On May 28, 2013, in Delshah Group LLC v. Javeri, a rare securities trial regarding credit-crisis related claims, Judge Katherine B. Forrest of the United States District Court for the Southern District of New York issued an order directing a complete defense judgment following a two-week bench trial. The decision includes a noteworthy discussion and analysis of loss causation in the context of credit crisis litigation—directly applicable to pending cases under Sections 10, 11 and 12—and highlights a tension between the Private Securities Litigation Reform Act and longstanding securities law when it comes to proving culpable intent.
The case arose from a real estate investment gone bad. In March of 2007, plaintiff purchased interests in a venture called 40 Broad Street Project. That project sought to make a return on converting commercial real estate space into condominiums and thus take advantage of the rapidly rising value of condos in New York City. Plaintiffs claimed that defendant misrepresented how far along the building project was, whether it was under budget, and how much “skin in the game” defendants had in the project. When the credit crisis hit and the real estate market collapsed, plaintiff lost substantial sums on its investment and claimed the above misstatements were its cause. Read More
Following up on clues earlier this year that the SEC may increase its scrutiny of cybersecurity disclosures, SEC Chairman Mary Jo White has asked the Commission to evaluate current guidance for cybersecurity disclosures and to consider whether more stringent requirements are necessary. White asked the Commission to assemble a report on general practice and compliance with existing guidelines, and to make recommendations for future guidance. White did not yet commit to changes to the current guidelines, issued in October 2011, pending issuance of the report.
Senator Jay Rockefeller, who disclosed the Chairman’s directive, has recently encouraged the SEC to provide further guidance on cybersecurity disclosures. He has already sponsored legislation in this arena, including the Cybersecurity Act of 2012, which would have pushed the private sector to share internal information within the industry and with government agencies. The proposed legislation in 2012 would have also encouraged the enactment of protective measures for computer networks. Senator Rockefeller has expressed concern about the lack of information regarding cybersecurity risks, and appears poised to push for additional disclosures. Read More
Cybersecurity may be the SEC’s newest area for enforcement actions. While the SEC first released Disclosure Guidance concerning cybersecurity in 2011, the recent media attention surrounding significant cybersecurity breaches at a number of U.S. companies may cause the SEC to renew interest in the issue, and may result in enforcement actions, as well as shareholder class actions and derivative lawsuits. Companies that fail to disclose cybersecurity events in their public filings may find themselves on the wrong end of an SEC investigation and enforcement action.
Companies may also see an increase in class actions where there is a significant stock drop following disclosure of a cybersecurity breach—however, to date, there is little evidence to suggest the market reacts in a negative way following disclosure of a cybersecurity breach, leaving questions about whether plaintiffs could prove materiality and causation in a securities fraud case. Finally, increased focus on cybersecurity disclosures may result in an increase in shareholder derivative actions against officers and directors, with shareholders alleging that the company breached their fiduciary duties by failing to ensure adequate security measures. Read More
On October 10, 2012, a federal district judge in Missouri granted in part and denied in part class action plaintiffs’ motion to compel certain documents that KPMG had supplied to the Public Company Accounting Oversight Board (“PCAOB”) in a 2006 investigation.
Judge Ortrie D. Smith held that KPMG was not required to produce the bulk of its withheld documents relating to a 2006 PCAOB inspection because those documents were privileged under SOX. Specifically, SOX provides that documents and information prepared or received by or specifically for the PCAOB are confidential and privileged and not subject to disclosure. Not all documents fell under the privilege, the court held: documents from the underlying transaction and work that was the subject of the investigation were not prepared for the PCAOB and so could not claim the privilege protection.
The court rejected plaintiffs’ arguments that the SOX privilege only covers documents “in the hands” of the PCAOB and not third parties, like KPMG, because the privilege covered materials both prepared for, and received by, the PCAOB. Finally, KPMG had not waived the privilege when it shared some of the information with Sprint employees or defendants in the litigation.
The Public Company Accounting Oversight Board (PCAOB)’s new accounting standard, Accounting Standard No. 16, seeks to bolster the relationship between audit committees and outside auditors, especially by encouraging ongoing, two-way tailored communications, as opposed to after-the-fact or boiler-plate notices. Auditing Standard No. 16, adopted August 15, 2012, was issued in light of requirements in Sarbanes-Oxley and the Dodd-Frank Act that relate to oversight and accounting, and replaces interim standards AU section 380 and AU section 310. The SEC is expected to approve the new rule, which could become effective as early as December of this year depending on the timing of SEC approval. Read More
The Supreme Court will hear Amgen’s appeal in Amgen v. Connecticut Retirement Plans in the upcoming October term, the Court announced on Monday June 11. The lawsuit against Amgen alleges that the biotech company made misrepresentations about the safety of two anti-anemia drugs for US FDA-approved uses. In certifying the class, the Ninth Circuit held that plaintiff only needed to plausibly allege that Amgen’s misrepresentations were material based on a fraud-on-the-market theory for the class to be certified. Amgen’s appeal claims the district court must both require proof of materiality and allow Amgen to present evidence rebutting the fraud-on-the-market theory before certifying the class.