Class Action Defense Blog

Judicial Panel Grants Plaintiff Request for Pretrial Coordination of Class Action Lawsuits Pursuant to 28 U.S.C. § 1407, Unopposed by Other Class Action Plaintiffs or by Common Defendants, and Transfers Actions to Southern District of New York

Six class actions – one in California and five in New York – were filed against Orleans Homebuilders and OHB Homes alleging violations of federal securities laws; specifically, the class action complaints “arise from a purported massive financial scandal involving common defendant Satyam Computer Services, Ltd. (Satyam), one of India’s largest information technology and outsourcing companies.” In re Satyam Computer Services, Ltd., Securities Litig., ___ F.Supp.2d ___ (Jud.Pan.Mult.Lit. April 9, 2009) [Slip Opn., at 1]. According to the allegations underlying the class actions, “defendants deceived the investing public regarding Satyam’s business and finances, and thereby caused plaintiffs to purchase the company’s American Depositary Shares at artificially inflated prices.” Id. Plaintiffs in the California class action filed a motion with the Judicial Panel for Multidistrict Litigation (MDL) requesting centralization of the class actions pursuant to 28 U.S.C. § 1407; initially, plaintiffs sought centralization in California, but ultimately agreed to centralization in the Southern District of New York, where the other five class actions were pending. Id. Only one class action plaintiff opposed centralization, id. The Judicial Panel granted the motion to centralize the class action lawsuits, id. The Panel also agreed that the Southern District of New York was the appropriate transferee court because “Five of the six constituent actions, including the first-filed action, are already pending there, and the parties suggest that some discovery from accountants and banks may take place in the district.” Id., at 2.

Posted In: Multidistrict Litigation, Class Action Court Decisions, PSLRA/SLUSA Class Actions

Allegations in Securities Fraud Class Action Failed to Meet Heightened Pleading Requirements under Private Securities Litigation Reform Act (PSLRA) Warranting Dismissal with Prejudice of Class Action Complaint Washington Federal Court Holds

Plaintiffs filed a class action against Zumiez and three individual defendants alleging violations of federal securities laws; the class action complaint asserted that defendants “engaged in a scheme to defraud shareholders by making materially false and misleading statements by making false and misleading statements and engaging in insider trading.” In re Zumiez Inc. Sec. Litig., ___ F.Supp.2d ___ (W.D. Wash. March 30, 2009) [Slip Opn., at 7]. According to the allegations underlying the class action, defendants made six different statements that were false or misleading, each of which concerned guidance given to investors and expectations for earnings growth. Id., at 7-8. Defense attorneys moved to dismiss the class action on the grounds that it failed to satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA). Id., at 9. The district court granted defendants’ motion.

The federal court began by noting that “One obvious difficulty with Plaintiffs’ theory is that, from arch until mid-October, Zumiez not only met, but significantly exceeded, its prediction of ‘mid-single digit’ comparable-store sales growth.” In re Zumiez, at 12. The district court explained at page 12, “Therefore, to raise a credible inference that the Company’s predictions during this time period were false or misleading, Plaintiffs must allege facts to suggest not only that Defendants knew of undisclosed problems within the company, but that these known problems (1) would somehow not manifest a negative effect on earnings until the later quarters, and (2) were not taken into account when calculating the Company’s projected earnings. Plaintiffs allege hardly any such facts, much less facts sufficient to raise a strong inference of wrongdoing.” The court considered plaintiffs’ claim that five of Zumiez’s 2007 earnings projections were false or misleading, see id., at 12-20, but ultimately found that the class action complaint “completely failed to raise a ‘strong inference’ that Defendants knowingly made false or misleading earnings projections,” id., at 20. The district court also considered plaintiffs’ challenges to “two statements that could arguably be viewed as assertions regarding current business performance, rather than forward-looking statements”; specifically, an October 18, 2007, statement that “the Company was ‘on track’ to grow earnings by at least 30%,” and a November 29, 2007, statement that “the Company’s month-to-date comparable-store sales growth were in line with its fourth quarter projections.” Id., at 20. To be actionable, these statements required allegations in the class action complaint of “specific facts sufficient to raise a strong inference that Brooks made the statements with deliberate recklessness to investors,” id., at 20-21 (citation omitted), but the court found no evidence to support such an inference, see id., at 21-23. Accordingly, the district court dismissed the class action complaint with prejudice.

Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Sheer Size of Class Action Complaint for Securities Fraud Violations did not Defeat Motions to Dismiss because Class Action Allegations were “Verbose” but “Disordered” and Required “More Definite Statement” Washington Federal Court Holds

Three class action complaints were filed against dozens of defendants alleging securities fraud in connection with Washington Mutual home lending business; specifically, the class actions alleged violations of §§ 10(b) and 20(a) of the 1934 Securities and Exchange Act and Rule 10b-5 promulgated under § 10(b), and under §§ 11, 12(a)(2) and 15 of the 1933 Securities Act. The class actions were consolidated by the Judicial Panel on Multidistrict Litigation, lead plaintiff appointed, and a consolidated class action complaint filed. Among the more than three dozen defendants named in the consolidated class action were officers and directors, including outside directors, underwriters and investment banks, and accounting firms. In re Washington Mutual, Inc. Securities, Derivative & ERISA Litig., ___ F.Supp.2d ___ (W.D. Wash. May 15, 2009) [Slip Opn., at 1-3, 5]. The consolidated class action complaint was enormous, containing almost 400 pages (without exhibits), more than 1000 paragraphs, and citations to 89 confidential witnesses, id., at 5. The first 300 pages of the complaint consist of factual allegations of improper activity that claimed “(1) deliberate and secret efforts to decrease the efficacy of WaMu’s risk management policies…; (2) corruption of WaMu’s appraisal process…; (3) abandonment of appropriate underwriting standards for WaMu loans…; and (4) misrepresentation of financial results….” Id. Defense attorneys for various defendants filed five motions to dismiss the class action claims, id., at 1-2. And if plaintiffs believed that size alone would be sufficient to defeat a motion to dismiss, then they were mistaken: in the end, the district largely granted the motion to dismiss concluding that Counts One, Two and Three required “a more definite statement of the grounds for their claims,” and that Counts Four, Five and Six should be dismissed with respect to “claims regarding WaMu’s August 2006, September 2006, and December 2007 securities offerings.” Id., at 2. (The federal court denied the motion to dismiss Counts Four, Five and Six to the extent they concerned WaMu’s October 2007 securities offering. Id.)

We summarize only briefly the federal court’s 33-page opinion. It is worth noting that the district court characterized the massive class action complaint as a “verbose and disordered pleading,” and concluded that it “failed to organize and clearly identify allegations in support of each element of the 10(b) claims against each defendant” even though more than 280 page of the complaint were directed toward these claims. In re WaMu, at 8. Relying on the heightened pleading requirements established by the Private Securities Litigation Reform Act (PSLRA) which requires that “a plaintiff alleging securities fraud must ‘plead with particularity both falsity and scienter,’” id., at 15 (citation omitted), the district court found “Remarkably, Plaintiffs make no effort to connect a particular statement made by any defendant with allegations as to why that statement was false or misleading or with allegations of facts giving rise to a strong inference of scienter,” id., at 17. The federal court also observed at page 17, “The first 300 pages of the Complaint fail to organize and identify the allegations supporting securities fraud as to each defendant, contain no useful cross-references or paragraph citations to connect the relevant allegations, and appear to include numerous irrelevant allegations, thereby depriving Defendants of proper notice of the grounds for the 10(b) claims against them.”

Continue reading "WaMu Class Action Defense Cases–In re Washington Mutual: Washington Federal Court Dismisses Majority Of Securities Fraud Class Action Claims Finding 400-Page 1000-Paragraph Class Action Complaint Lacked Specificity" »

Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Defense Motion to Dismiss Securities Fraud Class Action Granted because Defendants had no Duty to Disclose Merger Discussions Prior before Definitive Merger Agreement Reached and because Anonymous Source Insufficient to Satisfy Heightened Pleading Requirements of PSLRA (Private Securities Litigation Reform Act) New York Federal Court Holds

Plaintiffs filed a class action against Bioenvision and certain officers and directors, and Perseus-Soros Biopharmaceutical Fund (Bioenvision’s largest pre-merger shareholder) alleging violations of federal securities laws; the class action complaint alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, against Perseus-Soros under section 13(d) of the Exchange Act, and against the individual defendants and Perseus-Soros under section 20(a). Vladimir v. Bioenvision Inc., ___ F.Supp.2d ___, 2009 WL 857552, *1 (S.D.N.Y. March 31, 2009). According to the allegations underlying the class action, “defendants artificially deflated the value of Bioenvision’s stock by issuing and by failing to correct or update statements that contained material misrepresentations and omissions as to Bioenvision’s plan to enter into a merger with Genzyme.” Id. Defense attorneys moved to dismiss the class action on the grounds that the allegations in the class action complaint failed to meet the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 (PSLRA). Id. Defendants further argued that “they had no duty to disclose the merger discussions until May 29, 2007, the date when the merger was announced publicly.” Id. Plaintiffs countered that defendants’ failure to disclose the plan to sell Bioenvision to Genzyme had the practical effect of artificially suppressing Bioenvision’s stock price, causing damage to plaintiffs because they sold their stock before the merger was officially announced (at which time the stock price skyrocketed). Id., at 4. Essentially, the “false and misleading” statements consisted of disclosing that its “primary focus” was the development of cancer treatments when its real focus was to find a merger partner. Id., at *5. The district court granted the defense motion and dismissed the class action complaint.

Cutting to the heart of the federal court’s analysis, the district court held that under Second Circuit authority “‘a corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact.’” Vladimir, at *7 (citation omitted). Put simply, “[t]here is no specific duty to disclose merger negotiations under SEC rules until they become definitive agreements.” Id. (citations omitted). And since there was no duty to disclose, defendants’ silence could not be deemed misleading. Id. (citation omitted). Plaintiffs argued that the parties had reached a “definitive agreement” to merge in January 2007, thus creating the duty to disclose. Id. But as this allegation was supported only by an anonymous source, it failed to satisfy the PSLRA’s heightened pleading requirements. Id., at *7-*8. Further, as the federal court observed, “Under plaintiffs’ proposed rule, any public company that publicly described its core business or strategy – which is to say, every public company – would be required to disclose potential or actual merger negotiations. Statements that do not raise the subject of mergers, even tangentially, cannot impose a duty to disclose all material information concerning merger discussions.” Id., at *10. The district court ultimately concluded that the allegations in the class action complaint did not plead fraud with particularity as required by Rule 9(b), and in any event do not support a duty to disclose. Id., at *12. Accordingly, the court granted the motion to dismiss by the Bioenvision defendants. Id., at *13.

Continue reading "Securities Fraud Class Action Defense Cases–Vladimir v. Bioenvision: New York Federal Court Grants Motion To Dismiss Securities Fraud Class Action Holding Class Action Complaint Failed To Meet Heightened Pleading Requirements Of PSLRA" »

Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Amended Securities Fraud Class Action Complaint Against Countrywide and Various other Defendants Largely Survives Motion to Dismiss because Allegations in Class Action Complaint Generally Satisfied Heightened Pleading Requirements of Private Securities Litigation Reform Act (PSLRA) and, as Matter of First Impression, SEC Rule 430B is not Retroactive California Federal Court Holds

Plaintiff filed a putative class action against Countrywide and certain individual defendants alleging violations of federal securities laws; the class action was one of “several related securities actions” in the district court involving Countrywide, underwriter defendants and outside directors. In re Countrywide Fin. Corp. Sec. Litig., ___ F.Supp.2d ___ (C.D.Cal. April 6, 2009) [Slip Opn., at 1-2]. Plaintiff’s class action was consolidated with several other class action lawsuits “involving publicly traded Countrywide securities.” Id., at 2. The district court appointed lead plaintiffs, and a consolidated amended class action complaint was filed, id. By prior court order, dated December 1, 2008, the amended class action complaint was dismissed in part, but the district court granted leave to amend and a second consolidated amended class action complaint was filed. Id. Defense attorneys for various defendants again moved to dismiss, id. The district court granted the motions in part, but largely denied the motions.

