The past decade has seen an incredible rise in M&A litigation. According to Cornerstone, in 2014, a whopping 93% of announced mergers valued over $100 million were subject to litigation, up from 44% in 2007. As Delaware Supreme Court Chief Justice Leo Strine explained several years ago, “the reality is that every merger involving Delaware public companies draws shareholder litigation within days of its announcement.” These lawyer-driven class action suits, which typically allege breaches of fiduciary duty by directors and insufficient disclosures, overwhelmingly end in settlement, with corporate defendants agreeing to provide additional disclosures in exchange for a broad release, and plaintiffs’ counsel walking away with attorneys’ fees for the theoretical “benefit” they conferred upon the class.
Katie Lieberg Stowe
Ms. Stowe’s primary practice is defending corporations and individuals in federal and state litigation alleging fraud, breach of contract, or negligent misrepresentation related to stock, debt, and mortgage-backed securities. Her expertise includes the federal securities laws and the Financial Institutions Reform, Recovery, and Enforcement Act. She also has experience in internal investigations and criminal investigations related to compliance, fiduciary duty, insider trading, and investor disclosures.
Her recent matters include the following:
- Representing a bank in actions initiated by certificateholders in mortgage-backed securities claiming breaches of representations and warranties related to mortgage loans.
- Representing a bank in actions by monoline insurers seeking to deny coverage under financial guarantees covering residential mortgage-backed securitizations.
- Representing the former president of the nation’s largest mortgage lender in litigation with the SEC in the Central District of California, multiple suits by equity and debt holders, and litigation brought by RMBS investors and insurers.
- Conducting an internal investigation into allegations about compliance and insider trading at a Fortune 100 company.
Ms. Stowe is the co-editor of the RMBS Litigation section of Orrick’s Financial Industry blog. She devotes a portion of her practice to pro bono activities, including representing individuals in collateral attacks on criminal convictions.
Prior to joining Orrick, Ms. Stowe clerked for the Honorable Irma E. Gonzalez in the United States District Court for the Southern District of California.
On September 2, 2015, the North American Securities Administrators Association (NASAA) filed an amicus brief siding with Montana and Massachusetts in a bid to overturn the SEC’s new capital-raising rule, titled Regulation A but commonly referred to as Regulation A+. The NASAA, a non-profit association of state, provincial, and territorial securities regulators in the United States, Canada, and Mexico, includes securities regulators from all 50 states and the District of Columbia. The organization’s purpose is to “protect investors from fraud and abuse in connection with the offer and sale of securities.”
In United States v. Salman, the Ninth Circuit recently held that a remote tippee could be liable for insider trading in the absence of any “personal benefit” to the insider/tipper where the insider had a close personal relationship with the tippee. This opinion is significant in that it appears at first glance to conflict with the Second Circuit’s decision last year in United States v. Newman, in which the court overturned the conviction of two remote tippees on the grounds that the government failed to establish first, that the insider who disclosed confidential information in that case did so in exchange for a personal benefit, and second, that the remote tippees were aware that the information had come from insiders. Read More
In an interesting and uncommon intersection between securities law, curbing human rights abuses and freedom of speech under the First Amendment, the United States Court of Appeals for the District of Columbia recently agreed to re-consider whether the SEC can require companies to disclose whether their products contain “conflict minerals.” The term “Conflict Minerals” is defined in Section 1502(e)(4) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and refers to certain minerals originating from the Democratic Republic of the Congo (“DRC”), or an adjoining country, that have been used by armed groups to help finance violent conflicts and human rights abuses in those countries. These minerals currently include gold, tin, tatalum, tungsten, and may include any other mineral the Secretary of State determines is being used to finance conflict in the DRC or an adjoining country.
Corporate merger negotiations are typically conducted under a veil of secrecy, with public disclosure withheld until the end when a definitive agreement has been signed. The fear is that premature disclosure of preliminary merger talks will negatively impact the deal. For example, early disclosure might encourage speculative investment in the target company’s stock, driving up the price and diminishing shareholders’ perception of the offered premium, or even cause potential bidders to be reluctant to make an offer in the first place. In light of these problematic scenarios, courts widely recognize that typically there is no duty to disclose merger negotiations prior to the execution of a definitive merger agreement. See, e.g., Thesling v. Bioenvision, Inc., 374 F. App’x 141, 143 (2d Cir. 2010) (there is “no express duty [that] requires the disclosure of merger negotiations, as opposed to a definitive merger agreement”); Williams v. Dresser Indus., Inc., 120 F.3d 1163, 1174 (11th Cir. 1997) (“In the context of sales of stock while negotiations for merger or acquisitions were pending, courts have found no duty to disclose the negotiations”). Read More
Some things are better left unsaid. Especially, it seems, when they involve political intelligence shared by a congressional aide with a lobbyist linked to a political intelligence firm serving Wall Street traders.
