Appellate Law & Practice

CA1: White hat PSLRA dismissal

In Re: Tyco Intl Ltd, No. 05-2762, holds that for purposes of the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4(b), the plaintiffs did not adequately allege scienter.  The plaintiffs alleged that in the wake of the scandal at Tyco, a “clean up” “fell well short of sanitizing Tyco's books, and that new management [with PWC] perpetuated a fraud in the accounting for ADT, one of Tyco's largest subsidiaries.  The court notes that Tyco’s statements were cautious about the progress of the clean-up and ongoing government investigations, which seems to be enough, and there is nothing in the complaint that indicates that defendants knew of GAAP violations.  This will amuse securities law types for days.

CA2 (1.5.06): Letting an option expire is not a "insider" transaction

Allaire Corp. v. Okumus, No. 04-2149 (Kearse, Sack, Sotomayor): In a brief and technical securities law opinion, the Court holds that the expiration of an option contract is not a transaction under section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), which governs transactions by “insiders”.

CA1: Sarbanes-Oxley has no extraterritorial whistleblower protection

Carnero v. Boston Scientific Corporation, Nos. 04-1801, 04-2291, affirms the dismissal of a claim against an employer under Section 806, of the Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1514A (2005) (civil action to protect against retaliation in fraud cases)  brought by a Argentinian citizen resident in Brazil who worked for the two BSC subsidiaries and whose whistleblowing pertained to their alleged improprieties in Latin America.  Applying  E.E.O.C. v. Arabian Am. Oil Co., 499 U.S. 244, 248 (1991) and analyzing the text, history, and structure of the act, the court holds that Congress is presumed not to give Sarbanes-Oxley extraterritorial effect.  These subsidiaries were not listed, themselves, as foreign companies on the stock exchange.   The court also notes that the Department of Labor has had some misgivings about extraterritorial enforcement of the act.  See the Department of Labor’s Ruling here:  Sarbanes-Oxley Regulations, 69 Fed. Reg. 52104-01, 52105, 2004 WL 1876043 (Aug. 24, 2004)  The court also affirms the dismissal of his state law claims, because a necessary party to the suit would have destroyed diversify jurisdiction. 

CA1: Securities litigation and law and economics bonanza

The First Circuit issued two securities opinions today, and here goes... but you have to look under the fold because they are quite large.

CA1: pleading under the PSLRA

In re Credit Suisse First Boston Corp., No. 05-1646., affirms the dismissal of the plaintiff’s Section 10(b) case on the grounds that it did not plead with enough specificity the injuries of the plaintiffs as required by the Private Securities Litigation Reform Act (PSLRA), 15 U.S.C. § 78u-4.  Although the court notes that the authority is sparse, and the question is close, the court concludes that the plaintiff’s allegations that CSFB told its investors one thing (regarding what stocks to buy) and while taking opposite positions did not demonstrate the level of scienter “scienter in order to satisfy the PSLRA standard.... The bottom line, then, is that while the plaintiffs' allegations regarding the obvious conflicts of interest and general state of corruption within CSFB's analyst ranks may be enough to turn the stomach of an ethically sensitive observer, they are insufficient, on their own, to support a fraud pleading with respect to the subjective falsity of the eight ‘buy’ recommendations...”

CA5 - Certification of Securities Fraud Class

Feder v. EDS (Garwood, J.)

This is an interlocutory appeal from the certification of a plaintiff class in a securities class action. This opinion largely concerns the adequacy of class representation. The court rejects arguments that New Jersey is not an adequate representative even though: 1) it shares the same accountant as the defendant corporation; 2) some other class members are independently suing the defendant for ERISA violations; 3) the named plaintiff’s lawyer has an "unusual fee arrangement"

CA11: "Obey the law injunctions" cause angst

Securities litigators are all abuzz over a footnote in the 11th Circuit’s opinion in SEC v. Smyth, 04-11985.  Footnote 14 questions whether SEC injunctions sought by the FTC can really just order a party to “obey the law.”  The SEC has asked that this dicta be removed.

For more analysis see See Securities Litigation Watch and TheCorporateCounsel.net.

Update: White Collar Crime Prof blog provides some commentary (concluding that the 11th Circuit will dutifully capitulate to the demands of the executive because the “unfairness of calling into question an important regulatory tool of a federal agency without even a hint that it was an issue in the case, will likely impel the court to drop the discussion”) and a copy of the brief.

CA1: In re Stone & Webster, Inc., Securities Litigation petition for rehearing denied.

In docket No. 03-2429, the court concludes:

Defendants argue that our decision is inconsistent with our prior rulings, principally in Greebel v. FTP Software, Inc., 194 F.3d 185, 207 (1st Cir. 1999). Their contention is mistaken. In Greebel, we affirmed the dismissal of Rule 10b-5 claims against the controlled corporation, and on that basis affirmed the dismissal of the corresponding § 20(a) claims against the controlling persons.* * * that is not what happened in the present litigation. There is no inconsistency.

See earlier coverage here.

CTA5- Securities Fraud and Class Actions

Hoffman v. Ascendant Solutions (Smith, J.)

In a securities fraud case, the district court concluded that class certification was not appropriate because of the need for each plaintiff to individually prove reliance. The district court rejected the proposed "fraud on the market" theory because plaintiff’s expert had not demonstrated that the stock traded in an efficient market, i.e., one in which stock traders relied on the price for information concerning the stock’s value. The Fifth Circuit rejects the plaintiff’s argument that they need merely plead market efficiency at the class certification stage, and not provide supporting evidence. That the stock traded on NASDAQ, a major market, was not sufficient by itself to establish that the stock traded efficiently.  And the rest of the plaintiff's evidence was either not properly raised in the district court or was unpersuasive.

This case has some interesting and useful discussion of the factors relevant to demonstrating that a market for a stock is efficient.

CA11: two securities cases

In SEC v Mutual Benefits Corp., the Court holds that investments in viatical settlement contracts are "investment contracts" within the meaning of the Securities Acts of 1933 and 1934. In this, the Court is guided by the Supreme Court's decision in SEC v. Edwards, 540 U.S. 389 (2004) and its discussion of the scope of that phrase.

Speaking of which, there is also yesterday's decision on remand from the Supreme Court in SEC v Edwards. You may find an update to this post, later on, that fills you in on what the Eleventh Circuit said in yesterday's opinion. But in case I don't, you should look at it yourself if you're into securities law, and otherwise shouldn't bother.