On June 1, the Second Circuit in Tilton et al. v. SEC, No. 15-2103 (2d. Cir. Jun. 1, 2016), echoed recent Seventh and D.C. Circuit decisions (respectively, Bebo v. SEC, No. 15-1511 (7th Cir. Aug. 24, 2015), cert. denied, 136 S. Ct. 1500 (Mar. 28, 2016), and Jarkesy v. SEC, No. 14-5196 (D.C. Cir. Sept. 29, 2015)) in finding that constitutional or other challenges to SEC proceedings cannot go forward in court until the administrative proceeding ends; review can only be sought as an appeal from a final decision by the Commission. The Second Circuit’s decision in Tilton creates unanimity among the circuit courts that have addressed the issue to date, although, as we previously reported, the Eleventh Circuit is likely to rule on the issue sometime this year in Hill v. SEC, No. 15-12831. Unless the Eleventh Circuit bucks this trend and creates a circuit split, it now looks unlikely that the Supreme Court will weigh in on this issue (particularly because the Supreme Court previously denied a petition to review the Seventh Circuit’s decision in Bebo).
On May 3, 2016, the Financial Industry Regulatory Authority announced that MetLife Securities, Inc. agreed to pay $25 million to settle allegations that the company misled its customers in tens of thousands of variable annuity replacement applications. The sanction represents FINRA’s largest fine related to variable annuities.
Variable annuities (“VAs”) are highly complex and highly regulated insurance contracts that guarantee their holders—typically retirees—a minimum payment at the end of an accumulation stage. When a consumer seeks to replace one VA for another, her broker must complete an Annuity Replacement and Transfer Disclosure (ARTD) setting forth the comparative cost and guarantee information about existing and proposed annuity contracts. In New York, brokers must also complete a “Regulation 60 Disclosure,” which contains a hypothetical illustration of death benefits and surrender values for existing and proposed contracts under various hypothetical market growth rates.
The first Circuit Court of Appeals decision applying the Supreme Court’s landmark 2014 decision in Halliburton Co. v. Erica P. John Fund Inc., 134 S. Ct. 2398 (2014) (“Halliburton II”), favored the defendants, finding as a matter of law that Best Buy Co. and its executives successfully rebutted the presumption of reliance set forth in Basic v. Levinson, 485 U.S. 224 (1988) at the class certification stage through evidence of a lack of price impact from their alleged misstatements. See IBEW Local 98 Pension Fund et al. v. Best Buy Co., Inc. et al., Case No. 14-3178 (8th Cir. Apr. 12, 2016). By reversing the district court and holding that a class could not be certified, the Eighth Circuit showed that Halliburton II provides defendants with a meaningful opportunity to challenge the fraud on the market presumption. The plaintiffs’ bar, however, will be eager to highlight Best Buy’s unique pattern in trying to limit the impact of the decision beyond this case. Whether other federal courts follow the Eighth Circuit’s lead and deny class certification motions based on Halliburton II in greater numbers, and outside the Best Buy fact pattern, remains to be seen.
On February 29, 2016, the Supreme Court denied certification in Harman International Industries Inc. et al. v. Arkansas Public Employees Retirement System et al., thereby leaving unanswered a number of questions related to the Safe Harbor provision of the Private Securities Litigation Reform Act (PSLRA). The petitioners, defendant Harman International Industries Inc. (“Harman” or “the Company”) and related individual defendants, argued that the D.C. Circuit Court of Appeals erred when it reversed the district court’s decision granting Harman’s motion to dismiss. In declining to hear the case, the Supreme Court failed to resolve a circuit split concerning the relevance of state of mind to the efficacy of cautionary language.
The practice of high frequency trading has been a hot-button issue of late, thanks in part to Michael Lewis’ 2014 book Flash Boys: A Wall Street Revolt, which examines the rise of this phenomenon throughout U.S. markets. Several class action lawsuits have alleged that various private and public stock and derivatives exchanges entered into agreements and received undisclosed fees to favor high frequency traders (“HFTs”), conferring timing advantages that damaged other market participants. Two courts have recently addressed the merits of claims for damages against such exchanges and both ruled that plaintiffs failed to state a claim for relief.
In what is now the third interlocutory appeal in the course of class certification proceedings spanning more than a decade, the case of Erica P. John Fund, Inc. v. Halliburton Co. will head back to the United States Court of Appeals for the Fifth Circuit, with perhaps another trip to the Supreme Court to follow. The Fifth Circuit’s eventual decision on this latest interlocutory appeal could clarify—at least in the Fifth Circuit—just how far a defendant in a securities class-action can go in presenting indirect evidence of (a lack of) price impact to defeat class certification.
Malfeasance by a corporate insider against his company has the potential to leave a gaping wound. Facing a securities lawsuit due to that malfeasance is like salt in that wound. Corporations targeted with such lawsuits have turned to the adverse interest exception to try to protect themselves from further liability stemming from the rogue executive’s wrongdoing. But on October 23, the U.S. Court of Appeals for the Ninth Circuit issued a precedent-setting decision rendering that salve unavailable. In In re ChinaCast Education Corp. Securities Litigation, the court held that under the federal securities laws, an executive’s scienter is imputed to the corporation where he “acted with apparent authority on behalf of the corporation, which placed him in a position of trust and confidence and controlled the level of oversight of his handling of the business.” Slip op. at 4.
In a lengthy ruling containing a detailed analysis of dueling economic expert reports, a federal court in Texas held on July 25, 2015 that defendant Halliburton Company demonstrated a lack of price impact at the class-certification stage on nearly all of the plaintiffs’ claims, thus rebutting the presumption of reliance. This action has twice been to the Supreme Court, most recently in Halliburton, Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II”), which held that the fraud-on-the-market presumption of reliance may be rebutted by showing a lack of price impact from the alleged misrepresentation. The district court’s recent decision is significant because it is one of the first to consider the issue of price impact post-Halliburton II, and because the decision suggests that lower courts may be willing to wade deep into the complications of event studies and economic analysis in order to determine price impact at the class-certification stage.
On July 28, 2015, the Delaware Court of Chancery issued a post-trial opinion in which it criticized in particularly strong terms the analysis performed by a financial firm that was retained to value companies that were being sold to a third party or spun off to stockholders (the “valuation firm”). See Fox v. CDX Holdings Inc., C.A. No. 8031-VCL (Del Ch. July 28, 2015). CDX is just the latest decision in which the Chancery Court has awarded damages and/or ordered injunctive relief based in part on a financial firm’s failure to discharge its role appropriately. Calling the valuation firm’s work “a new low,” Vice Chancellor Laster’s opinion is another chapter in this cautionary tale that lays bare how financial firms can be exposed not only to potential monetary liability but, as importantly, significant reputational harm from flawed sell side work on M&A transactions.
On July 1, 2015, the United States for the District of Columbia sued the estate and trusts of the late Layton P. Stuart – the former owner of One Financial Corporation and its subsidiary One Bank & Trust– and the trust’s beneficiaries, for alleged fraud on the Treasury Department and its Troubled Asset Relief Program (“TARP”). This civil suit is the latest in a growing list of cases brought by the government to recover TARP funds that it alleges were fraudulently procured.