House Republican leaders John Boehner (R-OH) and Lamar Smith (R-TX) have asked the House Judiciary Committee to hold a hearing on the payment of kickbacks to lead plaintiffs in securities class actions. The press release and letter to the Chairman of the House Judiciary Committee can be found here. The WSJ Law Blog has a post on the topic and the ABA Journal has an article with related news links.
Establishing loss causation for the purpose of class certification or summary judgment is becoming a significant hurdle for plaintiffs. On the heels of the Flowserve and Omnicom decisions comes another defense victory.
In Fener v. Belo Corp., 2008 WL 876967 (N.D. Tex. April 2, 2008), the corrective disclosure made by the company attributed a decline in newspaper circulation to three separate sources. Only one of the sources, however, was related to the alleged fraudulent conduct. Based on Fifth Circuit precedent, the court held that it was the plaintiffs' burden to prove that it was more probable than not that this portion of the disclosure, and not the other unrelated negative statements, caused a significant amount of the stock price decline. The plaintiffs' expert failed to present empirical evidence sufficient to meet this burden. (The 10b-5 Daily previously posted about the initial motion to dismiss decision in the case.)
Holding: Class certification denied.
Quote of note: "[The] event study tends to establish that the market reacted to the bundle of August 5 news pieces with an August 6 stock price drop of 5.47%. Crucially, however, the study fails to target the corrective disclosure at issue."
Under the fraud-on-the-market theory, reliance by investors on an alleged misrepresentation is presumed if the company's shares were traded on an efficient market. Investors are not entitled to the presumption, however, if they are unable to show that the misrepresentation actually affected the market price of the stock. Class certification continues to be an intense battleground on the application of the fraud-on-the-market theory, as evidenced by two recent decisions.
(1) In In re Fannie Mae Sec. Litig., 247 F.R.D. 32 (D.D.C. 2008), the court considered whether it was appropriate to apply the fraud-on-the-market presumption to investors who purchased Fannie Mae stock after the company's Dec. 2004 announcement that it would engage in a large financial restatement. The plaintiffs argued that additional information about the alleged fraud was released over the next ten months and the class period should extend to Sep. 2005. The court disagreed and held that the Dec. 2004 announcement "severed the link between the alleged misrepresentations and the stock price" and later investors could not "claim a reasonable reliance on Fannie Mae's financial statements." Accordingly, the court found that the class period ended in Dec. 2004.
(2) In In re Credit Suisse First Boston Corp. (Lantronix Inc.) Analyst Sec. Litig., 2008 WL 512779 (S.D.N.Y. Feb. 26, 2008), the court considered whether a series of allegedly false analyst statements about Lantronix affected the market price of the company's stock. The court declined to decide whether the fraud-on-the-market presumption could ever apply to research analyst statements, noting that the issue is currently before the Second Circuit in the In re Salomon Analyst Metromedia Litig. case (see this post for more background). Nevertheless, the court decertified the class based on the plaintiffs' failure to adequately demonstrate that the analyst statements had: (a) increased Lantronix's stock price when issued; (b) had an effect throughout the class period; or (c) negatively impacted Lantronix's stock price when their falsity was revealed to the market.
The March 17, 2008 edition of the National Law Journal has a pair of columns on the impact of the Supreme Court's recent securities litigation decisions.
(1) In Stoneridge Alters Legal Landscape (subscrip. req'd), the authors recap the decision and argue that the Court's rejection of "scheme liability" has "profoundly changed" the potential securities fraud exposure of third parties.
Quote of note: "The holding in Stoneridge indicates that all or most of that $7 billion [in Enron-related settlements] probably did not have to be paid, because the banks, even if they acted with full knowledge that they were engaged in a scheme with Enron, had no liability to the investing public under the anti-fraud provisions of the federal securities laws. Note that while the settling banks in Enron paid approximately $7 billion, there remained a number of banks that declined to settle, and that would have faced massive exposure had Stoneridge been decided differently."
(2) In Courts Interpret Tellabs (subscrip. req'd), the authors examine the post-decision case law and conclude that courts are taking a "more stringent" approach to scienter pleading.
Quote of note: "Of 102 reported decisions reviewed applying Tellabs, 64 reflect dismissals (albeit some with leave to amend). On its face, this (unscientific) survey reflects a dismissal rate higher than historical norms."
A few items from around the web.
(1) RiskMetrics has released its annual SCAS 50 report of the top 50 plaintiffs' law firms ranked by the total dollar amount of final securities class action settlements occurring in 2007 in which the law firm served as lead or co-lead counsel.
(2) The Federalist Society has posted an online debate on the Stoneridge decision on scheme liability. Participants include Professor Stephen Bainbridge, Professor Jay Brown, and AEI's Ted Frank.
(3) Amanda Rose, an incoming Vanderbilt law professor, has issued an interesting working paper on securities class actions. Rose argues that the overdeterrence threat of securities class actions could be mitigated if "policymakers adopt an oversight approach to securities litigation reform by, for example, granting the SEC the ability to screen which Rule 10b-5 class actions may be filed, and against whom."
