Securities Litigation

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What factors might indicate a likelihood of financial misreporting? There might be markers in companies’ financial statements, for example, with respect to reserving practices or practices with respect to other estimated items. There may be more general indicators as well, as, for example where companies reliably hit their revenue estimates due to a rush of end of reporting period sales. According to a recent academic study, attitudes in the community where businesses are located may also affect companies’ propensity for financial misreporting.

In a May 30, 2017 paper entitled “Gambling Attitudes and Financial Misreporting” (here), Dale Christensen of the University of Oregon, Keith Jones of the University of Kansas, and David Kenchington of Arizona State University, companies headquartered  in areas where residents hold gambling-friendly attitudes are more likely to intentionally misreport financial information. The authors findings were summarized in an August 14, 2017 Wall Street Journal article entitled “A Roll of the Dice on Financial Misreporting” (here).
Continue Reading Gambling Acceptance and Propensity for Financial Misreporting

Seventeen years ago this month, the SEC instituted Rule 10b5-1 to permit company insiders – who often hold a significant portion of their wealth in company stock – to sell their shares without incurring liability under the federal securities laws. The Rule permits insiders who have traded in company shares to rebut the inference of scienter by showing that the trades were pre-scheduled and not suspicious. Over time, questions have been raised about the ways that some company executives have tried to use the plans. As discussed in an August 10, 2017 memo by the Simpson Thacher law firm on the CLS Blue Sky Blog entitled “Combatting Securities Fraud with 10b5-1 Trading Plans” (here), “sales made under 10b5-1 plans can substantially assist a company in getting such a claim dismissed by helping to rebut the inference of scienter that normally results when plaintiffs present evidence of insider stock sales during the class period.”

However, as discussed further below, while the plans can provide a substantial defensive boost, there are a number of steps companies should take in order to improve the likelihood that the existence of the plan will provide the intended protection.
Continue Reading Rule 10b5-1 and the Defense of Securities Fraud Claims

Securities class action lawsuits were filed at a record pace in the first half of 2017, according to the latest report from Cornerstone Research. While the surge in securities suit filings is due in part to the rise of federal court merger objection lawsuit filings, both traditional securities suit filings and M&A filings were “at historic levels.” The Report, jointly prepared by Cornerstone Research in conjunction with the Stanford Securities Class Action Clearinghouse and entitled “Securities Class Action Filings – 2017 Mid-Year Assessment,” can be found here. Cornerstone Research’s July 25, 2017 press release about the report can be found here. My own analysis of the first half securities suit filings can be found here.
Continue Reading Cornerstone Research: First Half Securities Suit Filings at Record Pace

For a while a few years ago, litigation reform bylaws were all the rage – including forum selection bylaws, fee shifting bylaws, even mandatory arbitration bylaws. More recently, discussion of the topic quieted down, in part because the Delaware legislature enacted legislation allowing Delaware corporations to adopt forum selection bylaws while also prohibiting fee-shifting bylaws. However, the topic of litigation reform bylaws may be back on the docket again. In a speech earlier this week, SEC Commissioner Michael Piwowar invited companies heading toward an IPO to adopt arbitration provisions in their corporate bylaws.
Continue Reading Up Next: Mandatory Securities Claim Arbitration Provisions?

It may come as little surprise that litigation has emerged in the wake of the tragic Grenfell Tower fire in London last month. Some may find it surprising, however, that among the lawsuits arising from the London building fire is a securities class action suit filed in the United States. The lawsuit is just the latest example of the follow-on securities suit, a phenomenon that, as discussed below, is one of several factors that helps explain the current elevated pace of securities class action lawsuit filings in the U.S.
Continue Reading Turning Events into Securities Suits

Since the U.S. Supreme Court’s June 2010 decision in Morrison v. National Australia Bank, the lower courts have wrestled with the issue of whether or not the transactions at issue in a particular securities suit were sufficiently “domestic” to bring them under the U.S. securities laws. These inquiries mostly have taken place at the motion to dismiss phase. However, as demonstrated in the Second Circuit’s July 7, 2017 decision in the Petrobras securities case, the “domestic” transactions inquiry is relevant at the class certification stage as well. The appellate court held that in determining whether or not Petrobras noteholders’ claims can proceed on a class-wide basis, the district court must, in light of the federal class action procedure’s “predominance” requirement, determine whether or not common questions outweigh individual questions of transactional domesticity. The appellate court’s ruling, which can be found here, could complicate class certification in cases involving non-U.S. companies whose securities do not trade on U.S. exchanges.  
Continue Reading Morrison Issues Cloud Class Certification in Petrobras Securities Litigation

Largely as a result of the continuing upsurge in the number of federal court merger objection lawsuits, securities class action lawsuits were filed at historic levels during the first half of 2017 and well above last year’s elevated pace. Though the number of filings in this year’s second quarter were slightly  lower than in the first quarter, the total number of filings in the first six months of the year overall were on pace for the highest annual number of securities class action lawsuits since 2001.
Continue Reading First Half 2017 Securities Suit Filings Continue at Exceptional Levels

sup ct 3In a June 27, 2017 order (here), the United States Supreme Court granted the petition of Cyan, Inc. for a writ of certiorari to consider the question of whether or not state courts retain concurrent jurisdiction for liability lawsuits under the ’33 Act, or whether as a result of changes to the relevant statutes under the Securities Litigation Uniform Standards Act of 1998 (SLUSA), state courts lack subject matter jurisdiction over ’33 Act suits. This case will address what has become a significant issue in IPO-related securities class action litigation, particularly in California, which is whether or not the plaintiffs’ state court securities class lawsuits can be removed to federal court or must be remanded back to state court.
Continue Reading Supreme Court Agrees to Hear Whether State Courts Retain Jurisdiction for IPO Securities Suits

Supreme court1On June 26, 2017, in a 5-4 decision, the U.S. Supreme Court, in an opinion written for the majority by Justice Anthony Kennedy, ruled that the Securities Act of 1933’s three-year time limit for filing liability lawsuits is a statute of repose and therefore is not subject to equitable tolling. The Court also said that the principles described in its 1974 American Pipe decision providing for equitable tolling of statute of limitations are inapplicable to the 3-year statute of repose. The Court’s ruling could have important practical implications, particularly with respect to the question whether or not class members will need to file protective individual actions to preserve a later option to opt-out of any class settlement. The court’s opinion in California Public Employees’ Retirement System v. ANZ Securities Inc. can be found here.
Continue Reading Supreme Court: Securities Act’s Three-Year Time Limit is a Statute of Repose that Cannot be Tolled

vivintWe have seen the scenario before – shortly after its debut, an IPO company releases unexpected results, the company’s share price declines, and the lawsuits appear. Usually when this happens, the updated results pertain to reporting periods following the IPO. But what about a situation where the disappointing results pertain to a reporting period that was completed prior to the IPO – in fact, the day before the IPO? That was the situation involving Vivint Solar, where the company released results for the reporting period ending September 30, 2014 – that is, just a day before the company’s October 1, 2014 IPO –several weeks after the company’s debut.
Continue Reading Second Circuit Rejects First Circuit Test Requiring IPO Company Interim Financial Information Disclosure