In LaPerriere v. Vesta Insurance Group, Inc., __ F.3d __, No. 06-14524, 2008 WL 1883482 (11th Cir. Apr. 30, 2008), plaintiffs filed a securities class action against Vesta Insurance Group ("Vesta") and Torchmark Corporation ("Torchmark"), the former parent company of Vesta, among other defendants. Id. at *1. Plaintiffs’ claims against Torchmark were based on Section 20(a) of the Securities Exchange Act of 1934 (the "1934 Act"), under which a person who controls the purported violator of the 1934 Act (the "controlling person") is "liable jointly and severally with and to the same extent" as that violator. Id.

After settling with all defendants except Torchmark, plaintiffs moved to strike Torchmark’s affirmative defenses that sought to invoke the proportionate liability scheme of Section 21(D)(f) of the 1934 Act, which was enacted pursuant to the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Id. Under Section 21(D)(f), a defendant who does not knowingly commit a violation of the 1934 Act is liable solely for the percentage of plaintiffs’ damages for which he or she is responsible. Id. at *2-*3. Plaintiffs asserted that controlling person liability is governed by Section 20(a), which provides for joint and several liability, and not by Section 21(D)(f), which provides for proportionate liability based on the defendant’s responsibility for plaintiffs’ alleged damages. Id. at *1.

The Eleventh Circuit rejected plaintiffs’ argument and held that Torchmark, a controlling person defendant, was able to take advantage of Section 21(D)(f)’s proportionate liability provisions. Id. To avoid an implicit repeal of one of the statutory provisions at issue, the two sections must be read in harmony. Id. Pursuant to the court’s holding, Section 20(a) provides the standard of liability for controlling persons, and Section 21(D)(f) governs the allocation of damages for which a liable controlling person may be held responsible. Id. at *9. The court’s interpretation of the two statutes requires a two-part analysis. Id. First, the fact finder must determine whether a controlling person is liable pursuant to Section 20(a). Id. Second, if the controlling person is liable, then the fact finder must determine the controlling person’s proportionate responsibility for the alleged damages pursuant to Section 21(D)(f). Id.

In reaching its conclusion, the court relied on the fact that the proportionate liability system of the Reform Act was "intended to address the problem of damages being imposed jointly and severally on those who had not themselves done anything wrong." Id. The legislative history of the Reform Act, thus, required that controlling persons be treated the same as controlled persons and be allowed to reduce their liability for violations of the 1934 Act in direct proportion to their responsibility for plaintiffs’ alleged damages. Id.

The District Court rejected plaintiffs’ argument, holding that it is not necessary for the state law claims to line up exactly with the requirements of the federal securities laws. See id. at *4. Plaintiffs’ allegations of misrepresentations or omissions of material fact by defendants and their alleged use of manipulative or deceptive devices in connection with the purchase or sale of a security were sufficient to preclude the claims under SLUSA. See id. The Tenth Circuit agreed, similarly holding that all of plaintiffs’ claims should have been dismissed under SLUSA, regardless of whether the particular elements of their state law claims matched up precisely with the claims available under federal law. See id. In another recent SLUSA case -- Segal v. Fifth Third Bank, N.A., No. 1:07-cv-348, 2008 WL 819290 (S.D. Ohio Mar. 25, 2008) -- the United States District Court for the Southern District of Ohio rejected under SLUSA certain class claims tendered in a proposed amended complaint. The original complaint filed by plaintiffs had contained class claims under state law, which were expressly based on the defendants’ alleged misrepresentations and omissions of material fact and/or on a purported fraudulent or deceptive scheme by the defendants. See id. at *3. Not surprisingly, the defendants had moved to dismiss the original complaint based on SLUSA preemption. See id. Prior to the court’s ruling on that motion to dismiss, however, plaintiffs sought to amend their complaint to remove any direct allegations of misrepresentations, omissions, and schemes. See id.

