingly, an increase in "standard" misstatement cases alleging violations of Rule 10b-5, Section 11, and/or Section 12. According to NERA, there have been 83 "standard" filings in the first half of 2012. If that pace continues, it will lead to the most "standard" filings since 2008.
(3) The number of cases against foreign-domiciled companies is decreasing, largely due to a decline in Chinese reverse merger filings.
(4) NERA's report contains an interesting analysis of the motions practice in securities class actions that were filed and settled between 2000 and 2012. The findings include that in 22% of cases where a motion to dismiss was filed, and in 46% of cases were a motion for class certification was filed, the cases were settled before the court issued a decision on the pending motion.
(5) NERA also examines the settlement activity so far this year and concludes (a) the overall number of settlements is lower than usual (a projected 98 settlements in 2012 vs. 123 settlements in 2011), but (b) the median settlement amount ($7.9 million) is about the same as last year and consistent with pre-credit crisis levels.
Quote of Note (Professor Grundfest - Stanford): "Looking over the horizon, the Libor-litigation industry is clearly a sector to watch for years to come. The magnitude of the potential exposures and the complexity of the underlying damages claims will likely generate large amounts of litigation activity in many geographies."
The U.S. Court of Appeals for the Second Circuit has reversed a summary judgment grant in favor of Grant Thornton (outside auditor) in a securities class action related to the collapse of Winstar Communications. The case was originally filed in 2001 and, due to intervening settlements, Grant Thornton is the sole remaining defendant. The district court found that Grant Thornton had engaged in "dubious accounting practices" and had "failed to uncover the accounting fraud" being perpetrated by Winstar. Nevertheless, the district court concluded that there was no genuine issue of material fact as to whether Grant Thornton had acted intentionally or recklessly (i.e., with scienter) in issuing its unqualified audit opinion for FY1999.
The Second Circuit disagreed. In Gould v. Winstar Communications, Inc., 2012 WL 2924254 (2d Cir. July 19, 2012), the court held that at least some evidence existed to support the plaintiffs' assertion "that in the course of its audit GT learned of and advised against the use of indisputably deceptive accounting schemes, but eventually acquiesced in the schemes by issuing an unqualified audit opinion." While the district court had placed "particular emphasis on the magnitude of GT's audit work, both in time spent and documents reviewed" in granting summary judgment, the court noted that "[t]he number of hours spent on an audit cannot, standing alone, immunize an accountant from charges it has violated the securities laws." In regard to two other issues raised on appeal - reliance by certain plaintiffs who brought a Section 18 claim and loss causation - the court found that there was sufficient evidence to allow a jury to reasonably infer that those elements were satisfied.
Holding: Grant of summary judgment vacated and case remanded.
The U.S. Court of Appeals for the First Circuit has issued a short, interesting decision discussing the "holistic" evaluation of scienter allegations. In In re Boston Scientific Corp. Sec. Litig., 2012 WL 2849660 (1st Cir. July 12, 2012), the company allegedly failed to disclose that it had fired ten sales personnel, who ended up going to a competitor and taking business with them. The district court found it was a material omission, but dismissed the claim based on the plaintiffs' failure to adequately plead a strong inference of scienter (i.e., fraudulent intent).
On appeal, the plaintiffs argued that the district court had failed to consider their scienter allegations holistically, as required by the Supreme Court in its Tellabs decision. The First Circuit noted that it was true that "allegations that are individually insufficient can sometimes combine together to make the necessary showing." In the instant case, however, "a single central risk existed - that sales personnel might leave and perhaps take some of their business with them." While that risk became greater over time, to the point where the district court decided that failure to disclose it was a material omission, the potential lost business was "extremely modest in relation to revenues." Accordingly, the court held that there was no basis for concluding that the defendants "were dishonest or at least reckless in failing to mention" something so marginally material.
Holding: Dismissal affirmed.