We do not discuss in detail the intensively detailed and fact-driven opinion. In broad terms, after summarizing recent Ninth Circuit authority, see In re Countrywide, at 3-5, and addressing certain evidentiary matters, see id., at 5-6, the district court turned to the merits, following the Ninth Circuit opinion in Glazer Capital Mgmt., LP v. Magistri, 549 F.3d 736 (9th Cir. 2008), which held that a securities fraud complaint must plead facts that constitute strong circumstantial evidence of scienter. The federal court summarily found that the accounting-related allegations against Countrywide, KPMG, and the Individual Defendants, as well as those against the Underwriters, in the second amended class action complaint were sufficient to satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA). Id., at 6. However, the same could not be said for the insider trading-related allegations: the district dismissed these claims in the original class action complaint, with leave, because of the “weak support” of scienter; the second amended class action complaint “does nothing to alter the insider trading-based scienter analysis” in the prior order, so the federal court dismissed the Section 20A claims with prejudice (except for the claims against Mozilo that post-date October 26, 2006). Id., at 6-7.

Continue reading "Countrywide Class Action Defense Cases–In re Countrywide: California Federal Court Grants In Part Motion To Dismiss Securities Fraud Class Action Claims And Holds SEC Rule 430B Not Retroactive" »

Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Securities Class Action Warranted Dismissal with Prejudice because Allegations in Second Amended Class Action Complaint Failed to Establish Duty to Disclose New York Federal Court Holds

Plaintiffs filed a class action against Authentidate Holding Corporation and individual defendants (collectively “Authentidate”) alleging violations of federal securities laws; the class action complaint asserted that defendants “failed to make proper disclosures regarding performance metrics in an agreement (‘the Agreement’) the Company had with the United States Postal Service to serve as the preferred provider of the Postal Service’s electronic postmark (‘EPM’), thereby artificially inflating the price of Authentidate common stock in order to, inter alia, attract capital and avoid insolvency.” In re Authentidate Holding Corp. Sec. Litig., ___ F.Supp.2d ___ (S.D.N.Y. March 23, 2009) [Slip Opn., at 1]. The class action alleged that defendants’ misconduct violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, id. Defense attorneys moved to dismiss the Consolidated Second Amended Securities Class Action Complaint for failure to meet the heightened pleading requirements established by the Private Securities Litigation Reform Act (PSLRA). Id. The district court determined that allegations in the class action complaint failed to satisfy the PSLRA and dismissed the class action with prejudice.

After summarizing the well established law governing Rule 12(b)(6) motions to dismiss securities class action complaints, see In re Authentidate, at 2-3, including Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955 (2007), the district court turned first to the duty to disclose and noted that for purposes of Section 10(b) “‘[s]ilence, absent a duty to disclose, is not misleading,’ Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988), and an omission is actionable under the securities laws only when the Defendant was subject to a duty to disclose.” Id., at 3 (additional citation omitted). The class action complaint alleged that defendants were under a duty to disclose Authentidate’s “low level of EPM sales and their continuing or likely failure to meet the revenue metrics.” Id. The federal court disagreed. First, it rejected the claim that Item 303 of SEC Regulation S-K (17 C.F.R. § 229.303) created a duty to disclose. See id., at 4-5. Item 303, entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations,” requires, inter alia, 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.” 17 C.F.R. § 229.303(a)(3)(ii). Id., at 4. Plaintiffs’ allegations that “virtually nonexistent EPM sales and the likely failure to meet upcoming revenue metrics were ‘known trends or uncertainties’” were not supported by “any particularized factual allegations making it plausible that these omissions caused any piece of existing ‘reported financial information’ to misleadingly indicate a specific future result or financial condition.” Id., at 5. This was particularly true since EPM sales were not “a significant percentage of the reported monthly revenues.” Id. (citation omitted).

Continue reading "PSLRA Class Action Defense Cases–In re Authentidate Holding: New York Federal Court Grants Motion To Dismiss Securities Class Action Holding Class Action Allegations Failed To Satisfy PSLRA" »

Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Securities Fraud Class Action Survives Motion to Dismiss because Class Action Complaint Adequately Alleged that Defendants Failed to Timely Discover and/or Disclose Material Adverse Information New York Federal Court Holds

Plaintiffs filed a class action against Arotech Corporation, a defense contractor, and three of its officers alleging violations of federal securities laws; the class action complaint violations Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and seeking to hold the individual defendants liable as “control persons” under Section 20(a) of the Act. Akerman v. Arotech Corp., ___ F.Supp.2d ___ (E.D.N.Y. March 30, 2009) [Slip Opn., at 1]. According to the allegations underlying the class action, defendants made materially false statements and withheld materials facts concerning Arotech’s financial condition, id. The class action centered on Arotech’s acquisition of Armour of America (AofA) in August 2004 for $19 million in cash “with additional possible earn-outs if AofA is awarded certain material contracts” up to a maximum of $40 million. Id., at 2-3. Arotech’s total revenue in 2003 was only $17.3 million, but its revenue in 2004 increased to $50.4 million, id., at 3-4. Defense attorneys moved to dismiss the class action complaint “principally on the grounds of materiality, scienter and particularity” as required by the Private Securities Litigation Reform Act (PSLRA). Id., at 1. The district court concluded that the class action complaint adequately alleged securities fraud.

The class action complaint cited various confidential witnesses who alleged that “Arotech’s pre-acquisition due diligence did not reveal all material information about AofA before the acquisition.” Akerman, at 4. In particular, the confidential witnesses cited the federal government’s cancellation of a substantial helicopter contract with AofA based on a “termination for default” (T4D), that is, the government’s belief that AofA had overstated the armor weight of the helicopters. Id., at 4-5. The T4D, together with stigma accompanying the T4D, created a “domino effect” at AofA that seriously impacted sales, id., at 5. The class action alleged that defendants had access to this information, despite the fact that AofA did not disclose it, id., at 5-6. Additionally details may be found in the district court opinion at pages 6 through 11.

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

Class Action Complaint Alleging Securities Laws Violations Failed to Satisfy Heightened Pleading Requirements of Private Securities Litigation Reform Act (PSLRA) California Federal Court Holds

Plaintiffs filed a class action against Downey Financial and certain current and former officers and directors alleging violations of federal securities laws; the class action complaint asserted that defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10(b)-5, and of Section 20(a) of the Act. In re Downey Securities Litig., ___ F.Supp.2d ___ (C.D.Cal. March 18, 2009) [Slip Opn., at 1-2]. The class action was consolidated with a similar class, and lead plaintiff filed a first amended consolidated class action complaint. Id., at 2. According to the allegations underlying the class action, “the decline in Downey’s shareholder value resulted from alleged misrepresentations made to the investing public by Downey’s current and former officers and/or directors, and not from the current economic climate,” id. Defense attorneys for the individual defendants moved to dismiss the class action, id., at 1-2; defendants argued that the complaint failed to meet the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA), id., at 4. The district court agreed and dismissed the class action.

After discussing the PSLRA, the district court turned to the misstatements or omissions attributed to the individual defendants. See In re Downey, at 4-5. The federal court noted that generally “only those defendants who actually make a false or misleading statement will be liable under section 10(b) or Rule 10(b)-5,” id., at 5 (citation omitted), but under Ninth Circuit authority “‘an individual may become a primary violator through “substantial participation or intricate involvement in the preparation of fraudulent statements” even if he did not actually make the statements,’” id., at 5-6 (citation omitted). And based on the Supreme Court opinion in Stoneridge Investment Partners, LLC v. Scientific-Atlantic, Inc., 128 S.Ct. 761 (2008), courts “dismiss actors (including insiders) who have not made any misleading statements, either explicitly or implicitly because plaintiffs could not prove reliance on their actions.” Id., at 6 (citation omitted). The district court found that the complaint failed to state claims against the individual defendants because “there is not a single actionable misrepresentation or omission in the 161 pages of the [class action complaint] attributed to the Individual Defendants.” Id. The district court further concluded that the class action complaint failed to adequately plead scienter. See id., at 8-15. And finally, the court found that plaintiff failed to adequately plead loss causation. See id., at 15-16.

Continue reading "PSLRA Class Action Defense Cases–In re Downey: California Federal Court Dismisses Securities Class Action Holding Class Action Complaint Failed To Adequately Plead Actionable Misrepresentations By Individual Defendants" »

Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Judicial Panel Grants Defense Request for Pretrial Coordination of Individual and Class Action Lawsuits Pursuant to 28 U.S.C. § 1407, Over Opposition of Majority of Plaintiffs, and Transfers Actions to Southern District of New York

Seventeen (17) individual and class actions – nine in New York, five Arkansas, two California and one in Arkansas – were filed against Lehman Brothers and various other defendants alleging that defendants had made materially false and/or misleading statements that negatively impacted the value of Lehman Brothers securities. In re Lehman Brothers Holdings, Inc., Securities & Employee Retirement Income Security Act (ERISA) Litig., ___ F.Supp.2d ___ (Jud.Pan.Mult.Lit. February 9, 2009) [Slip Opn., at 1]. Some of the class actions were “brought by securities holders seeking relief under the federal securities laws,” while other class actions were brought by “participants in Lehman Brothers’s retirement savings plans suing for violations of the Employee Retirement Income Security Act of 1974 [(ERISA)].” Id., at 2. Additionally, the Judicial Panel was advised that five related class actions had been filed, and it treated these class actions as potential tag-along lawsuits. Id., at 1 n.2. Defense attorneys for 10 of the individual defendants filed a motion with the Judicial Panel for Multidistrict Litigation (MDL) seeking centralization of the class actions pursuant to 28 U.S.C. § 1407 in the Southern District of New York, where 8 of the New York class actions were pending (with the remaining New York class action pending in the Eastern District); this motion was supported by responding defendants. Id., at 1. Plaintiffs in four of the class actions (3 in the Southern District of New York and the one in the Eastern District of New York) supported centralization of the other lawsuits, but requested that their actions “be coordinated, rather than consolidated, with the other actions in this litigation, because these plaintiffs’ actions (1) have distinct legal causes of action with different burdens of pleading and proof or (2) involve different types of securities.” Id. Plaintiffs in eight of the actions opposed centralization, “arguing that (1) their actions do not share sufficient questions of fact with the other actions in this litigation, and/or (2) motions to remand their actions to state court are pending.” Id.

The Judicial Panel granted the motion for centralization, finding that the individual and class actions involve common questions of fact and that “all actions can be expected to focus on a significant number of common events, defendants, and/or witnesses.” In re Lehman Brothers, at 1-2. Accordingly, pretrial centralization “will eliminate duplicative discovery; avoid inconsistent pretrial rulings, including on the issue of class certification; and conserve the resources of the parties, their counsel and the judiciary.” Id., at 2. The Panel rejected concerns the concerns of some plaintiffs that the MDL proceeding would be difficult to manage because some of the actions involve different types of securities or legal claims, finding that centralization will permit the parties to litigate the common issues “in a streamlined manner leading to the just and expeditious resolution of all actions to the overall benefit of the parties” and that the transferee court may permit litigation involving “non-common issues” to proceed on a parallel track. Id. The Judicial Panel also determined that the Southern District of New York was the appropriate transferee court “because (1) eight of the seventeen actions are already pending there, and (2) Lehman Brothers is headquartered in New York City and accordingly parties, witnesses and documents may be found there.” Id. Accordingly, the Panel ordered the lawsuits centralized in the Southern District of New York, id., at 2-3.

