Insider Trading Gets Political: Trading on Political Intelligence

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

Supreme Court Rejects Calls to Overrule Fraud-on-the-Market Theory in Halliburton; Presumption of Reliance Still a Basic Part of Class Certification

Today the Supreme Court rejected calls from lawyers, economists and corporate associations to overrule the “fraud-on-the-market” theory that makes it possible to litigate federal securities fraud claims as class actions, instead handing defendants a modest procedural victory.  In Halliburton Co. v. Erica P. John Fund, Inc., the Court declined to overrule a decision that for more than twenty-five years has been used by securities plaintiffs to certify thousands of federal class actions, but also recognized that defendants can rebut class certification by showing that allegedly misleading statements did not affect the price of a company’s securities.  Halliburton kills what had been a growing movement to eliminate federal securities fraud class actions for all intents and purposes.

Plaintiff-respondent Erica P. John Fund, Inc. (the “Fund”) purchased stock in Halliburton and lost money when Halliburton’s stock price dropped upon the release of certain negative news regarding the company.  The Fund filed suit against Halliburton and its CEO David Lesar (collectively, “Halliburton”), alleging that Halliburton had made knowing or severely reckless misrepresentations concerning those topics, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Read More

Sheer Yoga Pants and Over-Stretched Allegations: Court Refuses to Stretch Allegations of Corporate Mismanagement into Federal Securities Fraud

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

Halliburton Watch – Highlights from the Amicus Filings

This is the second post in our series on the Supreme Court’s coming ruling in Halliburton Co. v. Erica P. John Fund, Inc., Case No. 13-317.  Here’s our post from last week concerning background information about the case.

As the securities litigation bar holds its breath while the Supreme Court deliberates the fate of the fraud-on-the-market presumption of reliance, we take a moment to review some of the positions submitted by amici in Halliburton v. Erica P. John Fund, Inc.

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Halliburton Watch: Let’s Start with the Basics

On March 5, 2014, the Supreme Court heard oral argument in the case Halliburton Co. v. Erica P. John Fund, Inc., Case No. 13-317, and we are certain our blog readers are eagerly awaiting the Court’s ruling.  The case has potentially far-ranging implications for the survival of the Court’s landmark ruling in Basic, Inc. v. Levinson, 485 U.S. 224 (1988), which relied on the efficient market hypothesis to create the fraud-on-the-market presumption of reliance on misrepresentations.  This post provides background on the history of the Halliburton litigation and is the first in a series of posts that will analyze the arguments by the parties and amici, the Court’s ruling, and the potential implications for future litigation.

Plaintiff-Respondent Erica P. John Fund, Inc. is a not-for-profit group that supports the outreach work of the Archdiocese of Milwaukee.  The Fund purchased stock in Halliburton Company and lost money when Halliburton’s stock price dropped following negative news regarding Halliburton’s (1) potential liability in asbestos litigation, (2) revenue accounting on fixed-price construction contracts, and (3) merger with Dresser Industries.  The Fund sued Halliburton and its CEO David Lesar alleging that they had previously made fraudulent misrepresentations concerning those topics in violation of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Read More

Honey, You Did What? SEC Charges Yet Another Spouse with Insider Trading

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

Are Confidential Witness Reforms Looming on the Horizon? Can the Plaintiff’s Bar Stop Them?

A decision is expected shortly in the highly publicized so-called confidential witness “scandal” involving the Robbins Geller Rudman & Dowd law firm.  Judge Suzanne B. Conlon of the United States District Court, Northern District of Illinois, will decide whether to impose sanctions on the plaintiffs’ firm for its conduct regarding a confidential witness in the City of Livonia Employees’ Retirement System v. Boeing Company case, No. 1:09-cv-07143 (N.D. Ill.).  The decision could have a lasting impact over the use of confidential witnesses in securities fraud complaints.