Big news in the long-running Coca-Cola securities class action. As previously posted in The 10b-5 Daily, the defendants have sought the denial of class certification based on alleged misconduct by lead counsel for the plaintiffs. In a report issued this week, the special master considering the issue agreed with the defendants. The report found that lead counsel engaged in improper conduct when it paid a former Coca-Cola employee to provide the plaintiffs with stolen company documents. The special master's recommendation that lead counsel be barred from serving as class counsel is subject to approval by the district court judge. Legal Pad has an extensive post on the decision, including a link to the report.
Quote of note (Special Master's Report and Recommendation): "Ordinarily, in the absence of any reason to suspect class counsel of inappropriate conduct, courts must assume that class counsel will properly and candidly discharge these duties. Here, however, the Court is faced with a very unusual situation in which Class Counsel engaged in extremely troubling conduct by paying for documents stolen from Coke, and then exacerbated the conclusions to be drawn from that initial conduct by refusing to accept responsibility for that conduct and by continuing, to this day, to defend that conduct through the use of arguments that appear to be pretextual. The administration of justice would be prejudiced should the court turn a blind eye to these circumstances."
Will the "Securities Litigation Attorney Accountability and Transparency Act" finally gain some traction? It's doubtful. Initially introduced in 2006 after the Milberg Weiss indictment, the legislation would permit fee shifting for successful defendants at the discretion of the court, require the disclosure of conflicts of interest between a plaintiff and his attorney, and allow courts to approve lead counsel through a competitive bidding process. SecuritiesLaw360 reports (subscrip. req'd) that the bill was reintroduced last week with support from House Minority Leader John Boehner (R-Ohio).
(1) Lyle Roberts (the author of The 10b-5 Daily) and Jonathan Miller have a column in the Feb. 8, 2008 edition of the New York Law Journal on the collective scienter theory. The column (subscrip. req'd) discusses the Dynex Capital and Tellabs II decisions.
(2) Securities Litigation Watch is keeping a close tab on securities class action filings. January 2008 was a big month, with at least 20 new filings (and not all of them subprime related).
(3) Professor Stephen Bainbridge posts his remarks on "Stoneridge and Capital Markets Policy" from an ABA panel presentation today.
The Apollo Group securities class action trial ended with a plaintiffs' verdict. A couple of news articles - from Portfolio.com and The Legal Intelligencer (Jan. 31, 2008 edition - subscrip. req'd) - offer some more background on what happened.
Quote of note (Portfolio.com): "While this might sound like the perfect case for the defense to rush to settle, that did not happen. At one point, there was a confidential mediation, but it went nowhere, says [plaintiffs' counsel]. 'They made it abundantly clear to us that they had every intention of trying this case to verdict,' he says. 'We had no intention of caving, we would never cave, and we made it abundantly clear we try cases to verdict.'"
The author of The 10b-5 Daily, Lyle Roberts (Dewey & LeBoeuf), is participating in a Practicing Law Institute audio webcast on the U.S. Supreme Court's recent Stoneridge decision. The webcast will take place on Thursday, January 31 at 1 p.m. ET and CLE credit is available. Click here to register.
As it turns out, trials remain a risky business for both plaintiffs and defendants. Any thoughts that the JDS Uniphase defense verdict would lead to more securities class action trials will have to be tempered by yesterday's result in the Apollo Group trial. Bloomberg reports that the jury returned a plaintiff verdict that could lead to a payout of up to $277.5 million in damages.
Interestingly, the company has a web page on the litigation that includes a case summary, key documents, and a timeline of events. Comprehensive coverage of the trial and the jury verdict can be found at Securities Litigation Watch and The D&O Diary.
Two items of interest:
(1) Texas billionaire Sam Wyly's litigation over the settlement in the Computer Associates securities class action has hit a slight bump. The court decision giving Wyly access to the work product of the lead counsel in the Computer Associates case has been on appeal in New York state court. The New York Law Journal reports that the appellate court has overruled the earlier decision, finding that an absent class member does not have the same right to lawyers' files as a client in a traditional attorney-client relationship. Wyly's attorney states that Wyly plans to appeal the decision and, in any event, will be able to obtain the material as part of his ongoing legal malpractice suit against the plaintiffs' firms.
(2) Was the JDS Uniphase case a harbinger of success for defendants in securities class action trials? We should know soon. According to Securities Litigation Watch, a verdict in the Apollo Group trial could be reached today.
The New York Law Journal (subscrip. req'd) has two interesting columns this week discussing developments in the pleading of securities fraud.
(1) Lower Court's Handling of Tellabs' "Inference of Scienter" (Dec. 11) discusses how courts have addressed the PSLRA's scienter pleading standard in the aftermath of the Supreme Court's Tellabs decision earlier this year. After summarizing the relevant decisions, the authors conclude that Tellabs has made it more difficult to survive a motion to dismiss based on a "post-Tellabs trend that corporate investigations, revisions, and restatements do not necessarily support a sufficiently compelling inference of scienter."
