The Public Employee’s Retirement System of Mississippi (“MissPERS”) and Iron Workers Local No. 25 Pension Fund (“Iron Workers Fund”) each applied to serve as the lead plaintiff representing a putative class of investors who purchased subprime-mortgage-backed certificates from Merrill Lynch & Co. (“Merrill Lynch”).  Id.  Both lead plaintiff candidates alleged that Merrill Lynch should have made disclosures reflecting the true riskiness of these investments.  Id.  MissPERS was represented by Bernstein Litowitz, while Iron Workers Fund was represented by Coughlin Stoia.  Id.

Courts over the years have struggled with determining when a particular group of individuals is a “class” in all but name and, thus, should be subject to the restrictions associated with bringing class claims under the Securities Litigation Uniform Standards Act (“SLUSA”).  Courts of the Eleventh Circuit have issued rulings that call for a broad interpretation of what may constitute a “covered class action” and will, therefore, trigger the preemption (and removal) provisions of SLUSA.  Indeed, district courts within the Eleventh Circuit have even held that state law claims will constitute a “covered class action” and be preempted under SLUSA, even though the putative group of investors is comprised of fewer than fifty prospective members.  Drooker v. Morgan Stanley & Co., Inc., No. 07-61772-CIV-JORDAN, slip op. (S.D. Fla. Mar. 26, 2008).

In Drooker, the plaintiff filed suit in Florida state court on behalf of himself and all other individuals who purchased unlisted securities from Morgan Stanley.  See id. at 1.  The complaint asserted claims for breach of fiduciary duty and breach of contract under Florida law.  See id.  Morgan Stanley subsequently removed the case to the United States District Court for the Southern District of Florida, arguing that the plaintiff’s state law claims were removable and preempted by SLUSA.  See id.  SLUSA mandates removal and ultimately dismissal “of any (1) ‘covered class action,’ (2) based on state law, (3) alleging the purchase and sale of one or more ‘covered securities,’ and (4) a misrepresentation or omission of material fact in connection with the purchase or sale of such security.”  Id. at 2.

While conceding that the action asserted state law-based claims for fraud in connection with the purchase or sale of covered securities, the Drooker plaintiff nevertheless argued that the suit did not qualify as a “covered class action” under SLUSA.  See id.  SLUSA defines a “covered class action” as:

(i) any single lawsuit in which –

(I) damages are sought on behalf of more than 50 persons or prospective class members, and questions of law or fact common to those persons or members of the prospective class, without reference to issues of individualized reliance on an alleged misstatement or omission, predominate over any questions affecting only individual persons or members; or

(II) one or more named parties seek to recover damages on a representative basis on behalf of themselves and other unnamed parties similarly situated, and questions of law or fact common to those persons or members of the prospective class predominate over any questions affecting only individual persons or members ….

Id. (quoting 15 U.S.C. § 77p(f)(2)(A)).  The plaintiff argued that the action was not a “covered class action” because the putative class had less than fifty members.  The court, however, found that “[t]his argument ignores that [subsection (II)], a different sub-section of the SLUSA, applies to any class action irrespective of the number of members” and concluded that “[t]here is simply no textual support to extend the 50 person requirement to the definition of a covered class action under [subsection (II)], particularly where subsections (I) and (II) are separated by the disjunctive ‘or’.”  Id. at 3-4.  To the extent other courts’ opinions have suggested that putative class actions having fewer than fifty members did not constitute covered class actions under SLUSA, the scope of those decisions was found to be limited to subsection (I).  See id.

 The court did, however, also note in passing that commonality is easier to prove under subsection (I) than under subsection (II).  Specifically, the court found that,

[T]o be a “covered action” [under SLUSA,] issues common to the class must predominate over individual issues.  If the action is on behalf of more than 50 members, the court can determine that common issues predominate, without considering issues of individual reliance.  On the other hand, evidence of individual reliance needs to be considered to establish commonality if the suit is on behalf of less than 50 members.  In other words, the SLUSA establishes a scheme under which commonality is easier to prove (and sometimes can only be proved) if the class has more than 50 members.

