Securities class action lawyers are looking to the U.S. Supreme Court this term to clear up an issue that has been at the center of several prominent securities class actions, specifically, what is the standard for class certification where the class members’ reliance on defendants’ alleged misstatements is presumed under the fraud-on-the-market theory of reliance. Last term, in a class action ruling in an employment case, Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 1541 (2011), the Court signaled that class certification may require “a preliminary inquiry into the merits of a suit,” singling out elements of the fraud-on-the-market theory as an example.
On November 5, the Supreme Court heard argument in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, a securities fraud putative shareholder class action presenting the question of how far a court should consider a merits issue when deciding whether to certify a class. The appeal in Amgen is from a Ninth Circuit decision that affirmed the district court’s order certifying a plaintiff class of purchasers of Amgen stock. Defendants opposed class certification on the ground that the rebuttable presumption of reliance under the fraud-on-the-market theory requires not only that the market for Amgen stock was efficient, but that the alleged misstatements were material. Defendants offered evidence that the alleged misstatements in the case were immaterial. Therefore, according to defendants, reliance could not be presumed, and the proposed plaintiff class could not be certified because common issues did not predominate. The Supreme Court took the case in order to determine whether the district court was correct to disregard defendants’ evidence of immateriality on the ground that materiality is an issue appropriately considered at trial or at summary judgment rather than at the class certification stage. Read More
A federal court jury in Manhattan returned verdicts on Monday, November 12, largely exonerating the two most senior Reserve Management Company executives in a Securities and Exchange Commission enforcement action accusing them of fraud.
The SEC alleged that Bruce R. Bent, the company’s CEO, and his son, Bruce R. Bent II, the company’s president, as well as their investment advisory firm Reserve Management Co. and Resrv Partners Inc., had defrauded investors and the fund’s trustees by falsely claiming they would support the fund financially when it faced a run by investors after Lehman Brothers’ bankruptcy (the fund held about $785 million in Lehman debt on the day it filed for bankruptcy). The bankruptcy announcement caused investors to flee the fund, leading the fund to “break the buck,” i.e., to have a net asset value (“NAV”) of less than $1 per share. The SEC alleged that, on the morning after Lehman announced its bankruptcy, the Bents falsely assured investors and the trustees that they would use money from their firm to support the $1 NAV.
Following a trial lasting approximately a month, the jury found the elder Bent not liable on all counts and the younger Bent not liable on six of seven counts. The only count on which Bent II was found liable was a negligence-based claim, not the more serious claims that he had “knowingly and recklessly” defrauded investors and the trustees. The jury found the Bents’ two entities liable for the more serious scienter-based fraud charges. The case will now proceed for United States District Judge Paul Gardephe to determine what relief and sanctions, if any, are warranted against the entities and against Bent II for the one negligence-based count on which the jury found him liable. Read More
Imagine a plaintiff who buys stock in a company that subsequently discloses a misstatement in its financial statements that existed at the time plaintiff invested. The stock price drops upon the initial disclosure, and then rebounds back above the purchase price. Can that plaintiff plead economic loss, as is required under Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005)? According to the Second Circuit, the answer is yes. Read More
NERA Economic Consulting Group’s June 27, 2012 report shows a 20% increase in SEC settlements with individual defendants for the first half of fiscal 2012. This spike is consistent with the SEC’s stated intent to hold more individuals accountable for violations of federal securities laws.
Courts have been making slow but steady progress in testing the limits of the 2010 Supreme Court case Morrison v. Nat’l Australian Bank Ltd., 130 S.Ct. 2869 (2010). In Morrison, the Court held the federal securities laws apply only to purchases or sales made “in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.” Id. at 2888. The Second Circuit has held that the “purchase and sale” of a security occurs when “irrevocable liability” occurs and the parties are bound to the transaction. Absolute Activist Value Master Fund v. Ficeto, 677 F.3d 60 (2d Cir. 2012) Read More
A common claim alleged by monoline insurers is that RMBS sponsors fraudulently induced them to provide the insurance by misrepresenting the quality of loans and underwriting. As the story invariably goes, the insurer only discovered that it was defrauded after its vendor reviewed a sample of several hundred loan files, and was shocked to find that most loans, usually alleged to be somewhere between 75% to 95% of the sample, breached representations and warranties. On May 4, a New York court turned these types of post-loss file reviews against the insurer in CIFG Assur. N.A., Inc. v. Goldman Sachs & Co., Index No. 652286/2011 (N.Y. Sup. Ct.). Here, the court found that the very same file sampling and review easily could have been done – and legally should have been done – in the insurers’ due diligence. The insurer’s failure to conduct adequate due diligence when it issued its policy required dismissal of its fraud claim for lack of reasonable reliance. Read More
On April 25, 2012, Cornerstone Research released an interesting report entitled “Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions—March 2012 Update.” The report notes that the incidence of litigation in connection with mergers valued at $500 million or greater rose from 57% in 2007 to 96% in 2011. This observation has already caught the attention of the Delaware Chancery Court where Vice Chancellor Laster commented in a teleconferenced ruling, “I don’t think for a moment that 90%—or based on recent numbers—95% of deals are the result of a breach of fiduciary duty. I think there are market imbalances here and externalities that are being exploited. What this means is that the Court needs to think carefully about balancing.”
The report also shows that the number of lawsuits per litigated deal increased from an average of 2.8 in 2007 to 6.2 in 2011. The absolute count of lawsuits involving deals with values of $500 million or greater also nearly doubled from 289 in 2007 to 502 in 2011. The report also noted that as of March 2012, 67 lawsuits have already been reported for 13 out of 17 deals announced during January and February.
Relying on a lesser-known U.S. Securities and Exchange Commission rule, the Southern District of New York dismissed over forty underwriter and director defendants from a securities action against General Electric Co. on April 18, 2012. Shareholders alleged that GE made false statements in connection with a $12 billion secondary stock offering in 2008, including misrepresentations about its ability to sell commercial paper. GE, which was mostly financed by 30-day commercial paper, encountered difficulties in funding its operations after the collapse of Lehman Brothers in September 2008.
District Judge Denise Cote ruled that older statements incorporated by reference into the offering documents were modified and superseded by subsequent statements under SEC Rule 412, and that statements made by GE in its Forms 10-K between 2004 and 2007, expressing confidence in its commercial paper position, could not be relied upon to state a Securities Act claim. Citing SEC Rule 412, Judge Cote found that the 2008 offering’s prospectus supplement warned of potentially impaired access to the commercial paper market, and thus “directly modif[ied] and replace[d] the earlier statements” of GE. Judge Cote also rejected lead plaintiff’s argument that the newer statements were merely standardized “boilerplate.”
The ruling modified a January 2012 opinion from District Judge Richard Holwell in one of his last opinions before retiring from the bench. Upon reassignment of the matter Judge Cote granted defendants’ pending motions for reconsideration of the January opinion with respect to all surviving claims under the Securities Act and Exchange Act. Judge Cote’s ruling did not dispose of the entire action, keeping intact the Exchange Act claims against GE and its chief financial officer for alleged misstatements about the quality of the company’s loan portfolio.
In re: General Electric Co. Securities Litigation, case number 1:09-cv-01951, United States District Court for the Southern District of New York.
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