INSIDE THIS ISSUE
• Foreign Investors Allow Securities Class Action Settlement Assets Go Unclaimed
• U.S. Supreme Court To (Once Again) Address Fraud-On-The-Market Theory
• 2Q2012Antitrust Developments
• Conferencesand Educational Seminars
Foreign Investors Allow Securities Class Action Settlement Assets Go
Unclaimed
Securities law violations have an immediate
effect on the bottom line for defrauded investors regardless of where those
investors are located. Private investor
class actions have long been important in policing corporate misconduct and,
recently, more foreign investors are becoming involved in the class action
process. Even though more foreign
investors have become involved, it is clear that far too many foreign investors
stand on the sidelines and allow easily recoupable assets go unclaimed.
In recent decades, foreign investment in U.S.
financial markets has increased significantly.
According to the U.S. Congressional Research Service, foreign investors
accumulated $582 billion in U.S. corporate stocks in the 2002-08 period and
accumulated about $2.2 trillion in U.S. Corporate Bonds from 2001-07. From these figures, it is apparent that
citizens of foreign countries are free to participate in
Even though foreign
investors lose millions of dollars each year as a result of corporate fraud,
these investors are often not aware that they may pursue a variety of legal
claims based on the losses they have suffered, some of which include becoming a
lead plaintiff in a securities fraud class action lawsuit. In 1995, Congress amended the federal
securities laws to require courts to appoint lead plaintiffs in securities
class action lawsuits, and establish a presumption that the member of the class
with the largest financial interest in the litigation be appointed to this
leadership position. While some foreign
investors have exercised their right to become lead plaintiffs, many non-U.S.-based
investors are unaware that they have the ability to assert claims as a lead
plaintiff or simply do not have a sufficient level of understanding or comfort
with the process.
One of the most
common reasons for inaction on the part of foreign investors is that they are
not aware of the benefits of taking a leadership role in securities class
action litigation. While taking on this
role requires careful consideration, there are numerous benefits of becoming a
lead plaintiff. One of the biggest
benefits to becoming a lead plaintiff is the opportunity to secure a larger
recovery for the class, which in turn secures a larger recovery for the lead
plaintiff itself. Other benefits of
becoming a lead plaintiff include being able to supervise the litigation,
representing the legal rights of absent class members, devising legal
strategies with counsel, and also the possibility of being eligible for
reimbursement for time and expenses spent on the litigation. There is no financial risk in serving as a lead
plaintiff. Lead counsel advances all
costs and expenses incurred in the prosecution of the case and is reimbursed
only if there is a successful settlement or judgment on behalf of the
class. There is never a time when the
lead plaintiff would have to pay anything out of its own pocket. Similarly, litigation in the
When foreign
investors have moved for lead plaintiff in securities class actions, other
potential lead plaintiffs have tried to use these investors’ status as
foreigners to claim that their injury is not typical of other investors. These attempts have unanimously failed. One court stated, “In light of today’s travel
and communication methods, the geographical location of the [prospective
foreign lead plaintiff is] irrelevant.” Newman v. Eagle Bldg. Technologies, 209 F.R.D. 499, 505 (S.D. Fla.
2002). In the Goodyear Tire & Rubber
Co Securities Litigation, the court even declared that “to exclude a foreign
investor from lead plaintiff status on nationality grounds would defy the
realities and complexities of today’s increasingly global economy.” In re
The Goodyear Tire & Rubber Co. Sec. Litig., No. 5:03-cv-2166, 2004 WL 3314943, at *5 (N.D. Ohio, May 12,
2004).
Although foreign
investors are not excluded from becoming lead plaintiffs, many foreign
investors are not aware that certain actions are filed until after the deadline
for filing a lead plaintiff application has passed, or even after an action has
been resolved favorably for the class.
Similarly, foreign investors often fail to take part in recovering some
or all of their financial losses when a lawsuit settles or a judgment is
reached, as a result of the proper claim for not being submitted in a timely
fashion. Missing valuable opportunities
to pursue claims is not necessary or fiscally prudent.
