Circuits Split on Pleading Loss Causation: In a December 16, 2014 opinion written by Judge Milan D. Smith, Jr. for a unanimous three-judge panel of the Ninth Circuit, the appellate court affirmed the dismissal of the securities class action lawsuit that had been filed against Apollo Group and certain of its directors and officers. In affirming the dismissal, the court addressed the question of whether or not in pleading loss causation in a claim under Section 10(b) and Rule 10b-5 a plaintiff must satisfy the pleading standards under Fed. R. Civ. Proc. 9(b) – which requires a party alleging fraud to plead with “particularity the circumstances constituting fraud or mistake” – or whether it is sufficient to satisfy the more basic pleading requirements of Fed. R. Civ. Proc. 8 (requiring only a “short plain statement” of the plaintiff’s claim).
The Ninth Circuit ruled that held that the heightened pleading standards of Fed. R. Civ. P. 9(b) apply to all elements of a securities fraud action, including loss causation. In holding that a plaintiff’s loss causation allegations must meet Rule 9’s pleading with particularity requirements, the Ninth Circuit joined the Fourth and Seventh Circuits, widening a circuit split in which the Fifth Circuit and certain other federal district courts have held that it is sufficient for pleading purposes for a plaintiff to satisfy Rule 8’s basic pleading requirements.
The circuit split is detailed in a March 6, 2015 New York Law Journal article (here) by Steven Paradise of the Vinson & Elkins law firm. In light of the circuit split, the more interesting question now is whether the existence of the circuit split might be sufficient to attract the attention of the U.S. Supreme Court to the issue. As Paradise notes in his article,
Given the Supreme Court’s recent enthusiasm for taking up securities cases, particularly where there is a circuit split, this issue may eventually make its way there. If the Supreme Court were to agree with the Fourth, Seventh and Ninth circuits and hold that Rule 9(b) applies to loss causation, then plaintiffs would be required to allege more highly particularized facts to satisfy this element and defendants could have even greater latitude to offer alternative explanations for the stock price decline to rebut a plaintiff’s attempt to satisfy its burden.
And Speaking of Circuit Splits on Securities Law Issues: As I noted in a recent post (here), there is a sharp circuit split between the Ninth and Second Circuits on the interesting question of whether or not the alleged failure to make a disclosure required by Item 303 of Reg. S-K is an actionable omission under Section 10(b) and Rule 10b-5. In the post, I noted that in light of the circuit split this question might soon make its way to the U.S. Supreme Court. After I published the post, several alert readers pointed out to me that the issue may come before the Supreme Court even sooner than I speculated, because one of the plaintiffs in the NVIDIA case (in which the Ninth Circuit held that Item 303 does not create a duty to disclose for purposes of an omission actionable under Section 10(b)) has filed a petition for writ of certiorari to the U.S. Supreme Court on the issue.
As reflected on the Court’s docket (here), the plaintiff filed his petition with the Court on February 9, 2015. A copy of the plaintiff’s cert petition can be found here. The time for the defendants’ response has been extended to April 15, 2015.
As noted in a March 3, 2015 memo by Robert Hickok and Gay Parks Rainville of the Pepper Hamilton law firm about the cert petition (here), the preponderance of securities class action lawsuits are filed in the Ninth and Second Circuits (and the Third Circuit, which, as the memo notes, has also weighed in on the issue), so the Supreme Court may grant cert in the NVIDIA case “in order to resolve this conflict so that public companies will have clear guidance for complying with their disclosure obligations under Item 303.”
Amy Leisinger’s February 17, 2015 post on the Jim Hamilton’s World of Securities Regulation blog about the cert petition in the NVIDIA case can be found here.
