August 10, 2010 10:13 AM | Posted by Kerry K. Vatzakas | Topic(s): Litigation

In a recent decision issued by the District of Connecticut, Coyne v. General Electric Co., No. 3:08-cv-01135-SRU, 2010 WL 2836730 (Jul. 15, 2010), the Court granted the defendants’ motion to dismiss the plaintiffs’ complaint, which alleged securities fraud and violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“1934 Act”).    

 

In Coyne, the plaintiffs brought a purported class action on behalf of investors who purchased General Electric Co. (“GE”) stock between March 12, 2008 and April 10, 2008.  Id. at *1.  Plaintiffs alleged that they purchased GE stock based on positive projected earnings for 2008.  Id. at *1-*3.  In December 2007, before the start of the class period, GE projected that 10 percent revenue growth in fiscal year 2008 was “in the bag.”  Id. at *1.  In January 2008, GE re-affirmed the previous guidance for fiscal year 2008 and provided guidance for the first quarter 2008, expecting an increase in growth up 10% over the first quarter 2007.  Id.  Then in March 2008, GE again stated that revenues in fiscal year 2008 should grow by at least 10%.  Id. at *2. 

 

On April 11, 2008, the Company announced that they missed their guidance for the first quarter 2008, with double-digit decreases in certain divisions.  Id.  At that time, GE also lowered its guidance for fiscal year 2008 down to 0%-5%.  Id. at *3.  Immediately following the announcement, GE’s stock suffered a 13% drop.  Id.

 

Although the complaint alleged that defendants’ statements regarding first quarter 2008 earnings were false or misleading, the court noted that the “in the bag” statement was first made outside of the class period, and that, even after that point, defendants’ alleged misstatements were made with regard to the full year 2008.  Id. at *5-*6.  At no time did defendants represent that first quarter 2008 earnings were “in the bag,” nor did defendants promise to hit every weekly, monthly, or quarterly financial goal.  Id.

 

Accordingly, the court held that defendants’ statements regarding first quarter 2008 earnings, made in January 2008, merely established goals for the quarter, and GE had no duty to correct or update their statements during the quarter.  Id. at *6.  “Holding otherwise would lead to an absurd result, effectively imposing on GE a duty to inform investors constantly about the company’s earnings throughout the quarter.”  Id.

August 9, 2010 8:56 AM | Posted by Lisa Bugni | Topic(s): Litigation

The United States Securities and Exchange Commission (“SEC”) is now required to provide financial awards to whistleblowers who supply the SEC with original information if certain conditions are met.  On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), commonly known as the financial reform bill.  Section 922 of the Act amends the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78a, et seq., by adding Section 21F, which is entitled, “Securities Whistleblower Incentives and Protection.”  As explained in the House Conference Report, the addition of the whistleblower provision to the Exchange Act was designed to “enhance[] incentives and protections for whistleblowers providing information leading to successful SEC enforcement actions.”  See H.R. Conf. Rep. 111-517.  Some of the highlights of the new Exchange Act provision are as follows:

 

Whistleblower Award.  Section 21F specifies that the SEC “shall pay” an individual (or group of individuals) a financial award for voluntarily providing original information to the SEC.  The original information provided must lead to the SEC recovering monetary sanctions exceeding $1 million.  Original information is defined to mean information that “(A) is derived from the independent knowledge or analysis of a whistleblower; (B) is not known to the [SEC] from any other source …; and (C) is not exclusively derived from an allegation made in” other proceedings or the news, “unless the whistleblower is the source of the information.”      

 

Exclusions.  Certain whistleblowers are not entitled to receive the financial award.  Those excluded include whistleblowers who (a) are officers or employees of certain government or self-regulatory organizations or were officers or employees at the time the information was learned; (b) are convicted of a criminal violation related to the action for which they supplied the information; (c) gain the information through performance of an audit required under the securities laws; or (d) fail to submit the information to the SEC in the form the SEC requires.    