Id. at 4.  Because the plaintiff’s own allegations established a commonality of issues, the court found this distinction irrelevant in the context of the Drooker case.  See id. 

After finding that the plaintiff’s putative class action was preempted by SLUSA, the court dismissed the complaint.

In a recent decision issued by the Southern District of New York, In re UBS Auction Rate Securities Litigation, No. 08-cv-2967, 2009 WL 860812 (S.D.N.Y. Mar. 30, 2009), the District Court granted a motion to dismiss brought by UBS Financial Services (“UBS”).  The court held that the plaintiffs’ federal securities law claims failed to state a cause of action because they had no damages as a matter of law.  The court’s decision turned on the fact that plaintiffs had already rescinded their purchase of Auction Rate Securities (“ARS”) from UBS.  Under these same facts, the court also held that the plaintiffs lacked standing to represent a class of investors who still retained their ARS purchased from UBS. 

ARS can be either debt or stock-based securities.  ARS have interest rates and dividends that are determined by auctions held by a broker-dealer, in this case UBS, where ARS holders can sell their ARS.  Plaintiffs had alleged that UBS failed to disclose (1) the risk of illiquidity of ARS – specifically that the interest and dividend payments were “too low to attract liquidity to the ARS market,” – and (2) the frequency with which UBS had to purchase ARS at auctions to prop up the ARS market.  Id. at *2.  Plaintiffs alleged that, when UBS was no longer able to intervene in the ARS auctions, the ARS held by plaintiffs and the proposed class became illiquid.  Id.

The District Court focused on the important fact that UBS entered into a settlement with federal regulators, whereby UBS agreed to repurchase all ARS shares it sold at par value.  Plaintiffs in the current action received a refund at par plus interest and dividends.  Nevertheless, they continued to allege that they and the class suffered out-of-pocket damages.  First, plaintiffs argued that the purportedly fraudulent acts of UBS “prevented . . . [them] from receiving a sufficiently high rate of interest or dividends to compensate them for the risk of illiquidity associated with their ARS investments.”  Id. at *5.  Second, they argued that certain members of the class were excluded from the buy-back, and therefore still had damages associated with their retention of illiquid assets.

The court rejected both arguments.  Concerning plaintiffs’ claim regarding appropriate interest and dividend payments, the court looked to Section 28(a) of the Securities Exchange Act of 1934.  That provision confirmed that plaintiffs and the class were only entitled to receive “actual damages,” which is typically measured by either out-of-pocket loss, benefit of the bargain damages, or rescission.  Id. at *4.  The court held that, by accepting the payment at par value for their ARS pursuant to the regulatory settlement, plaintiffs chose to rescind their purchase of ARS.  Therefore, they were not entitled to out-of-pocket or benefit-of-the bargain damages.  Thus, “[p]laintiffs in this action may not now seek additional interest or dividends as benefits of ARS purchases they have already elected to disavow.”  Id. at *6. 

Plaintiffs’ other damages claim related to class members that still held ARS.  The court determined, however, that the appointed lead plaintiffs lacked standing to assert these claims because they did not personally have the same damages as those members of the class who were still ARS holders.  Id. at *6 (citing W.R. Huff Asset Mgmt. Co. v. Deloitte & Touche LLP, 549 F.3d 100 (2d Cir. 2008)). 

Accordingly, the District Court granted the defendants’ motion to dismiss.

The Southern District of New York recently dismissed a putative securities fraud class action complaint predicated on a company’s alleged failure to disclose certain internal sales information.  See In re Authentidate Holding Corp. Securities Litigation, No. 05-Civ-5323 (LTS), 2009 WL 755360 (S.D.N.Y. Mar. 23, 2009).  The plaintiffs alleged that Authentidate concealed the fact that the company was on the verge of breaching or had already breached an agreement with the United States Postal Service.  See id. at *2.  Authentidate allegedly knew that weak sales had rendered the company incapable of satisfying certain undisclosed revenue metrics set forth in the agreement with the Postal Service yet failed to disclose this information to its shareholders, thereby artificially inflating the price of the company’s stock.  See id.