The law nerd part of my brain (which, I confess, occupies a rather large part of the whole) is quite excited about the possibility that these various securities law issues might actually make their way before the Supreme Court. Some day, when historians finally write the history of the Roberts Court, they may be able to explain why the Court suddenly became so inclined to take up at least one or two securities cases every term, after decades in which the Supreme Court only intermittently and infrequently weighed in on securities law issues. But whatever the reason for the Court’s recent enthusiasm for securities cases, the Court’s willingness to take up the cases makes for interesting and noteworthy developments in the securities law field. Great grist for the blog, too.
Arbitration Clauses and Consumer Claims: On Tuesday March 10, 2015, the Consumer Financial Protection Bureau released to Congress a report required by the Dodd-Frank Act analyzing the impact of mandatory arbitration clauses in consumer contracts for financial products and services like credit cards and checking accounts. The agency’s massive 728-page report can be found here.
As Alison Frankel details in her March 10, 2015 post on her On the Case blog (here), “the study’s findings are unequivocal: Class actions deliver cash relief to vastly more consumers – especially those with small dollar claims – than individual arbitration.” Frankel details the report’s statistical analysis in her blog post. She summarizes the statistical report this way: “To recap (in a ruthlessly reductive way): According to CFPB, four financial services consumers with small claims received cash compensation through arbitration. Thirty-four million received compensation through class actions.” As Frankel also noted, CFPB director Richard Cordray said at a public hearing on March 10, 2015 that the study showed the difference between class actions and arbitration as a vehicle for providing relief to consumers to be “stark.”
On the other hand, as Frankel also notes, quoting other observers, in many class actions consumers come up empty, and the report does not detail consumers’ actual recoveries even where consumer class actions resulted in a settlement. Frankel’s initial post drew numerous responses from observers and commentators who found fault with the CFPB’s report and its conclusions, as she summarized in a subsequent post, here.
The CPFB has not yet proposed any rules restricting financial institutions from requiring arbitration, but, as Frankel notes, but that is almost sure to come. As she also notes, if the CFPB does issue rules restricting arbitration clauses, it will be sure to draw sharp opposition from banks and other institutions.
If in fact the CPFB does issue rules restricting the ability of financial institutions to require consumers to arbitrate disputes, it could have a broader impact beyond just the CFPB’s bailiwick. There is an even larger context for the questions surrounding mandatory arbitration clauses. As I have detailed in prior posts (refer here, for example), the U.S. Supreme Court has shown a significant enthusiasm for mandatory arbitration clauses and a predisposition to uphold their enforceability. This in turn has led to some noteworthy experiments involving the requirement of mandatory arbitration, including, for example , the inclusion of mandatory arbitration clauses with a class action waiver in corporate bylaws (as discussed here).
While there would be no direct connection between any rules the CFPB might issue and the developments involving mandatory arbitration clauses outside of the CFPB’s immediate jurisdiction, I suspect that were the CFPB to issue rules restricting the use of mandatory arbitration clauses, it could have a broader impact. At a minimum, the rules (and perhaps more significantly, the assumptions behind the rules) could prove helpful for or at least provide support for those opposing the use of mandatory arbitration clauses in other contexts.
At a minimum, it will be interesting to see what happens next – that is, whether the CFPB will propose rules restricting the clauses and how the financial services industry will respond.
Shortest Class Period?: In a post last week (second item), I noted that a securities class action lawsuit had been filed earlier in the week with an unusually short class period of only three trading days. Alert reader Adam Savett sent me a note reminding me of a post that Lyle Roberts had on his 10b-5 Daily blog way back in March 2004 (here), in which Roberts reported on the “Shortest Class Period Even in a Securities Class Action Lawsuit.” The “winner” (so to speak) was the Corinthian Colleges class action lawsuit filed in December 2003, which was filed against the Nasdaq Stock Market on behalf of a class of persons who purchased the shares of Corinthian Colleges between 10:46 a.m. and approximately 12:30 p.m. on December 5, 2003. As Roberts noted, “That’s a proposed class period of a mere one hour and forty-four minutes.” I am going to go out on a limb here and speculate that there has not been a securities class action lawsuit filed with a shorter class period, although if there is a reader who knows of a lawsuit with an even shorter class period, I would gratefuly welcome the information.
