Class Action Defense Blog

To Invoke Presumption of Reliance in Securities Fraud Class Action Based on Fraud on the Market Doctrine, Plaintiff must Establish Loss Causation at Time of Motion to Certify Class Action Fifth Circuit Holds

Plaintiffs filed a securities fraud class action against telecommunications provider Allegiance Telecom and others alleging violations of section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 based on an inaccurate statement concerning the number of line installations during the first three quarters of 2001 and a drop in stock price following a restated line count announced during the fourth quarter of that year. Oscar Private Equity Inv. v. Allegiance Telecom, Inc., __ F.3d __, 2007 WL 1430225, *1 (5th Cir. May 16, 2007). Plaintiffs’ lawyer moved to certify the litigation as a class action, advancing a “fraud on the market” theory to establish reliance by class members; defense attorneys objected to class action treatment, arguing that the restatement was not the cause of a drop in the stock price, id. The district court relied on the “fraud on the market” theory, rejected defense arguments, and certified a class action as requested. Id. The Fifth Circuit granted the defense leave to file an interlocutory appeal and reversed. The Circuit Court summarized its holding as follows: “We vacate the certification order and remand, persuaded that the class certified fails for wont of any showing that the market reacted to the corrective disclosure. Given the lethal force of certifying a class of purchasers of securities enabled by the fraud-on-the-market doctrine, we now in fairness insist that such a certification be supported by a showing of loss causation that targets the corrective disclosure appearing among other negative disclosures made at the same time.” Id. (italics added).

The details of the events that precipitated the filing of the class action complaint are set forth in the Note, below. The Fifth Circuit explained: “This dispute turns on whether the certification order properly relied upon the fraud-on-the-market theory. This theory permits a trial court to presume that each class member has satisfied the reliance element of their 10b-5 claim. Without this presumption, questions of individual reliance would predominate, and the proposed class would fail. Oscar, at *2 (footnotes omitted) (italics added). Under the fraud on the market theory, “Reliance is presumed if the plaintiffs can show that ‘(1) the defendant made public material misrepresentations, (2) the defendant's shares were traded in an efficient market, and (3) the plaintiffs traded shares between the time the misrepresentations were made and the time the truth was revealed.’” Id. (citation omitted). In the Fifth Circuit, it is insufficient for a plaintiff to show that defendant made a material misstatement; rather, “proof that the misstatement actually moved the market” is required, id., at *3. The Circuit Court explained at page *3:

Continue reading "Class Action Defense Cases-Oscar v. Allegiance: Fifth Circuit Holds That Loss Causation Must Be Established To Certify Securities Fraud Class Action And Criticizes Efficient Market Theory" »

Posted In: Certification of Class Actions, Court Decisions, PSLRA/SLUSA

Class Action on Behalf of Purchasers of Stock on NASDAQ Europe More Properly Brought in Belgium, Warranting Dismissal of Class Action on Grounds of Forum Non Conveniens Massachusetts Federal Court Holds

Plaintiffs, three individuals from Belgium, filed a putative securities class action against Lernout & Hauspie N.V., a Belgian company that developed speech recognition software, and other defendants on behalf of those who purchased L&H securities on the European EASDAQ stock exchange for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and of Rule 10b-5. Warlop v. Lernout, 473 F.Supp.2d 260, 261 (D. Mass. 2007). This class action was but one of several class actions filed against L&H, and this court opinion is but one of “several extensive opinions concerning the alleged fraudulent scheme causing the collapse of L&H,” id., at 261-62 (citations omitted). Defense attorneys for Belgian defendants KPMG-Belgium, the Outside Directors, Vanderhoydonck and Willaert moved to dismiss the class action under Rule 12(b)(6) on the grounds of forum non conveniens. The district court granted the motion.

Briefly, L&H was at one time very successful, and traded simultaneously on both Europe's EASDAQ market (known as “NASDAQ Europe”) and NASDAQ. Warlop, at 262. The class action complaint alleged that the company’s success was founded on misrepresentions by its directors concerning L&H’s finances, and on “the fraudulent creation of sham firms in Belgium and elsewhere which licensed software,” id. The fraud was discovered in August 2000 and EASDAQ suspending trading of the company’s securities; ultimately L&H collapsed. Id. A criminal investigation followed, leading to the arrest by the Belgian government of three L&H directors – Lernout, Hauspie and Willaert; by operation of Belgian law, all civil cases were stayed during the pendency of the still on-going criminal investigation, including a civil action by the class action plaintiffs in this case that essentially tracks the allegations in the class action complaint. Id. As noted above, several securities class actions were filed in various federal courts; the actions were eventually consolidated before the District of Massachusetts, and the consolidated amended class action complaint limited the scope of the class action to individuals who purchased L&H stock on NASDAQ. Id.

Continue reading "Class Action Defense Cases-Warlop v. Lernout: Massachusetts Federal Court Grants Defense Motion To Dismiss Securities Class Action On Grounds Of Forum Non Conveniens" »

Posted In: Court Decisions, PSLRA/SLUSA

Extensive News Reports of the Risks of Vioxx Placed Investors on Inquiry Notice More than Two Years before Filing of Securities Fraud Class Actions, Thus Warranting Dismissal of Class Action Complaint as Time-Barred as Requested by Defense Federal Court Holds

This securities fraud class action is but one of thousands of class action and individual complaints filed against Merck arising out of its prescription drug Vioxx. This class action alleged that Merck withheld information that Vioxx increased a patient’s risk of heart attack and misrepresented the drug’s safety. In re Merck & Co., Inc., Securities, Derivative & "ERISA" Litig., ___ F.Supp.2d ___ (D. N.J. April 12, 2007) [Slip Opn., at 2]. Defense attorneys moved to dismiss the class action complaint on several grounds, mostly notably that the claims were time-barred, id., at 1-2; the district court agreed with the statute of limitations defense and dismissed the class action complaint with prejudice as untimely.

By way of background, Merck brought Vioxx - a nonsterodial anti-inflammatory drug (NSAID) - to the market in May 1999,and two years later the Food & Drug Administration approved Vioxx for various uses. Slip Opn, at 2-3. “Merck continued to research, study and test Vioxx after its approval by the FDA and introduction to the market.” Id., at 3. In March 2000, Merck disclosed that one of those studies revealed that an increased incidence of heart attack and other thrombotic events. Id. Merck’s press release attributed this finding to the properties of the control drug but, according to the class action complaint allegations, Merck knew that the real cause of this difference was that Vioxx increased the risk of heart attacks. Id., at 4. The FDA advisory committee found inclusive evidence of the cause of the increased risk of cardiac events but believed it prudent to “include on the Vioxx label data about the higher incidence of cardiovascular events,” id. The study received extensive news coverage as early as April 2000, and several news articles warned patients that Vioxx “might increase their risk of suffering a heart attack.” Id., at 5. Other news reports agreed with Merck’s conclusion that the control drug used in the study worked to prevent heart attacks, thus accounting for the difference in incidence of cardiac events with the Vioxx control group, id., at 6-7. For its part, Merck issued numerous press releases touting the safety of Vioxx, id., at 7-8. The FDA criticized Merck’s promotional efforts, and in a warning letter dated September 17, 2001 and published on the FDA website, the FDA “admonished Merck for misrepresenting the safety profile of Vioxx, downplaying the cardiovascular findings of the . . . study,” id., at 8.

Continue reading "Merck Class Action Defense Cases-In re Merck: New Jersey Federal Court Grants Defense Motion To Dismiss Securities Fraud Class Action Finding Class Action Claims Barred By Statute Of Limitations" »

Posted In: PSLRA/SLUSA

Federal Court Rejects Defense Motion to Dismiss Securities Fraud Class Action Holding that Class Action Complaint Satisfied Heightened Pleading Requirements Under PSLRA and that Applicability of PSLRA’s Safe Harbor Provision Required Factual Development Through Discovery

Plaintiffs filed a securities class action against EVCI and certain officers and directors for violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1924 and Rule 10b-5 alleging that defendants misstated EVCI’s financial condition and failed to accurately disclose negative information that would bear directly on EVCI’s profitability. In re EVCI Colleges Holding Corp. Securities Litig., 469 F.Supp.2d 88 (S.D.N.Y. 2006). Defense attorneys argued that the 203-paragraph class action complaint failed to satisfy the heightened pleadings requirements of the federal Private Securities Litigation Reform Act (PSLRA) and had failed to adequately plead scienter. Id., at 91. The district court observed that “[i]f read too literally, the statute would appear to impose on a securities plaintiff the almost insuperable burden of having to file a complaint that is as comprehensive as his closing argument after trial.” Id. The court concluded that the allegations in the class action complaint clearly satisfied the pleadings requirements under the PSLRA and Rule 9(b), and criticized defense attorneys for filing the motion to dismiss, which it characterized as "utterly lacking in merit."

