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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Circuits Split on When to Impute Employees’ Knowledge to Corporation for Section 10(b) Claims

One of the most significant challenges facing plaintiffs in pleading a violation of Section 10(b) of the Securities Exchange Act of 1934 is sufficiently alleging that the defendant company possessed scienter, or an “intent to deceive.”  Because a corporation can only act through its employees, the challenge is to determine which employees’ alleged state of mind should be imputed to the company.

On October 10, 2014, the Sixth Circuit considered that question in In re Omnicare Sec. Litig., No. 13-5597, 2014 WL 5066826 (6th Cir. Oct. 10, 2014).  Omnicare involved a Section 10(b) shareholder class action against Omnicare, Inc., a pharmaceutical manufacturer, alleging that Omnicare’s financial statements and other public disclosures contained misstatements regarding the company’s compliance with Medicare and Medicaid regulations.  In particular, plaintiffs alleged that although Omnicare’s internal audit group discovered that certain company facilities had submitted false reimbursement claims, Omnicare failed to disclose the fraud and, in publicly-filed documents signed by the CEO and CFO, asserted that Omnicare’s “billing practices materially comply with applicable state and federal requirements.” Read More

Rural/Metro II: Additional Lessons for Financial Advisors, Directors and Counsel in M&A Transactions And Related Litigation

On October 10, 2014, the Delaware Court of Chancery issued a decision awarding nearly $76 million in damages against a seller’s financial advisor. In an earlier March 7, 2014 opinion in the case, In re Rural/Metro Corp. Stockholders Litigation, Vice Chancellor Laster found RBC Capital Markets, LLC liable for aiding and abetting the board’s breach of fiduciary duty in connection with Rural’s 2011 sale to private equity firm Warburg Pincus for $17.25 a share, a premium of 37% over the pre-announcement market price. The recent decision reinforces lessons from the March 7 decision and provides new guidance for directors and their advisors in M&A transactions and related litigation.

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Better Keep Your Opinions to Yourselves for Now: Second Circuit Doubles Down in Deutsche Bank Ruling in Advance of Supreme Court Review of Omnicare

On July 16, 2014, a three-judge Second Circuit panel affirmed the dismissal of a securities class action against Deutsche Bank AG and several underwriters.  The case was brought on behalf of investors who purchased approximately $5.5 billion in preferred Deutsche Bank shares in 2007, and who alleged that defendants misled them about the bank’s exposure to mortgage-backed securities and other risks in a registration statement filed in October of 2006.  Plaintiffs alleged that the registration statement omitted details about Deutsche Bank’s business, including that the company failed to properly record provisions for RMBS, commercial real estate loans and exposure to monoline insurers.

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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

Is the Free Lunch Ending for Stockholders Who Sue Corporations? Fee-Shifting Introduced in Intra-Corporate Litigation

ATP Tour: The Little Case That Could

On May 8, 2014 the Delaware Supreme Court upheld a “loser pays” fee-shifting bylaw for a Delaware non-stock corporation in ATP Tour, Inc. v. Deutscher Tennis Bund.  While the decision was released with little heralding, if ATP Tour’s “loser pays” provisions are widely adopted by public corporations and held also to be valid, the decisionmay create a significant impediment to the ubiquitous lawsuits alleging that directors have breached their fiduciary duties of loyalty and care to the corporation.

The board of ATP Tour, a membership organization that operates men’s professional tennis competitions, enacted a fee-shifting bylaw which provides that a “Claiming Party,” i.e. a member organization, would be liable for the corporation’s attorneys’ fees and other litigation expenses if it loses in an intra-corporation claim against the company.  The fee-shifting bylaw obligates any Claiming Party to reimburse the League and any member or owner of ATP Tour that the Claiming Party also sued. 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

Beyond Basic: Shareholder Litigation Without Fraud-On-The-Market

Will shareholder litigation survive the abandonment of the fraud-on-the-market presumption of reliance?  After the Supreme Court’s announcement that it will be considering the presumption in Halliburton Co. v. Erica P. John Fund,  No. 13-317, there is much discussion of whether a rejection of fraud-on-the-market could mean the end of securities litigation.  The fraud-on-the-market doctrine, set forth in Basic Inc. v. Levinson, 485 U.S. 224, 243-50 (1988), allows a plaintiff seeking class certification to use a rebuttable presumption to establish reliance.  The presumption is that public information is reflected in the price of a stock traded on a well-developed market, and that investors rely on the integrity of the market price when deciding whether to buy or sell a security.  Under the doctrine, investors do not need to show they actually relied on a misstatement in order to satisfy the “reliance” element of their claim for class certification.  Though overturning the presumption would have a significant impact on shareholder class actions under Section 10(b) of the Securities Exchange Act of 1934, it would not spell the end of shareholder litigation. Read More

A Bird in the Hand is Worth … Nothing if you Can’t Really Sell it

A pair of investment firms recently filed suit against Twitter in the Southern District of New York, alleging that Twitter had fraudulently refused to allow them to sell its private stock in advance of its much-anticipated IPO.  If that sentence looks somewhat bizarre, it is because the allegations themselves are bizarre, at best.

In short, the plaintiff investment firms allege that a managing partner of GSV Asset Management, who was a Twitter shareholder, engaged them to market a fund that would purchase and hold nearly $300 million in private Twitter shares from the Company’s early-stage shareholders.  Plaintiffs then embarked on an “international roadshow” to line up investors in the fund.  Plaintiffs allege that, on the roadshow, “there was substantial interest in purchasing [the private] Twitter shares at $19 per share.” Read More