Supreme Court Opines On Appellate Jurisdiction Over Class Certification Determinations

By Matthew Insley-Pruitt and Adam J. Blander

On June 12, 2017, the United States Supreme Court issued an important decision limiting a plaintiff's options when challenging a district court's adverse class certification decision.

In Microsoft Corp. v. Baker (Case No. 15-457), the plaintiffs sued Microsoft, alleging that its Xbox 360 video game console scratched and destroyed their game discs during normal playing conditions, and proposed a nationwide class of Xbox owners. The district court struck the plaintiffs' class allegations, which was "functionally equivalent" to denying class certification. Opinion at 9, n. 7. The plaintiffs petitioned the Ninth Circuit Court of Appeals for permission to appeal the ruling pursuant to Federal Rule of Civil Procedure 23(f), which grants appellate courts discretion to accept direct appeals from class certification orders. The plaintiffs' petition observed that the striking of their class allegations "effectively kill [ed] the case" because the small value of their individual claims rendered it "economically irrational to bear the cost of litigating . . . to final judgment." Id. at 9. This "death knell," as the plaintiffs put it, justified review. The Ninth Circuit denied the petition. Id.

Rather than continuing to litigate their individual claims, settling their individual claims, or petitioning the district court to certify its order for interlocutory appeal the order pursuant to 28 U.S.C. §1292(b), the plaintiffs voluntarily dismissed their claims with prejudice. They then appealed from the dismissal, challenging only the order striking their class allegations. The Ninth Circuit held that the plaintiffs' voluntary dismissal constituted a "final decision" under 28 U.S.C. §1291, thereby triggering their right to an appeal. The Ninth Circuit proceeded to decide the appeal, and reversed the order striking the class allegations.

In an Opinion authored by Justice Ginsburg (arguably, the Court's most distinguished civil procedure scholar), the Supreme Court reversed the Ninth Circuit's judgment. To allow the appellate tactic at issue, the Court reasoned, would invite plaintiffs to voluntarily dismiss their claims following any and all district-level class certification setbacks, causing "protracted litigation and piecemeal appeals." Op. at 12. Such a result would upend the finality and efficiency achieved by 28 U.S.C. §1291, as well as the "careful calibration" of Rule 23(f), which authorizes interlocutory review of adverse certification orders "solely in the discretion of the courts of appeals." Id. at 15. The Court also observed that the voluntary dismissal maneuver was "one-sided" as it helped only plaintiffs, even though a class certification order may expose defendants to such great damages and litigation costs that it could pressure them to settle on a class-wide basis and abandon any meritorious defenses. Such one-sidedness, the Court deduced, upsets the "evenhanded prescription" of Rule 23(f), which treats plaintiffs and defendants alike. Id. at 17.

Justice Thomas, joined by Chief Justice Roberts and Justice Alito, disagreed with the Court's reasoning, and concurred in the judgment only. Specifically, Justice Thomas found a decision to be "final" if it "ends the litigation on the merits and leaves nothing for the court to do but execute judgment," and that the district court order dismissing the plaintiffs' claims met that definition. Conc. at 2. Nevertheless, Justice Thomas believed that the plaintiffs' voluntary dismissal amounted to "disavowal of any right to relief from Microsoft." Id. at 3. Given that the parties were no longer adverse to each other, there existed no case or controversy for the Ninth Circuit to adjudicate, and it thus lacked jurisdiction under Article III of the Constitution to hear the plaintiffs' appeal. Id.

Baker puts class action plaintiffs in a difficult position if the district court denies class certification and the circuit court does not grant a petition under Rule 23(f). This difficulty is particularly biting when, as here, the circuit court ultimately finds that the substance of the appeal it had previously rejected was meritorious. As discussed, there are only a few unpleasant options: continue litigating an individual claim even when economically questionable; settle the individual claims of the plaintiffs, which will often only be for relatively small amounts of money and which will not prevent the defendant from continuing its challenged actions; or moving the district court for an order allowing an interlocutory appeal under §1292(b), which may not be successful.

A Quick Look At The Elements Of Securities Fraud Claim Under SEC Rule 10b-5, Pt.2

On behalf of Wolf Popper LLP

Last time, we began looking at the basic elements of a securities fraud claim under Rule 10b-5 of the Securities Exchange Act of 1934 ("Securities Exchange Act"). As we noted last time, justifiable reliance is one of the elements that must be proven with adequate evidence in order for a plaintiff to succeed in a claim under this measure.

Justifiable reliance requires not only that the plaintiff either purchased or sold securities in reliance on the defendant's materially untrue statements or omissions, but also that the plaintiff's reliance on these communications was reasonable, or justifiable. Exactly what constitutes justifiable reliance is not always easy to determine, though there is an established body of case law that provides some guidance on the matter.

Justifiable reliance ensures a "causal connection" between the misrepresentation and the harm suffered by investors. For example, an investor cannot turn a blind eye to a known risk. If an investor already knows the representation is false, he or she cannot later claim reliance on a false representation. This is an important limitation on recovery for securities fraud "because the securities laws create liability only when there is substantial likelihood that the misrepresentation significantly altered the total mix of information that the investor possesses." Atari Corp. v. Ernst & Whinney, 981 F.2d 1025, 1030 (9th Cir. 1992) (citation and quotation omitted).

Sorting out the proper application of the law in securities fraud and achieving a just outcome which holds responsible parties liable for their misconduct is not necessarily an easy matter. Building a solid case based on the law and effectively navigating the court system in these cases can be challenging, but working with an attorney experienced in the area of securities litigation helps ensure a plaintiff or class has the best chance of achieving a favorable outcome.

