seventhcircuitsealOn October 17, 2013, when Northern District of Illinois Judge Ronald Guzman entered a $2.46 billion judgment for the plaintiffs in the long-running Household International securities class action lawsuit, it was according to statements at the time the largest judgment ever in a securities fraud trial. However, on May 21, 2015, the Seventh Circuit reversed the verdict on loss causation grounds and remanded the case to the district court for further trial proceedings. Because the appellate court ruling reversed the verdict solely with respect to liability issues, the further trial proceedings will in effect determine whether or not the damages verdict totaling $2.46 billion will or will not be reinstated. A copy of the Seventh Circuit’s May 21 opinion can be found here.



As detailed here, the plaintiffs first filed their lawsuit back in 2002 on behalf of all persons who acquired Household International securities between October 23, 1997 and October 11, 2002. The plaintiffs contended that during the class period, the defendants concealed that Household “was engaged in a massive predatory lending scheme.”


According to the complaint, Household “engaged in widespread abuse of its customers through a variety of illegal sales practices and improper lending techniques.” Household also reported “false statistics” that were intended to “give the appearance that the credit quality of Household’s borrowers was more favorable that it actually was.” The plaintiffs allege that the “defendants’ scheme” allowed them “to artificially inflate the Company’s financial and operational results.”


In the third quarter of 2002, the company took a $600 million charge and restated its financial statements for the preceding eight years, and in October 2002, the company announced that it had entered into a $484 regulatory settlement regarding its lending practices. On November 14, 2002, the company announced that it was to be acquired by HSBC Holdings.


The defendants in the lawsuit included Household International and its mortgage finance subsidiary, Household Financial Corporation, and Household’s former CEO and CFO, as well as certain other former officers and directors. The company’s offering underwriters were also initially named as defendants, but they were later dismissed from the case. The plaintiffs also reached a prior settlement with the company’s former auditor, Arthur Anderson.


As detailed here, trial in the case commenced on March 30, 2009. Judge Guzman bifurcated the case into two parts, with a damages phase to follow the initial liability phase.


As detailed here, on May 7, 2009, the jury returned a mixed verdict in which the jury found for the plaintiff on a number of – but not all – counts. The jurors were asked to make specific findings with respect to 40 allegedly false and misleading statements. The jury found in favor of the defendants with respect to 23 of the statements. However, the jury found in favor of the plaintiffs with respect to 17 of the statements.


The ultimate October 2013 judgment order, arriving as it did some four and a half years after the verdict, followed several post-trial defense motions to invalidate the verdict as well as defense objections to thousands of class members’ claims. The Court also considered and ruled on issues concerning the reliance of absent class members on defendants’ statements.


The judgment was entered against Household International; its former Chairman and CEO William Aldinger; its former CFO and COO David Schoenholz; and its former Vice-Chair of Consumer Lending Gary Gilmer. The company, Aldinger and Schoenholz were hold jointly and severally liable for the judgment and Gilmer was liable for 10% of the judgment.


The defendants appealed the verdict to the Seventh Circuit. The defendants primarily challenged the judgment on loss causation grounds. They also argued that the trial judge had improperly instructed the jury on the basis on which the jury was to determine whether or not a defendant had “made” the misleading statement at issue. Finally, the defendants argued that during the damages phase rulings the trial court made improperly prevented them from challenging individual plaintiffs’ reliance on the misleading statements.


The May 21 Opinion

In a May 21, 2015 opinion written by Judge Diane Sykes for a unanimous three judge panel, the Seventh Circuit reversed the trial court judgment with respect to the liability phase and remanded the case to the trial court for further proceedings.


In reversing the trial court judgment on the issue of loss causation, the appellate court reviewed at length the relevant law on the issue of loss causation and the evidence that the plaintiffs presented at trial on the loss causation issue. In support of their loss causation case, the plaintiffs had presented the expert testimony of Daniel Fischel, formerly Dean at University of Chicago law school and now a professor at Northwestern Law School (about whom the Seventh Circuit noted in a footnote that “apparently he’s the expert for this kind of financial analysis”).


Fischel presented two economic models at trial, the “specific disclosure” model (designed to separate effects on a company’s share price due to misrepresentations from movements in the company’s share price caused by other market factors) and the “leakage” model, which assumes that the truth may “leak” into the marketplace as a result of more gradual exposure of the fraud. The jurors were given tables reflecting the stock price-related inflationary impact from the misleading statements under each of the two models. The jury selected the leakage model and used the table to calculate the class period impact of the statements the jury had concluded were misleading.


On appeal, the defendants challenged the leakage model of loss causation, arguing that it improperly and illogically showed that the stock as inflated on the first day of the class period without showing how the stock was inflated in the first place. The appellate court rejected this argument, holding that it was sufficient for plaintiffs to prove that the defendants’ false statements caused the stock price to remain higher than it would have been if the statements had been truthful.


