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
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 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
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.
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
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