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

As discussed in an earlier post, the BankAtlantic subprime related securities lawsuit is headed to trial. According to an October 5, 2010 Law.com article (here), jury selection in the case will begin this Friday, October 8, 2010, in federal court in Miami.

The Law.com article suggests the case has become contentious as it has moved forward. Among other things, the article quotes defense counsel as saying that "I’m offended by this case," which he characterizes as "a completely made-up, frivolous claim." Defense counsel reportedly has moved for sanctions against the plaintiffs’ attorney. (The article does not mention that in connection with the motions for summary judgment, Judge Ursula Ungaro granted summary judgment for plaintiffs on the issue of falsity, as to certain of the allegedly misleading statements, as discussed here.)

If the case does proceed to trial it would represent one of one only a very small handful of securities class action lawsuits that have actually made it to trial since the enactment of the PSLRA in 1995.

According to information compiled by Adam Savett, the Director of Securities Class Actions at the Claims Compensation Bureau, since the enactment of the PSLRA, there have only been nine securities class action lawsuits based on post-PSLRA conduct that have actually been tried to a jury verdict. Another seven cases alleging post-PSLRA conduct went to trial but were compromised or otherwise resolved prior to verdict. An additional eleven securities cases have gone to trial post-PSLRA but involved pre-PSLRA conduct.

In other words, if the BankAtlantic case actually does go forward, it would represent only the 28^th case to go to trial since the enactment of the PLSRA, and only the 17^th case since the enactment of the PSLRA involving post PSLRA conduct to go to trial. If the BankAtlantic case actually goes to verdict, it would represent only the tenth securities class action lawsuit to go to verdict post-PSLRA involving post-PSLRA conduct.

For those who are interested to know how the nine post-PSLRA verdicts have turned out, the current tally (taking into account post-verdict proceedings and reflecting only the current status of post-verdict proceedings) is as follows: Plaintiffs 5, Defendants 4. (The scoreboard is subject to revision pending the outcome of additional proceedings in several of the cases.)

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The subprime-related securities lawsuit pending against BankAtlantic Bancorp and certain of its directors and officers is headed to trial on October 6, 2010 in Miami, following the recent summary judgment rulings in the case. Southern District of Florida Judge Ursula Ungaro’s 62-page ruling, issued August 18, 2010, which granted in part and denied in part the parties’ cross-motions for summary judgment, contains a number of interesting features, discussed below.

BankAtlantic Bancorp is the publicly traded parent company of Bank Atlantic, a federally chartered bank. As reflected in greater detail here, plaintiffs first filed their securities class action lawsuit in October 2007. Judge Ungaro granted the defendants’ initial motion to dismiss the plaintiffs complaint, but allowed the plaintiffs leave to amend. However, in May 2009, Judge Ungaro denied the defendants’ renewed motions to dismiss after plaintiffs’ their amended complaint.

The plaintiffs’ amended complaint basically alleges that the defendants made misleading statements about the credit quality of certain land loans in the bank’s commercial real estate portfolio; failed to follow conservative lending practices as described in its underwriting policies, and therefore its loan portfolio was exposed to a higher level of risk than represented to investors, and misrepresented that BankAtlantic’s loan loss reserves were adequate.

Plaintiffs contend that when the truth about the banks loan portfolio was revealed between April and October 2007, the company’s stock price fell and investors were harmed.

In her August 18 order, Judge Ungaro addressed the plaintiffs’ motion for partial summary judgment with respect to the falsity of certain July 2007 statements by the company’s former Chairman and CEO, as well as the defendants’ motions for summary judgment as to all of plaintiffs’ claims.

Plaintiffs’ conceded that the defendants were entitled to summary judgment as to all claims for the period prior to October 18, 2006 and as to all claims arising from alleged misstatements about loan loss reserves, and accordingly Judge Ungaro granted defendants summary judgment as to those issues.

