Few can ignite a legal firestorm like U.S. District Judge Jed Rakoff of the Southern District of New York. Last week, in a mortgage fraud suit against Bank of America and Countrywide, Judge Rakoff refused to dismiss a novel claim for civil penalties under the obscure Financial Institutions Reform Recovery Enforcement Act (“FIRREA”). The ruling will surely encourage civil prosecutors to make wider use of FIRREA, which provides a generous ten-year statute of limitations and low burden of proof, in pursuing financial fraud cases.
FIRREA was enacted in response to the Savings and Loan debacle of the 1980s, as well as the fraud scandals that emerged during that era. The statute includes a clause imposing a civil penalty for mail and wire fraud and other violations “affecting a federally insured financial institution.” Until recently the civil penalty provision has been ignored by prosecutors, leaving courts without occasion to decide what exactly the statute means by “affecting” a financial institution. Read More
On Wednesday, the Supreme Court issued its decision in Amgen, Inc. v. Connecticut Retirement Plans. In a 6-3 decision authored by Justice Ginsburg, the Supreme Court handed a win to plaintiffs in securities fraud class actions, holding that plaintiffs do not have to prove materiality at the class certification stage. The decision marks a departure from some of the Court’s more recent class action rulings, which seemed to narrow class action litigation. Justices Scalia, Thomas and Kennedy dissented.
In their complaint, plaintiff shareholders alleged that Amgen and its executives misled investors about the safety and efficacy of two anemia drugs, thereby violating Section 10(b) and Rule 10b-5. During class certification, Amgen argued that Rule 23(b)(3) required that plaintiffs needed to prove materiality in order to ensure that the questions of law or fact common to the class will “predominate over any questions affecting only individual members.” Both the district court and the Ninth Circuit Court of Appeals rejected Amgen’s argument. The Supreme Court followed suit, affirming the Court of Appeal’s judgment and holding that proof of materiality is not a prerequisite to class certification in securities fraud cases. Read More
In Gabelli v. SEC, a unanimous Supreme Court held that the statute of limitations for “penalty” claims in governmental enforcement actions begins to run from the date of the underlying violation of the law, not when the government discovers or reasonably should have discovered the misconduct. Gabelli has important implications for the Securities and Exchange Commission (“SEC”) and all governmental agencies because it limits the sanctions available to the agency for conduct that occurred more than five years before it commences a civil enforcement action. Opinion.
Gabelli involved the application of 28 U.S.C. § 2462, which provides that “an action, suit or proceeding for the enforcement of any civil fine, penalty or forfeiture … shall not be entertained unless commenced within five years from the date when the claim first accrued[.]” In 2008, the SEC sought civil penalties from Mark Gabelli, a mutual fund portfolio manager, for alleged violations of the Investment Advisers Act in connection with alleged market timing issues. Gabelli successfully moved to dismiss the penalty claims as time-barred under Section 2462 because the complaint was filed almost six years after the alleged misconduct. On appeal, the Second Circuit reversed, reasoning that in cases of fraud the statute of limitations does not begin to run until the SEC discovered (or reasonably could have discovered) the wrongful acts. The Supreme Court disagreed, holding that “a claim based on fraud accrues—and the five-year clock begins to tick—when a defendant’s allegedly fraudulent conduct occurs.” Read More
It has been over three years since the SEC filed its insider trading charges against Galleon Management and Raj Rajaratnam. When that complaint was filed, the Director of the SEC’s Division of Enforcement, Robert Khuzami promised to “roll back the curtain” and “look at patterns across all markets” for illegal insider trading. Last month, Mr. Khuzami echoed those remarks when he announced that the SEC had filed its largest-ever insider trading case and warned “would-be insider traders” that the SEC is “here to stay.”
In that case, SEC v. CR Intrinsic Investors, LLC, the SEC alleges that a group of hedge funds and their managers made $276 million in illicit profits by improperly trading on insider information about pharmaceutical clinical trial results. One of the defendants, a medical consultant for an “expert network” firm who allegedly provided the inside information on which the trades were based, entered into a settlement with the SEC and a non-prosecution agreement with the Department of Justice. The case against the portfolio manager who allegedly made the trades, and the investment adviser with whom he was affiliated, is ongoing.
