On May 28, 2013, in Delshah Group LLC v. Javeri, a rare securities trial regarding credit-crisis related claims, Judge Katherine B. Forrest of the United States District Court for the Southern District of New York issued an order directing a complete defense judgment following a two-week bench trial. The decision includes a noteworthy discussion and analysis of loss causation in the context of credit crisis litigation—directly applicable to pending cases under Sections 10, 11 and 12—and highlights a tension between the Private Securities Litigation Reform Act and longstanding securities law when it comes to proving culpable intent.
The case arose from a real estate investment gone bad. In March of 2007, plaintiff purchased interests in a venture called 40 Broad Street Project. That project sought to make a return on converting commercial real estate space into condominiums and thus take advantage of the rapidly rising value of condos in New York City. Plaintiffs claimed that defendant misrepresented how far along the building project was, whether it was under budget, and how much “skin in the game” defendants had in the project. When the credit crisis hit and the real estate market collapsed, plaintiff lost substantial sums on its investment and claimed the above misstatements were its cause. READ MORE
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.