The sharing of political-insider scoop has recently caused Congress to be subpoenaed for an insider trading investigation that will likely test recent legislation enacted to curb trading on non-public political information. The SEC subpoenaed Rep. David Camp (R., Mich.) for records, and the Justice Department subpoenaed Camp’s aide Brian Sutter, staff director of the House Ways and Means Committee’s healthcare subpanel, to testify before a federal grand jury. Read More
On March 31, 2014, the Securities and Exchange Commission brought insider trading charges against Ching Hwa Chen, the husband of a corporate insider, alleging that he misappropriated financial information from his wife and then shorted her employer’s stock, netting $138,000 in ill gotten gains. SEC v. Chen, No. 5:14-cv-01467 (N.D. Cal). The SEC’s allegations (taken from its complaint) are as follows: Chen’s wife was the Senior Tax Director of Informatica, a data integration company. In late June 2012, Informatica learned it would miss its revenue guidance for the first time in 31 consecutive quarters. That miss caused the defendant’s wife to work more than usual as the company scrambled to close its books and prepare for a potential pre-release of its quarterly revenues. Over the next several days, the defendant overheard his wife’s phone calls addressing the revenue miss, including on a four-hour drive to Reno, Nevada where his wife fielded calls from the passenger seat as he drove. Early the next week, convinced that Informatica’s stock would lose value, Chen bet heavily against the company, shorting its stock, buying put options, and selling call options. In early July, after announcing the miss, Informatica’s stock price fell 27% from $43 to $31. Chen closed out all of his positions that same day. Read More
The SEC this year has demonstrated its willingness to incentivize whistleblowers and companies to share information about misconduct and assist with the SEC’s investigations. To that end, the SEC issued its first Deferred Prosecution Agreement (DPA) with an individual on November 12, 2013. A DPA is an agreement whereby the SEC refrains from prosecuting cooperators for their own violations if they comply with certain undertakings.
This first DPA is with Scott Herckis, a former Fund Administrator for Connecticut-based hedge fund Happelwhite Fund LP. In September 2012 Herckis resigned and contacted government officials regarding the misappropriation by the fund’s founder and manager, Berton Hochfeld, of $1.5 million in hedge fund proceeds. Herckis further reported that Hochfeld had overstated the fund’s performance to investors. Herckis’s cooperation with the SEC, including producing voluminous documents and helping the SEC staff understand how Hochfeld was able to perpetrate the fraud, led the SEC to file an emergency action and freeze $6 million of Hochfeld’s and the fund’s assets. Those frozen assets will be distributed to the fund’s investors. Read More
The Second Circuit last week ruled on a key aspect of the timing of securities suits. Under the Supreme Court’s decision in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), plaintiffs are often able to revive claims by relying on earlier-filed class actions to toll the statute of limitations. RMBS plaintiffs have recently turned to American Pipe when their putative class actions are dismissed for lack of standing.
In In re IndyMac Mortgage-Backed Securities Litigation, lead plaintiffs lacked standing to bring certain claims, which were dismissed by the district court. Other members of the asserted class—who had not been named as plaintiffs—sought to intervene in the action in order to bring those dismissed claims. Judge Lewis A. Kaplan of the United States District Court for the Southern District of New York denied the investors’ motions to intervene. Read More
In a decision rendered from the United States District Court for the Northern District of Illinois, Eastern Division, Judge Ronald Guzmán granted summary judgment on the SEC’s insider trading claims as to three defendants but allowed claims as to one defendant to proceed to trial. The SEC’s claims against all of the defendants focused on suspiciously-timed sales and other circumstantial evidence, but failed to identify specific tippers who provided defendants with inside information. The case highlights the SEC’s aggressive strategy in pursuing insider trading claims without direct evidence of tipping. The court’s decision also underscores the importance of pursuing motions during discovery in order to preserve arguments, or obtain sanctions establishing evidentiary points, in order to later use discovery misconduct to bolster otherwise thin bases for liability.
Defendant Yonghui Zhang worked full time for a company called Global Education & Technology Group, Ltd. (“GEDU”). GEDU was founded by Zhang’s younger brother and sister-in-law, and provides educational programs and services in China including consultation concerning higher education opportunities in the United States. Zhang purchased 7,900 GEDU American Depository Shares on the NASDAQ for almost $40,000 on the last trading day before GEDU announced its acquisition by Pearson plc. Zhang had never purchased GEDU stock for himself, spent more than three times his annual salary to purchase the securities, and made a profit of close to $50,000. Zhang moved for summary judgment, relying on his testimony that he had no knowledge of the Pearson acquisition and pointing to the SEC’s failure to identify a specific “tipper” who told him about the acquisition.
The Court denied his motion. Zhang’s office was on the same floor as his brother and sister-in-law’s offices, and Zhang had numerous communications with them and with GEDU senior management aware of the Pearson acquisition. Zhang argued that the SEC did not point to any particular records of communications or opportunities to communicate, but the SEC had sought those types of details and Zhang failed to provide them in discovery. Read More