SCOTUS Case To Clarify Use Of State Venue For Securities Cases

On behalf of Wolf Popper LLP

The Securities Act governs the issuance of stock and bonds by companies, such as IPOs, and prohibits, among other things, the company, as well as other designated persons, from making "untrue statement[s] of a material fact or omit[ing] a material fact required to be stated therein or necessary to make the statements therein not misleading." If a company violates this provision, then investors may sue for damages. (The Securities Act itself provided that cases could be brought in either state or federal court.)

The number of class actions that allege violations of the Securities Act filed in California state court increased from 5 in 2014 to 18 in 2016. Why the increase? According to some critics of filing these cases in state court, the reason is that only 6 percent of such cases filed in California state court are involuntarily dismissed, while the dismissal rate in U.S. federal courts is 31 percent. Therefore, the critics contend, state venues are more favorable to plaintiffs. (Plaintiffs contend that the uptick in 2016 was an isolated event and that the average number of such cases filed annually was only 6 and in the first half of 2017 there were only 4 such cases.)

Critics also contend that the federal securities laws require that these cases be brought in federal court, and filing these cases in state court is improper. On November 28, 2017, the Supreme Court will hear oral argument in Cyan, Inc. v. Beaver County Employees Retirement Fund, a case that will likely determine whether Securities Act class actions can be brought in state court.

A bit of history, how does securities law apply in these matters?

In 1995, Congress passed the Private Securities Litigation Reform Act (PSLRA). One of the reasons the PSLRA was enacted was that there was concern, founded or unfounded, that a large number of filed securities class actions were meritless and abusive. Among other things, the PSLRA increases the pleading and proof standards for securities class actions, requiring, among other things, specific allegations concerning falsity and a strong inference of intent.

Shortly after passage of the PSLRA, Congress noticed an increase in class actions concerning securities and alleging state law claims, instead of federal securities law claims, being filed in state courts. To combat this trend, Congress enacted the Securities Litigation Uniform Standards Act of 1998 (SLUSA). SLUSA prohibits state law class actions on behalf of more than 50 people alleging misrepresentations, omissions, or the use of manipulative or deceptive devices in connection with the purchase or sale of a securities traded nationally and listed on a regulated national exchange (i.e. the NYSE or NASDAQ). In sum, SLUSA prohibits state law class actions alleging claims identical to the federal securities laws. SLUSA also allows the removal, or transfer, of these cases from state court to federal court.

How does this apply to Cyan?

The plaintiffs in Cyan brought their case in California State Court, and alleged claims under the Securities Act. They claim that Cyan's IPO documents misrepresented Cyan's customer base and likely future sales. Once the truth was revealed, Cyan's stock price lost more than half its value. Defendants want the case dismissed, arguing that SLUSA and the Securities Act required the case to be brought in federal court. The plaintiff shareholders argue that neither SLUSA nor the Securities Act preclude state jurisdiction in their matter. They state that as long as the case does not involve "mixed cases that assert prohibited state law claims in connection with the purchase or sale of covered securities, combined with a Securities Act claim," state jurisdiction is allowed. Since their claim does not involve any of these issues, it can move forward in a state venue. The lower court agreed with and found in favor of the plaintiff shareholders.

Impact of the Supreme Court's decision?

The Supreme Court will most likely issue its decision by the end of June 2018. The holding will be significant for those with similar securities issues. A holding in favor of state venues is often one in favor of plaintiffs, while one opposed to state venues would often weigh in favor of defendants.

Supreme Court Limits Personal Jurisdiction

By Robert S. Plosky

All courts cannot hear all disputes. Not only do courts have to be able to rule on a particular type of case (such as a federal court hearing cases about federal law), but the court must be able to adjudicate a case against a particular defendant, which is referred to as "personal jurisdiction." For example, the personal jurisdiction requirements prevent a plaintiff from forcing an individual who lives in Rhode Island into court in Oregon for a dispute that has nothing to do with Oregon. The rules about personal jurisdiction become much more complicated when companies are involved. In this post, we discuss two recent U.S. Supreme Court decisions that narrowly limit personal jurisdiction in a way that may benefit large, multinational corporate defendants by insulating them from being subject to lawsuits in any U.S. forum. In each case, Justice Sotomayor provided the lone contrary viewpoint for an otherwise unanimous Court.

What is Personal Jurisdiction?