As investor losses
continue to rise, it is necessary for investors to take steps to protect their
portfolios and recover the highest percentage of monies lost as a result of
corporate malfeasance. Foreign investors
should have a reliable system in place to identify instances of securities
fraud that have impacted the fund’s portfolio.
One easy and reliable system is participation in a portfolio monitoring
system that can electronically identify losses arising from corporate
fraud. Scott+Scott’s portfolio tracker
system monitors clients’ investment portfolio for securities fraud and
investigates whether it is prudent to become involved in a securities class
action. Scott+Scott attorneys analyze
the merits of the allegations in the complaint and any additional evidence that
pertains to the securities litigation to determine whether further action by the
client is necessary. Scott+Scott
attorneys then counsel investors on their litigation and non-litigation options
and track the securities fraud action from its inception to ensure that the
client recovers any money it is owed at settlement. Similarly, the portfolio tracking system
allows easy recovery of investment assets from class action settlements.
Scott+Scott has extensive experience working with
all types of investors, including investors located outside the United States,
such as in Europe, Asia, Canada, South America, and the Caribbean. The Firm offers the same professional
services to all of its clients, regardless of their geographic location. For more information on the services
Scott+Scott offers to investors located outside the United States, please
contact David Scott at drscott@scott-scott.com.
U.S.
Supreme Court To (Once Again) Address Fraud-On-The-Market Theory
Reviving important 13-year-old precedent on
securities fraud law, on June 6, 2011, the U.S. Supreme Court blocked the
efforts of some lower courts to narrow investors’ ability to jointly challenge
a company’s alleged manipulation of the market price of its stock. Investors, the Court ruled unanimously in Erica P. John Fund v. Halliburton Co.,
131 S.Ct. 2179, may use the class action device to claim securities fraud
without first proving that market manipulation actually caused them to lose
money on their investment.
The ruling put a solid foundation under the
Court’s 1988 ruling in Basic Inc. v.
Levinson, 485 U.S. 224 (1988), and under the “fraud-on-the-market” theory
that the Court first outlined in that decision.
In the process, the Court removed doubts that had crept into the courts
about Basic and its fraud theory,
producing conflicting rulings.
Under the fraud-on-the-market theory, investors
are understood to rely generally upon the stock market’s valuation of a stock
before buying or selling. If the market
is functioning properly, according to the theory, all publicly available
information is taken into account in setting stock values—both good and
bad. Therefore, if a company reports
flawed information, the market will absorb that information in the auctioning
of that company’s stock.
By relying on the market, investors are spared
the duty in their class action fraud case of proving one critical element of
their legal claim: that each investor in the class actually relied on the
flawed information the company allegedly reported. By asserting “reliance” in this way,
investors are given the benefit of a “presumption” that they depended upon the
market. The company being sued can
counter, or “rebut,” that presumption.
Still, the survival of the theory of demonstrating market efficiency
provides a significant advantage to the investors as a class because they can
try the entire classes’ claims together as a certified class action.
Arguably an issue left open in Halliburton was whether those same
investors needed to demonstrate “materiality,” another important element to a
securities violation, at the class certification stage, and, if so, how. Significantly, in Halliburton, the defendants argued before the Supreme Court that
investors had failed to demonstrate their alleged misstatements “moved” the
market price of Halliburton’s stock price in the first place, i.e. to
demonstrate “price impact.” This, they
claimed, must be demonstrated at the class certification stage to preclude
defendants from having to defend at trial claims for misstatements that were
potentially not material. The Supreme
Court in Halliburton refused to reach
the issue, pointing out that the defendants had not argued this point until too
late into the proceedings.
However, on June 11, 2012, the Supreme Court
granted review in Connecticut Retirement
Plans and Trust Funds v. Amgen, Inc., 660 F.3d 1170 (9th Cir. Nov. 8,
2011), cert. granted, ___ U.S. ___,
(June 11, 2012), on this very point in an appeal from the Ninth Circuit Court
of Appeals.