The defendants argued further, however, that the leakage model on which the jury had relied did not account for firm-specific non-fraud factors that may have affected the company’s share price. The appellate court noted that in fact the plaintiffs’ expert had not ignored non-fraud factors; he said only that he had looked for company specific non-fraud factors during the relevant period and did not find any significant trend of positive or negative information apart from the fraud-related disclosure. The defendants argued that this was not enough and that under Dura, the plaintiffs needed to eliminate any firm-specific non-fraud factors that might have contributed to the stock’s decline.


The appellate court concluded that the plaintiffs’ expert’s trial testimony did not adequately account for the possibility that firm-specific nonfraud related information may have affected the decline in Household’s share price during the relevant period. The record, the appellate court said, reflects only the expert’s general statement that any such information was insignificant, which the court said, is not enough. On remand,, if the plaintiffs’ expert testifies that there were no nonfraud impacts on the share price, the burden shifts to the defendant to identify some “significant, firm-specific, nonfraud related information that could have affected the stock price.” If they cannot, the case goes to the jury. If they can, the burden shifts back to the plaintiff to account for the information or to provide a loss-causation model that does not suffer the same problem.


The appellate court also found that the trial court had erroneously instructed the jury as far on what it means to “make” a false statement under the Supreme Court’s holding in the Janus Capital Group case (about which refer here). The trial court had instructed the jury that the plaintiffs must prove that the defendants “made, approved or furnished information” in a false statement of fact. The defendants argued that the “approved or furnished information” language misstated the law and in effect held the defendants liable for statements they did not “make.”


The appellate court agreed, ruling that the instruction “directly contradicts Janus.” However, the court held, that the effort cause no prejudice to Household International, as it “made” all of the statements at issue. The court did hold as certain of the statements of the three individual defendants and that the three individuals were entitled to a new trial on the question whether they had “made” the misleading statements, and then to reallocate liability among the three defendants. The court emphasized “for clarity’s sake” that on remand the defendants may not relitigate whether any of the 17 statements were false or material, and that the jury’s secondary liability findings also remain undisturbed.


Finally, the defendants argued that during the damages phase various rulings the trial court had made had deprived them of an opportunity to rebut the presumption of reliance as to individual members in the plaintiff class.


After a lengthy review of the procedures used in the damages phase, the court rejected the defendants argument, adding that because the proceedings below were “neatly divided into two phases,” there’s “no need to redo anything in Phase II, even though the case was being remanded for a new trial. The appellate court said “assuming the plaintiffs have adequately prove loss causation, the district court may rely on the results from Phase II.”



This case has already been pending for 13 years, and it now has even further to go. As reported in the media, HSBC (as successor in interest to Household Financial) did indeed succeed in having the trial verdict set aside and securing a new trial, and in that respect there is no doubt that the Seventh Circuit’s ruling represents a significant victory for the defendants.


However, even though the largest securities trial verdict ever has now been set aside, it could be argued that the appellate outcome is neither as entirely good for the defendants nor as entirely bad for the plaintiffs as that might sound. The re-trial on remand will be a far different affair than the first trial, as the plaintiffs will not be required to re-establish many of the key factual determinations. Although the question of whether the individual defendants “made” various of the misleading statements will have to be litigated on remand, that will likely result at most in a reallocation of liability amongst the three of them, because the re-trial on that issue will relate for each of them only as to some but not all of the misleading statements.


The critical battle on remand will be the loss causation issue; the battle will be whether or not there were significant, company-specific nonfraud factors that affected the company’s share price during the relevant period. At issue in the case is whether or not the results of the first trial’s damages phase (that is, the $2.46 billion judgment) will or will not be reinstated.


Either way, this long-running case still has further to go. It is a well-known fact that very few securities class action lawsuits ever go to trial. This case may underscore many of the reasons why. Given the stakes and number of complicated legal issues involved, the cases can be interminable and exhausting for both sides.


I will say that for anyone interested in plumbing the depths of the loss causation issue in securities litigation, the Seventh Circuit’s opinion makes for interesting reading. The issue is itself complicated, and the complication is exacerbated by the fact that securities cases so rarely go to trial.


An Observation about the Plaintiffs’ Expert Witness: I wonder if I am the only one that sees some irony in the involvement of Daniel Fischel as the expert witness for the plaintiffs in this case. The irony comes from the fact that the lead plaintiffs’ counsel and trial counsel in the case was the Robbins, Geller, Rudman & Dowd law firm, which is of course the successor law firm to the predecessor plaintiffs’ securities class action firm in which Bill Lerach was the lead named partner. (The Lerach law firm in turn was a split off from the former Milberg, Weiss, Bershad, Hynes and Lerach law firm).


