On November 15, 2013, the U.S. Supreme Court granted certiorari in the case of Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317, raising the prospect that the Court will overrule or significantly limit the legal presumption that each member of a securities fraud class action relied on the statements challenged as fraudulent in the lawsuit. Without this so-called “fraud-on-the-market” presumption, putative class action plaintiffs will be unable to maintain a securities fraud class action unless they can clear the logistically difficult hurdle of proving that each individual shareholder actually relied on the challenged statements when making its purchase or sale of securities. At least four Justices have recently indicated that the Court should reconsider the validity of that doctrine, suggesting that the ultimate opinion in Halliburton could lead to a significant change in securities class action law. Even if the Court ultimately affirms fraud-on-the-market or some variant of the doctrine, the Court may expand defendants’ ability to defeat what in practice has evolved into a virtually irrefutable presumption of reliance. Furthermore, the uncertainty caused by the pendency of the Halliburton appeal may warrant staying securities class actions and may reduce the settlement value of pending cases.
Posts Tagged ‘Securities litigation’
It has been more than six years since the onset of the credit crisis and we have documented for the first time in the past few months a significant increase in the number and size of settlements. Meanwhile, the pace of new filings has slowed as housing markets continue to improve and delinquencies and defaults decline. However, litigation arising from the credit crisis is far from over.
In this post, we discuss the recent trends of settlement activity and review some of the major settlements in credit crisis litigation. We also discuss mortgage settlements that are related to repurchase demands mainly between mortgage sellers and Fannie Mae and Freddie Mac. We then examine the current trends in filings, including the types of claims made, the nature of defendants and plaintiffs in the litigation, and the financial products involved.
Our main findings, which are discussed in greater detail below, include the following:
It is a great honor to have been asked to give the Fifth Annual Judge Thomas A. Flannery Lecture. And it is especially meaningful to be joined tonight by Tom Flannery’s daughter Irene, son Tom, and so many friends, colleagues, and former law clerks who knew and served with him.
I unfortunately did not have the privilege of knowing and working with Judge Flannery. But one of the great benefits of being asked to speak tonight is that it gave me the opportunity to come to know him a little—through learning about his many impressive career accomplishments and through reading his own words and those of others about him. I wish I had known him. He was indeed a remarkable man, lawyer, and judge.
As all here know, Judge Flannery was a highly-respected Assistant United States Attorney, United States Attorney, trial lawyer, and jurist on this court for over 35 years. In fact, he spent most of his life within a few miles of this courtroom.
As part of the Historical Society’s Oral History Project for this Circuit, Judge Flannery gave an interview in 1992. It is a fascinating account of his professional life and the life of this court. Judge Flannery said that his view of the justice system was shaped in great part by watching police court trials here in Washington as a law student.
On November 15, 2013, the Supreme Court agreed to hear a case that could, depending upon its outcome, dramatically change private securities litigation. The case is Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317, and it presents the question of whether the Court should reconsider the fraud-on-the-market presumption of reliance that applies in class actions under Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5.
The case is of enormous potential significance. Adopted in 1988 in Basic v. Levinson, the fraud-on-the-market presumption effectively eliminated the need for plaintiffs to individually prove reliance on alleged misstatements in cases involving securities that trade on “efficient” markets. By dispensing with proof of individualized reliance, Basic makes possible the certification of massive Section 10(b) class actions. Without the presumption, classes could not be certified under Federal Rule of Civil Procedure 23(b)(3), because individual reliance questions would predominate over common questions affecting the class as a whole.
In the six months since Mary Jo White was sworn in as the Securities and Exchange Commission’s 31st Chairman, the SEC has announced important new policies and initiatives as the agency has begun to utilize new enforcement authority under the Dodd-Frank Act and to redeploy resources. In recent weeks, White and Andrew Ceresney, Co-Director of the Division of Enforcement, have made important public announcements regarding enforcement priorities. Taken together, these policies, initiatives, and announcements signal a shift toward more aggressive enforcement. This advisory discusses these developments.
Approach to Enforcement
From the time of her nomination, White stressed that the SEC would take an aggressive approach to enforcement under her leadership. At her March 12, 2013 confirmation hearing, White pledged that one of her highest priorities as Chairman would be “to further strengthen the enforcement function of the SEC” in a way that is “bold and unrelenting.” White also stated that the SEC would pursue “all wrongdoers – individual and institutional, of whatever position or size” in order to deter wrongdoing and protect the integrity of financial markets. 
