Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

In prior posts (refer here), I have discussed the increasing reluctance of U.S. courts to exercise subject matter jurisdiction over securities claims against foreign-domiciled companies brought by foreign claimants who bought their shares on foreign exchanges (so-called “f-cubed” claimants).

In the most recent example of this, Judge Thomas Griesa of the United States District Court for the Southern District of New York, in a June 3, 2008 opinion (here), granted the defendants’ motion to dismiss the claims of “f-cubed” claimants against AstraZeneca and certain of its directors and offices.

The complaint essentially alleges that Exanta, a pharmaceutical being develop by the AstraZeneca (a U.K.-based company) “was not as safe or effective as defendants’ public statements made it out to be.” The plaintiffs’ claimed that these statements inflated the company’s share price. Refer here for background regarding the lawsuit.

The outcome of the subject matter jurisdiction question was probably tipped in the court’s opening observation that “over 90% of the members of the putative class are foreigners who purchased their shares on foreign exchanges.”

The court reviewed the propriety of its exercise of jurisdiction over claims brought on behalf of these foreign shareholders, by considering whether or not there were sufficient allegations of U.S.-based conduct causing sufficient U.S.-based effects. The court found that while there were sufficient allegations of U.S.-based conduct, plaintiffs “do not allege facts in support of the second prong of the test – that the United States conduct ‘directly caused’ plaintiffs’ losses.”

The court said that in order to establish this requisite causal link, the plaintiffs must have “sufficiently alleged that the foreign purchasers relied on United States based conduct when deciding to acquire the stock”. In order to establish this kind of reliance, the plaintiffs urged the court in effect to adopt a global “fraud-on-the-market” theory, arguing that “it is illogical to suggest that the fraud-on-the-market theory applies within the United States but not outside of it.”

The court noted that other courts had rejected the global fraud-on-the-market theory, out of concerns that it would “extend the jurisdictional reach of the United States securities laws too far.” The court further noted that the Second Circuit had not yet provided guidance on whether the fraud-on-the-market theory should apply to foreign countries, and “in the absence of clear authority in favor of a global fraud-on-the-market theory, the court declines to adopt such a theory.” The court dismissed the claims of the foreign claimants based on lack of subject matter jurisdiction.

The court further concluded that the plaintiffs had not sufficiently alleged that two foreign-domiciled individual defendants had the requisite “minimum contacts” with the U.S. for the court to exercise personal jurisdiction over them.

Finally, the court concluded that the plaintiffs had not sufficiently pled scienter, and dismissed the remaining claims on that basis. The court held that neither the allegations of insider trading nor the allegations relating to a secondary offering were sufficient to establish scienter.

The court further rejected the plaintiffs allegations that the defendants had consciously disregarded the truth, based on the court’s own review of the various disclosure documents on which the plaintiffs sought to rely. The court concluded that the plaintiffs “have not alleged anything to negate the idea that that defendants were attempting to develop a drug they thought beneficial and were do describing it to the public.” The court found that the plaintiffs had “not alleged an inference of scienter as compelling as the opposing inference.”

The fact that the case will not be going forward even as to the domestic shareholders reduces the impact of the court’s ruling to exclude the f-cubed claimants from the class. The dispersion of the class, with such an overwhelming percentage of f-cubed claimants in the purported class members may well have inclined the outcome on the jurisdictional issue in any event.

Plaintiffs’ attorneys in the most recently filed cases seem to be anticipating that courts are inclined to exclude these claimants from the putative class and increasingly are taking that into account in their initial pleadings. For example, as discussed here, when plaintiffs’ lawyers recently launched a U.S. securities lawsuit against Société Générale, they included in the purported class only U.S residents and investors who bought ADRs on U.S. exchanges. Their purported class by its own construction excludes foreign residents who bought shares on foreign exchanges.

The increasing exclusion of f-cubed litigants from U.S. securities class actions (whether voluntary or as a result of court action) is one of the reasons that interest in U.S.-style securities relief is increasing in other countries, as I discussed in a recent post (here).

In any event, the court’s dismissal of the AstraZeneca case also continues another trend, which is that while life sciences companies are frequently sued (compared to companies in most other categories), the cases filed against them are often dismissed, as I also discussed in a prior post (here)

• Email This
• Print
• Comments (1)
• Trackbacks

The wave of subprime-related securities class action litigation has continued to spread, as plaintiffs’ lawyers have filed new securities lawsuits against two different companies.

First, according to their March 12, 2008 press release (here), plaintiffs’ lawyers have filed a securities class action lawsuit in the United States District Court for the Northern District of California (complaint here), against residential mortgage insurer The PMI Group. The lawsuit follows the company’s March 3, 2008 announcement (here), in connection with its fourth quarter earnings release, that it would delay filing its Form 10-K for year-end 2007 due to delays in obtaining 2007 financial results from recently downgraded bond insurer FGIC , in which PMI Group has a 40% ownership interest.

According to the plaintiffs’ attorneys’ press release, the complaint alleges that the defendants failed to disclose to investors that:

(a) the Company’s investment in FGIC was materially impaired as FGIC’s bond insurance arm, Financial Guaranty, had significant exposure to defaults on bonds it insured due to the plunge in value of mortgage debt; (b) the Company was materially overstating its financial results by failing to properly value its investment in FGIC and by failing to write down that investment in a timely fashion in violation of Generally Accepted Accounting Principles (“GAAP”); (c) the Company was not adequately accounting for its loss reserves in violation of GAAP, causing its financial results to be materially misstated; (d) the Company failed to engage in proper underwriting practices for its book of business related to insurance written in 2005 through most of 2007; (e) the Company had far greater exposure to anticipated losses and defaults related to its book of business related to insurance written in 2005 through most of 2007 than it had previously disclosed; (f) given the deterioration and the increased volatility in the subprime market, the Company would be forced to tighten its standards and stop writing insurance policies to certain categories of borrowers which would have a direct material negative impact on its book of business going forward; and (g) given the increased volatility in the subprime market, the Company had no reasonable basis to make projections about its incurred losses or about its new insurance written.

