INSIDE THIS ISSUE
• Shareholders Bring Actions Based On Violations Of The Foreign Corrupt Practices Act
• Facebook IPO Sparks Investor Lawsuits, Regulatory Scrutiny
• Scott+Scott Wins Victory In 11th Circuit Appeal
• Scott+Scott’s Appellate Practice Group Uniquely Equipped To Handle Tough Appeals
• Conferences and Educational Seminars
Shareholders Bring Actions Based On Violations Of The Foreign Corrupt
Practices Act
After a series of
U.S. Securities and Exchange Commission (“SEC”) investigations in the mid-1970s
revealed that over 400 U.S. companies admitted to making questionable or
illegal payments to foreign government officials, Congress passed the Foreign
Corrupt Practices Act (“FCPA”) to stem the tide of corrupt activity of U.S.
companies overseas. Since then, the
FCPA—passed in 1977—has prohibited U.S. companies from making payments to
government officials in order to secure improper advantages in obtaining or
retaining business. The FCPA also
created accounting transparency requirements to regulate how companies account
for such payments.
Federal enforcement
of the FCPA has increased in the recent years.
As of March 31, 2012, at least 81 companies are the subject of ongoing
and unresolved FCPA-related investigations.
On April 21, 2012, the FCPA became front page news when The New York Times reported retail giant
Walmart covered up potential FCPA violations in Mexico. According to the article, a former executive
with Walmart de Mexico alleged in 2005 that the company had paid bribes to
officials throughout Mexico to obtain construction permits and that Walmart
executives in the United States “hushed up” the allegations. On April 27, 2012, Scott+Scott filed suit
against Walmart executives on behalf of an institutional shareholder in
Arkansas federal court.
Although the text of
the FCPA itself does not contain a private cause of action that allows
individuals or institutions to bring lawsuits for violations of the FCPA,
conduct that violates the FCPA also violates several other laws. For example, the Department of Justice
maintains a “Lay Person’s Guide” to the FCPA that explicitly states, “Conduct
that violates the anti-bribery provisions of the FCPA may also give rise to a
private cause of action for treble damages under the Racketeer Influenced and
Corrupt Organization Act (RICO), or to actions under other federal or state
laws.”
Conduct which
violates the FCPA can also give rise to shareholder derivative lawsuits. Shareholder derivative lawsuits are brought
by shareholders against officers and directors of the companies that have
breached their fiduciary duties owed to the companies. Fiduciary duties require officers and
directors to put the interests of the company above personal interests and to
manage the company with the care that they would put into their own personal
business. Initiating or covering up
bribes and improper payments overseas undoubtedly is a breach of these
duties. As such, it is imperative for
shareholders to take action to rectify this behavior through the shareholder
derivative mechanism.
Scott+Scott has been
on the forefront of investigating and pursuing breaches of fiduciary duties by
officers and directors for directing or allowing their companies to violate the
FCPA. For more information on the FCPA
or shareholder derivative actions, please contact David Scott at (800) 404-7770
or drscott@scott-scott.com.
Facebook IPO Sparks Investor Lawsuits, Regulatory Scrutiny
To date, at least three shareholder class actions
have been filed in California and New York charging Facebook and three of its
underwriters, Morgan Stanley, JPMorgan Chase & Co., and Goldman Sachs
Group, Inc., with misleading investors ahead of the company’s May 18th initial
public offering (“IPO”). The shareholder
complaints allege Facebook and its bankers violated sections 11, 12, and 15 of
the Securities Act of 1933 in the offering. The suits stem from reports that
lead underwriter Morgan Stanley tipped certain of the bank’s clients that it
had reduced revenue forecasts for Facebook.
A key Morgan Stanley analyst had reportedly lowered the firm’s revenue
estimates because Facebook has been struggling to monetize its mobile
applications.
On May 9, three days into its road show—in which
Facebook executives and the underwriters discussed the IPO with prospective
investors—the company filed a late amendment to its registration statement with
the U.S. Securities and Exchange Commission (“SEC”), adding convoluted language
acknowledging the issue that was vexing its underwriters. “To the extent that increasing usage of
Facebook through mobile apps or our mobile website substitutes for the use of
Facebook through personal computers where we do show ads, the number of ads
that we deliver to users and our revenue may be negatively affected unless and
until we include ads or sponsored stories on our mobile apps and mobile
website,” the company wrote.
After filing the updated document, Facebook
contacted sell-side research analysts to discuss the contents. A majority of them revised their estimates on
revenue and earnings according to a report by The Wall Street Journal.
Morgan Stanley and Facebook’s other underwriters promptly informed the
banks’ key clients, certain large hedge funds, mutual funds, and wealthy
individuals, of the declining revenue prospects at Facebook. The WSJ
reported:
The Wall Street firms prepared
talking points for their salespeople outlining downward revisions on Facebook
revenue for the second quarter and full year, people familiar with the matter
said. The salespeople scrambled to make
as many calls as possible to key clients, reading out the new numbers.