As noted previously on this site, Sarbanes-Oxley's Statute of Limitations Does Not Revive Time-Barred Claims, the United States District Court for the Middle District of Alabama held in Berman v. Blount Parrish & Co., Inc., 523 F. Supp. 2d 1298 (M.D. Ala. 2007), that Sarbanes-Oxley’s extension of the statute of limitations period for certain types of securities fraud claims cannot be used to revive already stale claims. The Eleventh Circuit has now affirmed the District Court’s holding. See Berman v. Blount Parrish & Co., Inc., No. 07-15956, --- F.3d ---, 2008 WL 1805753 (11th Cir. April 23, 2008). This was an issue of first impression in the Eleventh Circuit. This decision brings the Eleventh Circuit in line with all other Circuit Courts that have considered the issue.

The plaintiffs in Berman brought suit in 2003 under Sections 12(a) and 15 of the Securities Act of 1933 for claims that arose in 1998 (and, thus, were almost five years old). See id. at *1. Plaintiffs asserted that, while their claims would have been extinguished in 2001 prior to Sarbanes-Oxley, Sarbanes-Oxley’s passage in 2002 revived their claims because it gave plaintiffs a five-year window to file suit. See id. The Court of Appeals rejected that argument and affirmed dismissal of the suit as time-barred, observing that every Circuit Court that had considered the revival argument had soundly rejected it. See id. The court also observed that, while the same revival issue had been before the Eleventh Circuit in two prior decisions, Tello v. Dean Witter Reynolds, Inc., 494 F.3d 956 (11th Cir. 2007), and Tello v. Dean Witter Reynolds, Inc., 410 F.3d 1275 (11th Cir. 2005), the Eleventh Circuit did not have occasion to address the issue in either instance. Id. at *2 n.2.

Through Berman's express rejection of the revival argument and the court’s observation that prior decisions never reached this issue, the Eleventh Circuit puts to rest any lingering concerns that the law in this Circuit on revival issues might differ from that found in other jurisdictions.

The Delaware Chancery Court’s recent decision in In re BEA Sys., Inc. S’holder Litig., Civ. Action No. 3298-VCL, slip op. (Del. Ch. Mar. 26, 2008), reinforced the longstanding principle under Delaware law that attempts to enjoin a merger transaction will likely fail where an injunction, if granted, would subject shareholders to a significant risk of injury due to the absence of a competing offer.  See, e.g., McMillan v. Intercargo Corp., C.A. No. 16963, 1999 Del. Ch. LEXIS 95, at *13 (Del. Ch. May 3, 1999); Kohls v. Duthie, 765 A.2d 1274, 1289 (Del. Ch. 2000).

The transaction in this case involved Oracle Corporation’s proposed purchase of the shares of BEA Systems, Inc. (“BEA”) at a price of $19.375 per share.  The Chancery Court refused to enjoin this transaction, citing several practical considerations that counseled against granting such relief.  The court, for example, observed that the transaction at issue had been known for some time and the company was shopped to other potential buyers before BEA actually agreed to accept Oracle’s unsolicited offer.  BEA, No. 3298-VCL, slip op. at 87-88 (Del. Ch. Mar. 26, 2008).  There was also an opportunity in the merger agreement for BEA to accept a better proposal if one came along, although none did.  Id.  In addition, the transaction had been negotiated at arms-length by BEA’s Board of Directors, who were independent and had been advised by reputable bankers and lawyers.  The transaction on the table was, thus, “the only available transaction at this time.”  Id.

Also important to the court was the fact that the transaction“[wa]s priced at a significant premium.”  Id. at 88.  Moreover, “disruptions in the marketplace” made it risky for the court to interfere with the completion of this transaction and these risks were of such a magnitude that they would give any judge “great[] pause . . . unless very substantial grounds existed” in favor of restraining the transaction.  Id. at 88-89.  Accordingly, the court determined that it should not impede “the [shareholders’] opportunity to take [advantage of] this premium offer,” which it concluded was “a valuable one.”  Id. at 87-88.

