It's not over until it's over. Last September, it certainly looked bleak for the defendants in the Oracle securities class action pending in the N.D. of California. The court found that the defendants had improperly withheld evidence and, as a result, the plaintiffs were entitled to adverse inference instructions with regard to the CEO's knowledge of the corporate problems Oracle allegedly failed to disclose.
Last week, however, the court granted summary judgment in favor of the defendants. See In re Oracle Corp. Sec. Litig., 2009 WL 1709050 (N.D. Cal. June 19, 2009). Although the court took the adverse inferences into account in its decision, the plaintiffs failed to demonstrate a genuine issue for trial on other elements of their causes of action. Most notably, the court concluded that the plaintiffs failed to identify sufficient evidence as to loss causation for their non-forecasting claims.
Holding: Defendants' summary judgment motion granted.
Quote of note: "[T]here is an absence of evidence that on March 1 [2001], Oracle revealed previously concealed information about Suite 11i or that analyst reports about the March 1 announcement linked the miss in Oracle's applications earnings to previously disclosed deficiencies with Suite 11i. Plaintiffs' only possible theory for loss causation is that the earnings miss itself revealed the truth about Suite 11i to the market, but plaintiffs cite no case in which an earnings miss alone was sufficient to prove loss causation."
Under the "true financial condition" theory, a plaintiff can adequately allege loss causation by citing a corrective disclosure that reveals the company's true financial results and condition, even if the disclosure does not directly reveal any alleged misrepresentations. Although the theory has been applied by some courts at the motion to dismiss stage (most notably by the 9th Circuit in its Daou decision), it has failed to gain wide acceptance. Courts have been particularly skeptical at the proof stage of a case, where the plaintiff bears the burden of producing evidence demonstrating a link between a corrective disclosure, public awareness of a misrepresentation, and a drop in the company's stock price (see, e.g., the Flowserve decision from the N.D. of Tex.)
In In re Retek Inc. Sec. Litig., 2009 WL 928483 (D. Minn. March 31, 2009), the court considered and rejected the true financial condition theory on a summary judgment motion. Noting that even the plaintiffs' expert witness "concedes that until the original complaint was filed, there was no disclosure such that the market became aware that Retek had committed improper or fraudulent practices regarding those four ventures," the court found that there was insufficient evidence demonstrating that the disclosures about Retek's financial condition revealed the truth about the alleged misrepresentations to the public.
Holding: Defendants' motions for summary judgment granted.
Addition: Note that yesterday the U.S. Supreme Court denied cert in the Gilead case, foregoing an opportunity to bring some clarity to the issue of what is necessary to adequately plead loss causation. SCOTUSBlog has links to all of the cert papers.
The plaintiffs in the Enron litigation have had a tough time establishing a viable theory of liability against the bank defendants. The first setback was the Fifth Circuit's reversal of the district court's grant of class certification. The appellate court held that the banks had not made any actionable omissions because they "did not owe plaintiffs any duty to disclose the nature of the alleged transactions." Later, the Supreme Court's Stoneridge decision severely limited the scope of scheme liability by imposing a strict reliance requirement in fraud-on-the-market cases. The Court also declined to address the plaintiffs' related appeal from the Fifth Circuit decision.
Given the enormous potential damages at stake, however, the plaintiffs were not ready to throw in the towel. In In re Enron Corp. Sec., Derivative &"ERISA" Lit., 2009 WL 565512 (S.D. Tex. March 5, 2009), the plaintiffs attempted to restructure their theory of liability against the bank defendants to avoid the impact of the two adverse decisions. The plaintiffs argued that the banks' "Enron-related market activity in addition to the deceptive transactions" gave rise to a duty to disclose to Enron's investors or the market as a whole. The district court disagreed. On summary judgment, the district court held (a) the "mandate rule" precluded plaintiffs from relitigating whether they had adequately demonstrated a duty of disclosure, and (b) even if they were not barred by the mandate rule, the plaintiffs had failed to establish the fiduciary relationship between the banks and the plaintiffs necessary to find a duty of disclosure.
Holding: Summary judgment motion of bank defendants granted.