EVCI is a holding company that provides “on-campus career two year college education” through three entities. Its principal subsidiary is Interboro; this asset “generates the bulk of EVCI's revenue” which “has grown substantially, from $8.6 million in 2000 to $50.4 million in 2005.” EVCI, at 92. The class action complaint alleged “pervasive fraud in the admissions process at EVCI's Interboro College – the institution that generated nearly all of EVCI's revenue during the asserted class period. Id. In brief, Interboro is two-year college, conditionally accredited by the State of New York, that primarily served “minority students from economically disadvantaged backgrounds” who had neither a high school diploma nor a GED, id., at 93. These students were required to pass an “ability-to-benefit” exam (ATB), and required federal and state grants to pay for their education at Interboro, and Interboro limited its tuition to the amounts of the student grants, id. “In other words, Interboro's revenues derive in substantial part – 94%, to be precise – from publicly funded education grants awarded to students who are both poor and poorly prepared for higher education. And EVCI, in turn, derives nearly all its revenue from Interboro.” Interboro was subject to strict state and federal regulation, and to maintain its conditional accreditation the college had to meet several goals, id.

Continue reading "PSLRA Class Action Defense Cases-In re EVCI Colleges: New York Federal Court Holds Safe Harbor Provision In Private Securities Litigation Reform Act (PSLRA) Inapplicable At Pleading Stage Of Securities Fraud Class Action" »

Posted In: Court Decisions, PSLRA/SLUSA

New Jersey Federal Court Holds as Matter of First Impression that Dismissal of One Claim for Relief under Federal Securities Litigation Uniform Standards Act (SLUSA) Requires Dismissal of Entire Complaint

Plaintiffs filed a putative securities class action against various Lord Abbett entities and numerous other defendants as “a federal class action complaint based upon the failure of defendant Lord Abbett ... to disclose excessive fees and commissions they siphoned from Lord Abbett mutual fund investors in order to improperly pay and induce brokers to steer investors into Lord Abbett mutual funds.” In re Lord Abbett Mut. Funds Fee Litig., 463 F.Supp.2d 505, 506-07 (D. N.J. 2006). The class action complaint contained 10 claims for relief under both state and federal law, all premised on the allegation that Lord Abbett “compensated brokers excessively as an incentive to steer new investors into Lord Abbett mutual funds,” id., at 507. Defense attorneys moved to dismiss the class action under Rule 12(b)(6); the district court granted the motion, ruling in part that the state law claims were preempted by the federal Securities Litigation Uniform Standards Act (SLUSA), but granted leave to amend with respect to two of the federal claims in the class action complaint. Id. Relying on Rowinski v. Salomon Smith Barney Inc., 398 F.3d 294 (3d Cir.2005), defense attorneys sought reconsideration on the ground that because the court dismissed Counts 7-10 under SLUSA, the court was required to dismiss the entire class action. Id., at 507-08. Ultimately, the district court vacated its order granting leave to amend and dismissed the class action complaint with prejudice.

The class action complaint advanced claims for relief under the Investment Company Act of 1940 (ICA) (Counts 1-4), the Investment Adviser Act of 1940 (IAA) (Count 5), the New Jersey Consumer Fraud Act (Count 6) which plaintiff later dismissed, and for unjust enrichment and alleged breaches of fiduciary duties and duties of good faith, loyalty, fair dealing, due care, and/or candor (Counts 7-10). In re Lord Abbett, at 507 and n.1. The district court dismissed Counts 1-5 for failure to state a claim, and dismissed Counts 7-10 as preempted by SLUSA. Id., at 507. However, the court also concluded that Counts 3 and 4 under ICA §§ 36(b) and 48(a) failed “because no direct cause of action exists under those statutes,” and granted plaintiffs leave to amend the class action complaint so as to replead them derivatively. Id. The defense moved the district court to dismiss the class action complaint with prejudice on the ground that preemption of one class action claim under SLUSA required dismissal of the entire class action complaint. Id., at 508.

Continue reading "SLUSA Class Action Defense Cases-In re Lord Abbett: Federal Court Grants Defense Motion To Dismiss Class Action Complaint With Prejudice Holding SLUSA Preemption Of One Claim Requires Dismissal Of Entire Class Action" »

Posted In: Court Decisions, PSLRA/SLUSA

Securities Class Action Complaint Properly Dismissed for Failure to Meet Pleading Requirements Under Private Securities Litigation Reform Act (PSRLA) and for Failure to Adequately Allege Loss Causation Fourth Circuit Holds

Plaintiffs filed a putative securities class action against Cree, Inc., a high-technology business in Durham, North Carolina, for violations of Section 10(b) of the Securities Exchange Act of 1924 and Rule 10b-5 alleging it made misleading statements about its business transactions and that these misstatements were discovered when a former officer sued the company. Teachers' Retirement Sys. of La. v. Hunter, 477 F.3d 162, 167 (4th Cir. February 20, 2007). Defense attorneys moved to dismiss the class action under Rule 12(b)(6) on the ground that the allegations in the class action complaint failed to satisfy the heightened pleadings requirements imposed by the Private Securities Litigation Reform Act of 1995 (PSLRA), id. The district court dismissed the class action, holding that “the complaint failed to allege facts sufficient to support the plaintiffs' claims that Cree's statements were misleading” and that “plaintiffs did not sufficiently allege that the statements were made with the requisite scienter or that plaintiffs' losses were caused by the misrepresentations and omissions of which they complained.” Id. (italics in original). The Fourth Circuit affirmed, “concluding that plaintiffs are complaining only about market risks, not particularized securities fraud.” Id., at 168.

In June 2003, Cree’s co-founder Eric Hunter filed suit against Cree and various officers and directors, including his brother and co-founder F. Neal Hunter, for violations of state and federal securities laws, defamation and intentional infliction of emotional distress; the complaint additionally sought “a preliminary injunction against Cree and Neal Hunter to prevent alleged personal harassment that appeared to have attended an ongoing family fight.” Hunter, at 168. Eric had served as Cree’s CEO from 1987 to 1994, and news of his lawsuit caused Cree's stock price to drop from $22.21 to $18.10 in a single day. Id. Eric’s lawsuit was resolved only two months later, but “the allegations in his complaint quickly spawned numerous class actions by purchasers of Cree stock who alleged securities fraud during a period beginning on August 12, 1999, when Cree filed an annual report on SEC Form 10-K, and ending on June 13, 2003, the day after Eric Hunter filed his suit, purportedly revealing the truth of Cree's fraud during the previous years.” Id. Eventually the cases were consolidated in the Middle District of North Carolina, and the court named Teachers' Retirement System of Louisiana as lead plaintiff. The first amended class action complaint alleged violations of § 10(b) and Rule 10b-5 (prohibiting false or misleading statements), § 20(a) (control person liability), § 18 (personal liability for making misleading statements), and Sarbanes-Oxley Act § 304 (reimbursement of accounting restatement costs due to misconduct). Id., at 168-69. The specific allegations of the complaint are set forth at page 169.

The Fourth Circuit summarized the district court order granting defendants’ Rule 12(b)(6) motion as follows: “The court concluded first that ‘plaintiffs adequately identif[ied] the statements [of Cree] they believe[d] to be false and the reasons why they believe[d] them to be false, but fail[ed] to state with particularity facts supporting a strong inference of fraud.’ Second, the district court concluded that plaintiffs did not adequately plead that the defendants acted with the requisite scienter because the complaint neither identified misleading statements or omissions nor alleged sufficient circumstantial evidence of scienter. Finally, the court found that ‘plaintiffs ... failed to demonstrate a direct relationship between their losses and the alleged misrepresentations and have failed, therefore, to establish the required element of loss causation.’ [¶] Having dismissed the first count alleging a claim under § 10(b) and Rule 10b-5, the court also dismissed plaintiffs' claims under §§ 20(a) and 20A . . . because these claims depended upon the liability alleged in the first count. Similarly, the court dismissed plaintiffs' claim pursuant to § 18 . . . because plaintiffs failed to plead facts showing that Cree made false statements. Finally, the court dismissed plaintiffs' claim under § 304 . . . because plaintiffs did not allege that Cree was required to issue any restatement of its financial reports.” Hunter, at 169-70.

