The Toshiba Securities Litigation stems from alleged violations of the Exchange Act, as well as the Financial Instruments and Exchange Act of Japan, against Toshiba Corp., in connection with its alleged accounting fraud and accompanying restatements of its financial reports. The plaintiffs represented a class of investors who had purchased Toshiba’s American Depository Shares or Receipts (ADRs) on the over-the-counter (“OTC”) market, rather than direct purchases of Toshiba common stock, which trade in Japan. ADRs are financial instruments, issued by U.S. depository banks, which enable investors in the United States to buy and sell stock in foreign corporations whose common stock is publicly traded on a foreign stock exchange, without having to actually buy and sell on that foreign exchange. They also give foreign companies easier access to U.S. capital markets.

The plaintiffs alleged that they paid artificially inflated prices for the ADRs as a result of Toshiba’s alleged fraud. The district court dismissed the case with prejudice, holding Morrsion precluded the plaintiffs from bringing claims for alleged losses on the ADRs because the OTC is not a “national exchange,” and that there was no transaction, in the United States, between the plaintiffs and Toshiba. The distinction between ADRs and common stock was critical to the district court’s dismissal of the Plaintiffs’ claims.

However, the U.S. Court of Appeals for the Ninth Circuit reversed and determined that the ADR trades were domestic. Toshiba argued that, under the U.S. Supreme Court’s decision in Morrison, its ADRs were not governed by Section 10(b) of the Exchange Act, because the Exchange Act applies only to transactions on a national securities exchange. The court disagreed. It held that the Exchange Act could apply to the Toshiba ADRs because, under Morrison, another category of transactions covered by the Exchange Act is “domestic transactions in other securities.” Acknowledging that Morrison said that the act exclusively focuses on “domestic purchases and sales,” the Ninth Circuit adopted other Circuits’ use of an “irrevocable liability” test to determine when a securities transaction is domestic. The irrevocable liability test looks to where purchasers incurred the liability to take and pay for securities, and where sellers incurred the liability to deliver securities, and not where the alleged misconduct occurred. Noting that the Plaintiffs’ ADRs were purchased in the United States, and that the depository institutions sold the ADRs in the United States, the court held that the Exchange Act could apply to the Toshiba ADRs. Thus, the Ninth Circuit held that purchases of Toshiba ADRs traded on the OTC satisfied Morrison’s requirements to be considered domestic transactions.

Continue Reading Ninth Circuit Holds Transactions in Unsponsored ADRs Can Be “Domestic” Under Morrison

Former U.S. District Judge Gerald Rosen, the Special Master appointed to investigate alleged improper billing by class plaintiffs’ firms in Arkansas Teacher Retirement System v. State Street Bank and Trust Company, recommended that the firms return up to $10.6 million of the $74.5 million in attorneys’ fees awarded to them after reaching a $300 million settlement in the underlying class action. If upheld, the results of the Judge Rosen’s report will likely have both negative and positive impacts. For example, it may create some barriers to the effective prosecution of plaintiffs’ securities cases, but it also may lead to more detailed scrutiny of fee applications to the benefit of class members.

In his balanced Special Master’s Report, Judge Rosen praised the “skilled and dedicated” plaintiffs’ attorneys for six years of work leading to an “excellent” settlement of a complex case in which plaintiffs alleged that State Street engaged in unfair and deceptive practices in conducting foreign exchange transactions on behalf of its customers while failing to disclose mark-ups to clients from which State Street ultimately benefited.

In fact, Judge Rosen found that, “all other things being equal, the attorneys’ fee award [of nearly $75 million] was fair, reasonable and deserved.” However, according to Judge Rosen, “all other things were not equal.” The investigation—which spanned over 14 months, cost $3.8 million, and encompassed written discovery, production of 200,000 pages of documents, 34 witness interviews and 63 depositions—resulted in, according to Judge Rosen, “a mixed narrative of good intentions, great talent, and undeniable accomplishment and result, undermined by serious albeit inadvertent mistakes compounded by a troubling disdain for candor and transparency that at times crossed the line into outright concealment of important material facts.”

Continue Reading Special Master Recommends Return of $10.6 Million in Attorneys’ Fees to Class Members

The U.S. Supreme Court granted certiorari in China Agritech Inc. v. Resh, to determine whether “[u]pon denial of class certification, may a putative class member, in lieu of promptly joining an existing suit or promptly filing an individual action, commence a class action anew beyond the time allowed by the applicable statute of limitations.”  On Monday, the Court decided that the answer is no, holding that “American Pipe tolls the statute of limitations during the pendency of a putative class action, allowing unnamed class members to join the action individually or file individual claims if the class fails,” but “does not permit the maintenance of a follow-on class action past expiration of the statute of limitations.”  As with the court’s decision in ANZ Securities last term, this decision highlights the need for institutional investors to closely monitor the statutes of limitations and repose applicable to securities fraud cases involving issuers in which they have made significant purchases during the putative class period.