Last week, the SEC filed yet another insider trading complaint, this time against ten individuals who made stock trades in advance of four merger and acquisition transactions. In SEC v. Femenia, the SEC claims to have identified a “massive, serial insider trading scheme obtaining at least $11 million in illicit trading profits” centered around a former investment banker who misappropriated the information and “tipped” his personal friends about the upcoming deals. According to the SEC, those personal friends (who are also defendants in the case) traded on the information and paid a portion of their profits to the investment banker. In some instances, the information was even “tipped” a second time to friends and family members of the original “tippee.”
According to the SEC’s statistics, it has brought 58 enforcement actions for insider trading in 2012, the second-highest total in the last ten years and the most in any year since 2008. Those numbers confirm that the SEC really is “here to stay” on insider trading.
Securities class action lawyers are looking to the U.S. Supreme Court this term to clear up an issue that has been at the center of several prominent securities class actions, specifically, what is the standard for class certification where the class members’ reliance on defendants’ alleged misstatements is presumed under the fraud-on-the-market theory of reliance. Last term, in a class action ruling in an employment case, Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 1541 (2011), the Court signaled that class certification may require “a preliminary inquiry into the merits of a suit,” singling out elements of the fraud-on-the-market theory as an example.
On November 5, the Supreme Court heard argument in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, a securities fraud putative shareholder class action presenting the question of how far a court should consider a merits issue when deciding whether to certify a class. The appeal in Amgen is from a Ninth Circuit decision that affirmed the district court’s order certifying a plaintiff class of purchasers of Amgen stock. Defendants opposed class certification on the ground that the rebuttable presumption of reliance under the fraud-on-the-market theory requires not only that the market for Amgen stock was efficient, but that the alleged misstatements were material. Defendants offered evidence that the alleged misstatements in the case were immaterial. Therefore, according to defendants, reliance could not be presumed, and the proposed plaintiff class could not be certified because common issues did not predominate. The Supreme Court took the case in order to determine whether the district court was correct to disregard defendants’ evidence of immateriality on the ground that materiality is an issue appropriately considered at trial or at summary judgment rather than at the class certification stage. Read More
Imagine a plaintiff who buys stock in a company that subsequently discloses a misstatement in its financial statements that existed at the time plaintiff invested. The stock price drops upon the initial disclosure, and then rebounds back above the purchase price. Can that plaintiff plead economic loss, as is required under Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005)? According to the Second Circuit, the answer is yes. Read More
In SEC v. Bartek, filed August 7, 2012, the Fifth Circuit held that the discovery rule does not apply to 28 U.S.C. § 2462, the statute of limitations governing penalties in SEC civil enforcement actions, thus affirming a district court’s grant of summary judgment in favor of the defendants. Under the Fifth Circuit’s ruling, the SEC’s claims for penalties accrue on the date of the violation, not on the date that the SEC discovers the violation. This opinion creates a circuit split after the Second Circuit’s decision in SEC v. Gabelli, 653 F.3d 49 (2d Cir. 2011), which held that the discovery rule applied to Section 2462, and increases the likelihood that the Supreme Court will weigh in on the issue. Read More
Earlier this month, President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”) into law. The JOBS Act, which had strong bipartisan and business support, is aimed at stimulating economic growth by allowing U.S. and foreign startup and emerging companies to more easily raise capital and transition to public companies.
The JOBS Act works by reducing a number of regulatory burdens that were imposed by the 2002 Sarbanes-Oxley Act. It directs the Securities and Exchange Commission to revise Rule 506 under the 1933 Securities Act to allow general advertising and solicitation for private placements, with no limit on the number of securities that are bought and sold, so long as they are sold only to accredited investors. It also amends Rule 144A(d)(1) of the Securities Act, which allows private resales of securities to qualified institutional buyers (“QIBs”), to permit such securities to be generally advertised to persons other than QIBs—as long as they are only later sold to QIBs. These changes have the effect of allowing firms to market themselves to a greatly expanded base of potential investors. Read More
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