Continue reading "Class Action Defense Cases-Teachers’ Retirement v. Hunter: Fourth Circuit Affirms Dismissal of Securities Class Action Based On Heightened Pleadings Requirements Under Federal Private Securities Litigation Reform Act (PSLRA)" »

Posted In: Court Decisions, PSLRA/SLUSA

Fifth Circuit Holds that District Court’s Erroneous Definition of “Deceptive Acts” Resulted in Mistaken Application of Presumption of Reliance in Certifying Class Action Against Banks, Necessitating Reversal of Class Certification Order

After Enron’s collapse in 2001, dozens of class action and individual lawsuits were filed against numerous defendants for violations of Section 10(b) of the Securities Exchange Act of 1924 and Rule 10b-5; more than 30 of these actions were consolidated in the district court for the Southern District of Texas and Regents of the University of California was named lead plaintiff. Regents of the Univ. of Cal. v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372 (5th Cir. 2007) [Slip Opn., at 3]. “Years of discovery have ensued, and tens of millions of documents have been produced.” Id. In 2006, the district court granted plaintiff’s motion to certify the litigation as a class action, id., at 3-4. Defense attorneys sought and received permission from the Fifth Circuit to file an interlocutory appeal, id., at 2; the Circuit Court reversed.

As the Circuit Court admitted, the facts of this case are “difficult to detail” so we simply quote the Court’s broad summary: “Plaintiffs allege that defendants Credit Suisse First Boston (“Credit Suisse”), Merrill Lynch & Company, Inc. (“Merrill Lynch”), and Barclays Bank PLC (“Barclays Bank”) (collectively “the banks”) entered into partnerships and transactions that allowed Enron Corporation (“Enron”) to take liabilities off of its books temporarily and to book revenue from the transactions when it was actually incurring debt. The common feature of these transactions is that they allowed Enron to misstate its financial condition; there is no allegation that the banks were fiduciaries of the plaintiffs, that they improperly filed financial reports on Enron’s behalf, or that they engaged in wash sales or other manipulative activities directly in the market for Enron securities.” Slip Opn., at 2. In essence, the class actions alleged that the banks knew Enron executives were manipulating financial information to inflate the company’s stock price to maximize their personal compensation. Id.

In certifying the class action, the district court concluded that a “deceptive act” under Rule 10b-5(c)3 includes participation in a “transaction whose principal purpose and effect is to create a false appearance of revenues,” and that Rule 10b-5(a)’s prohibition of any “scheme . . . to defraud” creates joint and several liability for individuals who commit deceptive acts in furtherance of such a scheme. Slip Opn., at 3. At the Fifth Circuit explained, “The court’s theory of scheme liability considerably simplified finding commonality among the plaintiffs with respect to loss causation. The court stated that ‘a reasonable argument can be made that where a defendant knowingly engaged in a primary violation of the federal securities laws that was in furtherance of a larger scheme, it should be jointly and severally liable for the loss caused by the entire overarching scheme, including conduct of other scheme participants about which it knew nothing.’” Id., at 3-4. The district court also concluded that plaintiffs could rely on “classwide presumptions of reliance for omissions and fraud on the market” because it believed the banks breached a “duty not to engage in a fraudulent ‘scheme,’” and concluded that plaintiffs need not demonstrate market efficiency or reliance to invoke the fraud-on-the market presumption of reliance under Rule 10-5(a) or (c), believing this to be required only for claims under Rule 10-5(b). Id.

Continue reading "Enron Class Action Defense Case-Regents v. Credit Suisse: Certification Of Securities Class Action Seeking $40 Billion Overturned By Fifth Circuit Because Classwide Presumption Of Reliance Did Not Apply" »

Posted In: Certification of Class Actions, Court Decisions, PSLRA/SLUSA

Plaintiffs in Securities Fraud Class were on Inquiry Notice of Claims Against Company thus Rendering Class Action Complaint Barred by Statute of Limitations New York Court Holds

Several securities fraud class action lawsuits were filed in federal courts against MBIA and various individual defendants alleging that certain financial statements contained materially misleading statements in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The actions were consolidated in the Southern District of New York, and defense attorneys moved to dismiss on the grounds that claims were time barred and that the allegations in the class action complaints failed to satisfy the heightened pleading requirements for securities fraud cases. In re MBIA Inc. Securities Litig., ___ F.Supp.2d ___, 2007 WL 473708 (S.D.N.Y. February 13, 2007) [Slip Opn., at 1-2]. The district court concluded that the class action claims were barred by the applicable statute of limitations and dismissed the complaint.

The class action complaint alleges that in 1998 MBIA - which is in the "primary business [of] selling financial guarantee insurance to public finance and structured finance clients" - entered into retroactive reinsurance agreements to protect itself against an anticipated $170 million loss in order to avoid a downgrade of its AAA rating. MBIA, at 3-4. According to the complaint, MBIA entered into a series of side agreements with the reinsurance companies that were not publicly disclosed for the purpose of inducing the reinsurers to cover the $170 million loss; under these side agreements, "MBIA promised to transfer insurance policies on the highest rated bonds in its portfolio, along with the associated premiums, to the Reinsurers over a period of six years." Id., at 4-5. The complaint also alleged that MBIA improperly booked these premiums as income rather than as loans. MBIA's disclosures of these transactions painted a positive picture for the company, see id., at 5-6; however, in the months following MBIA's disclosures, several published reports explained the trade-offs realized through the deals, some viewing the strategy as "the bond insurance equivalent to Houdini" and others viewing it as "innovative," id., at 6-7. And in 2002, a 66-page research report by Gotham Partners on MBIA detailed credit concerns involving the company's guarantee portfolio, which MBIA immediately criticized in a press release that "contained no factual discussion of the transactions related by the [research] report." Id., at 8-10.

Continue reading "MBIA Class Action Defense Case-In re MBIA Inc. Securities Litigation: New York Federal Court Grants Defense Motion To Dismiss Securities Fraud Class Action Finding Class Action Claims Time-Barred By Inquiry Notice" »

Posted In: Court Decisions, PSLRA/SLUSA

Defense Attorneys Established that Class Action Complaint Failed to Adequately Plead Securities Fraud with Particularity as Required by Rule 9(b) and the Private Securities Litigation Reform Act of 1995 (PSLRA) but New York Federal Court Gives Plaintiffs Leave to Amend their Complaint

Seven putative securities fraud class actions were filed against 51Job and several of its officers and directors alleging “false and misleading statements with respect to the company's revenues and expected growth, in violation of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 . . ., and Rule 10b-5,” Goplen v. 51job, Inc., 453 F.Supp.2d 759, 763 (S.D.N.Y. 2006) (citations omitted). Defense attorneys filed a motion to dismiss the class action complaint on the ground that it failed to satisfy the heightened pleading requirements set forth in Rule 9(b) of the Federal Rule of Civil Procedure and in the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u-4, for securities fraud. Id. The district court agreed with the defense and dismissed the class action complaint, but granted plaintiffs leave to file an amended complaint if they could allege facts sufficient to satisfy the PSLRA.

We do not here summarize the particular factual allegations in this case; the facts are quite detailed and an attorney interested in understanding the applicability of the PSLRA’s heightened pleading requirements for securities fraud class actions is well advised to read the opinion in its entirety. We provide only a broad summary of the legal arguments in the opinion. The district court concisely summarized at pages 765 and 766 the legal standard it was to apply as follows:

Continue reading "Class Action Defense Cases-Goplen v. 51job: New York Federal Court Grants Defense Motion To Dismiss Securities Fraud Class Action For Failing To Plead With Particularity Required by PSLRA and Rule 9(b)" »

Posted In: Court Decisions, PSLRA/SLUSA

Allegations in Securities Fraud Class Action Complaint Failed to Satisfy Heightened Pleadings Requirements Imposed by PSLRA (Private Securities Litigation Reform Act) But Plaintiffs Are Entitled To Leave To Amend Georgia Court Holds

In September 2005,, plaintiffs filed a putative securities fraud class action under the Securities Exchange Act of 1934 against Spectrum Brands (formerly known as Rayovac) and individual defendants - including its Chief Executive Officer and Chief Financial Officer/Executive Vice President - on behalf of purchasers of persons who purchased Spectrum Brands's common stock between November 11, 2004, and November 13, 2005 alleging that defendants' conduct "artificially affected the value of Spectrum Brands's stock" through the practice of "channel-stuffing." In re Spectrum Brands, Inc. Sec. Litig., 461 F.Supp.2d 1297, 1300-01 (N.D. Ga. 2006). Plaintiffs amended the complaint in February 2006, and defense attorneys moved to dismiss, id., at 1300. The district court granted the motion, finding that the class action complaint failed to plead securities fraud with sufficient particularity as required by the federal Private Securities Litigation Reform Act (PSLRA).

