Motions to dismiss have been called “the main event” in securities class actions. They are filed in over 90% of securities class actions and they result in dismissal close to 50% of the time they are filed. In contrast, out of 4,226 class actions filed between 1995 and 2013, only 14 were resolved through a trial, and of those, only five resulted in verdicts for the defendant. In between a denial of a motion to dismiss and a trial are i) discovery, ii) opposition to class certification, iii) motion for summary judgment, iv) mediation, and v) settlement. Unfortunately for defendants in securities class actions, class certification is granted in whole or in part 84% of the time, and there is no summary judgment decision at all over 90% of the time. Thus, for most defendants in securities class actions, a denial of a motion to dismiss usually results in writing a settlement check, often after years of costly discovery. Defendants that fail to give adequate attention to motions to dismiss are shortchanging the very best opportunity they have to avoid what may otherwise become multi-year, expensive litigation.
Archive for the ‘Securities Litigation & Enforcement’ Category
“[T]he fact that a federal statute has been violated and some person harmed does not automatically give rise to a private cause of action in favor of that person.”
—Touche Ross & Co. v. Redington, 442 U.S. 560, 568, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979).
In June 2008, I posted a short piece on this website entitled A Different Perspective on CSX/TCI: Should Courts Reject a Private Right of Action Under Section 13(d)? In that posting, I questioned whether, after Alexander v. Sandoval, 532 U.S. 275 (2001), a private right of action existed to enforce the Williams Act, in that case, section 13(d) of the 1934 Securities and Exchange Act. It drew a grand total of zero comments.
Let’s fast forward to the lawsuit du jour. Allergan and one of its employees who was a shareholder that sold some shares while Bill Ackman was buying and before Valeant announced its intent to acquire Allergan have sued Ackman in the United States District Court for the Central District of California for allegedly violating Rule 14e-3. Judge David O. Carter concluded that Allergan did not have standing to sue Ackman but that that a selling shareholder did have standing and that there were “serious questions” that need to be decided by a jury to determine whether Ackman violated Rule 14e-3. A number of respected commentators have weighed in on the merits of the case and about a potential class action lawsuit to recoup Ackman’s “illegal” profits.
A federal district court today ruled that serious questions existed as to the legality of Pershing Square’s ploy to finance Valeant’s hostile bid for Allergan. Allergan v. Valeant Pharmaceuticals Int’l, Inc., Case No. SACV-1214 DOC (C.D. Cal. November 4, 2014).
As we wrote about in April, Pershing Square and Valeant hatched a plan early this year attempting to exploit loopholes in the federal securities laws to enable Pershing Square to trade on inside information of Valeant’s secret takeover plan, creating a billion dollar profit at the expense of former Allergan stockholders that could then be used to fund the hostile bid. Since then, Pershing Square and Valeant have trumpeted their maneuver as a new template for activist-driven hostile dealmaking.
According to the U.S. Department of Justice (“DOJ”), deferred prosecution agreements are said to occupy an “important middle ground” between declining to prosecute on the one hand, and trials or guilty pleas on the other. A top DOJ official has declared that, over the last decade, the agreements have become a “mainstay” of white collar criminal law enforcement; a prominent criminal law professor calls their increased use part of the “biggest change in corporate law enforcement policy in the last ten years.”
My essay, Morrison at Four: A Survey of Its Impact on Securities Litigation, published by the U.S. Chamber of Commerce Institute for Legal Reform as part of a collection of essays on the shifting legal landscape governing federal claims involving foreign disputes, recounts the extraordinary impact of the Supreme Court’s landmark decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), in the realm of securities litigation.
It has been reported that approximately two-thirds of companies in the U.S. are affected by fraud, losing an estimated 1.2% of revenue each year to such activity.  Indirect costs associated with fraud, such as reputational damage and costs associated with investigation and remediation of the fraudulent acts, may also be substantial. When and where implemented, an internal whistleblower hotline is a critical component of a company’s anti-fraud program, as tips are consistently the most common method of detecting fraud.  Consequently, it is essential that companies consider implementing, if they have not already done so, effective whistleblower hotlines.  To the extent hotlines are currently in place, companies need to evaluate them to ensure that the hotlines are operating as intended and are effective in preventing and identifying unethical or potentially unlawful activity, including corporate fraud, securities violations and employment discrimination or harassment. This evaluation should be a key element of every company’s assessment of its compliance and ethics program.
Two recent Dodd-Frank whistleblower awards suggest that the program is becoming the kind of “game changer” for law enforcement that many had predicted. The program, which took effect in August 2011, mandates the payment of bounties to persons who voluntarily provide information leading to a successful securities enforcement action in which more than $1 million is recovered. Informants are entitled to receive between 10 and 30 percent of the amounts recovered, with the precise amount to be determined by the SEC.
Last month, the SEC announced that it brought enforcement actions primarily relating to Section 16(a) under the Securities Exchange Act against 34 defendants. The defendants were 13 individuals who were or had been officers or directors of public companies, five individual investors, ten investment funds/advisers and six public companies.
This post briefly discusses several noteworthy points regarding this development and also discusses practical steps that companies could consider taking in response.
As an echo of the last financial crisis, the two themes that have arguably dominated the corporate governance debate globally are investor activism and corporate governance enforcement. Recent years have seen by all accounts the highest rates of institutional investor activism on a range of issues such as executive remuneration, non-financial disclosure and board composition, and at the same time, increased oversight and enforcement. Stewardship-oriented initiatives and rigorous enforcement activity by securities but also banking sector regulators have seen a level of heightened interest in Europe and North America, and to a lesser extent in emerging markets.
The increasing use of Non- and Deferred Prosecution Agreements (N/DPAs) has enabled federal prosecutors to incrementally expand their traditional role, exemplifying a shift in prosecutorial culture from an ex-post focus on punishment to an ex-ante emphasis on compliance. N/DPAs are contractual arrangements between the government and corporate entities that allow the government to impose sanctions against the respective entity and set up institutional changes in exchange for the government’s agreement to forego further investigation and corporate criminal indictment. N/DPAs enable corporations to resolve allegations of corporate criminal conduct, strengthen corporate compliance mechanisms to prevent corporate wrongdoing in the future, and mitigate the risks that collateral consequences of a conviction can bring for companies, their shareholders, employees, and the economy.