 

Amount of Award.  The amount of the financial award to which qualifying whistleblowers are entitled ranges from a guaranteed minimum of 10% to a maximum of 30% of the amount of the monetary sanctions that the SEC collects in the action.  The percentage awarded within this range is within the discretion of the SEC, subject to four specified criteria.  Notably, a whistleblower who is denied the financial award may appeal the SEC’s decision directly to the court of appeals of the United States.  A whistleblower may not, however, appeal the amount of an award if it is within the specified range of 10 – 30% of the amount collected.

 

Establishment of a Fund.  The financial award is to be paid by the SEC out of a new fund called the “Securities and Exchange Commission Investor Protection Fund.”  Certain amounts of monetary sanctions collected by the SEC are to be deposited into the Fund; but if the Fund does not have enough money to pay the required whistleblower award, then the award, effectively, is to be paid out of the monetary sanction that the SEC collects as a result of the information the whistleblower provided.   

 

Whistleblower Protection.  Section 21F includes certain protections for whistleblowers, including provisions that (a) protect the confidentiality of whistleblowers; (b) expressly prohibit retaliation by employers; and (c) provide a private cause of action against a whistleblower’s employer in the event the whistleblower is discriminated against or discharged.  

 

Section 924 of the Act requires the SEC to establish final regulations implementing the whistleblower program within 270 days from the enactment of the Act.  The SEC warns on its website that “[c]ompliance with the regulations will be a prerequisite to an award,” so it will be interesting to see how difficult, or easy, the SEC will make it for whistleblowers to receive Section 21F’s financial award.   

August 5, 2010 9:05 AM | Posted by Liz Skola | Topic(s): Litigation

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).  The law includes a wide range of new regulations and reforms affecting, among other areas, corporate governance and executive compensation for public companies.  One of these reforms expands upon the so-called “compensation clawback” provision under Section 304 of the Sarbanes-Oxley Act.  This new provision requires public companies to develop internal policies for the recovery of previously-awarded executive compensation and includes certain penalties that are intended to ensure strict compliance with these policies. 

 

Section 304 of the Sarbanes-Oxley Act of 2002 mandates that the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) reimburse their company for any bonus or other incentive-based compensation he or she received in the twelve-month period following the first issuance of a noncompliant financial statement that was “due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws.”  15 U.S.C. § 7243.  Although the plaintiffs’ bar filed numerous lawsuits on behalf of investors seeking disgorgement pursuant to this provision, courts have generally held that Section 304 did not create a private right of action.  See, e.g., In re Digimarc Corp. Derivative Litig., 549 F.3d 1223 (9^th Cir. 2008); Kogan v. Robinson, 432 F. Supp. 2d 1075 (S.D. Cal. 2006); Neer v. Pelino, 389 F. Supp. 2d 648 (E.D. Pa. 2005); In re Bisys Group, Inc. Derivative Action, 396 F. Supp. 2d 463 (S.D.N.Y. 2005).  The Securities and Exchange Commission (“SEC”), meanwhile, was slow to embrace the clawback provision and initially limited its application to stock option backdating cases.  See, e.g., SEC Litigation Release No. 21598 (July 22, 2010); SEC Litigation Release 20387 (Dec. 6, 2007); SEC Litigation Release No. 20136 (May 31, 2007).  In July 2009, the SEC brought the first action seeking reimbursement under the Sarbanes-Oxley clawback provision from an individual who was not alleged to have otherwise violated the securities laws, a position that was upheld by the U.S. District Court for the District of Arizona on June 9, 2010.  SEC v. Jenkins, No. 2:09-cv-1510-GMS, 2010 WL 2347020 (D. Ariz. June 9, 2010).  In this instance, the Sarbanes-Oxley requirement to reimburse the company for compensation was based on the fact that the CEO was running the company at a time when its financial statements were fraudulently misleading and had to be restated.  The SEC did not contend that the CEO had personally engaged in any misconduct that caused or contributed to the restatement.

