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Posts Tagged ‘securities class action’

Forbes columnist Daniel Fisher has authored an excellent preview of the three class-action-related cases set to be decided by the U.S. Supreme Court this term.  The article, entitled Class-Action Lawyers Face Triple Threat At Supreme Court, previews the issues in each of the three cases and summarizes what’s at stake for class action lawyers.  The article points out that although the three decisions have potential to spell disaster for class action plaintiffs given the conservative majority in the Supreme Court, two of the three class-action-related decisions last term came out in favor of the plaintiffs.  I highly recommend this article, as well as Fisher’s work more generally.

For quick reference, the three cases set for decisions on class action issues this term, and the questions presented for review, are as follows:

Comcast v. Behrend, No. 11-864 – “Whether a district court may certify a class action without resolving whether the plaintiff class has introduced admissible evidence, including expert testimony, to show that the case is susceptible to awarding damages on a class-wide basis.”

Standard Fire Insurance Co. v. Knowles, No. 11-1450 – “When a named plaintiff attempts to defeat a defendant’s right of removal under the Class Action Fairness Act of 2005 by filing with a class action complaint a ‘stipulation’ that attempts to limit the damages he ‘seeks’ for the absent putative class members to less than the $5 million threshold for federal jurisdiction, and the defendant establishes that the actual amount in controversy, absent the ‘stipulation,’ exceeds $5 million, is the ‘stipulation’ binding on absent class members so as to destroy federal jurisdiction?”

Amgen Inc. v. Connecticut Retirement Plans, No. 11-1085 – “1. Whether, in a misrepresentation case under SEC Rule 10b-5, the district court must require proof of materiality before certifying a plaintiff class based on the fraud-on-the-market theory.  2. Whether, in such a case, the district court must allow the defendant to present evidence rebutting the applicability of the fraud-on-the-market theory before certifying a plaintiff class based on that theory.”

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The United States Supreme Court granted certiorari today in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085, to address the requirements for certifying a securities class action based on the “fraud-on-the-market” theory of reliance.  The “fraud-on-the-market” theory involves allegations that public misrepresentations or omissions adversely affected the market price of a stock causing losses to an entire class of investors whether or not they individually relied on the information.  The theory can alleviate a common barrier to class certification, the need to prove individual reliance on alleged fraud.  As summarized by the folks at SCOTUS blog, the issues accepted for review are as follows:

(1) Whether, in a misrepresentation case under Securities and Exchange Commission Rule 10b-5, the district court must require proof of materiality before certifying a plaintiff class based on the fraud-on-the-market theory; and (2) whether, in such a case, the district court must allow the defendant to present evidence rebutting the applicability of the fraud-on-the-market theory before certifying a plaintiff class based on that theory. (Breyer, J., recused)

Amgen comes close on the heels of the Court’s decision last term in Erica P. John Fund Inc. v. Halliburton Co., in which a unanimous Court overturned a Fifth Circuit Court of Appeals ruling that the plaintiff in a securities class action brough under the fraud-on-the-market theory must prove loss causation at the class certification phase.  While the Court in Erica P. John Fund held that proof of the element of loss causation on the merits could not be required as a precondition of class certification, it was not presented with the question of what proof is needed at the class certification phase to support the application of the fraud-on-the-market doctrine itself.

The case will be heard in the October 2012 Supreme Court term.

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According to Deborah Mao in this article published today on businessweek.com, regulators for the city of Hong Kong has proposed new legislation that would permit representative actions for certain consumer class actions.  The legislation is reportedly a response, at least in part, to concerns about the difficulty of shareholders to seek collective redress for alleged acts of securities fraud, although the new law would not initial apply to securities fraud claims. 

The legislation would likely provide for class actions to be financed through a public legal aid program rather than through contingency fees, as is typically the case in the United States.  The proposal is still in the early stages, and specific legislation remains to be “drafted and introduced,” according to an official quoted in the article.

We’ll keep an eye on future developments relating to the proposed legislation.  Stay tuned…

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After 12 years of litigation, a trial court in Germany has finally reached a decision in a landmark case for group actions in European civil law jurisdictions.  The court decided that Deutsche Telekom did not make false or misleading statements of fact in a prospectus for a secondary stock offering in 2000. 

The case was the first of its kind under 2005 German legislation allowing for special model proceedings in mass actions for certain types of securities fraud, which had been enacted as a direct result of the thousands of individual lawsuits that had been filed against Deutsche Telekom for prospectus fraud after the stock dropped following the secondary offering.  The law that created the group action procedure under which the case was tried is known in English as the Capital Market Model Proceedings Act.  Passed in 2005, the Act allows for the trial court to assign a representative plaintiff in a model proceeding that is to be tried first while similar claims are suspended.  The purpose of the model proceeding is to resolve any generic or common issues for all of the cases, but unlike in a U.S. class action, the model proceeding does not have the legal effect of also resolving all of the individual claims.  As a result, although today’s ruling is a victory for the defendant, it does not represent an end to the litigation even if it is upheld on appeal.

