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?”
John Nucci is an Associate in the firm’s Boston office. He focuses on a wide variety of litigation matters and has experience in all phases of litigation. Prior to joining Mintz Levin, John served as a judicial law clerk to the Honorable Robert Cordy of the Massachusetts Supreme Judicial Court and as an Assistant District Attorney in the Appellate Division of the Suffolk County District Attorney’s Office.
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.
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.
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
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
As detailed repeatedly in this space, the Canadian court system has issued a number of decisions which have altered the practice of bringing – or defending against – a securities class action for secondary market misrepresentation. In its recent decision in Mask v. Silvercorp Metals, Inc. (“Mask”), the Court of Appeals for Ontario further clarified the evidentiary standard to be applied on a motion for leave and certification of a proposed class action. Its decidedly defendant-friendly decision is relevant to any entity which finds itself defending against such a claim in Ontario. Continue Reading Canadian Appellate Court Confirms That Judges Must Consider Evidence From Both Parties when Deciding a Motion for Leave to Bring a Class Action
The United States is a popular location for securities class actions, due in large part to its reputation as a generally plaintiff-friendly system. A key contributor to that reputation is the acceptance of the “fraud-on-the-market” presumption of reliance. However, in the wake of a recent decision by the Supreme Court of New South Wales, Australia is poised to become another popular location for “fraud on the market” actions. Continue Reading After Adopting the “Fraud-on-the-Market” Presumption of Reliance, Australia is Poised to Become a Plaintiff-Friendly Venue
In January of 2016, this blog commented on the Supreme Court of Canada’s decision in the seminal case of Canadian Imperial Bank of Commerce v. Green. There, the Court held that a prospective plaintiff must move for leave to commence a class action for secondary market misrepresentation before the three-year statute of limitations passes; but if leave is not actually granted within that time period, the Court has jurisdiction to allow leave and backdate it to within the three year period. Recently, the Ontario Superior Court of Justice in London had its first opportunity to consider the test for leave in the aftermath of Green in Bradley v. Eastern Platinum Ltd. (“Bradley”). The court’s decision there shed further light on the evidence a plaintiff must proffer to “surpass the leave threshold.” Continue Reading Canadian Court Holds That Evidentiary Requirement For Leave To File Securities Class Action Is “Not A Low Bar”
As securities litigation becomes increasingly globalized, the Mintz Levin Institutional Investor Class Action Recovery practice is constantly monitoring and participating in jurisprudential developments in a number of countries, both alone and through collaboration with foreign counsel. For example, in Australia, where the procedure to consolidate cases is not uniform, some securities class action cases may overlap, leaving issuers in the undesirable position of having to defend against claims of misrepresentation on two fronts. This scenario recently played out in New South Wales, where the Court found an interesting and workable solution to a problem with concurrent class actions in Smith v. Australian Executor Trustees Limited; and Creighton v. Australian Executor Trustees Limited.
Under the Ontario Securities Act (“OSA”), a statutory right of action exists for secondary market misrepresentation for any person who acquires or disposes of an issuer’s securities within the relevant time period. An action for secondary market misrepresentation requires leave of the court under s. 138.8. Such leave may only be granted where a plaintiff has met his burden of showing, to a reasonable possibility of success, both an alleged misrepresentation and a public correction of that misrepresentation. While the case law on the former prong is relatively clear, the latter has been largely undefined. The recent decision of Superior Court Justice Edward P. Belobaba in Swisscanto v. Blackberry sheds some light on what, exactly, a plaintiff must show to meet its burden of establishing the existence of a public correction.
In Swisscanto, the Plaintiff, a European investment fund that bought 1,700 BlackBerry shares during the proposed class period, sought leave to bring a class action suit for secondary market misrepresentation. The claim stemmed from the release of the BlackBerry 10 smartphone (“BB 10”), a product that BlackBerry hoped would revitalize its business. On launch, BlackBerry’s revenue recognition policy was of the “sell-in” variety, where BlackBerry booked the sale when the product was sold to its distributors, rather than waiting until the distributors actually sold the product (which would constitute “sell-through” accounting). This practice is permitted under GAAP only if the seller can make “reasonable estimates of the actual amount of adjustments that might be needed to help move the product from distributors to end-users.”
Between January 30, 2013 and June 1, 2013, sales of the BB 10 to end-users were extremely disappointing. Only about a quarter of the BB 10 phones shipped to distributors were actually purchased by end users, leading to several concessions by BlackBerry that failed to increase sales. To that end, on September 20, 2013, BlackBerry announced its results for 2Q14. The Release noted that BlackBerry would write off by way of inventory charge almost $1 billion in unsold BB 10 smartphones, eliminate 40 percent of its global work force, limiting its focus to corporate and professional customers, and pursuing a buyer. At the bottom of the first page, BlackBerry also noted that, going forward, it would change its revenue recognition practice from sell-in to sell-through. When the price of BlackBerry’s shares dropped by 15 percent, the instant suit was filed.
At issue was whether there was an alleged misrepresentation and, if so, whether there was a public correction. The court concluded that the plaintiff presented at least enough evidence to show a reasonable possibility of a misrepresentation. More interesting was the court’s discussion of whether a public correction occurred. The plaintiff argued that BlackBerry’s announcement of a change to sell-through recognition constituted a public disclosure. The defendant argued that it was merely a footnote, and one unconnected to the failure of the BB 10.
Justice Belobaba laid out very specific criteria to use in determining whether the public correction requirement of s. 138.3 of the OSA had been satisfied. He proposed that courts consider the following:
1. Whether the public correction was pleaded with sufficient precision to provide fair notice to the defendant, using specific words or figures that allegedly constitute the public correction of the alleged misrepresentation, along with its timing.
2. Whether there is some linkage or connection between the pleaded public correction and the alleged misrepresentation. The correction need not be a “mirror-image” of the misrepresentation, or a direct admission of a previous falsity, but it must at least share the same subject matter of, and relate back to, the misrepresentation.
3. Whether the public correction is reasonably capable of revealing to the market the existence of the misrepresentation. The correction need not be understood by the ordinary investor. It is sufficient that market participants with specialized knowledge and expertise can understand that the language of the release equates to a public correction of a misrepresentation.
4. The form taken by the public correction. Justice Belobaba took care to note that the correction may take “any number of forms” and need not come from the defendant corporation. The source of the correction can be third parties like media reports or internet postings.
Taking these factors into consideration, the court concluded that the public correction requirement was satisfied by the language in the September 20, 2013, statement. It essentially concluded that the statement could be fairly understood to inform sophisticated market participants that BlackBerry was correcting the sell-in method of revenue recognition that had been used during the class period.
This decision is relevant to investors because it lays out a very clear set of guidelines to be considered in determining whether the public correction requirement has bene met. It also clarifies that the public correction requirement is really a temporal marker for assessing damages. It essentially bookends the class period, which runs from the date of the misrepresentation to the date of the public correction of that misrepresentation. It is not a substantive hurdle to be cleared; it is simply the end date of the class period, and its importance thus pales in comparison to the requirement of showing an alleged misrepresentation.