           

Under the Dodd-Frank Act, any company listed on a national securities exchange will be required to develop and implement its own internal clawback policy covering incentive-based compensation.  H.R. 4173 § 954.  The recent no-fault interpretation of the Sarbanes-Oxley clawback is codified in the Dodd-Frank Act clawback statute.  Under the Dodd-Frank Act, the clawback policy must provide that, in the event the issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer with any financial reporting requirement under the securities laws, the issuer will recover any incentive-based compensation (including stock options) paid to any current or former executive officer during the three-year period preceding the date on which the issuer is required to prepare the restatement.  The amount to be recovered is the excess of the amount originally paid to the executive officer based on the incorrect financial statements over the amount that would have been paid under the restated financials.  The specifics of the Dodd-Frank Act clawback provision will need to be fleshed out in SEC rules as there are many ambiguous aspects of the law itself.  

           

Although the Dodd-Frank Act clawback provision requires repayment of only “excess” compensation, this new provision is broader than Section 304 of the Sarbanes-Oxley Act in several respects.  First, while Section 304 was limited to the CEO and CFO, the new clawback provision applies to all current and former executive officers.  Second, under the Dodd-Frank Act, the repayment of excess incentive-based compensation is required in the event of any material noncompliance, regardless of whether it was the result of “misconduct.”  Finally, the look-back period of the Dodd-Frank Act extends to three years prior to the requirement for the restatement as opposed to the twelve-month period following the initial publication of the erroneous financial statements. 

 

Importantly, the Dodd-Frank Act enhances enforcements of these internal clawback policies by penalizing issuers who fail to do so.  Under the new law, the national exchanges will be required to de-list any issuer that fails to comply with its own policy.  Public companies will need to review their compensation policies to ensure compliance with this new clawback provision.

August 2, 2010 9:33 AM | Posted by Austin Hall | Topic(s): Litigation

In a recent decision dismissing a Rule 10b-5 claim brought by investors, Local No. 38 IBEW Pension Fund v. American Express Co., 2010 WL 2834226 (S.D.N.Y. July 19, 2010), the Southern District of New York discussed at some length the role of confidential witnesses and the level of detail required for such witnesses.  In keeping with other recent decisions, the district court made clear that plaintiffs must allege specific facts regarding these witnesses in addition to particularized facts on the subject matter of the alleged fraud in order to have such allegations count towards establishing a strong inference of scienter.

 

In Local No. 38 IBEW Pension Fund, the plaintiffs had alleged that the defendants made false or misleading statements about the lending practices of the consumer credit card division of American Express.  Specifically, the plaintiffs complained of statements that American Express employed a rigorous risk management policy, that the firm’s customers did not present a high credit risk, and that the company did not employ “0% balance transfers” to attract new customers.  The plaintiffs alleged these statements were false or misleading in light of later disclosures about rising delinquencies and an increase in loss reserves, which resulted in a sharp decline in American Express’ stock price at the height of the recent credit crisis.  To attempt to satisfy the scienter pleading requirement for a securities fraud claim, the plaintiffs had asserted that the defendants knew of, or recklessly disregarded, information showing that American Express had lowered its lending standards and that its credit portfolio had deteriorated significantly. 

 

The complaint relied heavily on statements from twelve supposed confidential witnesses (“CWs”) to establish that the defendants allegedly possessed contradictory information when making public statements about the lending practices of American Express.  The district court observed, however, that the plaintiffs’ allegations of reckless disregard were “a gossamer patchwork of general statements from the CWs and inferences from reports published after the allegedly false and misleading statements were made.” Id. at *10.  Although the complaint contained “sixty-four seemingly unedited paragraphs” of information supplied by the confidential witnesses, the court held that the complaint failed to identify any specific reports demonstrating the defendants’ awareness of a less restrictive lending policy or deteriorating credit data that contradicted their public statements.  Id. at *6.  Instead, the court concluded that assertions by the confidential witnesses were merely “anecdotes and conclusory statements of belief” about the business practices of American Express.  Id. at *10.  The court also noted that many of the confidential witnesses were rank and file employees who did not have contact with the defendants or access to aggregated data about credit risk.  Thus, the confidential witnesses could not provide the critical information necessary to plead scienter, i.e., what information the defendants received or when they received it.

