Appellate Law & Practice

CA1: PSLRA dismissal reversed

Mississippi Public Employees' Retirement System v. Boston Scientific  Corp. et al., 07-1794 reverses the dismissal of a Private Securities Litigation Reform Act of 1995 ("PSLRA"), Pub. L. No. 104-67, 109 Stat. 737 case.  If you practice securities law you should know about this case by now, because your clients expect you to.  If practice securities law and you have not read this case, you are not detail-oriented, and are malpracticing.  That said, I will briefly touch on the issues for those of you that don’t care about your clients but falsely claim to know something about “Securities.” 

Sorry, where was I?  Oh yeah... This case includes both regular FRCP pleading-with-particularity issues as well as PSLRA pleading-with-particularity issues.  The plaintiffs claimed that the executives were not up front about Boston Scientific’s ongoing litigation and problems with some of its medical equipment.  The theory the plaintiffs assert is thus:

Plaintiff's theory is that the investing world was aware of reports of patient death and injury involving TAXUS. However, defendants said that the problems with the TAXUS stents were caused by doctor unfamiliarity with the new product. It was natural for investors to conclude the problems would disappear over time as doctors became more familiar with the product, and there would be no recalls. Having given that explanation, the defendants, plaintiff argues, were required to disclose as soon as they could the connection between the patient problems, the manufacturing defect, and the manufacturing change remedying this problem.

The First concludes that there was enough in the complaint to show that the managers knew what they knew at a certain time, and acted with scienter.

The defendants had argued that the plaintiffs were really seeking liability under a “fraud by hindsight” theory, but the First says that this Circuit caselaw forecloses it, and besides this isn’t a case where “...plaintiff alleges that the fact that something turned out badly must mean defendant knew earlier that it would turn out badly.”

As well, the insider trading dismissals are also reversed.

The D&O Diary Comments here.

CA1: stock option period strictly enforced

Mariasch v. Gillette Company, 07-1549.  An employee got some stock options from his employer.  He says he gets to exercise them late.  There is a choice of law issue, but the First says that this is really a matter of internal corporate governance, and therefore the state of incorporation of the corporation (Delaware) provides the rule of decision.  Applying First Marblehead Corp. v. House, 473 F.3d 1 (1st Cir. 2006) (our coverage here), the First says that the option exercise period must be strictly enforced.  An equitable estoppel argument fails, because at a deposition he said some things that foreclosed it.

CA1: PSLRA case goes to defendant (as does denial of motion to amend), but not all news is good for defendants

ACA Financial v. Advest , 07-1367.  The First proudly announces that this its first post-Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007) PSLRA case.  PSLRA, in case you are a moron, stands for Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737.  And, of course, it affirms the dismissal of the claims of bond-holders that were defaulted on by Bradford College (the bonds were issued by the Massachusetts Industrial Finance Agency ("MIFA")).   

The First acknowledges that its prior PSLRA precedent was, in part overruleed (as to determining the sufficiency of pleadings of scienter in securities fraud cases under FRCP 12(b)(6)).  So In re Credit Suisse First Boston Corp., 431 F.3d 36 (1st Cir. 2005) (our coverage here) ("Scienter allegations do not pass the 'strong inference' test when, viewed in light of the complaint as a whole, there are legitimate explanations for the behavior that are equally convincing.") is now bad law, and “In other words, where there are equally strong inferences for and against scienter, Tellabs now awards the draw to the plaintiff.” 

And you are never going back to your old bankrupt school... so read on.

CA1: punitive damages and defamatory U-5s

Galarneau v. Merrill Lynch, No. 06-2410.  The plaintiff was fairly sophisticated stock broker at Merrill that handled accounts of the moderately wealthy, and developed somewhat (though not extremely) sophisticated tax strategies for them.  They vetted the strategies with Merrill’s in-house counsel who seemed to approve.  Her strategies were initially successful, but a client complained and sued and settled.  Merrill thought she was “churning,” (see, lawyers are not the only ones that do it) Merrill fired her and told the NASD that she had engaged in “inappropriate bond trading.”

There were a number of communications between counsel for the plaintiff and defendant that were excluded under FRE 403, but the First basically says that this wasn’t an abuse of discretion.

Merrill had conducted an internal and external investigation.  It also notified the Maine Securities division and NASD via a form U-5.