Posted In: Multidistrict Litigation, Class Action Court Decisions, PSLRA/SLUSA Class Actions

Class Action Premised on Violations of “Best Execution” Duty Fell within Scope of SLUSA (Securities Litigation Uniform Standards Act of 1998) so Properly Removed and then Properly Dismissed because Time-Barred and no Proof of Injury Seventh Circuit Holds

Plaintiffs, former investors in portfolio managed by Fidelity Management & Research and FMR Co. (collectively “Fidelity”), filed a class action in state court against Fidelity alleging violations of state law and breach of contract based on the allegation that “some of [Fidelity’s] employees placed trades through Jeffries & Co.” because “Jeffries bribed the employees to send business its way.” Kurz v. Fidelity Management & Research Co., ___ F.3d ___ (7th Cir. February 23, 2009) [Slip Opn., at 1-2]. The rules of the National Association of Securities Dealers (NASD) prohibit trading through a broker “paid under the table” as violative of the duty of “best execution,” that is, failing to get “the optimal combination of price, speed, and liquidity for a securities trade.” Id., at 2 (citation omitted). The conduct underlying the class action is covered by regulations under the Securities and Exchange Act of 1934, the Investment Advisers Act of 1940 (IAA) and the Investment Company Act of 1940 (ICA). Id. The SEC commenced proceedings against Fidelity under the IAA and the ICA, and Fidelity entered into a consent decree governing “how future trades will be placed and executed.” Id. In response to plaintiffs’ class action, Fidelity argued that the employee misconduct involved securities laws and, accordingly, removed the class action to federal court under the Securities Litigation Uniform Standards Act of 1998 (SLUSA). Id., at 2-3. In essence, defense attorneys argued that, according to the allegations in the class action, Fidelity “had either misrepresented that best execution would be achieved, or failed to disclose that best execution was not being achieved,” and that under either scenario “the wrong took place ‘in connection with the purchase or sale’ of covered securities because it affected trades in those securities (and potentially the net price obtained).” Id., at 3-4. Plaintiffs moved to remand the class action to state court; the district court agreed with Fidelity that the class action fell within the scope of SLUSA and denied the motion. Id., at 4. The district court subsequently entered judgment in favor of Fidelity on the class action complaint on the grounds that plaintiffs “filed suit after the federal statute of limitations had run and also was unable to show injury.” Id. The Seventh Circuit affirmed.

The Seventh Circuit first held that removal was proper. Plaintiffs argued that the class action was based on contract law, and that further the duty of “best execution” is not one “in connection with the purchase or sale” of securities; accordingly, plaintiffs insisted that the class action did not fall within the scope of SLUSA. Kurz, at 4. The Circuit Court concluded “[t]hat argument is frivolous,” id., at 4-5 (citations omitted). The Seventh Circuit recognized that a true contract claim would fall outside of SLUSA, but no contract existed in this case. Id., at 5. The class action complaint did not allege that Fidelity breached any promise to plaintiffs; rather, the class action asserted that plaintiffs were third-party beneficiaries of a contract between Fidelity and Jeffries. Id. Moreover, plaintiffs could not produce that contract, and the Circuit Court observed at page 5 that “for all we know none exists.” On the other hand, a securities law violation would support plaintiffs’ class action claims. Id., at 6. Put simply, “How Fidelity discharges its duties toward investors is a subject requiring disclosure under federal law.” Id. And even though Fidelity’s top managers and board did not know about the misconduct, and therefore could not have acted with the necessary scienter to support a securities liabilities claim, the individual employees did act with scienter and Fidelity may be derivatively liable for their misconduct. Id., at 6-7. In sum, the Seventh Circuit held that the district court correctly determined that plaintiffs had either a federal securities claim or nothing. Id., at 7. Assuming it was the former, plaintiffs’ class action advanced “a bad securities claim, given the expiration of the federal statute of limitations and the class’s inability to show loss causation.” Id. (citation omitted). Accordingly, the Circuit Court affirmed the judgment.

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

Judicial Panel Grants Defense Request for Pretrial Coordination of Class Action Lawsuits Pursuant to 28 U.S.C. § 1407, Opposed by Responding Class Action Plaintiffs, but Transfers Actions to Northern District of California

Three class actions – one each in California, Illinois and New York – were filed against Bank of America Investment Services, Inc.; Bank of America Securities, LLC; Bank of America Corp. (collectively “BofA”) alleging “that Bank of America entities and/or its employees made misrepresentations in the context of the sale of auction rate securities (ARS).” In re Bank of America Corp. Auction Rate Securities (ARS) Marketing Litig., ___ F.Supp.2d ___ (Jud.Pan.Mult.Lit. February 12, 2009) [Slip Opn., at 1]. Two additional class actions were filed in New York, and treated as potential tag-along matters, id., at 1 n.2. Defense attorneys filed a motion with the Judicial Panel for Multidistrict Litigation (MDL) requesting centralization of the class actions pursuant to 28 U.S.C. § 1407 in the Southern District of New York, id., at 1. Lead plaintiff in the California class action opposed the motion, or alternatively requested that the class actions be centralized in California; lead plaintiff in the Illinois class action also opposed centralization, or alternatively requested centralization of the class actions in Illinois. Id. The Judicial Panel granted the motion to centralize the class action lawsuits, id., at 2, but determined that the Northern District of California was the appropriate transferee court, id., at 3.

In opposing centralization of the class actions, plaintiffs’ lawyers argued: “(1) the actions do not share sufficient questions of fact; (2) there are only a few actions involved in the litigation, making voluntary coordination among the parties preferable to formal centralization; and (3) centralization of the actions to which the Private Securities Litigation Reform Act of 1995 (PSLRA) applies with the Independence Tube action (to which, plaintiffs assert, the PSLRA does not apply) will slow the progress of the latter action.” In re BofA, at 1-2. The Judicial Panel disagreed, explaining at page 2, “All actions possess a common factual core regarding Bank of America’s role in selling ARS. In particular, plaintiffs in all actions allege that…Bank of America failed to disclose that (1) ARS were not cash alternatives similar to money market funds, and (2) the ARS sold by Bank of America were only liquid because, at the time of sale, Bank of America and other broker-dealers artificially supported and manipulated the market to maintain the appearance of liquidity and stability. Transfer of these related actions under Section 1407 will foster a pretrial program that: (1) allows pretrial proceedings with respect to any non-common issues to proceed concurrently with pretrial proceedings on common issues, [citation]; and (2) ensures that pretrial proceedings will be conducted in a streamlined manner leading to the just and expeditious resolution of all actions to the overall benefit of the parties.” The Panel selected the Northern District of California without analysis, id., at 2-3.

Posted In: Multidistrict Litigation, Class Action Court Decisions, PSLRA/SLUSA Class Actions

Securities Fraud Class Action Claims Against Accountants Properly Dismissed for Failure to Plead Scienter Required by Private Securities Litigation Reform Act (PSLRA) because Evidence Showed Company Concealed Information from Accountants Fourth Circuit Holds

Plaintiffs filed a class action against various defendants alleging securities fraud violations; the class action complaint alleged that Royal Ahold, N.V., a Dutch corporation, and U.S. Foodservice, Inc. (USF), a Maryland-based Ahold subsidiary, engaged in improper accounting practices. Public Employees' Retirement Ass’n of Colorado v. Deloitte & Touche LLP, 551 F.3d 305, 306 (4th Cir. 2009). The class action also alleged that Ahold’s accountants, Deloitte & Touche LLP (Deloitte U.S.) and Deloitte & Touche Accountants (Deloitte Netherlands) – which are two legally distinct entities, participated in Ahold’s alleged fraud, id. Defense attorneys for the Deloitte defendants moved to dismiss the class action on several grounds, including for failure to satisfy the heightened pleading requirements established by the Private Securities Litigation Reform Act (PSLRA). In pertinent part, the PSLRA requires that plaintiffs plead facts alleging a “strong inference” that the defendant in a securities fraud lawsuit acted with the requisite scienter. Id., at 306. The district court granted the defense motion and dismissed the class action complaint as to the Deloitte defendants without leave to amend, id., at 307-08. The Fourth Circuit affirmed, finding “the inference that the Deloitte defendants lacked the necessary scienter more compelling than any competing inference that they knowingly or recklessly perpetrated a fraud on Ahold's investors” and that the proposed second amended class action complaint was futile. Id., at 306.

We do not here discuss in detail the nature of the improper accounting practices underlying the class action claims. See Deloitte, at 306-08. In brief, the two frauds Ahold alleged perpetrated involved (1) the improper consolidation of revenue from various joint ventures, in violation of GAAP, that resulted in substantial overstatement of earnings, and (2) the premature recognition of income from promotional allowances. Id., at 307. The actions led Ahold to restate earnings for fiscal years 2001 and 2002, and revealed that Ahold’s accounting practices had overstated earnings by more than $500 million. Id. The announcement led to a 60% drop in stock price, and to SEC civil enforcement actions against Ahold and various individual defendants. Id. Moreover, at least 21 private class action lawsuits were filed alleging securities fraud, and the Judicial Panel on Multidistrict Litigation centralized the class actions for pretrial purposes in the District of Maryland, id. The district court appointed Public Employees' Retirement Association of Colorado and Generic Trading of Philadelphia, LLC as Lead Plaintiffs, and a Consolidated Amended Securities Class Action Complaint was filed against Ahold entities, the Deloitte defendants, and others. Id. Lead Plaintiffs settled the class action as to the non-Deloitte defendants, and then filed a motion to amend the class action complaint to assert new claims against the Deloitte defendants. Id., at 308. The district court denied the motion on the basis of futility, and the Fourth Circuit affirmed.

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Securities Class Action Claims Meritless because GMAC’s Representations Concerning Its Bonds were not False or Misleading and GMAC was not Required to Learn and Disclose Information Concerning the Financials of its Parent Company GM Sixth Circuit Holds

Plaintiffs, as purchasers of bonds registered by GMAC, filed a class action against GMAC, GM and others alleging violations of federal securities laws; specifically, the class action complaint advanced claims under Sections 11 and 12(a)(2) of the Securities Act of 1933, and that GMAC failed to disclose required information and made material misstatements in its registration statements and prospectuses for various bond offerings. J & R Marketing, SEP v. General Motors Corp., 549 F.3d 384, 387 (6th Cir. 2008). According to the allegations underlying the class action, GMAC's offering materials filed violated Sections 11 and 12(a)(2) of the Securities Act of 1933 because they contained “material omissions and misstatements” by failing to disclose GM’s (in addition to GMAC’s) performance and credit rating, even though matters adversely affecting GM could also adversely affect GMAC’s credit rating. Id., at 388. The class action also alleged that GMAC materially misstated its 2004 financial results, id. Defense attorneys moved to dismiss the class action for failure to state a claim; the district court granted the motion and dismissed the class action, finding that plaintiffs lacked standing to prosecute class action claims on behalf of purchasers of bonds which plaintiffs themselves had not purchased. Id., at 387. Additionally, the district court held that the non-disclosure claim failed because defendants were not required to disclose the information at issue, and because GMAC’s statements were not misleading and were not false, id. Accordingly, the district court dismissed the class action complaint. Id. The Sixth Circuit affirmed because it found “that the named plaintiffs' own claims are without merit,” id.

Briefly, GMAC borrowed money from several sources, including the general public through publicly offer debt securities. J & R Marketing, at 387. “The debt securities had a coupon rate, which is the rate of interest GMAC would pay, as well as a yield, which was the payments GMAC would make over the life of the security not including the return of the principal. At the time the last interest payment was due, GMAC would return the principal to the investor.” Id., at 387-88. The class action plaintiffs had purchased “Second SmartNotes,” which were bonds registered by GMAC in September 2003, but the class action sought to define a class of all investors who purchased GMAC bonds sold from July 2003 through November 2005 “alleg[ing] that GMAC's conduct similarly injured all members of the purported class.” Id., at 388. According to plaintiffs, once GM’s financial risks became known, its credit rating fell, as did GMAC’s credit rating, id. Defense attorneys argued that the named plaintiffs lacked standing to prosecute the class action as to any bonds other than those purchased by them, and that the offering materials concerning the Second SmartNotes did not contain material omissions or misstatements. Id., at 388-89. The district court granted the motion and dismissed the class action, id., at 389. The Sixth Circuit affirmed, but it did not address the standing issue because it found that plaintiffs’ class action claims lacked merit. Id., at 389-90.

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Summary Judgment as to Securities Fraud Claims against Various Deloitte Entities Denied because Genuine Issues of Fact Existed as to Liability for Claims in Class Action Complaint New York Federal Court Holds

Following the collapse of Parmalat Finanziaria, S.p.A., Parmalat S.p.A. and their affiliates because of a multi-billion dollar fraud that understated Parmalat’s debt by $10 billion and overstated Parmalat’s assets by $16 billion, various securities fraud class actions were filed against numerous parties: one such class action was filed against Deloitte Touche Tohmatsu (DTT), Deloitte & Touche LLP (DT-US), and James Copeland (collectively “Deloitte defendants”) on behalf of purchasers of Parmalat stock. In re Parmalat Securities Litig., ___ F.Supp.2d ___ (S.D.N.Y. January 27, 2009) [Slip Opn., at 2]. The class action alleged violations of Section Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and of Rule 10b-5 thereunder, id., at 2-3. Defense attorneys moved for summary judgment as to the class action claims against the Deloitte defendants, id., at 2. Alternatively, the defense argued that the Deloitte defendants were not jointly and severally liable under the Private Securities Litigation Reform Act of 1995 (PSLRA), id., at 8.