 

The court did observe that one of the confidential witnesses was a high level employee who had contact with the defendants and prepared reports for senior executives.  Yet, this confidential witness could only assert that certain information about the credit quality of American Express cardholders “would have been” reviewed by the defendants.  The court held these claims were too speculative to give rise to a strong inference of scienter.  Additionally, the court discounted the statements of this confidential witness because she could not identify the specific names or contents of documents which supposedly contradicted the defendant’s public statements.

 

Local No. 38 IBWE Pension Fund stands as a reminder that a complaint heavy with company-specific detail provided by former employees provides a plaintiff with no guarantee of surviving dismissal.  The Private Securities Litigation Reform Act requires not just detail, but the right type of detail -- particularly as to the alleged state of mind of the individual defendants.  Indeed, plaintiffs, who allege that the defendants made public statements while in possession of purportedly contradictory information, must specifically identify the conflicting reports or data and provide a compelling level of detail as to their distribution, contents and timing in order for these allegations to contribute to a showing of a strong inference of scienter.

July 14, 2010 1:07 PM | Posted by Ambreen Delawalla | Topic(s): Litigation

The U.S. Supreme Court recently issued its decision in a so-called “foreign cubed” securities case, Morrison v. National Australia Bank Ltd., No. 08-1191, 2010 WL 2518523 (U.S. June 24, 2010).  The Court held that a foreign investor’s complaint against a foreign issuer in connection with securities purchased or sold on a foreign exchange failed to state a claim under Section 10(b) or Rule 10b-5.  2010 WL 2518523, at *14. 

 

Justice Scalia delivered the opinion of the Court, which focused not surprisingly on the actual language of Section 10(b) of the Securities Exchange Act of 1934.  The Court held that Section 10(b) contained no evidence that Congress intended it to apply extraterritorially.  Indeed, “[i]t is a longstanding principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.”  Id. at *5 (internal citations omitted). 

 

The Court, thus, rejected any suggestion that Congress intended to inject extraterritorial application into Section 10(b) through, for example, the statutory definition of “interstate commerce,” which included a reference to “any foreign country.”  The Court similarly rejected as dispositive a reference to extraterritorial jurisdiction in Section 30(a) of the Exchange Act, which seeks to prevent “evasion” of the Act.  The Court concluded that this provision was not evidence of the intent of Congress to extend the entire Act to transactions on foreign exchanges.  Id. at **9-10.  In other words, “Congress knows how to give a statute explicit extraterritorial effect—and how to limit that effect to particular applications . . . .”  Id. at *10 n.8.

 

The Supreme Court instead established a transactions-based test.  The Court held “that the focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States.”  Id. at *11.  Accordingly, Section 10(b) provides a cause of action only where “the purchase or sale is made in the United States, or involves a security listed on a domestic exchange . . . .”  Id. at *12.

 

The Court, therefore, rejected the “conducts and effects” tests that had been developed by the Second Circuit Court of Appeals.  Under those tests, a Section 10(b) claim could be successful against a foreign issuer with respect to a security registered on a foreign exchange if “the wrongful conduct occurred in the United States” and/or “the wrongful conduct had a substantial effect in the United States or upon United States citizens . . . .”  Id. at *7.  The Court refused to embrace these tests because they were not based on the text of the statute and would be difficult to administer.  Id.  The Court likewise rejected the “significant and material conduct” test put forth by the Solicitor General for similar reasons.  Id. at *13.

 

Policy concerns played a key role in briefs filed with the Court as evidenced by the many organizations and nations submitting amicus briefs.  The Court ultimately gave differing weight to some of the most apparent policy issues.  The Court did give credence to the concerns voiced by foreign nations that an extraterritorial application of Section 10(b) would engender conflicts with the securities laws of those other nations.  Id. at *12.  The Court was not, however, persuaded by concerns that the United States would become a launching pad for the perpetration of fraud in foreign markets.  Instead, the Court’s opinion seemed to be more focused on the adverse consequences of allowing more, rather than less claims.  The decision references the fact that “some fear that [the United States] has become the Shangri-La of class-action litigation for lawyers representing those allegedly cheated in foreign securities markets.”  Id. at *13. 