The parties in the Baxter International securities litigation deserve credit for perseverance. First, there was a dismissal based on the PSLRA's safe harbor for forward-looking statements. Then came a Seventh Circuit decision overturning the dismissal and controversially limiting the application of the safe harbor. That was followed by a denial of class certification, another Seventh Circuit decision upholding the denial, and then the continuation of the case on a non-class basis.
Seven years later, the case is back were it started -- and perhaps, with the benefit of hindsight, never should have left. In Asher v. Baxter Int'l, Inc., 2009 WL 260979 (N.D. Ill. Feb. 4, 2009), the court granted summary judgment to the defendants on the basis that the plaintiffs "failed to indentify any evidence that Baxter's forward-looking financial projections lacked either good faith or a reasonable basis in fact." One more appeal?
Holding: Defendants' motion for summary judgment granted.
Quote of note: "Although the court has gone into great detail analyzing why this evidence fails to meet the plaintiffs' burden of production, the analysis boils down to this: the financial reports and other documents and testimony cited simply do not establish that the defendants ignored relevant information when reaffirming and revising Baxter's financial commitments. Moreover, the commitments were in line with previous years' commitments, which Baxter had met for eight straight years. Although the plaintiffs have identified financial challenges that Baxter faced during 2002, the mere existence of financial challenges does not establish that sales growth is unachievable."
Global auditing firms are often organized as a professional services organization of member firms, with a different member firm operating in each country. As a result of this structure, courts have often found that the global umbrella entity cannot be liable for the fraudulent activities of a member firm. In the Parmalat securities litigation, however, the court declined to dismiss the claims against Deloitte Touche Tohmatsu ("DTT"). The court found that the plaintiffs had sufficiently alleged a principal-agent relationship between DTT and its Italian member firm that conducted Parmalat audits.
In In re Parmalat Sec. Litig., 2009 WL 179920 (S.D.N.Y. Jan. 27, 2009), the court considered the issue again on summary judgment, with the same result. The court found: (a) the U.S. Supreme Court's decision in Stoneridge did not foreclose vicarious liability for a principal based on the acts of its agent, and (b) there was sufficient evidence that "DTT exercised substantial control over the manner in which the member firms conducted their professional activities," including "in the specific context of the Parmalat engagement." The court also declined to dismiss the control person liability claims against DTT and Deloitte & Touche LLP (Deloitte's U.S.-based member firm).
The WSJ Law Blog has a post on the decision.
Holding: Deloitte defendants' motion for summary judgment denied.
The long-running securities litigation related to Iridium World Communications, which attempted to create and market a global satellite phone system, has produced an interesting decision. In Freeland v. Iridium World Communications, 2008 WL 906388 (D.D.C. April 3, 2008), the court considered a summary judgment motion brought by Motorola, the former parent company of Iridium and the sole remaining defendant in the case. The decision was a sweeping victory for the plaintiffs, with at least two determinations of note.
(1) Forward-Looking Statements - A continuing analytical problem for courts is how to interpret the PSLRA's safe harbor for forward-looking statements. One issue is whether the first prong of the safe harbor, which states that a defendant shall not be liable with respect to any forward-looking statement if it is accompanied by "meaningful cautionary statements," insulates the defendant from liability for false statements made with actual knowledge of their falsity. Courts have sometimes balked at applying the safe harbor in this manner, even though there is no state of mind limitation in the first prong and the second prong creates an alternative actual knowledge requirement for liability.
The Iridium court's conclusion: the cautionary statements at issue could not be "meaningful" if Iridium and Motorola knew their statements to be false and misleading at the time they were made. As The 10b-5 Daily has pointed out before, however, this approach simply does not comport with the plain language of the statute. Again, Congress did not impose a state of mind limitation in the first prong of the safe harbor, instead leaving that examination for the second prong. It is hard to justify collapsing the two prongs into a single "actual knowledge" test on the basis of "statutory interpretation." Adding insult to injury, the Iridium decision relies heavily on a recent law review article in support of its decision. Not mentioned in the decision, but surely noted by the defendant, is that the article's author is a staff attorney with the SEC's Division of Enforcement.