Quote of note: "The early returns suggest a significant change in how lower courts are addressing scienter issues in 12(b)(6) motions in Section 10(b) private civil cases. As one court aptly stated, the analysis required by Tellabs 'is akin to holding a minitrial on the merits of the case based only on the complaint.'"
(2) Group Pleading Suffers Another Blow (Dec. 13) addresses the varying court decisions on whether the "group pleading doctrine," which permits the attribution of alleged misstatements in group-published documents to corporate officers without specific factual allegations about their respective involvement in the misstatements, has survived the passage of the PSLRA. As the authors note, some courts (especially the S.D.N.Y.) have drawn a distinction between group pleading for purposes of attributing misstatements (permitted) and group pleading for purposes of establishing the existence of a strong inference of scienter (not permitted). Other courts, most notably the Third Circuit in its recent decision in Winer Family Trust v. Queen, 503 F.3d 319 (3rd Cir. 2007), have rejected the distinction as "illogical" given that it requires a heightened pleading of scienter for an act that the defendant is only presumed to have committed.
Quote of note: "The issue may yet reach the Supreme Court. At present, there is only a latent conflict among the circuits, as no circuit court has expressly held that group pleading is still permissible despite the PSLRA. Nonetheless, many district courts, particularly in the Second Circuit, have continued to apply the doctrine. It is difficult to predict where the Second Circuit would come out on this issue, given its silence to date. However, if it were to adopt the prevailing view of its district courts, that would create a clear conflict between circuit court holdings, which could send the issue to the Supreme Court."
Whether the plaintiffs in a securities class action should be required to disclose the identities of their confidential witnesses as part of the discovery process is an issue that continues to be the subject of litigation. The 10b-5 Daily had a post last year about an E.D. of Pa. decision in which the court held that the defendants were entitled to the names of all individuals known by the plaintiff to have relevant knowledge, but the plaintiff was not required to specifically identify the confidential witnesses relied upon in the complaint. The court did note, however, that it would consider revisiting its decision if the defendants were presented with an overwhelming list of names.
How many names would be "overwhelming"? A court in the N.D. of Cal. has an answer: 77. In In re Harmonic, Inc. Sec. Litig., 245 F.R.D. 424 (N.D. Cal. 2007), the court found the only effect of allowing the plaintiffs to withhold the names of the five confidential witnesses relied upon in the complaint would be "to force the Defendants to expend resources on taking the depositions of 77 people [i.e., the witnesses identified in the plaintiffs' initial disclosures] in order to obtain the information." The court also rejected the plaintiffs' argument that the names of their confidential witnesses were protected work product, noting that the information would "inevitably come to light."
Holding: Motion to compel answers to interrogatories concerning confidential witnesses granted.
Texas billionaire Sam Wyly has been in litigation over the settlement in the Computer Associates securities class action for years, alleging that plaintiffs' counsel improperly settled the case for a low amount just prior to the company's public disclosures of accounting fraud. The 10b-5 Daily has previously posted about Wyly's efforts to obtain documents related to the case (see here, here, and here). Having finally obtained the documents earlier this year, Wyly has brought a fraud action in New York state court against the relevant plaintiff law firms. Newsday has an article on the suit.
Quote of note: "The heart of Wyly's claim is the distinct difference between two sets of shareholder lawsuits filed against CA -- one in 1998 following a sharp drop in CA's share price, and another in 2002 following revelations of federal probes of CA's accounting. . . . The suit takes exception with the law firms' claims that allegations in the two suits were largely similar and therefore could be combined for the purposes of a settlement. The suit claims that if allegations in the latter suit had been properly researched and argued, the settlement would have been much larger. Instead, Wyly's suit argues, the 2002 suit never even reached the discovery phase."
Addition: An alert reader notes that Wyly has not actually been given the documents he was seeking from plaintiffs' counsel. According to the relevant court docket, production has been stayed pending an appeal of the court's decision.
The trial of the year - if you are a securities litigator - has come to an end. Reuters and the Associated Press report that the jury in the JDS Uniphase trial has returned a unanimous verdict in favor of the defendants. (Thanks to Securities Litigation Watch for the links.)
Quote of note (Associated Press): "Christopher Dewees, JDS Uniphase's chief legal officer, said the company participated in multiple settlement talks since the lawsuit was filed in 2002, but the parties remained 'very far apart.' 'The company is obviously extremely pleased that the jury recognized that this case is without merit,' he said in an interview. 'But it is obviously chagrined to have spent the time, effort and money over the past 6 years to achieve this verdict.'"
The New Jersey Law Journal has an article discussing the status of the various Vioxx-related securities litigations pending against Merck & Co. The company entered into a $4.8 billion product liability settlement last week, which may make the plaintiffs' cases easier to win. The securities class action, however, was dismissed earlier this year on statute of limitations grounds. The dismissal is being appealed to the Third Circuit. (The 10b-5 Daily has previously posted about the lead plaintiff dispute in the case.)