We do not here discuss Deloitte’s corporate structure, or the Parmalat scandal and the alleged fraud of Deloitte Italy. See In re Parmalat, at 3-7. In a detailed opinion, the federal district court first rejected the defense challenge to DTT’s vicarious liability, on a respondeat superior theory, for the federal securities class action claims arising out of the acts of its alleged agent, Deloitte Italy. See id., at 9-11. The question was whether DTT had a principal-agent relationship with Deloitte Italy, id., at 12, and the district court found that a triable issue of material fact existed as to whether it did, see id., at 12-19. As the court concluded at page 19, “In all the circumstances, the totality of the evidence…raises a genuine issue of material fact as to whether Deloitte Italy was an agent of DTT with respect to the Parmalat engagement.” It accordingly denied DTT’s motion for summary judgment as to those class action claims premised on respondeat superior liability for Section 10(b) violations. Id., at 19. Turning to the class action’s Section 20(a) claim against DTT, defense attorneys argued that “there is no evidence that would justify a conclusion that it controlled the alleged primary violator, Deloitte Italy,” and that in any event DTT is not liable because it “acted in good faith and did not induce the act or acts constituting the alleged violations.” Id., at 19-20. Again, the federal court found a genuine issue of material fact existed as to whether DTT was a “control person” within the meaning of Section 20(a), id., at 20-21, and that it could not find, as a matter of law, that DTT acted in good faith, see id., at 21-25.

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

District Court Properly Dismissed Securities Fraud Class Action Against JP Morgan Chase because Misrepresentations Underlying Class Action were not Material and Class Action Failed to Adequately Allege Scienter under Heightened Pleading Requirements Established by Private Securities Litigation Reform Act (PSLRA) Second Circuit Holds

Plaintiffs filed a class action against JP Morgan Chase (JPMC) and two of its officers alleging violations of federal securities laws; the class action complaint asserted that defendants “defrauded JPMC shareholders by making deliberate misrepresentations that artificially inflated the price of JPMC stock and ultimately led to a collapse of JPMC’s share price.” ECA v. JP Morgan Chase Co., ___ F.3d ___ (2d Cir. January 21, 2009) [Slip Opn., at 4]. More specifically, the class action alleged that JPMC “created disguised loans for Enron and concealed the nature of these transactions by making false statements or omissions of material fact in its accounting and Securities and Exchange Commission (SEC) filings.” Id. “JPMC created ‘Special Purpose Entities,’ among them an entity called Mahonia Ltd., to facilitate disguised loan transactions with Enron Corporation.” Id. “Following the collapse of Enron, however, the Senate investigated JPMC’s role in Enron’s fraudulent practices and concluded that JPMC had knowingly engaged in and actively assisted Enron in its sham transactions; the resulting disclosures caused JPMC’s stock to suffer significant losses.” Id., at 5. Defense attorneys moved to dismiss the class action for failure to meet the heightened pleadings requirements established by the Private Securities Litigation Reform Act (PSLRA); the district court dismissed the class action because it found that the class action complaint “failed to plead with the requisite particularity that JPMC made a materially false statement or omitted a material fact, with scienter.” Id., at 6. In particular, the district court found that plaintiffs adequately pleaded scienter only as to the “alleged improper accounting of the Mahonia transactions as trades rather than loans,” but found further that “the allegedly improper accounting of the Mahonia transactions as trades rather than loans was not material.” Id., at 6. Plaintiffs filed an amended class action complaint that included new allegations concerning “(1) JPMC’s alleged downplaying of its Enron-related exposure, (2) JPMC’s alleged misrepresentation of its integrity and risk management, and (3) the allegedly faulty reporting of the Mahonia transactions.” Id., at 7. Defense attorneys again moved to dismiss the class action, and the district court again granted the motion. See id., at 7-9. The Second Circuit affirmed.

The Second Circuit’s opinion provides a detailed discussion of the applicable law. See ECA, at -11-16. With respect to JPMC’s allegedly false financial reports, plaintiffs argued that defendants’ GAAP violations created a presumption that the financial statements were misleading, id., at 16-17. The Second Circuit agreed with plaintiffs that they had adequately alleged that JPMC and Mahonia were “related” and that they adequately alleged false or misleading statements by defendants, id., at 17, but the Court found the class action complaint failed to adequately allege scienter, id., at 17-25. The Circuit Court agreed with the district court’s finding that the class action “fail[s] to allege facts explaining why, if it was aware of Enron’s problems, [JPMC] would have continued to lend Enron billions of dollars,” id., at 25 (citation omitted), explaining at page 25 that “Even if JPMC was actively engaged in duping other institutions for the purposes of gaining at the expense of those institutions, it would not constitute a motive for JPMC to defraud its own investors.” The Court further rejected plaintiffs’ claim that JPMC disguised its loans to Enron as “trading activities,” id., at 25-30, agreeing with the district court that even assuming JPMC should have treated the prepaid transactions as trades rather than as loans was immaterial, id., at 25-26. Accordingly, “Because Plaintiffs have failed to adequately plead that JPMC made a materially false statement or omitted a material fact with scienter,” the district court properly dismissed the class action complaint. Id., at 33.

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Securities Fraud Class Action Complaint Failed to Adequately Plead Strong Inference of Scienter Required by Private Securities Litigation Reform Act (PSLRA) because Defense Presented Compelling Inference that Company Refused to Disclose Details of Phase III Drug Trials for “Competitive Reasons,” thereby Supporting District Court Order Dismissing Class Action Complaint Without Leave to Amend Fourth Circuit Holds

Plaintiffs filed a class action against Inspire Pharmaceutical and three of its directors (collectively “Inspire”), as well as other defendants, alleging violations of federal securities laws; the class action complaint asserted that Inspire “overstat[ed] the prospects for an experimental drug that the company was developing to treat dry eye disease.” Cozzarelli v. Inspire Pharmaceuticals Inc., 549 F.3d 618 (4th Cir. 2008) [Slip Opn., at 2]. Specifically, the class action alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and of Rule 10b-5, as well as violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. See id., at 6. Defense attorneys moved to dismiss the class action on the ground that the allegations in the class action complaint failed to meet the heightened pleading requirements established by the Private Securities Litigation Reform Act of 1995 (PSLRA), and the Supreme Court’s decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd., ___ U.S. ___, 127 S.Ct. 2499 (2007). See id., at 2-3 and 6-7. Specifically, Inspire argued that plaintiff’s class action complaint failed to raise the requisite “strong inference of scienter,” id., at 6, or that defendants had made false or misleading statements, id., at 7. The magistrate recommended that the motion be granted, and the district court dismissed the class action. Id., at 6-7. The Fourth Circuit affirmed.

In brief, Inspire had reached Phase III trials of its drug diquafosol tetrasodium, but while the study showed that the drug objectively resulted in substantial improvement of dry eye disease, the company failed to achieve its second primary goal, or “endpoint,” in that patients did not report subjective feelings of improvement. See Inspire, at 3-4. The FDA gave Inspire two options: (1) “conduct two additional trials that met both an objective endpoint and a subjective endpoint,” or (2) “conduct one additional trial that replicated – this time as a primary endpoint – the corneal clearing that Inspire achieved” in its prior study. Id., at 4. Inspire chose the second option but was “tight-lipped” about details of its new study, id., at 5. Inspire made several “generic” comments about its new study, including that it was “very similar” to the prior study and that it was a “confirmatory” Phase II trial, id. Additionally, some stock analysts “speculated that the primary endpoint of [the new study] was only a relative improvement in corneal staining scores and that [the new study] was likely to meet that endpoint.” Id. In point of fact, however, the new study failed to meet its primary endpoint, and Inspire’s stock plunged 44.5% on the news. Id., at 6. Plaintiffs’ class action complaint followed, id.

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Securities Class Action Complaint Properly Dismissed because Class Action Failed to Satisfy Heightened Pleading Requirements under Private Securities Litigation Reform Act (PSLRA) Ninth Circuit Holds

Plaintiffs filed a class action against InVision Technologies and two of its officers alleging violations of federal securities law; the class action complaint arose because after InVision announced that it had entered into a merger agreement with General Electric, the company disclosed that the merger may not occur because of the discovery of potential violations of the Foreign Corrupt Practices Act causing an immediate drop in InVision’s stock price, even though the merger eventually went through. Glazer Capital Management, LP v. Magistri, 549 F.3d 736 (9th Cir. 2008) [Slip Opn., at 15765-66]. The class action alleged that defendants violated Section 10(b) of the Securities Exchange Act of 1934, as well as Rule 10b-5. Id., at 15768. Defense attorneys moved to dismiss the class action for failure to plead adequately falsity or scienter under the heightened standards established by the Private Securities Litigation Reform Act (PSLRA); the district court granted the motion and dismissed the class action complaint. Id., at 15766. (Plaintiffs had amended the class action complaint twice, but the district court denied them leave to file a third amended class action complaint. See id., at 15768.) The Ninth Circuit affirmed.

We do not discuss here the facts detailed in the Circuit Court’s opinion, see Glazer Capital, at 15766- 68. The pertinent facts are that, after announcing the merger agreement, (1) “on July 30, 2004, InVision issued a press release stating that an internal investigation had revealed possible violations of the FCPA in connection with certain foreign sales transactions,” and (2) “InVision announced that it had voluntarily reported the activities to the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ), but warned that subsequent investigations could potentially delay or terminate the merger.” Id., at 15767. InVision’s stock price plummeted on the news, and only a few days later the class action complaint was filed. Id. Within a few months, InVision settled with DOJ and with the SEC, and the merger with GE went through. Id., at 15767-78.

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

Securities Fraud Class Action Properly Dismissed by District Court because Class Action Complaint Failed to Adequately Allege Failure to Disclose and because Class Action Complaint Failed to Create Strong Inference of Scienter Sixth Circuit Holds

Plaintiffs filed a class action against Visteon Corporation and certain officers and directors of Visteon, and against its outside auditor, Pricewaterhousecooper, alleging violations of federal securities law; specifically, the class action complaint asserted claims for violations of § 11 of the Securities Act of 1933, § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and § 20(a) of the Exchange Act. Ley v. Visteon Corp., 543 F.3d 801, 804-05 (6th Cir. 2008). The class action complaint followed the disclosure by Visteon of “$108 million in accounting errors which understated net losses by in excess of $60 million,” id., at 805. According to the class action, this disclosure “shocked the market” and caused Visteon’s stock to drop dramatically. Id., at 804-05. Defense attorneys moved to dismiss the class action complaint, id., at 804. Defense attorneys moved to dismiss the class action’s § 11 claim as barred by the statute of limitations, id., at 806. The defense motion as to the remaining class action claims focused on the failure of the class action complaint to meet the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 (PSLRA). The district court granted the motion and dismissed the class action complaint in its entirety, id., at 805. Plaintiffs appealed but did not challenge the dismissal of the class action’s § 11 claim, id., at 806; accordingly, the Sixth Circuit affirmed that portion of the district court’s order without discussion and focused its analysis only on the remaining claims. The Sixth Circuit affirmed.