The defendants moved to dismiss the complaint on the ground that they did not have a duty to disclose the omitted data to Authentidate’s shareholders.  The court acknowledged that a duty to disclose can arise in a variety of contexts “including statutorily created disclosure duties, when disclosure is necessary to make prior statements not misleading, when it is necessary to update statements that may have become misleading as the result of intervening events or the passage of time, when an insider seeks to trade on the basis of information known only to her, and the presence of certain fiduciary relationships.”  Id.  The plaintiffs asserted the existence of a duty to disclose based on (i) Item 303 of SEC Regulation S-K; (2) the company’s February 2004 stock offering; and (iii) an obligation to ensure that prior statements are not subsequently rendered misleading.  See id.

The court first rejected the plaintiffs’ argument that Regulation S-K required the company to disclose the omitted data.  Item 303 of Regulation S-K is entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and requires that a registrant “describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.”  Id.  Significantly, the instructions for Paragraph 303(a) provide that “[t]he discussion and analysis shall focus specifically on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition.”  Id. (emphasis added).  Because the plaintiffs had failed to plead particularized factual allegations demonstrating that the omissions rendered the company’s reported financial information misleading, the court found that Item 303 did not create a duty to disclose.  See id. at *3.

The plaintiffs’ second argument – that Authentidate was obligated to disclose the omitted information in connection with the company’s February 2004 stock offering – was equally unpersuasive.  Pursuant to the company’s agreement with the U.S. Postal Service, Authentidate was to be in compliance with the aforementioned revenue metric no later than July 2004, five months after the February 2004 stock offering.  See id.  As noted by the court, any statements at that time regarding the company’s sales “during the remaining five-month time period and whether the first revenue metric would be achieved would have been speculative at best.”  Id.  The plaintiffs similarly failed to identify “any past statement concretely predicting or suggesting that the Company would achieve a certain level of … sales by a specific time period, such that Authentidate’s failure to disclose the levels of sales in February 2004 constituted a material omission.”  Id.

The court likewise rejected the plaintiffs’ third and final argument that the defendants were required to disclose the omitted data in order to prevent certain prior statements from becoming misleading.  The court found that the factual allegations in the complaint were “insufficient to demonstrate plausibly that any of the cited statements by Defendants were rendered materially misleading as a result of the omissions” and further held that the forward-looking statements cited by the plaintiffs were “merely optimistic expressions of belief of the Company’s potential for improved future performance that are too vague to be material.”  Id. at *4. 

For all these reasons, the Southern District of New York found that the defendants did not have a duty to disclose the omitted information and dismissed the plaintiffs’ complaint.

In what may have been the final blow to plaintiffs’ attempt to hold several investment banks liable for their involvement in the Enron scandal, the United States District Court for the Southern District of Texas granted summary judgment in favor of the investment banks after several years of litigation.  In re Enron Corp. Sec., Derivative & “ERISA” Litig., No. H-01-3624, 2009 WL 565512 (S.D. Tex. Mar. 5, 2009).  The court’s decision relied in large part upon the Fifth Circuit’s reversal of the court’s previous grant of class certification to plaintiffs, Regents of University of California v. Credit Suisse First Boston (USA), 582 F.3d 372 (5th Cir. 2007), as well as the Supreme Court’s decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, 128 S. Ct. 761 (2008).  Ultimately, the court concluded that those decisions precluded liability as a matter of law against the secondary actor investment banks.   Enron, 2009 WL 565512, at *1.

