On May 9, 2017, the U.S. Court of Appeals for the Federal Circuit (“Federal Circuit”) affirmed in part and reversed in part an earlier decision from the U.S. Court of Federal Claims, which had held that aspects of the Government’s bailout of AIG constituted an illegal exaction. This case stems from two steps the Government took as part of its bailout of AIG. First, the Government issued a loan to AIG in exchange for preferred shares that were convertible to common shares representing an 80% equity interest in AIG. Second, AIG executed a 1:20 reverse stock split that enabled AIG to have enough unissued and authorized common shares to enable the Government to convert its preferred shares, without the need for AIG shareholder to vote in favor of authorizing enough common shares to allow for the Government’s conversion.  This case proceeded as an “opt-in” class action, and many institutional investors opted in to the class.

Briefly stated, AIG’s largest shareholder, Starr International Co. (“Starr”) asserted claims based on the Government’s acquisition AIG equity (the “Equity Claims”) and claims based on the reverse stock split (the “Stock Split Claims”). With respect to the Equity Claims, Starr alleged that the Government’s acquisition of AIG equity was an illegal exaction because Section 13 of the Federal Reserve Act did not authorize the Government to take equity as consideration for its bailout loan. Additionally, through the Stock Split Claims, Starr maintained that the Government engineered a reverse stock split to enable it to convert the preferred shares it obtained as consideration for the bailout loan into common shares without a shareholder vote, depriving Starr of its ability to block the resulting dilution. In sum, the Federal Circuit (a) reversed the Court of Federal Claims decision that Starr had standing to pursue its Equity Claims, holding those claims were solely derivative; and (b) affirmed the Court of Federal Claims decision that denied relief for the Stock Split Claims, holding the court did not clearly err in finding that the primary purpose of the stock split was to prevent delisting by the NYSE, not to avoid a shareholder vote.

Continue Reading Federal Circuit Rules that Starr International Lacks Standing to Pursue Class Claims Stemming from the U.S. Government’s Acquisition of AIG Equity

In an April 28, 2017 ruling on a motion to dismiss in the In re Valeant Pharmaceuticals International, Inc. Securities Litigation (the “Valeant Litigation”), the U.S. District Court for the District of New Jersey addressed an issue that has yet to be addressed by any Federal Circuit court and which has split the District Courts below. The Court concluded that plaintiffs cannot pursue claims under Section 12(a)(2) of the Securities Act of 1933 (“Section 12(a)(2) claims”) in connection with large unregistered offerings made to Qualified Institutional Buyers (“QIBs”) pursuant to SEC Rule 144A.

The Valeant Litigation plaintiffs allege that Valeant failed to disclose that it had engaged in price gouging and had created a secret network of specialty pharmacies in order to avoid scrutiny. Plaintiffs further allege that once Valeant’s deceptive practices were disclosed to the public, Valeant’s share price fell dramatically.  Counts III through VI of the plaintiffs’ complaint alleged violations of Section 12(a)(2) based on purportedly defective disclosures in the offering of senior notes to QIBs pursuant to Rule 144A (the “Note Offerings”). The offering memorandum for these Note Offerings stated that the notes would not be registered with the S.E.C. or offered to the general public.

Relying heavily on a string of cases from the U.S. District Court for the Southern District of New York and the Supreme Court’s decision in Gustafson v. Alloyd Co., the Valeant defendants argued that the plaintiffs’ section 12(a)(2) claims failed as a matter of law because Section 12(a)(2) does not apply to private placements of securities conducted pursuant to Rule 144A.  They argued that Section 12(a)(2) imposes liability for defective disclosures “by means of a prospectus,” and “cannot attach unless there is an obligation to distribute the prospectus in the first place.”  Defendants reasoned that the term “prospectus” relates only to public offerings and that Section 12(a)(2) thus cannot impose liability for misstatements in marketing materials for non-public offerings that do not require a prospectus. They concluded that offerings made pursuant to Rule 144A—such as the Note Offerings—are by definition not made to the public and thus exempt from the registration and prospectus requirements of the Securities Act. Continue Reading Court Overseeing the Valeant Securities Litigation Issues a Highly Anticipated Decision Ruling that Alleged Misstatements in Rule 144A Offerings Are Not Actionable Under Section 12(a)(2)

The Supreme Court is set to hear arguments on Monday in CalPERS v. ANZ Securities.  Previously we provided a comprehensive overview of CalPERS’s brief.  In anticipation of oral arguments, below we discuss the arguments raised in ANZ’s brief and CalPERS’s reply.

The CalPERS litigation is notable because of the potential impact it will have on the Second Circuit’s IndyMac decision, which held that because the three-year limitations period in Section 13 of the Securities Act is a statute of repose, the time to initiate a claim is not tolled by the filing of a class action.  In the case now before the Supreme Court, CalPERS argues that the Second Circuit’s ruling in IndyMac, and in the instant case, conflicts with the Supreme Court’s holding in American Pipe that the filing of a class action tolls the limitations period for any unnamed member of the proposed class.