Channel-stuffing refers to the act of persuading customers to purchase more inventory than they presently require - a practice the Eleventh Circuit recognizes "is not fraudulent per se." Garfield v. NDC Health Corp., 466 F.3d 1255, 1261 (11th Cir. 2006). The practice, however, causes a company to realize as revenue monies that would otherwise be received later, assuming that the customer did not decide to switch suppliers. In re Spectrum Brands, at 1301. The class action complaint alleged Spectrum "engaged in aggressive channel-stuffing during the fourth quarter of 2004 and the first quarter of 2005, which allowed Spectrum Brands's performance in the battery market to appear better than it should have and caused an artificial spike in the company's stock price." Id. As the district court summarized at page 1301, the class action hinged on the theory that "[company] statements of strong battery sales growth and positive earnings guidances were misleading because Defendants concealed that battery sales reported during the Class Period were generated at the expense of sales in future quarters." The complaint asserts senior management engaged in channel-stuffing for the purpose of artificially inflating the company's stock price. Id., at 1301-02.

Continue reading "Class Action Defense Cases-In re Spectrum: Georgia Federal Court Grants Defense Motion To Dismiss Securities Fraud Class Action Finding Allegations Fail To Meet Requirements Under Private Securities Litigation Reform Act (PSLRA)" »

Posted In: Court Decisions, PSLRA/SLUSA

Second Circuit Holds that District Court Properly Granted Defense Motion to Dismiss Securities Class Action Against Outside Accountant Because (1) Claims fell Outside Class Period, (2) Accountant is under no Duty to Correct Financial Statement for which it Provided no Public Opinion, and (3) Plaintiffs’ Failed to Adequately Allege Loss Causation

Plaintiffs filed a putative securities class action against Deloitte & Touche in its capacity as outside accountant for Warnaco Group for violations of Section 10(b) of the Securities Exchange Act of 1924 and Rule 10b-5 alleging that Deloitte misstated Warnaco’s financial condition and breached its duty to correct previous misstatements once it learned that they were inaccurate. Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 2007 WL 259877, *1 (2d Cir. January 31, 2007). Defense attorneys moved to dismiss the class action under Rule 12(b)(6). The district court granted the motion finding that “[i] Deloitte was not liable for Warnaco’s quarterly statements, which it did not audit; [ii] Deloitte had no duty during the class period to correct statements or misstatements made by Deloitte prior to the class period; and [iii] Plaintiffs inadequately alleged loss causation in connection with the statements that Deloitte made during the class period.” Id. On appeal, the Second Circuit affirmed the “thorough and well-reasoned opinion” of the district court. Id.

Deloitte began serving as Warnaco’s outside accountant in November 1999. Plaintiffs filed this class action after Warnaco declared bankruptcy in June 11, 2001 seeking to represent those who purchased Warnaco’s common stock from August 15, 2000 through June 8, 2001 (defined as “the Class Period”). Lattanzio, at *1. The class action complaint alleged that Warnaco’s 1999 Form 10-K (filed in March 2000) overstated total shareholder equity by $30 million, and that in February 2000 Deloitte learned of $26 million of this sum but did not correct Warnaco’s financial statements until March 2001. Id. Deloitte allegedly learned of the additional $4 million mistake “sometime in fall 2000” but did not correct the financial statements until August 2001 (by which time Warnaco was in bankruptcy). Id., at *2. The complaint also complained that the three quarterly statements Warnaco filed during the Class Period contained material misstatements; Deloitte did not audit these statements but “reviewed” them as required by federal law and, allegedly, learned of the errors but failed to correct them. Id. Finally, the complaint alleged that Warnaco’s 2000 Form 10-K contained material misstatements Id., at *3. However, Deloitte’s audit opinion expressed a “going concern” that the company “was not in compliance with certain covenants of its long-term debt agreements” and that the company “was a working capital deficiency as of December 30, 2000” which “raise substantial doubt about its ability to continue as a going concern.” Id. As noted above, the district court granted the defense Rule 12(b)(6) motion and dismissed the class action complaint.

Continue reading "Deloitte & Touche Class Action Defense Case-Lattanzio v. Deloitte: Second Circuit Affirms Dismissal of Securities Class Action Against Outside Accountant" »

Posted In: Court Decisions, PSLRA/SLUSA

California Court Holds that Plaintiffs' Procedural Objections to Removal are Waived as Untimely and that Federal Securities Litigation Uniform Standards Act (SLUSA) Preempted Class Action Claims Requiring Dismissal of Complaint

In 2004, plaintiffs filed a putative class action against Edward D. Jones & Co., one of the largest brokerages in the United States, for violations of California’s unfair competition laws (UCL) and breach of fiduciary duties alleging that it "entered into agreements with certain mutual fund companies whereby Defendant placed the companies on an internal 'Preferred Funds' list and received retention 'kickbacks' based on the amount of money held by Plaintiff and the Class members in those funds." In re Edward Jones Holders Litig., 453 F.Supp.2d 1210, 1211 (C.D. Cal. 2006). Defense attorneys removed the action to federal court on the ground that the state law claims were preempted by the federal Securities Litigation Uniform Standards Act (SLUSA), but the district court granted plaintiffs' motion to remand finding that SLUSA did not apply "because the alleged wrongdoing . . . was not 'in connection with the purchase or sale of covered securities.'" Id., at 1212. Two years later, after the Supreme Court issued its opinion in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 548 U.S. ----, 126 S.Ct. 1503 (2006), defense attorneys removed the class action to federal court anew on the ground that Dabit "compels a finding that Plaintiffs' claims are in fact preempted by SLUSA." Id. Plaintiffs again moved to remand the complaint to state court, but the district court denied the motion.

First, the district court held that plaintiffs' procedural objections to removal were waived because the motion to remand the class action to state court was untimely under 28 U.S.C. § 1447(c). In re Edward Jones, at 1212-13. Plaintiffs had argued that the removal was defective in two ways: (1) as untimely under 28 U.S.C. § 1446(b), and (2) as an improper "successive" notice predicated on the identical legal ground previously raised and rejected by the district court. Id., at 1212. An untimely notice of removal is a procedural defect, not a jurisdictional defect, id., at 1213 n.3 (citation omitted), and Rule 6(e) does not extend the time for filing a motion to remand so the motion - filed 32 days after removal - was untimely, id., at 1213.

Continue reading "In re Edward Jones Class Action Defense Case: California Federal Court Denies Motion To Remand Securities Class Action And Grants Defense Motion To Dismiss Finding Class Action Complaint Preempted By SLUSA" »

Posted In: Removal & Remand, Court Decisions, PSLRA/SLUSA

Defense Defeats Class Action Certification for Contested Time Period Because Plaintiff's Evidence Failed to Demonstrate "Cause and Effect" and Only "Weakly" Showed Market Efficiency Massachusetts Court Holds

Plaintiff investors filed a putative class action against PolyMedica and others alleging securities fraud, relying on the "fraud on the market" doctrine to establish the reliance element of their securities fraud claim. In re PolyMedica Corp. Securities Litig., 453 F.Supp.2d 260, 264-65 (D. Mass. 2006). A Massachusetts federal court certified a class action for the time period of October 26, 1998 to August 21, 2001; the First Circuit reversed with respect to the time period of January 1, 2001 to August 21, 2001, and remanded the case for further proceedings. Id., at 264. The new district court explained at page 264, "The sole issue for further adjudication here is whether Rule 23(b)(3) can be satisfied in the circumstances of this case." (Broadly, Rule 23(b)(3) requires that common questions of law or fact predominate over individual issues and that the class action device be the superior method for resolving the dispute.) The court agreed with defense attorneys that it could not, and refused to certify a class for the 2001 time period.

The federal court began by noting the special problem created by securities fraud class actions, explaining at page 264: "In the context of securities fraud allegations, the nature of Rule 23(b)(3) analysis is quite particularized. Securities frauds, like all frauds, entail proof of reliance. . . . While reliance is typically demonstrated on an individual basis, the Supreme Court has noted that such a rule would effectively foreclose securities fraud class actions because individual questions of reliance would inevitably overwhelm the common ones under Rule 23(b)(3). . . . To avoid this result, the Supreme Court has recognized the fraud-on-the-market theory, which relieves the plaintiff of the burden of proving individualized reliance on a defendant's misstatement, by permitting a rebuttable presumption that the plaintiff relied on the 'integrity of the market price' which reflected that misstatement." (Citations omitted.) The fraud on the market doctrine requires that the market be "efficient" - that is, "'one in which the market price of the stock fully reflects all publicly available information,'" id., at 265 (quoting In re PolyMedica Corp. Securities Litig., 432 F.3d 1, 14 (1st Cir. 2005)).