There are two categories of personal jurisdiction: specific and general. Specific jurisdiction requires a foreign (out-of-state or out-of-country) defendant's in-state conduct to arise out of, or give rise to, the conduct and liabilities at issue in the litigation. For example, an out-of-state trucking company causes a car accident while driving within the state can be sued for claims that relate to the car accident, but not their employment practices in another state. General jurisdiction is far broader, and enables a court "to hear any and all claims against" a defendant, even those that are based on conduct that took place entirely outside of the forum and with no relationship to the defendant's typical in-state activities. General jurisdiction only applies when a corporate defendant's contacts within the state are so substantial, continuous, and systematic that they "render [the defendant] essentially at home in the forum State." The "paradigm" examples of such contacts are incorporating or maintaining a principal place of business in the forum. There may also be "exceptional case[s]" where general jurisdiction would exist without incorporation or a principal place of business, but that would depend on whether the defendant's in-forum activities are substantial enough.

The Recent Limits to Personal Jurisdiction.

In Daimler AG v. Bauman, decided by the U.S. Supreme Court in 2014, Argentine citizens sued a German corporation, DaimlerChrysler Aktiengesellschaft ("Daimler"), in federal court in California based on human rights violations allegedly committed by one of Daimler's subsidiaries in Argentina. The plaintiffs attempted to achieve general personal jurisdiction over Daimler in California by first establishing general jurisdiction over Daimler's U.S. subsidiary, Mercedes-Benz USA ("MBUSA"), and then attributing MBUSA's in-state activities to Daimler. MBUSA is incorporated in Delaware and headquartered in New Jersey. However, MBUSA had substantial in-state contacts in California, including being the largest supplier of luxury vehicles to the California market, with multiple in-state facilities and billions of dollars in in-State sales (which accounted for 2.4% of Daimler's sales worldwide).

The Supreme Court found that although MBUSA was neither incorporated in California nor maintained its principal place of business there, its contacts with and activities in California were so substantial that it would be appropriate to assume that MBUSA was "at home" in California such that it was subject to general jurisdiction. The Court further assumed that MBUSA's California contacts and activities were "imputable to Daimler." However, the Court held that the same in-state contacts and activities that were sufficient to create general jurisdiction over MBUSA in California were not sufficient to create general jurisdiction over Daimler. The Court reasoned that "the general jurisdiction inquiry does not focus solely on the magnitude of the defendant's in-state contacts," but "instead calls for an appraisal of a corporation's activities in their entirety, nationwide and worldwide." The Court compared each company's respective contacts and activities within California against their out-of-state activities. Although a substantial portion of all of MBUSA's business was conducted in California, that same level of business activity constituted only a small percentage of Daimler's total world-wide activities.

Concurring in the judgment, Justice Sotomayor criticized the majority's comparative contacts analysis, stating that the majority's "focus on Daimler's operations outside of California ignore[d] the lodestar of [the Court's] personal jurisdiction jurisprudence: A State may subject a defendant to the burden of suit if the defendant has sufficiently taken advantage of the State's laws and protections through its contacts in the State; whether the defendant has contacts elsewhere is immaterial." Thus, she reasoned, the fact that the majority had assumed that MBUSA was subject to California's general jurisdiction and that its activities could be attributed to Daimler should have been "dispositive" to create general jurisdiction over Daimler.

Justice Sotomayor noted that "the ultimate effect of the majority's approach [would] be to shift the risk of loss from multinational corporations to the individuals harmed by their actions." Justice Sotomayor imagined that "a parent whose child is maimed due to the negligence of a foreign hotel owned by a multinational conglomerate will be unable to hold the hotel to account in a single U.S. court, even if the hotel company has a massive presence in multiple States." Because the hotel's extensive worldwide activities would be greater than those of any single U.S. forum, it would effectively be "immunized from general jurisdiction" in any single U.S. forum.

In the Supreme Court's 2017 decision in BNSF Railway Co. v. Tyrrell, Justice Sotomayor's unsettling prediction came to pass. There, the defendant railroad, BNSF Railway Company ("BNSF"), was sued in Montana state court by two former employees who alleged that they had been injured on the job. The injured workers did not reside in Montana and were not injured there, but BNSF conduced business in Montana.

Applying the principles espoused in Daimler, the Court held that general jurisdiction over BNSF in Montana was lacking. After noting that BNSF was neither incorporated, nor headquartered, in Montana, the majority performed its comparative contacts analysis to determine whether BNSF's contacts in Montana were substantial enough, when compared to its contacts outside of that forum, to render the company "essentially at home" in Montana. BNSF maintained over 2,000 miles of railroad track and over 2,000 employees in Montana, but those amounted to only 6% of its total track mileage and less than 5% of its total work force, respectively. The majority determined that BNSF was not "at home" in Montana because its in-state business activities were outweighed by its activities occurring outside of Montana.