ANZ’s AND AMICI’S ARGUMENTS

In sum, in its brief ANZ (a) urges the Court to adopt the Second Circuit’s reasoning in IndyMac, which distinguishes the two limitations periods in Sections 13, delineating Section 13’s one-year limitations period as a statute of limitations and Section 13’s three-year period as a statute of repose; (b) argues that American Pipe establishes an equitable tolling rule that cannot be applied to a congressionally mandated repose period; (c) argues that CalPERS has intentionally distorted the issues to its own advantage by framing its argument to addresses case-specific matters on which the Court declined to grant certiorari; and (d) addresses CalPERS’s policy arguments (which we outlined in our prior post). Continue Reading Update: Briefs Filed in CalPERS v. ANZ Securities

In the long-running Halliburton securities litigation, a dispute has arisen between two rival class proponents.   While readers of this blog are no doubt familiar with The Erica P. John Fund, Inc. v. Halliburton Co. case and its two trips to the Supreme Court, there is also a companion case, Magruder v. Halliburton Co.  Both cases were filed in the United States District Court for the Northern District of Texas, and both cases deal with various misrepresentations allegedly made by Halliburton and its CEO, which allegedly harmed the value of stock owned by the class members.  The alleged class period in the Magruder case runs from December 10, 2001 through July 24, 2002, while the Erica P. John Fund case covers an earlier period, July 22, 2009 to December 7, 2001.  Disputes between the two classes have led the proponent of the Magruder class to bring several motions attempting to consolidate the cases and scuttle a potential settlement between Halliburton and the class led by the Erica P. John Fund (the “Fund”).  After the Fund revised the definition of “Released Claims,” the court has preliminary approved the settlement despite the objection.

Continue Reading Dueling Classes Dispute the Breadth of Released Claims in the Halliburton Securities Litigation

On February 27, 2017, the California Public Employees’ Retirement System (“CalPERS”) filed its brief with the Supreme Court, requesting that the Court reverse the decision of the Second Circuit and abrogate the Second Circuit’s ruling in Police and Fire Retirement System of the City of Detroit v. IndyMac MBC, Inc., as inconsistent with the Supreme Court’s holding in American Pipe & Construction Co. v. Utah.  Specifically, CalPERS argues that the timely filing of a valid class action satisfies or tolls the three-year filing period set by Section 13 of the Securities Act with respect to subsequently filed opt-out suits.

BACKGROUND

In 2008, a retirement fund filed a class action (the “Class Action”) in the Southern District of New York, asserting claims pursuant to Section 11 of the Securities Act related to debt offerings underwritten by the Respondents in the instant case.  The Class Action was filed on behalf of all persons and entities that purchased the securities in question.  In 2011, CalPERS brought individual suit asserting the same claims and relying on the same facts presented in the Class Action.

Subsequently, the District Court issued a notice of settlement to the class and granted each class member the right to opt-out of the settlement.  CalPERS did so.  The District Court then dismissed CalPERS’s claims as untimely pursuant to Section 13, because by 2011, when CalPERS filed its individual complaint, more than three years had passed since the securities in question were offered to the public.  The Second Circuit affirmed the District Court’s ruling, relying on its decision in IndyMac.

CalPERS ARGUMENTS

In the brief filed in part by Tom Goldstein, who will presumably argue the case for CalPERS, the pension fund argues that the Second Circuit’s ruling in IndyMac and in the instant case conflict with the Court’s holding in American Pipe, and thus must be overturned.   In American Pipe, the Supreme Court held that Rule 23 of the Federal Rules of Civil Procedure provides that the filing of a class action commences the action for all class members, named or unnamed, and tolls the limitations period for the cause of action if the class action fails.  CalPERS argues that pursuant to American Pipe, as a putative member of the Class Action, it cannot be time-barred by Section 13 from asserting the claims it filed in 2011.

CalPERS argues that the Court can rule consistent with American Pipe by either:  1) holding that CalPERS’s action was timely regardless of tolling because it was a member of the timely filed Class Action; or 2) holding that the time for CalPERS to file its complaint was tolled by the filing of the Class Action.  In addition to its arguments regarding the language of Section 13 and American Pipe, CalPERS relies on two other arguments concerning efficiency and due process. Continue Reading Briefs Filed in CalPERS v. ANZ Securities

We have been keeping up with the In re LendingClub Securities Litigation class action, No. 3:16-cv-02627-WHA in the Northern District of California (“LendingClub”), in regard to Judge William Alsup’s unusual decision to require additional briefing from the class plaintiff before agreeing to the class plaintiff’s choice of class counsel.  Now, as the LendingClub Plaintiffs oppose the Defendants’ motions to dismiss, Plaintiffs’ counsel is highlighting a recurring trend in motion to dismiss practice: defendants arguing facts at the motion to dismiss stage, particularly in complex cases.

Continue Reading LendingClub Update: Class Plaintiffs Claim Defendants Are “Arguing Facts” on a Motion to Dismiss

Recently introduced legislation pending before the U.S. House of Representatives attempts to make wide-sweeping reforms to the procedural rules governing class actions and, if implemented, could permanently alter the class action landscape and render class actions a “shadow of what we know today,” according to Reuters.