At issue in Amgen
is a split in authority among the federal circuits over whether a plaintiff
must prove that alleged misstatements were sufficiently material to invoke the
fraud-on-the-market theory in support of class certification. Three circuit courts (Second, Fifth, and, to
a lesser extent, the Third) previously have held that this is a requirement of
the fraud-on-the-market analysis when evaluating whether a class should be
certified. The Ninth Circuit joined a
decision from the Seventh Circuit, however, in rejecting that position. The court held that materiality is a merits
question that does not affect whether class certification is appropriate.
The Amgen
case also picks up threads from another recent Supreme Court decision. In Matrixx
Initiatives, Inc. v. Siracusano, 131 S.Ct. 1309 (2011), the Court addressed
the issue of materiality, but in the context of what must be pled to survive a
motion to dismiss. There, the Court
squarely held materiality presented an issue of fact for the jury: “It is
substantially likely that a reasonable investor would have viewed [the alleged
truthful but concealed] information “as having significantly altered the ‘total
mix’ of information made available,’” Matrixx,
131 S.Ct. at 1312 (citing Basic, 485
U.S. at 232).
In Halliburton,
conversely, the Supreme Court found that a plaintiff does not have to prove
loss causation to invoke the fraud-on-the-market presumption at the class
certification stage, but arguably left open the question of whether the
plaintiff must demonstrate that the misstatement had a “stock price impact,”
which is often used as a proxy for determining whether the misstatement was
material. As a practical matter, if the
Supreme Court were to find that lower courts should be evaluating whether
alleged misstatements are material in determining whether to grant class
certification, it will introduce fact finding on a very significant element
into the class certification process.
And an important issue of fact—those typically reserved only for
juries—will be made by judges, and often on an incomplete factual record prior
to the close of formal discovery.
On May 25, the United
States Court of Appeals for the Second Circuit issued an important decision in Panther
Partners Inc. v. Ikanos Communications Inc., No. 11-63-cv, 2012 WL 1889622 (2d Cir. May 25, 2012),
confirming that companies that issue stocks and bonds through registered public
offerings must comply with the stringent requirements of Item 303 of U.S.
Securities and Exchange Commission Regulation S-K and disclose “known
uncertainties.” A company’s failure to
disclose such uncertainties may support a securities claim under Sections 11,
12, and 15 of the Securities Act of 1933.
In Ikanos, the lower court dismissed the
complaint alleging violations of Sections 11, 12(a)(2), and 15 of the
Securities Act of 1933, and denied the plaintiffs leave to amend. The complaint alleged that, in connection
with a secondary offering of the firm’s securities, Ikanos Communications was
required to disclose, and failed to adequately disclose, the known defects in
the company’s semiconductor chips.
Ikanos learned in
January 2006 that there were quality issues with its chips. Specifically,
the chips would develop a problem called “Kirkendahl voiding,” resulting in the
mingling of gold wires and the aluminum pad and causing the connection between
the components to fail over time when exposed to different temperatures. These defects were a substantial problem and
the company was unable to determine which of the chip sets it sold to customers
contained the defective chips. The
plaintiff alleged that the board of directors met and discussed the defect
issue when it arose, and that company representatives flew to Japan to meet
with third-party manufacturers to discuss the problem. The complaint alleged that the company did
not disclose the magnitude of the defect issue in the Registration Statement or
Prospectus for the Secondary Offering.
Instead the offering documents stated in generalized terms that “[h]ighly
complex products . . . frequently contain defects and bugs…. In the past we have experienced, and may in
the future experience, defects and bugs in our products.” Feb. 22, 2007 U.S. Securities and Exchange
Form 10-K at 32. When the truth about
the defective chips was reported, the company’s share price dropped 30%.
The Second Circuit
ruled that the district court applied the wrong standard in assessing whether
the complaint alleged a failure to comply with Item 303. The district court framed its dismissal in
terms of whether Ikanos knew the defect rate of its chips was “above average”
before filing the Registration statement.
The Second Circuit held that the complaint successfully stated a claim
because it plausibly alleged that the defects constituted “a known trend or
uncertainty that the Company reasonably expected would have a material
unfavorable impact on revenues.” Ikanos, 2012 WL 1889622, at *1.
