Tweet, Tweet: The SEC Gets Social

The SEC recently issued an investor alert to warn investors about potential fraudulent investment schemes involving popular social media sites such as Facebook, YouTube and Twitter, turning its eye towards investor fraud perpetuated via social media. The alert, issued by the SEC’s Office of Investor Education and Advocacy, provides five tips to help consumers recognize and avoid investment fraud, easily made anonymous online, using social media websites and services: (1) be wary of unsolicited offers to invest; (2) look for “red flags,” e.g., offers that sound too good to be true or that “guarantee” returns; (3) look for “affinity frauds,” which are “investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly or professional groups;” (4) be thoughtful about privacy and security settings; and (5) ask questions and investigate investment opportunities thoroughly. The alert also describes common investment scams that have used social media and the internet to gain traction, including “Pump-and-dump” schemes, fraudulent “research opinions” or “investment newsletters,” high-yield investment programs, and offerings that just fail to comply with applicable registration provisions of the federal securities laws.

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When the Whistle Blows, What Follows?

Real estate investment trust American Realty Capital Properties (“ARCP”) recently announced the preliminary findings of an Audit Committee investigation into accounting irregularities and the resulting resignation of its Chief Financial Officer and Chief Accounting Officer. The events surrounding ARCP are a case study of how, within a matter of weeks, an internal report of concerns to the Audit Committee can lead to both internal and external scrutiny: an internal investigation and review of financial reporting controls and procedures, on the one hand; media coverage, securities fraud litigation, and an inquiry by the Securities Exchange Commission, on the other.

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How Far Does Section 10(b) Reach? The Second Circuit Says That A Domestic Transaction Is Necessary, But Not Sufficient, To Invoke U.S. Securities Laws

In a long-awaited opinion issued on August 15 in Parkcentral v. Porsche, the Second Circuit limited the extraterritorial reach of the U.S. securities laws, affirming the dismissal of securities claims brought by parties to swap agreements that were entered into in the United States but were based on the price of foreign securities.  Although the Parkcentral opinion offers an important interpretation of the Supreme Court’s 2010 opinion in Morrison v. National Australia Bank, the Second Circuit declined to set forth a bright-line rule for determining when a securities fraud claim based on domestic transactions in foreign securities is sufficiently “domestic” to be subject to U.S. securities laws, thereby leaving the door open to future litigants to confront this issue in securities cases involving foreign elements.

In Morrison, the Supreme Court found that Section 10(b) of the Exchange Act does not apply extraterritorially based on a lack of congressional intent to overcome the strong presumption against the extraterritorial application of domestic laws.  In so holding, the Court rejected a long line of Second Circuit cases that allowed the application of Section 10(b) to claims involving foreign securities so long as the claims involved either significant conduct in the U.S. or some effect on U.S. markets or investors.  The Supreme Court reasoned that the Second Circuit’s so-called “conduct test” and “effects test” improperly extended the geographic reach of the U.S. securities laws beyond Congress’s intent, and would interfere with foreign countries’ own securities regulations.  Instead, the Court adopted a new “clear test,” holding that Section 10(b) applies only to claims based on: (1) “transactions in securities listed on domestic exchanges” or (2) “domestic transactions in other securities.”

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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