The First notes that under Maine law, a statement in a U-5 is conditionally privileged under Maine law, and “While a conditional (or qualified) privilege does not change the actionable quality of words published, it rebuts the inference of malice that is imputed in the absence of the privilege...[and] A conditional privilege may be abused if the defamatory statement is made with reckless disregard as to its falsity. 

Buy low, sell high and keep reading.

CA1: claim preclusion in derivative actions

In Re: Sonus Networks, Inc, No. 06-1937.  This is a really big piece of derivative litigation.  The plaintiff’s claims were dismissed when the district court held that their claims were precluded by an earlier state-court lawsuit, in which the plaintiffs did not plead that they demanded that the company sue its employees (or allege futility under the law of the state of incorporation).  The state court had held that futility wasn’t apparent from the face of the complaint, which named several officers, because it wasn’t really alleging wrongdoing by them, but rather a failure of supervision and there wasn’t enough particularity to show that the other directors were so disinterested that they couldn’t consider the demand.   

CA1: not enough to allege scienter for purposes of the PSLRA

Rodriguez-Ortiz v. Margo Caribe, Inc., No. 06-1765 (6/19/07). This case deals with the ever-present question of “how much particularity is enough” to meet the pleading standards of the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u-4(b). The underlying claim involves an alleged failure of a former employer to allow a former employee to exercise his stock options after failed negotiations with an executive as to the terms of his resignation (which the company called a dismissal.) The First looks at the complaint and determines that for the securities claims, there just isn’t any specifics regarding the defendant’s scienter or an “intent to deceive” when the underlying contract was signed.

Apparently the other claims (i.e. contract) were not dismissed.

CA1: negligently misrepresenting stock option terms

First Marblehead v. House, No. 06-1114 (12/22/06). An employer had a incentive stock option plan. The employees were told that the options had a ten-year exercise period. But, it later emerged that if the employee left, the options expired three months after the employee left. The company's lawyers knew this, and the company's lawyers told management that this little detail was pretty big. The record does not indicate whether this information was distributed.

CA1: little misappropriation theory of insider trading

SEC v. Rocklage, No. 06-1571 (11/14/06).  Although many women are advised by their parents to “marry rich,” few are advised of the pitfalls of telling their brothers inside information about their husband’s company.  Their parents probably tell them that they can avoid liability by telling their husbands that they intend to disclose the information to their brothers, who will, in turn disclose the information to the “downstream tipees.”

Tell everyone a Santorum joke, and keep reading.

CA1: Corporate In Pari Delicto

Nisselson v. Lernout, No. 05-1774. Selya is strangely entertaining. 

In the underlying series of events, a corporate shark, using fraudulent means, induced an allegedly innocent target corporation to enter into an ill-advised merger. After both the shark and the merged entity drowned in red ink, plaintiff-appellant Alan Nisselson (the trustee), appointed by the bankruptcy court to prosecute any causes of action that the merged entity might possess, attempted to mount various claims arising out of the innocent target's legal rights.

Applying the In Pari Delicto Doctrine, The First sides against the trustee, because it concludes that it is a successor to the shark, and these claims really belong to the first corporations shareholders. 

Obviously, if you have been involved in the KPMG litigation, this decision, and the First’s allocation of moral condemnation will be of interest to you.

CA1: Duress and indemnification of directors in SEC enforcement proceedings

SEC v. Happ, No. 06-1324 *10/20/06. Due to technical difficulties, there was some delay. While this case involves an interesting tale of securities law, it really comes down to a question of “what is duress.” Duress, as we might guess is something usually suffered by poor people. Mr. Happ was the former director of a subsidiary of Corning, and sought indemnification that he was contractually entitled to as a director. However, when Happ was allegedly informed that the company was having some problems, he allegedly sold all his stock. The SEC civilly went after Happ for insider trading, and Corning reluctantly agreed to fund his defense provided unless it was “’finally determined" that he ‘wrongfully used material non-public information.’” Happ claims that Corning not only breached the indemnification provisions, but refused to cooperate with him in providing him the needed documents to mount his defense. A jury decided against Happ. Happ sued Corning , arguing that the agreement was secured by duress. Corning counterclaimed. On summary judgment, corning won!