(2) Expert Report On Loss Causation - In several recent decisions, courts have declined to consider expert reports on loss causation due to methodological concerns. The Iridium court, however, rejected Motorola's motion to exclude damages testimony. Although Motorola complained that the plaintiffs' expert simply assumed that certain disclosures corrected prior misrepresentations and did not consider other information already known to the market, the court held that these were factual issues that went "to weight, not admissibility" and could be resolved by the jury.
Holding: Motion for summary judgment denied (except as to certain bondholder claims).
In the aftermath of the Dura decision, loss causation can be a contentious issue at every stage of a securities class action. Two recent decisions provide some insight on how courts are addressing the plaintiff's burden of proof on this element.
(1) In Ryan v. Flowserve Corp., 245 F.R.D. 560 (N.D. Tex. 2007), the court rejected the use of the "true financial condition" theory to establish loss causation. When Flowserve announced a financial restatement in 2004, the stock price only declined a few cents. According to the plaintiffs' expert, however, Flowserve's 2002 announcements of an earnings miss and a reduction in guidance were a "revelation of the Company's true financial condition" and served as corrective disclosures. As a result, the stock price declines associated with the 2002 announcements were losses related to the alleged fraud. The court disagreed and held that there needed to be a stronger relationship between the supposed corrective disclosures and the alleged fraud.
Held: Class certification denied.
Quote of note: "Plaintiffs' expert leads the court to a dangerous precipice. . . . [A] plaintiff, like here, with debatable evidence of fraud, can pick the largest stock price drop irrespective of the actual reason and still relate the fraud because the stock drop is nevertheless a revelation of the company's true financial health. The 'true financial condition' theory, if accepted, threatens to undermine the objective of securities laws and disregards precedent."
(2) In In re Omnicom Group, Inc. Sec. Litig., 2008 WL 243788 (S.D.N.Y. Jan. 29, 2008), the company had announced in 2001 that it was placing certain investments into a separate holding company. There was no statistically significant movement in the company's stock price following the disclosure. In June 2002, however, there was a flurry of negative news reports about Omnicom and the transaction, leading to a stock price decline. On summary judgment, the court held that (a) the news reports generally did not contain any new facts about the transaction or the company's accounting, and (b) to the extent any new facts were disclosed, they could not have qualified as corrective. (The court relied heavily on the Hunter decision from the Fourth Circuit.) Moreover, the court found that the event study done by the plaintiffs' expert failed to "isolate [any corrective disclosures'] effect on Omnicom's stock price from that of the negative reporting, which dwarfed any shreds of new information disclosed in June 2002."
Held: Summary judgment granted in favor of defendants.
Quote of note: "Because the law requires the disaggregation of confounding factors, disaggregating only some of them cannot suffice to establish that the alleged misrepresentations actually caused Plaintiffs' loss."
In an unusual decision, the S.D. of Tex. has ordered that a prominent plaintiffs' firm pay the attorneys' fees and expenses of Alliance Capital, a money management company sued for control person liability (under Section 15 of the 1933 Act) in the Enron securities class action. The plaintiffs had alleged that Alliance controlled one of its employees who also served as an Enron outside director. In his role as an Enron director, the employee signed a registration statement for a public offering that incorporated Enron's admittedly false financial statements for 1998-2000.
In In re Enron Corp. Securities, Derivative & "ERISA" Litigation, 2006 WL 3474980 (S.D.Tex. Nov. 30, 2006), the court found that the plaintiffs had failed to establish facts sufficient for a reasonable jury to conclude that Alliance was a control person. More interestingly, the court held that although the plaintiffs' firm could not be held liable for all of Alliance's fees and expenses from the outset of the case, once the director was deposed and sufficient evidence did not emerge, the plaintiffs' firm should have dropped the claim. Accordingly, the firm was required to pay Alliance's fees and expenses related to the summary judgment stage of the litigation.
The New York Times and the Wall Street Journal both have articles (subscrips. req'd) on the decision.