The court also analyzed and rejected each of the plaintiff’s disclosure-oriented allegations where plaintiff had attempted to argue that the proxy materials were not complete in certain respects.  The court found that none of the supposed omissions from these materials, which related to the valuation analysis performed by Goldman Sachs or its fees, were material.  Id. at 91-96.  “[T]he fact that something is included in materials that are presented to a board of directors does not, ipso facto, make that something material.  Otherwise every book . . . given to the board and every presentation made to the board would have to be part of the proxy material that follows the board’s approval of a transaction.”  Id. at 100-01.  Rather, the law is “that a plaintiff has to show why the omission of information in the disclosure material amounts to a material omission.”  Id.  In other words, he or she must show “why a reasonable shareholder reading the material would find it important in deciding how to vote to know this particular omitted fact.”  Because the court concluded that plaintiff’s claims of non-disclosures were weak, not strong, there was “no question [that] the threat of injury that could flow from the entry of an injunction is much more powerful and immediate than any injury that an injunction might remedy.”  Id.

With its recent opinion in Pugh v. Tribune, No. 06-3898, 2008 U.S. App. LEXIS 6912 (7th Cir. Apr. 2, 2008), the Seventh Circuit became the first appellate court to apply the Supreme Court’s decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761 (2008).  Pugh is also noteworthy in that it demonstrates that courts are willing to apply Stoneridge outside the context of traditional “secondary actor defendants,” such as investment banks, accountants, and law firms.  In Pugh, the Seventh Circuit invoked Stoneridge to dismiss claims against an employee of the corporate defendant because he personally did not make any public statements about the company on which the company’s investors could have relied.  2008 U.S. App. LEXIS 6912, at *22-*23.

According to the complaint in Pugh, beginning in 2001, Newsday and Hoy, two of the newspapers owned by the Tribune Company (“Tribune”), began using various schemes designed to inflate their circulation numbers.  Such overstated figures allegedly allowed the newspapers to charge higher advertising rates and thereby increase reported advertising revenues.  Several advertisers filed lawsuits against the company in 2004.  In response, Tribune conducted an internal investigation, which eventually revealed that circulation numbers had been overstated.  Over a period of several months, the company issued three press releases disclosing these misstatements and the corrected circulation figures.  Tribune also announced that its financial results would be adversely affected by the need to take a reserve associated with a potential settlement of the advertiser lawsuits.  In the wake of these announcements, certain shareholder plaintiffs brought claims pursuant to Section 10(b) of the Securities Exchange Act of 1934 against Tribune, four of its executive officers, and certain Newsday and Hoy employees. 

One of the defendants was the vice-president of circulation for Newsday and the president, publisher, and chief executive of Hoy.  Plaintiffs alleged that he participated in a “fraudulent scheme” by knowingly signing false circulation audits that were submitted to an outside monitoring organization charged with the task of auditing each newspaper’s circulation figures for purposes of determining advertising rates.  Plaintiffs alleged that this individual defendant should be liable under Section 10(b) because (1) he participated in a scheme to defraud the advertisers and (2) it was foreseeable that this scheme would result in improper revenue being reflected on Tribune’s financial statements. 

Citing Stoneridge, the Seventh Circuit rejected these allegations of “scheme liability” as insufficient to state a claim under the federal securities laws.  Pugh, 2008 U.S. App. LEXIS 6912, at *21.  The court noted that this defendant “had no role in preparing or disseminating Tribune’s financial statements or press releases” and that plaintiffs made no allegations that Tribune investors were ever informed of the defendant’s false certifications to the monitoring organization.  Id. at *22-*23.  The court also rejected the notion that allegations of “an indirect chain [of events leading] to the contents of false public statements” would be sufficient to establish liability as to the defendant.  Id. at *23.  Rather, as in Stoneridge, the Court of Appeals found such claims to be “too remote to establish primary liability.”  Id.