The plaintiffs’ original theory was that the investment bank defendants had entered into partnerships and transactions that allowed Enron to take liabilities off of its books and to record revenues when it was actually incurring debt.  Id. at *2.  Plaintiffs alleged that these transactions were part of a long-term scheme to defraud investors.  Id.  In reversing the district court’s certification of the proposed class, however, the Fifth Circuit found that the banks owed no duty of disclosure to Enron’s shareholders and were, at most, aiders and abettors of Enron’s fraud.  Id. at *3.  Thus, because there was no duty of disclosure, the district court had erred in applying the Affiliated Ute presumption of reliance, which applies in cases alleging omissions as opposed to misrepresentations.  Id. at *4.

In addition, the Supreme Court’s Stoneridge decision, which was issued after the Fifth Circuit ruled, expressly rejected the same theory of “scheme liability” that had been employed by plaintiffs against the investment banks.  The Stoneridge plaintiffs had attempted to hold two equipment suppliers of Charter Communications, Inc. liable for their alleged participation in a scheme to defraud Charter’s investors, even though the suppliers had made no statements to the investors and owed them no duty of disclosure.  The Supreme Court held that the plaintiffs could not prove reliance because the suppliers’ “[alleged] deceptive acts, which were not disclosed to the investing public, [were] too remote to satisfy the requirement of reliance.”  Stoneridge, 128 S. Ct. at 770.

In response to these decisions, plaintiffs in Enron still insisted that their case was an omissions case for which the Affiliated Ute presumption should apply.  Enron, 2009 WL 565512, at *10.  To counter the holdings in Regents and Stoneridge, plaintiffs attempted to rely upon a scarcely used multifactor test for determining the existence of a duty even in the absence of a fiduciary or confidential relationship.  Id. at *25 (citing First Virginia Bankshares v. Benson, 559 F.2d 1307, 1314 (5th Cir.1977)).

As a threshold matter, however, the court had to determine whether plaintiffs were barred under “the mandate rule” from further litigation regarding whether the investment banks had a duty to disclose.  Id. at *23.  The mandate rule is a specific application of the “law of the case” doctrine, which “compels compliance on remand with the dictates of a superior court and forecloses relitigation of issues expressly or impliedly decided by the appellate court.”  Id. at *8 (quoting United States v. Lee, 358 F.3d 315, 321 (5th Cir. 2004) (internal quotation marks omitted).  Because the Fifth Circuit had concluded in Regents that the investment banks owed no disclosure duty to Enron’s shareholders, the investment banks asserted that the plaintiffs could not relitigate the issue on remand, even under this new theory.

The district court agreed, holding that the mandate rule barred relitigation of the question of whether the investment banks had a duty to disclose, which had been squarely addressed by the Fifth Circuit, and that none of the exceptions to the mandate rule applied here.  Id. at *24.  The court also rejected plaintiffs’ contention that the mandate rule did not apply because the Fifth Circuit erroneously considered matters that were beyond the scope of the class certification issues on appeal.  The Fifth Circuit had addressed the disclosure duty issue because the “necessity of establishing a classwide presumption of reliance in securities class actions makes substantial merits review on a Rule 23(f) appeal inevitable.”  Id. at *22.  Thus, the Fifth Circuit’s consideration of the duty issue was appropriate and its prior ruling that no duty existed meant that plaintiffs were not entitled to invoke the Affiliated Ute presumption of reliance for purposes of attempting to fend off summary judgment.  Id.

The district court held in the alternative that the plaintiffs’ revised theory would also fail to create a genuine issue of material fact regarding a duty to disclose or presumption of reliance.  Id. at *25.  Plaintiffs’ new theory relied upon the Virginia Bankshares “flexible duty” test, created by the Fifth Circuit in 1977, which held that, even in the absence of a fiduciary or confidential relationship, a court may find a duty to speak based on its consideration of:  (1) the relationship between the parties; (2) the parties’ relative access to the information to be disclosed; (3) the benefit derived by the defendant from the purchase or sale; (4) the defendant’s awareness of plaintiff’s reliance on defendant in making its investment decisions; and (5) defendant’s role in initiating the purchase or sale.  Id. at *26 (citing Virginia Bankshares, 559 F.2d at 1314). 