Quote of Note: "Moreover, it appears to this Court more appropriate that an award of fees and costs under § 11(e) should be borne by counsel: non-attorney clients more likely than not would not have the ability to determine at what point, based on what evidence, an action becomes legally 'frivolous,' while its licensed counsel should and is held to such a standard."
The Star-Ledger (New Jersey) reports that a court in the D.N.J. is allowing parts of the securities class action pending against Bristol-Myers Squibb to proceed. The case relates to the FDA's rejection, in April 2000, of a high blood pressure drug developed by the company. Although on Tuesday the court dismissed Bristol's chief executive from the case and significantly narrowed the claims, the remaining claims could go to trial as early as this winter.
Quote of note: "In response to the judge's action, Bristol and the lead plaintiff, Long View Collective Investment Fund, both claimed victory and vowed to go to trial. Pretrial discovery, which has taken four years, has generated nearly 4 million pages of documents and sworn statements from 44 witnesses and 23 experts, according to court papers."
The 10b-5 Daily has posted previously about the interesting securities class action brought against Tyson Foods, Inc. in connection with the company's 2001 acquisition of IBP Inc. (see here and here).
The plaintiffs in the case are a group of hedge funds who were seeking to arbitrage the merger. They allege that on March 29, 2001, Tyson falsely stated that it was backing out of the merger with IBP due to a government investigation into accounting discrepancies at one of IBP's units. As a result, Tyson artificially deflated the price of IBP's stock. Tyson eventually completed the acquisition in September 2001, after being ordered to perform on the merger contract by a Delaware state court. The plaintiffs represent all IBP shareholders who bought on or before March 29, 2001, and then sold their shares following Tyson's announcement.
The Associated Press reports that the D. of Del. has granted summary judgment in favor of Tyson in the case. According to the article, the court found that the father-son team that ran Tyson at the time was "under no duty to tell shareholders the business reasons for their decision not to go forward with the deal."
Checkers Drive-In Restaurants Inc. (Nasdaq: CHKR) has announced a summary judgment win in the securities class action filed against Rally's Hamburgers in the W.D. of Kentucky. (Rally was acquired by Checkers in 1999). The suit was based on conduct that took place in the early 1990s.
Judge Simpson found that the plaintiffs would not be able to establish fraudulent intent and that certain analyst evaluations of the company's challenged statements "counterbalanced any misleading effect those statements might have had on the market." (The opinion actually can be found on Checkers' website.)
Quote of note (opinion): "[I]n this case, as in others, the claims of wrongdoing are based upon a fiction that poor management constitutes fraud if a company's plans for continued growth do not succeed."
As discussed previously in The 10b-5 Daily, Chrysler Corp.'s former shareholders have brought a class action in the D. of Del. alleging that Daimler-Benz misrepresented the acquisition of Chrysler as a "merger of equals" to avoid paying them a takeover premium for their shares. The court recently certified the class and things are continuing to go well for the plaintiffs. The Associated Press reports that Judge Farnan has denied the portion of Diamler-Benz's summary judgment motion based on the statute of limitations.
Quote of note: "In his ruling on DaimlerChrysler's statute of limitations argument, Farnan wrote: 'I agree with the plaintiffs' assertion that they could not have known that the merger-of-equals representations were false until Schrempp revealed his true intent in the Financial Times article.' Farnan has not yet ruled on other parts of DaimlerChrysler's motion for summary judgment."
Deloitte Touche Bermuda is accused of aiding and abetting the Manhattan Investment Fund's alleged $400 million fraud through audits it conducted for the 1996 and 1997 fiscal years. On Monday, the New York Law Journal reports, the S.D.N.Y. rejected a summary judgment motion by the accounting firm. Among other things, Deloitte had argued that the court lacked subject matter jurisdiction because the plaintiffs are not U.S. citizens.
Quote of note: "'All of the causes of action and defendants are tied together through their connection to the single scheme which was the fraud committed by Berger [who controlled the hedge fund] in New York,' [Judge] Cote said. 'It matters not, therefore, whether any beneficial owner of shares in the Fund or the two named plaintiffs are United States citizens.'"