As a result of a spike in second half filings, the number of new securities class action lawsuits increased slightly in 2010 compared to the year before, although the 2010 filing levels remained below historical averages, according to the annual study released jointly by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse. This year’s version of the study, entitled "Securities Class Action Filings: 2010 Year in Review," introduces some innovations that provide some interesting perspectives on securities class action lawsuit filings.

 

The study can be found here, and the joint January 20, 2011 press release about the study can be found here.

 

According to the study, there were 176 securities class action lawsuit filings in 2010, up 4.8% from 2009, but 9.7% below the 1997-2009 average number of filings (195). The increased number of filings in 2010 was largely due to the increased filing activity in the second half of the year, when 104 new securities suits were filed (compared to only 72 in the first half).

 

A significant factor in the increased number of 2010 filings was the number of lawsuits related to merger and acquisition transactions. According to the report, there were 40 filings with allegations related to M&A transactions, which represents a 471 percen increase from the seven M&A-related filings in 2009.

 

This increase in M&A-related litigation cannot be explained simply as reflection of increased M&A activity, since M&A activity increased only 20 percent in 2010. The increase, the report suggests "may be largely a result of changes in plaintiff law firm behavior rather than changes in underlying market forces." The press release quotes Stanford Law Professor Joseph Grundfest as saying that "plaintiffs lawyers are scrambling for new business as traditional fraud cases seem to be on the decline," adding that "there is little reason to believe that this trend will reverse or slow down."

 

The report also notes a number of trends that have previously been noted elsewhere, including the decreasing number of credit crisis-related lawsuits during the year, and the spate of lawsuits involving for-profit education companies and also involving Chinese companies.

 

With regard to the surge in lawsuits involving Chinese companies, the press release quotes Professor Grundfest as saying that this litigation is arising as "some Chinese issuers struggle to conform to Western market norms, adding that at the same time others might engage in outright fraud." The report itself adds the observation that most of the Chinese companies sued in 2010 were only recently listed on major U.S. exchanges; eight out of the 12 Chinese companies sued were listed during 2009 or 2010, while the remaining three issuers were listed toward the end of 2006, 2007 and 2008. On average these companies were sued within 1.4 years of their listing dates.

 

The report includes a status update for the credit crisis related filings. The report confirms an observation I had previously noted, which is that the credit crisis cases seem to be reaching the settlement stage more slowly than compared to securities cases generally. The report states that credit crisis filings "have significantly lower settlement rates compared to non-credit-crisis filings," largely as a result of the cases pending in the Second Circuit. The report shows a 9.8 percent settlement rate for credit-crisis filings compared to 24.1 percent for non-credit crisis filings. However, the dismissal rates for credit crisis-related filings "do not appear to be different from non-credit-crisis-filings."

 

A new feature added to this year’s report is an analysis of the litigation exposure following initial public offerings. The report analyzed the likelihood that a company would be sued in the eleven year period after its IPO, and compared that likelihood to the possibility that a company in the S&P 500 would be sued during that same eleven year period.

 

The report found that the exposure to securities class actions is the highest during the first few years after an IPO, although the exposure diminishes over time as the companies mature. The analysis showed that there is more than a 10 percent chance that firms would be hit with a securities suit within three years of an IPO, with the highest risk in the second year after an IPO, when they faced a 4.1 percent chance of being sued.

 

Interestingly enough, at least with respect to IPO companies that survived for eleven years, the possibility of those companies being sued during that eleven year period is actually lower than for the S&P 500 companies during that period. The S&P companies had a 49.9 percent chance of a suit during that period, compared to only 28.7 percent for the IPO companies. The report speculates that this lower risk over the longer period may be explained by the fact that the IPO companies tend to be much smaller than S&P 500 companies, and therefore represent less attractive targets for the plaintiffs’ lawyers.

 

One particularly interesting aspect of the report’s IPO review is its analysis of the survivability of IPO companies. The report shows that only 39.4% of IPO companies survived for the full eleven year study period (compared to 65.1% of S&O 500 companies).Indeed, more than 35 percent of companies failed to survive four years after their IPO (compared to less than 15% of the S&P 500 that failed to survive the first four years of the study period).

 

The report’s industry analysis shows that as filings against financial companies declined due to the diminution of the credit crisis litigation wave, filings against companies in the health care sector spiked.