The district court determined, however, that the flexible duty test was no longer viable since the Supreme Court has “published key decisions that implicitly and severely restrict, if not render obsolete, the flexible multifactor approach to finding a duty outside of a fiduciary or quasi-fiduciary confidential relationship.”  Id.  Most notably, the Supreme Court’s decision in Chiarella v. United States established, in the insider trading context, that there was no duty to disclose absent a fiduciary or other similar relation of trust between the parties.  Id. (citing Chiarella v. United States, 445 U.S. 222, 228 (1980)).  Thus, the court held that plaintiffs’ revised theory could not establish a duty to disclose on the part of the investment banks, even if the mandate rule did not apply.  The district court also summarily rejected other similar arguments that the investment banks were: (1) “constructive fiduciaries”; (2) subject to the duty to disclose under the insider-trading “disclose or abstain” rule; (3) required to disclose certain information under Regulation S-K; (4) subject to a requirement of disclosure as underwriters, and (5) otherwise liable for market-related activities.  Id. at *31-*33.

The district court further held that, in any event, plaintiffs’ modified theory would require an amendment of its complaint for which leave had not been sought pursuant to Federal Rules of Civil Procedure 15(a)(2) and 16(b)(4).  Id. at *33-*34.  Pursuant to Rule 16, the court held that plaintiffs could not demonstrate good cause for an amendment, and allowing an amendment at this stage would involve “reopening discovery in this massive multidistrict litigation, not to mention the extended litigation likely to follow.”  Id. at *34.  Moreover, even under Rule 15(a)’s more lenient standard, the court determined that it would deny leave to amend based on undue delay and the futility of any such amendment in light of Regents and Stoneridge.  Id. at *35-*36. 

The district court’s decision likely puts to an end the plaintiffs’ protracted attempt to hold liable the investment bank previously affiliated with Enron.  Given the enormous potential damages in the case, the district court’s decision may be appealed to the Fifth Circuit.  However, given the district court’s thorough and comprehensive analysis and recent controlling precedent from the Supreme Court, the plaintiffs would appear to have little chance of success on appeal.

Judge Andrew Guilford of the United States District Court of the Central District of California has issued a decision that should resonate deeply with the many lenders facing securities fraud claims arising from the current mortgage collapse.  Pittleman v. Impac Mortgage Holdings, Inc., 2009 U.S. Dist. LEXIS 18213 (C.D. Cal. March 9, 2009).  The decision dismisses with prejudice a securities class action against a mortgage lender and two of its chief executives based on plaintiffs’ failure to adequately plead scienter. 

Plaintiffs framed the case as a classic “race-to-the bottom,” where Impac and its CEO and COO allegedly knowingly disregarded basic loan quality and underwriting standards in order to originate more loans.  Id. at *10.  Impac is a publicly traded mortgage lender that specializes in “Alt-A” loans, which the court described as “more stable than sub-prime loans but . . . not eligible for sale to prime lenders.”  2009 U.S. Dist. LEXIS at *2.  Plaintiffs were investors who lost money in the company as it struggled against the current economic downturn.  Id.     

Plaintiffs brought claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  They based their allegations of fraudulent intent or “scienter” entirely on statements supposedly made by five unnamed former employees.   Id. at *3-*4, *6.  The court rejected these statements as being “too vague to plead a strong inference of scienter” as required under the Private Securities Litigation Reform Act (“PSLRA”), whether the statements were considered individually or in their “totality” as required under the Supreme Court’s decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 127 S.Ct. 2499, 2504-05 (2007).