Continue reading "Class Action Defense Cases-In re PolyMedica: Massachusetts Federal Court Refuses To Certify Securities Fraud Class Action For Contested Period Because Plaintiff Failed To Establish "Cause And Effect" And "Market Efficiency"" »

Posted In: Certification of Class Actions, Court Decisions, PSLRA/SLUSA

Second Circuit Clarifies Standard of Proof for Certification of Class Action Under Rule 23 and Holds that IPOs are not "Efficient Markets" in Handing Defense Victory on Appeal

Beginning in 2001, hundreds of class action lawsuits were filed against Wall Street banks alleging violations of federal securities laws in connection with the initial public offerings of certain Internet companies. In re Initial Public Offering Securities Litig., 471 F.3d 24, 2006 WL 3499937, *1 (2nd Cir. December 5, 2006). Following the consolidation of 310 of the class action lawsuits, plaintiffs' lawyers moved for class certification in six "focus cases." Id., at *3. Defense attorneys objected to certification of a class action arguing primarily that individual issues predominate over common ones; the district court granted the motion finding that plaintiffs had made "some showing" of the elements required under Rule 23 to warrant certification, id., at *3-*5. The Second Circuit reversed, agreeing with defense attorneys that plaintiffs had not satisfied the requirements of Rule 23 and further that they could not satisfy those requirements.

The class action complaints alleged that underwriters, issuers and individual officers of the issuing companies defrauded investors through "tie-in arrangements, undisclosed compensation, and analyst manipulation" in connection with the IPOs of certain Internet companies, id., at *2. In certifying a class action, the district court perceived conflicting guidance in Supreme Court authority concerning the proper standard of proof required to warrant class action certification. Specifically, Supreme Court authority requires a "rigorous analysis" that may require the court to "probe behind the pleadings," but a court may not "conduct a preliminary inquiry into the merits of a suit." Id., at *4 (citations omitted). The district court rejected Fourth Circuit and Seventh Circuit authority requiring plaintiffs to "establish the requirements of Rule 23 by a preponderance of the evidence, even if resolving those issues requires a 'preliminary inquiry into the merits . . ., or 'overlap with issues on the merits.'" Id. (citations omitted). The court instead crafted an amorphous "some showing" test and, applying that new standard, concluded that plaintiffs had met their burden of proof. Id., at *4-*5.

Continue reading "Class Action Defense Cases-In re Initial Public Offering: Significant Defense Victory As Second Circuit Holds Federal Court Erred In Certifying Securities Class Action Against Wall Street Banks Arising Out Of Internet IPOs" »

Posted In: Certification of Class Actions, Court Decisions, PSLRA/SLUSA

Judge Grants Defense Motion for Attorney Fees Against Plaintiffs' Law Firm Following Successful Defense of Class Action Lawsuit

Floyd Norris of the New York Times reports that federal district court judge Melinda Harmon awarded the defense in an Enron-related class action attorney fees against plaintiff class-action law firm Lerach, Coughlin, Stoia, Geller, Rudman & Robbins for maintaining class action claims against Alliance Capital, a money management firm, after it was apparent that the claims had no merit. The district court awarded the attorney fees under Section 11(e) of the Securities Act of 1933, despite acknowledging the existence of Second Circuit authority that Section 11(e) "was not intended to authorize an award against the parties' attorney." Mr. Norris summarizes the court's reasoning as placing financial responsibility for the sanctions on the class action attorneys because "non-attorney clients more likely than not would not have the ability to determine at what point, based on what evidence, an action becomes legally 'frivolous,' while its licensed counsel should be and is held to such a standard." Defense attorneys are quoted as stating that the court's ruling punishes class action plaintiff lawyers for continuing to pursue "what was clearly an innocent party." The amount of the fees have not yet been set, and Lerach promises to appeal the ruling.

Floyd Norris' article, entitled "In Unusual Ruling, Law Firm is Told to Pay Opponent's Legal Fees in Enron Case,” may be found in Section C. of the December 2, 2006 edition of the New York Times.

Posted In: Class Actions In The News, PSLRA/SLUSA

Court Holds Allegations in Securities Class Action Fail to Meet Heightened Pleadings Requirements Mandated by FRCP Rule 9(b) and the PSLRA (Private Securities Litigation Reform Act of 1995), and Denies Plaintiffs Request To Rule on its Year-Old Remand Motion as Untimely

Plaintiff investors filed separate putative class actions against New York Community Bancorp (NYCB) and several of its officers alleging violations of federal securities laws by making materially false and misleading statements to investors. In re New York Community Bancorp, Inc., Securities Litig., 448 F.Supp.2d 466, 469 (E.D.N.Y. 2006). The federal court eventually consolidated 11 such class action lawsuits, and appointed lead plaintiff and lead counsel. Following the filing of a Consolidated and Amended Class Action Complaint, defense attorneys filed a motion to dismiss and certain plaintiffs filed a motion for reconsideration of the consolidation order. Id. The district court denied the motion for reconsideration and granted the defense motion to dismiss.

The amended class action complaint alleged violations of the Securities and Exchange Act of 1934 (“Exchange Act”) and the Securities Act of 1933 (“Securities Act”) on behalf of NYCB shareholders. In re New York Comm. Bancorp, at 469. NYCB went through a period of substantial earnings growth and acquired several financial institutions, building "a unique and profitable core lending business comprised of multi-family mortgage loans." Id., at 470. Over time, however, market conditions changed and NYCB expanded into a " risky, but common, leveraging strategy involving mortgage-backed securities known as the 'carry trade.'" Id. The complaint alleged that NYCB diverted increasingly large sums away from conservative investments and to carry trade investments, but continually held itself out as a risk-adverse, conservative community bank. Id., at 471. The court summarized the material allegations of the complaint as follows: "In particular, the Plaintiffs allege that the Defendants: (1) falsely represented that NYCB was uniquely able to thrive in an environment of rising interest rates and that its business prospects remained strong; (2) highlighted a false strategy of deleveraging following the acquisition of Roslyn; and (3) failed to adequately disclose the extent of the risks of the carry trade activity." Id.

The court first addressed the motion for reconsideration, which additionally sought to reinstate a motion that the plaintiffs had filed more than a year earlier to remand to state court one of the class action lawsuits. In re New York Comm. Bancorp, at 474. Plaintiffs had filed their class action in state court, and the defense removed the lawsuit to federal court. Plaintiffs filed a motion to remand arguing that the Securities Litigation Uniform Standards Act of 1998 (SLUSA) prohibits removal of cases based exclusively on the Securities Act. When the federal court consolidated the 11 securities class actions, it did not specifically address the remand motion but the practical effect of the court's ruling was to deny the motion. Id., at 475. In evaluating the plaintiffs' motion, the district court concluded that even though claim of improper removal appears to have merit, id., the fact remained that plaintiffs' motion was too late, id., at 475-76.

Continue reading "Class Action Defense Cases-In re New York Bancorp: New York Federal Court Grants Defense Motion To Dismiss Securities Class Action And Rejects Plaintiffs' Meritorious Remand Motion As Untimely" »

Posted In: Removal & Remand, Court Decisions, PSLRA/SLUSA

Defense Motion to Dismiss Class Action Complaint Denied Because Plaintiff Adequately Alleged Securities Laws Violations by Company’s Chief Commercial Banker

Plaintiff filed a securities fraud class action against Dexia Bank Belgium as successor to Artesia Banking Corp., “the former chief commercial banker for Lernout & Hauspie Speech Products N.V.,” alleging “that L&H could not have committed its wide ranging fraud without the intimate involvement of Defendant . . . as architect of the fraudulent scheme” and that Defendant “made numerous fraudulent loans to L&H in an effort to bolster L&H’s stock price.” Quaak v. Dexia, S.A., 445 F.Supp.2d 130, 134 (D. Mass. 2006). The district court denied a defense motion to dismiss the class action complaint, but certified several questions to the First Circuit because “the legal issues involved, particularly the question of scheme liability under the securities laws, were . . . quite cutting edge,” and the First Circuit accepted the appeal. Id. Before the Circuit Court heard oral argument, plaintiff sought and received leave from the district court to amend the class action complaint; the Circuit Court therefore vacated the appeal, and defense attorneys filed a new motion to dismiss. Id.

The district court explained that the amended complaint added “significant factual allegations” based on newly discovered documents that purportedly evidenced Defendant made millions in profits from the sale of L&H stock and that it “exercised absolute control over the operations of a wholly-owned subsidiary” and caused the issuance of reports that promoted the purchase of L&H stock based on false financial data. Quaak, at 135. According to the complaint, the scheme inflated the value of the stock or artificially caused it to retain its inflated value, but the stock plummeted once the company’s true financial condition was learned. Id. Based on the new allegations, the complaint alleged Defendant was a “controlling person” and therefore liable within the meaning of Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), and liable under Section 10(b) for the issuance of false and misleading reports. Id.