 

The report also notes that as the number of M&A related cases has increased, the phenomenon noted in recent years of belated filings (in which the filing date came well after the stock price decline that precipitated the suit) has largely abated.

 

Overall, the report contains a number of interesting observations and findings, and the report warrants reading at length and in full.

 

Two final notes: First, the lawsuit count reflected in the Cornerstone report may differ from other published figures, as the Cornerstone report counts multiple filings against the same defendants as a single filing (compared to other commentators that may count separate complaints separately until they have formally been consolidated).

 

Second, while securities class action lawsuit filings may have been down in 2010 compared to historical averages, the overall level of corporate and securities litigation during the year was actually up – indeed, at "record" levels" – at least according to Advisen’s recently issue report about 2010 litigation activity, about which refer here.

 

My own analysis of the 2010 securities class action lawsuit filings can be found here.

 

Though securities class action lawsuit filings were below historical averages, overall corporate and securities litigation reached "record" levels during 2010, according to a report from the insurance information firm, Advisen. The report, which was released on January 19, 2011 and is entitled "2010 a Record Year for Securities Litigation," can be found here.　

 

 Preliminary Notes

In considering the Advisen report, it is critically important to recognize that the report uses its own unique vocabulary to describe certain of the litigation categories.

 

The litigation analyzed in the Advisen report includes not only securities class action litigation, but a broad collection of other types of suits as well, including regulatory and enforcement actions, individual actions, derivative actions, collective actions filed outside the U.S. and allegations of breach of fiduciary duty. All of these various kinds of lawsuits, whether or not involving alleged violations of the securities, are referred to in the aggregate in the Advisen report as "securities suits."

 

One subset of the overall collection of "securities suits" is a category denominated as "securities fraud" lawsuits, which includes a combination of both regulatory and enforcement actions, on the one hand, and private securities lawsuits brought as individual actions, on the other hand. However, the category of "securities fraud" lawsuits does NOT include private securities class action lawsuits, which are in their own separate category ("SCAS").

 

Due to these unfamiliar usages and the confusing similarity of category names, considerable care is required in reading the report.

 

The Report’s Analysis

According to the latest Advisen report, there were a total of 1196 corporate and securities lawsuits field in 2010, which is slightly above the 1171 corporate and securities lawsuits filed in 2009, and represents a "record."

 

According to the report, there were 193 securities class action lawsuits filed in 2010, down from 233 in 2009 (Advisen’s securities class action lawsuit counts may differ from those of other published sources because the Advisen count, unlike those of other sources, include state court securities class action lawsuits as well as federal court lawsuits). The 193 securities class action lawsuits is 2010 is well below the 2004-2009 average of 227. The Advisen report attributes the relative decline to "a sharp drop in credit crisis suits."

 

The proportion of all securities class action lawsuits as a percentage of all corporate and securities lawsuits has been, according to the report, "steadily trending downward." Thus, prior to 2006, securities class action lawsuits represented as much as one third of all corporate and securities lawsuits. However, in 2010, securities class action lawsuits represented only 16 percent of all corporate securities lawsuits, and only 14 percent during the fourth quarter of the year.

 

Two growing categories of corporate and securities litigation are breach of fiduciary duty lawsuits and shareholders derivative lawsuits.

 

Breach of fiduciary duty lawsuits have grown rapidly as a category of all corporate and securities litigation. As recently as 2004, fiduciary duty suits represent only 8 percent of all corporate and securities lawsuits, whereas they represented about a third of all corporate and securities suits in 2010, and 40 percent in the fourth quarter of 2010. Many of the breach of fiduciary duty cases filed in 2010 are related to merger and acquisition transactions.

 

Similarly, derivative lawsuits filings increased to 129 in 2010, up from 93 in 2009. In 2011, the derivative lawsuits represented 11 percent of all corporate and securities lawsuit filings.

 

Financial firms remained the most frequently sued companies in 2010, although filings against financial firms were down relative to prior years. Overall, 30 percent of the corporate and securities lawsuits in 2010 were filed against financial firms, compared to 40 percent in 2008 and 2009. The remaining 2010 lawsuits were more widely dispersed than in recent years.

 

The report notes that the average settlement value of all corporate and securities lawsuits in 2010 was $37 million, compared to $29 million. In considering this information it is critically important to consider that this figure aggregates regulatory and enforcement settlements with private lawsuit settlements. In that regard it is important to note that the report states that average securities class action settlement in 2010 was $32 million, the average breach of fiduciary duty settlement was $17 million, and the average derivative settlement was $11 million. In each case the private lawsuit settlements averages are substantially influenced by outlier settlements.

