Echoing a famous epistemological observation from The Big Lebowski, the Supreme Court today rejected the argument, for the most part, that a statement of opinion stands on the same footing as a statement of fact. READ MORE
We first blogged about the obscure Financial Institutions Reform Recovery Enforcement Act (“FIRREA”) on May 14. As we explained, this statute provides a generous ten-year statute of limitations and a low burden of proof. Just as we predicted, the FIRREA story is beginning to heat up.
The most recent FIRREA litigation involves claims brought under this statute against ratings agency giant Standard & Poor’s. The DOJ sued S&P for $5 billion, accusing it of knowingly issuing ratings that didn’t accurately reflect mortgage-backed securities’ credit risk. S&P’s practices of issuing credit ratings to banks that paid for those services led to an inherent conflict of interest. To reassure banks and investors that its ratings were accurate, S&P issued a “Code of Conduct,” containing promises that it had established policies and procedures to address these conflicts of interest. The DOJ alleged that the “Code of Conduct” statements were false and material to investors.
On July 8, Judge David O. Carter of the Central District of California tentatively denied S&P’s motion to dismiss the case. In his tentative order, Judge Carter explained why S&P’s three arguments for dismissal were unpersuasive. First, he found that the allegedly fraudulent statements regarding the credibility of S&P’s ratings were not “mere puffery” because they were filled with “shalls” and “must nots” that went beyond mere aspirational language. READ MORE
The Sixth Circuit recently made it easier for plaintiffs to bring securities suits brought under Section 11 of the Securities Act of 1933. In a recent ruling in Indiana State Dist. Council v. Omnicare, Inc., No. 12-5287 (6th Cir. May 23, 2013), the court of appeals revived a purported class action lawsuit against Omnicare. The suit, which had been dismissed by the District Court for the Eastern District of Kentucky, alleged that Omnicare artificially inflated its stock price by failing to disclose a kickback scheme in its registration statement.
The Sixth Circuit (which covers Kentucky, Ohio, Tennessee, and Michigan), held that the shareholders did not have to allege that the defendant executives knew that statements were false at the time they were made. In a unanimous opinion, Judges Cole, Griffin, and Gwin reasoned that Section 11 imposes strict liability for misstatements made in offering documents – whether or not the executive “making” the statement knew them to be false at the time they were made. The panel expressly refused to extend the U.S. Supreme Court’s ruling in Virginia Bankshares v. Sandberg, 501 U.S. 1083 (1991) (which requires plaintiffs to allege both objective and subjective falsity to pursue a Section 14(a) claim) to Section 11 claims. This ruling will likely embolden plaintiffs to bring Section 11 claims in the Sixth Circuit. READ MORE
On April 8, 2013, Judge Shira A. Scheindlin of the Southern District of New York granted auditor Deloitte Touche Tohmatsu CPA’s (“DTTC”) motion to dismiss a shareholder class action, finding that plaintiffs failed to sufficiently allege scienter or any misstatements by DTTC pursuant Section 10(b) and Rule 10b-5 of the Securities Exchange Act. Plaintiffs alleged that DTTC issued unqualified audit opinions on behalf of its client Longtop from 2009 to 2011. During that period, Longtop reported very strong financial results, which were later revealed to be fraudulently inflated.
In May 2011, DTTC released a public letter of resignation as Longtop’s auditor, disclosing that its second round of bank confirmations were cut short by Longtop’s deliberate interference, that Longtop’s CEO admitted the company’s books were fraudulent, and that DTTC had resigned due to that admission and Longtop’s deliberate interference with its audit. As a result, the NYSE stopped trading on Longtop’s securities and delisted the company.
