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.

The U.S. Supreme Court‘s 2017 term begins October 2nd and we will be tracking at least three cases relevant to institutional investors:

  • 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.

Continue Reading Upcoming Supreme Court Cases Worth Noting by Institutional Investors

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.

Continue Reading Phantom Recusal Policy Leads to Partial Summary Judgment for Plaintiffs in the Ocwen Securities Litigation

 

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.

Continue Reading U.S. Supreme Court Holds that the Filing of a Class Action Does Not Toll the Securities Act’s Statute of Repose

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.

Continue Reading Lending Club Decision Provides Guidance For Bringing Section 11 Claims Based on Weaknesses in Internal Controls

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