 

The Advisen report also notes that securities litigation has been "on the rise" in recent years outside of the U.S. The report notes that there were 36 "securities suits" in courts outside the U.S., which is ‘in line" with 2006-2008 totals.

　

Discussion

The data point to which most discussions default in trying to gauge the level of corporate and securities litigation activity is the level of securities class action lawsuit filings. Indeed, a number of commentators (including this blog) release annual studies of securities class action lawsuit filing levels, which typically trigger discussions about whether or not lawsuits are up or down.

 

The Advisen study makes it clear that if the discussion is focused solely on securities class action litigation activity, then there may be a misleading impression about the level of overall corporate and securities litigation.

 

The fact is that securities class action litigation is an increasingly smaller part of all corporate and securities litigation. So even though the number of securities class action lawsuits filed in 2010 was down relative to recent annual averages, the overall level of corporate and securities litigation was up in 2010 – in fact, according to the Advisen report, it was at "record" levels.

 

There are probably a few caveats that need to be supplied with these overall observations about filing levels. First, some readers may object to the conflation of regulatory and enforcement actions with private civil lawsuits. One obvious concern is that the conclusion that corporate and securities litigation overall is reaching "record" levels may simply be a reflection of the fact that regulatory authorities have ramped up their enforcement activities – indeed, there is no doubt that that is at least part of what is going on.

 

Along those lines, I think it is fair observation that the Advisen analysis would be improved if the regulatory and enforcement actions were separated out from the overall analysis. In that regard, it is particularly unfortunate that the "securities fraud" category is both confusingly named and also incorporates both regulatory actions and securities lawsuits not brought as securities class action lawsuits, eliminating any chance that a reader might try to filter out the regulatory and enforcement activity from the private litigation activity.

 

Another concern is that even if securities class action lawsuit filing levels are down relative to historical norms and as a percentage of all corporate and securities lawsuits, securities class action lawsuits remain the most significant source of severity risk – at least in terms of private civil litigation, as distinct from regulatory and enforcement actions.

 

However, from the perspective of the likelihood of litigation, and in particular from the perspective of the claims experience of D&O insurance carriers most active in the primary layer, the increasing incidence of other types of corporate and securities litigation is a very significant development. An analysis focused solely on securities class action litigation would miss the significance of the increase claim frequency coming from these other kinds of claims, and the resulting claim exposure for companies and for the D&O insurers.

 

My own analysis of the 2010 securities class action lawsuit filings can be found here.　 

 

2010  Securities Litigation Overview Webinar: On Friday January 21, 2011, at 11:00 am EST, I will be participating in a free webinar on the topic "Year End 2010 Securities Litigation Overview," sponsored by Advisen, to discuss 2010 securities litigation trends and developments.. Other panelists participating in the webinar include David Bradford of Advisen, Kevin Mattesich of the Kaufman Dolowich law firm and Gerald Silk of the Bernstein Litowitz firm. Further information about the webinar, including registration instructions, can be found here. 

 

 

　

As detailed in the accompanying blog post, all signs are that the FDIC will be filing increasing numbers of civil actions against former officials of banks that have been closed as part of the current round of bank failures. With this possibility in mind, it seems like it is time for The D&O Diary to initiate yet another of its litigation tracking lists.

 

A list reflecting the civil lawsuits that the FDIC has filed in its capacity as receiver against former officials of failed banks can be found here.

 

 

 

I will be updating this list periodically as I become of aware of additional civil lawsuits that the FDIC has filed. This list is a community resource for readers of this blog, and I hope that readers will help maintain the value of this resource for the community by advising me of any new lawsuits that have been filed and of any omission from the list. As I update the list, I will indicate at the top of this blog post the last date on which the list was most recently updated.

 

More banks have failed in Georgia than any other state as part of the current bank failure wave, but the FDIC had not yet filed a civil action against the former officials of a failed Georgia bank – that is, until now. On January 14, 2011, in what is the third FDIC lawsuit overall against former officials of a failed bank as part of the current round of bank failures, the FDIC filed a lawsuit against eight former officials of the failed Integrity Bank of Alpharetta, Georgia. The FDIC’s complaint can be found here.

