A lack of sweaty models trying on yoga pants may be problematic, but does it give rise to securities fraud? Not in the Southern District of New York. In In re lululemon Securities Litigation, decided on April 18, 2014, Judge Katherine B. Forrest dismissed in its entirety a class action complaint against lululemon based on sheer yoga pants alleging violations of Section 10(b) and Section 20(a) of the Exchange Act and SEC Rule 10b-5. As summarized by the court, lead plaintiff alleged, “if only lululemon had someone try on its black luon yoga pants before they shipped, it would have realized they were sheer; similarly, if lulumeon had only had someone exercise in certain athletic wear (enough to produce sweat), it would have realized that the colors bled.” Based on these purported shortcomings, plaintiff alleged that statements touting the high quality of the company’s products were materially false and misleading. The court, however, disagreed: “This narrative requires the Court to stretch allegations of, at most, corporate mismanagement into actionable federal securities fraud. This is not the law.” Read More
Richard A. Martin
Richard A. Martin, a partner in Orrick’s New York office, is a member of the Securities Litigation and Regulatory Enforcement Group. His practice focuses on accountants’ liability, securities and commercial litigation, as well as arbitration and international and domestic white-collar criminal law.
Mr. Martin has been involved in litigation in the state and federal courts of the United States and in Europe for 30 years. His practice has concentrated on international and domestic litigation and arbitration involving securities, accounting and financial services and corporate governance. He also regularly provides advice and assistance in international criminal and civil law matters.
From June 1987 to July 1990, Mr. Martin served as Special Representative of the Attorney General, located at the United States Embassy in Rome, Italy. There, he represented the Department of Justice in Europe and handled extradition and mutual assistance matters. In August 1990, Mr. Martin’s contributions were recognized when he was named “Commendatore al Merito della Repubblica Italiana,” the Italian Legion of Honor.
Prior to transferring to Rome, Mr. Martin served as an Assistant United States Attorney for the Southern District of New York, from January 1980 to June 1987. Mr. Martin received numerous commendations for his work in the United States Attorney’s Office, including the Distinguished Service Award from the Department of Justice.
- Lazare Kaplan International, Inc. v. KBC Bank N.V. and Antwerp Diamond Bank N.V. (No. 11 Civ. 9490 (ALC) (S.D.N.Y. Sept. 5, 2012), 2012 WL 3854618 (S.D.N.Y.)). Co-lead counsel for KBC Bank in a RICO action seeking US$1.5 billion against the bank and its subsidiary, Antwerp Diamond Bank, based on the banks’ alleged complicity in the loss of US$135 million in diamonds and diamond proceeds. The district court granted KBC’s motion to dismiss the action in favor of proceedings in Belgium based on forum non conveniens, and also rejected plaintiff’s application for an anti-suit injunction. An appeal of the dismissal has been filed.
- Sterling National Bank v. J.H. Cohn, LLP. (Index No. 650879/12 (MLS) (N.Y.Sup. Aug. 28, 2012.)). Successfully defended accounting firm J.H. Cohn in an action alleging fraud in connection with losses suffered by Sterling National Bank which made loans to J.H. Cohn’s audit client. Distinguishing a long line of cases supporting the view that intent to deceive could be inferred from an auditor’s alleged knowledge of the company’s financial misrepresentations, the court granted J.H. Cohn’s motion, finding that Sterling failed to adequately allege fraud.
- Innospec Fuel Specialties, LLC v. Isochem North America, (Civ. No. 10-1642, 2012 WL 3682988 (D.N.J. Aug. 24, 2012). Lead counsel for Isochem North America (a subsidiary of French chemical supplier SNPE) in its defense of breach of contract and other claims brought by Innospec. Following Isochem’s motion to dismiss, the district court allowed the parties to conduct expedited discovery and briefing. Based on that record, the court granted summary judgment in favor of Isochem.