Second Circuit Denies En Banc Review Of Amex Arbitration
Ruling
On May 29, 2012, the
U.S. Court of Appeals for the Second Circuit denied en banc review of the
court’s January 31, 2012 ruling that American Express Co. cannot enforce
arbitration agreements containing class action waivers against merchants
pursuing antitrust tying claims against the company in In re American Express Merchants’ Litigation. The January decision was significant because
it followed the U.S. Supreme Court’s rulings in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), and Stolt-Nielsen
S.A. v. AnimalFeeds International Corp., 130 S.Ct. 1758 (2010), in which
the Court enforced class action waivers found in arbitration agreements. The Second Circuit held that enforcement of
the class action waivers in American
Express would preclude the merchants’ ability to bring antitrust claims
because individually arbitrating the claims would be cost-prohibitive, effectively
depriving the merchants of the protection of the antitrust laws.
The Court’s denial of
en banc review was split with 5 of the 13 judges dissenting from the decision
to deny rehearing. Chief Judge Jacobs, with whom Judge Cabranes and Judge
Livingston joined, would have granted denial because in their view, the panel
misapplied Concepcion and did not
properly apply the Federal Arbitration Act’s policy favoring enforcement of
arbitration agreements. Judge Cabranes also wrote separately urging the Supreme
Court to take review of the case. Judge
Raggi, joined by Judge Wesley, dissented from the denial, pointing out a split
in the circuits, citing Coneff v.
AT&T Corp., 673 F.3d 1155
(9th Cir. 2012).
Second Circuit Refines Antitrust Pleading Standard
On April 3, 2012, the
Second Circuit issued a ruling in Anderson
News, LLC v. American Median, Inc., 680 F.3d 162 (2d Cir. Apr. 3, 2012),
interpreting the level of detail required to state a claim under Section 1 of
the Sherman Act. In a major victory for
antitrust plaintiffs, the Second Circuit reversed a district court order, which
had required a high level of detail to state an antitrust claim. The district court had dismissed the case
after weighing the plaintiff’s allegations of a violation against the defendant’s
purported business justifications and concluded that the defendant’s
interpretation of events was more plausible.
The Second Circuit reversed, holding that factual determinations were
inappropriate for a motion on the pleadings; it was “not the province of the
court to dismiss the complaint on the basis of the court’s choice among
plausible alternatives. . . . [T]he choice between or among plausible
interpretations of the evidence will be a task for the factfinder.” Anderson
News, 680 F.3d at 190.
DOJ and Consumers Bring Enforcement Actions Against
E-Book Publishers
On April 11, 2012,
the U.S. Department of Justice, Antitrust Division, filed a civil complaint
accusing Apple and five large book publishers—Hachette, HarperCollins,
Macmillan, Penguin, and Simon & Schuster—of fixing prices for e-books.
The complaint follows
changes in the publishing industry brought by the introduction of Amazon’s
Kindle reading device and other e-readers.
Amazon began pricing e-books at $9.99 to drive demand for the
Kindle. The complaint alleges that the
publishers feared Amazon’s aggressive pricing on e-books would drive down
prices for print books. The publishers
reacted by selling e-books to retailers using an “agency model” under which the
publishers determined the retail price for books. Each of the publishers was alleged to have
entered into an identical agency contract with Apple.
Three publishers
settled the charges via a proposed consent decree also filed on April 11. The
consent agreement will force the settling publishers—Hatchette, HarperCollins,
and Simon & Schuster—to terminate its agency model contracts with Apple and
other e-book retailers.
Consumers also
brought antitrust claims against Apple and the publishers. On May 15, 2012, the U.S. District Court for
the Southern District of New York denied the defendants’ motion to dismiss the
complaint. The court held that the
plaintiffs plausibly alleged concerted action and a restraint of trade under
Section 1 of the Sherman Act. The
complaint alleged specific conversations between competitors, as well as
parallel conduct suggestive of an agreement, including a sudden and
unprecedented shift in the business models of the publishers.