 

Morrison is an obvious victory for foreign issuers, especially those who have recently faced securities litigation in the United States and/or suffered adverse verdicts, such as Vivendi Universal S.A., Fairfax Financial Holdings Limited, Fortis N.V., Royal Dutch/Shell Transportation, Bayer AG, and Siemens AG.  Although Morrison leaves open the possibility that a foreign issuer may still be sued in this country under the federal securities laws, the decision goes a long way to limit the circumstances under which such claims would be viable. 

July 13, 2010 9:19 AM | Posted by Michael Hartley, Elizabeth Skola | Topic(s): Litigation

In a recent decision affirming the dismissal of investors’ securities fraud claims, In re Cutera Securities Litigation, No. 08-17627, 2010 WL 2595281 (9th Cir. Feb. 11, 2010), the Ninth Circuit Court of Appeals clarified its construction of the safe harbor provision of the Private Securities Litigation Reform Act (“Reform Act”), 15 U.S.C. § 78u-5.  In so doing, the Ninth Circuit confirmed the protections for forward-looking statements issued by public companies and joined several other circuits in holding that a defendant’s state of mind is irrelevant where forward-looking statements are identified as such and accompanied by meaningful cautionary language.

 

The Cutera plaintiffs brought claims against the defendants under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, alleging that the defendants had made false and misleading revenue projections and failed to disclose the poor performance of its junior sales force.  The district court granted the defendants’ motion to dismiss, finding no material difference between the Company’s allegedly inadequate disclosures regarding sales force performance in January 2007, and its alleged fuller disclosures regarding those problems in May 2007.  The district court also held that the plaintiffs’ allegations regarding the Company’s misleading earnings projections fell within the Reform Act’s safe harbor and, therefore, could not form the basis for a claim of securities fraud.

 

The Ninth Circuit agreed with the district court that the defendants had adequately identified the revenue projections as forward-looking statements and that the projections were accompanied by cautionary language that “spoke directly to the purported misstatements identified in the complaint.”  2010 WL 2595281, at *7.  Specifically, the Company had warned of its dependence on the performance of its sales force and that its failure to attract and retain sales and marketing personnel would materially harm its business prospects.  Id.  The Court of Appeals confirmed that these statements met the requirements of subsection (A)(i) of the safe harbor.  Id.  The plaintiffs, however, argued that their allegations of defendants’ actual knowledge of falsity should be sufficient to overcome this claim of protection under the safe harbor.  Id.  The plaintiffs based their position on subsection (B) of the safe harbor, which requires lack of proof of actual knowledge, and on an earlier decision from the Ninth Circuit, No. 84 Employer-Teamster Joint Council Pension Trust Fund v. American West Holding Corp., 320 F.3d 920, 937 n.15 (9th Cir. 2003), where, in a footnote, the Court suggested that “a strong inference of actual knowledge” could remove forward-looking statements from the protection of the safe harbor.  

 

The Ninth Circuit rejected the plaintiffs’ argument, characterizing the American West footnote as “obiter dicta” and a “passing reference that offered no statutory analysis or discussion of the safe harbor itself.”  2010 WL 2595281, at *8.   The Court explained that the plaintiffs’ suggestion that the safe harbor statute be read conjunctively “ignores the plain language of the statute, which is written in the disjunctive as to each subpart.”  Id. at *7.  The Court further recognized that the “logical reading of the [safe harbor] statute is to take it as written – subsections (A) and (B) and their subpoints each offer safe harbors for different categories of forward-looking statements.”  Id.  Holding that “[t]he defendants’ state of mind is not relevant to subsection (A),” the Ninth Circuit joined the Fifth, Sixth, and Eleventh Circuits – the only other circuits to have addressed the issue – in their interpretations of the safe harbor.  Id.  Accordingly, the Ninth Circuit concluded that the plaintiffs could not rely on their allegations of actual knowledge to overcome the safe harbor’s protection for Cutera’s January 2007 disclosures, which were accompanied by meaningful cautionary language.  Id. at *8.