- Madoff Litigation. Represents Ernst & Young Luxembourg (“EY Luxembourg”) in litigation in the Southern District of New York arising out of EY Luxembourg’s involvement in the audits of certain feeder funds that invested in Bernard Madoff securities. After intensive fact investigation, analysis of the legal issues and coordination, with counsel for nearly thirty other defendants, the Luxemburg firm joined in the motion to dismiss the claims against it and all other defendants. That motion was granted on November 29, 2011. That ruling motion included a section seeking dismissal based on the application of Luxembourg law and forum non conveniens in favor of proceedings pending in Luxembourg, and was supported by an expert opinion of Luxembourg counsel with whom Mr. Martin worked closely. An appeal of the dismissal is pending.
- Stewardship Funds Litigation. Successfully defended Ernst & Young Bermuda (“EY Bermuda”) in litigation arising out of the Stewardship funds’ investment with a group of companies run by Thomas E. Petters, who was found guilty of running a US$3 billion Ponzi scheme. In response to investors’ initial filing in Connecticut state court, EY Bermuda successfully compelled arbitration in Connecticut federal court under the Federal Arbitration Act, on the ground that the investors’ claims were derivative, rather than direct, and, therefore, the investors were bound by the arbitration clause in the fund’s engagement letter. See Ernst & Young Ltd. Bermuda v. Quinn, 2009 WL 3571573 (D. Conn.). Mr. Martin also served as lead counsel for Ernst & Young Bermuda (”EY Bermuda”) and Ernst & Young Bahamas (“EY Bahamas”) in litigation arising out of the Stewardship funds’ investment brought by another group of investors. See, Isakov v. Ernst & Young Bermuda (Bermuda) and Ernst & Young Bahamas (Bahamas), 3:10-CV-1517 (D. Conn.). On March 9, 2012, the Court dismissed the federal securities claims against the Ernst & Young Firms and directed that all but one of their claims be sent to arbitration, as defendants had argued.
- Bear Stearns Hedge Fund Litigation. Lead counsel for Deloitte & Touche Cayman Islands against claims arising out of the collapse of the Bear Stearns Cayman Islands hedge funds, which invested heavily in mortgage-backed securities. Plaintiffs, representing the interests of the Cayman Islands liquidators of the hedge funds, sought recovery of US$1.5 billion in losses, based on claims for fraud, and aiding and abetting fraud. Following argument on June 24, 2010, the Court dismissed all claims other than negligence against DT Cayman. A motion to dismiss the final claim against DT Cayman was granted on January 5, 2011, when the Court dismissed the action in its entirety. Following that ruling, all matters raised by the Cayman Liquidators, including Proofs of Debt filed on behalf of DT Cayman in the Cayman liquidation proceeding seeking reimbursement of our firm’s costs and fees incurred in the defense of the firm where successfully resolved.
- In re Parmalat Securities Litigation. Lead counsel for Deloitte & Touche SpA in the Parmalat Securities Litigation Class action (in re Parmalat Securities Litigation, 04 MD 1653), and the related action brought by the receiver of Parmalat, Dr. Enrico Bondi (Bondi v. Grant Thornton International et al., 322 B.R. 44 (S.D.N.Y. 2005). Successfully defended against remand motion filed by the receiver and had the action consolidated with other claims in the Southern District of New York. Also acted as coordinating counsel for related Italian civil, criminal and administrative proceedings.
- In re Computer Associates, McBride v. Ernst & Young LLP, No. 02-CV-126, Mem. & Order (E.D.N.Y., Dec. 3, 2003); aff’d, In re Enterprise Mortgage Acceptance Co., LLC, Sec. Litig., 391 F.3d 401 (2d Cir. 2005). Successfully defended Ernst & Young LLP in shareholder class action alleging US$1 billion financial fraud, involving Computer Associates, Inc. and establishing in a case of first impression that Sarbanes-Oxley’s statute of limitations is not retroactive. Lead counsel for Ernst & Young LLP in Rosenzweig v. Wang, et al., No. 04-CV-2959 E.D.N.Y. (derivative action arising out of the same alleged fraud).