In dismissing shareholder claims against DTTC, the court applied the stringent test for plaintiffs to meet when alleging scienter against an auditor. Because “an outside auditor will typically not have an apparent motive to commit fraud, and its duty to monitor an audited company for fraud is less demanding than the company’s duty not to commit fraud,” an auditor’s mere failure to identify problems with a company’s internal controls and accounting practices will not constitute recklessness. READ MORE
The NASDAQ Stock Market recently submitted a proposed rule change that would require all companies listed on the NASDAQ to maintain an internal audit function. The function would “provide management and the audit committee with ongoing assessments of the Company’s risk management processes and system of internal control.” In addition, the company’s audit committee would be required to meet periodically with the internal auditors and oversee the internal audit function. If implemented, the rule would require companies listed prior to June 30, 2013 to establish the internal audit function by December 31, 2013. Companies listed after June 30, 2013 would have to establish the function prior to listing.
The purpose of the proposed rule is to ensure that listed companies have a mechanism to regularly review and assess their internal controls and ensure management and audit committees receive information about risk management. The NASDAQ also believes the internal audit function will assist companies in complying with Rules 13a-15 and 15d-15, which require management to evaluate a company’s internal controls on a quarterly basis.
Despite the rule’s requirement of an internal audit function, the proposed language permits companies “to outsource this function to a third party service provider other than its independent auditor.” So, while the rule permits the internal audit work to be done by an outside third party, the company cannot engage the same auditing firm as both its internal and external auditor. In other words, the company needs both an independent outside auditor that cannot act as the inside auditor and an inside auditor that can be an outside auditor as long as it’s not the independent outside auditor.
Although most companies listed on the NASDAQ already have an internal audit function, the proposed rule would bring the NASDAQ into alignment with the New York Stock Exchange, which already requires its listed companies to have an internal audit function. See NYSE Listed Company Manual Section 303A.07(c).
The deadline for comments on the proposed rule is March 29, 2013.
Orrick’s Securities Litigation & Regulatory Enforcement Group is proud to release the 25th Anniversary Edition of The Orrick Guide to Securities Litigation.
Users can download this innovative legal research tool on an iPad, Kindle or other electronic reading device to assist them with questions about federal securities class actions, shareholder derivative suits, SEC enforcement actions and other complex business litigation. The Guide offers carefully selected case cites, thoughtful discussion and pragmatic practice suggestions from Orrick’s distinguished securities litigation team.
More than a treatise and easier to use, the Orrick Guide to Securities Litigation represents 25 years of collective expertise, and is an invaluable resource for anyone practicing in the area (or simply interested in learning more about securities law).
To download a copy for your practice, visit www.orrick.com/seclitguide, or, you can download the ebook directly from iTunes or the Amazon Kindle Store.
What happens between a mature multinational insurance corporation and its regulator is nobody’s business, or so says the United States Court of Appeals for the D.C. Circuit, which issued an opinion in SEC v. AIG on February 1, telling the press that it couldn’t have reports prepared by an AIG consultant under a consent decree with the SEC.
In 2004—years before AIG would rise to infamy in the financial collapse—the SEC charged AIG with securities violations, and the result was a consent decree requiring, among other things, that AIG hire a consultant to review AIG’s transaction policies and procedures and to prepare reports. The court supervising the decree later allowed disclosure of the consultant’s reports twice: to the Office of Thrift Supervision and the House of Representatives. Sue Reisinger, a reporter for Corporate Counsel and American Lawyer, wanted to know what the consultant found at the government bailout recipient. Not being a regulator or constitutionally-created legislative body, Ms. Reisinger turned to the courts for access. The district court found that the consultant’s reports were “judicial records” to which Reisinger had a common law right of access. The court of appeals disagreed.
Whether something is a judicial record depends on the role it plays in the adjudicatory process. The court of appeals noted that the consultant’s reports were not relied upon by the district court in any way, and thus never found their way into the fabric of the court’s record or decision-making process. Though merely filing the reports with the court would not have been sufficient to transform them into the type of judicial records Reisinger sought, the court of appeals held that filing was “very much a prerequisite.” Thus, while the terms of the decree requiring a consultant were surely important to the district court, the court was agnostic as to the eventual content of the reports. In other words, Reisinger had the substantive cart before the procedural horse, and whatever those reports eventually contained, their import did not work to make them judicial records. READ MORE
In a precedent setting decision, the Ninth Circuit affirmed dismissal of a putative class action in In re Century Aluminum Co. Securities Litigation, significantly raising the pleading bar in Section 11 cases. Plaintiffs alleged that Century Aluminum and its underwriters, Credit Suisse and Morgan Stanley, issued false and misleading statements in connection with a secondary offering. The Ninth Circuit applied the Twombly/Iqbal “plausibility” standard, holding that those decisions no longer make it possible for plaintiffs to simply allege without plausible supporting facts that their shares can be “traced” back to a secondary offering. The court’s decision in Century Aluminum may mean that Ninth Circuit plaintiffs filing suit under Section 11 who rely on aftermarket purchases, and cannot otherwise plead plausible facts they purchased in the secondary offering itself, face a near impossible uphill battle at the pleading stage when alleging tracing.