Continue Reading Institutional Investors Must Remain Vigilant of Limitations Deadlines in the Wake of the Supreme Court’s Holding in China Agritech v. Resh

This case stems from alleged misstatement made by Volkswagen Group of America Finance (“VWGoAF”) in an Offering Memorandum governing the issuance of three sets of bonds.  The bonds were offered in private placements with qualified institutional buyers that were exempt from registration under SEC Rule 144A.   The plaintiffs generally allege that the Offering Memorandum highlighted Volkswagen’s efforts to research and develop emission-reducing technology.  Specifically, they allege that the emission-related statements in the Offering Memorandum were misleading because Defendants failed to disclose Volkswagen’s use of a defeat device, and that a significant number of Volkswagen’s vehicles’ on-road emissions greatly exceeded legal limits. These omissions rendered the R&D statements misleading, they assert, because these statements “implied that Volkswagen had already reduced vehicle emissions,” which was not true for a significant number of vehicles. Plaintiff contends that the omissions also made the regulatory-risk statements misleadingly because those statements “implied that Volkswagen’s vehicles were compliant with all such emissions regulations and requirements.”

Continue Reading Volkswagen Bondholders Reliance Allegations Come Under Scrutiny

In LBP Holdings Ltd. v Hycroft Mining Corporation, the Ontario Superior Court of Justice denied the plaintiff’s motion to certify a class action in common law negligence and negligent misrepresentation against the underwriters involved in a Canadian public offering. Similarly to Section 12(a)(2) of the U.S. Securities Act of 1933, Section 130(1)(b) of the Ontario Securities Act provides for a cause of action against underwriters. However, while the plaintiff in LBP timely filed a Section 130 action against the issuer, it failed to add the underwriters as defendants until after Section 130’s 180-day statute of limitations had lapsed.  Thus, the plaintiff abandoned its statutory claim against the underwriters and sought to certify only common law claims for negligence and negligent misrepresentation against the underwriters, alongside Section 130 claims against the issuer.

Continue Reading Canadian Court Limits Underwriters’ Liability and Susceptibility to Class Treatment

On Tuesday, February 6, 2018, United States District Judge Jed S. Rakoff denied class counsel’s request to file under seal three supplemental agreements to a $2.95 billion settlement in the Petrobras Securities Litigation, and made the side agreements part of the public record. (See Memorandum Order – Petrobras (2-6-18)).  This included making public the supplemental agreement that Petrobras could back out of the settlement if more than 5% of the class members opted out.  In his order denying the request, Judge Rakoff could not help but find irony in the fact that plaintiffs’ counsel, “who have premised their claim of fraud on defendants’ alleged failure to disclose material information,” was “seeking to keep secret three agreements that are a material part of the settlement.” However, the existence of the supplemental agreements, and the fact that Petrobras could terminate the settlement if an undisclosed “Opt-Out Threshold” was met, were disclosed publicly in the stipulation of settlement.  Keeping secret the percentage of opt-outs needed to “blow up” a settlement is standard practice, and publishing it can embolden opt-out proponents and threaten the stability of settlements.

Continue Reading Petrobras Court’s Denial of Plaintiffs’ Request for Confidential Treatment of Opt-Out Provisions Could Undermine the Settlement Process

First there was Libor.  Next came credit default swaps and foreign exchange.  Now, highlighted by the over $2 billion settlement reached in the Foreign Exchange Antitrust Litigation, plaintiffs are pursuing a number of additional antitrust class actions against financial institutions alleging anti-competitive behavior in a number of markets affecting institutional investors. These include: the ISDA interest-rate benchmark litigation, the Euribor antitrust litigation, the U.S. Treasuries antitrust litigation, the stock lending antitrust litigation, and the gold and silver antitrust litigation.  Some defendants in some of these cases have agreed to settlements, including the over $2 billion in FX settlements, as well as partial settlements in the Libor, ISDAfix and Euribor cases for approximately $830 million combined.  Institutional investors who are active participants in these markets may be in-line for significant recoveries, and the claims filing deadlines are fast approaching.

Of course, it is axiomatic that a claimant has to file a claim before it can recover.  Mintz Levin’s Institutional Investor Class Action Recovery Practice is uniquely positioned to manage the claims filing process on behalf of institutional investors. The claims filing processes for these cases can be complex, and present an entirely new set of variables from typical securities cases.  Indeed, custodians and other service providers that typically handle claims filing for institutional investors in securities settlements may not be able, or willing, to file claims in these antitrust settlements. Please contact Peter Saparoff or Joel Rothman to learn if Mintz Levin could efficiently and effectively manage filing claims in these antitrust matters for you.