A significant portion of Judge Ungaro’s opinion is focused on defendants’ motion to exclude the testimony of the plaintiffs’ expert on the issues of market efficiency, materiality, loss causation and damages, which Judge Ungaro addressed because she considered the motion relevant to the summary judgment motion.

Judge Ungaro largely granted the defendants’motion to exclude the expert’s testimony on the issue of loss causation and materiality, ruling that the expert may testify on only narrow parts of these issues, although she ruled that the expert may testify as to the cause of certain specific aspects of the decline in the company’s share price. Judge Ungaro also excluded certain aspects of the expert’s testimony on damages, but ruled that the testimony will be permitted on other damages issues.

With respect to the defendants’ motions for summary judgment on the plaintiffs’ claims, Judge Ungaro held that the "the evidence raises genuine issues of material fact as to whether Defendants’ statements beginning in April of 2007, focusing solely on the credit and repayment problems with [builder land bank, or BLB] loans and omitting mention of the problems the non-BLB land loans were contemporaneously experiencing were misleading."

Judge Ungaro also concluded that the defendants were not entitled to summary judgment on the issue of scienter, concluding that the evidence raised genuine issues of fact as to whether the defendants knew their class period statements creased a "an obvious danger of misleading investors" as to "the true credit quality of the land loan portfolio"; as to "the accelerating deterioration of credit quality throughout the land loan portfolio"; and as to the "worsening credit and repayment problems with the BLB loans."

Finally, on the issue of loss causation, Judge Ungaro concluded that there were genuine issues of material fact regarding the April 26, 2007 and October 26, 2007 price declines, but not as to the October 29, 2007 price declines.

Judge Ungaro then turned to the plaintiffs’ motion for partial summary judgment on to certain statements by the company’s former Chairman and CEO in a July 25, 2007 analyst conference call. In response to a specific question in the call about the Bank’ BLB loans, the Chairman made a number of reassuring statements, including the statement that "the portfolio has always performed extremely well, continues to perform extremely well."

In reliance on prior email exchanges in which the Chairman and CEO participated, as well as the testimony of other bank officials, Judge Ungaro concluded that there were not genuine issues of material fact that the July 25, 2007 statements were false when made, and accordingly ruled that the plaintiffs are entitled to summary judgment on this issue.

Discussion

This decision is noteworthy if for no other reason it means that (absent intervening events) a trial in this case will commence in just a few short weeks. As most readers of this blog know, trials in securities class action cases are quite rare, and it would be a significant and noteworthy event if this case were to go to trial beginning on or about October 6.

The decision is also noteworthy for Judge Ungaro’s detailed explication of the issues on which the plaintiffs’ expert will be permitted to testify. Again, because so few of these cases actually go to trial, there is relatively little judicial authority on questions concerning the issues on which expert testimony will be admitted. The absence of this authority can present a challenge when parties attempt to rely in expert testimony, for example, in connection with settlement negotiations, which can be vexing without knowing whether the expert’s views are relevant in any way. However, because Judge Ungaro’s analysis of these issues is very case and fact specific, her analysis of the expert testimony questions, though interesting, may be of limited value in other cases.

But perhaps the most interesting thing about this ruling is Judge Ungaro’s grant of partial summary judgment for the plaintiffs on the issue of falsity. It is relatively rare for any case to get to the point where a decision on this kind of issue is even ripe, and in most cases courts are inclined to leave these kinds of issues to the jury. I actually can’t recall ever having seen a court granting summary judgment in the claimants’ favor on the issue of falsity.

The plaintiffs will still have to prove that these false statements were materially misleading, were made with scienter, and cause damages. However, it will be a singular development when the court instructs the jury that the court has already concluded that the statements are false.

And so, if this case does go to trial on October 6, it will be interesting to watch, for a number of reasons.

I have in any event noted Judge Ungaro’s August 18 order in my running tally of rulings in subprime and credit-crisis related cases, which can be found here.

Special thanks to a loyal reader for sending me a copy of Judge Ungaro’s ruling.