This article from Karin Matussek in BusinessWeek summarizes the decision and its potential implications.  According to the article, the attorney for the model plaintiffs has stated that they do plan to appeal.

The case is a “model” proceeding for more than just the resolution of the claims against Deutsche Telekom.  It has been followed by many academics and policymakers in Europe and elsewhere as a test case for the viability of group proceedings in common law jurisdictions.  Time will tell whether the German experiment in group proceedings will be seen as a success.  Concerns that the introduction of group litigation procedures in Europe will usher in a US-style litigation culture will no doubt be tempered by the fact that the defendant ultimately prevailed.  On the other hand, the length of time that the it took for the model proceeding to be resolved raises legitimate questions about the long-term social utility and efficiency of the procedure.   By comparison, class action litigation brought in the United States alleging prospective liability by U.S. investors against Deutsche Telekom arising out of the same offering was settled for more than $120 million more than seven years ago, in 2005.

The German Capital Market Model Proceedings Act and the Deutsche Telekom case are among the many cutting-edge topics addressed in the book World Class Actions, which is still on schedule to be on bookshelves early this summer.  The German chapter is authored by Dr. Luidger Röckrath, attorney with the law firm Gleiss Lutz.  Stay tuned here for more updates on the status of of the book.

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A few weeks ago, I posted a link to a Cornerstone Research report concluding that securities class action settlements were at a 10-year low.  Yesterday, securities litigators Daniel Tyukody and Gerald Silk posted an article in the New York Times DealBook blog entitled Understanding the Dip in Class-Action Securities Settlements with some insights explaining the downturn.  Among the explanations are lower starting inventory, the added size and complexity of credit crisis-related lawsuits, increased legislative and judicial scrutiny over securities class actions, and a decline of financial restatements by companies.  The article is a must read for anyone interested in understanding US securities class action trends.

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Cornerstone Research has published a new study on trends in securities class action settlements concluding that the total number of securities class action settlements, the total amount of settlement dollars, and the average settlement value, fell to their lowest levels in 10 years in 2011.  Michael J. de la Merced of the New York Times authored this article summarizing the study’s key findings and analyzing the potential causes of the decrease.

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The Second Circuit Court of Appeals issued a decision last week that confirms that there are still situations where primarily foreign securities fraud disputes may be litigated as class actions in the United States courts.  The decision explores the contours of the US Supreme Court’s holding in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010) that § 10(b) of the Securities Exchange Act of 1934 does not have an extraterritorial reach.  Here’s a link to the opinion, courtesy of the New York Law Journal: Absolute Activist Value Master Fund Ltd. v. Ficeto, No. 11-0221-cv (2d Cir., March 1, 2012).

Morrison recognized two situations in which a securities fraud claim would be sufficiently domestic in nature to be governed by § 10(b) and SEC Rule 10b-5.  The first, not at issue in Absolute Activist, is where the security is traded on a US exchange.  Absolute Activist addresses the second situation, which involves “domestic transactions in other securities.”  The Second Circuit’s test for whether transactions are domestic is whether “irrevocable liability is incurred or title passes within the United States.”  In simpler terms, if the parties become bound to effectuate the transaction in the United States, the transaction is a domestic one, but the transaction could also be domestic if title to the securities passes within in the United States, even if the parties became bound elsewhere.  In reaching this conclusion, the panel rejected several other tests proposed by the parties, including tests proposed by the plaintiff that would have looked to the location of the broker-dealer or to whether the security was issued by a US company or was registered with the SEC, and tests proposed by defendants that would look to the place of residence of both the buyer and seller in the transaction or to whether a given defendant committed some affirmative act within the United States.

Unfortunately, given the fact-intensive nature of the test articulated by the Second Circuit panel, the decision leaves open the question of what specific facts might be sufficient to establish that irrevocable liability was incurred or title transferred within the United States.  The panel held that the facts in the complaint were not sufficient to meet either requirement, but remanded with instructions to allow leave to amend.  However, the opinion does offer some insight into what might be sufficient.  In concluding that leave to amend would not be futile, the court held pointed to representations made by counsel at oral argument that there existed “trading records, private placement offering memoranda, and other documents indicating that the purchases became irrevocable upon payment and that payment was made through Hunter in the United States.”

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