News of the estimated cut was passed on only to a
handful of big investor clients, not everyone else who was considering an
investment in Facebook. The New
York Times’ Dealbook reported:
One
investor, after being briefed on Facebook’s revised forecast, unloaded all of
its holdings in the first hour of trading, according to Scott Sweet, founder of
the IPO Boutique, who advises mutual funds, hedge funds and individuals. The investor sold hundreds of thousands of
shares at about $42.
The investor suits charge that the revised
analyst estimates were not adequately disclosed to the public prior to
Facebook’s offering. On the Monday
following the IPO, Facebook shares plunged 11%, declining a total of 19% in a
two-day span. The company lost over $19
billion in market capitalization from the $38 per share offering price when it
closed at $31 per share on May 22nd.
Beyond the shareholder lawsuits, the IPO is being
reviewed by key U.S. regulators. The
Financial Industry Regulatory Authority (“FINRA”), Wall Street’s
industry-funded brokerage watchdog, and the SEC are reviewing issues around
Facebook’s IPO. In particular, Morgan
Stanley will be probed regarding reports of the firm’s selective disclosure of
the negative news about Facebook. “If
true, the allegations are a matter of regulatory concern” to FINRA and the SEC,
stated FINRA Chairman and Chief Executive Officer Richard Ketchum in an email
to reporters at Bloomberg. In addition, Massachusetts Secretary of
Commonwealth William Galvin has issued a subpoena to Morgan Stanley seeking
information related to analysts’ discussions with institutional investors
regarding Facebook’s revenue prospects.
In the face of the charges lodged against the
bank, it was reported that Morgan Stanley would adjust prices on thousands of
trades made in the IPO and that certain limit orders wouldn’t be filled at $43
a share or higher because of low volume at that price range.
Scott+Scott Wins Victory In 11th Circuit Appeal
Scott+Scott Partner Walter Noss and Associate
Penelope Abdiel achieved a victory in a case recently brought before the 11th
Circuit Court of Appeals. The team won a
$4.1 million dollar jury verdict in April 2011 in the case of Novak v. Gray, Case No. 09-08880, before
the U.S. District Court for the Middle District of Florida, Tampa Division. The appeal, brought by the defendant in that
case, was denied by a panel of three circuit judges in a per curium opinion on April 10, 2012.
The case originally brought before the district
court concerned the existence and breach of an oral agreement between two
business partners to share the value of the net proceeds of stock options held
in the name of the defendant. In return
for sharing the proceeds, the plaintiff alleged that he continued to participate
in business opportunities through which he incurred additional risk and costs,
including working for years without a paid salary with the prospect of higher
returns for both partners. The plaintiff
also pled a cause of action for fraud regarding statements made by the
defendant with respect to the stock options.
The jury found that the defendant had breached his agreement with the
plaintiff to share the proceeds of the stock options and awarded the plaintiff
over $1.3 million in damages. The jury
further found that the defendant made fraudulent statements to the plaintiff
concerning the stock options, and the plaintiff had suffered damages for which
the jury awarded him over $2.7 million.
The defendant appealed the jury’s verdict and the
district court’s decision to deny his post-trial motions on five separate
grounds: (1) the parties’ contract was illegal under Florida law and federal
securities laws; (2) the contract was barred by Florida’s parole evidence rule;
(3) the plaintiff’s claim of fraud must fail under Florida’s economic loss doctrine;
(4) the jury instructions on fraudulent inducement were incorrect; and (5) the
damages award was speculative. The 11th
Circuit court rejected Appellant-Gray’s arguments in the first four instances,
finding that the district court did not err in its decision to deny the
defendant’s post-trial motions on those grounds. On the fifth, the court clarified that the
amount of damages should be half of the total net proceeds of the stock options
in dispute for both of the fraud and breach of contract claims. The court remanded that issue to the district
court for remittitur, noting that the judgment should be adjusted to the
“maximum amount established by the evidence… the outer limit of the damages
Novak claimed in his sworn testimony that he was entitled to receive. In all other respects, the district court’s
judgment is affirmed.”
Scott+Scott’s Appellate Practice Group Uniquely Equipped To Handle
Tough Appeals
Scott+Scott’s
appellate practice group recently obtained a significant appellate victory in
the Sixth Circuit United States Court of Appeals on behalf of employees and
retirees who had invested their retirement savings in General Motors’ (“GM”)
two main 401(k) plans.