 

UPDATE: As discussed further below, in addition to the Integrity Bank case, the FDIC also filed a separate lawsuit on January 14, 2011 in the Central District of California against former directors and officers of the failed 1st Centennial Bank of Redlands, California.

 

Including one bank closed already in 2011, there have been 52 bank failures in Georgia since January 1, 2008. Integrity Bank was one of the first in Georgia to fail when it was closed on August 28, 2008.  

 

 

In some ways, it may come as no surprise that the FDIC filed its first failed bank lawsuit in Georgia against officials from Integrity Bank. As noted here, the FDIC had successfully intervened in a derivative lawsuit brought by the trustee of the bank’s bankrupt holding company. In moving to intervene in the trustee’s lawsuit, the FDIC had said that it intended to file its own lawsuit against former Integrity bank officials.

 

 

In addition, two former Integrity officials have already drawn criminal charges involving activities at the bank, as discussed here. One of the two indicted Integrity officials, Douglas Ballard, is also named as a defendant in the FDIC’s civil lawsuit. As noted here, in July 2010, the two individuals entered criminal guilty pleas in the case.

 

 

As noted in Scott Trubey’s January 18, 2011 Atlanta Journal-Constitution article about the FDIC’s civil suit (here), among the former Integrity Bank officials names as defendants in the FDIC’s lawsuit is Georgia State Senator Jack S. Murphy,   who was only recently named as Chairman of the Georgia Senate Banking Committee. Another defendant, Clinton M. Day, a former bank chairman, previously was a state senator and was at one time the Republican Candidate for lieutenant governor, and also once served on the Senate Banking Committee

 

 

The FDIC, which filed the lawsuit in its capacity as Integrity Bank’s receiver, seeks to recover “over $70 million in losses” that the FDIC alleges the bank suffered on 21 commercial and residential acquisition, development and construction loans between February 4, 2005 and May 2, 2007.

 

 

The 56-page complaint, which names as defendants eight former directors of the company who also served on the bank’s director loan committee, alleges one count of negligence and gross negligence, and one count of breach of fiduciary duties.

 

 

The complaint alleges that the 21 loans at issue were “concentrated in a small number of preferred individual borrowers,” in violation both of the bank’s own lending policies and applicable statutory lending limits. The loans are alleged to have been made without appropriate documentation and with inadequate collateral. The complaint alleges that state and federal regulators “repeatedly warned” the bank about its heavily concentrated loan portfolio and lax oversight and control of its lending function.

 

 

The complaint concludes that “the years of excess risk taking and lack of oversight by the Defendants that fueled Integrity’s astronomical growth ultimately led to its failure on August 29, 2008.” The complaint also quotes the bank’s founder as admitting that “Our overwhelming success up to [mid-2006] became intoxicating and we shifted some of our focus from asset quality to earnings and growth which was a mistake …[t]his shift in our focus also created gaps in the enforcement of Bank policies and procedures. In other words, we became lax on having our checker checking the checker.”

 

 

Though a total of 325 banks have failed since January 1, 2008 (through Friday January 14, 2011), the Integrity Bank lawsuit is only the FDIC’s third lawsuit against former officials of failed banks filed as part of the current wave of bank failures. There undoubtedly are more lawsuits to come, as the FDIC’s website indicates (here) that through December 2010 the FDIC has authorized lawsuits against a total of 109 former bank officials. The website clearly shows that lawsuits against additional officials are being authorized each month.  

 

 

With the likelihood of many more lawsuits to come, I have started a list of the FDIC’s lawsuits, which can be accessed on accompanying blog post, here.

 

 

Special thanks to alert loyal readers who alerted me to this new lawsuit.

 

 

UPDATE: FDIC Also FIles Suit Against 1st Centennial Bank: After I first published this blog post, I learned that that in addition to the Integrity Bank lawsuit, the FDIC also filed a lawsuit on January 14, 2011 against 12 former directors and officers of the failed 1st Centennial Bank of Redlands, California. A copy of the FDIC’s 1st Centennial complaint can be found here.

 

 

1st Centennial failed on January 23, 2009, so the FDIC’s lawsuit arrived about two years after the bank first failed.

 

 

The complaint alleges that after a period of rapid growth, and at a time when it was apparent that the Southern California real estate market was already in decilne, the bank increased its exposure to the riskiest loans, in excess of regulatory limits. The complaint alleges that by concentrating the bank’s activities in these riskiest loans, the bank suffered capital and liquidity problems. The complaint specifically alleges that the defendants 16 specific loans that caused the bank at least $26.8 million in losses. The complaint alleges that the bank’s failure caused the FDIC insurance fund losses of about $163 million.