After discussing briefly the rules governing its review of the dismissal of the class action complaint, see Ley, at 805-06, the Sixth Circuit summarized the law governing securities fraud claims and the heightened pleading requirements necessitated by the PSLRA, see id., at 806-07. The § 10(b)/Rule 10b-5 class action claim against Visteon alleged that it failed to disclose certain information; specifically, Visteon, a spin-off of Ford Motor, “failed to disclose that ‘Ford so dominated the day to day business affairs of Visteon via the contracts between the two and beholden Visteon management, such that Visteon was essentially no more than a repository for operations of Ford that had built in losses.’” Id., at 807. In the words of the Circuit Court, “Essentially, Plaintiffs argue that Defendants failed to adequately disclose that Visteon may have difficulty shedding unprofitable business lines.” Id. The Sixth Circuit disagreed finding the company’s disclosure to be “rife with such information.” Id. And the Circuit Court similarly rejected plaintiffs’ other claims regarding Visteon’s failure to disclose material information, see id., at 807-08. In fact, the Court found that defendants made numerous disclosures and that Visteon was under no duty to disclose information relative to its competitors, id., at 808. As the Sixth Circuit explained at page 808:

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Securities Fraud Class Action Properly Dismissed for Failure to Adequately Plead Falsity and Scienter because Allegations in Class Action Complaint did not Meet Heightened Pleading Requirements Under Private Securities Litigation Reform Act of 1995 (PSLRA) Eighth Circuit Holds

Plaintiffs filed a class action against Centene Corporation and three of its officers alleging violations of federal securities law; the class action complaint alleged violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and of Rule 10b-5. Elam v. Neidorff, 544 F.3d 921, 924-25 (8th Cir. 2008). The class action centered on the company’s estimates of costs that had been “incurred but not reported” (IBNR). According to the class action, Centene – a “healthcare enterprise that primarily provides programs and related services to individuals receiving benefits under Medicaid,” acted as “an intermediary between the government and Medicaid recipients in the states” and “receive[d] a monthly amount for each Medicaid recipient in its plan and, in turn, [paid] for the recipient's healthcare services.” Id., at 925. In filing its quarterly reports, the company “include[d] not only the costs incurred and billed during the quarter but also an estimate of medical costs that have been incurred but not reported (IBNR).” Id. Centene’s calculation of IBNR was necessarily an educated guess: it represented “an estimate of claims liability because some medical events occur before the end of a given reporting period (and Centene is therefore liable to pay them) but have not yet been formally billed to the company,” and Centene calculated the estimate “on a monthly basis employing various factors, including in-patient hospital utilization dates and prior claims experience.” Id. Moreover, “Independent actuaries review Centene's quarterly estimates.” Id. In April 2006, Centene filed its Form 10-Q with the SEC and issued a press release that “were positive and in line with analyst estimates,” and providing positive guidance for the second quarter as well as the balance of the year. Id., at 925-26. In July 2006, the company disclosed that second quarter earnings would be “substantially lower than expected,” and this securities fraud class action complaint soon followed. Id., at 926. Defense attorneys moved to dismiss the class action complaint on the grounds that it failed to satisfy the heightened pleading requirements established by the Private Securities Litigation Reform Act of 1995 (PSLRA); the district court granted the motion and dismissed the class action “finding that plaintiffs failed to allege facts demonstrating that defendants had misrepresented a material fact or acted with scienter.” Id., at 926. The Eighth Circuit affirmed.

After summarizing the “heightened pleading requirements” imposed by the PSLRA on securities fraud cases (class action and non-class action), Elam, at 926-27, the Eighth Circuit turned its attention to plaintiffs’ claim that the class action complaint “sufficiently alleges both falsity and scienter, satisfying the elevated pleading standard for their securities fraud class action,” id., at 927. The Circuit Court held that the mere fact defendants “monitored” its medical costs was insufficient under the PSLRA to establish that defendants knew of information that contradicted any of the financial statements they made, id. The Eighth Circuit refused plaintiffs’ invitation to infer that defendants’ statements were false “based solely on defendants’ representations as to their ability to estimate medical costs.” Id. On the contrary, the PSLRA's heightened pleadings standards requires that falsity be pleaded with particularity, and this requirement “cannot be satisfied with allegations that defendants made statements ‘and then showing in hindsight that the statement is false.’” Id. (quoting In re Navarre Corp. Sec. Litig., 299 F.3d 735, 743 (8th Cir. 2002)). Plaintiffs’ failure to “point to any contemporaneous reports, witness statements, or any information that had actually been provided to defendants as of April or June that indicated that Centene would need to increase estimated medical costs” was fatal to the class action. Id. (citation omitted). The Circuit Court therefore affirmed the district court’s conclusion that falsity had not been adequately pleaded. Id., at 927-28.

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Securities Fraud Class Action Properly Dismissed without Leave to Amend because Class Action Failed to Plead Loss Causation, Scienter or Falsity with Specificity Required by Private Securities Litigation Reform Act (PSLRA) Ninth Circuit Holds

Plaintiff filed a putative class action against Corinthian Colleges (one of the nation's largest operators of private for-profit vocational colleges) and three of its officers, alleging violations of federal securities laws; specifically, the securities fraud class action alleged violations of §§ 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5. Metzler Investment GMBH v. Corinthian Colleges, Inc., 540 F.3d 1049, 1055 (9th Cir. 2008). According to the class action complaint, “Corinthian's colleges are pervaded by fraudulent practices designed to maximize the amount of federal Title IV funding – a major source of Corinthian's revenue-that those schools receive.” Id. (footnote omitted). Defense attorneys moved to dismiss the class action for failure to meet the heightened pleadings requirements of the Private Securities Litigation Reform Act of 1995 (PSLRA); the district court granted the motion but dismissed the class action complaint with leave to amend. Id., at 1060. Plaintiff filed an amended class action complaint, and defense attorneys again moved to dismiss for failure to meet the PSLRA’s heightened pleading requirements. Id. The district court granted the motion and dismissed the class action without leave to amend, id. The Ninth Circuit affirmed.

We do not here discuss the class action complaint in detail: a detailed summary may be found at pages 1055 through 1059 of the opinion. The Ninth Circuit summarized the class action’s allegations of fraud as including “a variety of false or deceptive schemes: falsifying financial aid applications to obtain federal funds and increase federal award entitlements; encouraging students to falsify federal student aid forms themselves; manipulating student enrollment by counting students not yet enrolled (referred to in the [class action complaint] as ‘false starts’); manipulating or falsifying student grades to maintain federal funding eligibility; exposing the company to bad debt in order to meet regulatory requirements for continued federal funding; delaying notification to federal officials of dropped students and delaying refunds to the federal government after students had dropped; and manipulating job placement data in order to satisfy federal and state regulatory requirements.” Metzler Investment, at 1055. The fraud allegations were based on information from confidential witnesses – “former Corinthian employees that served at numerous campuses in differing capacities” including” campus presidents, admissions officials, financial aid officers, and IT and accounting personnel.” Id., at 1056. The class action complaint relied also on government investigations and private litigation that allegedly confirmed Corinthian's practices, and noted that certain States had revoked, or were threatening to revoke, Corinthian’s accreditation. Id. With respect to scienter, the class action relied on (1) “suspicious stock sales” totaling more than $33 million by two of the individually-named officers, (2) “Corinthian's ‘hands on’ management and tracking of student data and information,” to suggest that “Corinthian's management must have known about underlying fraudulent conduct to achieve maximum federal funding at various schools,” and (3) the allegation that Corinthian’s corporate officers knew that its early revenue recognition practices – “crediting a full month's worth of tuition regardless of whether a student started at the beginning or end of that particular month” – was improper. Id., at 1058. The bottom line is that the alleged fraud purportedly violated GAAP and inflated Corinthian’s stock price, id., at 1056.

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Class Action Claims Against Merrill Lynch Preempted by SLUSA (Securities Litigation Uniform Standards Act of 1998) because Pension Manager Lawsuit Constituted “Covered Class Action” under SLUSA Eleventh Circuit Holds

Plaintiff, a quasi-governmental agency that manages pension funds for armed forces personnel, filed a putative class action in Florida state court against Merrill Lynch alleging violations of various Florida state laws; it filed separate class action lawsuits against Lehman Brothers and against Pension Fund of America (PFA). Instituto de Prevision Militar v. Merrill Lynch, 546 F.3d 1340, 2008 WL 4723777, *1-*2 (11th Cir. 2008). According to the class action complaint, plaintiff was solicited by Pension Fund of America (PFA) to deposit pension funds with Merrill Lynch in a retirement trust account; believing PFA was the agent of Merrill Lynch, plaintiff invested almost $8 million in PFA through Merrill, id., at *2. The class action alleged further that PFA was carrying out an embezzlement and money laundering scheme, and at the time the class action was filed PFA could not account for almost $3 million of the funds plaintiff invested in it through Merrill Lynch. Id. Defense attorneys moved to dismiss the class action on the grounds that plaintiff’s claims were preempted by the federal Securities Litigation Uniform Standards Act (SLUSA); plaintiff opposed dismissal, arguing that the class action complaint was not a “covered class action” within the meaning of SLUSA. Id., at *3. The district court granted the motion and dismissed the class action. Id. The Eleventh Circuit affirmed.

The Eleventh Circuit explained that “[t]he central question presented on appeal is whether [SLUSA] bars [plaintiff] from pursuing state law claims against Merrill Lynch & Co. and its affiliates for their role in a fraud committed on [plaintiff] by [PFA], a non party to this action.” Instituto, at *1. The Circuit Court summarized the class action as one that arose out of PFA’s theft of funds that it was supposed to have invested, and that sought to hold Merrill Lynch liable under Florida state law for PFA’s fraud “because it allowed PFA to hold itself out as Merrill Lynch’s agent, and because it failed to stop PFA from misappropriating [plaintiff’s] funds.” Id. However, “Congress enacted the Securities Litigation Uniform Standards Act to ensure that securities fraud class actions were brought under federal law.” Id. The district court granted the defense motion to dismiss because it found plaintiff’s class action was a “covered class action” within the meaning of SLUSA. Id. The Circuit Court focused its analysis on whether that determination was correct, see id., at *4, and concluded that it was, id., at *6. The Eleventh Circuit further held that each of the four elements required for SLUSA preclusion had been met by Merrill Lynch. See id., at *6-*10.

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

“Core-Operations Inference” Insufficient Alone to Support PSLRA’s Heightened Pleading Requirements for Scienter in Securities Fraud Class Action Ninth Circuit Holds

Plaintiffs filed a putative class action against Washington Mutual and individual officer defendants alleging securities law violations; specifically, the class action complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. South Ferry LP, # 2 v. Killinger, 542 F.3d 776, 779 (9th Cir. 2008). The class action “relate[d] to several related aspects of WAMU's mortgage lending business.” Id., at 780. The class action focused on two types of risks: the first involved the mortgage servicing rights (MSR) related risk that WAMU would lose revenue “due to the pre-payment of loans that it services”; the second involves a “pipeline risk” that WAMU will “commit to fund a loan at a certain interest rate only to see market interest rates change by the time the loan is finalized.” Id. According to the class action complaint, “the individual defendants made materially false or misleading statements concerning WAMU's ability to manage MSR-related and pipeline risk during the class period.” Id. Defense attorneys moved to dismiss the class action for failure to meet the heightened pleading requirements under the Private Securities Litigation Reform Act (PSLRA). Id., at 779. The district court granted the motion as to certain defendants, but denied the motion as to others; it found plaintiff met the heightened pleading requirements of the PSLRA “by inferring that the remaining defendants had knowledge of WAMU's difficulties with their information systems ‘because of the nature of the statements they [Defendants] were making and the nature of these specific alleged operational problems,’” id., at 781 (quoting In re Northpoint Communications Group, Inc. Securities Litig., 184 F.Supp.2d 991, 998 (N.D. Cal. 2001)). In short, the district court believed “that it may be inferred that facts critical to a business's ‘core operations’ or important transactions are known to key company officers,” id. Defense attorneys filed an interlocutory appeal, and the Ninth Circuit reversed.

The issue on appeal was “whether a scienter theory that infers that facts critical to a business's ‘core operations’ or an important transaction are known to a company's key officers satisfies the PSLRA's heightened pleading standard.” South Ferry, at 783. After reviewing its prior cases on the subject, see id., at 783-84, the Ninth Circuit explained at page 784 that plaintiffs argued that while not adequate in and of itself to satisfy the scienter requirement of the PSLRA, “the core-operations inference can be one relevant part of a complaint that raises a strong inference of scienter.” The Ninth Circuit concluded, “Where a complaint relies on allegations that management had an important role in the company but does not contain additional detailed allegations about the defendants' actual exposure to information, it will usually fall short of the PSLRA standard.” Id., at 784. Moreover, “a general matter, ‘corporate management's general awareness of the day-to-day workings of the company's business does not establish scienter-at least absent some additional allegation of specific information conveyed to management and related to the fraud’ or other allegations supporting scienter.” Id., at 784-85 (citation omitted).