In the lawsuit, GM’s employees and retirees,
represented by Scott+Scott, had argued that State Street Bank and Trust Company
breached its fiduciary duties by failing to eliminate GM stock as an investment
option in the plan in the months leading up to GM’s bankruptcy filing in
2009. The district court had dismissed
the case, but on appeal the Sixth Circuit reversed and remanded the suit back
to the district court. In the suit, the
Sixth Circuit made it clear that State Street owed the GM employees and
retirees a fiduciary duty to eliminate GM stock in the event that GM stock
became an imprudent investment for the 401(k) plans.
The GM case is one of several cases that
Scott+Scott’s appellate practice group has appealed to the United States
circuit courts over the past several years.
The Firm has handled appeals in the Second, Third, Sixth, Seventh,
Ninth, and Eleventh Circuit U.S. Courts of Appeals, making it one of the few
plaintiff-side securities firms with an active appellate practice. The majority of Scott+Scott’s appellate cases
are securities class action cases where the district court has dismissed the
suit for failing to plead the case with sufficient particularity.
According to Geoff Johnson, who heads
Scott+Scott’s appellate practice group, there are unique challenges when
appealing a case to the U.S. circuit courts.
“On appeal, the case typically turns on one or two discrete issues. The key is to identify and then argue the
issues that are most likely to persuade the appellate court to find in your
favor. Identifying the key issues are
especially important when you are appealing, as opposed to defending, the
district court’s decision, as the vast majority of cases that get appealed to
the circuit courts are affirmed.”
Scott+Scott’s strong appellate practice group is
one of the areas distinguishing the Firm in securities class action
litigation. Scott+Scott has both the
experience and resources to see class action cases through to their very end,
and has the ability to appeal cases in the event that the Firm receives an
unfavorable ruling in the district court.
“L[aws] and institutions are
constantly tending to gravitate. Like
clocks, they must be occasionally cleansed, and wound up, and set true to
time.”
--Life Thoughts: Gathered from the Extemporaneous Discourses of Henry
Ward Beecher (Boston: Phillips, Simpson, and Co., 1858), 129.
Henry Ward Beecher,
American Clergyman, Social Reformer
Conferences and Educational Seminars
+June 3-6, 2012
Massachusetts Association of Contributory Retirement Systems (MACRS)
Hyannis Resort and Conference
Center
Hyannis, MA
The four-day conference will focus on a variety of issues of particular
importance to the Massachusetts retirement community, including several
sessions regarding the recent passage of Chapter 176 (“Pension Reform lll”).
+June 5-6, 2012
Michigan Pipe Trades Association 100th Convention
Atheneum Hotel and Convention
Center
Detroit, MI
Attending the convention will be 110 delegates including business
managers, financial secretaries, business agents, and elected officers of the
13 UA Local Unions making up the association.
Also in attendance will be officers and guests from UA Local Unions in
Ohio, Indiana, Wisconsin, and Washington, DC.
+June 10-13, 2012
Government Finance Officers Association (GFOA) 106th Annual Conference
McCormick Place West
Chicago, IL
This year’s theme is “Winds of Change: Public Finance in
Transition.” Dedicated to the sound
management of government financial resources, the GFOA provides professional
development training opportunities to state and local government finance
professionals each year, as well as an ideal venue for meeting and networking
with colleagues and experts from across the nation.
+June 11-13, 2012
International Foundation of Employee Benefit Plans (IFEBP) Presents the
Benefit Plan Professionals Institute for Accountants
Hilton San Francisco Union Square
San Francisco, CA
Earn continuing professional education (CPE) credit at this three-day
conference offering the latest health and pension fund industry information for
accountants and auditors.
+June 12-13, 2012
The Pennsylvania State Building and Construction Trades Council
(PABCTC) Convention
Harrisburg Hilton Hotel and Conference
Center
Harrisburg, PA
The Council is made up of 16 regional council and more than 115 local
unions from 15 international building trades unions. The focus of this conference is to provide a
comprehensive overview of current legislative and regulatory issues facing the
members, including job creation, fiduciary measures, construction industry
standards, and defensive battles occurring on the federal and state level.
+June 24-27, 2012
Florida Public Pension Trustees Association (FPPTA) 28th Annual
Conference
Hilton Walt Disney
Lake Buena Vista, FL
FPPTA’s primary purpose in conducting an annual educational forum is to
provide the basis for improved financial and operational performance of the
public employee retirement systems in the state. FPPTA acts as a central educational resource
for the public pension industry, including topics such as the political reality
of public pension plans and private sector plans.
Government Finance Officers Association Conferences
+June 7, 2012
Connecticut GFOA
Tunxis Plantation
Farmington, CT
+June 20-22, 2012
Maryland GFOA
Clarion Fontainebleau Hotel
Ocean City, MD
+June 28-July 1, 2012
Municipal Association of South Carolina (MASC)
Marriott Hilton
Hilton Head Island, SC
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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