 

 

I have added the 1st Centennial bank complaint to my list of bank lawsuits, which as a result of this latest suit now shows that the FDIC has launched a total of four lawsuits so far as part of the current wave of bank failures.

 

On January 14, 2011, in a ruling that could have implications for other failed bank investors’ securities class action lawsuits, Northern District of Georgia Judge Charles A. Pannell, Jr. granted defendants’ motions to dismiss the securities suit that had been brought by investors in the failed Haven Trust Bank of Duluth, Georgia. A copy of Judge Pannell’s order can be found here.

 

This case may be familiar to readers as I recently wrote about the FDIC’s failed bid to intervene in this case. As discussed here, Judge Pannell denied the FDIC’s motion to intervene.

 

Banking regulators closed Haven Truston December 12, 2008. As detailed here, on December 31, 2009, investors who purchased shares in the bank’s holding company filed suit in the Northern District of Georgia alleging that the company’s former officials had misled investors in connection with the share offering, in violation of federal and state securities laws.

 

In his January 14 order, Judge Pannell granted the defendants’ motion to dismiss, finding that the plaintiffs had not adequately alleged violations of either the state or federal securities laws. With respect to the plaintiffs’ federal securities laws allegations, Judge Pannell held that the plaintiffs had not adequately alleged scienter or loss causation.

 

In holding that the scienter allegations were insufficient, Judge Pannell said that "the amended complaint’s reliance on the defendants’ positions as directors and officers, their attendance at meetings, and access to internal documents and reports is insufficient to allege a strong inference of scienter." He also found that the defendants’ alleged motivation to maintain a dividend stream was also insufficient to allege scienter.

 

Finally, with respect to the plaintiffs’ allegations that there had been "excessively risky" loans to one of the defendant’s children "may be relevant to a shareholder derivative claim for corporate mismanagement" but were not relevant to determining scienter.

 

With respect to loss causation, the plaintiff’s allege that the FDIC announcement that it was taking over the bank caused the loss in value of the plaintiffs’ stock. Judge Pannell said that "this allegation does not establish that the defendants’ alleged misrepresentations and omissions caused the plaintiffs’ loss, but instead establishes that the loss was caused by the FDIC’s decision to close the Bank due to the effect of the subprime mortgage and financial crises on the Bank’s loan portfolio."

 

After quoting with approval from a Second Circuit decision holding that "when the plaintiff’s loss coincides with a marketwide phenomenon.. . the prospect that the plaintiff’s loss was caused by fraud decreases," Judge Pannell concluded by stating that "in this case, the plaintiffs have not offered any facts distinguishing between losses caused by the defendants’ alleged misrepresentations and the intervening events that wreaked havoc with the banking industry as a whole."

 

Discussion

Judge Pannell’s decision is interesting in an of itself, as it shows at a minimum in that investors in the many pending failed bank-related shareholder lawsuits will face difficult hurdles in surviving the initial pleading hurdles.

 

To be sure, it hardly comes as news that plaintiffs will be challenged in satisfying the scienter requirements under the federal securities laws, which is equally true in the failed bank investor suits as it is in securities class action cases in general.

 

On the other hand, Judge Pannell’s rulings with respect to loss causation may be particularly noteworthy, and may be particularly encouraging to defendants in the other failed bank-related securities cases. The plaintiffs in those other cases, like the plaintiffs in the Haven Trust case, may also face significant challenges showing that their alleged investment losses were caused by the alleged misrepresentations rather than the "intervening events that wreaked havoc with the banking industry as a whole."

 

Most defendants will be able to argue, as did the defendants in the Haven Trust case, that the plaintiffs’ investment lost value when the FDIC took over the now failed bank. Defendants in those cases will undoubtedly attempt to argue that since the investors’ loss "coincided with marketwide phenomena" the plaintiffs’ burden of pleading loss causation increases.

 

Many of the failed bank cases are just getting started and it may be some time before many of these cases have worked their way to the motion to dismiss stage. But Judge Pannell’s ruling in the Haven Trust case suggests that many of these cases could face uphill battle.