What Happens if the Delaware Legislature Passes Legislation Forbidding Fee-Shifting Bylaws?: As I noted in a separate post earlier last week (here), the Corporate Law Section of the Delaware State Bar Association has submitted proposed legislation to the Delaware state egislature that would among other things limit the abililty of corporations to adaopt fee-shifting bylaws. The proposed legislation is the subject of intense debate and significant lobbying both for and against the legislation. In an interesting March 13, 2015 post on the Law 360 Securities section page entitled “Fee-Shifting May Disrupt Delaware’s Dominance” by Anthony Rickey of the Greenhill Law Group (here, subscription required), the author suggests that if the legislation passes and Delaware corporations are prohibited from adopting fee-shifting bylaws. other states may take the initiative to allow fee-shifting by laws. The author suggests that fee-shifting may “unlock competition in the market for corporate charters,” and notes that “There is evidence that other states may already be eyeing Delaware’s lucrative revenue stream.” Among other things, the author cites Oklahoma’s adoption of legislation requiring fee-shifting for derivative lawsuits. The debate over the fee-shifting bylaws may represent a potentially disruptive moment for Delaware’s long dominance of the realm of corporate charters.
A Proposal to Fight IPO Lawsuits: As I have previously noted on this blog (most recently here), IPO activity on the U.S. securities markets is at its highest level in years. Among other things, the heightened IPO activity means that we are likely to see increase levels of IPO-related securities litigation (as discussed here).
In light of this likelihood of increased IPO-related litigation, a recent post on the Harvard Law School Forum on Corporate Governance and Financial Regulation by our good friend Boris Feldman of the Wilson Sonsini is particularly interesting. In his article, entitled “A Modest Strategy for Combatting Frivolous IPO Lawsuits” (here), Feldman points out that as a standard feature of many IPO transactions, many offering underwriters will require management and other shareholders to agree not to sell their shares for a specified period after the offering.
Feldman notes that an unintended consequence of these lock-up requirements is that it helps plaintiffs in IPO-related lawsuits under Section 11 to “trace” their shares to the offering and establish standing because following the IPO and until the lock-up period expires, all of the publicly available shares trading on the open marketplace can be traced to the offering, so all shareholders who purchased during this period can establish Section 11 standing and be part of the Section 11 class. If, on the other hand, there were no lock up and company employees were free to share their pre-IPO shares in the open marketplace, it would be more difficult for the post-IPO, open market purchaser to trace his or her shares to the IPO.
Feldman proposes a more nuanced approach as an alternative to the standard, one-size fits all lock-up provision that is now a part of the typical IPO transaction. In particular, he suggests that underwriters consider easing the lock-up requirement as a way “to enhance the potency of the standing defense in Section 11 claims.” Among other things, he suggests that underwriters might consider allowing some company employees(other than senior managers and directors) to sell their pre-IPO shares in the open market or to allow some holders to sell into the market subject to a cap on the number of shares that may be sold. He suggests that the many alternative options might be sorted out over time, but his point is that “by taking a fresh look at the scope and operation of lock-up agreements, regular players in the IPO process can reduce the risk from Section 11 claims that so often follow a decline in the stock price.”
Feldman’s perspective is interesting, but it does seem that this is the perspective of a litigator. While his concerns about the litigation consequences undoubtedly are legitimate, most underwriters will be significantly more concerned about the potential dilutive effect on the share price if pre-IPO shares are allowed to enter the marketplace earlier than they would be about theoretical potential effects on standing defenses if there were to be a post-IPO lawsuit. Just the same, Feldman’s ideas are interesting. There certainly is some merit to reconsidering the standard one-size-fits-all approach to the lock-up issue.
The Title Says it All: “Pictures of Guitar Solos Make a Lot More Sense When Guitars are Replaced with Giant Slugs.” Seriously, what is the Internet for if not to bring us guitar solos and giant slugs? See the article here.