Subprime litigation may be all the rage, but the consolidated IPO Laddering case is back in the news, a seemingly distant reverberation from a long-gone era that may nonetheless still vex the same investment banks caught up in the current subprime crisis. The consolidated Initial Public Offering Securities Litigation is going forward in the district court after the Second Circuit reversed the district court’s grant of class certification (refer here regarding the Second Circuit’s reversal). On remand back to the district court, the plaintiffs have amended their Master Allegations and Complaints in the six focus cases, and the defendants moved to dismiss.
Judge Scheindlin’s rulings in the March 26 opinion are largely consistent with her prior rulings in the case, and, indeed, in significant parts of her opinion she simply repeats her prior ruling and states “I see no reason to reconsider this decision.” However, in two particular areas, intervening Supreme Court case law required Judge Scheindlin to reassess her prior analysis. Judge Scheindlin made it clear that the intervening case law did not change her view of the case.
First, Judge Scheindlin reexamined the plaintiffs’ scienter allegations in light of the Tellabs decision. The plaintiffs assert two separate claims under Section 10(b). One is asserted solely against the Underwriter defendants and is based on alleged market manipulation (based on the alleged tie-in arrangement that required IPO share buyers to purchase additional shares at higher prices). The other Section 10(b) claim is asserted against all defendants and alleges misrepresentations and omissions regarding the alleged manipulation scheme.
With respect to the market manipulation claim, Judge Scheindler reaffirmed her prior ruling, reiterating that the alleged conduct was so obviously manipulative that “it could not have been done inadvertently,” and therefore the inference of scienter was at least as compelling as the competing inference.
With respect to the misrepresentation allegations, Judge Scheindlin focused on the allegation that the issuer defendants’ officers and directors allegedly held shares that were inflated by the price manipulation. She viewed this consideration with the fact that each of the issuer defendants used “inflated shares as currency” to acquire target companies, as well as the fact that two of the issuer companies (from among the six focus companies) “raised additional capital through secondary offerings.” Judge Scheindlin said that “when these and other allegations against each issuer are viewed as a whole, they are sufficient to plead scienter in each case.”
Judge Scheindlin also reconsidered her prior ruling on the issue of loss causation, in light of the Supreme Court’s decision in the Dura case. Judge Scheindlin found that the intervening case law does “not support a reversal of my earlier decision.” Judge Scheindlin said
the misstatement and omissions concealed the alleged market manipulation that caused plaintiffs’ losses, and without such misstatements and omissions, plaintiffs’ losses could not have occurred. Further, plaintiffs’ losses are those that could be expected to result from the concealment of the market manipulation scheme. Plaintiffs have thus pled loss causation.
Judge Scheindlin did grant the defendants’ dismissal motion on two narrow grounds. First, consistent with her prior rulings in the case, she dismissed claims brought under Section 11 by those plaintiffs who sold their securities for a price in excess of the initial offering price. Second, she dismissed certain plaintiffs who purchased their shares outside the previously certified class period.
And so the Initial Public Offering Securities Litigation will grind on, a vestige of an earlier time and place, its significance seemingly eclipsed by more recent and more momentous events. Yet the collective litigation nonetheless remains significant. Its sheer bulk and scale makes the prospect of any definitive global resolution challenging, a prospect even further complicated by the Second Circuit’s class certification ruling. The current circumstances make future course of the litigation seem even more uncertain.
I welcome readers thoughts on the immediate procedural direction likely in the litigation, as well as any views about where the litigation ultimately is headed.
Special thanks to Edward Carleton of the Boundas Skarzynski Walsh & Black law firm for providing a copy of the March 26 opinion.