Last week brought more bad news for private blood testing company Theranos Inc., as San Francisco-based Partner Fund Management L.P. (“PFM”) launched a suit claiming that it was duped into making a $96.1 million investment in Theranos in February 2014. The complaint, filed in Delaware Court of Chancery, alleges common law fraud, securities fraud under California’s Corporations Code, and violations of Delaware’s Consumer Fraud Act and Deceptive Trade Practices Act, among other things, against Theranos, its Chief Executive Officer, Elizabeth Holmes, and its former Chief Operating Officer, Ramesh Balwani.
An important issue for companies and their executives that are the subject of an investigation by the federal government is whether, and how early, to cooperate.
On September 27, 2016, Principal Deputy Associate Attorney General Bill Baer delivered remarks at the Society of Corporate Compliance and Ethics Conference, where he laid out in some detail his views on the value of early cooperation with the federal government in financial cases, and the consequences for waiting. As the number 3 attorney in the Department of Justice who is charged with overseeing civil litigation, antitrust, and other large divisions, Baer’s words are significant, and are a further gloss on the so-called “Yates Memo”, which Deputy Attorney General Sally Yates released last September, detailing DOJ’s guidance on individual accountability for corporate wrongdoing.
Speaking specifically about cases against banks and the fallout from protracted litigation involving residential mortgage-backed securities, Baer said those cases could have been resolved more quickly if only the financial institutions “had decided early to cooperate.” Consequently, “each [institution] paid a lot more than it would have if it had cooperated early on.” Recalling that many of these same institutions had nonetheless sought “significant cooperation credit,” Baer stated that DOJ “dismissed the arguments quickly because they so lacked merit.”
So how early is early enough, and how can your company get credit for cooperating? Baer elaborated on recent “internal” guidance he has provided to his attorneys in civil enforcement matters.
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 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 November 3, 2014, the U.S. Supreme Court held oral argument in Omnicare v. Laborers District Council Construction Industry Pension Fund. As discussed in earlier posts, from March 18, 2014 and July 22, 2014, the Supreme Court in Omnicare has been asked to resolve a circuit split regarding the scope of liability under Section 11 of the Securities Act: does an issuer violate Section 11 if it makes a statement of opinion that is objectively false, or must the issuer also have known that the statement was false when made?
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.
Earlier this month, Judge Victor Marrero of the Southern District of New York issued his opinion certifying a class of buyers of the common stock of a company created by a Chinese reverse merger. McIntire v. China MediaExpress Holdings, Inc., 2014 U.S. Dist. LEXIS 113446 (S.D.N.Y. Aug. 15, 2014). In doing so, he rejected defendants’ Daubert motion challenging the qualifications and methodology of plaintiffs’ expert witness on market efficiency, Cynthia Jones, and concluded that the market was efficient enough to support the Basic presumption of reliance and to permit class certification. READ MORE
“Dark pools of liquidity” have recently become the focus of increased regulatory scrutiny, including a number of high-profile enforcement actions related to these alternative trading systems. This increased scrutiny follows on the heels of Michael Lewis’s popular book, “Flash Boys,” which introduced the public at large to dark pools through its allegations that high frequency trading firms use dark pools to game the system to the detriment of common investors. But what exactly are dark pools and do they have any redeeming qualities? This post provides a primer on the benefits and disadvantages of dark pools and why they matter.
In general, “dark pools of liquidity” are private alternative forums for trading securities that are typically used by large institutional investors and operate outside of traditional “lit” exchanges like NASDAQ and the NYSE. The key characteristic of dark pools is that, unlike “lit” exchanges, the identity and amount of individual trades are not revealed. The pools typically do not publicly display quotes or provide prices at which orders will be executed. Dark pools, and trading in dark pools, have proliferated in recent years due in part to the fragmentation of financial trading venues coupled with advancements in technology, including online trading. There are currently over 40 dark pools operating in the United States. Around half of these are owned by large broker-dealers and are operated for the benefit of their clients and for their own proprietary traders. According to the SEC, the percentage of total trading volume executed in dark venues has increased from approximately 25% in 2009 to approximately 35% today.
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
Can a securities plaintiff satisfy Section 11 of the Securities Act simply by alleging that a statement of opinion was objectively false, or must the plaintiff also allege that the speaker subjectively knew the statement was false when it was made? That is the question taken up by the Supreme Court earlier this month when it granted certiorari in Omnicare, Inc. v. The Laborers District Council Construction Industry Pension Fund and the Cement Masons Local 526 Combined Funds. As we previously discussed, the Sixth Circuit decision on appeal runs contrary to decisions in the Second and Ninth Circuits, so all eyes are on the Court to settle the debate. READ MORE