 

The defendants in these cases may still face separate claims brought by the FDIC as receiver, as may yet be the case for the defendants in the Haven Trust case (after all, the FDIC did seek to intervene in the securities case, in part based on the FDIC’s stated intent to assert its own claims against the defendants). But even if there are separate FDIC claims, at least the defendants are not facing a multi-front war.

　

Special thanks to a loyal reader for providing a copy of the dismissal motion ruling in the Haven Trust case.

　

More About Georgia Banks: At the same time as the lawsuit involving banks that failed some time ago are working their way through the system, other trouble banks in Georgia are continuing to fail. Just this past Friday night, regulators closed yet another bank in Georgia. Though this is the first bank to fail in Georgia in 2011, the bank is the 52nd bank to fail in Georgia since January 1, 2008, the highest number of any state.

 

Highly reliable rumors also suggest that the FDIC is getting ready to initiate civil litigation, in its capacity as receiver of failed banks, against directors and officers of one or more failed Georgia banks, possibly as early as this week. Stay tuned.

　

More About China: Regular readers may recall prior posts (refer for example here), where I have written about increasing amounts of securities class action litigation involving Chinese-domiciled companies. Questions concerning Chinese companies listed in the U.S. are continuing to emerge, particularly with respect to Chinese companies that establish their U.S. listing by way of merger with a dormant publicly traded shell.

 

On January 13, 2011, Bloomberg Businessweek published another article raising questions about Chinese companies financial reporting. The article, entitled "Worthless Stock from China" (here), raises questions about a number of Chinese companies and their reporting practices. The article makes for interesting (albeit disturbing) reading.

　

　

In a January 12, 2010 opinion (here) in a subprime-related securities suit involving Goldman Sachs-issued mortgage pass-through certificates, Southern District of New York Judge Harold Baer, Jr. granted the rating agency defendants’ motion to dismiss on the grounds that they are not "underwriters" under Section 11, but denied the Goldman Sachs defendants’ motion to dismiss, at least as to the securities offerings in which the plaintiffs had actually purchased shares.

 

Although Judge Baer’s closely follows other decisions in similar cases, it also diverges from other recent decisions in certain respects, including a recent decision in a separate case in the same courthouse involving other Goldman Sachs-issued mortgage pass through certificates.

 

Background

Goldman Sachs and related entities sold over $2.6 billion in mortgage pass-through certificates in three offerings from three issuing trusts between February 2, 2006 and March 28, 2006. The credit rating agencies assigned AAA ratings or their equivalent to the certificates. The named plaintiff in the case purchased securities in only one of the three trusts.

 

The plaintiffs filed their initial securities class action complaint February 6, 2009. The plaintiffs alleged that the originators of the mortgages underlying the certificates had "systematically disregarded" their own underwriting standards in originating the mortgages, contrary to the representations about the originators’ underwriting practices in the offering documents.

 

The defendants moved to dismiss.

 

The January 12 Opinion

The plaintiffs had named the credit rating agency as defendants and sought to hold them liable on the theory that, as a result of the involvement in structuring the securities, the credit rating agencies had acted as "underwriters" within the meaning of Section 11 of the Securities Act of 1933.

 

In rejecting this theory, Judge Baer observed that:

 

While the Rating Agency Defendants may have played a significant role in the ability of other defendants to market the securities at issue, and if we were writing on a clean slate, their liability might be presumed, the fact is we are not writing on a clean slate and, for the moment at least, the law insulates them from exposure under section 11 and they must be dismissed.

 

Judge Baer similarly had little trouble granting the defendants’ motions to dismiss the plaintiffs’ claims as to the two of the three securities offerings in which the plaintiffs had not purchased any securities. Referring to many other cases in which plaintiffs were held to lack standing under similar securities, Judge Baer said "I concur with these well reasoned and common-sense opinions that Plaintiff needs to show an injury connected with the offerings it challenges as misleading, and therefore Plaintiff’s claims with regard to Certificates they did not purchase …are dismissed for lack of standing."

 

However, Judge Baer rejected the Goldman defendants’ bid to have the plaintiffs’ remaining claims dismissed.

 

First, Judge Baer rejected the defendants’ bid to have the claims dismissed on statute of limitations ground. Specifically, he rejected that defendants’ contention that the plaintiffs had been put on ""inquiry notice" of possible misrepresentations more than a year before the plaintiffs filed their suit.