 

The Court of Appeals also upheld the district court’s decision regarding the plaintiffs’ failure to meet the materiality requirement for their Section 10(b) claim.  See id. at *3-*5.  The Ninth Circuit began by examining the basis of the allegations regarding the January disclosure on the junior sales force and juxtaposing it with the Company’s later clarifications.  Id. at *4.  In January 2007, Cutera had announced that it had not seen the expected productivity from its junior sales force and was making “modifications to the [alignment] of the sales organization.”  Id.  The Company made further statements in April and May 2007, that it was “implementing specific initiatives to address” its shortfall and restructuring its sales force and that it had “discontinued the junior sales program.”  Id.  The Court held that these disclosures were “not materially different” and agreed with the district court that the defendants’ earlier disclosure of the details of the sales force reorganization would not have made a material difference in the plaintiffs’ investment decisions.  Id. at *5. 

 

The Ninth Circuit also noted that the alleged misstatement referring to the Company’s employee relations as “good” was “nonactionable puffing.”  Id.  The Court concluded that the plaintiffs failed to “raise[] a plausible claim that stock prices fluctuated with disclosures about the sales staff, or that a reasonable investor would have received a materially different impression of Cutera’s state of affairs had the company used language from the May 5 or April 7 press releases to describe the sales shortfalls in its January 31 statements.”  Id.

 

The Ninth Circuit’s decision is an important step in maintaining the Court of Appeals’ uniformity to date in holding that a defendant’s state of mind is irrelevant for safe harbor purposes where forward-looking statements are identified as such and accompanied by meaningful cautionary language.

July 9, 2010 3:58 PM | Posted by Elizabeth Skola | Topic(s): Litigation

In Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008), the Supreme Court affirmed what had long been the law – namely, that there was no private right of action for aiding and abetting liability under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”).  In the wake of that decision, there have been several legislative efforts whose stated goal was to overturn that decision.  As described below, these recent efforts, like past attempts, have not yielded a new cause of action that would allow shareholders to bring claims against those individuals or entities accused of aiding and abetting another party’s violations of the federal securities laws. 

 

It is also important to note that these recent legislative efforts ignore the critical fact that Stoneridge did not make new law in this area, but was instead squarely grounded in several prior Supreme Court decisions.  Indeed, in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), the Supreme Court previously held that aiding and abetting liability could not exist because it would be fundamentally and fatally at odds with the mandatory reliance requirement for all Section 10(b) claims.  A private cause of action for aiding and abetting liability would, thus, be contrary to not only the Stoneridge opinion, but decade’s worth of jurisprudence on the reliance requirement and other aspects of the federal securities laws imposing additional requirements on Section 10(b) claims, such as the requirement that a plaintiff must plead and prove loss causation.  Stoneridge has nevertheless become the focal point for some advocates who seek to broaden the scope of potential liability under the federal securities laws in response to highly-publicized corporate scandals.  

 

In July of last year, Senator Arlen Specter (D-PA) introduced a bill to amend Section 20(e) of the Exchange Act that was designed to allow private claims for aiding and abetting liability in securities fraud cases.  See Liability for Aiding and Abetting Securities Violations Act of 2009, S. 1551, 111th Cong. (2009).  Senate Bill No. 1551 would have created an express private right of action against any person who provided “substantial assistance” – i.e., aiders and abettors – in any violation of the Exchange Act.  The bill was referred to the Senate Judiciary Committee, which held a hearing on September 17, 2009, but the Committee has yet to make any report on that bill. 

 

More recently, Representative Maxine Waters (D-NY) introduced a similar bill.  See Liability for Aiding and Abetting Securities Violations Act of 2010, H.R. 5042 111th Cong. (2010).  This bill was introduced on April 15, 2010 and subsequently referred to the House Judiciary Committee, but to date, there has been no further activity.  In the past month, however, Representative Waters again raised the issue of aiding and abetting liability during a joint congressional conference addressing the financial reform legislation.  Although similar language was absent from both the Senate and the House versions of the financial reform bills, Waters proposed amending the Senate bill to include a provision that would establish a private right of action for investors against anyone who aids or abets securities fraud, or, in other words, a provision that would effectively overturn Stoneridge.  Following a vote of 11 to 8 to keep the proposed amendment and further discussions on the issue during the conference, other senators, including Senator Christopher Dodd (D-CT), suggested that, prior to the passage of any such legislation, a study should be conducted on its potential impact.  The proposed study was intended to evaluate the costs and benefits of an expansion of liability to address concerns that such legislation would generate unnecessary and costly litigation and cause businesses to abandon the United States’ capital markets for overseas markets.  Waters also sought a review of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”), which set forth heightened pleading standards in securities fraud cases, and its impact on the number and type of lawsuits filed. 