Douglas Greene, one of the United States’ most well-known securities litigators – on either side of the bar – recently wrote a four-part treatise, titled Who is Winning the Securities Class Action War – Plaintiffs or Defendants?, in which he discussed the various ways in which the defense bar is losing the “securities class action war.”  Greene’s thorough analysis is well-worth reading in full, but we will briefly summarize and comment on his piece here. Continue Reading Is the Defense Bar Losing the “Securities Class Action War?”

LendingClub is facing two parallel securities litigation cases stemming from alleged false statements it made in connection with its initial public offering (“IPO”).   One case is proceeding in the U.S. District Court for the Northern District of California (the “federal court case”), while another, filed about three-months before the Federal Court Case, is pending in the Superior Court of the State of California, County of San Mateo (the “California state court case”).  As we have discussed in prior posts (herehere and here), plaintiffs generally allege that LendingClub’s registration statement issued in connection with the IPO misrepresented the strength of LendingClub’s internal control procedures and misrepresented that LendingClub used a “sophisticated risk assessment” process to evaluate potential borrowers.  The federal court case raises claims under Sections 11 and 15 of the Securities Act and Section 10(b), Rule 10b-5 and Section 20(a) of the Exchange Act, while the California state court case asserts claims under Sections 11, 12(a)(2) and 15 of the Securities Act.

In June of 2017, the judge overseeing the California state court case certified a class.  Meanwhile, before the state court case plaintiffs sent a notice of class certification, in the federal court case, the lead plaintiff filed a motion for class certification, seeking to certify a class consisting of “[a]ll persons and entities who purchased o otherwise acquired the common stock of LendingClub during the period from December 11, 2014 through May 6, 2016.”  As expected, LendingClub (and the individual director defendants) filed an opposition to the motion.  However, in a somewhat rare move, the lead plaintiff in the California state court case filed a motion to intervene in the federal court case and also filed an opposition to the federal court plaintiff’s motion for class certification.  In response, the federal court plaintiffs asked the federal court to enjoin the California state court case.

BATTLE BETWEEN STATE AND FEDERAL COURT THE LEAD PLAINTIFFS

With respect to the motion to intervene, the federal court granted the motion, for the limited purpose of allowing the state court case plaintiffs the opportunity to “set forth their argument for why they are the better representative” of the class.  Additionally, the federal court granted the motion to intervene “on the condition that they remain under this Court’s jurisdiction so that the undersigned judge may coordinate their action with the federal action to avoid any prejudice to absent class members.”  Concerning such coordination, the federal court noted:

To a limited degree, such coordination is already underway. At the hearing on this motion, state plaintiffs agreed they will participate in the settlement conference before Chief Magistrate Judge Joseph Spero on November 28, and have further assured the undersigned judge that they will not send class notification until this order issued. Moreover, state plaintiffs agreed that they will not discuss settlement (except at the settlement conference) until the Supreme Court issues a decision in Cyan, Inc. v. Beaver Cty. Employees Ret. Fund… which decision has the potential to jeopardize their case by revoking state court jurisdiction over Securities Act claims.

The California state court plaintiff then argued that class certification should be denied in the federal court case because certain theories of recovery that were dismissed in the federal court case remained active in the California state court case, making the state court case “superior.”  They contended their additional Section 11 theories could increase their potential recovery by at least $200 million because Section 11(e) provides that if a defendant can show that any portion of the plaintiff’s claimed damages arise from something other than their claimed theory of liability, “such portion of or all such damages shall not be recoverable.”

The federal court plaintiffs responded that their proposed class was in fact superior because the price of LendingClub’s stock was lower on the day they brought the federal suit.  Specifically, under Section 11 damages are limited to “the difference between the amount paid for the security … and [] the value thereof as of the time such suit was brought.”  The state plaintiffs’ filed their Section 11 suit when the closing price of LendingClub’s stock was $8.41 per share. The day the federal plaintiffs filed suit LendingClub’s stock closed at $3.94 per share. Therefore, the federal plaintiffs asserted that the state plaintiffs were foreclosed from pursuing $4.47 per share that is available to the federal plaintiffs. The federal court sided with the federal plaintiffs, holding the federal case was superior because the different stock prices on the days the suits were filed “presents a difficult issue (not decided here) that could seriously hamper state plaintiffs, limiting their damages to a number well below that of our plaintiff.”