NFL Defeats Antitrust Claims Brought
By Former Players
On June 13, 2012, the
U.S. District Court for the District of Minnesota dismissed retired NFL
football players’ class action antitrust claims against the NFL. The players alleged that the NFL’s refusal to
allow retired players to use their likenesses as NFL players restrained trade
and monopolized the market for their likenesses. The court held there was no Sherman Act
“agreement,” distinguishing the case from American
Needle v. NFL, 130 S.Ct. 2201 (2010), where the Supreme Court held that the
NFL, a joint venture, was capable of entering into a Sherman Act agreement for
certain kinds of activities. The court
held that the NFL and its teams act as a single entity for purposes of
licensing NFL programming because the production of NFL programming requires
the participation of all teams if it is to be available at all. The court also found the complaint’s market
definition allegations insufficient and dismissed the complaint with prejudice.
“By uniting we stand, by dividing we fall.”
John Dickinson,
American Lawyer and Politician
Excerpt from “The Liberty Song,” first published in the Boston Gazette on July 18, 1768.
Conferences
and Educational Seminars
+July 11-13, 2012
Missouri Association of Public
Employee Retirement Systems (MAPERS) Annual Conference
Tan-Tar-A Resort
Osage Beach, MO
MAPERS began in October 1987.
Since that time, the organization has worked to bring together
individuals and organizations interested in expanding their knowledge of
pension and investment issues. The
purpose of the association is to provide education, information, and ideas to
strengthen and protect Missouri’s public employee retirement systems. Plan Sponsor membership is open to trustees
and administrators of all public pension funds in the State of Missouri. Corporate membership is open to commercial
financial and investment groups.
Associate membership is open to organizations affiliated with public
retirement systems including unions, lobbying groups, etc. MAPERS’ annual conference is held each summer
and attended by members from all three membership categories. The agenda includes nationally-known speakers
from the financial, legal, and retirement arenas.
+July 21-27, 2012
International Association of Fire
Fighters (IAFF) 51st Convention
The Sheraton Philadelphia
Downtown
Philadelphia, PA
The IAFF’s mission is to build and grow a stronger union while
educating its members with free credit evaluations and certifications. Firefighters keep abreast of state and
federal politics, including pending legislation through the IAFF outreach
programs. This year’s convention is
expected to include a segment regarding successful collective bargaining
strategies.
+July 22-26, 2012
Pennsylvania State Association of
County Controllers (PSACC) Summer Conference
Seven Springs Mountain Resort
Seven Springs, PA
The PSACC is an organization of county government finance professionals
whose purpose is to encourage the discussion and resolution of issues arising
in the discharge of the duties and functions of the office of County
Controller. The organization advances
the professional development of its members through a conscientiously applied
program of continuing professional education and training.
+July 23-25, 2012
OPAL Financial Group presents
Public Funds Summit East
Newport Marriott
Newport, RI
“Navigate The Future” is the theme of this year’s conference. The summit will address the processes for
selection and evaluation of investment managers, legal advisors, as well as
management policies in light of new reform legislation. This conference is very informative,
particularly with current industry trends.
Government Finance Officers Association Conferences
+July 15-17, 2012
North Carolina GFOA
Wrightsville Beach, NC
Scott + Scott LLP is a nationally recognized law firm headquartered in Connecticut with offices in New York City, Ohio and California. The firm represents individual as well as institutional investors who have suffered from corporate stock fraud. Scott+Scott has participated in recovering billions of dollars and achieved precedent-setting reforms in corporate governance on behalf of its clients. In addition to being involved in complex shareholder securities and corporate governance actions, Scott+Scott also has a significant national practice in antitrust, ERISA, consumer, civil rights and human rights litigation. Through its efforts, Scott+Scott promotes corporate social responsibility.
Scott+Scott’s PT+SM System is the firm’s proprietary investment portfolio tracking service. Carefully combining the firm’s proprietary computer-based portfolio monitoring software with Scott+Scott’s hands-on approach to client relations is a proven method for institutional investors and their trustees to successfully
- Monitor their investment portfolios
- Identify losses arising from corporate fraud
- Consider what level of participation any given situation requires
- Recover funds obtained on their behalf through investor litigation action
To obtain more information about Scott+Scott’s PT+SM services or to schedulea presentation to fund trustees, fund advisors or asset managers, please
contact: David R. Scott + Toll Free: 800.404.7770 email: drscott@scott-scott.com
+ UK Tel: 0808.234.1396
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