The second of the new securities class action lawsuits involves Société Générale. As I noted in a prior post (here), SocGen has previously been sued in a French court on behalf of 130 individual investors and certain companies. But according to their March 12, 2008 press release (here), plaintiffs’ lawyers in the U.S. have now filed an action in the United States District Court for the Southern District of New York under. U.S. securities laws against SocGen and its Chairman and CEO. The complaint can be found here.

According the plaintiffs’ press release, the plaintiffs allege that the defendants

·        made false and misleading statements and concealed material adverse information regarding SocGen's exposure to subprime loans, collateralized debt obligations ("CDOs") and SocGen's internal controls

·        touted SocGen's conservative management, risk control, and expertise in risk analysis and structured finance, including CDO vehicles

·        misled investors by announcing that it had "very little exposure" to the subprime segment

·        ignored or failed to act upon numerous alerts which should have led to the uncovering of Jerome Kerviel's massive irregular trading activity from 2005 through early 2008

The press release states that the case “also involves alleged insider trading by SocGen’s top U.S. executive and board member, Robert A. Day (I discussed Day’s trading in the company’s shares at length in my prior post, here).

One of the interesting features of the SocGen securities lawsuit is the class of investors on whose behalf the lawsuit purports to be brought. The complaint describes the class as consisting of all purchasers of the company’s American Depositary Receipts (which trade on the OTC market), and “all U.S. citizens who purchased SocGen securities on any exchange,” between August 1, 2005 and January 23, 2008.

By narrowing the class to include only investors who bought ADRs on the OTC and U.S. investors in general regardless of where they bought their SocGen securities, the plaintiffs clearly are seeking to avoid the jurisdictional and class certification issues that can arise in U.S. class actions against overseas companies involving overseas investors who bought their shares overseas.

As I have discussed in prior posts (most recently here), courts have wrestled with the so-called “f-cubed” litigants (foreign investors who bought their shares in foreign companies on foreign exchanges) and those issues have created complicated jurisdictional and class certification issues (as discussed here and here). The SocGen plaintiffs’ complaint seems calculated to try to avoid these issues, and possibly even to try to avoid conflicts with the prior French lawsuit.

The exclusion of the “f-cubed” litigants from the purported class does raise the question of where these investors are left, particularly if they would like to pursue remedies under U.S. securities laws. Clearly, they retain the option of bringing individual or group actions – what might be called the “left out” actions, by contrast to the more common “opt out” actions. As noted on the Securities Litigation Watch blog, here, that is what has happened with the overseas investors who were precluded from the class in the Vivendi class action; they have filed extensive individual actions.

While the subprime litigation wave has involved lawsuits against a wide variety of kinds of companies, the lawsuit against The PMI Group is the first case of which I am aware involving a residential mortgage insurer – although the lawsuit arises in part due to The PMI Group’s investment in troubled bond insurer FGIC, and there have been numerous prior subprime-related lawsuits against bond insurers.

In any event, as reflected in my running tally of subprime related securities lawsuits (which can be accessed here), the addition of these two lawsuits brings the total of subprime-related securities lawsuits to 49, ten of which have been filed in 2008.

Federal Securities Class Action to Proceed State Court: As discussed at length in a prior post (here) concerning two securities class actions that have been launched against mortgage-backed asset securitizers, the plaintiffs’ lawyers filing these actions chose to file the lawsuits in state court, in reliance on the concurrent state court jurisdiction under the ’33 Act. As I also noted in the prior post, the defendants in Luther v Countrywide Home Loans Servicing removed the case to federal court.

In a February 28, 2009 order (here), Judge Mariana R. Pfaelzer held that the lawsuit had not been properly removed to federal court, and granted the plaintiffs’ motion to remand the case back to state court.

The defendants had based arguments in support of removal on the Class Action Fairness Act of 2005, which provides that a state court class action is removable to federal court where the amount in controversy is greater than $5 million and any class member is a citizen of a state different than the defendant. The parties agreed that the conditions were met in this case. In seeking remand, the plaintiffs relied on the express provision of Section 22(a) of the Securities Act of 1933 that prohibits the removal from state court to federal court of an action under the ’33 Act.

In reliance on principals of statutory construction, Judge Pfaelzer concluded that the specific principals in the ’33 Act must control. She said that “the Court continues to harbor significant doubt that CAFA provides removal jurisdiction in the face of the 1933 Act’s absolute prohibition on removal. Accordingly, the Court must remand the case to state court.”

Given the language in Section 22(a), Judge Pfaelzer’s decision seems correct. However, the outcome seems undesirable. There is no way to know for sure why the plaintiffs’ lawyers seek to proceed in state court. As I discussed in my prior post, the likeliest explanation is that the plaintiffs intend to take the position that the provisions and requirements of the PSLRA do not apply to a ’33 Act case in state court. It certainly does seem like putting federal securities class actions in state court opens up a can of worms. It will be interesting to see (but difficult to track) what happens with these class action lawsuits.

Speakers’ Corner: On Friday, March 14, 2008, I will be participating in a webcast sponsored by RiskMetrics Group entitled “Securities Litigation – What European Investors Need to Know.” The panel will be moderated by Adam Savett, of the Risk Metrics Group and author of the Securities Litigation Watch blog. Also on the panel will be Eric Belfi of Labaton Sucharow and an additional guest speaker. Information regarding the webcast can be found here.

• Email This
• Print
• Comments
• Trackbacks