Rep. Bob Goodlatte (R-VA), Chairman of the U.S. House of Representative’s Judiciary Committee, along with co-sponsors Reps. Pete Sessions (R-TX) and Glenn Grothman (R-WI), recently introduced the “Fairness in Class Action Litigation Act of 2017” in the Committee.  The bill circumvents the traditional rulemaking process under the Rules Enabling Act, judicial interpretation of Federal Rule of Civil Procedure 23, and the Advisory Committee on Civil Rules’ amendment process.

The bill’s stated purpose is to “diminish abuses in class action and mass tort litigation that are undermining the integrity of the U.S. legal system.” Should the bill pass the House and the Senate in its current form and be signed by President Trump, plaintiffs’ ability to bring and certify class actions as currently understood could be severely hampered.

Continue Reading Proposed Class Action Fairness Act Could Negatively Affect Institutions’ Securities Class Action Recovery

As discussed in this space before, Australia is quickly becoming a key venue for securities class action litigation. With the release of its decision in Money Max Int. Pty. Ltd. (Trustee) v. QBE Insurance Group Limited, the Federal Court of Australia took another step toward making Australia a class-friendly location.  One issue with the current Australian “open-class” collective action scheme is that it permits some investors a free ride while others agree to reimburse a litigation funder out of any proceeds recovered as a result of the suit.  Yet, without this second group of investors agreeing to the litigation funding arrangement, the suit would likely never be initiated.  As a result, many class actions in Australia proceed as “closed-class” collective actions where only plaintiffs who agree to the funding arrangement are named in the suit and able to recover.  In Money Max, the Federal Court of Australia – for the first time – approved a common fund application sought by the applicant.  The Court ruled that, in the event the case settles or the plaintiffs obtain a favorable judgment, all class members, regardless of whether they agreed to a litigation funding arrangement, would reimburse the litigation funder out of their recovery. While the long-term implications of this decision remain to be seen, whether or not the common fund class action model catches on in Australia bears watching. Continue Reading Federal Court of Australia Approves a Common Fund Class Action Model for the First Time – No Opt-In Required

As we have previously noted (here and here), Dutch Foundations (or Stichtings) have been considered a useful tool in seeking recovery for losses on foreign securities. After the Morrison decision closed U.S. courts to claims for purchases of shares of foreign issuers on non-U.S. exchanges, investor advocates sought to use Dutch Foundation effectuate a recovery. Under the Dutch Civil Code, Foundations may negotiate global settlements of investor claims and/or bring suit in the Netherlands to recover for alleged securities fraud. Last year, for example, a foundation negotiated a €1.2 billion settlement with Ageas, the successor-in-interest to Fortis Holdings, over claims that Fortis misled investors. Prior to that, a Dutch Foundation had also forged $58.4 million settlement with Converium covering claims that Converium misstated its financial condition, and a $340 million settlement with Royal Dutch Shell covering transactions on non-U.S. exchanges. Currently, an investor Foundation has asserted claims in the Dutch courts against Volkswagen relating to the Dieselgate scandal.

Recent developments, however, have put the continued viability of Dutch Foundation actions into question. As we wrote here, in June of 2016, a Dutch court dismissed a foundation’s claims because, in the court’s view, the foundation failed to sufficiently safeguard the interests of its members from the foundation president’s potential conflict of interest. Then, the Court of Justice of the European Union (“CJEU”) issued a decision in Universal Music International Holding BV v Schilling that limited the jurisdiction of courts in EU countries, such as the Netherlands. The Universal Music decision addressed Regulation 44/2001, under which defendants must be sued in courts of the member state where they are headquartered, or, for tort-based claims, the place where the harmful event occurred. The CJEU concluded that pure financial damage to a bank account cannot by itself give rise to jurisdiction in the member state where the bank account sits. The CJEU thus held ““It is only where the other circumstances specific to the case also contribute to attributing jurisdiction to the courts for the place where a purely financial damage occurred, that such damage could, justifiably, entitle the applicant to bring the proceedings before the courts for that place” (par. 39).

More recently, the Dutch court has applied the Universal Music case to limit the ability of a foundation to bring suit against BP p.l.c. in the Dutch courts. After settlement negotiations apparently failed, a Foundation representing the interests of BP retail shareholders filed an action against BP in Amsterdam, relating to BP’s alleged misstatement concerning its safety protocols leading up to the Deepwater Horizon oil spill and its alleged misstatement concerning the spill flow-rate. The Foundation sought recovery for investors who had invested in BP shares through a Dutch financial intermediary or account.

Continue Reading Viability of Dutch Claims Foundations In Question

Recently, the Supreme Court of Canada had the opportunity to decide a specific issue with potentially large ramifications.  In Endean v. British Columbia (Endean), the Court considered whether judges of the Canadian Superior Courts have jurisdiction to hear motions in a different province.  While the decision was limited to a fairly specific circumstance, the Court’s answer in the affirmative confirms the Canadian court system’s dedication to ensuring efficiency and easy access to justice in class action proceedings. Continue Reading Away Game: Canadian Supreme Court Allows Superior Court Judges to Determine Settlement Motions Outside of their Home Provinces