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Posts Tagged ‘securities class action’

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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Kevin LaCroix, whose blog The D&O Diary is a premier source for the latest trends in securities-related class action litigation, has an excellent post out today discussing two key developments in an area that is very close to my heart, international class action litigation.  The first part of LaCroix’s post discusses a recent publication from Asia-based International law firm King & Wood Mallesons discussing class action filings in Australia.  According to the report, there are currently only about 14 class action filings filed on average in the Australian federal court, a number that represents less than 1% of all federal filings in that country (this figure does not include filings in the courts of individual states; both Victoria and New South Wales also have civil procedure rules similar to the federal rules).

The second part of the post addresses the potential implications of the recent enactment of a class action law in Mexico.  LaCroix summarizes a recent Jones Day publication on the subject, then adds his own commentary.  In particular, he makes an observation similar to one that international plaintiffs’ class action lawyers Michael Hausfeld and Brian Ratner make in the forthcoming book World Class Actions: that one of the potential implications of the US Supreme Court’s 2010 decision in Morrison v. National Australia Bank, which limited f-cubed securities class actions in the United States, may be an increase in litigation in foreign jurisdictions that allow for securities class actions or some other form of collective redress.

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Alison Frankel, whose On the Case blog is featured in the Thomson Reuters News and Insight section, posted this interesting article today discussing a novel alternative to the class action as a device to resolve mass disputes.  The procedural device in question is Article 77 of the New York State Code, which allows a trustee to seek court approval of decisions relating to a trust.  Frankel’s article today offers an update on proceedings brought under Article 77 seeking approval of an agreement between institutional investors and the trustee of hundreds of residential mortgage-securitization trusts, which had created in order to allow banks to raise funds in order to offer residential mortgages to consumers.  If approved, the settlement would resolve the claims of not only the institutional investors who reached the settlement with the trustee, but also potential claims of other investors in the trusts.  Thus, Article 77 essentially provides a means of creating a global settlement of all investor’s claims, without allowing the opportunity to opt out, which would have been available if the agreement had been presented as a proposed class action settlement. 

Frankel has done an excellent job of summarizing the issues in the case as well as today’s Second Circuit Court of Appeals decision holding that the federal courts lack jurisdiction over the case under the Class Action Fairness Act (CAFA) as a result of the securities exception in 28 U.S.C. §§ 1332(d)(9)(C) and 1453(d)(3), so I won’t re-summarize the article here but simply commend it to your reading.  The case is BlackRock Fin. Mgmt. Inc. v. The Segregated Account of Ambac Assur. Corp., 11-5309-cv(L), (2d Cir., Feb. 27, 2012).

Although the use of Article 77 to create a binding settlement that does not require an opportunity to opt out may be a novel strategy, the case highlights an often-overlooked option that may be available in any class action litigation involving a trust, benefits plan, or other fund with a custodian or trustee.  This would include certain banking and securities cases or class actions filed under the Employee Retirement Income Security Act (ERISA) against a party other than the trustee.  Rather than having to negotiate with class action lawyers, it may be possible in these contexts to come to a global resolution of a dispute by negotiating with the trustee and then seeking court approval of that agreement.  Even if a class action is pending, resolution of the dispute with the trustee may provide grounds to defeat class certification on superiority grounds, since a settlement with a party having a fiduciary responsibility to the beneficiaries of the fund can be an adequate and significantly more efficient means of resolving any dispute.

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I have to put in a little pitch for one of the many worthy blogs nominated for the ABA Journal’s Blawg 100 awards this year.  I must admit my bias.   TheRacetotheBottom.org is edited by one of my favorite law school professors, Jay Brown, and the contributors are students and other faculty from my alma mater, the University of Denver Sturm College of Law.  However, it is also one of the best sources on the Web for information on corporate governance and securities class actions.  You can vote for TheRacetotheBottom and many other fine law blogs on the ABA Journal’s Blawg 100 page.

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David H. Kaye, Distinguished Professor of Law and Weiss Family Faculty Scholar at the Penn State School of Law, recently published a fascinating commentary in the BNA Insights section of the BNA Product Safety & Liability and Class Action Reporters, entitled Trapped in the Matrixx: The U.S. Supreme Court And the Need for Statistical Significance.  In the article, Professor Kaye applies his vast expertise in the areas of scientific evidence and statistics in the law to add some color to the U.S. Supreme Court’s March 2011 decision in the securities class action Matrixx Initiatives, Inc. v. Siracusano

For those not familiar with Matrixx, the case involved allegations that the makers of the cold remedy product, Zicam, withheld information from investors suggesting that the product may cause a condition called anosmia, or loss of smell.  At the risk of oversimplifying, the holding of Justice Sotomayor’s unanimous opinion can generally be summarized as follows: in a securities fraud action arising out of an alleged failure to disclose information about a possible causal link between a product and negative health effects, the plaintiff need not allege that the omitted information showed a statistically significant probability that the product causes the ill effects in order to establish that the information was material.  The decision reaffirms the applicability of the reasonable investor standard for materiality announced in Basic Inc. v. Levinson, which looks to whether the omitted information would have “significantly altered the ‘total mix’ of information made available” to investors. 

Thus, Matrixx eschews a bright-line rule (statistical significance) in favor of a more flexible “reasonable investor” standard.  Professor Kaye does not take issue with the Court’s rejection of a bright line rule requiring a plaintiff to plead (and ultimately, prove) statistical significance of omitted information in the securities context.  Instead, he is critical of the Court’s failure to articulate in better detail the technical shortcomings of using statistical significance as a bright-line rule, and he cautions against interpreting Matrixx as suggesting that something less than statistical significance would be appropriate to prove a causal link between a product and disease in other contexts.  In other words, it is one thing to say that the causal link does not have to be statistically significant in order for information about an association between the product and disease to be meaningful to investors or consumers.  It is another thing to say that statistical significance is unimportant when it is necessary to actually show evidence of a causal link itself, such as in the toxic tort context.

Although I followed and generally agreed with Professor Kaye’s article from a legal perspective, there were some technical concepts discussed in the article that were admittedly a bit over my head.  Fortunately, I knew just who to ask for more insight, having recently worked with Justin Hopson of Hitachi Consulting on two CLE presentations discussing the use of statistics in class actions.  Here are some of Justin’s observations after reading the article:

  • The article is well-written.  Professor Kaye would make a good expert witness.
  • Kaye identifies studies showing that zinc sulfate caused anosmia.  He does not comment on zinc acetate, nor zinc gluconate, the active ingredients in Zicam.  It sounds like the causal link may have been known, and available to use.  So, this was not a case about “arbitrary statistics.”  Instead, the issue had to do with the measurement of an understood, causal relationship.
  • Kaye describes the standard applied in Matrixx as looking to whether a reasonable investor would find the omitted information “sufficiently extensive and disturbing” to induce him to make a different investment decision.  Nonlawyer experts may be tempted to ask for a formulaic definition for this phrase, and it may not be obvious without explanation that the standard would leave the question about what is “sufficiently extensive and disturbing” to the factfinder.
  • Kaye talks about the historical treatment of .05 as the threshold “significance level” that makes something statistically significant.  I’ve often thought of “significance level” associated with the relative degress of the “risks”.  If the risk of being wrong is death, then is 1-in-20 OK?  You really have to think through: What does Type I and Type II error look like in my experiment?  What are the implications?
  • If one were really attempting to compute the potential causal connection between Zicam and anosmia, it might help to understand why the FDA suggested a background rate in “all cold remedies”.  If the causality is related to zinc sulfate, then isn’t that the common population?
  • The point that the 0.05 “convention” is somewhat arbitrary is an important one.  Kaye observes that “[a] useful rule of complaint drafting must avoid inquiries into the soundness of expert judgments about the population, the test statistic, and the model.”  Hmm…so how do we get a useful rule if you cannot attack the fundamentals?  Indeed, Kaye’s next point is that Bayesian analysis should be used sometimes.  All inferential statistics have assumptions, and any appropriate standard of pleading or proof should be flexible enough to allow the opposing lawyer to challenge every single assumption. 
  • The observation that “the p-value, by itself, cannot be converted into a probability that the alternative hypothesis is true” is also very important.  This is a common misunderstanding in beginning stats because we teach, “I fail to reject the null hypothesis.  Or I reject the null, and accept the alternative hypothesis.”  It becomes very important to correctly specify null/alternative in exhaustive and exclusive terms.  Otherwise some other non-specified conclusion should be reached.
  • The one thing I might challenge is the assertion that adverse event reports (AERs) are “haphazardly collected data”.  I’m not sure why Kaye chose this phrase.  The AERs should be observations.  It is only their cause that is in doubt.  It is not their function to establish the causal link.  Instead, the link would have to be established with other data, such as through a clinical trial using a well-organized data collection process.

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It’s not too late to sign up for tomorrow’s Strafford Publications Webinar Class Certification After Dukes, Bayer and Halliburton Rulings.   As a preview, here is a copy of the written materials for my portion of the presentation, Opposing Class Certification After Dukes, Bayer and Halliburton.  I hope you can make it.

 

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Just when we were starting to think that 2011 might mark the end of the great American class action…

Today, the Supreme Court issued a unanimous decision reversing a denial of class certification in the securities class action Erica P. John Fund, Inc. v. Halliburton Co., No. 09-1403, slip op (June 6, 2011).  In the opinion, authored by Chief Justice Roberts, the Court held that the Fifth Circuit Court of Appeals had erred by requiring a securities fraud plaintiff proceeding under a “fraud on the market” theory to prove loss causation as a prerequisite to class certification. 

The decision does not necessarily mean that class certification will be granted, however.  It just means that the denial of class certification cannot rest on the conclusion that the plaintiff failed to prove loss causation at that stage.  The case will be remanded to the Fifth Circuit, which may consider any other arguments against class certification to the extent that they have been preserved by the defendant.  See Slip Op. at 9.

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