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.
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
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.
On November 4, 2016, Judge Keith Ellison of the United States District Court for the Southern District of Texas granted preliminary approval of a $175 million settlement in the federal securities class action In re: BP p.l.c. Securities Litigation between BP and Lead Plaintiffs for the “post-explosion” class. While the settlement is still subject to final approval, it resolves allegations that BP misrepresented the seriousness of the Deepwater Horizon explosion and its aftermath—covering investors who purchased BP shares between the date of the first alleged misrepresentation about the amount of oil being released as a result of the explosion (April 26, 2010) and the date on which it was revealed that BP initially misrepresented the spill’s severity (May 28, 2010). In granting preliminary approval of the settlement, Judge Ellison also: (1) rejected 135 institutional investors’ request for exemption from opt-out procedures; and (2) allowed some plaintiffs who timely requested exclusion from the class to withdraw their requests and opt back into the settlement. Continue Reading Court in the BP p.l.c. Securities Litigation Upholds Opt-Out Procedures But Then Allows Individual Action Plaintiffs to Opt Back Into $175 Million Settlement
Angela DiIenno contributed to this article.
Recently, the United States District Court for the Northern District of California (the “Court”) dismissed claims against Yahoo, Inc., holding that a 16-year old exemption granted to Yahoo by the Securities and Exchange Commission (“SEC”) barred the plaintiff’s claims alleging that Yahoo was operating as an unregistered investment company in violation of the Investment Company Act of 1940 (“ICA”). UFCW Local 1500 Pension Fund v. Mayer, et al., No. 16-cv-00478 (N.D. Cal. Oct. 19, 2016).
This litigation relates to a 2000 SEC order granting Yahoo an exemption from registering as an investment company. The SEC granted the exemption because it found that Yahoo was “primarily engaged in a business other than that of investing, reinvesting, owning, holding, or trading securities . . . .” The exemption was predicated on two conditions: “1. Yahoo! [would] continue to allocate and utilize its accumulated cash and Cash Management Investments for bona fide business purpose; and 2. Yahoo! [would] refrain from investing or trading in securities for short-term speculative purposes.”
According to the plaintiff’s complaint, Yahoo’s business has changed substantially since the exemption was issued. The complaint alleges that “in 2000 approximately 57 percent of Yahoo’s income came from its operating business, while approximately 44 percent came from investments.” According to the plaintiff, however, by 2014 operations were responsible for only 1.2 percent of Yahoo’s income, and in 2015, “all of its net income was attributable to its investments.” Additionally, the complaint asserts that “[i]n 2013, Yahoo began considering spinning-off its Alibaba holdings” and registering the spin-off company itself as an investment company.
Due to these “fundamental changes to Yahoo’s business” the plaintiff, UFCW Local 1500 Pension Fund (“UFCW”), filed derivative and direct claims against Yahoo and its directors and officers for the alleged failure to register Yahoo as an investment company in violation of the ICA. UFCW argued that Yahoo had lost the protection of its registration exemption such that Yahoo was required to register as an investment company under the ICA. It further argued that because Yahoo had never so registered, “it had been operating illegally as an unregistered investment company.” Continue Reading Court Dismisses Claims Alleging that Yahoo Is Illegally Acting as an Unregistered Investment Company