- FraternityFund Ltd. v. Beacon Hill Asset Management, LLC, 376 F.Supp.2d 385 (S.D.N.Y. 2005); Bullmore et al. v. Ernst & Young et al. 861 N.Y.S.2d 578. Successfully defended Ernst & Young Cayman Islands in hedge fund securities litigation claims by fund investors in federal action, where claims were dismissed. Successfully defended parallel action in New York State Court, where claims asserted by Cayman liquidators were dismissed on summary judgment, and recovered substantial reimbursement of legal fees and costs from the liquidator through an indemnification claim.
- Cromer Finance, Ltd. v. Berger, 137 F.Supp. 2d 452 (S.D.N.Y. 2001). Lead counsel for Ernst & Young International. Successfully obtained dismissal of all claims by hedge fund purchasers against EYI.
- Semi-Tech Litigation LLC v. Ting, et al., No. 604664/02 (N.Y.S. Sup. Ct.). Lead counsel to Ernst & Young International in action by note holders claiming US$800 million loss.
- Amorim v. Allen et al., Sup. Ct. Nassau County, aff’d 2d Dept.; and Patrick v. Allen et al., (E.D.N.Y.). Lead counsel to defendant Board members against shareholder claims of breach of duty and waste. New York State action dismissed, and dismissal affirmed; federal case resolved on terms very favorable to the Board.
- Sniado v. Bank of Austria et al., 174 F. Supp. 2d 159 (S.D.N.Y. 2001); 02-77012; 378 F.3d 210 (2nd Cir. 2004). Successful defense of Banca Intesa on claim of antitrust violation for alleged fixing of exchange rates in Italy. Certiorari granted, and dismissal affirmed by U.S. Supreme Court pursuant to ruling in F. Hoffmann-La Roche Ltd. v. Empagran S.A., 542 U.S. 155 (2004).
- KPMG Italy. Successfully defended the Italian member firm of KPMG in connection with the efforts of U.S. plaintiffs to obtain documents and testimony from the Italian firm in a malpractice action against KPMG LLP. We were successful in defeating claims of U.S. jurisdiction over the Italian firm, and limited discovery to that which Italy recognizes under its law – which was very limited. Bontex, Inc. v. KPMG LLP, Case No. CL 04000017-0 (Buena Vista, Va.)
- NYSE Euronext. On behalf of client, submitted amicus curiae brief in Morrison v. National Australia Bank Ltd., urging adoption of the bright-line transactional test which the Supreme Court enunciated in its June 2010 opinion 130 S.Ct. 2869.
International Civil and Arbitration Matters
- Core Furnace Systems Corp. v. DeAcero S.A. de C.V., 50T 110 00537 03. Representation of Mexican steel manufacturer in AAA arbitration and coordination of parallel patent/trade use claims in Mexico and Italy.
- Confidential advice to an Italian energy supplier regarding arbitration provisions concerning joint venture with a U.S. company in Argentine energy supplier.
- Confidential advice to a Hong Kong supplier in Singapore arbitration case applying New York law.
- Representation in AAA proceeding of eyewear manufacturer.
- Representation in AAA of Italian clothing designer and manufacturer against joint venture partner and distributor in the United States.
International Regulatory Proceedings and Investigations
Mr. Martin has conducted internal investigations of numerous multinational Fortune 500 corporations and presented results to corporate boards, U.S. authorities and committees, as well as foreign law enforcement and legislative authorities. He has also represented numerous corporate defendants and individuals investigated by foreign criminal and administrative authorities and in parallel U.S. proceedings, including the following.
- Advised numerous foreign member firms regarding parallel U.S. and foreign regulatory investigation including Switzerland, Italy, Luxembourg, Mexico, the Cayman Islands, Bermuda and Bahamas.
- Advised J. Paul Getty Museum regarding claims seeking forfeiture of antiquities, and claims against curator in criminal action relating to receipt of illegally excavated antiquities. Advised a U.S. medical supply manufacturer regarding investigation of commercial bribery in European subsidiary.
- Advised a U.S. pharmaceutical manufacturer relating to investigation of sales through compensation to doctors recommending the use of the company’s product and claims of “permanent establishment.”