 

Judge Baer found that neither the December 2007 ratings downgrade of the securities nor generalized press coverage about problems with loan originators’ underwriting practices were sufficient to put the plaintiffs on inquiry notice, because this information did not "directly relate" to the misrepresentations that the plaintiffs alleged in this lawsuit.

 

Second, Judge Baer rejected the defendants’ argument that the plaintiffs had not suffered any cognizable loss, noting that "here, plaintiff alleges that it purchased the Certificates at par value of $99.99 and later sold the Certificates, before it filed this action, at a par value of $16.15. Section 11 does not require Plaintiff to allege more."

 

Finally, Judge Baer rejected the defendants’ argument that the plaintiffs had not alleged any action misrepresentation, noting that the plaintiffs had alleged that the mortgage originators "systematically disregarded" their supposed underwriting standards, and therefore the offering documents "did not put investors on notice as to the underwriting practices that the loan originators were using, and therefore obscured the actual level of risk faced by investors who purchased the Certificates."

 

Discussion

Several aspects of Judge Baer’s opinion closely track other rulings in similar cases. For example, his ruling that the rating agencies are not "underwriters" within the meaning of Section 11 follows a growing line of decisions reaching the same conclusion, including Judge Kaplan’s ruling in the Lehman Brothers case (about which refer here).

 

Similarly, his ruling that the plaintiff lacked standing to assert claims based on offerings in which it had not purchased shares is consistent with rulings in many other subprime-related cases, in which the plaintiffs in those cases were similarly found to lack standing to assert claims based on shares they had not purchased (about which, refer for example, here).

 

In addition, his ruling that the plaintiffs had alleged actionable misrepresentations based on the mortgage originators’ alleged "systematic disregard" of their underwriting practices is consistent with rulings in other mortgage-backed securities lawsuits in which plaintiffs were found to have adequately asserted claims of misrepresentation based on similar allegations that the mortgage originators had "systematically disregarded" the stated underwriting standards (about which refer here).

 

However, Judge Baer’s decision arguably diverges from other recent rulings, including even one recent ruling in a case involving similar Goldman-Sachs issued mortgage pass-through certificates.

 

Thus, an October 14, 2010 ruling in a case involving Goldman Sachs mortgage pass through certificates issued in 2007 (in offerings subsequent to the offerings at issue in the case before Judge Baer), by Southern District of New York Judge Miriam Cedarbaum held that the plaintiffs in that case had failed to allege "cognizable injury" under Section 11, by contrast to Judge Baer’s ruling that the plaintiffs in this case had adequately alleged cognizable injury.

 

The difference in the two rulings may be understood by an important difference between the two plaintiffs’ circumstances. In Judge Baer’s case, the named plaintiffs had actually sold the securities at issue at a steep loss. By contrast, Judge Cedarbaum found in that the plaintiffs in the case before her could only assert that they would lose money in a hypothetical sale of their securities. She found that it was not sufficient for the plaintiffs’ to allege injury based on an alleged hypothetical price on the secondary market at the time of the suit, without alleging that a secondary market actually exists. She found that the plaintiffs had failed to allege any facts regarding the actual market price.

 

There is a certain ironic tension between the two lawsuits, as the sale alleged in the lawsuit before Judge Baer showed what Judge Cederbaum had said the plaintiffs’ allegations in her case lacked – clearly, the sale in the case before Judge Baer showed there was some form of a functioning market for securities of this type, and that securities in that market were trading at a steep discount.

 

Judge Baer’s statute of limitations ruling also diverges somewhat from Judge Paul Crotty’s ruling just a few days ago in the subprime-related securities suit involving Barclays (about which refer here). In the Barclays case, Judge Crotty granted the defendants’ motion to dismiss on statute of limitations grounds based on his conclusion, contrary to Judge Baer’s ruling in this case, that the plaintiffs had been put on inquiry notice.

 

The difference in outcome between the two rulings may be understood by the specific event that Judge Crotty found to have put the plaintiffs in that case on inquiry notice, which was a Trading Update that Barclays itself had issued and that he found to have contained revelations about the very circumstances on which the plaintiffs were basing their allegations in that case. By contrast, in the case before Judge Baer, the communications on which the defendants sought to rely to show that the plaintiffs were on inquiry notice were not issued by Goldman Sachs and did not, according to Judge Baer, "relate directly" to the alleged misrepresentations.