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In the latest development in the long-running lawsuit that is among the very few securities cases to actually have gone to trial, the Ninth Circuit – in its second crack at the case – affirmed the district court’s dismissal. The Ninth Circuit’s August 9, 2010 opinion (here) in the Thane International securities class action lawsuit affirmed the district court’s entry of judgment for the defendants on the issue of loss causation.

Background

Reliant Interactive Media Corp. was acquired by Thane International in September 2001. Reliant shareholders received Thane shares in the merger. Thane’s shares had not been publicly traded, but the merger prospectus stated that Thane’s shares had been "approved for quotation and trading on the NASDAQ National Market" upon completion of the merger.

However, when the merger was consummated, Thane’s shares commenced trading not on the NASDAQ National Market System by on the NASDAQ Over-the-Counter Bulletin Board. For nineteen days, the shares traded above the merger price. However, when the company then reported disappointing earnings, the share price fell, and it continued to decline until Thane ultimately bought back the shares at a fraction of the merger price.

In September 2002, a class of former Reliant shareholders sue Thane and four of its directors and officers under Sections 12(a)(2) and 15 of the ’33 Act, alleging that the pre-merger prospectus had been misleading because it implied that Thane Shares would list on the NASDAQ National Market System.

Following a three-day bench trial, the district court concluded that Thane did not violate Section 12(a)(2), finding that the prospectus was not misleading, and that in any event the misrepresentations were not material because Thane’s share price did not depreciate below the merger price after the market became aware of the market on which the company’s shares were trading.

As discussed here, in a prior appeal, the Ninth Circuit reversed the district court’s trial ruling, holding that the statements in the prospectus, even if literally true, contained misleading statements regarding where Thane shares would be listed and trade, and that the information was material, because a reasonable investor would have wanted to know where the shares would trade. However, the Ninth Circuit recognized that the defendants could still prevail by establishing the affirmative defense of lack of causation.

On remand, the district court held that the defendants had carried their burden of establishing lack of loss causation, holding that there could be no loss as long as Thane’s share price remained above the merger price, and there could be no loss causation since the stock price didn’t fall below the merger price after "impounding" the information about the nonlisting on the National Market System. The plaintiffs’ appealed.

The August 9 Opinion

In its latest opinion, the Ninth Circuit quickly rejected the plaintiffs’ argument that the appellate court’s prior ruling that the prospectus misrepresentation "foreclosed" the defendants’ reliance on the loss causation defense. The Ninth Circuit found that materiality and loss causation are separate issues, and the question whether investors would find information important (materiality) is different than the question whether a particular misstatement actually resulted in a loss (loss causation). Even if the "two inquiries are related" that "does not mean they are the same."

The Ninth Circuit also rejected the plaintiffs’ argument that, due to the inefficiency of the market in which Thane’s shares traded, the share price could not be used in a loss causation assessment. The Court said the absence of efficiency "does not mean that prices are unreliable." The Court rejected the theory urged by the plaintiffs that it is inappropriate to rely on stock prices in an inefficient market to determine loss causation.

Finally, the Ninth Circuit held that the district court did not err when it found that Thane’s share price had "impounded" (absorbed) the failure to list on the National Market System before it fell below the merger price.

Discussion

The decision is likely to be of greatest interest to the parties involved, although it also has some value for its analysis of the relation between materiality the loss causation issue. The Court’s analysis of the role in the loss causation analysis of prices for shares that trade on an inefficient market is also interesting.

However, the thing that makes this decision most noteworthy is that it involves one of the very rare securities class action lawsuits that actually went to trial. Yes, the trial was a three-day bench trial, and yes the case’s lengthy post-trial procedural history essentially reduces the fact that there was a trial to just one event in the long history of the case.

Nevertheless, the process of tracking securities cases that have gone to trial has taken on an importance of its own, so for purposes of maintaining the running scorecard of securities cases that have gone to trial, this Ninth Circuit’s decision upholding the lower court’s dismissal is noteworthy.

