Janus Distinguished: In an interesting opinion that distinguishes the U.S. Supreme Court’s decision in Janus, on September 30, 2011 Southern District of New York Judge John Koetl granted in part and denied in part the defendants’ motion to dismiss in the EnergySolutions securities class action lawsuit. Judge Koetl’s opinion can be found here.
As discussed here, in October 2009, plaintiff shareholders filed a securities suit against the company, certain of its directors and officers, and its offering underwriters in connection with the company’s November 14, 2007 IPO and July 24, 2008 secondary offering. The plaintiffs also named as a defendant the parent company of Energysolutions (ES), ENV Holdings. The plaintiffs alleged that the company’s offering documents misrepresented the company’s financial opportunities in the nuclear energy decommissioning business, as well certain of its regulatory constraints.
ES had been formed by several sponsor institutional investors that had purchased several individual businesses through ENV Holdings. At the time of the IPO ENV owned 100% of the shares of ES. ENV was also a selling shareholder in the secondary offering.
The defendants moved to dismiss the plaintiffs’ complaint. Although the defendants’ motion was granted as to certain of the alleged misstatements, it was denied in other material respects.Among the more interesting aspects of Judge Koetl’s opinion is his analysis of the question whether the plaintiffs had stated a cognizable claim against ENV, which had been ES’s 100% owner prior to the IPO. ENV had moved to dismiss based on the U.S. Supreme Court’s holding in the Janus case, arguing that like the mutual fund management company in that case, it was a legally distinct entity lacking “ultimate authority” over the statement of its related entity, and therefore because it had not “made” the alleged misstatements, it could not be held liable under the securities laws.
Despite the apparent parallels between the cases, Judge Koetl nevertheless held that the claim against ENV could go forward. Judge Koetl found that there are “significant differences” between EMV and the fund management company in the Janus case. Among the critical differences that Judge Koetl found were “ENV’s owndership of ES, its direct control over all corporate transactions, and its authority to determine when and whether to sell the shares beings sold.”
Judge Koetl went on to note that even though the individual directors and officers signed the registration statements in their capacities as directors and officers of ES, that did not “preclude attribution” to ENV as well. He added that Janus itself even said that attribution “could be implied from the surrounding circumstances.” A reasonable jury, Judge Koetl found, could conclude that ENV’s role went far beyond a “speechwriter drafting a speech,” because “ENV had control over the message, the underlying subject matter of the message, and the ultimate decision whether to communicate the message.”
Judge Koetl’s decision adds an interesting new layer to the evolving analysis of the question of when alleged misrepresentations made by one party can be attributed to another party. Under Judge Koetl’s analysis, there are times when the second party’s alleged control is so complete that notwithstanding the legal separation between the two parties, the controlling party can be said to have “made” the misstatement delivered by the other party – almost as if the controlling party were using the other party as its mouthpiece. The critical element in Judge Koetl’s analysis seems to have been ENV’s complete ownership and consequent complete ability to dictate its actions. (I would certainly be interested in hearing a panel of informed securities law specialists discuss the question of whether or not the differences Judge Koetl cites are or are not distinctions without a difference between this case and Janus.)
It is worth noting that the EnegySolutions case is one of the so-called “backlog" cases that were filed in late 2009 and early 2010 (the name refers to the fact that the cases were filed more than a year after the proposed class period cutoff date). As the time, some commentators speculated that the plaintiffs were filing the belated cases because they were out of fresh ideas and they were scraping the bottom of the barrel. But as this case’s dismissal motion survival shows, merely because the cases were belated does not necessarily mean they are not meritorious. Indeed, a number of the so-called belated cases have survived their initial dismissal motions (refer for example here).
Special thanks to a loyal reader for sending me a copy of Judge Koetl’s opinion.
Eleventh Circuit on Loss Causation: On September 30, 2011, the Eleventh Circuit affirmed in part and reversed in part the district court’s partial dismissal and later entry of summary judgment on the defendants’ behalf in the FindWhat.com securities class action lawsuit. The opinion, which can be found here, has a number of interesting features.
Among the more interesting aspects of the Eleventh Circuit’s opinion is its reversal of the district’s summary judgment grant on loss causation issues. The Eleventh Circuit observed that the district court’s reasoning “misapprehends” the relation of misstatements, the company’s share price, and the plaintiffs’ allegations.
The district court had rejected the plaintiffs’ loss causation arguments because the plaintiffs’ expert had found that the stock price inflation predated the alleged misstatements, and that the subsequent alleged misrepresentations had not increased the amount of price inflation. The district concluded that the misstatements could not have caused the price inflation and therefore the misstatements could not have caused the alleged financial harm.
The Eleventh Circuit, declining to follow prior Fifth Circuit case law, and looking at the nature of the plaintiffs’ allegations, reversed the district court’s loss causation ruling, holding that “fraudulent statements that prevent a stock price from falling can cause harm by prolonging the period during which the stock price traded at inflated prices,” adding that “confirmatory information that wrongfully prolongs a period of inflation – even without increasing the level of inflation—may be actionable.”
In an interesting footnote (fn.32), the Eleventh Circuit also observed that the district court had also improperly conflated the “loss causation” and “reliance” issues. The Eleventh Circuit directed the parties on remand to clarify their reliance and loss causation arguments, particularly with respect to the defendants’ reliance-related arguments that the alleged misstatements had not caused the price inflation (as opposed to the defendants’ loss causation-related arguments that the alleged inflation had not caused the plaintiffs’ financial loss).
Special thanks to a loyal reader for sending me a copy of this opinion.