Justice Sotomayor, dissenting in that portion of the Court's judgment governed by Daimler (and concurring in other respects), renewed her objection from Daimler that the majority's comparative contacts analysis, which had "prove[n] all but dispositive" here, had no precedential basis and was merely "invented" by the Daimler majority. According to Justice Sotomayor, the result was "perverse" because "[t]he majority's approach [would] grant[] a jurisdictional windfall to large multistate or multinational corporations that operate across many jurisdictions. Under its reasoning, it is virtually inconceivable that such corporations will ever be subject to general jurisdiction in any location other than their principal places of business or of incorporation."

We will be watching to see how the federal district and appellate courts treat personal jurisdiction over large national and international companies.

Equifax Faces Threat Of Legal Action: Options For Victims

On behalf of Wolf Popper LLP

Equifax is starting to experience the legal ramifications that are following the recent hack of its systems. This breach led to the exposure of personal information for over 145 million consumers.

News of the breach has left consumers confused and concerned. One of the biggest issues with this hack is the fact that it will likely result in a surge of identity theft issues. The consumer credit reporting agency is facing the threat of lawsuits from state attorneys general as well as individuals. But this still leaves the general population with questions. What does this mean for individual's personal information? Who exactly is at an increased risk of identity theft because of this breach?

Those who think they may be negatively impacted by the breach can benefit from a basic understanding of the legal channels that are available for relief. The following will provide some guidance on the claims likely present for state attorneys general as well as those that may be available for individuals that are impacted by this breach.

State laws may protect victims of data breaches. 

Many states have laws that address data breaches such as this. A failure to follow the deadlines and requirements for consumer notification set by each state statute can come with serious penalties.

In this case, the penalties can be particularly severe as they are often applied per incident. Massachusetts state law sets a civil penalty that can reach $5,000 per violation and other states have penalties that can reach $10,000. Due to the magnitude of the breach, the financial ramifications of state penalties alone could be massive. As noted in a recent Market Watch piece, this portion of penalties could quickly exceed $700 billion.

Depending on which states' laws apply, state attorneys general may have the ability to file a lawsuit against Equifax to protect to rights of that state's citizens. Also, individuals who personally experience a large debt as a direct result of the hack may be able to file a lawsuit to hold Equifax accountable. This type of case would require that the injured person establish he or she was the victim of identity theft and that the information was gathered from the Equifax breach.

A class action may also be available, although some recent court cases have made these class claims difficult to prosecute. The class action process could allow injured individuals to seek action on behalf of a "class" of persons injured by Equifax's actions (or inactions) with respect to their personal data. Equifax had sought to avoid such class actions by including an arbitration clause (which precluded class actions) in its monitoring program. However, public pressure forced Equifax to agree not to enforce such a clause.

Certification is not an easy process. As noted in a previous publication by our firm, it requires that the motion to certify the class action meet all elements pursuant to Rule 23 of the Federal Rules of Civil Procedure. These claims also often face fierce opposition.

Equifax and legal woes: Just the beginning?

This may be the beginning for the legal woes Equifax will need to navigate as a result of this hacking incident. We will address other issues that will arise in future posts. Watch for our next post delving into an arbitration provision present on the agency's website.

What's The Deal With Equifax?

By Fei-Lu Qian

Equifax Inc. (EFX), one of the largest credit reporting agencies ("CRAs") in the US, made $3.1 billion in revenue last year by selling consumer credit reporting and scoring products based on consumers' personal information and credit history. The Fair Credit Reporting Act ("FCRA") requires CRAs such as Equifax to protect a consumer's privacy by guarding against inappropriate disclosure to third parties, and permits a CRA to disclose a consumer's information only for a handful of exclusively defined "permissible purposes." To ensure compliance, CRAs must maintain reasonable procedures to ensure that such third party disclosures are made exclusively for permissible purposes.

On September 7, 2017, after the stock market closed, Equifax disclosed a massive data breach that have compromised personally identifiable information ("PII") of approximately 143 million U.S. consumers, plus PII of United Kingdom and Canadian residents. Equifax later increased its estimate to a total of 145.5 million people. According to Equifax, from mid-May through July 2017, hackers were able to gain access to a website application utilized by Equifax where they were able to obtain critical consumer information including "names, Social Security numbers, birth dates, addresses and in some instances, driver's license numbers." The hackers were also able to get access to "credit card numbers for approximately 209,000 U.S. consumers, and certain dispute documents with personal identifying information for approximately 182,000 U.S. consumers." As has become typical when breaches such as this are announced, Equifax offered impacted American consumers a one year free subscription to identity protection services.