Plenty of cases get snatched from the hands of juries by settlements on the courthouse steps. The JDS Uniphase trial, however, is still going strong. More updates can be found on Crash.net (click here, here, and here) and a San Jose Mercury News blog.
Quote of Note (San Jose Mercury News): "As of now, it looks like closing arguments will start sometime on Monday (maybe) and continue through at least Tuesday."
Addition: Meanwhile, Securities Litigation Watch reports that another securities class action trial has gotten underway in the D. of Arizona. The corporate defendant in the case, which started in 2004, is Apollo Group.
A few interrelated items of note:
(1) The New York Law Journal has a column (Nov. 15 edition - subscrip. req'd) on possible securities litigation reform. Professor John Coffee argues that "we have too little securities litigation in the contexts where it would be useful and too much securities litigation in the contexts where it is useless." He suggests a compromise reform that would "restore 'aiding and abetting' liability by overturning Central Bank, while also placing a percentage ceiling on the non-trading corporation's liability in a secondary market case."
(2) Professor Coffee states in his column that the number of securities class actions has dropped and "no real upturn is in sight." Others are not so sure. The D&O Diary had a post two weeks ago noting that a significant upturn in filings appeared to be underway. That trend is continuing, fueled largely by filings from a single plaintiffs' law firm. Coughlin Stoia has filed ten new securities class actions so far this month (click here for a press release search).
(3) Lots of suits leads to lots of settlements. RiskMetrics has released the Securities Class Action Services (SCAS) 50 Power Rankings report, which ranks the top 50 plaintiffs' law firms based on various settlement statistics. Coughlin Stoia heads the list for cumulative dollar value of securities class action settlements from 2003 to 2006.
While media reports on the JDS Uniphase securities class action trial have tapered off since the opening statements, there is one place to get updated reports - Crash.net, a motorsport website. It turns out that Kevin Kalkhoven, the former CEO of JDS Uniphase and a defendant in the case, is one of the owners of the Champ Car World Series. Accordingly, Crash.net is following the trial closely, with a focus on Kalkhoven (click here, here, here, here, and here for the last two weeks of coverage).
Quote of note: "The trial is scheduled for nineteen days, which means if all goes according to plan, the evidentiary portion of the trial will end on Friday 16 November. Then, the thanksgiving week will be a 'break' for all lawyers and jurors, before reconvening the following week for closing arguments and jury deliberations."
After the large settlement comes the large fee request. The Tyco settlement, at $3 billion with an additional $225 million to be paid by PricewaterhouseCoopers (the company's auditor), has been hailed as the largest payout ever by a single corporate defendant in a securities fraud lawsuit. The Wall Street Journal has a report on the attorneys' fees requested by the lead counsel for the plaintiffs - $460 million, or 14.5% of the settlement. Three institutional investors who are members of the class have objected to the size of the request. WSJ Law Blog has a rundown of the numbers.
Quote of note: "In similar cases, known as mega securities settlements, fees have averaged closer to 10%. 'This is something of an outlier in terms of the percentage of the fee request,' says Adam Savett, a director of the Securities Class Action Services Group, a unit of RiskMetrics Group. He added, 'Plus, the sheer size of the fee check that the judge will picture in his mind might pose a burden.'"
There was talk about an increase in the number of securities class action trials back in 2005, but the trend never went anywhere. Not surprisingly, therefore, the start of the trial in the JDS Uniphase case has generated a fair amount of media attention. The case has an interesting history, including the lead plaintiff taking out a newspaper advertisement urging JDS Uniphase employees to disclose what they know about the alleged fraud.
Coverage of the opening statements in the trial can be found in Reuters (plaintiffs), the San Jose Mercury News (plaintiffs), and, from a few hours ago, the Associated Press (defendants).
Addition: RiskMetrics Group has put together a handy summary of post-PSLRA securities class action trials (via WSJ Law Blog).
There has been an interesting development in the long-running Coca-Cola securities class action. According to media reports, the defense has sought denial of class certification based on alleged misconduct by lead counsel for the plaintiffs (Coughlin Stoia and Chitwood Harley) relating to payments to witnesses. Coca-Cola asserts that these are the "same sort of tactics" that the former lead attorney on the case has admitted to as part of a recent criminal plea agreement. Coverage can be found in the Wall Street Journal, the Fulton County Daily Report, and Reuters.
A few items of interest:
(1) The D & O Diary has a post examining recent securities class action decisions involving foreign investors. One type of litigation that is receiving a lot of attention is "foreign cubed" cases (defined as an action brought in the U.S. against a foreign issuer, on behalf of a class that includes not only investors who purchased the securities in question on a U.S. securities exchange, but also foreign investors who purchased the securities on a foreign securities exchange).
(2) Securities Litigation Watch has a post on a recent Ninth Circuit case setting out the standard for determining when an investor is on inquiry notice of his securities fraud claim for purposes of the running of the statute of limitations. The case is Betz v. Trainer Wortham & Co., Inc., 2007 WL 2874369 (9th Cir. Oct. 4, 2007).
