A recent Yale Law Journal article describes a “striking trend in the administration of civil justice in the United States”—“the virtual abandonment of the centuries-old institution of trial.” In recent times, only approximately 1% of federal civil cases end in jury trials. Deep-pocketed companies often settle before trial because they fear that jurors will sympathize with individual plaintiffs and that jurors may lack the patience and ability to weigh complicated evidence. This is especially true for financial institutions in the current public-relations climate. But our recent experience co-defending Goldman Sachs in a five-week jury trial demonstrates that corporate defendants need not avoid juries at all costs, especially where important principles are at stake and there is a strong belief that the claims are baseless.

…continue reading: Lessons from a Jury Trial

It has become routine for plaintiffs’ lawyers to make allegations purportedly obtained from confidential witnesses to meet the stringent pleading requirements applicable to federal securities fraud complaints, and the weight that courts should give such allegations in deciding motions to dismiss has been hotly contested. In affirming the dismissal of a federal securities fraud class action, the United States Court of Appeals for the Second Circuit has questioned the use of anonymous sources in securities complaints and endorsed the examination of those sources in determining whether such complaints should be dismissed. Campo v. Sears Holdings Corp., No. 09-3589, 2010 WL 1292329 (2d Cir. Apr. 6, 2010).

Citing information purportedly obtained from several confidential witnesses, the complaint in Campo alleged that Kmart Holding Corporation, now part of Sears Holdings Corporation, and certain of its officers had intentionally understated the value of Kmart’s real estate in the company’s SEC filings. When the defendants moved to dismiss the complaint, the district court allowed the defendants to depose these confidential witnesses to determine if they had made the statements attributed to them in the complaint. Upon being deposed, the witnesses disowned and contradicted many of those statements.

…continue reading: Scrutiny of Confidential Witnesses Endorsed in Securities Fraud Complaint

The United Stated District Court in Chicago has granted summary judgment dismissing a class action claiming that statements by Sears about its business that did not also disclose that it was negotiating a merger with Kmart constituted federal securities fraud. Levie v. Sears Roebuck & Co., No. 04C7643 (N.D. Ill. December 18, 2009).

Sears and Kmart had briefly discussed in the spring of 2004 the possibility of Sears acquiring Kmart through a merger, but instead Sears agreed in June 2004 to buy 54 Kmart stores. The complaint alleged that the merger negotiations continued after that, and Sears’ failure to disclose their existence made its public statements about its business plans materially misleading. In declining to dismiss the complaint, the Court stated that “[i]f the merger negotiations became material at a point in time when the Sears defendants were making announcements about the purchase of Kmart stores, a jury could find that the existence of the merger negotiations was a material fact necessary to make the store purchase statements not misleading.”

…continue reading: Federal Court Rejects Claim that Merger Negotiations are Required to be Disclosed

The Third Circuit recently upheld the validity of two clarifying amendments adopted by the SEC in 2005. The amendments clarified two important exemptions from shortswing-profit liability under Section 16(b) of the Securities Exchange Act: (1) Rule 16b-3, which exempts certain transactions between an issuer and its officers or directors; and (2) Rule 16b-7, which exempts certain mergers, reclassifications, and consolidations. In so doing, the Court expressly overruled a prior decision of the Third Circuit that imposed novel restrictions on the applicability of the two exemptions.

In Levy v. Sterling Holding Co., 314 F.3d 106 (3d Cir. 2002) (“Levy I”), the Third Circuit held that grants, awards, and other issuances to officers or directors must be compensation-related to be eligible for exemption under Rule 16b-3(d). The Third Circuit also suggested that Rule 16b-7 would not exempt reclassifications that involve classes of securities with different risk-return characteristics (such as an exchange of non-convertible preferred stock for common stock) or that increase shareholders’ percentage of common-stock ownership. (See our memo dated March 10, 2003.)

In response to the Third Circuit’s holding in Levy I, the SEC adopted clarifying amendments to Rules 16b-3 and 16b-7. The amendment to Rule 16b-3 made clear that the exemption would apply regardless of whether a compensation-related purpose could be demonstrated. The amendment to Rule 16b-7 made clear that the only condition for exempting a reclassification is that the company whose securities are acquired or disposed of owns 85% or more of the equity or assets of all companies that are parties to the transaction. Thus, where a single issuer reclassifies one class of its securities into another, there is effectively 100% “crossownership” and the exemption is available. (See our memo dated August 8, 2005.)

…continue reading: Third Circuit Upholds Validity of SEC: Amendments Clarifying Exemptions from Section 16 Liability