- Defended three U.S. directors named in an asbestos-related prosecution and civil proceedings in Italy.
- Advised a major cigarette distributor regarding claims of tax evasion by Italian authority based on presence of “permanent establishment” in Italy.
- Advised a large U.S. securities dealer concerning investigation by CONSOB, the Italian equivalent of the SEC.
- Assisted in the defense of a major U.S. banking institution in criminal charges against former officer who structured a “usufruct” transaction in Italy, and in related civil claims.
- Advised several individuals prosecuted in Italy for possession of allegedly stolen artworks, and assisted with defense of civil claims in U.S. courts.
- Assisted in the defense of the management of an Italian office of a U.S. public relations firm regarding commercial bribery charges.
Prior to joining Orrick, Mr. Martin was a shareholder at Heller Ehrman LLP, where he had served as Managing Partner and Head of Litigation in the New York office.
Corporations contemplating going private should take note of recent rulings from the Delaware Court of Chancery, which provide clear guidance on how to structure their transactions to reduce the risk of being subjected to the “entire fairness” standard of review.
Several months ago, the Delaware Court of Chancery issued an important MFW decision, in which Chancellor Strine set forth the procedural mechanisms a company can employ so that a going-private transaction with its controlling stockholder can be reviewed under the deferential business judgment rule, as opposed to the more stringent entire fairness standard. In that decision, Chancellor Strine held that the business judgment rule would apply if: (1) the controlling stockholder at the outset conditions the transaction on the approval of both a special committee and a non-waivable vote of a majority of the minority investors; (2) the special committee was independent, (3) fully empowered to negotiate the transaction, or to say no definitively, and to select its own advisors, and (4) satisfied its requisite duty of care; and (5) the stockholders were fully informed and uncoerced.
More recently, in SEPTA v. Volgenau, C.A. No. 6354-VCN (Del. Ch. Aug. 5, 2013), Vice Chancellor Noble provided further clarity on when a sale of a company with a controlling stockholder will be entitled to business judgment rule review. In SEPTA, Vice Chancellor Noble applied the business judgment rule and granted summary judgment to the defendants in case that challenged the acquisition of SRA International by Providence Equity Partners. Like the change-in-control transaction in MFW, the change-in-control transaction in SEPTA was negotiated by a disinterested and independent special committee and approved by a majority of the minority stockholders. Unlike MFW, however, where the controlling stockholder was the buyer in the transaction, SEPTA involved a transaction in which a third party was the buyer, and in which the controlling stockholder agreed to roll over a portion of his shares into the merged entity. Read More
Almost two years after the Supreme Court issued its momentous decision in Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), lower courts continue to reach significantly different conclusions concerning its scope. The Supreme Court held that, for purposes of SEC Rule 10b-5, “the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” Id. at 2302. Specifically, in Janus, the Supreme Court held that an investment advisor could not be liable for statements in prospectuses filed by a related, but legally separate entity. Because the investment advisor did not “make” the statements—that is, did not have “ultimate authority” over them—it could not be liable as a primary violator of Rule 10b-5 for any misstatements or omissions contained therein.
Janus established a bright-line rule. But the Southern District of New York, in particular, has split over whether Janus applies beyond the context of private actions brought under Rule 10b-5(b). In the most recent decision from that district to address the issue, SEC v. Garber, No. 12 Civ. 9339, 2013 WL 1732571 (S.D.N.Y. Apr. 22, 2013), Judge Shira A. Scheindlin deepened this divide. Read More
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 its recently-released Report on the Municipal Securities Market, the Securities and Exchange Commission asked Congress to increase the SEC’s authority to regulate the municipal securities market, which it described as “decentralized . . . illiquid and opaque.” While the SEC has brought a handful of enforcement actions against issuers of municipal securities based on allegedly-misleading offering materials, most recently against the state of New Jersey in 2010 and the city of San Diego in 2006, it has done so rarely because municipal securities are exempted from most of the provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. Read More