Public officials were outraged and dozens of consumer lawsuits were filed almost immediately. Senate Minority Leader Chuck Schumer called the data breach, "one of the most egregious examples of corporate malfeasance since Enron." In a letter to Equifax, Senator Brian Schatz of Hawaii criticized Equifax's complimentary one year free subscription as "insufficient given the scope and scale of this data breach," without offering "to pay for or reimburse credit freezes, which can cost $10 per credit reporting agency." In a joint letter by the leaders of the Senate Finance Committee to Equifax, they asked whether Equifax plans "to promote its paid service to these individuals at the end of the free year" as a tactic to profit from the massive breach.

On September 15, 2017, Equifax revealed that the hackers had exploited a vulnerability with an open source application that Equifax utilized called Apache Struts CVE-2017-5638. However, this vulnerability was easily fixable by updating the software with a patch that was developed and available on March 7, 2017. Equifax has admitted that it was "aware of this vulnerability at" the time that the patch was available, but it appears that Equifax failed to update the Apache Struts software. In fact, in his prepared testimony to Congressional committees, Equifax's recently retired Chairman of the Board of Directors and Chief Executive Officer, Richard F. Smith admitted "that the vulnerable version of Apache Struts within Equifax was not...patched in" time, and therefore, "allowed hackers to access personal identifying information."

Shockingly, Equifax discovered the massive breach on July 29, 2017, but waited six weeks to reveal to consumers and its shareholders that sensitive information of more than half of the entire adult American population had been stolen. To make matters worse, it was revealed through various media reports that on August 1 and 2, 2017, less than a week after discovering the breach, three top Equifax executives, including its Chief Financial Officer, sold Equifax shares for proceeds of almost $1.8 million.

Since the initial public revelation of the breach on September 7, 2017, Equifax has announced the retirement of three major executives, including Smith. In addition, Equifax common stock has declined more than 20%, or nearly $30.00 per share, erasing shareholder value of more than $3.5 billion. Various state attorneys general and federal agencies are investigating the massive breach and multiple Congressional committees have held hearings on the matter.

According to a security expert, "Considering Equifax is one of the largest credit reporting agencies whose sole business relies on both credibility of data and securely handling the sensitive data of millions of consumers, it is fair to say that they should have patched it as soon as possible, not to exceed a week." A letter from the Credit Union National Association to the leaders of the U.S. House Energy and Commerce Subcommittee on Digital Commerce and Consumer Protection sums up the long-term impact of the data breach, and how it has exposed practically every adult American "to damages in replacing...payment cards, covering fraudulent purchases and taking protective measures to reduce risk of identity theft and loan fraud and assuming financial responsibility for various types of fraudulent activity related to stolen identities and misuse of PII and payment card data."

In the coming weeks we will look at some of the legal claims being asserted against Equifax, and remedies consumers may have against Equifax.

Beware Statutes Of Repose, They Can Sneak In And Cost You Your Case

By Patricia I. Avery and Joshua W. Ruthizer

Anyone who has watched law or crime television shows probably has heard of the term "statute of limitations," which protects a defendant from facing a lawsuit or prosecution based on old events. In civil litigation, a "statute of limitations" is the fixed time period that starts to run once the plaintiff can file a lawsuit, an event known as "accrual." "Accrual" typically occurs when the plaintiff is injured, or when the plaintiff discovers, or should have discovered, the injury. A statute of limitations is different from a "statute of repose," which imposes an absolute bar to a lawsuit after the expiration of a fixed time period. For example, in order to ensure fairness, a statute of limitations may sometimes be "tolled" (i.e. the court may "stop the clock from running"). A statute of repose, however, cannot be tolled. Indeed, a statute of repose may expire before an injury is even discovered.

The difference between these two concepts was recently explored by the U.S. Supreme Court in California Public Employees Retirement System v. ANZ Securities, Inc., 137 S. Ct. 2042, (June 26, 2017), which concerned litigation over the demise of Lehman Brothers. In 2007 and 2008, Lehman Brothers raised capital through a number of securities offerings, and the California Public Employees Retirement System ("CalPERS"), the largest pension fund in the United States, purchased securities in some of these offerings. In September 2008, Lehman Brothers filed for bankruptcy, and a class action was filed against the underwriters of the offerings for violating Section 11 of the Securities Act of 1933.

The Securities Act requires companies issuing stock or bonds to fully disclose information relevant to the securities offering in a registration statement filed with the U.S. Securities and Exchange Commission. Under Section 11 of the Securities Act, if the company or other designated individuals, including underwriters, make an "untrue statement of a material fact or omit [] a material fact required to be stated therein or necessary to make the statements therein not misleading," then investors may sue for damages.