(3) Two new papers on determining securities fraud damages have been published: Inflation and Damages in a Post-Dura World (David Tabak - NERA) and The Loss Causation Requirement for Rule 10b-5 Causes-of-Action: The Implication of Dura Pharmaceuticals v. Broudo (Allen Ferrell - Harvard; Atanu Saha - Alix Partners).
On the eve of oral argument in the Stoneridge (a.k.a. Charter Communications) case on scheme liability, the media coverage continues.
(1) The Wall Street Journal had two items in its weekend edition, including a "Hot Topic" breakout of the case and an editorial (subscrip. req'd) urging the court to reject the position advocated by the investor plaintiffs.
(2) More editorials can be found in the Washington Times, the Financial Times, and the USA Today.
(3) CNBC has a point/counterpoint with two prominent securities litigators from its "Power Lunch" program.
A number of media outlets have chosen to run articles on the Stoneridge (a.k.a. Charter Communications) case today in anticipation of next week's argument. Articles can be found in the Washington Post, Wall Street Journal , Reuters, and MarketWatch.
Quote of note (Washington Post): "Joseph A. Grundfest, a Stanford University law professor who supports businesses in the case, said the SEC and the Justice Department already have the power to sue third parties for their involvement in a fraud scheme. He noted that Congress repeatedly has rejected attempts to expand the rights of investors to sue. 'There's a question of real principle here: Which decisions should be made by the courts, and which should be made by Congress?' Grundfest said."
For those readers who would like to get a preview of the Stoneridge (a.k.a. Charter Communications) argument in the U.S. Supreme Court next week, there are two notable events being held this Friday.
(1) The American Enterprise Institute is hosting a panel discussion (including Harvey Pitt, the former SEC Chairman) on the case in Washington, D.C. Details can be found here.
(2) The Center for Business Law & Regulation at Case Western Reserve University has a half-day conference on the case taking place on campus in Cleveland, Ohio. There also will be a live webcast. Details can be found here.
The New York Law Journal (Sept. 28) has two columns on securities litigation topics. A subscription is required to view the columns online.
(1) In "DOJ Backs 'Scheme Liability' in Third-Party Class Actions" the authors provide a preview of the upcoming Stoneridge (a.k.a. Charter Communications) case in the U.S. Supreme Court. The column summarizes the history of the case and discusses the arguments presented in the DOJ's amicus brief.
Quote of note: "The U.S. Department of Justice's endorsement of scheme liability for third parties may result in a pyrrhic victory for the plaintiff class action bar given the stark impact that its proposed reliance test would have upon many scheme liability claims. Scheme liability, according the solicitor general's view, would only apply to defendants whose misconduct was directly relied upon by the allegedly defrauded investor and not to other, potential deep-pocket defendants who allegedly participated in a broader scheme to defraud."
(2) In "'Oscar': Nearing the End of Fraud-On-Market Theory?" the author argues that the Dura decision on loss causation has led courts to question the continuing efficacy of the fraud-on-the-market theory. The author discusses the Fifth Circuit's denial of class certification in Oscar Private Equity (a short summary and link to the decision can be found here) and concludes that it may be a harbinger of things to come.
Quote of note: "[T]he Fifth Circuit seems to have accepted the Supreme Court's challenge, and has significantly chipped away at the validity of the fraud-on-the-market theory by barring use of the presumption at the class action certification stage. In so doing, it has invoked the logic of Justice White's Basic dissent. Based on Oscar and other appellate decisions, it seems as though the repudiation of the fraud-on-the-market theory will continue and Justice White's opinion will sometime soon become the law of the land."
The Wall Street Journal reports that the SEC will hold a roundtable early next year on the topic of shareholder litigation. The roundtable is being held in response to a letter (along with discussion questions) from six prominent law professors petitioning the agency to examine the topic. It also comes in the wake of a series of reports, including from The Committee on Capital Markets Regulation and Bloomberg/Schumer, that have discussed the potential negative impact of shareholder litigation on the U.S. financial markets.
Quote of note (WSJ): "The SEC roundtable, as it appears so far, will address the law professors' concerns, including who bears the cost of paying for attorneys fees in securities lawsuits, the role insurance plays in indemnifying companies or individuals, the percentage of investors who file claims and collect portions of settlements, and how the economics of a settlement change when the defendant is a third party."
The problems in the subprime mortgage market have led to extensive litigation. The Washington Post had an article this week on the topic. Meanwhile, The D&O Diary has been keeping a running tab on subprime-related securities class actions.
Quote of note (Washington Post): "A consortium of investors is going after the collapsed Bear Stearns hedge funds. Home buyers, shareholders and investment banks have filed suits against more than a dozen mortgage lenders. A working group at the Securities and Exchange Commission is examining accounting and disclosure issues, as well as stock sales earlier this year by executives at companies that since have been ensnared by the subprime mess."
The American Lawyer (September 2007) has a feature article (including a sidebar and a timeline) on the twists and turns in the securities litigation surrounding Biovail Corporation. Biovail is Canada's largest publicly traded drugmaker and has been both defending itself in a securities class action and prosecuting a case against short-sellers of the company's stock. The company's use of information gathered in the securities class action (which was subject to a protective order) in its other case has gotten the company and its counsel into trouble with the court.
