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 ‘U.S. federal courts’
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.
A recent decision of the Southern District of New York is noteworthy in its rejection of the plaintiffs’ argument that disclosure of a threatened suit in which the potential loss could have reached $10 billion was required under either the federal securities laws or Accounting Standards Codification 450. See In re Bank of America AIG Disclosure Sec. Litig., C.A. No. 11 Civ. 6678 (JGK) (S.D.N.Y. Nov. 1, 2013).
In January 2011, BofA and AIG entered into an agreement to toll the statute of limitations on fraud and securities claims arising out of BofA’s sale of mortgage-backed securities (“MBS”) to AIG. In February 2011, AIG provided BofA with a detailed analysis of its potential claims in which it claimed to have lost more than $10 billion. Later that month, BofA’s annual report disclosed that it faced “substantial potential legal liability” relating to sales of MBS, which “could have a material adverse effect on [its] cash flow, financial condition, and results of operations,” but cautioned that BofA “could not estimate a range of loss for all matters in which losses were probable or reasonably possible.” BofA did not disclose the tolling agreement with AIG or the magnitude of its potential exposure to AIG. On August 8, 2011, AIG had filed a complaint against BofA seeking damages of at least $10 billion. BofA’s stock price dropped 20% in a single day.
A three-judge panel of the U.S. Court of Appeals for the Third Circuit—issuing three opinions, a majority, concurrence, and dissent—today [Oct. 23, 2013] affirmed a district court ruling enjoining the Delaware Court of Chancery’s arbitration program. Click here to download a copy of the Court’s opinion.
In 2009, the Delaware General Assembly enacted legislation empowering sitting judges of the Court of Chancery to arbitrate private business disputes so long as one party is a Delaware entity, neither party is a consumer, and the amount in controversy exceeds $1 million (“Chancery Arbitrations”). Like most private arbitrations, Chancery Arbitrations are conducted confidentially. In 2011, the Delaware Coalition for Open Government challenged the constitutionality of Chancery Arbitrations, arguing that because the proceedings are conducted in private, the program violated the First and Fourteenth Amendments of the U.S. Constitution, which guarantee a right of public access to certain government proceedings. In 2012, the district court enjoined the members of the Court of Chancery from conducting Chancery Arbitrations, concluding that the proceedings were no different than civil trials to which a right of public access extended. The Chancellor and Vice Chancellors appealed the decision.
For the second time in six months, Judge Sean H. Lane of the United States Bankruptcy Court for the Southern District of New York declined to approve a $20 million severance payment to Thomas Horton, Chief Executive Officer of AMR Corporation. Earlier this year, as described in our April 18, 2013 client alert (discussed here), Judge Lane reviewed and denied the Horton severance payment as part of the $11 billion merger of US Airways and AMR Corporation but he left open the possibility—without expressing a view—of pursuing such a payment under the chapter 11 plan. In a September 13, 2013 decision, Judge Lane reviewed the same $20 million severance payment, this time included as part of AMR Corporation’s plan of reorganization, and, while confirming the plan of reorganization, again denied the severance payment. 
On September 23, 2013, the United States Court of Appeals for the Second Circuit issued a decision clarifying the standard for aiding and abetting liability under the Commodities Exchange Act (“CEA”). The decision, in In re Amaranth Natural Gas Commodities Litigation, No. 12-2075-cv (2d Cir. Sept. 23, 2013), affirmed a judgment of the United States District Court for the Southern District of New York, which dismissed a putative class action filed by purchasers of natural gas futures contracts against J.P. Morgan Chase & Co., J.P. Morgan Chase Bank, Inc. and J.P. Morgan Futures, Inc. (“JPMorgan”). The purchaser plaintiffs claimed that Amaranth, a hedge fund for which JPMorgan provided clearing broker services, manipulated natural gas futures prices on the NYMEX commodities exchange, and that JPMorgan aided and abetted Amaranth’s manipulation.
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.
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.”
On August 12, 2013, the U.S. Court of Appeals for the Fifth Circuit affirmed the dismissal of a lawsuit contending that alleged controlling stockholders of Ascension Orthopedics, Inc. had expropriated voting and economic control from the minority stockholders via a series of financing transactions that occurred before Ascension merged with another company. The Fifth Circuit affirmed the district court’s decision that, under applicable Delaware law, the claims by the minority stockholders were derivative rather than direct, and thus were extinguished by the merger. Wilson Sonsini Goodrich & Rosati represented the former directors of Ascension in the litigation and represented Ascension in the financing and acquisition transactions.
On May 13, 2013, the U.S. Bankruptcy Court for the District of Delaware confirmed a prepackaged Chapter 11 plan of reorganization in the case of Central European Distribution Corporation (CEDC)  that incorporated an unmodified reverse Dutch auction. A reverse Dutch auction is a type of auction employed when a single buyer accepts bids from numerous sellers, and lowest-priced seller bids are accepted as winning bids.
The CEDC plan is perhaps the first instance of a Dutch auction process being incorporated successfully into a Chapter 11 reorganization plan. This precedent provides guidance for the use of Dutch auctions that may offer creditors distribution alternatives and maximize the utility of limited cash (or other limited property) available for distribution under a plan.