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Archive for the ‘Securities Class Actions’ Category

Price Waterhouse Coopers recently published an interesting study entitled Daubert challenges to financial experts, a yearly study of trends and outcomes, 2000–2015 (click the link to download a copy).

The study includes citations to recent opinions on the subject, along with practical insights from attorneys, including yours truly.  It concludes with a variety of useful statistics on the outcomes of Daubert challenges to financial experts, including the types of cases in which the change is made, the types of experts excluded, the jurisdictions in which exclusion rates are higher or lower, and the reasons for exclusion, among other things.  The study includes information on Daubert challenges in the class certification context that will no doubt prove useful in dealing with other types of experts as well as financial experts.  Be sure to check it out!

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The U.S. Supreme Court issued its decision earlier today in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317 (Halliburton II), its most highly-anticipated class-action-related decision of the October 2013 term.  Those who were hoping for a sea-change in securities class action jurisprudence were left disappointed, as the Court, in an opinion authored by Chief Justice Roberts, declined to overrule its 25-year-old decision in Basic Inc. v. Levinson, 485 U.S. 224 (1988).  Rather than abolish the framework established in Basic, which provides a means for securities fraud plaintiffs to satisfy the elements of class certification through a class-wide presumption of reliance on material misrepresentations, the Court instead held that a defendant can rebut the presumption by demonstrating, at the class certification stage, that the alleged misrepresentations did not actually have any impact on the stock price.  In doing so, the Court reversed the Fifth Circuit Court of Appeals’ decision barring the defendant from offering evidence of non-impact on stock price at the class certification stage.

The Court distinguished its earlier decision in the same case, Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. ___ (2011) (Halliburton I), in which it held that a plaintiff should not be required to prove materiality of the alleged misrepresentation at the class certification stage.  The distinction between the issue of materiality of a misrepresentation (a merits issue not appropriate for the class certification phase according to Halliburton I), and the issue of whether a misrepresentation actually had a common price impact on the stock (a proper class certification question according to Halliburton II) is the key to making sense of the Court’s decision today.  As Justice Roberts stated:

[P]rice impact differs from materiality in a crucial respect. Given that the other Basic prerequisites must still be proved at the class certification stage, the common issue of materiality can be left to the merits stage without risking the certification of classes in which individual issues will end up overwhelming common ones. And because materiality is a discrete issue that can be resolved in isolation from the other prerequisites, it can be wholly confined to the merits stage.

Price impact is different. The fact that a misrepresentation “was reflected in the market price at the time of [the]transaction”—that it had price impact—is “Basic’s fundamental premise.” Halliburton I, 563 U. S., at ___ (slip op., at 7). It thus has everything to do with the issue of predominance at the class certification stage. That is why, if reliance is to be shown through the Basic presumption,the publicity and market efficiency prerequisites must be proved before class certification. Without proof of those prerequisites, the fraud-on-the-market theory underlying the presumption completely collapses, rendering class certification inappropriate.

Halliburton II, slip op., at 21-22.  In other words, a merits question that is indisputedly common to the class should not be considered prior to class certification, but a merits question that also bears on whether the issues to be resolved at trial are truly common or individualized in the first place must be considered as part of the class certification decision.

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The Supreme Court granted certiorari earlier this week in Halliburton Co. v. Erica P. John Fund, 13-317, a second trip to the high Court for the same case.  At issue is whether the Court should overrule holding of Basic Inc. v. Levinson, which recognized the “fraud-on-the-market” theory of class wide reliance in securities fraud cases.  The Court foreshadowed its willingness to consider this issue last term when it decided Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, 132 S. Ct. 2742 (2012).  Both Amgen and the Court’s earlier decision in  Erica P. John Fund v. Halliburton Co., 131 S. Ct. 2179 (2011) were victories for plaintiffs, with the Court holding in both cases that plaintiffs were not required to prove questions on the merits as a prerequisite to class certification.  However, in Amgen, Justice Alito’s concurrence as well as dissenting opinions by Justices Scalia and Thomas (joined by Justice Kennedy) all raised questions about the continued viability of the Basic decision.

At the risk of oversimplification, the “fraud-on-the market” theory is that a material misrepresentation made in connection with the sale of a publicly traded security can have an effect on the entire market, so that investors may be harmed (or benefitted) by the misrepresentation even if they did not directly rely on it, because enough investors in the market did rely on it to the point where the price was affected.  A decision by the Court that this presumption is no longer viable could seriously limit or eliminate securities fraud class actions, because without the “fraud-on-the-market” presumption, a required element of a securities fraud claim, reliance, becomes an individualized question of fact.  As a result, Halliburton becomes the first case on the Court’s 2013-14 docket that has a potential for a truly significant impact on class actions.

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The Supreme Court has issued its opinion in one of the most highly anticipated class action-related cases on the docket this term.  The result in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085, slip op. (U.S., Feb. 27, 2013) is not surprising given the content and tone of the questioning at oral argument.  In an 6-3 opinion authored by Justice Ginsberg, the Court held that the plaintiff in a securities fraud case based on a fraud-on-the-market theory of reliance does not have to prove materiality of the fraudulent statement or omission at the class certification stage.  Because materiality is a common question capable of resolution simultaneously for the entire class, the majority reasoned, it does not have to be proven at the class certification stage.  Justices Scalia, Thomas, and Kennedy dissented.

Amgen is an important decision in the securities fraud context because it addresses the lingering question of whether any special prerequisites exist in certifying a securities fraud class action that aren’t required in certifying other types of class actions.  Like the Supreme Court’s earlier decision in Erica P. John Fund v. Halliburton Co., 131 S. Ct. 2179 (2011), Amgen will probably have an impact beyond the securities fraud context.  In the context of class certification decisions more broadly, the opinion will be almost certainly be cited as clarifying the distinction between issues impacting the elements of class certification, which must be resolved at the class certification phase, and merits issues, which can wait until trial to be resolved.

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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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