The statements from these anonymous informants included the following:  

• A statement that the CEO’s and CFO’s actions were “in violation of standard due diligence procedures,” which the court rejected because it did not identify the specific actions or due diligence procedures.  Id. at *7.
• A statement that “when bulk loan pools did not satisfy [Impac]’s guidelines, they were still approved by management on a regular basis,” which the Court rejected because it did not identify the particular loan pools or why they did not satisfy Impac’s guidelines.  Id. 
• Statements that one of Impac’s divisions “had so many bad loans (loans that did not comply with [Impac] underwriting guidelines) that the division was closed and the loans were securitized and sold to investors,” and that there was “significant pressure” to approve one loan pool, the purchase of another that “did not meet underwriting guidelines,” and that certain companies were “notorious for selling bulk loan pools to Impac.”  Id. at *8.  The court held all of these statements were “too vague.”  Id. 
• A statement that one employee “left the Company out of frustration because he said a majority of loans that were being recommended for rejection were regularly approved for sale to investors,” which the court rejected because it did not identify which loans were recommended for rejection, why, or who approved them for sale.  Id.
• Statements that another employee had “disagreements regarding the loan approval process on a regular basis” and that he “saw it all the time where we’d deny [a loan] and then say, yeah, we could do this,” which the court rejected because they did not specify the disagreements or loans.  Id.

The court characterized all of these statements as “exactly the[] sorts of vague, conclusory allegations” that “[t]he PLSRA was intended to guard against.”  Id. at *11.

The court also rejected the notion that these statements together could give rise to a “core operations inference” of scienter.  Plaintiffs argued that they had alleged “facts critical to a business’ core operations or an important transaction [that were] so apparent that their knowledge may be attributed to the company and its key officers.”  Id. at *9 (quoting South Ferry LP #2 v. Killinger, 542 F.3d 776, 783 (9th Cir. 2009)).  This inference, the court explained, applied only in “exceedingly rare cases,” where the event was so prominent that it would be “absurd” to suggest the company’s key officers lacked knowledge.  Id.  Plaintiffs’ “vague allegations of violations” did not qualify.  Id.

In dismissing the plaintiffs’ third amended complaint with prejudice, the court concluded by offering this simple but elegant reflection on the failings inherent in the complaint:

Plaintiff argues that this case is about “a staggering race-to-the-bottom of loan quality and underwriting standards as part of an effort to originate more loans for sale through secondary market transactions.”   The Court disagrees.  This case is about a company involved in a volatile industry at the onset of a long, destructive economic downturn.

Id. at *10 (internal citations omitted).  This viewpoint should resonate deeply with the many other defendants seeking to strike a similar chord in near-identical securities fraud cases currently pending across the country.

Alston & Bird recent issued a Corporate Governance/Securities Litigation Advisory on the Delaware Supreme Court decision in Lyondell Chemical Company v. Ryan.  The denial of summary judgment by the Chancery Court in that case had given rise to serious concerns that monetary liability for directors based upon violations of the duty of good faith in a corporate sale context was much more likely than previously thought.  In reversing the Chancery Court and entering summary judgment for the directors, the Delaware Supreme Court reaffirmed its previous decisions outlining the contours of the duty of good faith and provided welcome comfort to directors and their advisors as they consider how to fulfill directors’ fiduciary duties relating to change of control transactions.  A copy of this advisory can be found at:

http://www.alston.com/corporate_governance_advisory_protections

In a recent decision underscoring the importance of the Supreme Court’s decision in Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 342 (2005), the United States Court of Appeals for the Tenth Circuit affirmed summary judgment because the plaintiffs’ expert could not articulate a reliable theory of loss causation.

In re Williams Securities Litigation-WCG Subclass, No. 07-5119, 2009 WL 388048 (10th Cir. Feb. 18, 2009), involved a shareholder class action against the former parent company of Williams Communications Group (WCG), a telecommunications company based in Tulsa, Oklahoma.  WCG’s spin off from its parent was completed on April 23, 2001.  Just under a year later, WCG filed for bankruptcy.  The plaintiffs’ claims centered on alleged knowingly false statements concerning WCG’s financial condition and its prospects that were made from the time the spin off was announced until several months after WCG became independent.  The plaintiffs asserted that the alleged misstatements created a “fraud premium” that drained from the stock price over the course of the class period.  Id. at *2.