Quote of note: "By the end of 2003, Biovail stock was trading below $25. The drop could be explained, at least in part, by Biovail's poor performance. In October 2003 the company issued an announcement of disappointing third quarter results, which sent the stock downward. But [the Chairman of Biovail] suspected that there was something else going on. As Biovail's share price continued to languish through 2004, he came to believe that short-sellers were waging a campaign of disinformation to make sure the share price never recovered."
Two articles from last week:
(1) The American Lawyer has a feature article on Milberg Weiss's indictment and the concurrent decline in securities class action filings.
(2) The Wall Street Journal Law Blog reports that Milberg Weiss and Lerach Coughlin have been sued in a class action based on the kickback allegations in the Milberg Weiss indictment. The suit is being brought on behalf of former class members in several lawsuits in which Milberg Weiss acted as lead counsel. A copy of the complaint can be found here. Legal Pad has more on the allegations in the case.
Quote of note (The American Lawyer): "Nor is there a new Milberg on the horizon. After several years, and several key court rulings, the PSLRA's goal of forcing plaintiffs to allege highly specific allegations appears to be working, according to both plaintiffs and defense lawyers. That makes a firm model based on filing lots of actions harder to maintain, since plaintiffs cases are more prone to dismissal. A handful of major players in the practice-Bernstein Litowitz and Grant & Eisenhofer, for example-file the major cases that Milberg did at its peak, but don't bring the bevy of smaller cases that Milberg also did."
In an op-ed in yesterday's edition of the Financial Times, the director of the Committee on Capital Markets Regulation (a.k.a. the "Paulson Committee") addresses a securities litigation reform that the SEC appears eager to avoid endorsing. Christopher Cox, the Chairman of the SEC, has told Congress that the SEC is not considering allowing companies to "mandate" arbitration for shareholder claims. The op-ed points out that the proposed reform actually puts the mandating power in the hands of the shareholders - who would vote on a charter amendment requiring arbitration and could always decide to reverse their decision later - not the company.
Quote of note: "The reform that the committee urges strengthens shareholder rights by broadening choice beyond the route of class action litigation. The SEC should not feel constrained to block or endorse alternatives to class actions. Indeed, after full and fair public discussion, the SEC should leave resolution of disputes between shareholders and their companies where it belongs, in the hands of shareholders and the courts."
The Wall Street Journal has an online debate (subscrip. req'd) between two securities litigators on the merits of scheme liability, a topic that will be addressed by the U.S. Supreme Court next term in the Stoneridge (a.k.a. Charter Communications) case. For those who like their debates slightly heated and reasonably entertaining, this will not disappoint. The WSJ Law Blog also has a related post where they invite comments on the topic.
Quote of note:
"Well, Sean, there you go again. You pick a troubling fact pattern -- a Wall Street bank's alleged involvement in a phony sale of assets to prop up corporate cash flow -- to argue for the rewriting of the securities laws.". . . .
"Thanks Bob for your concession that Bank A's conduct in my hypothetical was 'troubling.' That had to hurt. The question that investors would like to have you (and the Chamber of Commerce) answer is: do you think Bank A should get a pass for what it did in the (not so) hypothetical? Or is Bank A an 'innocent' third party that should be beyond the reach of defrauded investors?"
Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse have released an interim report on federal securities class action filings in 2007. The findings include:
(1) There were 59 filings in the first half of 2007. This represents a slight uptick from the previous six-month period, but is significantly below the post-PSLRA average semi-annual filing rate of 101 (mid-year periods July 1996 through June 2005).
(2) The report suggests two hypotheses for the continued low filing rate: (i) increased government enforcement activity leading to lower incidence of fraud; and/or (ii) a strong stock market with low volatility.
(3) The communication and finance sectors had the most filings.
The New York Law Journal (July 9, 2007 edition) has a special section (subscrip. req'd) on securities litigation and regulation, including articles on merger & acquisition cases related to private equity deals, the recent Billing antitrust decision in the U.S. Supreme Court, and the "changing face" of securities class actions. Two prominent New York securities litigators also have a publicly available "point-counterpoint" on recent judicial developments.
(1) A column on Law.com provides an overview of the recent U.S. Supreme Court cases related to securities litigation.
Quote of note: "While Dura and Tellabs are significant in their own right, their impact may pale in comparison to the Supreme Court's resolution, to be made in 2008, of Stoneridge Investment Partners LLC v. Scientific-Atlanta, Inc., which squarely puts the theory of "scheme liability" to the test."
(2) Professor Hannah L. Buxbaum has posted a forthcoming article on the jurisdictional issues raised by "foreign cubed" cases (defined as an action brought against a foreign issuer, on behalf of a class that includes not only investors who purchased the securities in question on a U.S. securities exchange, but also foreign investors who purchased the securities on a foreign securities exchange). The article - entitled "Multinational Class Actions Under Federal Securities Law: Toward a "Fraud on the Global Market" Theory?" - can be downloaded here.
