The US Court of Appeals for the Eleventh Circuit recently issued an important decision that addresses two types of allegations that plaintiffs routinely rely on to plead loss causation in federal securities fraud cases. In Meyer v. Greene, 2013 US App. LEXIS 4187 (11th Cir. Feb. 25, 2013), the Eleventh Circuit appears to have become the first federal court of appeals to rule definitively that the mere announcement of an investigation by the US Securities and Exchange Commission (“SEC”) followed by a decline in a company’s stock price is insufficient to plead loss causation. The Court also ruled, consistent with decisions from other federal circuits, that a negative third-party analyst presentation is not a corrective disclosure for purposes of pleading loss causation if the presentation is based on publicly available information.
Posts Tagged ‘Securities fraud’
In Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, No. 11-1085, 2013 WL 691001 (Feb. 27, 2013), the Supreme Court of the United States decided a significant issue concerning the requirements for class certification in actions based on alleged misrepresentations in violation of the federal securities laws. Under Amgen, a plaintiff in such an action is not required to prove the materiality of the alleged misrepresentation in order to obtain class certification. The Amgen decision will make it at least marginally easier for plaintiffs to obtain class certification in some Circuits.
Amgen is likely to be influential in ways that go well beyond its immediate holding. For example, the various opinions in Amgen debate the continuing vitality of the Supreme Court’s decision in Basic Inc. v. Levinson, 485 U.S. 224 (1988), which established the fundamental structure enabling claims under the federal securities laws to be litigated as class actions. These and other implications of the decision are discussed below. Readers not requiring a summary of the framework established in Basic may wish to go directly to section 2.
Gabelli v. Sec. & Exch. Comm’n, No. 11-1274 (U.S. Feb. 27, 2013)
In a unanimous opinion authored by Chief Justice Roberts, the U.S. Supreme Court held that the five-year limitations period that governs SEC enforcement actions begins to run when the alleged fraud is complete. The Court reversed the Second Circuit on the issue, which had held that the discovery rule applied in cases where the defendant allegedly committed fraud. The SEC alleged that two mutual fund managers allowed one of the fund’s investors to engage in market timing in the fund in exchange for an investment in a separate hedge fund, but the SEC filed the action more than five years after the conduct was alleged to have taken place. The Court explained that limitations periods ordinarily begin to run upon a party’s injury, but in cases of fraud — when the injury itself is concealed — courts have developed the discovery rule to protect individuals, who are after all not required to be in a constant state of investigation. That rationale however does not apply to the SEC, whose mission is to investigate (and prevent) fraud and which has statutory authority to demand detailed records, including those extra-judicial subpoenas. Therefore, the Court concluded the discovery rule does not apply to the SEC.
Click here to view the opinion.
On February 27, 2013, in a 6-3 decision, the Supreme Court of the United States held in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds that a securities fraud plaintiff alleging fraud on the market need not establish the materiality of an alleged fraudulent statement in order to obtain class certification. Justice Ginsburg delivered the opinion of the Court, and Justices Scalia, Thomas and Kennedy dissented.
The particular questions presented by the Supreme Court’s grant of certiorari were whether, in a misrepresentation case under SEC Rule 10b-5, a securities fraud plaintiff alleging fraud on the market must establish materiality of the misstatements in order to obtain class certification and whether, in such a case, the district court must allow the defendant to present evidence rebutting the applicability of the fraud-on-the-market theory before certifying a plaintiff class based on that theory.
Federal securities fraud class action filing activity slowed sharply in 2012. There were 152 filings in 2012 compared with 188 in 2011. The number of federal securities fraud class actions (also referred to in this report as filings, class actions, or cases) filed was 21 percent below the annual average of 193 filings observed between 1997 and 2011 (Figure 1).
The following trends are noteworthy for 2012:
In our paper, SEC Investigations and Securities Class Actions: An Empirical Comparison, we compare investigations by the SEC with securities fraud class action filings involving public companies. Critics of securities class actions commonly contrast those suits with enforcement actions brought by the SEC. According to those critics, the SEC is superior to plaintiffs’ lawyers both in targeting defendants and securing sanctions against them. With respect to targeting, critics of securities class actions claim that the settlement dynamics of class actions encourage plaintiffs’ lawyers to bring a high proportion of non-meritorious suits. If companies must pay substantial costs when they are unjustifiably targeted, the deterrent value of class actions is diluted. With regard to sanctions, class action settlements are almost always paid by the company and its directors’ & officers (D&O) insurance; the corporate officers responsible for the fraud rarely contribute. By contrast, SEC enforcement actions commonly lead to payments from the responsible officers; the SEC also has the authority to bar individuals from serving as directors and officers of public companies, a career death sentence for the individual subjected to a bar. Critics of class actions argue that the combination of more precise targeting of suits and more individual sanctions yields a stronger deterrent punch for SEC enforcement relative to class actions.