As the fiscal year comes to a close—even while the Securities and Exchange Commission, amidst the government shutdown, continues to fund its operations through a carryover balance from FY 2013—it is a good time to review recent signs of SEC skepticism regarding financial statement reporting practices and the SEC’s current focus on public company officers, directors, and auditors as targets of potential enforcement actions. Since Mary Jo White was confirmed as the new Chairman in April, and George Canellos and Andrew Ceresney were named Co-Directors of the Division of Enforcement later that month, a number of enforcement actions and SEC statements suggest a heightened vigilance, particularly with respect to potential corporate accounting failures.
It is an honor to be here today [September 26, 2013]. The Council is an extremely important voice on behalf of investors and an excellent source of input for the SEC on new rules or guidance that is needed, existing rules that need to be changed and market practices that may be harming investors.
As the Chair of an agency that is focused on the needs of investors, I very much want to hear what you have to say—on everything from corporate governance to shareholders’ rights to 10b5-1 plans.
So I urge you to use your voice. We are listening. Continue to be our eyes and ears.
This morning, I will first talk briefly about some of the agency’s near-term priorities. And then I will go into more depth about how we are deploying our full enforcement arsenal for the benefit of investors. I was told that enforcement was one of the topics you would be interested in hearing about and, well, I never pass up an opportunity to talk about enforcement. But I want to start with some of the agency’s other overall priorities.
A textualist interpretation of the implied private right of action under Section 10(b) of the Exchange Act concludes that the right to recover money damages in an aftermarket fraud can be no broader than the express right of recovery under Section 18(a) of the Exchange Act. The Act’s original legislative history and recent Supreme Court doctrine are consistent with this conclusion, as is the Act’s subsequent legislative history.
Section 18(a), however, requires that plaintiffs affirmatively demonstrate actual “eyeball” reliance as a precondition to recovery and does not permit a rebuttable presumption of reliance. Accordingly, if the Exchange Act is to be interpreted as a “harmonious whole,” with the scope of recovery under the implied Section 10(b) private right being no greater than the recovery available under the most analogous express remedy, Section 18(a), then Section 10(b) plaintiffs must either demonstrate actual reliance as a precondition to recovery of damages, or the Court should revisit Basic, as suggested by four justices in Amgen, and overturn Basic’s rebuttable presumption of reliance. A textualist approach thus provides a rationale for reversing Basic that avoids the complex debate over the validity of the efficient market hypothesis, an academic dispute that the Supreme Court is not optimally situated to referee.
On August 30, 2013, the United States Court of Appeals for the Second Circuit unanimously held that Section 10(b) of the Securities Exchange Act of 1934 (“Section 10(b)”) does not apply to extraterritorial conduct, “regardless of whether liability is sought criminally or civilly.” Interpreting the scope of the Supreme Court’s landmark ruling in Morrison v. National Australian Bank Ltd.,  the Second Circuit’s significant decision in United States v. Vilar, et al. means that a criminal defendant may be convicted of fraud under Section 10(b) only if the defendant engaged in fraud “in connection with” a security listed on a United States exchange or a security “purchased or sold” in the United States. In reaching its conclusion, the court rejected the government’s attempts to distinguish criminal liability under Section 10(b) from the civil liability at issue in Morrison, holding that “[a] statute either applies extraterritorially or it does not, and once it is determined that a statute does not apply extraterritorially, the only question we must answer in the individual case is whether the relevant conduct occurred in the territory of a foreign sovereign.”
The recent trial of Fabrice Tourre has raised again the issue of whether the SEC should prosecute individuals who engage in misconduct or the firms that employ them. In the case of Tourre, some complained that the SEC targeted a relatively low level employee of Goldman Sachs rather than Goldman Sachs itself. Some even described him as a scapegoat. Not long ago, in the Bank of America case, Judge Rakoff leveled the opposite criticism at the SEC. Why was the agency seeking to impose a monetary penalty on BofA rather than prosecuting and penalizing individuals within BofA who had engaged in misconduct?
Each time this issue has come up, it seems that commentators assume that the practice in question is the predominant practice of the SEC—for example, the SEC predominantly goes after the corporation rather than individuals, or the SEC predominantly goes after low level employees rather than the corporation. We have recently completed, and intend to maintain, a database of SEC enforcement practices, and in this post, we shed some factual light on what the SEC actually does with respect to prosecuting and penalizing individual and corporate defendants. Specifically, we answer three questions: First, who does the SEC name as defendants—high level executives, lower level employees, the corporation itself? Second, to what extent does the SEC impose penalties on individual defendants? Third, how often does the SEC impose a monetary penalty on corporate defendants? We address these questions within the universe of SEC enforcement actions involving nationally listed firms for violation of disclosure-related rules—fraud, books and records and internal control rules. Our dataset covers cases filed from 2000 to the present.