Continue reading "Class Action Defense Cases-Quaak v. Dexia: Massachusetts Federal Court Denies Defense Motion To Dismiss Securities Class Action Against Banker Because Of Alleged Involvement In Scheme To Inflate Stock Price" »

Posted In: Court Decisions, PSLRA/SLUSA

As a resource for the class action defense lawyer who defends against securities class actions, we provide the text of the Securities Act of 1933. While Congress set forth those securities that are exempt under the Act in 15 U.S.C. § 77c, section 77d addresses those transactions that are exempt and provides:

§ 77d. Exempted transactions

The provisions of section 77e of this title shall not apply to--

(1) transactions by any person other than an issuer, underwriter, or dealer.

(2) transactions by an issuer not involving any public offering.

(3) transactions by a dealer (including an underwriter no longer acting as an underwriter in respect of the security involved in such transaction), except--

(A) transactions taking place prior to the expiration of forty days after the first date upon which the security was bona fide offered to the public by the issuer or by or through an underwriter,

(B) transactions in a security as to which a registration statement has been filed taking place prior to the expiration of forty days after the effective date of such registration statement or prior to the expiration of forty days after the first date upon which the security was bona fide offered to the public by the issuer or by or through an underwriter after such effective date, whichever is later (excluding in the computation of such forty days any time during which a stop order issued under section 77h of this title is in effect as to the security), or such shorter period as the Commission may specify by rules and regulations or order, and

Continue reading "15 U.S.C. § 77d--Transactions Exempted Under The Securities Act Of 1933" »

Posted In: PSLRA/SLUSA, Statutes & Rules

As a resource for the class action defense lawyer who defends against securities class actions, we provide the text of the Securities Act of 1933. Congress set forth those securities that are exempt under the Act in 15 U.S.C. § 77c, which provides:

§ 77c. Classes of securities under this subchapter

(a) Exempted securities

Except as hereinafter expressly provided, the provisions of this subchapter shall not apply to any of the following classes of securities:

(1) Reserved.

(2) Any security issued or guaranteed by the United States or any territory thereof, or by the District of Columbia, or by any State of the United States, or by any political subdivision of a State or territory, or by any public instrumentality of one or more States or territories, or by any person controlled or supervised by and acting as an instrumentality of the Government of the United States pursuant to authority granted by the Congress of the United States; or any certificate of deposit for any of the foregoing; or any security issued or guaranteed by any bank; or any security issued by or representing an interest in or a direct obligation of a Federal Reserve bank; or any interest or participation in any common trust fund or similar fund that is excluded from the definition of the term "investment company" under section 80a-3(c)(3) of this title; or any security which is an industrial development bond (as defined in section 103(c)(2) of Title 26) the interest on which is excludable from gross income under section 103(a)(1) of Title 26 if, by reason of the application of paragraph (4) or (6) of section 103(c) of Title 26 (determined as if paragraphs (4)(A), (5), and (7) were not included in such section 103(c) ), paragraph (1) of such section 103(c) does not apply to such security; or any interest or participation in a single trust fund, or in a collective trust fund maintained by a bank, or any security arising out of a contract issued by an insurance company, which interest, participation, or security is issued in connection with (A) a stock bonus, pension, or profit-sharing plan which meets the requirements for qualification under section 401 of Title 26, (B) an annuity plan which meets the requirements for the deduction of the employer's contributions under section 404(a)(2) of Title 26, (C) a governmental plan as defined in section 414(d) of Title 26 which has been established by an employer for the exclusive benefit of its employees or their beneficiaries for the purpose of distributing to such employees or their beneficiaries the corpus and income of the funds accumulated under such plan, if under such plan it is impossible, prior to the satisfaction of all liabilities with respect to such employees and their beneficiaries, for any part of the corpus or income to be used for, or diverted to, purposes other than the exclusive benefit of such employees or their beneficiaries, or (D) a church plan, company, or account that is excluded from the definition of an investment company under section 3(c)(14) of the Investment Company Act of 1940 [15 U.S.C.A. § 80a-3(c)(14)], other than any plan described in subparagraph (A), (B), (C), or (D) of this paragraph (i) the contributions under which are held in a single trust fund or in a separate account maintained by an insurance company for a single employer and under which an amount in excess of the employer's contribution is allocated to the purchase of securities (other than interests or participations in the trust or separate account itself) issued by the employer or any company directly or indirectly controlling, controlled by, or under common control with the employer, (ii) which covers employees some or all of whom are employees within the meaning of section 401(c)(1) of Title 26, or (iii) which is a plan funded by an annuity contract described in section 403(b) of Title 26. The Commission, by rules and regulations or order, shall exempt from the provisions of section 77e of this title any interest or participation issued in connection with a stock bonus, pension, profit-sharing, or annuity plan which covers employees some or all of whom are employees within the meaning of section 401(c)(1) of Title 26, if and to the extent that the Commission determines this to be necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of this subchapter. For purposes of this paragraph, a security issued or guaranteed by a bank shall not include any interest or participation in any collective trust fund maintained by a bank; and the term "bank" means any national bank, or banking institution organized under the laws of any State, territory, or the District of Columbia, the business of which is substantially confined to banking and is supervised by the State or territorial banking commission or similar official; except that in the case of a common trust fund or similar fund, or a collective trust fund, the term "bank" has the same meaning as in the Investment Company Act of 1940 [15 U.S.C.A. § 80a-1 et seq.];

Continue reading "15 U.S.C. § 77c--Securities Exempt Under The Securities Act Of 1933" »

Posted In: PSLRA/SLUSA, Statutes & Rules

As a resource for the class action defense lawyer who defends against securities class actions, we provide the text of the Securities Act of 1933. Congress defined "swap agreements" in 15 U.S.C. § 77b-1:

§ 77b-1. Swap agreements

(a) Non-security-based swap agreements

The definition of "security" in section 77b(a)(1) of this title does not include any non-security-based swap agreement (as defined in section 206C of the Gramm-Leach-Bliley Act).

(b) Security-based swap agreements

(1) The definition of "security" in section 77b(a)(1) of this title does not include any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act).

(2) The Commission is prohibited from registering, or requiring, recommending, or suggesting, the registration under this subchapter of any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act). If the Commission becomes aware that a registrant has filed a registration statement with respect to such a swap agreement, the Commission shall promptly so notify the registrant. Any such registration statement with respect to such a swap agreement shall be void and of no force or effect.

(3) The Commission is prohibited from--

(A) promulgating, interpreting, or enforcing rules; or

(B) issuing orders of general applicability;

under this subchapter in a manner that imposes or specifies reporting or recordkeeping requirements, procedures, or standards as prophylactic measures against fraud, manipulation, or insider trading with respect to any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act).

(4) References in this subchapter to the "purchase" or "sale" of a security-based swap agreement shall be deemed to mean the execution, termination (prior to its scheduled maturity date), assignment, exchange, or similar transfer or conveyance of, or extinguishing of rights or obligations under, a security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act), as the context may require.

Posted In: PSLRA/SLUSA, Statutes & Rules

As a resource for the class action defense lawyer who defends against securities class actions, we provide the text of the Securities Act of 1933. Preliminarily, Congress set forth the applicable definitions in 15 U.S.C. § 77b:

§ 77b. Definitions; promotion of efficiency, competition, and capital formation

(a) Definitions

When used in this subchapter, unless the context otherwise requires--

(1) The term "security" means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

Continue reading "15 U.S.C. § 77b--Definitions Applicable To Lawsuits Under The Securities Act Of 1933" »

Posted In: PSLRA/SLUSA, Statutes & Rules

Federal Court Grants Motion to Consolidate PSLRA Class Actions, and Pursuant to PSLRA Appoints Plaintiff With Largest Financial Investment as Lead Plaintiff and Confirms Lead Plaintiff’s Choice of Lead Counsel

Six securities fraud class action lawsuits were filed against a corporation and three of its officers and directors alleging that defendants violated §§ 10(b) and 20(a) of the federal Securities Exchange Act of 1934 and Rule 10b-5 by making false and misleading statements concerning the corporations earnings and enrollment growth. A separate derivative action also was filed. Plaintiffs’ attorneys in five of the class actions sought consolidation of the lawsuits and appointment of Lead Plaintiff and Lead Counsel. Glauser v. EVCI Career Colleges Holding Corp., 236 F.R.D 184, 186 (S.D.N.Y. 2006). The defense apparently took no position on the motions, each of which were granted by the district court.

