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.
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 (here, here 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.
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.
- Cyan, Inc. v. Beaver County Employees Retirement Fund
- Digital Realty Trust v. Somers
- Leidos v. Indiana Public Retirement System
Cyan, Inc. v. Beaver County Employees Retirement Fund
Cyan addresses the procedural question of whether claimants may bring Securities Act class actions in state courts, and whether defendants can remove such cases to federal court. California federal district courts hold, yes, state courts retain jurisdiction over Securities Act class actions brought in those courts and such cases cannot be removed to federal courts. Federal district courts in New York, New Jersey, and Delaware, however, hold that class actions alleging Securities Act claims are removable to federal court.
In a June 13, 2017, ruling on a motion for partial summary judgment in the Ocwen Financial Corp. Securities Litigation (the “Ocwen Litigation”), the United States District Court for the Southern District of Florida determined Ocwen materially misrepresented in its securities filings and other public statements that its Executive Chairman would recuse himself from Ocwen’s transactions with companies in which the Executive Chairman also served as Chairman and thus had a direct financial interest. The Court concluded that although Ocwen and the Executive Chairman definitively stated the Executive Chairman would recuse himself according to company policy, there was in fact no company policy requiring recusal, nor had the Executive Chairman recused himself. The Court further concluded these statements by Ocwen and the Executive Chairman was materially false and misleading as a matter of law. Thus, while class plaintiffs still must prove the remaining elements of their Section 10(b)/Rule 10b-5 claim at trial, the Court found the class plaintiffs were entitled to judgment as a matter of law on the first element of their claim – that the statements concerning the Executive Chairman’s recusal were materially false and misleading.
In a 5-4 decision, issued during the final week of the its term, the U.S. Supreme Court held that the filing of a class action does not toll the three-year period provided for in Section 13 of the Securities Act of 1933. Interestingly, aside from the holding, both the majority and dissenting opinions contain statements potentially impacting institutional investors. The majority, in a phrase that could be repeated in the future by law firms soliciting institutional investors to opt out, asserted – citing only to law review articles from 2008 and 1997 – that plaintiffs who opt out have “considerable leverage” and receive “outsized recoveries.” Meanwhile, the dissent suggested that the majority’s decision will require “every fiduciary who must safeguard investor assets” to file individual actions before the three-year deadline.
We have been following defendants’ motions to dismiss in the In re Lending Club Securities Litigation class action, No 3:16-cv-02627-WHA, in the United States District Court for the Northern District of California (“the Lending Club Litigation”). Plaintiffs brought claims under both Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, alleging that Lending Club misled shareholders about (1) the company’s internal controls over financial reporting, (2) its relationship with Cirrix—a company formed for the sole purpose of purchasing loans from lending club, (3) its data integrity and security, and (4) its loan approval process. The Court’s decision on defendants’ motions to dismiss provides a roadmap for plaintiffs’ bringing Section 11 claims based on failure to disclose weaknesses in internal controls.
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.