Despite the district court’s determination that there were triable issues concerning the allegedly false statements, the district court found the plaintiffs’ expert’s theory of loss causation unreliable.  Id.  The expert proposed essentially two alternative theories of causation.  The expert first opined that there was a “leakage” of corrective information throughout the course of the class period.  Id.  Although agreeing that a gradual leakage was an acceptable methodology, the Tenth Circuit concluded that the expert made no showing that share devaluations were independently linked either to corrective information that in fact leaked out or to allegedly concealed risks that materialized.  Id. at *5-*6.  As the Tenth Circuit put it, the plaintiffs’ expert “could not explain how the market learned of the fraud” nor did he tie such disclosures to the losses.  Id. at *7.

In the plaintiffs’ expert’s alternative theory, he attempted to tie declines in share value to specific disclosures that occurred late in the class period -- in the months just before WCG declared bankruptcy.  Id.  The Tenth Circuit did not disturb the district court’s determination on this theory either.  At bottom, the alternative theory suffered a similar deficiency to the expert’s other theory --  there was no sufficient tie between the alleged corrective disclosures and the alleged misstatements.  Id. at *8.

A problem that pervaded both theories and supported the determination that there was an insufficient causal link was the expert’s apparent inability to separate the impact of the alleged corrective disclosures from other market-related factors.  Id. at *7, *11.  The court pointed to both news about WCG that had nothing to with the allegedly false statements and the overall meltdown in the telecommunications industry as independent factors that were not sufficiently accounted for by the plaintiffs’ expert.  Id.

After affirming the district court’s conclusion that the expert’s opinion was too unreliable to be admitted, the Tenth Circuit concluded the same about potentially similar conclusions by a jury.  The court held that “[t]hese conclusions . . . would be no less speculative and unreliable if reached by jurors than when reached by [the plaintiffs’ expert].”  Id. at *11.  Accordingly, the Tenth Circuit affirmed the district court’s grant of summary judgment to the defendants. 

In a recent decision issued by the First Circuit Court of Appeals, Day v. Staples, Inc., No. 08-1689, 2009 WL 294804 (1st Cir. Feb. 9, 2009), the Circuit Court affirmed the lower court’s dismissal of a former Staples employee’s claim that Staples violated the whistleblower protection provision of the Sarbanes-Oxley Act of 2002 (“SOX”).  In doing so, the Court of Appeals set forth the specific criteria necessary for such a claim to succeed. 

The plaintiff alleged that he reasonably believed Staples had committed securities fraud by manipulating certain accounting data, and had violated Section 1514A of SOX, the whistleblower provision, by firing him after he brought the issue to the company’s attention.  The District Court and First Circuit disagreed.  As the Court of Appeals discussed, Section 1514A of SOX was enacted to “‘encourage and protect [employees] who report fraudulent activity that can damage innocent investors in publicly traded companies.’”  Day, 2009 WL 294804, at *8.  The employee has the initial burden to make a “prima facie showing of retaliatory discrimination because of a specific act.”  Id. at *9.  Pursuant to Department of Labor regulations, the complaint must allege

the existence of facts and evidence showing that: (i) the employee engaged in a protected activity or conduct; (ii) the [employer] knew or suspected, actually or constructively, that the employee engaged in the protected activity; (iii) the employee suffered an unfavorable personnel action; and (iv) the circumstances were sufficient to raise the inference that the protected activity was a contributing factor in the unfavorable action.

Id. (quoting 29 C.F.R. § 1980.104(b)(1)).  The Court of Appeals determined that to be actionable, the plaintiff  must have had a reasonable belief that Staples’ conduct constituted securities fraud, which has components that are both subjective (did he bring the complaint in good faith) and objective (the employee’s theory comports with the basic elements of the law the employee states was violated).  The Court of Appeals discussed that SOX protects employees related to three broad categories of conduct by employers:  “(1) a violation of specified federal criminal fraud statutes . . . ; (2) a violation of any rule or regulation of the SEC; and/or (3) a violation of any provision of federal law relating to fraud against shareholders.”  Id. at *10.  The Court of Appeals concluded that the plaintiff’s allegations for securities fraud “do not meet the basic components” for this type of claim.  Id. at *10-*12.  Thus, although he may have had a subjective belief that fraud occurred, his claim for fraud was not objectionably reasonable.  Id.