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Securities Fraud Class Action Failed to Adequately Allege Scienter under Heightened Pleading Requirements of the Private Securities Litigation Reform Act (PSLRA) so District Court Properly Granted Defense Motion to Dismiss Class Action Complaint Eighth Circuit Holds

After Ceridian Corporation publicly disclosed accounting errors that “necessitated multiple amendments and restatements of its published financial statements,” the SEC opened an investigation into the company’s accounting practices and “numerous class action complaints were filed against Ceridian and three former corporate officers.” In re Ceridian Corp. Securities Litig., 542 F.3d 240, 243 (8th Cir. 2008). The class actions alleged securities fraud in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5. Id. The class actions were consolidated, and defense attorneys moved to dismiss the consolidated class action complaint for failure to “state with particularity facts giving rise to a strong inference that the defendant[s] acted with the required state of mind,” as required by the Private Securities Litigation Reform Act (PSLRA). Id. The district court granted the motion and dismissed the class action. Relying on the Supreme Court’s opinion in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499 (2007), id., at 244, the Eighth Circuit affirmed.

The Eighth Circuit recited the well-settled heightened pleading requirement, including “the required state of mind,” established by the PSLRA. In re Ceridian, at 244. The Circuit Court noted that scienter may be established through “proof of severe recklessness, that is, ‘highly unreasonable omissions or misrepresentations that ... present a danger of misleading buyers or sellers which is either known to the defendant, or is so obvious that the defendant must have been aware of it.’” Id. (citation omitted). The Eighth Circuit observed that under Tellabs, “Not only must a plaintiff state with particularity facts giving rise to an inference of scienter that is strong when viewed in isolation, the inference ‘must be more than merely plausible or reasonable-it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.’” Id. (citation omitted).

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Securities Fraud Class Action Properly Dismissed by District Court because Class Action Complaint Failed to Allege Scienter under Heightened Pleadings Requirements of the PSLRA (Private Securities Litigation Reform Act of 1995) Eleventh Circuit Holds

In May 2006, plaintiff John Mizzaro filed a securities fraud class action against Home Depot and six of its officers and directors; the gravamen of the class action complaint was that “(1) Home Depot obtained excessive rebates from its vendors, and (2) violated the securities laws by not informing investors that the financial results it reported for fiscal years 2001-2004 were inflated by these excessive rebates.”  Mizzaro v. Home Depot, Inc., ___ F.3d ___ (11th Cir. October 8, 2008) [Slip Opn., at 5-6].  According to the class action, the failure to make this disclosure constituted a violation of § 10(b) of the Exchange Act of 1934 and Rule 10b-5. The class action complaint also sought to hold the individual defendants liable based on the allegation that they were “control persons” under § 20(a) of the Exchange Act.  Id., at 6.  Four identical class action lawsuits followed; the class actions were consolidated and plaintiff Bucks County Retirement Board was appointed lead plaintiff.  Id., at 5.  Defense attorneys moved to dismiss each of the class actions; in response, Bucks County filed a 150-page Amended Class Action Complaint, which became the operative class action complaint in all five cases.  Id.  Defense attorneys again moved to dismiss the class action complaint arguing, in part, that the allegations “failed to create a ‘strong inference’ that [defendants] acted with the requisite scienter” under the Private Securities Litigation Reform Act of 1995 (PSLRA).  Id., at 6. The district court dismissed the class action and denied plaintiff’s motion for leave to further amend its class action complaint; the court held that the amended class action complaint “failed to adequately plead scienter, and that granting leave would be futile because the additional facts presented in the motion for leave would not change t hat result.”  Id., at 7.  In a 60-page opinion, the Eleventh Circuit affirmed.

The Circuit Court explained that “[t]o survive a motion to dismiss under the [PSLRA], the factual allegations contained in a private securities fraud class action complaint must raise a ‘strong inference,’ one that is ‘cogent and compelling,’ that the named defendants acted with the requisite scienter.”  Mizzaro, at 4.  This article assumes the reader is familiar with the PSLRA and with the U.S. Supreme Court opinion in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499 (2007); the author’s summary of Tellabs may be found here .  Central to the Eleventh Circuit’s analysis was its determination of an issue not addressed in Tellabs – viz., “how courts should go about evaluating allegations based on statements made by unidentified, confidential witnesses.”  Id., at 14.  As a matter of first impression, the Circuit Court held that a securities fraud complaint need not name a confidential source “so long as the complaint unambiguously provides in a cognizable and detailed way the basis of the whistleblower’s knowledge.”  Id., at 16.  However, in light of legitimate reasons to be “skeptical of confidential sources cited in securities fraud complaints,” id., the Eleventh Circuit held that “the weight to be afforded to allegations based on statements proffered by a confidential source depends on the particularity of the allegations made in each case, and confidentiality is one factor that courts may consider,” id., at 16-17.  The Court clarified its holding at page 17 as follows, “Confidentiality… should not eviscerate the weight given if the complaint otherwise fully describes the foundation or basis of the confidential witness’s knowledge, including the position(s) held, the proximity to the offending conduct, and the relevant time frame.”

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Securities Class Action Properly Dismissed for Failure of Allegations in Class Action Complaint to Meet PSLRA’s Heightened Pleading Standards because Defendants were Under no Legal Duty to “Search out and Disclose” Raw Data of FDA Clinical Trials Prior to FDA Issuing Results of Drug Trial Eighth Circuit Holds

Plaintiff filed a class action against Orphan Medical and two of its officers for violations of federal securities laws; specifically, the class action complaint alleged that defendants “negligently failed to disclose material information to Orphan's stockholders before asking the stockholders to approve Orphan's merger with [Jazz Pharmaceuticals], in violation of §§ 14(a) and 20(a) of the Securities Exchange Act of 1934…, and Securities and Exchange Commission (SEC) Rule 14a-9.” Little Gem Life Sciences LLC v. Orphan Medical, Inc., 537 F.3d 913, 914 (8th Cir. 2008). Defense attorneys moved to dismiss the class action complaint on the grounds that the class action’s allegations “failed to meet the heightened pleading standards required by the Private Securities Litigation Reform Act (PSLRA)”; the district court agreed and dismissed the class action. Id. On appeal, plaintiff argued that the district court should have converted the motion to dismiss into a motion for summary judgment, and that the allegations in the class action complaint satisfied the PSLRA. Id., at 914-15. The Eighth Circuit affirmed.

According to the class action complaint, Orphan, a pharmaceutical company, sought a merger because it was experiencing financial difficulties. At the time, the company’s future profitability was uncertain, largely because it was unclear whether its drug Xyrem, upon which it heavily relied, had broader medical uses. In particular, Orphan was testing whether Xyrem could be used to treat fibromyalgia, and it initiated Phase I of its FDA clinical trials in June 2004, which it passed. Xyrem still had to pass Phase II and Phase III trials before it could obtain FDA approval to treat fibromyalgia. Little Gem, at 915. The gravamen of the class action was that shareholders voted on the merger in June 2005, and in July 2005 it was announced that Xyrem successfully passed Phase II: plaintiff alleges that defendants should have disclosed the successful completion of Phase II before the shareholders voted on the merger with Jazz. Id., at 915-16. In support of its motion to dismiss the class action, defendants “asserted factual allegations that went beyond the face of [the class action] complaint.” Id., at 916. The district court did not consider those factual allegations in holding that the class action “failed to meet the heightened pleading standards mandated by the PSLRA.” Id.

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Defense Motion to Dismiss Securities Class Action Claims Granted in Part, but Class Action Plaintiffs Adequately Alleged Existence of Certain Omissions or Misrepresentations as to Most Defendants as well as Control Person Liability as to All Individual Defendants Illinois Federal Court Holds

Plaintiffs filed a class action against Motorola and some of its officers and directors alleging violations of federal securities law; the class action complaint alleged that defendants artificially inflated the company’s stock price by issuing statements that omitted important facts or contained material misrepresentations in violation of Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5. Silverman v. Motorola, Inc., ___ F.Supp.2d ___ (N.D.Ill. September 23, 2008) [Slip Opn., at 1-2]. Count I of the class action complaint was premised on the Section 10(b) and Rule 10b-5 violations (material misrepresentations and omissions); Count II of the class action complaint was premised on the Section 20(a) violation (asserting control person liability). Id., 1-2. The allegations in the class action centered on Motorola’s development of its third generation cell phones, or “3G” cell phones. Id., at 3. Defense attorneys moved to dismiss the class action complaint for failure to satisfy the heightened pleading requirements under the PSLRA (Private Securities Litigation Reform Act), id., at 2. The federal court granted defendants’ motion in part, but refused to dismiss the class action in its entirety.

After detailing the statements underlying the class action complaint, see Silverman, at 3-12, the district court noted that plaintiffs’ misrepresentation claims fall into two categories: (1) the drop in price of the company’s RAZR cell phones, and (2) the delayed rollout of the company’s new 3G cell phones, id., at 15. The federal court readily rejected the RAZR category, noting that the company had expressly discussed the price drop in the RAZR line and the reasons for the price reductions. See id. “Therefore, any allegations of fraud based on statements regarding the RAZR price decrease are dismissed.” Id. With respect to the 3G cell phone claims in the class action complaint, the district court agreed that some of the alleged misrepresentations were “mere puffery,” see id., at 15-16, and that company representations concerning projected sales and revenue were protected as “forward-looking statements,” see id., at 18-19. However, the federal court rejected the puffery defense as to other company statements, finding that representations such as whether new products will be “competitive” and “on track” would be material if defendants knew these statements to be untrue, id., at 16-17, and found that the “forward-looking” safe harbor did not apply to statements of present or future facts that could have materially affected an investor’s decisions, id., at 18-19. Similarly, omissions concerning potential delays in the 3G rollout could be actionable, id., at 17-18, particularly as the delay severely impacted sales during the Christmas holiday season, see id., at 27.

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Fact Stock Price did not React to “Storm Warnings” Contradicted District Court Finding that Class Action Plaintiffs were on Inquiry Notice of Class Action Claims so as to Commence Statute of Limitations Third Circuit Holds

“[Plaintiffs], purchasers of Merck & Co., Inc. stock, filed the first of several class action securities fraud complaints on November 6, 2003, alleging that the company and certain of its officers and directors…misrepresented the safety profile and commercial viability of Vioxx, a pain reliever that was withdrawn from the market in September 2004 due to safety concerns.” In re Merck & Co., Inc. Securities, Derivative & “ERISA” Litig., 543 F.3d 150 (3d Cir. 2008) [Slip Opn., at 3]. The class action complaint alleged that defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934, and Rule 10b-5 by “materially misrepresent[ing] the safety and commercial viability of VIOXX,” id., at 15. Defense attorneys moved to dismiss the class action claims on the ground that they were barred by the statute of limitations, and that the allegations in the class action complaint failed to meet the heightened pleading requirements under the Private Securities Litigation Reform Act of 1995 (PSLRA); the district court granted the motion to dismiss on the first ground, and did not reach the PSLRA argument. Id., at 15-16 and n.8. Plaintiffs appealed, challenging the district court’s finding that “there was sufficient public information prior to November 6, 2001 to trigger Appellants’ duty to investigate the alleged fraud.” Id. The Third Circuit reversed.

We do not discuss the Circuit Court’s 36-page majority opinion in detail, and we do not here summarize the history of Vioxx, leading up to the first class action lawsuit in May 2001, see In re Merck, at 4-9. The FDA sent Merck a warning letter on September 21, 2001, regarding the “marketing and promotion” of Vioxx and stating in part “that Merck’s ‘promotional activities and materials’ for the marketing of Vioxx were ‘false, lacking in fair balance, or otherwise misleading in violation of the Federal Food, Drug, and Cosmetic Act (the Act) and applicable regulations.’” Id., at 9. The FDA’s letter “received widespread coverage by the media and securities analysts,” id., at 10; nonetheless, securities analysts “all maintained their ratings for Merck stock at ‘buy’ or ‘hold’ and/or continued to project increased future revenues for Vioxx,” id., at 11-12. Merck’s stock price did decline in the days immediately following the FDA warning letter, it quickly rebounded and by October 1, 2001 the stock price closed higher than before the announcement of the FDA warning letter a week before. Id., at 12. More product liability class action lawsuits were filed against Merck on September 27, 2001, see id., and the New York Times reported on the health risks of Vioxx in early October 2001, see id., at 12-13. Cutting to the chase, Merck withdrew Vioxx from the market in September 2004, and securities analysts began recommending that Merck stock be sold. See id., at 14-15.