Judge Conlon will decide this matter following the Seventh Circuit’s remand in late March 2013 on the narrow issue of whether to impose Rule 11 sanctions for (1) providing multiple assurances to the court that the confidential source in their complaint was reliable even though none of the lawyers had spoken to the source or (2) failing to investigate after plaintiffs’ investigators expressed qualms about the confidential source.  (Previous blog post here).  In remanding the case, the Seventh Circuit ruled that making “representations in a filing that are not grounded in an inquiry reasonable under the circumstance or are unlikely to have evidentiary support after a reasonable opportunity for further investigation or discovery violate Rule 11.”  City of Livonia Empls.’ Ret. Sys. v. Boeing Co., 711 F.3d 754, 762 (7th Cir. 2013). Read More

SAC Pleads Guilty to Five Counts of Securities Fraud; Agrees to Pay Largest Fine in History for Insider Trading Offenses

SAC Capital Advisors pleaded guilty last Friday to securities fraud claims brought by the U.S. Attorney in Manhattan.  If approved, the deal would require SAC to pay a $1.2 billion penalty, including a $900 million criminal fine and $284 million civil forfeiture, and to cease operation of its outside investment business.  Appearing on behalf of SAC, Peter Nussbaum, general counsel for the hedge fund, offered the plea of five counts of securities and wire fraud charges based on the allegations that the company allowed rampant insider trading among its employees.  More than merely turning a blind eye, SAC allegedly went out of its way to hire portfolio managers and analysts who had contacts at corporations and failed to monitor and prevent trades based on their inside knowledge.

Mr. Nussbaum expressed “deep remorse” for each individual at SAC who broke the law, taking responsibility for the misconduct which occurred under SAC’s watch.  He also noted that “even one person crossing the line into illegal behavior is too many,” but emphasized that despite the six former employees that SAC admitted engaged in insider trading, “SAC is proud of the thousands of people who have worked at our firm for more than 20 years with integrity and excellence.”  The six former employees, Noah Freeman, Richard Lee, Donald Longueuil, Jon Horvath, Wesley Wang and Richard C.B. Lee, had already pled guilty to insider trading-related claims.  Critics have called for the judge to reject the plea, arguing that SAC has not taken enough responsibility.  Prosecutors have indicated that had the case gone to trial, evidence would have shown that far more than six people were involved in the insider trading there. Read More

Say Hello to My Imaginary Friend! Judge Posner, Seventh Circuit Issue Stern Warning to Plaintiffs’ Firms For Again Citing Bogus Confidential Witnesses

Plaintiffs’ counsel beware: to avoid Rule 11 sanctions you might actually have to talk to “confidential witnesses” yourself and corroborate their statements before citing them in a securities fraud complaint.

That is one major takeaway from the Seventh Circuit’s March 26, 2013 opinion in City of Livonia Employees’ Retirement System v. The Boeing Company, et al. In that case, Judge Posner singled out plaintiffs’ counsel for making “confident assurances in their complaints about a confidential source . . . even though none of the lawyers had spoken to the source and their investigator had acknowledged that she couldn’t verify what (according to her) he had told her.” Slip op. at 16. Citing multiple cases in which the same firm, Robbins Geller Rudman & Dowd LLP, had “engaged in similar misconduct” and noting that “recidivism is relevant in assessing sanctions,” Judge Posner remanded to the district court for further proceedings on Rule 11 sanctions.

The appeal came from the district court’s grant of a renewed motion to dismiss in Boeing’s favor after discovery into the CW’s statement revealed significant inconsistencies with the complaint’s allegations. The allegations, briefly, were that Boeing made false statements about the progress of Boeing’s flagship aircraft, the Dreamliner. In April and May 2009, with the Dreamliner’s maiden test flight (or “First Flight”) scheduled for June 30, 2009, the Dreamliner failed several “stress tests” that raised doubts about the First Flight’s timing. Boeing remained optimistic about the scheduled First Flight, though, and made disclosures to that effect in May and June. But one week before the anticipated First Flight, the Company disclosed that it had failed the tests and that the First Flight had been canceled, delaying final delivery of the plane to customers. Following the disclosure, Boeing’s stock price fell 10% over two days of trading.

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Shareholder Plaintiffs Score a Class Certification Win from SCOTUS

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