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
The second quarter of 2013 saw the largest quarterly percentage decline in new securities actions since before the 2007/2008 financial crisis. New filings in the first quarter plummeted by 41 percent, from 352 in the first quarter to 234 in the second quarter. This drop represents a 55 percent decrease in the number of new securities actions filed as compared to same period last year (Q2 2012). It has been approximately five years since we have seen a lower number of quarterly filings.
The number of new securities fraud cases also plummeted, falling 59 percent from the prior quarter, with the number of new filings decreasing from 149 to 61. There were also quarterly declines in newly-filed shareholder derivative actions, which decreased from 43 filings in the first quarter to 37 in the second quarter, and breach of fiduciary duty cases, which fell from 99 new filings in the first quarter to 71 in the second quarter.
Not only did the number of securities actions filed drop significantly, but so too did the average settlement amounts. The average settlement for all types of securities cases in the second quarter was just over $37 million, a marked decrease from the average settlement amount of $69.3 million during the first quarter of 2013.
What’s going on? There are a number of factors that may be contributing to these downward filing trends. The stock market has been strong, so many investors have little to complain about. Moreover, the surge in suits against U.S.-listed Chinese companies appears to have run its course, and no new scandal or market development has yet become the next “big thing” that will drive increased filings. In addition, SEC enforcement activities have continued to shift into areas (such as insider trading and whistleblowing) that do not always spawn parallel private litigation. It remains to be seen whether the recent appointment of new SEC personnel or a renewed focus on accounting fraud cases by regulators, which is anticipated by some analysts, will cause a variation in these trends moving forward.
Source = Advisen D&O Claims Trends: 2013 Report (July 2013)
Judge Carter issued his final order on July 16, 2013, following our blog post. The final order is substantively the same as the tentative order, and denies S&P’s motion to dismiss the case for the same reasons previously set forth. Judge Carter added a note rejecting Defendants’ argument at the hearing on July 8, 2013 that no reasonable investor or issuer bank could have relied on S&P’s claims of independence and objectivity, because this would beg the question of whether S&P truly believed that S&P’s rating service added zero material value as a predictor of creditworthiness. Judge Carter’s finding that an issuer bank could be a victim that was misled by S&P’s fraudulent ratings of its own mortgage-backed security products is an interesting development, and one that may open new doors to mortgage-backed securities litigation under FIRREA.