Section 11 provides a remedy to shareholders who purchase securities under “a materially false or misleading registration statement.” When shares are issued under only one such registration statement, this tracing requirement is not a problem. However, when shares are issued under multiple registration statements, tracing back to the allegedly misleading registration statement can be extremely difficult. The court acknowledged that tracing to a secondary offering is “often impossible,” but noted that the tracing requirement “is the condition Congress has imposed for granting access to the ‘relaxed liability requirements’ that Section 11 affords.”
Century Aluminum issued 49 million shares in an Initial Public Offering that were already trading when plaintiffs purchased their shares. In a prospectus supplement on January 28, 2009, an additional 25 million shares entered the market. Plaintiffs alleged they had standing to pursue a Section 11 claim because they “purchased Century Aluminum Common Stock directly traceable to the Company’s Secondary Offering.” In support of their tracing theory, plaintiffs argued that their shares were purchased on dates that showed sharp spikes in trading activity, indicating the flood of new shares as a result of the allegedly misleading prospectus supplement. READ MORE
As U.S. Secretary of Treasury Timothy Geithner steps down, Treasury released a January 18, 2012 update on the Troubled Asset Relief Program (“TARP”). This most recent update highlights an often misunderstood reality — Geithner’s signature program was a smashing success. As to the bailout of the too-big-to-fail banks and AIG, the truth is that TARP has generated tens of billions of dollars in profit for American taxpayers.
The hallmark of Treasury’s work during Mr. Geithner’s tenure has been its administration of the TARP. Although created in 2008 under the previous Secretary, Henry Paulson, Mr. Geithner has had responsibility for enlarging and steering TARP since January 2009. TARP came under significant criticism for use of taxpayer funds to bail out banks from diverse constituencies, spawning both the “Occupy” movement and contributing to the 2010 Republican takeover of the House of Representatives. Nevertheless, Mr. Geithner and the Treasury Department argued that TARP ultimately would produce a profit for the government. Four years later, that forecast has proven correct, at least with respect to funds provided to financial institutions, as many TARP investments have generated tens of billions of dollars in profit for American taxpayers.
The Capital Purchase Program (“CPP”) has been the primary driver of federal profits. The CPP made funds available for the Treasury Department to purchase mortgages, mortgage-backed securities, and preferred stock from financial institutions. Treasury disbursed nearly $205 billion under the CPP and, according to the Treasury’s January 18, 2012 TARP update, already has received over $220 billion in total cash back, a return of over 7%. This profit was mainly the result of dividends and gains received through Treasury’s ownership of bank stock and other assets. READ MORE
The Federal Trade Commission has announced the following new Hart-Scott-Rodino (HSR) filing thresholds, which will be effective for transactions closing on or after Feb. 11, 2013.
Any acquisition of voting securities and/or assets requires premerger notification to the FTC and the Department of Justice under the HSR Act and the regulations promulgated thereunder (16 C.F.R. Sections 801 – 803) if the following tests are satisfied and if no exemption applies (15 U.S.C. Section 18a(a)(2)).
Where a premerger notification is required, both parties must file, the acquiring person must pay a filing fee ($45,000 for transactions valued in excess of $70.9 million but less than $141.8 million, $125,000 for transactions valued at $141.8 million but less than $709.1 million or $280,000 for transactions valued at $709.1 million or more) and the parties must observe a 30-day waiting period prior to closing. READ MORE