Section 13 of the Securities Act includes a statute of limitations, requiring an action under Section 11 to be brought within one year after the discovery of the untrue statement or omission or when such untrue statement or omission should have been discovered. Section 13 also includes a statue of repose, which provides that "in no event shall any such action be brought . . . more than three years after the security [was sold]...."

The class action at issue here was filed within one year of the discovery of the untrue statements and omissions and within the three year statute of repose. In February 2011, more than three years after the relevant securities offerings and while the Lehman class action was pending, CalPERS filed an individual lawsuit against the underwriters, raising claims nearly identical to those alleged in the class action. A settlement of the class action was later reached, and CalPERS opted out of participation in the settlement, seeking to pursue its own individual claims against the underwriters.

The underwriters moved to dismiss the CalPERS suit, claiming it was time-barred under Section 13's three year statute of repose. CalPERS opposed the motion, observing that a 40-year old Supreme Court precedent, American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), held that the filing of a class action tolls the statute of limitations on behalf of all members of a class. The District Court for the Southern District of New York and the Second Circuit Court of Appeals agreed with the underwriters and dismissed the complaint, finding that the CalPERS suit was untimely, and that American Pipe tolling was inapplicable to Section 13's statue of repose.

The Supreme Court affirmed, pointing to the policy differences between statutes of limitations and statutes of repose. While statutes of limitations are designed to encourage plaintiffs to diligently pursue their claims (and therefore begin to run when the injury occurred or was discovered), statues of repose are designed to completely shield a defendant from liability after a certain period of time set by lawmakers. Because of this legislative judgment, the Court held, a statute of repose cannot be tolled unless the legislature (in this case, Congress) specifically enacts an exception to, or provides for tolling of, the statute of repose. As the Securities Act's statute of repose did not have such an exception, it could not be tolled.

The Supreme Court's decision may well have impact beyond the Securities Act, as many other laws contain statutes of repose. For example, the antifraud provisions of the federal securities laws, Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, which make it unlawful, among other things, to use the mail, wire, or internet to make materially false and misleading statements and omissions concerning publicly traded securities, are subject to a five year statute of repose, commencing from the date the false statement is made. At least one federal district court and one federal appeals court have already relied on ANZ Securities to find that the five year statute of repose for these securities fraud claims is not subject to tolling by the filing of a class action within the relevant timeframe.

The primary lesson to be learned from the ANZ Securities case is that investors who have suffered losses due to a potential violation of the securities laws must be aware of the date the relevant statute of repose will expire, regardless of whether or not a related securities class action has been filed by another investor. Also, investors can no longer wait until a settlement is reached in a securities class action before deciding whether to opt out and prosecute an individual claim. Investors should analyze their damages and claims before the statute of repose expires so that they may, if warranted, file a complaint to protect individual claims. Reasons an investor would file an individual claim include: i) protecting significant potential individual damages, and ii) guarding against the danger that a class is not certified, a class is later "decertified," or, in the investor's view, an inadequate class settlement is reached. In addition, investors should examine the statute of repose before determining whether to opt out of a securities class action.

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.

Finding Fraud In Pharmaceutical Stock Promotion

On behalf of Wolf Popper LLP

Pharmaceutical companies can be lucrative investments when they are on the verge of developing a blockbuster drug. But in some cases, companies have been taking fraudulent steps to make it look like a blockbuster drug is imminent, when in fact it is not. They do this by hiring stock-promotion agencies to write favorable articles touting successful clinical trials in an effort to inflate stock prices. The stock-promoting agencies do not reveal that the pharmaceutical companies have paid them to write the articles. Then, once the stock has inflated, high-level executives sell off their stock and make a killing; that is, until the Securities and Exchange Commission (SEC) discovers what they're doing.

In the case of Immunocellular Technologies and Lion Biotechnology, both of which have been subject to cease-and-desist orders from the SEC, the CEO of both companies had also been running two separate stock-promoting agencies on the side.

A double betrayal

For people waiting for effective new, potentially lifesaving drugs, the practice of stock promotion is particularly cruel. That's because, in some cases, drugs that performed well in one phase of a trial do not perform as well in a subsequent trial, but are presented as effective nevertheless. When executives misrepresent the results of a clinical trial and fraudulently champion the drugs in articles they pay for (but do not disclose), they enrich only themselves -- until the SEC catches up with them.

Not an isolated incident

Unfortunately, this practice is not limited to a few rogue firms; the SEC recently issued 27 cease-and-desist orders against pharmaceutical companies and individuals who have engaged in this kind of misrepresentation; there may be more instances that have yet to come to light. Investors who have been misled by such fraudulent claims may be eligible to join a class action lawsuit.

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.