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

District Court Order Reducing Fee Award from 8.5% Negotiated with Lead Plaintiff to 3% of Value of Securities Class Action Settlement not Subject to Attack on PSLRA Grounds because Argument Waived as not Raised below and Attorney Fee Award is Reasonable Second Circuit Holds

Plaintiffs filed a class action complaint against Nortel Networks alleging violations of federal securities laws; specifically, the class action alleged that defendant “knowingly and recklessly issued false and misleading statements and engaged in various accounting manipulations causing its stock price to be inflated between October 24, 2000 and February 15, 2001.” In re Nortel Networks Corp. Securities Litig., 539 F.3d 129, 130-31 (2d Cir. 2008). After several years of litigation, the parties reached a settlement of the class action (Nortel I); the district court gave final approval to a class action settlement valued at more than $700,000,000. Id., at 131. As part of the settlement, class counsel negotiated a fee award under the Private Securities Litigation Reform Act of 1995 (PSLRA) that provided for an attorney fee award of 8.5%. Id., at 130. At the same time, Nortel settled another class action involving similar securities claims filed on behalf of a separate class of plaintiffs (Nortel II); the value of that class action settlement also was valued at more than $700 million. Id., at 131. Class counsel in each class action sought an award of attorney fees: the district court in Nortel II awarded approximately 8% of the total class recovery in fees; the district court in Nortel I awarded approximately 3% of the total class recovery in fees. Id. Class counsel in Nortel I, Milberg Weiss & Bershad LLP, appealed the fee award, id., at 130, and the Second Circuit affirmed.

The district court based its attorney fee award on its independent analysis of the factors set forth by the Second Circuit in Goldberger v. Integrated Resources, Inc., 209 F.3d 43, 50 (2d Cir. 2000); this analysis led the district court to conclude that an 8.5% fee award would be excessive and that a 3% fee award – amounting to approximately $34 million – would be “fair and reasonable.” In re Nortel Networks, at 131-32. On appeal, “Milberg argues that the district court erred by disregarding the purportedly altered fee-award scheme under the [PSLRA] pursuant to which Milberg's negotiated fee with the lead plaintiff would have been presumptively reasonable.” Id., at 130. The Second Circuit held that Milberg waived the argument by failing to raise it in the district court. See id., at 132-34. Turning to the reasonableness of the fee award itself, the Second Circuit held that it “will not overturn a district court's award of attorneys' fees ‘absent an abuse of discretion, such as a mistake of law or a clearly erroneous factual finding.’” Id., at 134 (citation omitted). The Circuit Court noted that the district court properly considered each of the relevant factors, and that it “carefully weighed” those factors in making its award. Id. The Court rejected Milberg’s argument that “the district court abused its discretion in part because it awarded a fee significantly below those awarded in other cases where we have upheld higher percentage fees and higher lodestar multipliers” and “erred by not using the 8% Nortel II award as a ‘benchmark,’” id. While the award was “toward the lower end of reasonable fee awards,” and while the Circuit Court was “troubled by the district court's failure to discuss Nortel II and why it believed the fee award here to be more reasonable,” the question on appeal was “not whether we would have awarded a different fee, but rather whether the district court abused its discretion in awarding this fee.” Id. Accordingly, the Circuit Court affirmed the district court’s attorney fee award. Id.

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Securities Class Action Properly Dismissed because Allegations in Class Action Complaint Failed to Meet PSLRA’s Heightened Pleading Requirements Eighth Circuit Holds

Plaintiff filed a class action complaint against Hutchinson Technology and six of its officers and directors alleging violations of federal securities law; the class action complaint asserted claims under Section 10(b) of the Securities Exchange Act of 1934 and under Rule 10b-5 of the Securities and Exchange Commission implementing regulation, as well as control person liability under Section 20 of the 1934 Act. In re Hutchinson Technology, Inc. Securities Litig., 536 F.3d 952, 954-55 (8th Cir. 2008). Defense attorneys filed a motion to dismiss the class action complaint on the ground that it failed to meet the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA). Id., at 955. The district court granted the motion and denied plaintiff’s request for leave to file an amended class action complaint. Id. Plaintiff appealed, and the Eighth Circuit affirmed.

Very briefly, Hutchinson manufactures and supplies suspension assemblies for computer hard disk drives. In re Hutchinson, at 955. In 2005, the company’s five largest customers accounted for 90% of its revenue, and sales of suspension assemblies accounted for 95% of its total revenue. Id. After giving guidance of $0.10 earnings per share (EPS) for the fourth quarter of 2004, the company reported EPS of $0.15 to $0.20 for that quarter and announced that it expected an increase in product demand in the first quarter of 2005. Id. Hutchinson stock price increased more than 10% on the news, from $30.93 to $34.09. Id. Thereafter, despite releasing positive information, Hutchinson’s stock price dropped to about $30 per share; also during this time, certain officers sold a total of 137,750 shares of stock at $29-$30 per share for a total of about $6 million, and later sold another 26,820 shares at $33.55-$34 per share for a total of about $1 million. Id., at 956. We do not summarize further additional positive guidance provided by the company, or additional shares of stock sold by insiders. See id., at 956-57. But on August 30, 2005, the company issued a press release disclosing lower demand and a reduction in sales and earnings for fourth quarter 2005: in response, the company stock price dropped from $31.51 to $26.16. Id., at 957. In addition to the financial allegations, the class action complaint contained allegations from five confidential witnesses. Id., at 957-58. In granting the defense motion to dismiss the class action complaint, the district court “[held] that the complaint did not meet the heightened pleading standards for falsity and scienter required by the PSLRA.” Id., at 958. Additionally, it dismissed the Section 20 class action claim (concerning “control person” liability) as derivative of the class action’s Section 78j(b) claim. Id. Finally, the district court denied leave to amend the class action complaint because it found that amendment would be futile, id.

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Class Action Claims Preempted by SLUSA (Securities Litigation Uniform Standards Act of 1998) because Ten Class Actions had been Litigated as a Single Proceeding by Plaintiffs’ Common Counsel Fifth Circuit Holds

Numerous class action complaints were filed against various defendants following the collapse of Enron; ten of those class action complaints, which filed by former Enron investors against various financial institutions, certain former members of Enron’s management, and Arthur Anderson (Enron’s former accounting firm) and certain Arthur Anderson partners, but not against Enron itself, were consolidated into the action now at issue. In re Enron Corp. Securities, Derivative & ERISA Litig., ___ F.3d ___, 2008 WL 2689248, *1 (5th Cir. 2008). Most of the class actions had been filed in state court, but they were removed to federal court based on Enron’s bankruptcy filing on the ground that they were “‘related to’ bankruptcy jurisdiction,” and the class actions were later consolidated in the Southern District of Texas by order of the Judicial Panel on Multidistrict Litigation. Id., at *3. The class actions “allege virtually identical state law claims for fraud, fraud on the market, civil conspiracy, aiding and abetting, negligent misrepresentation, negligence, violations of the Texas Business and Commerce Code, and violations of the Texas Securities Act.” Id. Defense attorneys moved to dismiss the class action complaints as preempted by SLUSA (Securities Litigation Uniform Standards Act of 1998). Id., at *1. The district court granted the defense motion and dismissed all of the class action claims, id., at *3. In dismissing the class actions, the district court denied class action plaintiffs leave to amend because it found that amendment would be futile. Id. Plaintiffs appealed, arguing that the district court lacked jurisdiction to enter the order dismissing the class action complaints and, alternatively, that the class actions that had been removed to federal court were not “covered class actions” within the meaning of SLUSA; the Fifth Circuit affirmed.

We do not summarize the facts surrounding the rise and fall of Enron. See In re Enron, at *2 and Newby v. Enron Corp., 394 F.3d 296, 299 (5th Cir. 2004). The issues on appeal were (1) whether the district court had jurisdiction over the class actions, and (2) whether the class action claims were preempted by SLUSA. In re Enron, at *3. We do not here discuss the bankruptcy jurisdiction issue; the Fifth Circuit’s analysis, leading to its conclusion that bankruptcy jurisdiction did exist, may be found at pages *3 through *6 of the Circuit Court’s opinion. With respect to the SLUSA preemption issue, plaintiffs’ argued that “for preemption purposes, SLUSA's definition of a ‘covered class action’ should be applied only at the time a state action is removed to federal court, not after a federal court issues a consolidation order.” Id., at *6. As a backdrop to is legal analysis, the Circuit Court provided a summary of the “evolution of federal securities law,” including the Private Securities Litigation Reform Act (PSLRA). See id., at *7-*8. This summary including the language in SLUSA that “[n]o covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party,” see id., at *8 (citation omitted) (italics added by court). The central issue was whether the class actions were “covered class actions” within the meaning of SLUSA.

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

District Court Carefully Analyzed Requisite Factors in Determining Reasonable Attorney Fee Award in Securities Class Action and did not Abuse its Discretion in Awarding Class Counsel 3% of the Value of Class Action Settlement Rather than 8.5% Requested by Class Counsel, even though Lead Plaintiffs in Class Action Supported 8.5% Award Second Circuit Holds

Plaintiffs filed a class action against Nortel Networks alleging violations of federal securities laws (Nortel I); specifically, the Nortel I class action complaint alleged that Nortel “knowingly and recklessly issued false and misleading statements and engaged in various accounting manipulations causing its stock price to be inflated between October 24, 2000 and February 15, 2001.” In re Nortel Networks Corp. Securities Litig., ___ F.3d ___ (2d Cir. August 19, 2008) [Slip Opn., at 2]. Plaintiffs in the Nortel I class action were represented by Milberg Weiss & Bershad LLP, id. After several years of litigation, the district court approved a class action settlement of almost $439 million in cash, plus more than 300,000,000 shares of Nortel common stock valued at more than $700 million at the time the class action settled was approved. Id. As part of the “same overall settlement,” Nortel settled a separate action securities class action lawsuit (Nortel II); the terms of that class action settlement involved common stock also valued at more than $700 million plus $370 million in cash (roughly $68.5 million less than the Nortel I class action settlement). Id., at 2-3. The district court in Nortel II awarded class counsel 8% of the settlement value in attorney fees, but the Nortel I court awarded Milberg attorney fees amounting to only 3% of the settlement value. Id., at 3. Milberg Weiss appealed the attorney fee award, and the Second Circuit affirmed.

Milberg argued on appeal that they were entitled to 8.5% of the value of the class action settlement they obtained in prosecuting the private securities class action and that the district court erred in reducing the award to only 3%. In re Nortel, at 2. Milberg argued that it had a “negotiated fee” which, under the terms of the Private Securities Litigation Reform Act of 1995 (PSLRA), should have been deemed “presumptively reasonable.” Id. The Second Circuit held that Milberg waived its PSLRA argument because it failed to raise it in the district court, id. The Circuit Court’s analysis of the waiver issue may be found at pages 5 through 8.

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Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Defense (Bank of America, Citigroup and Pavia e Ansaldo) Entitled to Summary Judgment on Securities Fraud Claims because Plaintiffs Failed to Establish Reliance on any Deceptive Acts by Moving Defendants New York Federal Court Holds

Plaintiffs filed a class action complaint against various defendants, including various Bank of America entities, various Citigroup entities, and Pavia e Ansaldo, alleging violations of federal securities laws; specifically, the Third Amended Consolidated Class Action Complaint alleged violations of Rule 10b-5 and Section 10(b) “on behalf of purchasers or securities of the international dairy conglomerate Paramalat Finanziaria S.p.A. and its subsidiaries and affiliates.” In re Parmalat Securities Litig., 570 F.Supp.2d 521 (S.D.N.Y. 2008) [Slip Opn., at 1-2]. Some of the defense attorneys moved to dismiss the class action but the district court denied the motion on the ground that “plaintiffs could have prevailed against those defendants under Rule 10b-5(a) and 10b-5(c) with respect to some (but not all) of the challenged transactions, assuming that they proved their allegations notwithstanding their lack of any actionable misrepresentations or omissions by them.” Id., at 1-2 (citing In re Parmalat Sec. Litig., 376 F.Supp.2d 472 (S.D.N.Y. 2005). Subsequently, the United States Supreme Court issued its opinion in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 128 S.Ct. 761 (2008), our summary of which may be found here. Defense attorneys for Bank of America, Citigroup and Pavia moved for summary judgment on the ground that Stoneridge Investment precludes liability in the absence of any actionable misrepresentations or omissions by the named defendants. Id., at 2. The district court agreed and granted judgment in favor of defendants against the class action claims.