The Court of Appeals also held that the plaintiff’s belief was objectively unreasonable for additional reasons, including the fact that his claim of an accounting irregularity did not amount to accounting fraud, and required evidence beyond the mere belief that such an irregularity occurred, which the plaintiff was unable to allege in his complaint.  Id. at *12.  Moreover, his belief was objectionably unreasonable because the plaintiff was unable to show in his complaint that the inaccuracy complained of was material to shareholders.  Id. at *13.  Last, the Court of Appeals held that the company’s explanations after investigation of the employee’s complaints were important for purposes of determining objective reasonableness, and here plaintiff’s “beliefs were not initially reasonable as beliefs in shareholder fraud and they became less reasonable as he was given explanations.”  Id.  Accordingly, the Court of Appeals affirmed the District Court’s ruling granting Staples’ motion for summary judgment.

The Ninth Circuit recently ruled that an accounting firm could not be held liable under Section 10(b) of the Securities Exchange Act of 1934 where the plaintiff was unable to show that the defendant participated in any “deceptive acts” that were communicated to the public.  In In re Peregrine Systems, Inc. Securities Litigation, No. 06-55197, 2009 WL 186165 (9th Cir. Jan. 23, 2009), the Court of Appeals affirmed the dismissal of a securities fraud suit against KPMG and certain of its affiliates based on their alleged participation in a scheme with business partner Peregrine Systems, Inc. involving so-called “parking” transactions.  The court held that the Supreme Court’s decision in Stoneridge Investment Partners v. Scientific-Atlanta, 128 S. Ct. 761 (2008), prohibited the plaintiff from holding these non-speaking defendants liable as primary violators of Section 10(b). 

The plaintiff in Peregrine Systems alleged that the KPMG defendants enabled Peregrine to improperly recognize $32.1 million in revenue by agreeing to purchase software at the end of fiscal quarters when Peregrine could not complete legitimate sales to end users in time to properly recognize the revenue and that, in exchange, KPMG received service contracts with the end users to whom the software would later be sold.  2009 WL 186165, at *1.  The plaintiff further asserted that these “parking” transactions allowed Peregrine to meet its quarterly revenue projections.  Id.  Noting the similarity of the allegations to those in Stoneridge, the court held that, pursuant to that case, the parking transactions could not form the basis of a Section 10(b) claim unless a member of the investing public had knowledge of the KPMG defendants’ deceptive acts sufficient to demonstrate reliance upon those acts.  Id. (quoting Stoneridge, 128 S. Ct. at 769). 

The plaintiff attempted to invoke the fraud-on-the-market presumption to demonstrate reliance based on certain press releases referencing the partnership between Peregrine and KPMG.  Id. at *2.  The Ninth Circuit, however, noted that the press releases at issue contained only non-misleading statements regarding the partnership between the companies and did not communicate any information regarding the allegedly misleading “parking” transactions.  Id.  “Notably, not one of the press releases announce[d] a specific transaction between KPMG and Peregrine.”  Id.  Accordingly, the court concluded that, as in Stoneridge, “it was Peregrine, not the KMPG Defendants, ‘that misled its auditor and filed fraudulent financial statements; nothing [the KPMG Defendants] did made it necessary or inevitable for [Peregrine] to record the transactions as it did.’”  Id. (quoting Stoneridge, 128 S. Ct. at 770).  Ultimately, “the press releases did not communicate the KPMG Defendants’ allegedly deceptive acts and, therefore, do not trigger a presumption of reliance.”  Id. at *2.

The Ninth Circuit also rejected the plaintiff’s request to amend the complaint to add references to the press releases and similar documents.  Id.  The court affirmed the district court’s dismissal with prejudice because it was clear that “the press releases and other similar information [the plaintiff] seeks to incorporate into a newly amended complaint cannot save the [complaint].”  Id.