Quote of note: "Multinational class actions invoke particularly strongly the concerns courts and commentators share regarding the over-expansive application of U.S. regulatory law in the global arena. (And, as I have argued, they are likely in the near future to attract the unfavorable notice of foreign governments as well.) Moreover, these claims illustrate particularly clearly the weaknesses of traditional jurisdictional rules."
The author of The 10b-5 Daily, Lyle Roberts (LeBoeuf Lamb), will be co-moderating a Practicing Law Institute audio webcast on the U.S. Supreme Court's recent Tellabs decision. The webcast will take place on Wednesday, July 11 at 1 p.m. ET. Bruce Vanyo (Katten Muchin) is the other co-moderator and the panelists are Jerome Congress (Milberg Weiss) and David Graham (Sidley Austin), who represented the parties in the case. CLE credit is available. Click here to register.
The Tellabs decision has been the subject of considerable media and blog commentary.
Legal Times: High Court Raises the Bar for Investors Alleging Securities Fraud
WSJ Law Blog: Tellabs - Securities Lawyers React
WSJ Law Blog: Supremes Deliver Another Blow to Plaintiffs Securities Bar
WSJ Law Blog: Scalia and Stevens Battle Over Statutory Interpretation
Washington Post: Pro-Business Decision Hews To Pattern of Roberts Court
Washington Post: Strict Standard Set On Investor Suits
NYT: Investors' Suits Face Higher Bar, Justices Rule
Bloomberg: Top U.S. Court Tightens Limits on Shareholder Suits
CNN Money.com/Legal Pad With Roger Parloff Blog: Supreme Court Deals Blow to Securities Class Actions, 8-1
SEC Actions Blog: The Supreme Court Strikes a Balance Regarding Requirements In Securities Damage Actions
The D&O Diary: Supreme Court Issues Tellabs Opinion
CFO.com: Shareholder Lawsuit Ruling a Boon?
SCOTUSBlog: A Lingering Thought on Tellabs
Securities Law Prof Blog: Tellabs v. Makor Issues & Rights
Sixth Circuit Blog: Tellabs Defines "Strong Inference" for Pleading Securities Fraud Under the PSLRA -- It Could Have Been Much Worse!
With all of the talk about the U.S. Supreme Court's most recent securities litigation issues (scienter and scheme liability), it is important to remember that the full impact of the court's last big decision - the Dura opinion on loss causation issued in 2005 - is still playing out in the lower courts. This year has seen a number of interesting decisions.
(1) In In re Motorola Sec. Litig., 2007 WL 487738 (N.D. Ill. Feb. 8, 2007), the court undertook a comprehensive examination of loss causation in the context of a summary judgment motion. Notably, the court rejected defendants' argument that under Dura "a securities fraud plaintiff bears the burden, even as a nonmoving party on summary judgment, of proving that its loss was caused by the claimed fraud, and not by the 'tangle of other factors' affecting share price." Instead, the court found that it is the defendant's burden to show that the decline in share price did not result from the disclosure of information related to the claimed fraud. (The parties settled the case shortly after this decision.)
(2) In Ray v. Citigroup Global Markets, Inc., 2007 WL 1080426 (7th Cir. April 12, 2007), the court addressed an appeal from a grant of summary judgment in a collective action against an investment advisor. The court identified three possible ways "a plaintiff might go about proving loss causation." First, a plaintiff could demonstrate the "materialization of a risk" - i.e., that it was the facts about which the defendant lied that caused the plaintiff's injury. Second, a plaintiff could rely on the "fraud-on-the-market scenario" discussed in Dura and show both that the misrepresentations artificially inflated the price of the stock and that the value of the stock declined once the market learned of the deception. Finally, a plaintiff could show that its broker falsely assured the plaintiff that a particular investment was "risk-free." The court found that the plaintiffs in the instant case had failed to introduce evidence sufficient to go ahead with their suit under any of these approaches.
(3) In Oscar Private Equity Investments v. Allegiance Telecom, Inc., 2007 WL 1430225 (5th Cir. May 16, 2007), the court vacated a class certification order "for wont of any showing that the market reacted to the corrective disclosure." The court held that the plaintiffs had failed to provide sufficient empirical evidence of loss causation and, therefore, could not take advantage of the "fraud-on-the-market" presumption of reliance.
Quote of note (Oscar Private Equity): "The plaintiffs' expert does detail event studies supporting a finding that [the company's] stock reacted to the entire bundle of negative information contained in the 4Q01 announcement, but this reaction suggests only market efficiency, not loss causation, for there is no evidence linking the culpable disclosure to the stock-price movement. When multiple negative items are announced contemporaneously, mere proximity between the announcement and the stock loss is insufficient to establish loss causation."
A few items of interest:
(1) With Vigour and Zeal has a post, including a link to a related article in Legal Week, on the filing of derivative actions in U.S. courts against non-U.S. companies.