With respect to the consolidation motion, the federal court held that “consolidation is particularly appropriate in the context of securities class actions if the complaints are ‘based on the same “public statements and reports.”’” Glauser, at 186 (citation omitted). Because the class actions involved “common issues of law and fact” the Court consolidated those lawsuits “for all purposes,” including trial; the derivative action was consolidated for all pretrial purposes, and the Court reserved a decision on whether to consolidate it for trial as well. Id.

Continue reading "Class Action Defense Cases-Glauser v. EVCI: New York Federal Court Grants Motion To Consolidated Class Action Lawsuits Under Private Securities Litigation Reform Act (PSLRA) And to Appoint Lead Plaintiff And Lead Counsel" »

Posted In: Court Decisions, PSLRA/SLUSA

Federal Securities Claims Without Fraud Element Must Still be Pled with Particularity if Nonfraud Securities Claim is Part of Defendant’s Alleged Fraudulent Conduct Under the Exchange Act and Rule 10(b)-5

Plaintiffs filed a putative class action under the Securities Act, 15 U.S.C. § 77a et seq., and the Exchange Act, 15 U.S.C. § 78a et seq., alleging that defendant “employed a fraudulent scheme to control the revenue growth; defense attorneys filed a motion to dismiss for failure to meet the pleading requirements of FRCP Rule 9(b) and the federal Private Securities Litigation Reform Act (PSLRA), 15 U.S.C. § 78u-4(b). The federal court granted the motion to dismiss, and required that plaintiffs pay defense costs and fees incurred in connection with the motion to dismiss as a prerequisite to plaintiffs’ filing a motion to amend their class action complaint. Wagner v. First Horizon Pharm. Corp., 464 F.3d 1273, 1275-76 (11th Cir. 2006). Rather than pay these defense costs, plaintiffs allowed the complaint to be dismissed and then appealed. Id., at 1276.

The Eleventh Circuit first observed that Section 11 of the Securities Act creates “virtually absolute [liability], even for innocent misstatements,” as does Section 12(a)(2); thus, “neither allegations of fraud nor scienter are necessarily part of either of these claims.” Wagner, at 1277. The Circuit Court therefore characterized claims under Sections 11 and 12(a)(2) as “nonfraud” claims, and noted: “The question presented . . . [is] whether there are circumstances when [Rule 9(b)] would require nonfraud securities claims to be pled with particularity.” Id. While noting that sister circuits are split on this issue, the Eleventh Circuit adopted the conclusion of the majority of the circuits that have addressed the question and held “Rule 9(b) applies when the misrepresentation justifying relief under the Securities Act is also alleged to support a claim for Fraud under the Exchange Act and Rule 10(b)-5, id. The Circuit Court explained its holding at page 1278 as follows:

Continue reading "Class Action Defense Cases-Wagner v. First Horizon: Eleventh Circuit Holds As A Matter Of First Impression That If Nonfraud Securities Claim Is Part Of Allegedly Fraudulent Conduct Then It Must Be Pleaded With Particularity" »

Posted In: Court Decisions, PSLRA/SLUSA

Maryland Federal Court Grants Defense Motion to Dismiss Class Action Despite Plaintiffs’ Attempt to Plead Around Securities Litigation Uniform Standards Act of 1998 (SLUSA)

Plaintiffs filed putative class action lawsuits in Illinois state court alleging state law causes of action carefully pleaded “to avoid the preemptive scope of the Securities Litigation Uniform Standards Act” and focusing on the theory “that the defendants negligently breached state common law duties” by using “stale” mutual fund prices - that is, mutual fund prices not based on “the most recent market information.” In re Mutual Funds Investment Litig., 437 F.Supp.2d 439, 440 (D. Md. 2006). Defense attorneys removed the action to federal court, and the Judicial Panel on Multidistrict Litigation transferred the cases to Judge Motz of the Maryland district court. After the defense moved to dismiss the case as preempted by SLUSA, “plaintiffs filed amended complaints . . . that eliminate any explicit mention of misrepresentation and deception, and that plead only one cause of action: common law negligence.” Id., at 442.

Continue reading "Class Action Defense Cases-In re Mutual Funds: Federal District Court Grants Defense Motion To Dismiss Class Action Because “Plaintiffs’ Artful Attempt At Avoiding SLUSA Preemption Ultimately Fails”" »

Posted In: Court Decisions, PSLRA/SLUSA

Class Action Securities Fraud Claims Against Business Partners of Internet Company Failed to Establish § 10(b) Liability for Secondary Actors

Plaintiff filed a putative class action against multiple defendants alleging securities fraud arising out of the overstating of revenues of an Internet company. Defense attorneys for several outside defendants and individual defendants successfully moved to dismiss the § 10(b) claims under the Securities Exchange Act of 1934 on the grounds that Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994) holds that § 10(b) does not permit recovery for aiding and abetting, and that the moving defendants were not “primary violators.” Simpson v. AOL Time Warner Inc., 452 F.3d 1040, 1042 (9th Cir. 2006). The Ninth Circuit disagreed with the interpretation of Central Bank proffered by the defense, but affirmed because plaintiff had not sufficiently alleged that defendants were primary violators of § 10(b). Id., at 1043. We do not here summarize the detailed fact pattern set forth in the Ninth Circuit opinion. Rather, we focus on the court’s holdings concerning Central Bank and § 10(b) liability.

Defense attorneys argued that “Central Bank limited primary liability under § 10(b) to defendants who personally made a public misstatement, violated a duty to disclose or engaged in manipulative trading activity, and not to those engaged in a broader scheme to defraud.” Simpson, at 1043. The Ninth Circuit disagreed. While the Supreme Court held that Rule 10b-5 liability “does not extend beyond the limits of § 10(b),” id., at 1046, it also cautioned “that secondary actors, other than the securities issuer, may be liable as primary violators under § 10(b) when all elements of the statute are satisfied,” id., at 1047. And while § 10(b) does not extend to the act of “merely ‘aiding and abetting’” a violation thereof, under Ninth Circuit authority one may be found to have primary liability under § 10(b) - even without making any statements - if they substantially participated or were intricately involved in preparing the fraudulent statements. Id., at 1048 (citing Howard v. Everex Sys., Inc., 228 F.3d 1057, 1061 n.5 (9th Cir. 2000).

Continue reading "AOL Class Action Defense Case-Simpson v. AOL: Defense Motion To Dismiss Class Action Securities Claims Against Securities Issuer’s Business Partners Properly Granted Ninth Circuit Holds" »

Posted In: Court Decisions, PSLRA/SLUSA

Second Circuit Reaffirms SEC’s Authority SEC Authority to Create Exemptions to Security Exchange Act's Proxy Statement Requirements and Upholds Exemption For Foreign Private Issuers - Defense Motion to Dismiss Class Action Affirmed

On June 1, 2006, in Schiller v. Tower Semiconductor Ltd., 449 F.3d 286 (2d Cir. 2006), the Second Circuit addressed a “novel” challenge to exemptions for foreign private issuers to the proxy statement requirements of the Securities Exchange Act (“the Act”). The challenge came in the form of a putative class action premised on the allegation that a proxy statement issued by Tower Semiconductor “was materially misleading and therefore violated §§ 14(a) and 20(a) of the Securities Exchange Act of 1934 . . ., 15 U.S.C. §§ 78n(a), 78t, and certain regulations, including Rule 14a-9, 17 C.F.R. § 240.14a-9 (2004),” id., at 289. The defense moved to dismiss the class action on the grounds that Tower was a foreign private issuer (an Israeli corporation) and therefore exempt from § 14(a) by virtue of Rule 3a12-3 of the Act. See 17 C.F.R. § 240.3a12-3 (2004). Plaintiffs’ lawyer responded that the Securities Exchange Commission (SEC) “exceeded its authority in promulgating Rule 3a12-3,” id. The District Court agreed with defense counsel and dismissed the class action.

Continue reading "Schiller v. Tower Semiconductor: Order Granting Defense Motion to Dismiss Class Action Alleging Violation of Security Exchange Act’s Proxy Solicitation Requirements Affirmed By Second Circuit" »

Posted In: Court Decisions, PSLRA/SLUSA

Class Action Securities Fraud Cases Must Plead Economic Loss and Causal Connection Between Alleged Fraud and Loss

Class actions alleging securities fraud are commonplace. Whenever a publicly traded stock declines in value, an investor is ready to file a class action claiming that the stock price had been inflated or that he would not have invested in the company but for misleading representations made by the company. Congress enacted the Private Securities Litigation Reform Act of 1995 (PSLRA) hoping, in part, to stem the “abusive” practice of “the routine filing of lawsuits . . . with only a faint hope that the discovery process might lead eventually to some plausible cause of action.” H.R. Conf. Rep. No. 104-369, p. 31 (1995), U.S. Code Cong. & Admin. News 1995, pp. 679, 730.

