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.
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.
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.
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.
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