(2) WSJ Law Blog has coverage of a humorous D. of Minn. decision denying the motion to dismiss in the UnitedHealth securities class action. As noted in the comments to the post, however, the defendants presumably were not amused by the court's heavy reliance on a pleading standard repudiated by the U.S. Supreme Court two weeks ago.
(3) And just in case you cannot get enough of the Stoneridge case, Best In Class has a post on some chatter that appears to have arrived a bit late.
Addition: Regarding the D. of Minn. decision, an alert reader points out that the court subsequently issued an amended opinion reflecting the change in the law (but reaching the same result).
According to an article in the Washington Post this weekend (which has been picked up by a number of other media outlets), the suspense is over. The SEC reportedly has asked the Solicitor General to file an amicus brief in support of the investor plaintiffs in the Stoneridge (a.k.a. Charter Communications) case on scheme liability that will be heard by the U.S. Supreme Court next term.
Two notes:
(1) Although some reports have suggested that the amicus brief will be filed in support of Enron's investors (and the original Washington Post article is not very clear on this point), that appears unlikely unless, as advocated by the attorneys for Enron's investors, the Supreme Court decides to hear the Enron and Stoneridge appeals together.
(2) Presuming the amicus brief is filed, it will be interesting to see if the SEC/Solicitor General deviates in any way from the earlier position on scheme liability taken by the SEC in a 9th Circuit case.
Just when you thought it was safe to read about something else on this blog, here are a few more pieces on the Stoneridge (a.k.a. Charter Communications) case pending before the U.S. Supreme Court.
(1) The Harvard Law School Corporate Governance Blog has a post with further speculation (see here) about whether Justice Alito could be the deciding vote. The post also discusses how the granting of cert in the related Enron's banks case might alter the outcome.
Quote of note: "[I]f the Court grants review in Credit Suisse [the Enron's banks case], it could well mean that Chief Justice Roberts and Justice Alito are inclined to take a narrow view of primary liability, and that The Chief Justice will be in a position to assign the opinion to a wavering Justice Alito. If Credit Suisse is granted, look for the case to be a 5-4 decision, with liability under Section 10(b) not extended to vendors and investment bankers, even where they know the transaction is a sham and will be used to effect a financial fraud."
(2) The Los Angeles Times ran an editorial on Wednesday urging the SEC to support the investor plaintiffs in the Stoneridge and Enron's banks cases.
Quote of note: "So far, the SEC has remained silent. But with its mandate to 'maintain fair, orderly and efficient markets and facilitate capital formation,' the SEC is uniquely suited to speak out when legal interpretations undermine confidence in the stock market's fairness."
(3) Meanwhile, the Washington Examiner has an op-ed urging the SEC to take the opposite position.
Quote of note: "The SEC’s support, expressed through a U.S. government friend-of-the-court brief in Stoneridge, would well tip the balance in the Supreme Court. For the sake of our capital markets and American shareholders, let’s hope the commission does the right thing. The SEC’s mission of 'investor protection' cannot be achieved by further empowering plaintiffs’ lawyers."
The battle to win the hearts and minds of the American people (or at least the SEC) on the issue of scheme liability, which is currently before the U.S. Supreme Court in the Stoneridge (a.k.a. Charter Communications) case, shows no signs of slowing down. This week has seen three publications of note:
(1) In its Tuesday edition, the Wall Street Journal had a feature article (subscrip. req'd) on the pressure being put on the SEC to side with the plaintiff investors.
Quote of note: "[A plaintiffs attorney] won the support of aspiring Democratic presidential candidate and former plaintiffs lawyer John Edwards, who said: 'I urge the SEC to fulfill its historic mission of protecting investors. Silence, or even worse, siding with fraud participants, would be a betrayal of that mission.'"
(2) The Wall Street Journal also has an op-ed (subscrip. req'd) in today's edition urging the SEC to support the defendant corporations.
Quote of note: "Unfortunately, we cannot be certain why the Supreme Court has taken the case, or if it will do the right thing. While Chief Justice John Roberts and Justice Stephen Breyer have spoken of the need for judicial modesty, both have recused themselves from the case. All the more reason for Treasury and the SEC to stand firm and ask the solicitor general to urge the Supreme Court to keep liability circumscribed."
(3) Finally, the Legal Times has an op-ed, written by attorneys who represent investors in a scheme liability case against Enron's banks, urging the Supreme Court to adopt a broad interpretation of the relevant statutes.
Quote of note: "At bottom, Section 10(b) and Rule 10b-5 have long proscribed any scheme or artifice to defraud, as well as any conduct that operates as a fraud on investors. Enron's banks worked hand-in-hand with Enron to design and implement sham transactions with the sole purpose of hiding debt and generating fake revenue. If that's not participating in a scheme to defraud, what else can we call it?"
Bloomberg has a feature article discussing the recent criticisms of the SEC's investor protection efforts. Of particular note for readers of this blog, the article states that Chris Cox, Chairman of the SEC, has denied that the SEC is considering a proposal or rule to allow corporations to mandate arbitration of shareholder claims. (Just