 

Ultimately, the conferees reached a compromise and recommended that any legislation require the Government Accountability Office (“GAO”) to conduct a study on (1) the costs of giving investors this right, including the direct costs to companies and indirect costs to the United States’ capital markets, and (2) the effectiveness of the Reform Act in reducing the number of deficient claims brought against innocent parties.  Thus, the final version of the conference report reconciling the House and Senate versions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) bill does not contain any provision purporting to overturn Stoneridge.  The bill instead states that the GAO must “conduct a study on the impact of authorizing a private right of action against any person who aids or abets another person in violation of the securities laws.”  H.R. 4173, § 929Z(a).  The study should include (1) a review of the role of secondary actors in companies’ issuance of securities; (2) the courts’ interpretation of the scope of liability under the federal securities laws in the wake of Stoneridge (i.e., after February 14, 2008); and (3) the types of lawsuits decided under the Reform Act.  Id.  Further, a report on the findings of the study should be submitted to Congress within a year of the passage of the Dodd-Frank Act.  Id. § 929Z(b). 

 

The House of Representatives voted to pass the bill on June 30, 2010, but the Senate vote has not yet occurred.  Given the compromise reached regarding the so-called “Stoneridge amendment,” it is likely that there will not be any further consideration of a possible private cause of action for aiding and abetting liability until after the results of the GAO study are presented to Congress next year.

July 9, 2010 8:38 AM | Posted by Mark D. Trainer | Topic(s): Litigation

The Eleventh Circuit in Ledford v. Peeples, 605 F.3d 871 (11th Cir. 2010), clarified the steps District Courts must take in order to satisfy the Private Securities Litigation Reform Act’s (“Reform Act”) mandatory Rule 11 analysis.  The Reform Act requires a court, upon final adjudication of an action, to make “specific findings regarding compliance by each party and each attorney . . . with each requirement of Rule 11(b) of the Federal Rules of Civil Procedure as to any complaint, responsive pleading, or dispositive motion.”  Id. at 919 (internal citations omitted).  The Eleventh Circuit’s recent ruling makes clear that a detailed analysis including both findings of fact and conclusions of law as to each claim and each party are required under the Reform Act.

In Ledford, the District Court granted summary judgment to the defendants concerning claims brought pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.  The court ruled that judgment for the defendants was required because there was no issue of disputed fact regarding plaintiffs’ lack of reliance on any of the defendants’ alleged misrepresentations.  Id. at 876.  In the wake of this decision, the defendants moved for sanctions pursuant to the Reform Act’s provision requiring the court to assess compliance with Rule 11, but the District Court declined to award sanctions.  Id. at 900.

On appeal, the Eleventh Circuit found that the District Court did not properly conduct the Rule 11 analysis required by the Reform Act.  As an initial matter, the Eleventh Circuit stated that the Reform Act removed any discretion that a court might otherwise have in deciding whether or not to award sanctions for a Rule 11(b) violation.  Id. at 920.  In other types of cases, Rule 11(c) provides a court with discretion as to whether to award sanctions, i.e., the provision states that a court may impose appropriate sanctions on attorneys, law firms, or parties found to have violated Rule 11(b).  Although the Reform Act did not alter the substantive standards for finding a violation of Rule 11(b), it did, however, strip a court of any discretion concerning sanctions as it mandates that the court must impose sanctions if it finds a party or attorney in violation of Rule 11(b).  Id. at 919 – 20. 

With this understanding, the Eleventh Circuit proceeded to list the deficiencies in the lower court’s Rule 11 analysis.  First, the Court of Appeals observed that the District Court had failed to provide the “specific findings” regarding compliance with Rule 11 mandated by the Reform Act, which are necessary for meaningful appellate review.  Id. at 921 – 22.  These “specific findings” should be the functional equivalent of the findings of fact and conclusions of law discussed in Fed. R. Civ. P. 52(a)(1).  Id. at 921.  The court in Ledford, however, provided only legal conclusions without findings of fact, referred to “other evidence” without identifying it, and did little more than restate the elements of Rule 11.  Id. at 924. 