Class action defendants had high hopes for the PSLRA: it imposes limits on damages and attorney fees, imposes limits on the way lead plaintiffs are selected and the amounts they can be awarded, imposes sanctions for frivolous litigation, provides companies with a “safe harbor” for certain statements, and allows courts to issue stays of discovery pending motions by a defendant to have the case dismiss. See, 15 U.S.C. § 78u-4. Also, Section 21D(b)(2) of the PSLRA requires that a plaintiff alleging securities fraud “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” SLUSA, discussed in a separate article, represents Congress’s attempt to fill in the loopholes in the PSLRA. Other holes, however, have been left to the judicial branch. The U.S. Supreme Court filled one such hole in Dura Pharmaceuticals v. Broudo, 544 U.S. 336, 125 S.Ct. 1627 (2005).

A class action alleging securities fraud was filed against Dura Pharmaceuticals in a California federal court. The complaint alleged that Dura falsely represented that a new product would secure FDA approval and that its drug sales would be profitable. The Supreme Court opinion sets forth the basic allegations of the complaint, which we do not repeat here. The Court stated at pages 339-40:

Continue reading "Dura Pharmaceuticals v. Broudo -- Class Action Defense Cases" »

Posted In: Court Decisions, PSLRA/SLUSA

Remand to State Court of Case Removed Under SLUSA (Securities Litigation Uniform Standards Act of 1998) Not Appealable U.S. Supreme Court Holds

CAFA (Class Action Fairness Act of 2005) and SLUSA (Securities Litigation Uniform Standards Act of 1998) are discussed in various separate articles. Removal and remand issues also are discussed in various articles, which set forth the general rule recently reiterated by the United States Supreme Court: "28 U.S.C. § 1447(d) limits appellate review of a district court order remanding a case from federal to state court." Kircher v. Putnam Funds Trust, 547 U.S. ___, 126 S.Ct. 2145, 2150 (2006). The Supreme Court addressed the scope of appellate review of remand orders in Kircher. As the Supreme Court summarized, "The question here is whether an order remanding a case removed under [SLUSA] is appealable, notwithstanding § 1447(d). We hold it is not." Kircher, at 2150 (italics added).

Kircher involves eight separate putative class actions by investors against mutual funds, investment advisers and an insurance company that alleged state law claims for damages (such as damages for negligence and breach of fiduciary duty) arising out of the practice of "market timing." Kircher, at 2150 and n.4. The actions were removed to federal court on the grounds that they were "removable under and precluded by [SLUSA]." Id., at 2151. The investors moved to remand the lawsuits claiming the district court lacked subject matter jurisdiction; the district court agreed, and remanded the actions on the grounds that it lacked subject matter jurisdiction and that SLUSA did not preclude the claims asserted therein. Id.

The Seventh Circuit reversed, but only after concluding that it had appellate jurisdiction to hear the appeal. Kircher v. Putnam Funds Trust, 373 F.3de 847, 849-50 (7^th Cir. 2004). In part, the Court concluded that the district court's orders were not actually founded on lack of jurisdiction but on the substantive issue of whether the state law claims were precluded by SLUSA: accordingly, the Seventh Circuit concluded that appellate review was not barred by § 1447(d). Id., at 849-51. Having concluded that it had appellate jurisdiction, the Seventh Circuit then held further that SLUSA precluded the investors' claims.

Continue reading "Class Action Defense Cases: Kircher v. Putnam Funds Trust : Remand Of SLUSA Class Action To State Court Not Appealable Supreme Court Holds" »

Posted In: Class Actions In The News, Court Decisions, PSLRA/SLUSA

SLUSA (Securities Litigation Uniform Standards Act) was enacted by Congress in 1998. SLUSA followed the Private Securities Litigation Reform Act of 1995 (PSLRA), 109 Stat. 737 (codified at 15 U.S.C. §§ 77z-1 and 78u-4). The House Conference Report accompanying the PSLRA enumerated ways in which abusive class actions have hurt the U. S. economy. See, H.R.Rep. No. 104-369, p. 31 (1995). To address these concerns, Congress enacted sweeping changes to federal securities laws class actions, covering pleading, class representation, discovery, liability, attorney fee awards, expenses and more. This article discusses the salient points of class action provisions of SLUSA; SLUSA is discussed in more detail in a separate article.

One powerful change concerned new requirements for pleading fraud. As the Sixth Circuit explained,

Congress heightened the pleading standard for securities fraud. Before 1995, a plaintiff had to allege fraud “with particularity.” Fed.R.Civ.P. 9(b). Under the PSLRA, a plaintiff must now “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2) (emphasis added).

Helwig v. Vencor, Inc., 251 F.3d 540, 548 (6^th Cir. 2001); see also, Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 345, 125 S.Ct. 1627 (2005).

The PSLRA also imposed limits on damages and attorney fees, imposed limits on the way lead plaintiffs were selected and the amounts they could be awarded, imposed sanctions for frivolous litigation, provided companies with a “safe harbor” for certain statements, and allowed courts to issue stays of discovery pending motions by a defendant to have the case dismiss. See, 15 U.S.C. § 78u-4.

Continue reading "Class Action Provisions of the Securities Litigation Uniform Standards Act of 1998 (SLUSA) – A Brief Overview: Class Action Defense Issues" »

Posted In: PSLRA/SLUSA

SLUSA (Securities Litigation Uniform Standards Act) was enacted by Congress in 1998 to affect sweeping changes to federal securities laws class actions. SLUSA addresses numerous federal securities laws class actions issues including pleading, class representation, discovery, liability, attorney fee awards, expenses and more. SLUSA also sought to pre-empt state law securities class action litigation, but the Circuit Courts disagreed on the breadth of that pre-emption.

In Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, __ U.S. ___, 126 S.Ct. 1503 (2006), the United States Supreme Court issued its opinion. This opinion addresses whether the Securities Litigation Uniform Standards Act (SLUSA) “only pre-empts state-law class-action claims brought by plaintiffs who have a private remedy under federal law,” as the Second Circuit held in Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 395 F.3d 25 (2005), or whether SLUSA “also pre-empts state-law class-action claims for which federal law provides no private remedy,” as the Seventh Circuit held in Kircher v. Putnam Funds Trust, 403 F.3d 478 (7th Cir. 2005). The Supreme Court agreed with the Seventh Circuit, holding that SLUSA's pre-emption provision was intended to be read broadly, and pre-empted state-law class-action claims brought not only by purchasers and sellers of securities, but also by holders of securities. As so read, SLUSA pre-empted state-law claims alleging the fraudulent manipulation of stock prices.

As the Supreme Court observed,

Title I of the Securities Litigation Uniform Standards Act of 1998 (SLUSA) provides that “[n]o covered class action” based on state law and alleging “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security” “may be maintained in any State or Federal court by any private party.” § 101(b), 112 Stat. 3227 (codified at 15 U.S.C. § 78bb(f)(1)(A)).

Merrill Lynch v. Dabit, 126 S.Ct. at 1506-07.

Continue reading "Brief Overview of Class Action Issues Under SLUSA (Securities Litigation Uniform Standards Act) For The Defense Lawyer" »

Posted In: PSLRA/SLUSA

SLUSA (Securities Litigation Uniform Standards Act) and Pre-emption

SLUSA (Securities Litigation Uniform Standards Act) was enacted by Congress in 1998 to affect sweeping changes to federal securities laws class actions. SLUSA addresses numerous federal securities laws class actions issues including pleading, class representation, discovery, liability, attorney fee awards, expenses and more. SLUSA also sought to pre-empt state law securities class action litigation, but the Circuit Courts disagreed on the breadth of that pre-emption.

In Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, __ U.S. ___, 126 S.Ct. 1503 (2006), the United States Supreme Court issued its opinion. This opinion addresses whether the Securities Litigation Uniform Standards Act (SLUSA) “only pre-empts state-law class-action claims brought by plaintiffs who have a private remedy under federal law,” as the Second Circuit held in Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 395 F.3d 25 (2005), or whether SLUSA “also pre-empts state-law class-action claims for which federal law provides no private remedy,” as the Seventh Circuit held in Kircher v. Putnam Funds Trust, 403 F.3d 478 (7^th Cir. 2005). The Supreme Court agreed with the Seventh Circuit, holding that SLUSA's pre-emption provision was intended to be read broadly, and pre-empted state-law class-action claims brought not only by purchasers and sellers of securities, but also by holders of securities. As so read, SLUSA pre-empted state-law claims alleging the fraudulent manipulation of stock prices.

Continue reading "Merrill Lynch v. Dabit Class Action Defense Case" »

Posted In: Class Actions In The News, Court Decisions, PSLRA/SLUSA