The federal court next declined to enjoin the California state court case.  The federal plaintiffs argued that an injunction was expressly authorized by the Private Securities Litigation Reform Act (PSLRA) and necessary to prevent the California state court from “seriously impair[ing] the federal court’s flexibility and authority to decide [the] case.”  The federal court declined to enjoin the California state court case.  However, it did express “concerns” with “the current form of state plaintiffs’ class notice, which fails to notify class members of the parallel federal action, the pendency of Cyan and its potential effect on their case, or the potential that the filing date of their suit could substantially limit damages.” (Our discussion of the Cyan case can be found here.)  To alleviate these concerns the federal court ordered:

Specifically, the notices must inform class members of the following:

(1) There are two lawsuits proceeding in parallel, one in state and one in federal court, which overlap in certain respects and not in others;

(2) Some important differences between these suits include:

(a) the state action maintains certain theories of liability under which the class may be granted relief including as a result of LendingClub’s allegedly usurious loan rates, and alleged problems with LendingClub’s loan application procedures. The federal action does not contain these theories of liability and, therefore, risks a lower recovery depending upon whether defendants can successfully show that damages should be attributed to the state theories;

(b) class members in the federal action are potentially entitled to a greater recovery based upon the date federal lead plaintiff filed its action. Whether the state class members are entitled to this recovery remains uncertain; and,

(c) the state action may be  subject to dismissal depending upon the outcome of Cyan, Inc. v. Beaver Cty. Employees Ret. Fund, _U.S. _, 137 S. Ct. 2325 (2017), a case currently pending before the United States Supreme Court, which challenges state courts’ jurisdiction over the claims that state plaintiffs have asserted in this action; and,

(3) Class members will be notified of any settlement in either action, at which point they will have an opportunity to opt out of the settlement if they elect to do so.

TRACEABILITY

Lastly, the federal court addressed an issue of first impression raised by LendingClub and the individual defendants regarding the traceability of the federal plaintiffs shares.  LendingClub argued that the lead plaintiff in the federal court case was not “typical” of class members because it was open to specific defenses, including that because it purchased some shares that were not traceable to the offering.  Notably, LendingClub issued 295 million shares via a private offering prior to the IPO.  LendingClub then issued 67 million shares in the IPO.  The registration statement specified a 180-day “lock-up” period, beginning on December 11, 2014, during which only IPO shares were available to the public.  When the lock-up period ended on June 9, 2015, both IPO and non-IPO shares became available on the open market.  Therefore, the federal court ruled that only shares that were purchased in the IPO or on the open market before the end of the lock-out period on June 9, 2015 were traceable to the allegedly misleading offering materials.  It was undisputed that the lead plaintiff did not purchase any privately issued shares prior to the IPO or during the lock-out period. It was also undisputed that it purchased and sold hundreds of thousands more shares during the post-lock-up market period than it had purchased in the lock-up period.

Because of this trading pattern, the traceability of the lead plaintiffs shares turned on whether the court adopted a “last-in, first-out” (“LIFO”) or “first-in, first-out” (“FIFO”) method to calculate holdings.  If the lead plaintiff’s transactions were accounted for using LIFO, all of its holdings as of the end of the lock-out period would remain traceable to the lock-up period.  If, however, the court adopted a FIFO calculation, the lead plaintiff would have been deemed to have owned no shares traceable to the IPO.  First, the court noted that “[w]hether LIFO or FIFO applies is a matter of first impression in the Section 11 traceability context.”  The court ultimately held that LIFO applied because the majority of courts use the LIFO method to estimate losses under the PSLRA when determining a putative lead plaintiff’s stake in the litigation, and “[i]t would be incongruous to measure losses by one method, yet measure traceability by the opposite method.”  The court highlighted its reasoning by noting “[a] lead plaintiff who suffered the greatest losses under a Section 10(b) claim might also be deemed to lack standing under a Section 11 claim based on such an incongruity.”  Accordingly, the court held that the lead plaintiff could trace its shares to the IPO, and ordered that the plaintiffs adjust the class definition to only include those who purchased shares prior to the end of the lock-up period.

The federal court’s opinion and order can be found here.

Recently, in Melbourne City Investments Pty Ltd v. Treasury Wine Estates Limited (“Treasury Wine”), the Full Court of the Federal Court of Australia considered a primary judge’s class closure order which broke new ground in group action practice in Australia.  The Treasury Wine case is part of a growing trend in Australian securities litigation toward class proceedings similar to the U.S. model, where investors do not have to be a named plaintiff to participate in a recovery.  Rather, in this case, prior to the issuer and the representative plaintiff mediating the case, investors needed to “register” by submitting their transaction data.  When the case settled after mediation, those who registered could recover from the settlement fund, but those who did not register were shut out of the settlement.  Registering was not without risks, however, as the mediation could have failed.  Some investors may have feared that by submitting their transaction data they were exposing themselves to the defendants and potential discovery in the event the case did not settle.  However, the case did settle after mediation, and those who registered were rewarded.

Continue Reading Treasury Wine Decision Confirms Shift in Class Action Closure Process