Second, the District Court failed to evaluate each plaintiff and each claim individually.  Id. at 925.  In Ledford, there were five plaintiffs and three theories of liability (e.g., Rule 10b-5 (a) and (b) and Section 20(a)).  The Court of Appeals concluded that the District Court should have treated the securities claims as 15 separate claims instead of grouping them all together as one.  Id.  The court also failed to analyze each of these 15 claims against each subpart of Rule 11(b) and provide specific findings for each such analysis.  Id.

Once the Eleventh Circuit turned to the substance of the sanctions analysis, it determined that the court had abused its discretion in not imposing sanctions as to individual plaintiffs, while remanding for further findings with respect to the corporate plaintiff.  Id. at 931.  Of further note, the Eleventh Circuit rejected plaintiffs’ argument in their motion for rehearing that a fair reading of the complaint could suggest that the securities law claims were brought by only one of the five plaintiffs.  Id. at 926 – 28.  The Eleventh Circuit found such argument untenable.  Id. at 927.  The complaint named all of the plaintiffs in each count set forth in the complaint, all of the plaintiffs’ prior submissions used the term “plaintiffs” in discussing the securities claims, and in the opening brief on appeal, plaintiffs framed the securities law issues as applying to multiple “plaintiffs.”  Id. at 927 – 28. 

July 8, 2010 9:35 AM | Posted by David O'Neal | Topic(s): Litigation

The Supreme Court recently granted certiorari to review the decision of the Fourth Circuit Court of Appeals in First Derivative Traders v. Janus Capital Group, Inc., 566 F.3d 111 (4th Cir. 2009), cert. granted, 78 U.S.L.W. 3271 (U.S. June 28, 2010) (No. 09-525).  This appeal concerns whether a legally distinct investment advisor to a group of mutual funds may be subject to claims for primary liability under Section 10(b) for “helping” or “participating” in the preparation of false or misleading prospectuses for the funds.  The Court could take on the existing split among the circuits concerning the degree of attribution required to subject a defendant to primary liability under the federal securities laws.  The Second Circuit, for example, requires that the public statement at issue must be directly attributed to the defendant at the time of its original distribution in order for a viable claim of primary liability to exist.  See Wright v. Ernst & Young LLP, 152 F.3d 169 (2d Cir. 1998).  In contrast, the Ninth Circuit has in the past allowed claims for primary liability to proceed where the plaintiffs adequately alleged that the defendant substantially participated in the preparation of the allegedly false or misleading public statement.  See In re Software Toolworks Inc. Sec. Litig., 50 F.3d 615 (9th Cir. 1994).

 

According to petitioners, the Fourth Circuit’s denial of their motion to dismiss in the Janus case puts at risk service providers such as lawyers, accountants, and bankers in contravention of the Supreme Court’s ruling in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 522 U.S. 148 (2008), which re-affirmed the long-standing rule that there is no private cause of action for aiding and abetting liability under Section 10(b).  As pointed out by respondent as well as the Solicitor General, however, the issue presented in Janus may be unique to the mutual fund industry in which mutual fund investment advisors are essentially insiders responsible for the day-to-day management of the funds.

 

Alston & Bird LLP will continue to monitor this important case and provide updates here when the Court issues a decision.

June 24, 2010 4:35 PM | Posted by Scott Hilsen | Topic(s): Articles & Advisories

The Fraud Reporter is a periodic newsletter published by Alston & Bird LLP that is designed to be a source of news and information regarding fraud prevention, investigation, and litigation.  The June 2010 edition is now available and includes articles discussing:

• A&B Hired By Florida Republican Party
• ACFE Releases 2010 Fraud Report
• Whistle-Blowers Find More Corporate Fraud Than Regulators
• Investigation Materials Are Privileged If Legal Services Are Provided

To access the latest issue of The Fraud Reporter, click here.