Keep Your Unreasonable Opinions to Yourselves: The Supreme Court Hears Argument in Omnicare

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?

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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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Does Being an ‘Expert’ Make You an Expert?

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

Introducing Jason M. Halper, Orrick’s new Securities Litigation and Regulatory Enforcement Partner

The Partners of Orrick Herrington & Sutcliffe LLP are pleased to announce the addition of Jason M. Halper as co-head of the firm’s Financial Institutions Litigation practice and a partner with the Securities Litigation and Regulatory Enforcement practice group in New York. Mr. Halper has over 20 years of experience representing financial institutions and other clients in high-stakes litigation and regulatory matters.

 

Swimming in the Deep End: A Primer on Dark Pools

“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.

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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

You Were Wrong, But Did You Know You Were Wrong? The Supreme Court to Resolve the Circuit Split On the Pleading Standard for Opinion-Based Allegations Under Section 11

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

You Better Forum-Shop Around . . . While You Still Can

On January 31, 2014, Chevron Corporation moved to certify to the Delaware Supreme Court the question of whether exclusive forum bylaws are valid under Delaware law.  Chevron filed its motion before the Honorable Jon S. Tigar of the Northern District of California.  If Judge Tigar certifies the question, it seems likely that the Delaware Supreme Court will affirm a recent Delaware Court of Chancery decision finding such bylaws to be valid under statutory and contractual law, given that the author of that decision, then-Chancellor Leo E. Strine, is now Chief Justice of the Delaware Supreme Court.

In 2013, plaintiffs filed suit in both the Delaware Court of Chancery and the Northern District of California challenging Chevron’s board-adopted forum exclusivity bylaw.  The case in the Northern District was stayed pending the outcome of the Delaware case, since both involved questions of Delaware state law.  The Delaware plaintiffs argued that the forum exclusivity bylaw was statutorily invalid under Delaware General Corporation Law (DGCL), and contractually invalid because it was adopted unilaterally without shareholder consent.  In June 2013, the Delaware Court of Chancery – in a decision by then-Chancellor Strine – found that the bylaw was enforceable, and that the Delaware Court of Chancery should be the sole and exclusive forum for (1)any derivative action brought on behalf of the Corporation, (2) any action asserting a claim of breach of a fiduciary duty, (3) any action asserting a claim arising pursuant to any provision of the DGCL, or (4) any action asserting a claim governed by the internal affairs doctrine. Read More

Second Circuit to Issuers: You Need Not Disclose Every Single Asset in Your Registration Statements

That was the Second Circuit’s message to companies in a September 25, 2013 order by upholding dismissal of claims against defendant Royal Bank of Scotland (“RBS”) for alleged failure to disclose enough information about its exposure to subprime mortgages. In so doing, the Court reaffirmed longstanding principles at the heart the securities laws and issued an opinion as applicable to technology companies as it is to banks.

RBS had issued five offering documents in 2005 and 2006, which plaintiff alleged contained a number of misstatements and omissions. Among others, the complaint alleged RBS had misstated its exposure to subprime mortgages, falsely claimed it had effective risk controls, and failed to disclose an inadequate capital base. Read More

The Blue Sky Is The Limit for Securities Liability in Washington

Many state securities laws, known as blue sky laws, are patterned after Section 12(a)(2) of the Securities Act of 1933.  The interpretation of these state blue sky laws, however, may diverge significantly from the interpretation of analogous federal securities statutes.  The recent Washington Court of Appeals opinion in FutureSelect Portfolio Management, Inc. et al. v. Tremont Group Holdings, Inc. et al., No. 68130-3-1 (Wn. Ct. App. Aug. 12, 2013), highlights one such divergence in which the scope of potential primary liability for secondary actors under the Washington State Securities Act extends beyond the scope of the federal law on which it was based.

In FutureSelect, a group of Washington state investors (“FutureSelect”) lost millions of dollars after purchasing interests in the Rye Funds, a “feeder fund” that invested in Bernie Madoff’s Ponzi scheme.  The investors sued Tremont Group Holdings, Inc., the general partner in the Rye Funds and its affiliates, as well as the audit firm Ernst & Young LLP.  The plaintiffs’ claims against EY were based primarily on the allegation that EY misrepresented that it had conducted its audit of the Rye Funds’ financial statements in conformity with generally accepted auditing standards when issuing its unqualified audit opinion on these financial statements.  The trial court dismissed the plaintiffs’ claims against EY for failure to state a claim, but the Washington State Court of Appeals reversed that decision on appeal. Read More