On November 5, 2012, the United States Supreme Court heard oral argument in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds (No. 11-1085) (“Amgen”). In Amgen, Plaintiff/Respondent Connecticut Retirement Plans and Trust Funds (“Connecticut Retirement”) brought a putative class action under the Exchange Act of 1934, alleging that Defendant/Petitioner Amgen and several of its directors and officers misstated and failed to disclose safety information concerning two of its drugs. Amgen contends that it did not mislead investors and that the information it allegedly concealed was widely known.
Background of Amgen and Path to the Supreme Court
The issue in Amgen is the predominance requirement of Federal Rule of Civil Procedure (“Rule”) 23(b)(3), which states that a court may not certify a class for trial without determining that “questions of law or fact common to class members predominate over any questions affecting only individual members.” Because of the near-impossibility of establishing commonality of direct reliance on alleged misstatements in securities fraud litigations, plaintiffs typically rely on a rebuttable presumption of common indirect reliance on the integrity of the market price for the securities at issue. The Supreme Court first recognized this presumption in Basic Inc. v. Levinson, 485 U.S. 224, 241-47 (1988), relying in part on the “fraud-on-the-market” (“FOTM”) theory. The FOTM theory assumes that the market price of securities traded in an efficient market reflects all publicly-available material information, including any material misrepresentations.
The Supreme Court’s decision in Basic, Inc. v. Levinson is widely credited with spawning a vast industry of securities fraud litigation by removing the requirement of individualized proof of reliance as an obstacle to class certification. Modern criticisms of private litigation coupled with questions about the validity of the economic premises on which Basic relied have led critics to question the legitimacy of the Court’s holding in Basic. Most recently, with the Supreme Court’s decision to grant certiorari in Amgen, commentators are again speculating that the Court may use the Amgen case as an opportunity to overrule Basic.
In my article, The Trouble with Basic: Price Distortion After Halliburton (forthcoming in Washington University Law Review), I argue that this criticism of Basic mischaracterizes the decision. Basic did not release federal securities fraud from its moorings in common law fraud and deceit. Rather, by retaining the reliance requirement in federal securities fraud litigation, Basic reflected judicial conservatism. Despite contemporaneous recognition by lower courts and commentators that a reliance requirement was anomalous in the context of impersonal transactions in the public securities markets, the Supreme Court lacked the courage to reject reliance outright. Instead, the Court constructed a complex theory of market integrity relying on the fact that, in an efficient market, fraudulent public statements distort stock prices. According to the Basic Court, the existence of this price distortion justifies a rebuttable presumption of reliance.
In November 2012, the United States Supreme Court will again hear an appeal of a federal securities class action in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds (No. 11-1085) (“Amgen”). In the past two years, the Supreme Court has heard no less than five appeals arising from securities class actions.
Amgen requires the Court to reconsider its own landmark decision in Basic Inc. v. Levinson, 485 U.S. 224 (1988), adopting a rebuttable classwide presumption of reliance based on the “fraud-on-the-market” (“FOTM”) theory. The FOTM theory assumes that the market price of securities traded in an efficient market reflects all publicly-available information, including any material misrepresentations. Twenty-five years later, the parties in Amgen ask the Court to resolve whether, in such a case, a district court must (1) “require proof of materiality” concerning the challenged statements and/or (2) “allow the defendant to present evidence rebutting the applicability of the fraud-on-the-market theory” before certifying a class under Fed. R. Civ. P. 23(b)(3). To fully understand the import of these questions, some background on the relevant concepts is helpful.
In the latest of a string of litigation victories it has scored in the Second Circuit, the Securities and Exchange Commission convinced a panel of the Second Circuit on September 6, 2012, to vacate a district court’s grant of summary judgment to the defendants in Securities and Exchange Commission v. Obus, No. 10 Civ. 4749. In so doing, the Circuit clarified, and to some extent modified, the standards for tipper/tippee insider trading under the misappropriation theory.
The SEC alleged that Thomas Strickland, an employee of General Electric Capital Corporation (“GE Capital”), tipped a friend of his, Peter Black, who worked for a hedge fund, about a planned acquisition of Sunsource, Inc., by Allied Capital Corporation, that GE Capital was financing. The SEC alleged that Black relayed the tip to his boss, Nelson Obus, who then traded on the information. The SEC argued that all three participants were liable under the misappropriation theory, alleging that Strickland owed a fiduciary duty to GE Capital to keep the information about the acquisition confidential, that he breached this duty by disclosing the information to Black, and that Black and Obus knew or should have known that Strickland was breaching a duty by providing the tip.