According to data compiled by Adam Savett, the Director of Securities Class Actions at Claims Compensation Bureau, there have been nine securities class action lawsuits that have gone to trial post-PSLRA involving post-PSLRA conduct, including the Thane International case. Taking the Ninth Circuit’s recent ruling in the Thane case into account (as well as other recent developments, including the Ninth Circuit’s recent action in the Apollo Group case), the scoreboard in those nine post-PSLRA cases currently stands at five for the plaintiffs and four for the defendants.

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As I discussed in a recent post, on June 23, 2010, the Ninth Circuit issued an opinion reinstating the $277.5 million jury verdict in the Apollo Group securities class action lawsuit. In my post discussing the opinion, I included some observations about the Ninth Circuit’s ruling and the likely future course of the Apollo Group case, as well as about the current state of play on post-PSLRA jury trials in securities class action lawsuits in general.

Over the weekend, Tower Snow of the Howard Rice law firm sent me a note commenting on my observations. Because I think Tower makes a number of interesting points, I asked his permission to reproduce his observations on this blog. Tower very graciously gave me permission, and the text of his email is reproduced in indented text below.

Although I rarely disagree with what you post on the blog, I do disagree with the conclusions you draw re where the Apollo case is heading.

The Ninth Circuit reversed based on the concept that the market may have failed to appreciate the significance of earlier disclosures and that any earlier disclosures may not have been of sufficient intensity and credibility for the market to understand them. Thus, according to the Ninth Circuit, the jury could properly conclude that the disclosure at issue was "corrective."  These are alien concepts to economists and the efficient market theory.

There is a vast universe of economic studies and literature which incontrovertibly shows that the financial markets are incredibly efficient (and sophisticated) and absorb and properly evaluate new information entering the markets in a matter of minutes. There is no respected economic literature which supports the idea that markets sometimes "fail to appreciate the significance" of negative information or that markets may be misled by disclosures because they are not of sufficient "intensity or credibility" to be fully understood. To the contrary, all the studies conclude the opposite.

The courts can't rely on the efficient market theory for purposes of creating a rebuttable presumption of reliance for purposes of class certification and then ignore its underpinnings for purposes of evaluating loss causation. Either one embraces the theory or one does not. If one embraces it, then once it is established that the prior disclosures revealed the truth about the allegedly misstated or omitted information, there is nothing left for the jury to decide. The later disclosure, by definition, cannot be corrective, as the market already had absorbed the information. Here, the "corrective" disclosure came out seven days after the information had been previously released. Seven days is an eternity in the financial markets.

The district court denied the defendants' motion for summary judgment on this issue because it had not heard the evidence. When it did, the court properly concluded that the "corrective" disclosure was old news. It was, and it could not under well established economic doctrine have caused plaintiffs' losses. The district court got it right.　

This case has a good chance of eventually making its way to the Supreme Court. If it does so, the defendants will win. Loss causation is too important an issue, and the lower courts are all over the map in applying the efficient market doctrine in different contexts. Either the efficient market theory has to be embraced and applied consistently, as economists apply it, or it should be thrown out.

For what it is worth, I also come to a different conclusion re Post-PSLRA trial results. Although your win/loss numbers are correct, when one takes into account post plaintiff-verdict settlements and plaintiff verdicts in the context of the damages sought, plaintiffs have done very poorly. What the trials show is that juries view investing as a high risk game, they hold investors accountable for their actions and losses, and they are not inclined when seeing individual officers and directors-- absent very compelling evidence -- to easily conclude that  they engaged in fraud. Couple these dynamics with plaintiffs' fear of post-trial adverse rulings, the dangers of appeals, the time delays, and a host of other factors, and it becomes apparent that even a plaintiff "win" often turns into a loss. I personally doubt whether either the Apollo or Vivendi verdict will survive.　

I would like to express my thanks to Tower for taking the time to send a detailed commentary and for his willingness to allow me to reproduce it here. I welcome submissions from responsible persons who are interested in proposing guest posts for publication on this blog. I am in any event always interested in hearing what readers think.

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