As detailed in Patrick Dillon and Carl Cannon’s excellent 2010 book, Circle of Greed (about which refer here), Lerach had waged a vendetta against Fischel, that in the end went seriously awry. In a class-action case in 1988 involving Nucorp Energy,  Lerach for the first time faced Fischel and quickly developed a keen dislike of him, saying to a colleague that “someday I’m going to wipe that grin right off” Fischel’s face (although he used a more colorful term to refer to Fischel).


When he crossed paths with Fischel in another case two years later, when Fischel introduced himself, Lerach said, “I know who you are. And I will destroy you.” In the Lincoln Savings and Loan case in 1990 Lerach sued Fischel’s consulting firm, Lexecon, as part of the class action. At a Christmas party while the case was pending, Lerach said that he wanted to bury Fischel “under the courthouse steps.”


Lerach’s feud with Fischel ultimately led to a defamation suit by Fischel and Lexecon that resulted in a landmark Supreme Court decision about multi-district litigation (Lexecon Inc. v. Milberg Weiss Bershad Hynes & Lerach, 523 U.S. 26 (1998)) and a $50 million settlement. Lerach himself wound up pleading guilty in 2007 to obstruction of justice and was sentenced to two years imprisonment. In 2009 he was disbarred from practicing law in California.


So perhaps you can see why I think it is interesting that Daniel Fischel was testifying for the plaintiffs in this case, given that the plaintiff class was represented by the successor firm to the old Milberg Weiss law firm.


Despite Blockbuster Plea Deal, Big Banks’ Foreign Exchange Conspiracy Woes Continue: It was big news last week when the U.S. and U.K. authorities announced that five banks (J.P. Morgan, UBS, Barclays, Citigroup and Royal Bank of Scotland) had agreed to fines and penalties totaling over $5.4 billion and to plead guilty (at the parent company level) to criminal charges. While this announcement was big news, last week’s deal is far from the end of the foreign exchange-related woes for the global banks involved in the foreign exchange conspiracy investigation.


For starters, regulators from other countries are continuing their investigations of the banks’ foreign exchange operations. And U.S. regulators continue to investigate individuals involved in the foreign exchange price-fixing conspiracy.


In addition, all of the banks continue to face private civil litigation. As the Moneybeat blog noted in a May 20, 2015 post (here), the information that the U.S. regulators disclosed as part of its announcement of the recent $5.6 billion deal is a veritable treasure trove for the claimants in the civil litigation. As the blog post notes, the internal documents and emails disclosed in connection with the plea deal show not only that the companies internal controls had serious weaknesses, but also that front line management were involved in many of the efforts to fix prices and suppress competition in the foreign exchange market.


As noted in a prior blog post, a consolidated foreign exchange price fixing class action is pending in the Southern District of New York. As noted here, on January 28, 2015, Southern District of New York Judge Laura Schofield denied the defendants’ motion to dismiss in the consolidated lawsuit. Several of the defendant banks, all too aware that the antitrust lawsuit is going to go forward, and even more aware that the recent disclosures in connection with the recent plea deal will likely make matters even worse, recently reached agreements to settle the pending case against them.


Specifically, on May 20, 2015, the plaintiffs’ lawyers announced that they had reached a $394 million deal with Citigroup to settle the private civil action that had been filed accusing the bank of conspiring to fix foreign exchange rates.  On May 21, 2015, Bank of New York Mellon announced that it had reached a $180 million deal to settle its slice of the foreign exchange antitrust class action lawsuit.  These settlements follow earlier settlements that had been reached with J.P. Morgan, Bank of America and UBS and bring the total settlement reached in the case to over $800 million.


However, while there has been a raft of jumbo settlements in the case, the settlements so far involve just five of the 12 banks that are named as defendants in the case. Last week’s developments have not improved the settlement environment in the case for the remaining defendants. The lead plaintiffs’ counsel in the case has already announced that they intend to amend their complaint in the civil action to incorporate the additional information disclosed in connection with the plea deal.


As if that were not enough, on  Thursday May 21, 2015 a plaintiff filed a new lawsuit in the Northern District of California alleging that J.P. Morgan, Bank of America and other large banks have continued to rig the foreign exchange markets. The complaint (here) alleges that the foreign exchange price fixing conspiracy at the heart of the government’s criminal action continues to this day.  The newly filed complaint alleges violations of the Sherman Antitrust Act, the California Cartwright Act, and the California Unfair Competition Law.


In other words, despite the massive plea agreement announced last week, the foreign exchange rate-fixing conspiracy woes for the big banks are far from over. And of course, the regulators’ continuing investigation into other market manipulative activities (Libor, etc.) continue as well.