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 ‘Supreme Court’
On Nov. 12, 2013, the Supreme Court heard oral arguments in Lawson v. FMR LLC, a case in which the Court is expected to clarify whether the whistleblower protections of the Sarbanes-Oxley Act (“SOX”) cover employees of private companies that contract with public companies. Section 806 of SOX prohibits a publicly-traded company—or any officer, employee, contractor, subcontractor, or agent of a publicly-traded company—from retaliating against an “employee” who reports suspected violations of Securities and Exchange Commission rules or federal fraud laws. The word “employee” in the statute is not defined. The issue before the Court is whether the whistleblower protections are limited to employees of public companies or extend as well to employees of privately held contractors and subcontractors of public companies.
The Lawson Case
The defendants are privately-held companies that, by contract, provide advisory and management services to the Fidelity family of mutual funds. The Fidelity Funds are publicly-held entities organized under the Investment Company Act of 1940. The Fidelity Funds have no employees of their own but rather are overseen by a board of trustees that rely on private companies such as the defendants to provide advisory and management services. Plaintiffs are two putative whistleblowers who were employees of the defendant advisors and managers. After plaintiffs raised concerns about the management of Fidelity Funds, one plaintiff was terminated and the other plaintiff resigned claiming a constructive discharge of their employment.
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.
Argentina is in hot pursuit of multiple audiences before the Supreme Court: two petitions for writs of certiorari filed by Argentina are pending in the NML v. Argentina cases, and another is almost certainly on the way. In addition, a writ of certiorari has already been issued in another case against Argentina. With so much action involving Argentina in the high court, there is the potential for confusion between these multiple proceedings, which we clarify in this post.
NML Capital, Ltd. v. Argentina (Supreme Court Docket No. 12-1494): Review of the Second Circuit’s October 26, 2012 Decision (Pari Passu)
On June 24, 2013, Argentina filed a certiorari petition with respect to the Second Circuit’s October 26, 2012 decision, in which the Second Court affirmed Judge Griesa’s interpretation of the pari passu clause, his determination that the plaintiffs were entitled to a “Ratable Payment,” and his conclusion that the Injunction did not violate the Foreign Sovereign Immunities Act (“FSIA”). However, the Court remanded the case to Judge Griesa to address certain issues relating to the operation of its Injunction.
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.
Filing and Settlement Trends
Filing and settlement trends continue to reflect “business as usual” for the plaintiffs’ bar—hundreds of suits and significant settlement values can be expected for the rest of 2013, based on results from the early half of the year. According to a recent study by NERA Economic Consulting, the annualized rate of new class action filings based on results in the first half of 2013 is expected to be slightly up from the prior six-year averages. Through June 2013, new securities class action filings were annualizing at 222 cases for the full year, representing an uptick from the six-year average of 219 suits. On the other hand, median settlement amounts were somewhat lower that the six-year average: $8.8 million in the first quarter of 2013, versus the six-year average of $9.3 million, but higher than four out of those six years. The average settlement value in the first quarter of 2013 was more than double the six-year average: $78 million, versus the six-year average of $35 million. Finally, median settlement amounts as a percentage of investor losses in the first half of 2013 were 2.0%, up from 1.8% for the full year 2012, but slightly lower than the six-year average of 2.
Class Action Filings
Overall filing rates are reflected in Figure 1 below (all charts courtesy of NERA Economic Consulting). NERA reports an average of 219 new cases filed in the period 2007 to 2012. Annualized filings in the first half 2013 are projected to be higher than the prior six-year average, at 222 cases. Notably, these figures do not include the many such class suits filed in state courts, including the Delaware Court of Chancery.
On April 17, 2013, the Supreme Court issued its decision in Kiobel v. Royal Dutch Petroleum Co., __ U.S. __ (2013), addressing the scope of the Alien Tort Statute, 28 U.S.C. § 1350 (“ATS”). In Kiobel, the Court sharply limited the availability of U.S. courts to hear claims brought by foreign nationals against other foreign nationals for human rights violations committed outside the United States. Although the decision was unanimous, the Justices’ reasoning divided. Chief Justice Roberts, writing for the Court, concluded that the presumption against extraterritoriality applies to claims under the ATS and that nothing in the ATS itself rebuts that presumption. The Chief Justice’s opinion, joined by Justices Alito, Kennedy, Scalia, and Thomas, casts doubt on the viability of ATS claims arising from foreign acts, but leaves open the possibility that the presumption against extraterritoriality might be rebutted if claims “touch and concern the territory of the United States” with “sufficient force to displace” that presumption. A foreign defendant’s “[m]ere corporate presence” in the United States, however, does not suffice. Justice Breyer, joined by Justices Ginsburg, Sotomayor and Kagan, filed a concurrence in the judgment rejecting the application of the presumption against extraterritoriality and instead proposing that claims for violations of international law can be recognized under the ATS even for violations committed abroad either where the defendant is an American national or where the case sufficiently implicates a U.S. interest.
The Court’s analysis in Kiobel will likely have far-reaching repercussions for foreign nationals alleging that they have been the victims of human rights abuses outside the United States, for corporations potentially subject to expensive and difficult-to-predict ATS suits, and for foreign countries whose policies and actions might become the subject of ATS suits.
The United States Supreme Court ruled unanimously that a plaintiff’s pre-class certification stipulation, under which plaintiff committed not to seek damages on behalf of the proposed class in excess of $5,000,000 (the federal jurisdictional threshold under the Class Action Fairness Act (“CAFA”)), cannot bind absent class members and therefore cannot be used to defeat federal jurisdiction. Standard Fire Ins. Co. v. Knowles, No. 11-1450 (Mar. 19, 2013).
In 2005, Congress enacted CAFA, which provides that federal district courts have jurisdiction over class actions (subject to certain exceptions, including a carve-out for many state-law class actions for breach of fiduciary duty) if the proposed class has 100 or more members, the parties are minimally diverse (meaning that, for example, one member of the plaintiff class and one defendant are from different states) and the “matter in controversy” exceeds the sum or value of $5,000,000.
In Standard Fire, plaintiff sought to circumvent the federal jurisdiction provisions in CAFA by filing a class action in a state court on behalf of a proposed class of members from that state and stipulating that the plaintiff and the class would not seek to recover total aggregate damages of more than $5,000,000. The defendant nevertheless removed the case to federal court. The district court found that, absent the stipulation, the amount in controversy would have been just above the $5,000,000 jurisdictional threshold. But in light of the stipulation, the district court concluded that the amount in controversy was below the threshold and remanded the case to state court. The Court of Appeals declined to hear the appeal.
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.