A Quick Look At The Elements Of Securities Fraud Claim Under SEC Rule 10b-5

On behalf of Wolf Popper LLP

Previously, we began looking at recent securities fraud cases, all involving traders for Nomura Securities International. The cases all involve allegations that the traders misled customers regarding securities prices in order to increase their profits.

In the second set of cases we mentioned last time, one interesting aspect of the litigation is that the traders didn't deny that they lied, but that customers were not justified in taking the lies seriously. This argument refers to an important aspect of securities litigation.

In securities fraud cases under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, one of the most commonly used measures to pursue securities fraud claims, a plaintiff must be able to provide sufficient evidence to meet a number of requirements. First of all, there must be evidence that the defendant made an untrue statement of material fact or omitted a material fact in connection with the purchase or sale of securities.

Second, the statement or omission must have been made with "scienter," or an intent to deceive. To satisfy the scienter requirement, a plaintiff must prove the statement was made knowingly or with severe recklessness. Negligence is not sufficient to prove scienter. In addition, a private plaintiff, or a class of investors, must also be able to show that the fraudulent misrepresentation or omission caused the plaintiff or class to suffer damages. For publicly traded securities, this is sometimes evidenced by a decline in the price of the security when the truth becomes public.

In addition to the above elements, another important element is reliance. This element gets to the heart of the defense tactic attempted in the above-mentioned set of securities fraud cases. We'll say more about this issue, and how the reliance element is satisfied in securities fraud class actions, in upcoming posts.


Sources:

United States Courts for the Ninth Circuit, Manual of Civil Jury Instruction: 8.2 Securities-Rule 10b-5 Claim, Accessed May 23, 2017.

Cornell Law School, 17 CFR 240.10b-5

Securities Traders Accused Of Misleading Investors About Their Trading Profits

On behalf of Wolf Popper LLP

In securities trading, there is a lot of opportunity for deception and misleading consumers. Driven by the hope of getting a good deal and profiting on investments, investors can easily be lead astray by unethical traders.

This is highlighted in recent cases involving securities fraud charges against traders working at Nomura Securities International. Two of the firm's former senior traders, according to the Securities and Exchange Commission, generated hundreds of thousands of dollars in profits from trading commercial mortgage-backed securities by lying to customers about several aspects of bonds trading. 

Specifically, the SEC accused the traders of lying about the prices the firm paid or received in the purchase and sale of bonds, bids and offers made or received for bonds, and the difference between bond bids and ask prices. The result, according to the SEC, was that customers were deceived about how much the firm was earning in the sale of bonds. Together, the traders earned Nomura over $750,000 in illegal profits. As of earlier this week, one of the traders had settled the charges with the SEC, agreeing to pay a $150,000 penalty, $51,965 in disgorgement, an equitable remedy under the Securities and Exchange Act, and $11,758 in interest. The case against the other trader is still pending.

Another set of securities fraud cases, also involved three former Nomura traders who supervised the firm's residential mortgage-backed securities desk. They are on trial for lying to customers about securities prices in order to increase their profits. One particularly interesting aspect of these cases is that the legal defense the traders are trying to make is not that they didn't lie to customers, but that their lies did not constitute fraud.

In our next post, we'll look further at this case, and why it is so important to work with an experienced attorney when pursuing compensation for securities fraud.


Sources:

Hartford Courant, "Bond Traders Fight Fraud Charges With Novel Defense," Edmund H. Mahony, May 8, 2017.

CFO.com, "Ex-Nomura Traders Accused of Commercial Mortgage Backed Securities Fraud," Matthew Heller, May 16, 2017. 

What Does Neil Gorsuch Appointment Portend For Businesses, Plaintiffs?

On behalf of Wolf Popper LLP

President Trump recently nominated federal appellate judge Neil Gorsuch to fill the U.S. Supreme Court seat made vacant by the death of Justice Antonin Scalia. Gorsuch's confirmation is bound to be tied up with a certain amount of political opposition, though it remains to be seen how far Democrats will go to oppose the appointment.

Opponents of Judge Gorsuch's appointment argue, among other things, that he is extremely conservative on social issues, citing his opinion regarding religious freedom and access to contraception in the Hobby Lobby case. Opponents also claim that he is pro-business based on the opinions he wrote as a judge in the 10th U.S. Circuit Court of Appeals in Denver in which he comes off as critical of regulators and anxious to limit investor lawsuits.  

With regard to regulators, Judge Gorsuch apparently disagrees with the Chevron doctrine, which holds that states must defer to federal agencies' interpretation of ambiguous statutes. If the Chevron doctrine were to be struck down or undermined, businesses would have an easier time challenging federal agency actions. However, businesses that have benefited from regulatory review or pre-marketing approval may face increased collateral attacks in the Court.

When it comes to investor lawsuits, commentators say that Judge Gorsuch's opinions show he believes the current legal framework makes it too easy for investors to bring claims for securities fraud, and that this has caused a flood of securities litigation. For instance, Judge Gorsuch delivered an opinion that tightened up the rules for investors to bring securities cases based on misleading statements from issuers. While in private practice, Gorsuch also filed briefs on behalf of the U.S. Chamber of Commerce advocating changes to make it harder to file securities class actions.

In our next post, we'll continue looking at this topic and what it might mean for businesses, and especially for investors and shareholders, going forward.