With regard to the other defendants in the case, the court held that plaintiffs had failed to allege a strong inference of scienter as required under the Private Securities Litigation Reform Act.  Id. at *14-*18.  The Seventh Circuit rejected plaintiffs’ attempt to establish scienter by pleading that Tribune’s executive officers named in the suit created weak circulation controls, concluding that this was nothing more than an improper attempt to plead “fraud by hindsight.”  Id. at *15.  Furthermore, plaintiffs’ allegations of stock sales by the executive officer defendants failed to demonstrate a strong inference of scienter because the complaint contained no facts that would show that the trading during the class period was unusual or suspicious.  Id. at *16-*17.  The court similarly rejected plaintiffs’ allegations that the advertiser lawsuits demonstrated actual knowledge of the fraud.  These lawsuits merely put the executive officer defendants on notice of accusations of fraud, and, after they were filed, the defendants acted properly and reasonably by promptly investigating the claims and publicly disclosing their findings.  Id. at *18. 

The Circuit Court also held that the complaint lacked any allegations that the three other Newsday and Hoy employees participated in preparing the allegedly false and misleading public statements.  And with regard to the publisher of Newsday, the court held that plaintiffs failed to allege that he was aware of the improper circulation practices at the time he issued a statement denying the validity of the advertiser lawsuits.  Finally, the Seventh Circuit rejected plaintiffs’ attempt to impute the scienter of the vice-president of circulation to Tribune under a theory of respondeat superior because, among other reasons, there were no allegations that this employee’s misconduct was intended to benefit Tribune.

The United States Court of Appeals for the Eleventh Circuit recently rejected demand futility arguments that have become endemic to complaints in shareholder derivative actions.  In Staehr v. Alm, No. 01-11653, 2008 WL 657865 (11th Cir. Mar. 13, 2008), the Eleventh Circuit affirmed a ruling by Judge Thrash of the District Court for the Northern District of Georgia that the plaintiff had not pled demand futility with sufficient particularity under Delaware law and that the case should be dismissed with prejudice.  Staehr, 2008 WL 657865, at *1.  The allegations in the case charged that the nominal corporate defendant was dominated and controlled improperly by an entity from which it purchased raw materials for its manufacturing process and that the nominal defendant was forced to engage in channel-stuffing conduct as a result of this improper domination and control.

On appeal, plaintiff challenged the lower court’s ruling on the disinterestedness and independence of seven of the thirteen members of the nominal defendant’s Board of Directors.  Id. at *2.  Importantly, however, the Eleventh Circuit recognized that, if this challenge failed as to a single director, the plaintiff could not bear its burden of alleging with particularity that a majority of the Board was interested or not independent for purposes of assessing a shareholder demand.  Id.  With this framework in mind, the Eleventh Circuit evaluated the allegations as to two directors and rejected them both.  Id. at *3.

The Court of Appeal’s analysis focused on allegations that two of the directors were also directors of other corporations that purportedly had business relationships with the entity that was alleged to be dominating and controlling the nominal defendant.  The plaintiff claimed that these two directors would not agree to sue the allegedly controlling entity for fear of the impact on the other corporations with which they were affiliated.  Id.  The Eleventh Circuit relied on the seminal Delaware case, Beam v. Stewart, 845 A.2d 1040 (Del. 2004), and held that the plaintiff “failed to allege any particularized facts showing that there was any actual bias [to these directors] because of their positions.”  Staehr, 2008 WL 657865, at *3.  In addition, the Eleventh Circuit agreed with the District Court’s holding that allegations as to these two directors regarding insider trading activity, a substantial likelihood of liability, the applicability of the insured versus insured exclusion, and compensation were conclusory and lacked sufficient specificity to demonstrate demand futility.  Id.

Finally, the Eleventh Circuit denied the plaintiff’s request to amend her complaint yet again.  The lower court’s dismissal with prejudice was affirmed on the grounds that the plaintiff had not moved for leave to amend, had not presented that court with the new allegations in any proposed amendment, and had not articulated why justice required an opportunity to amend the complaint.  Id. at *1 n.1.

On February 8, 2008, the Securities and Exchange Commission (SEC), the North American Securities Administrators Association (NASAA), and the Financial Industry Regulatory Authority (FINRA) announced a new initiative intended to identify effective “best practices” used by financial services firms in their dealings with senior citizen investors.