Stoneridge Investment held that “‘[r]eliance by the plaintiff upon the defendant’s deceptive acts is an essential element of the § 10(b) private cause of action.’” In re Parmalat, at 2 (quoting Stoneridge Investment, at 769). In opposition to the summary judgment motion, class action plaintiffs argued that they can establish such reliance as to all three defendants. The district court disagreed. We discuss here only one of the arguments – plaintiffs’ claim that “BofA, as a placement agent, breached a duty to disclose” certain facts “to investors who purchased securities from BofA in private placements.” Id., at 2-3. The federal court explained that a “fundamental problem” existed in plaintiffs’ argument against BofA in that “the duty of disclosure that BofA allegedly breached was a duty owed only to purchasers from BofA in private placements” and that, while “some members of the alleged class bought from BofA in private placements,” it was undisputed that “none of the named plaintiffs” had done so. Id., at 3. The district court held, “This is fatal to plaintiffs’ argument.” Id. The court explained at page 3, “Although reliance is presumed where a defendant seller breaches a duty of disclosure, only investors to whom the duty was owed may avail themselves of that presumption.” Put simply, “reliance is not presumed merely because named plaintiffs in a purported class action allege that a duty was owed to other members of the proposed class.” Id. Based on Stoneridge Investment, the district court granted the defense motion for summary judgment, id., at 6.

Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Securities Fraud Class Action Complaint Adequately Alleged Loss Causation when Facts were Considered as a Whole so District Court Erred in Granting Defense Motion to Dismiss Class Action Complaint Ninth Circuit Holds

Plaintiffs, a group of investors, filed a class action against Gilead Sciences, “a biopharmaceutical company that specializes in developing and marketing treatments for life-threatening diseases,” alleging violations of federal securities law; specifically, the class action complaint alleged that defendants “misled the investing public by representing that demand for its most popular product” – Viread, an antiretroviral agent used to treat HIV – was “strong without disclosing that unlawful marketing was the cause of that strength.” In re Gilead Sciences Securities Litig., ___ F.3d ___ (9th Cir. August 11, 2008) [Slip Opn., at 10322-23]. Viread accounted for almost two-thirds of Gilead’s total revenues, and the fourth amended class action complaint alleged that defendants Gilead and “some of its top officers” violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by aggressively promoting Viread for “off-label” uses, that is, for uses that had not been approved by the FDA, id., at 10323-24. The class action complaint outlined an alleged scheme to promote off-label uses and further alleged that ultimately “75% to 95% of Viread sales resulted from off-label marketing efforts.” Id., at 10324-25. Defense attorneys moved to dismiss the class action under Rule 12(b)(6) for failure to adequately allege loss causation; the district court agreed and dismissed the class action complaint. Id., at 10323. The Ninth Circuit reversed.

As with all securities fraud cases, the specific facts detailed in the class action complaint are central to the Circuit Court’s analysis of the district court order dismissing the class action with prejudice. In this case, those facts span more than 9 pages of the appellate court’s opinion. See In re Gilead Sciences, at 10323-31. We do not summarize those facts here, noting only that, according to “two confidential witnesses who served as Gilead salespeople,” the off-label marketing efforts “took three forms: (1) marketing to HIV patients co-infected with Hepatitis B; (2) marketing Viread as a first-line or initial therapy for HIV infection; and (3) marketing against Viread’s safety profile,” and that, ultimately, “75% to 95% of Viread sales resulted from off-label marketing efforts.” Id., at 10325 (footnote omitted). The FDA sent Gilead a letter in March 2002, accusing the company of off-label marketing, id., and in August 2003 the FDA made public a July 2003 “warning letter,” but the investing public did not yet appreciate the letter’s significance, id., at 10328-29. According to the class action complaint, Gilead also encouraged overstocking of Viread but publicly stated that overstocking was not a basis for Viread’s increased sales, id., at 10326-27. It was not until October 2003 that investors realized the impact of off-label marketing on Viread sales, id., at 10330. The district court dismissed the class action with prejudice on the ground that plaintiffs “failed to adequately plead loss causation” under Dura Pharmaceuticals, Inc.. v. Broudo, 544 U.S. 336 (2005), because the class action complaint failed to “connect the following chain of events…: 1) that [the] alleged failure to disclose the off-label marketing scheme caused a material increase in sales; 2) that practitioners materially decreased their demand for Viread due to the publication of the FDA Warning Letter; and most importantly, 3) that the alleged decrease in sales due to the FDA letter proximately caused Gilead’s stock to decrease three months later,” id., at 10331. The Ninth Circuit explained that the district court order rested entirely on its conclusions concerning loss causation, id.

Continue reading "Class Action Defense Cases–In re Gilead Sciences: Ninth Circuit Reverses Dismissal Of Securities Fraud Class Action Holding Class Action Complaint Adequately Alleges Loss Causation Under Dura Pharmaceuticals" »

Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Defense Motion for Judgment as a Matter of Law Granted because Plaintiff’s Evidence Failed to Establish Loss Causation so Jury Verdict could not Stand Arizona Federal Court Holds

Plaintiffs filed a class action against Apollo Group and certain of its officers and directors the Bank and other defendants alleging violations of federal securities law; the class action complaint asserted that defendants made false or misleading statements concerning a Department of Education (DOE) program review at Apollo Group’s wholly-owned subsidiary, University of Phoenix (UOP). In re Apollo Group, Inc. Securities Litig., ___ F.R.D. ___ (D.Ariz. August 4, 2008) [Slip Opn., at 1]. The class action claims relied on two analyst reports, published in September 2004 (“the Flynn reports”) that allegedly disclosed the truth to the market, id. The Policemen’s Annuity and Benefit Fund of Chicago represented the class; the district court certified the litigation as a class action and the matter proceeded to a jury trial. Id. The jury ruled in favor of the plaintiff, and defense attorneys moved the court for judgment as a matter of law or, alternatively, for a new trial. Id. The district court granted the motion for judgment as a matter of law.

The district court set forth the entirety of the facts relevant to its determination in a single paragraph: “On February 5, 2004, as part of its ongoing program review at the UOP, the DOE sent Apollo a program review report that preliminarily found that the UOP had violated DOE regulations. Apollo was not required to immediately disclose the report, and it chose not to do so. But on six different occasions thereafter, between February 27, 2004 and September 7, 2004, Apollo misrepresented the actual state of affairs surrounding the program review by making public statements at odds with the existence and contents of the DOE report. On September 14 and 15, 2004, the contents of the DOE report were widely disseminated for the first time through various newspapers articles, including articles in The Wall Street Journal, The Arizona Republic, and the Chicago Tribune. The market did not react to the disclosure of this news in any significant way. Five days later, the Flynn reports were issued. These reports downgraded Apollo’s stock for various reasons, some of which PABF argued at trial were necessary to reveal the truth of Apollo’s prior misrepresentations. Apollo’s stock price fell significantly thereafter.” In re Apollo, at 2.

Continue reading "Class Action Defense Cases–In re Apollo: Arizona Federal Court Vacates Jury Verdict In Securities Fraud Class Action And Enters Judgment In Favor Of Defendants Because No Proof Of Loss Causation" »

Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

Class Action Claims Against Bank of America Preempted by SLUSA (Securities Litigation Uniform Standards Act of 1998) Eighth Circuit Holds

Plaintiffs, beneficiaries of trust accounts at Bank of America, filed a class action against the Bank and other defendants alleging violations of federal securities law; the class action complaint also asserted state-law claims for unjust enrichment and breach of fiduciary duty, asserting that federal court jurisdiction existed under the Class Action Fairness Act (CAFA). Siepel v. Bank of America, N.A., 526 F.3d 1122, 1124 (8th Cir. 2008). The allegations underlying the class action were that the Bank decided to “implement[] a plan to consolidate the trust management activities of other banks it had acquired” and led class members to believe that “their assets were being managed on an individualized basis, when in fact the assets were being invested in shares of the Nations Funds mutual fund, managed by an investment company substantially owned by the Bank.” Id. The class action alleged further that “higher-yielding and better-managed mutual funds were available in the marketplace,” but the Bank directed customers to Nations Funds for the Bank’s economic benefit and that the Bank accomplished this by sending “misleading letters” to trustees and beneficiaries that, in part, threatened “adverse tax consequences” if they went elsewhere. Id. Defense attorneys moved to dismiss the federal claims on the merits, and moved to dismiss the state-law claims as preempted by SLUSA (Securities Litigation Uniform Standards Act of 1998). Id. In part, the defense argued that the class action should be dismissed on the grounds of judge shopping because plaintiffs’ counsel “had already filed at least five class actions in various jurisdictions seeking redress for the same alleged injuries.” Id., at 1125. The district court granted the defense motion in its entirety, and denied plaintiffs’ request for leave to file an amended class action complaint. Id., at 1125. The Eighth Circuit affirmed.

The class action argued that the Bank failed to disclose “conflicts of interest, higher expenses, and increased tax liability” that would result from using Nations Funds, and plaintiffs argued on appeal that SLUSA did not preempt their class action’s state-law claims that a trustee breaches its fiduciary duty “by failing to disclose conflicts of interest in its selection of nationally-traded investment securities.” Siepel, at 1124. SLUSA “expressly preempts all ‘covered’ state-law class actions that allege: (1) an untrue statement or omission of a material fact, or (2) use of a manipulative or deceptive device or contrivance, ‘in connection with the purchase or sale of a covered security.’” Id., at 1126 (citations omitted). The district court had held that SLUSA preempted the state law claims because the alleged misrepresentations were made “in connection with the purchase or sale of a covered security,” and that the alleged misrepresentations were “central to the Plaintiffs’ state-law claims.” Id., at 1125. The Eighth Circuit easily concluded that the class action was a “covered class action” within the meaning of SLUSA, and that the alleged misrepresentations concern a “covered security” within the meaning of SLUSA. Id., at 1126. The issue on appeal, then, was “whether the alleged misrepresentations and omissions were ‘in connection with’ the purchase or sale of securities.” Id.

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Posted In: Class Action Fairness Act (CAFA), Class Action Court Decisions, PSLRA/SLUSA Class Actions

District Court did not Err in Dismissing Securities Class Action Without Leave to Amend because Second Amended Class Action Complaint Failed to Adequately Plead Scienter Third Circuit Holds

Plaintiff filed a putative class action against Bio-Technology General Corp. (now known as Savient Pharmaceuticals) and three of its officers and directors for violations of federal securities laws by allegedly “making false and misleading statements about the corporation’s financial performance in 1999, 2000, and 2001.” In re Savient Pharmaceuticals, Inc. Securities Litig., Case No. 06-4864 (3d Cir. July 2, 2008) [Slip Opn., at 2]. The district court had dismissed the original class action complaint on the grounds that it failed to plead scienter with the specificity required under the Private Securities Litigation Reform Act (PSLRA), but granted plaintiff leave to amend; the district then granted a motion by defense attorneys to dismiss the second amended class action complaint on the same grounds, but this time the dismissal was without leave to amend. Id., at 2-3. In an unpublished opinion, the Third Circuit affirmed.

While the opinion is unpublished, we believe it noteworthy for its glowing praise of the district court. The Circuit Court noted that the main issue on appeal was “whether the District Court erred in finding that the Second Amended Complaint failed to adequately plead scienter.” In re Savient, at 3. The Third Circuit noted that it had reviewed the “extensive” record, as well as “the thorough, thoughtful and, in a word, superb opinions of the District Court,” id. The Court noted that “the [district court’s] first opinion comprehensively analyz[ed] the numerous allegations of the initial consolidated class action complaint in light of the applicable law and [laid] out a road map for plaintiff to follow,” id. Despite this guidance, the second amended class action complaint suffered from the same defects. Id. The Court concluded at page 3, “This is a case in which we need do no more than recognize the excellence of the District Court’s opinions; indeed, it would make little or no sense to even attempt to match the quality of that work. And so, substantially for the reasons set forth by the Honorable Harold A. Ackerman, we will affirm.”

A copy of the unpublished Third Circuit opinion in In re Savient Pharmaceuticals may be found here.

A copy of the district court's order may be found here.

Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions