Source: http://blog.abbeyspanier.com/category/securities/
Timestamp: 2019-04-26 01:54:56+00:00

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As discussed in a post last year, on March 19, 2013, Justice van Rensburg of the Ontario Superior Court of Justice issued an opinion relating to overlapping class action proceedings against IMAX Corporation (“IMAX”) in the United States and Ontario, Canada (the “March 2013 Order”). In her decision, Justice van Rensburg recognized a U.S. class action settlement with IMAX, which had already been approved by a U.S. Court and amended its previous decision certifying a “global” class of investors that acquired IMAX shares on both the NASDAQ and TSX stock exchanges. The March 2013 Order amended the definition of the Ontario global class by removing all persons previously within the Ontario global class who decided to participate in the settlement arising out of the parallel U.S. proceedings, and approved by the U.S. Court. The removal from the Ontario global class of all class members who would partake in the U.S. settlement was a condition of that settlement and prevented any double recovery from both jurisdictions.
Shortly after the decision, Plaintiffs in the Canadian Action appealed the March 2013 Order.
On October 29, 2013, Justice Tzimas of the Ontario Superior Court of Justice issued an order denying the Canadian plaintiffs’ July 29, 2013 motion for leave to appeal the March 2013 Order. See Silver v. IMAX Corp.,  ONSC 1667 (Can. Ont. Sup. Ct. J.), Reasons for Judgment, October 29, 2013. A copy of that decision can be found here. In rejecting the Canadian plaintiffs’ motion for leave, Justice Tzimas determined, among other things that, “The amendment of the class would facilitate the exercise of a class member’s litigation autonomy. It would not take anything away. Nobody would be forcing a class member to exercise his option on the day of reckoning in one way or another. To the contrary, a refusal to amend the class would effectively extinguish the U.S. settlement completely, and therefore, take away the settlement option from the class members who wanted to settle their claim.” Id. at ¶44.
In November 2013, after the parties in the U.S. Class Action determined that the March 2013 Order is now final and unappealable, Lead Plaintiff in the U.S. Class Action moved the U.S. Court for entry of final judgment. On November 21, 2013, the Court entered a final judgment dismissing all claims against defendants IMAX, Richard L. Gelfond, Bradley J. Wechsler, Francis T. Joyce and PricewaterhouseCoopers-Canada LLP (the “Final Judgment Order”). The Final Judgment Order permits the U.S. settlement to be concluded and payments to eligible claimants to proceed.
On March 19, 2013, Justice van Rensburg of the Ontario Superior Court of Justice issued an important decision relating to overlapping class action proceedings against IMAX Corporation (“IMAX”) that are currently pending in the United States and Ontario, Canada. In the opinion, the Ontario Court recognized a U.S. class action settlement with IMAX, which has already been approved by a U.S. Court and amended its previous decision certifying a “global” class of investors that acquired IMAX shares on both the NASDAQ and TSX stock exchanges. See Silver v. IMAX Corporation, 2013 ONSC 1667 (March 19, 2009, Sup. Ct. J.). A copy of the Order can be found here. The Canadian decision is significant for practitioners involved in parallel securities class actions in the United States and Canada.
In August 2006, IMAX announced that it was in the process of responding to an informal inquiry from the Securities and Exchange Commission concerning the timing of revenue recognition, and specifically, its application of multiple element arrangement accounting to revenue derived from theater system sales and leases. This disclosure severely impacted the value of IMAX’s stock which dropped by approximately 40% following the announcement. At that time, IMAX was incorporated under the laws of Canada, duly headquartered in Canada and New York and held a dual-listing on the NASDAQ and TSX stock exchanges.
Following the announcement of the SEC’s investigation, class action lawsuits were commenced in the United States District Court for the Southern District of New York (“U.S. Court”) alleging that IMAX and other defendants made material misrepresentations and omissions regarding revenue recognition for theater systems in violation of the federal securities laws. The U.S. actions were not the only proceedings triggered by the disclosure of IMAX’s revenue recognition issues. On September 20, 2006, following the filings of the U.S. class actions, a parallel class action lawsuit captioned Silver v. IMAX Corporation, Court File No. CV-06-3257-00, was filed in the Ontario Superior Court of Justice, Canada (the “Canadian Action”) against IMAX and other defendants alleging, based on substantially identical facts to those alleged in the U.S. actions, that IMAX made material misrepresentations and omissions regarding revenue recognition for theater systems.
After the U.S. actions were consolidated, an amended complaint was filed against the defendants by the lead plaintiff in the U.S. Court. After briefing by the parties, on September 15, 2008, the defendants’ motions to dismiss were denied by the U.S. Court. See In re IMAX Sec. Litig., 587 F. Supp. 2d 471 (S.D.N.Y. 2008). Shortly after discovery commenced in the U.S. Action, the lead plaintiff moved for class certification (seeking a global class of investors). However as a result of the Second Circuit’s decision in W.R. Huff Asset Management Co., LLC v. Deloitte & Touche LLP, 549 F.3d 100 (2d Cir. 2008), several procedural issues surfaced that complicated and derailed the progress in the U.S. Action. In the intervening time period, the Canadian Action started progressing more rapidly and the parties completed class certification discovery and submitted briefing on plaintiffs’ motion for certification of a global class.
On December 14, 2009, the Canadian Court certified the Canadian Action on behalf of investors worldwide who acquired IMAX’s common stock on the NASDAQ or Toronto Stock Exchange. See Silver v. IMAX Corporation,  O.J. No. 5585, 2009 ON.C. LEXIS 4847 (Dec. 14, 2009, Sup. Ct. J.). The certified class in the Ontario proceedings was defined as: “All persons, other than the Excluded Persons, who acquired securities of IMAX during the Class Period on the TSX and on the NASDAQ on or after February 17, 2006 and held some or all of those securities at the close of trading on August 9, 2006.” At the time, the Canadian order certifying a “global class” of IMAX investors was unprecedented in Canadian class action procedure.
The U.S. class action was able to get back on track and by November 2011, the parties in the U.S. Action commenced settlement negotiations and reached a final settlement agreement in March 2012. In light of the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), the settlement class included only those who “purchased or otherwise acquired IMAX shares on the NASDAQ from February 27, 2003 through July 20, 2007” and excluded those who purchased IMAX stock on the Toronto Stock Exchange. In order to address the overlap between the U.S. class and Canadian class (overlapping class members are those who purchased or acquired their IMAX shares on the NASDAQ between February 17, 2006 and August 9, 2006) the settlement agreement was conditioned on the entry of an order in the Canadian Action that excluded from the Canadian class any investor who did not opt out of the U.S. class (the “Canadian Order”). If the Canadian Order was not granted, the settlement would not proceed and the parties to the U.S. Action would revert back to their previous litigation positions.
After the U.S. Court preliminarily approved the settlement on March 28, 2012, the IMAX defendants made a motion to the Canadian Court to amend the “global” class definition to exclude from the certified Canadian class all persons who would be bound by a final judgment in the U.S. settlement.
On April 27, 2012, notice was published in the U.S. Action. The U.S. notice described the parallel U.S. and Canadian class actions, noted the differences in the proceedings and advised all class members (i.e. those who purchased or otherwise acquired IMAX shares on the NASDAQ between February 27, 2003 and July 20, 2007) of their right to remain in the class in the U.S. Action and be eligible to claim their settlement compensation, or to opt-out, and pursue their own individual action, or opt-out and elect to remain instead in the class in the Canadian Action (i.e. those who purchased IMAX securities on the NASDAQ on or after February 17, 2006 and held some or all of those securities on August 9, 2006). Presumably overlapping class members would opt-out of the U.S. settlement and choose to remain in the Ontario class if they thought that they would receive a better recovery in the Canadian Action. If an overlapping class member did not opt out of the U.S. Action, they would automatically be bound and deemed to be a member of the class in the U.S. Action and excluded from the Canadian Action.
A fairness hearing to consider the final approval of the U.S. settlement was held in the U.S. Court on June 14, 2012, resulting in an Order dated June 20, 2012 (the “U.S. Fairness Decision”) determining that the U.S. settlement was fair, reasonable and adequate and in the best interests of the U.S. class. In re IMAX Sec. Litig., No. 06-6128 (S.D.N.Y. June 20, 2012). Although the U.S. settlement was approved, finality of the settlement is contingent on the Canadian Court amending the class definition and the Canadian Order becoming final and unappealable.
Approximately a year after the defendants made their motion to the Ontario Court to amend the global class definition, on March 19, 2013, Justice van Rensburg issued a detailed opinion granting the motion. In granting the defendants’ motion, Justice van Rensburg first determined that under Sections 5(1)(d), 8(3) and 10(1) of the Ontario Class Proceedings Act, 1992, S.O. 1992, c. 6, the Ontario Court had authority to amend its previous order certifying a “global” class. Justice van Rensburg noted in the opinion that her original decision to certify a global class “contemplated [ ] that this issue could be revisited depending on what occurred in the parallel U.S. proceedings.” Silver, 2013 ONC 1667, para. 67.
As part of her consideration to amend the certified global class, Justice van Rensburg determined that the Court needed to recognize the U.S. Fairness Decision and consider whether the Canadian Action remained the “preferable procedure” for resolving the claims of overlapping class members who did not opt out of the U.S. Settlement. Silver, 2013 ONC 1667, para. 83-85. When determining the issue of recognition, the Court applied the factors from the Canadian Court of Appeal’s decision in Currie v. McDonald’s Restaurants of Canada Ltd., (2005), 74 O.R. (3d) 321 (C.A.).
I have applied the factors from the Court of Appeal’s decision in Currie with respect to when a decision of a foreign court purporting to settle claims of class members that are the subject of parallel proceedings in Ontario, will be given preclusive effect. Having determined that the U.S. Court has a “real and substantial connection” with the claims of the overlapping class members, I have considered whether there was procedural fairness in the treatment of such claims (including the adequacy of notice and representation in the proceedings). Having found that the U.S. Settlement should be recognized, I have considered all of the circumstances, including the current status of these proceedings, before concluding that the Ontario Action is no longer the ‘preferable procedure’ for the determination of the claims of class members whose claims are covered by, and who have not opted out of, the U.S. Settlement. The class definition in these proceedings is amended accordingly.
Silver, 2013 ONC 1667, para. 18.
It is not the function of this court to seek to jealously guard its own jurisdiction over a class proceeding that has been certified here. Such an approach is inconsistent with the principles of comity. It is also not the function of the court to favour or protect the interests of class counsel within this jurisdiction, knowing that they have invested time and resources into the litigation, and that their compensation will depend on the size of the judgment or settlement they are able to achieve. As I have already noted, class action counsel assume significant risks, including the potential that the court may certify a smaller class than that requested. In pursuing an action when there are existing parallel proceedings in another jurisdiction, class counsel are aware that the other action might move more quickly or reach a determination before their own case is decided or resolved.
All persons, other than Excluded Persons, who acquired securities of Imax during the Class Period on the TSX and on NASDAQ, and held some or all of those securities at the close of trading on August 9, 2006 (the “Class Members”).
“Excluded Persons” means Imax’s subsidiaries, affiliates, officers, directors, senior employees, legal representatives, heirs, predecessors, successors and assigns, and any member of the defendants’ families and any entity in which any of them has or had during the Class Period a legal or de facto controlling interest and all NASDAQ purchasers during the Class Period who did not deliver an opt out notice in the U.S. class action In re IMAX Securities Litigation, Civil Action No. 1:06-cv-06128 (S.D.N.Y.).
Abbey Spanier, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm. As lead counsel in the IMAX U.S. class action, we are extremely pleased with the decision from the Ontario Court. The plaintiffs in the Canadian Action are currently in the process of appealing Justice van Rensburg’s March 2013 Order. The decision to grant the defendant’s motion to amend the class will permit the U.S. settlement to be concluded and payments to eligible claimants will proceed once the Canadian Order becomes final and unappealable.
The fraud on the market theory is based on the hypothesis that, in an open and developed securities market, the price of a company’s stock is determined by the available material information regarding the company and its business…Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements…The causal connection between the defendants’ fraud and the plaintiffs’ purchase of stock in such a case is no less significant than in a case of direct reliance on misrepresentations.
Id. at 241-42 (citation omitted). The fraud-on-the-market doctrine dispenses with the requirement that an investor prove that he or she was aware of a particular misstatement, or that he or she directly relied on it. Id. at 246-47.
Recently, Oregon became the first state to adopt the fraud-on-the-market theory. On December 13, 2012, the Oregon Supreme Court issued an opinion finding that a stock purchaser who brings a claim for damages based on misrepresentations under Oregon Securities Laws can rely on the “fraud-on-the-market” doctrine. State of Oregon v. Marsh & McLennan Cos., Inc., Nos. CC050808454, CAA139453, SC S059386, 2012 WL 6212518 (Or. Sup. Ct. Dec. 13, 2012). A copy of the opinion can be found here.
In Marsh, The State of Oregon, acting on behalf of the Oregon Public Employee Retirement Fund (collectively, the “State”), asserted state law claims against Marsh & McLennan Companies, Inc. and Marsh, Inc. alleging that the insurance companies engaged in a scheme perpetrated by false and misleading statements that caused the State to lose approximately $10 million on investments in Marsh stock. The trial court determined that the provisions of ORS 59.135 and ORS 59.137 require proof of reliance, that the State had failed to establish proof of actual reliance, and that a stock purchaser under Oregon’s securities laws was prohibited from establishing reliance through the fraud-on-the-market doctrine. The Court of Appeals affirmed the trial court’s determination.
For the Oregon Securities Law to be consistent with the corresponding federal securities law, the 2003 Oregon legislature must have intended that fraud-on-the-market claims that had been recognized since 1988 by the United States Supreme Court under federal securities law be incorporated into Oregon law.
We conclude that, in recognizing claims under Oregon law for damages to open market stock purchasers “caused by” misrepresentations by companies whose stock is sold on the open market, the Oregon Legislative Assembly intended that the causal connection in such sales could be established through the use of the fraud-on-the-market doctrine. In other words, we understand that in recognizing claims by open market stock purchasers, the Oregon legislature also provided the means of proving such claims when the stock purchases were made in non-face-to-face transactions on the open market – and we further understand that the Oregon legislature intended to adopt as one of the available means the fraud-on-the-market doctrine that the federal courts had provided under federal securities law since 1988. To conclude otherwise would be to interpret the terms of ORS 59.137 enacted by the Legislative Assembly in a restrictive manner when the unquestioned intent of the legislature was to expand the reach of the Oregon Securities Law to make it consistent with federal securities law.
Recently, in Absolute Activist Value Master Fund Limited v. Ficeto, Docket No. 11-0221-cv, 2012 U.S. App. LEXIS 4258 (2d Cir. Mar. 1, 2012), the Second Circuit interpreted for the first time, the second prong of the test enunciated by the Supreme Court in Morrison v. National Australia Bank, 130 S. Ct. 2689 (2010), which rejected nearly fifty years of legal precedent and limited the ability of investors to invoke the protection of the United States securities laws. In Morrison, the Supreme Court held that Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) only applies to “transactions in securities listed on domestic exchanges and domestic transactions in other securities.” 130 S. Ct. at 2884, 2886.
In Absolute Activist, the Second Circuit determined under what circumstances the purchase or sale of a security not listed on a domestic exchange should be considered “domestic.” The Court concluded that transactions involving securities that are not traded on a domestic exchange are domestic if irrevocable liability is incurred or title passes within the United States. 2012 U.S. App. LEXIS 4258, at *16.
Because the point at which the parties become irrevocably bound is used to determine the timing of a purchase and sale, the Court held that the point of irrevocable liability also can be used to determine the locus of a securities purchase or sale. Thus, in order to adequately allege the existence of a domestic transaction, it is sufficient for a plaintiff to allege facts leading to the plausible inference that the parties incurred irrevocably liability within the United States: that is, that the purchaser incurred irrevocable liability within the United States to take and pay for a security, or that the seller incurred irrevocable liability within the United States to deliver a security. 2012 U.S. App. LEXIS 4258, at *20-21. However, the Court did not believe this was the only way to locate a securities transaction. Because a “sale” is ordinarily defined as “[t]he transfer of property or title for a price,” the sale of securities can be understood to take place at the location in which title is transferred. 2012 U.S. App. LEXIS 4258, at *21.
The Absolute Activist court rejected several other tests proposed by the parties. Although the Court acknowledged that the location of the broker could be relevant to the extent that the broker carries out task that irrevocably bind the parties to buy or sell securities, the location of the broker alone does not necessarily demonstrate where a contract was executed. 2012 U.S. App. LEXIS 4258, at *22. The Court also rejected the test that the identity of the securities i.e. that the securities were issued by a U.S. company and registered with the SEC, should determine whether a transaction was domestic. The Second Circuit also rejected defendants’ argument that the identity of the buyer or seller should be used to determine whether a transaction is domestic.
Last year, in our December 2010 blog post, we reported about the “Martin Act” which provides the New York Attorney General with the authority to file civil or criminal charges for fraud in connection with the offer and sale of securities, in and from New York State. As we explained in that post, for many years, the majority of federal and New York state courts have taken the position that the Martin Act gives exclusive authority to the Attorney General, and thus preempts any private non-fraud common law causes of action (e.g. breach of fiduciary duty, gross negligence, unjust enrichment, negligent misrepresentation) related to the sale of securities.
More recently, in cases brought by investors seeking to recover losses related to the Bernard Madoff scandal, New York courts have been unwilling to follow Anwar I or Assured. See In re J.P. Jeanneret Assocs., 769 F. Supp. 2d 340 (S.D.N.Y. January 31, 2011)(dismissing all state law claims as preempted by the Martin Act); Merkin v. Gabriel Capital, L.P., 2011 U.S. Dist. LEXIS 112931 (S.D.N.Y. Sept. 23, 2011)(dismissing non-fraud claims for breach of fiduciary duty, gross negligence (and mismanagement), and unjust enrichment as preempted by the Martin Act).
[A] private litigant may not pursue a common-law cause of action where the claim is predicated solely on a violation of the Martin Act or its implementing regulations and would not exist but for the statute. But, an injured investor may bring a common-law claim (for fraud or otherwise) that is not entirely dependent on the Martin Act for its viability. Mere overlap between the common law and the Martin Act is not enough to extinguish common-law remedies.
Assured Guaranty, slip op. at 10-11.
This landmark decision is a victory for investors and will likely have a wide impact on pending and future class action litigations.
Abbey Spanier, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm with a concentration in employment law.
In the Ninth Circuit, a plaintiff invoking the fraud-on-the-market presumption at the class certification stage does not need to prove materiality; he must only plausibly allege that the misstatements were material.In so holding, the Ninth Circuit joins the Third and Seventh circuits, but adds to the growing divide among the circuits. The First, Second, and Fifth circuits require proof of materiality before a plaintiff may assert the fraud-on-the-market presumption.
In Connecticut Retirement Plans and Trust Funds v. Amgen Inc., No. 0956965, 2011 U.S. App. LEXIS 22540 (9th Cir. Nov. 8, 2011), the court held that “a plaintiff need not prove materiality at the class certification stage to invoke the [fraud-on-the-market] presumption,” emphasizing that “materiality” is a merits issue to be addressed at trial. Id. at *18.
In Amgen, the plaintiff class alleged that the company had misrepresented key safety information relating to two Amgen products used to treat anemia. The complaint alleged that Amgen: (1) downplayed the FDA’s safety concerns about its products in advance of an FDA meeting with a group of oncologists; (2) concealed details about a clinical trial that was canceled over concerns that Amgen’s product exacerbated tumor growth in a small number of patients; (3) exaggerated the on-label safety of its products; and (4) misrepresented its marketing practices, claiming that it promoted its products solely for on-label uses when it actually promoted off-label usage, violating federal law.Id. at *4–5.
In order to obtain class certification in a 10b-5 securities fraud case, the plaintiff, as required by Fed. R. Civ. P. 23(b)(3), must show that the element of reliance is common to the class. The U.S. Supreme Court first approved the fraud-on-the-market doctrine in Basic Inc. v. Levinson, 485 U.S. 224 (1988) and created the presumption of reliance. The doctrine is based on an efficient capital markets hypothesis—that is, the price of a stock traded in an efficient market reflects all publicly available information about the company and its business. Id. at 246–47. Any investor who purchased the stock in an efficient market is presumed to have relied on the integrity of that price, which reflects all publically available information. The presumption can be invoked even if the investor never saw the misstatements.See id. at 247.
In order to successfully invoke the fraud-on-the-market doctrine, the plaintiff must show that the stock was traded in an efficient market and that the alleged misstatements were public. Amgen argued that the plaintiff did not carry its burden because it failed to prove the alleged misstatements were material, noting that if those misrepresentations were immaterial, the statements would not affect the stock price in an efficient market. Therefore, Amgen argued, “each individual plaintiff would be left to prove reliance at trial individually—making a class proceeding unwieldy.” Amgen, 2011 U.S. App. LEXIS 22540, at *11.
The Amgen court, however, stated that, “because materiality is an element of the merits of their securities fraud claim, the plaintiffs cannot both fail to prove materiality yet still have a viable claim for which they would need to prove reliance individually.” Id. at *11.
“By contrast, the elements of the fraud-on-the-market presumption—whether the securities market was efficient and whether the defendant’s purported falsehoods were public—are not elements of the merits of a securities fraud claim. . . . Thus, if the plaintiffs failed to prove those elements, they could not use the fraud-on-the-market presumption, but their claims would not be dead on arrival; they could seek to prove reliance individually. That scenario, however, would be inappropriate for a class proceeding. Id. at *12–13.
As the Amgen court pointed out, the current split in authority over the issue of proving materiality at the class certification stage arises out of a misinterpretation of footnote 27 in Basic. According to the Seventh Circuit, “All note 27 [in Basic] does . . . is state that the court of appeals deemed materiality essential; the Justices did not adopt it as a precondition to class certification.” Schleicher v. Wendt, 618 F.3d 679, 687 (7th Cir. 2010). And, as the Amgen court noted, this reading of Basic has support in the Supreme Court’s most recent discussion of the fraud-on-the-market presumption in Erica P. John Fund v. Halliburton, 131 S. Ct. 2179, 2185 (2011), which requires the plaintiff to show that the stock was traded in an efficient market and that the information was public, but does not mention that materiality is a prerequisite.
David Brown is a third year student as New York Law School. He is Executive Editor of Law Review. He has interned at the US Attorney’s Office for the Eastern District of New York and for the Honorable Joel H. Slomsky, US District Court, Eastern District of Pennsylvania.
Is Mandatory Audit Firm Rotation Necessary for True Audit Independence?
The Public Company Accounting Oversight Board, also known by the forgettable initials PCAOB, was established pursuant to the Sarbanes-Oxley Act of 2002. The PCAOB defines its mission as overseeing the audits of public companies in order to protect the interests of investors and furthering the public interest in the preparation of informative, accurate and independent audit reports. SOX considered the effectiveness of outside auditors very important in protecting investors from corporate fraud. The PCAOB, established up front in Title I of SOX, was to be the cornerstone of that effort. SOX specifically addressed the role of outside public auditors, particularly in Title II, “Auditor Independence.” Among other things, Title II, in Section 203, “Audit Partner Rotation,” prohibits a public accounting firm from keeping the same lead audit partners in charge of the financial statement audits of the same public company for more than five consecutive years.
The concept release invites comments from the public on mandatory audit firm rotation and related auditor independence concerns, due by December 14, 2011, and announces that the PCAOB will hold a public roundtable on the concept release issues in March 2012. We will follow developments relating to the concept release and other auditor independence issues and report on them from time to time in this forum.
In connection with volatile stock markets, Warren Buffett once said, “It’s only when the tide goes out that you learn who’s been swimming naked.” One would expect to see some naked swimmers, i.e. traders who are suffering huge losses, when the Dow Jones Industrial Average fell 15% between late July and mid-August, in part due to the debt-ceiling fiasco in Congress. A subsequent Standard & Poors downgrade of US sovereign debt and the European debt crisis have only fueled the market volatility.
Cue up the recent story that UBS AG (NYSE: UBS) may have to restructure due to over $2.3 billion of losses allegedly attributed to a “rogue trader,” Kweku Adoboli. The losses were a huge blow to UBS and its shareholders, and led to the resignation of CEO Oswald Gruebel as well as Adoboli’s boss in the Equity Trading department, John Hughes. Apparently, the trading losses came to light only when Adoboli himself told superiors about them. Athough Adoboli was allegedly able to conceal huge bets against major European stock indexes using fictitious hedging trades, at a minimum there was a lack or failure of risk management controls that should have alerted UBS’s management before the trader was able to take on such huge risk.
So who suffers? UBS shareholders who’ve watched their stock holdings get slaughtered on the news. UBS owes its shareholders a duty to implement a reasonable risk management control system so that these $2 billion surprises are prevented. UBS was on notice regarding the damage other banks, such as Barings Bank, Société Générale, and Kidder Peabody, famously suffered at the hands of rogue traders.
For example, Great Britain’s Barings Bank managed to survive for more than a couple centuries before succumbing in 1995 to the trading folly of Nick Leeson, whose unsupervised trading activities cost Barings $1.3 billion and forced the venerable institution into insolvency the day after Leeson’s 28th birthday. Investigators agreed that Barings’ demise resulted from poor risk management and lack of employee oversight.
In 1994, Kidder Peabody, a 130-year-old American institution, fell at the hands of Joseph Jett and equity investors were harmed. And more recently, Société Générale’s flamboyant junior trader Jerome Kerviel in early 2008 allegedly cost the French bank $7 billion due to poor internal risk management controls.
After a few of these high-profile catastrophes, one would think that all investment banks would implement reasonable, yet rigorous, checks and balances to reduce the banks’ exposure to rogue trading activities. But alas, UBS shows that bank management, even after the chastening losses from the bursting of the mortgage backed securities bubble, is incapable of taking, or does not want to take, these steps. Therefore, it’s incumbent on the shareholders to hold management accountable through activism and litigation to protect their investment and stop management from blinding themselves to the very real risk that aggressive traders will always be tempted to roll the proverbial dice with shareholders’ assets.
As this UBS story develops, some colorful characters have already emerged, making it almost certain that a film will result from the scandal. Going Rogue may have its place in politics, but shareholders should not tolerate it in their investment bank.
Abbey Spanier, LLP is located in New York City, is a well recognized national class action and complex litigation law firm.
In our June blog post , we reported that the U.S. Securities and Exchange Commission proposed new regulations in its effort to ensure that credit rating agencies no longer have conflicts with the issuers they rate. During the last several months, various lawmakers and consumer advocates have suggested that the proposals are inadequate.
For example, last week The New York Times reported that Sen. A. Franken, Democrat of Minnesota, participated in a conference call held by Americans for Financial Reform and said that the SEC’s proposals fail to respond to the conflict of interest inherent in the credit rating system. Franken is an advocate for eliminating the current rating model in which corporations and banks that issue debt pay the rating agencies to rate their products. Instead, Franken has proposed that the SEC create an independent, self-regulatory organization that would be responsible for assigning ratings to different credit agencies.
Barbara Roper, director of investor protection at the Consumer Federation of America (“CFA”), has also urged the SEC to strengthen the proposed rules. The CFA believes that the “recent proposals from the SEC to improve regulation in these areas fall well short of what is needed to deliver the sweeping reforms promised by the Dodd-Frank Wall Street Reform and Consumer Protection Act.” A copy of the CFA’s August 8, 2011 comment letter to the SEC which provides recommendations to improve the proposed rules can be found here.
A list of additional comments to the SEC’s proposed rules can be found here.
The U.S. Securities and Exchange Commission (the “SEC”) has been widely criticized for its credit rating agency oversight failures and, as we noted in a post several weeks ago (here), the SEC recently decided to propose new, tougher regulations to ensure that credit rating agencies don’t have conflicts with the issuers they rate.
A June 17, 2011, The Wall Street Journal article indicates that that the SEC may be going further than proposing new regulations. It is considering civil fraud charges against certain credit rating companies, including Standard & Poor’s and Moody’s, for their roles in providing undeserved positive credit grades on the mortgage-backed securities that triggered the financial crisis.
According to the news article, the SEC is questioning whether the ratings companies committed fraud by failing to do enough research to be able to adequately rate the pools of subprime mortgages and other loans that underpinned the mortgage-bond deals. This includes the rating agencies’ reliance on incomplete or out-of-date information and ignoring clear signs of problems which resulted in unduly high ratings to slices of the deals that were sold to investors.
Abbey Spanier will continue to monitor the SEC’s investigation and report back with any relevant updates.
On Monday, June 6, the Supreme Court issued a very short and, for plaintiffs’ securities lawyers, sweet decision almost summarily reversing the Fifth Circuit’s decision denying Rule 23 (b)(3) class certification to the lead plaintiff in a 10b-5 securities fraud class action. Erica P. John Fund, Inc. v. Halliburton, 563 U.S. ____(2011). This should not be taken as a sign that this Supreme Court has turned soft on plaintiffs or hard on big business. It was just that the Fifth Circuit was so very wrong.
While it is no longer true that the merits are entirely banished from the Rule 23 class certification proceeding, the Fifth Circuit’s attempted imposition of a Rule 23 requirement of “proof” of one of the key elements of a 10b-5 claim was leading to pitched battles over class discovery, which would rival full merits discovery if the burden to “prove” loss causation at that early stage became the law of the land. Such a requirement, Chief Justice Roberts wrote, simply cannot be found in Rule 23.
Concern over the imposition of stricter loss causation scrutiny under Rule 23 has already caused many plaintiffs to engage expensive market experts to perform premature “event studies”. These are elaborate analyses of market trading and disclosures for widely traded public companies, to support the allegations in a securities fraud class action complaint that plaintiff investors suffered losses when defendants’ false representations about the company were eventually revealed to the world and caused the market price of the company’s stock to fall.
Now, plaintiffs will not be required to prove loss causation twice–once in a mini-bench trial and again before the jury.
Since 2008, the big three credit rating agencies, Moody’s Corporation, Standard & Poor’s and Fitch Ratings have been under intense scrutiny by Congress, the Securities and Exchange Commission and the general investing public for their role in the global financial crisis. Credit rating agencies are responsible for providing investors with information about the creditworthiness of different financial products. Prior to the bursting of the housing bubble, Moody’s, S&P and Fitch each consistently provided positive credit grades on mortgage-backed securities despite the fact that they were extremely risky products. Much of the criticism of the credit rating agencies relates to the fact that these firms are paid by the issuers they rate and therefore have a conflict of interest.
Require disclosure concerning third-party due diligence reports for asset-backed securities.
You can find the SEC’s press release here, which also contains a link to the proposed rules. Public comments on the SEC’s proposal are required to be submitted within 60 days after it is published in the Federal Register. The major rating agencies immediately issued press releases expressing general approval of the proposed rules, which rely primarily on internal self-assessment. So far one comment received by the SEC suggests that the new proposals are not enough and that periodic external audit of some rating agency decisions should also be imposed.
On March 22, 2011, the United States Supreme Court delivered a unanimous opinion that is quite favorable to investors and the lawyers who represent them.
Plaintiffs in this securities class action alleged that Matrixx Initiatives, Inc., the maker of a popular zinc-based cold remedy called Zicam, and three of its executives, failed to disclose customer reports that they lost their sense of smell when they used the nasal spray product, a condition known as anosmia.They argued that the condition was material information that should have been disclosed to investors since Zicam nasal spray lead to markedly increased sales at Matrixx.
Fortunately, the Supreme Court rejected Matrixx’s argument that it should adopt a “bright line” rule that reports like those at issue must be based on “statistically significant” information in order for the plaintiff’s case to proceed, observing that both the FDA and medical experts rely on evidence other than that which is statistically significant. The Supreme Court reiterated a standard for determining whether information is material to a shareholder that has long been the rule in securities cases:“whether a reasonable investor would have viewed the nondisclosed information as having significantly altered the total mix of information made available.” So, rather than adopting a specific rule that would require plaintiffs to allege a specific number or percentage of reported problems in order for their case to survive, the Supreme Court opted to maintain the rule that courts should revew the information in question in the context of the situation.
This sensible approach acknowledges that every case is different and must be evaluated on its own facts.
On February 15, 2011, NYSE Euronext, Inc. (“NYSE”) unveiled its merger plan with Deutsche Börse AG (“Deutsche Börse) which would result in cost synergies related in part to clearing and market operations. If consummated, the combined company would be 60% owned by Deutsche Börse shareholders, 40% owned by NYSE shareholders and the combined company would have dual headquarters in New York City and Frankfurt, Germany. Arguably, the New York Stock Exchange will no longer be American.
While there is no justification for knee jerk opposition to such an arguably unpatriotic transaction (the proposed merger is just the latest manifestation of the increasing and inevitable globalization of securities trading), we do have to ask how this globalization impacts the rationale of the Supreme Court’s decision last summer in Morrison v. National Australia Bank. That decision, as it has been interpreted by district courts, bars all investors, including U.S. citizens, from asserting Securities Exchange Act Section 10(b) fraud claims for the purchase of securities not listed for trading on a U.S. securities exchange. However, the globalization of securities trading was not made an issue in the briefing or argument in Morrison, nor was it discussed in the majority decision written by Justice Scalia.
That decision is based on the premise that when Congress passed the Securities Exchange Act in 1934, in the midst of the Great Depression, it did not specifically state that these anti-fraud provisions should have any extraterritorial application. It therefore followed that the many circuit courts that had established standards by which some but not all purchases or sales of securities outside the United States could be subject to Section 10(b) claims in U.S. district courts, were wrong. Rather, the Supreme Court imposed a stricter test limiting the reach of Section 10(b) to purchases and sales of securities listed on U.S. exchanges or unlisted securities where the transaction took place in the U.S.
It remains to be seen whether and to what extent the courts’ and Congress’s application of federal securities law will keep up with the realities of global securities markets.
As reported on January 7, 2011, the U.S. Supreme Court will hear an appeal from the Fifth Circuit Court of Appeals’ decision in Erica P. John Fund Inc v. Halliburton, No. 09-1403 that, for a lawsuit to proceed as a class action, the plaintiffs must prove, by a preponderance of the evidence, that the alleged misrepresentations caused the stock price to fall, resulting in investor losses. The appellate court’s decision requiring that plaintiffs prove this significant element of their case at the class certification stage, without the benefit of full discovery of the facts, has been challenged by attorneys in the Obama administration.
A common theme in criticism of the Fifth Circuit’s ruling is the impossibility of requiring plaintiffs to do at the class certification stage what would otherwise be done at the merits stage after full discovery. Showing proof of loss causation requires plaintiffs to produce empirical evidence, such as an event study, to analyze all possible causes of the drop in stock price and prove that it is more probable than not that the corrective disclosure, and not some other piece of bad news, caused the drop in stock price. At such an early stage of a litigation, discovery may not be complete, or even substantially underway and yet the Halliburton ruling requires plaintiffs to make that showing by a preponderance of all admissible evidence.
Plaintiffs’ lack of access to discovery at the class certification stage of a securities fraud suit is particularly significant if the Fifth Circuit’s opinion in this case is read to require proof of scienter as well as, or as a component of, loss causation. Under Fifth Circuit precedent, establishing loss causation requires plaintiffs to prove the corrective disclosure shows the misleading or deceptive nature of the prior positive statements and that the corrective disclosure more probably than not show that the original estimates or predictions were designed to defraud. Proving the nature of statements and a design to defraud before discovery has taken place is impossible for all practical purposes, absent a confession by a defendant or some other smoking gun.
As the brief filed by the Obama administration correctly notes, at the class certification stage, the Supreme Court has held that the question is not whether the plaintiff or plaintiffs have stated a cause of action or will prevail on the merits, but rather whether the requirements of Rule 23 are met. Aside from requiring plaintiffs to meet a monumental evidentiary burden prior to any significant discovery, the brief argues that this ruling is wrong for the additional and fundamental reason that it is based on a ground not found in Rule 23.
Is There No Judicial Love For Penny Stocks Under Morrison?
In response to the question “How do cases end up in law school text books,” one of my law school professors stated matter-of-factly, “Either because of bad lawyering or bad judging.” Without opining on said professor’s hypothesis, a recent court decision, Absolute Activist Value Master Fund Ltd. v. Homm et. al., reminded me of the professor’s conclusion.
The Homm decision was an early Christmas gift to Homm and his merry band of domestic and international defendants – not only was it short, 11 pages, it was also sweet in that the judge, relying on the Supreme Court’s Morrison v. National Australia Bank decision, dismissed the plaintiffs’ case in its entirety. Securities law practitioners and the blogosphere are well aware of the tremendous implications of the Morrison decision, which has severely restricted the scope of Section 10(b) securities fraud claims.
Although the defendants in Homm, following the procedural path chosen by the Supreme Court, moved to dismiss the complaint for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure , Judge George B. Daniels of the United States District Court for the Southern District of New York dismissed all of the plaintiffs’ claims on the ground of lack of subject matter jurisdiction under Rule 12(b)(1). Subject-matter jurisdiction refers to whether the court in which the case has been filed has the legal authority or power i.e., the jurisdiction, to even look at the allegations to determine if they may have merit (e.g Judge Judy’s court does not have subject matter jurisdiction over terrorism cases).
Morrison did not hold that U.S. district courts may never exercise subject matter jurisdiction to decide the merits of Section 10(b) claims involving the purchase of securities traded on foreign exchanges or in foreign countries. Rather, the Supreme Court, per Justice Scalia, applied a legal doctrine known as the presumption of non-extraterritoriality to set new limiting standards that district court judges must consider if a defendant claims that the complaint filed against it does not properly support a securities fraud claim under Section 10(b). Specifically, Morrison held that because Congress did not explicitly state that Section 10(b) should apply extraterritorially, the scope of Section 10(b) securities fraud claims should be restricted by a “transactional test” to claims that a defendant has used a manipulative or deceptive device or contrivance only in connection with either (1) “the purchase or sale of a security listed on an American stock exchange”, or (2) “the purchase or sale of any other security in the United States.” While these standards, particularly the second, are subject to differing interpretations, some legal commentators read Morrison to limit the scope of a Section 10(b) claim to exclude all foreign security trades, irrespective of whether the purchaser was a US citizen or whether some aspects of the purchase or sale transaction occurred within the US.
In the Homm case, plaintiffs were investment funds organized in the Cayman Islands, i.e. foreign plaintiffs. Defendants, except for the broker-dealer underwriter of the securities at issue, were all foreign and the defendants had legal authorization to manage the investment decisions of the plaintiffs. The securities at issue were penny stocks of U.S. companies, but the securities traded in over-the-counter markets such as the Pink Sheets and OTCBB. In the complaint, the plaintiffs alleged that the defendant underwriter first sold plaintiffs shares in the penny stocks through a Securities and Exchange Commission (“SEC”) registered offering. After acquiring the shares in the offering, plaintiffs, upon defendants’ direction and control, bought more of those shares in the open market to move the price upward while those same defendants sold their own personal shares in what’s known as a pump-and-dump scheme.
“Plaintiffs are based in the Cayman Islands. Defendants, with the exception of Ficeto and Hunter, are foreign nationals. The corporations that issued the Penny Stocks were registered with the SEC, however, their shares were not traded on a domestic exchange. Instead, the fraudulent scheme alleged involved private offerings (i.e. the ‘PIPE’ transactions) in which the Funds were caused to purchase the illiquid shares directly from the companies through private placements. At no point were the shares released to the general market. In face, the entire ‘market’ alleged was the trading by and between the Funds. The Funds were based in the Cayman Islands and managed in Europe.
Query whether the presence in Homm of Cayman Island-based plaintiffs dealing in penny stocks may have justified the result reached. However, we do not believe it should have been at the cost of a ruling on subject matter jurisdiction that could preclude future plaintiffs, including those defrauded in the purchase of more “substantive” securities than penny stocks, from having their allegations receive review in the district court under Rule 12(b)(6) to determine if they state an actionable Section 10(b) claim. The question that will most likely be answered on appeal is whether this court has reached beyond even the highly restrictive limits of Morrison under any analysis.
On November 3, 2020, the Securities and Exchange Commission (“SEC”) issued a Rule Proposal for implementing a whistleblower program under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).
By way of background, prior to Dodd-Frank, employees were encouraged to “blow the whistle” on their employers by reporting fraud to the SEC but did not have very much financial incentive to do so. The SEC’s whistleblower program was limited to insider trading cases and the awards given were often small and discretionary.
However, Dodd-Frank is a game changer. Dodd-Frank broadens the SEC’s whistleblower program to include all kinds of federal securities violations, including accounting fraud. Most important, however, is the promise of large and mandatory bounties – up to 30% of the recovery – for those who furnish the SEC with useful and original information, subject to certain conditions.
In general, a whistleblower is deemed to have provided information voluntarily if the whistleblower has provided information before the government, a self-regulatory organization or the Public Company Accounting Oversight Board asks for it.
A whistleblower’s information can be deemed to have led to successful enforcement in two circumstances: (1) if the information results in a new examination or investigation being opened and significantly contributes to the success of a resulting enforcement action, or (2) if the conduct was already under investigation when the information was submitted, but the information is essential to the success of the action and would not have otherwise been obtained.
… in which the SEC obtains monetary sanctions totaling more than $1 million. No further explanation is provided on the SEC’s Fact Sheet; however, this should be self-explanatory.
Dodd-Frank allows potential whistleblowers to report fraud anonymously if they retain counsel to report the securities fraud on their behalf. The SEC’s Rule Proposal contemplates that attorneys may not only help the whistleblower complete the SEC’s required forms for reporting fraud, but may assist in the investigation of their claims.
Under Dodd-Frank, original information provided by a whistleblower can derive from “independent knowledge” and from “independent analysis.” The SEC’s Rule Proposal broadly defines “independent analysis” to mean the whistleblower’s own analysis, whether done alone or in combination with others. “Analysis” would mean the whistleblower’s “examination and evaluation of information that may be generally available, but which reveals information that is not generally known or available to the public.” This definition recognizes that there are circumstances where individuals can review publicly available information, and through their additional evaluation and analysis, can provide vital assistance to the SEC in understanding complex schemes and identifying securities violations.
Thus, under the SEC Rule Proposal, an attorney would be able to help a potential whistleblower develop and investigate the facts provided by the whistleblower by examining their legal import and determining whether any of the facts have either been disclosed publicly or intentionally concealed. The attorneys can also assist the whistleblower in completing the SEC’s required forms. Presumably, the stronger and more coherent the “tip” furnished to the SEC, the greater the likelihood that the SEC (or a collaborating federal agency) will bring an enforcement action. An attorney’s involvement could make a potential whistleblower’s submission stand out in the mountain of complaints and tips that the SEC has begun and will continue to receive under this new and expansive whistleblower program.
Finally, the SEC also expects that in the vast majority of cases in which a whistleblower is represented by an attorney, the whistleblower will enter into a contingency fee arrangement with the attorney, providing that counsel will be paid for the representation through a fixed percentage of any recovery by the whistleblower under the whistleblower program. Thus, the SEC Rule Proposal explains that most whistleblowers will not incur any direct expenses for attorneys’ fees for the completion of the SEC’s required forms.
I’m optimistic about the whistleblower program although I do think it will be difficult for the SEC’s limited staff and resources to weed out the useful and the less useful tips.
New York General Business Law, Art. 23-A, §§352-359, commonly referred to as the “Martin Act” provides the New York Attorney General with the authority to file civil or criminal charges for fraud in connection with the offer and sale of securities in and from New York State. The majority of federal and New York state courts have taken the position that the Martin Act gives exclusive authority to the Attorney General and thus preempts any private non-fraud common law causes of action (e.g. breach of fiduciary duty, gross negligence, unjust enrichment, negligent misrepresentation) related to the sale of securities. However, several recent decisions indicate that the tide is changing as courts in New York are finally rejecting Martin Act preemption arguments and permitting investors to assert claims for breach of fiduciary duty and negligent conduct. See Anwar v. Fairfield Greenwich Ltd. (“Anwar I”), No. 09 Civ. 0118 (VM), 2010 U.S. Dist. LEXIS 78425 (S.D.NY. July 29, 2010) (finding that the Martin Act does not preempt common law claims); Terra Sec. ASA Konkursbo v. Citigroup, Inc., No. 09 Civ. 7058 (VM), 2010 U.S. Dist. LEXIS 84881 (S.D.N.Y. Aug. 16, 2010) (same).
In Anwar I, Judge Marrero examined the history and evolution of how different courts have interpreted the Martin Act and its relationship with private common law causes of action. Judge Marrero determined that previous cases supporting preemption were based on a misreading of precedent that had been taken out of context. In support of his determination that the Martin Act should not preempt common law claims, Judge Marrero reviewed the plain language of the statute and determined that, although it granted the Attorney General investigatory and enforcement powers, the law “nowhere mentions or otherwise contemplates erasing common law causes of action.” See Anwar I, 2010 U.S. Dist. LEXIS 78425, at *21-22. While recognizing that many federal courts have held that the Martin Act preempts non-fraud common law causes of action, Judge Marrero noted that several New York state courts have reached the opposite conclusion. Id. at *31-48. The Court also looked at the legislative history of the Martin Act and determined that it did not “suggest a desire on the part of the legislature to preempt common law actions” (Id. at *22) and that preemption would conflict with the policy goals of the Martin Act, which is “a consumer protection law intended to defeat any scheme whereby the public is exploited.” Id. at *59-60.
Last month, in Assured Guaranty (UK) Ltd. v. J.P. Morgan Inv. Mgmt. Inc., No. 603755/08, 2010 N.Y. Slip Op. 8644 (N.Y. App. Div. First Dept. Nov. 23, 2010), a unanimous panel of New York’s Supreme Court, Appellate Division, First Dept., determined that the Martin Act does not preempt private common-law claims of securities fraud. In a detailed holding, the Court concluded that “there is nothing in the plain language of the Martin Act, its legislative history or appellate level decisions in this State that supports the defendant’s argument that the act pre-empts otherwise validly pleaded common-law causes of action.” 2010 N.Y. Slip. Op. 8644 at *8. The panel cited the “exhaustive analysis” in Anwar I and recognized Judge Marrero’s cogent and forceful argument that to find Martin Act preemption would “leave [ ] the marketplace arguably less protected than it was before the Martin Act’s passage, which can hardly have been the goal of its drafters.” Id. at *7 (citing Anwar I, 2010 U.S. Dist. LEXIS 78425 at *25).
President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) on July 21, 2010, which, among other things, codified the ability of the Securities and Exchange Commission (“SEC”) and the United States Department of Justice (“DOJ”) to bring actions under 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) in cases involving transnational securities fraud.
(4) Whether a narrower extraterritorial standard should be adopted.
The SEC is accepting public comments regarding issues related to its Study on Extraterritorial Private Rights of Action or before February 18, 2011. After reviewing all submissions the SEC is required to submit and make its recommendations to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House not later than January 21, 2012.

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