Month: April 2013

News of the (Shareholder Derivative) World: Record-High $139 Million Settlement in News Corp. Phone Hacking Suit

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Stack of Money

Putting an end to shareholder derivative litigation arising from News Corp.’s phone-hacking scandal, the company’s directors agreed last week to a record-breaking $139 million cash settlement. According to the plaintiffs’ lawyers, the deal is the “largest cash derivative settlement on record.” The settlement will be funded by directors’ and officers’ insurance proceeds.

Plaintiffs initially filed suit in the Delaware Court of Chancery in March 2011, asserting claims based on the company’s proposed acquisition (since completed) of Shine Group Ltd., a television and movie production company owned by the daughter of News Corp. Chairman Rupert Murdoch. According to plaintiffs, the News Corp. directors breached their fiduciary duties by permitting the purchase of Shine at an excessive price. The court later consolidated various related cases, and plaintiffs’ allegations expanded to include claims that the company’s directors failed to properly investigate the UK phone-hacking allegations that led to the demise of News Corp.’s News of the World. READ MORE →

PCAOB Issues Its First Cooperation Policy Statement

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Ringed Book

On April 24, 2013, the Public Company Accounting Oversight Board issued its inaugural “Policy Statement Regarding Credit for Extraordinary Cooperation in Connection with Board Investigations.” The Policy Statement reiterates many of the themes of the SEC’s “Seaboard Report,” and therefore many may view it as largely plowing over well-trodden ground. But, the Policy Statement merits close attention, because it is the first such statement the Board has issued since it was formed, it sets forth specific examples of conduct that is likely to earn credit for cooperation, and it focuses specifically on the auditing profession.

The Policy Statement identifies three forms of “extraordinary” cooperation that could result in audit firms and/or individuals receiving credit in enforcement investigations:

  • self-reporting;
  • remedial or corrective action; and
  • substantial assistance.

According to the Board, “[a] firm or associated person may earn credit for self-reporting by making voluntary, timely and full disclosure of the facts relating to violations before the conduct comes to the attention of the Board or another regulator.” And, the sooner self-reporting is made, the more likely it will result in credit. The Board stressed, however, that self-reporting is “not eligible for cooperation credit” if it is “required by legal or regulatory obligations,” e.g., the auditor’s obligation under Section 10A of the Securities Exchange Act of 1934 to report a client’s illegal acts. READ MORE →

Record SEC Settlement in S.A.C. Capital Investigation. Well….Kind Of.

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People at a Table

On April 16, 2013, Judge Victor Marrero conditionally approved a $600 million consent judgment between the SEC and CR Intrinsic Investors LLC (“CR”) where CR “neither admitted nor denied” the allegations brought against it. The settlement was on the heels of a highly publicized investigation and lawsuit regarding CR’s purported insider trading scheme involving S.A.C. Capital Advisors and former S.A.C. trader Mathew Martoma. Despite finding the proposed injunctive and monetary relief “fair, adequate, and reasonable, and in the public interest,” Judge Marrero questioned the appropriateness of the “neither admit nor deny” provisions because of the extraordinary public and private harm caused by CR’s alleged wrongful conduct.

Approval of the CR settlement was conditioned upon the outcome of the pending Second Circuit appeal in S.E.C. v. Citigroup Global Markets, Inc., 11-cv-5227 (2d Cir.). In Citigroup, Judge Rakoff (of the Southern District of New York) denied approval of the SEC’s proposed settlement of fraud charges against Citigroup. Rakoff’s opinion harshly critiqued the agency’s use of “no admission” settlements as imposing “substantial relief on the basis of mere allegations.” He questioned whether “no admission” settlements could be properly judged when the Court did not know the relevant facts and therefore “lack[ed] a framework for determining adequacy.” Both Citigroup and the SEC appealed Rakoff’s decision to the Second Circuit, where the decision remains pending. READ MORE →

In the SDNY, Hindsight Is No Substitute for Red Flags When Alleging Scienter

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Letter to Shareholders

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 →

SEC: Facebook Friends Can Benefit

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Email

The SEC issued a release today confirming that companies can use social media outlets like Facebook, Twitter, and LinkedIn to announce information in compliance with Regulation FD (“Reg FD”) so long as investors have been alerted in advance about which social media will be used to send the information.

The SEC’s release grows out of an inquiry involving the CEO of a major Internet television network. The CEO posted on his Facebook page that his company’s online viewing had exceeded a key milestone for the first time. His Facebook statement was not accompanied or preceded by any company press release or 8-K. The stock jumped substantially, and the SEC came knocking.

The SEC’s release confirms that companies are permitted to announce material news through social media, provided investors know when and where to expect it. In response to the SEC’s latest release on Reg FD, we expect that public companies will update their social media protocols and, as appropriate, integrate investor relations communications more closely with links to sites like Facebook, Twitter and LinkedIn.

Say Hello to My Imaginary Friend! Judge Posner, Seventh Circuit Issue Stern Warning to Plaintiffs’ Firms For Again Citing Bogus Confidential Witnesses

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Plaintiffs’ counsel beware: to avoid Rule 11 sanctions you might actually have to talk to “confidential witnesses” yourself and corroborate their statements before citing them in a securities fraud complaint.

That is one major takeaway from the Seventh Circuit’s March 26, 2013 opinion in City of Livonia Employees’ Retirement System v. The Boeing Company, et al. In that case, Judge Posner singled out plaintiffs’ counsel for making “confident assurances in their complaints about a confidential source . . . even though none of the lawyers had spoken to the source and their investigator had acknowledged that she couldn’t verify what (according to her) he had told her.” Slip op. at 16. Citing multiple cases in which the same firm, Robbins Geller Rudman & Dowd LLP, had “engaged in similar misconduct” and noting that “recidivism is relevant in assessing sanctions,” Judge Posner remanded to the district court for further proceedings on Rule 11 sanctions.

The appeal came from the district court’s grant of a renewed motion to dismiss in Boeing’s favor after discovery into the CW’s statement revealed significant inconsistencies with the complaint’s allegations. The allegations, briefly, were that Boeing made false statements about the progress of Boeing’s flagship aircraft, the Dreamliner. In April and May 2009, with the Dreamliner’s maiden test flight (or “First Flight”) scheduled for June 30, 2009, the Dreamliner failed several “stress tests” that raised doubts about the First Flight’s timing. Boeing remained optimistic about the scheduled First Flight, though, and made disclosures to that effect in May and June. But one week before the anticipated First Flight, the Company disclosed that it had failed the tests and that the First Flight had been canceled, delaying final delivery of the plane to customers. Following the disclosure, Boeing’s stock price fell 10% over two days of trading.

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