 

While Judge Baer’s various rulings in this case substantially narrowed the plaintiffs’ claims, the plaintiffs’ ’33 Act allegations against the Goldman defendants survived, at least as to the securities in which the plaintiffs had invested, which stands in significant contrast to the claims of the plaintiffs in the other Goldman-related case before Judge Cedarbaum and to the claims of the plaintiffs in the Barclays case.

 

I have in any event added Judge Baer’s ruling to my running tally of subprime-related securities lawsuit dismissal motions rulings, which can be accessed here.

 

Alison Frankel’s January 14, 2011 Am Law Litigation Daily article about Judge Baer’s ruling can be found here.

 

Interview with Bill Lerach: If you have not yet seen Nathan Koppel’s January 14, 2011 interview of Bill Lerach on the WSJ.com Law Blog, you will definitely want to take a few minutes to read the item, which can be found here. Lerach has a number of interesting observations about his time in prison and in a half way house, as well as about his present circumstances.

 

My review of the recent biography of Lerach can be found here. Lerach also recently wrote a guest post on this blog, which can be found here.

 

A Contrary California Opinion on the Triggers of Excess Coverage: In an number of recent rulings, including a California case involving Qualcomm, several courts have held that the payment obligations of excess D&O insurers are not triggered if the underlying insurance is not exhausted by payment of loss, even if the policyholder funded the gap out of its own resources.

 

However, as discussed in a January 14, 2011 memorandum from the Wiley Rein law firm (here), the California Court of Appeal, declining to follow the Qualcomm decision , held that an excess insurer’s coverage obligation was triggered even though the underlying insurers had settled for less than their policy limits.　The outcome of the case turns in large part on the nature of the settlement of the underlying claim and rather arcane distinctions between "horizontal exhaustion" and "vertical exhaustion." The Wiley Rein memo does an admirable job explaining relevant circumstances and the sense of the court’s analysis.

 

A Few Words of Support for Those Struggling With New Year’s Resolutions: The January 15, 2011 Wall Street Journal had a somewhat snarky front-page article about how health clubs are jammed up with "pudgy" newcomers trying to keep up with their New Year’s resolutions, making life unpleasant for the regulars.

 

I have observed this same phenomenon in many gyms and health clubs in many different parts of the country over the years, including also the club to which I currently belong. There is no doubt that for the first few weeks of January every year, health clubs are notably more crowded and notably less pleasant, and problems do arise when newcomers violate unwritten rules of protocol.

 

However, I think the Wall Street Journal article is both unfair to the newcomers and omits the one critical piece of information that every newcomer needs to know.

 

The unfairness comes from the fact that the newcomers just want to get into shape and it is not their fault that out of simple unfamiliarity they don’t know the unwritten rules. The whole reason they are there is that they want to do something about the fact that they haven’t been spending enough time in the gym. If they have paid their fees, they are every bit as much entitled to the precious gym space as the regulars are. I have always found that a bit of patience and a friendly word of encouragement takes care of most situations arising from newcomers’ unfamiliarity with the expectations of other users.

 

The one critical piece of information the newcomers need to know is that the New Year’s crush only lasts a few days. By Martin Luther King Day, most of the hubbub has died down, and by February 1, everything is back to normal. The sad part is that the reason everything is back to normal is that almost all of the newcomers have become discouraged and deterred from coming back..

 

If I had one word of advice for the newcomers, it would be to postpone their New Year’s fitness resolve until February 1. Then the newcomers will find the gym a much more relaxed and less crowded place, and the newcomers might not be as discouraged and might even have a better shot of sticking with their resolution.

 

If you are one of the many who decided this New Year’s to try to get back into shape, please just stick with it for a few more days – within a week or two, the gym will not be nearly as crowded, and you will find it much more pleasant to complete your work out. The first two weeks of the year is the worst possible period to be trying to start a new fitness regime. For the remaining 50 weeks of the year, it will not be as challenging to fulfill your resolution. So hang in there.

 

Year End 2010 Securities Litigation Overview: On Friday January 21, 2011, at 11:00 am EST, I will be participating in a free webinar on the topic "Year End 2010 Securities Litigation Overview," sponsored by the insurance information firm, Advisen. Other panelists participating in the webinar include David Bradford of Advisen, Kevin Mattesich of the Kaufman Dolowich law firm, as well as an insurance company underwriter and a member of the plaintiffs’ bar. Further information about the webinar, including registration instructions, can be found here.
 

　

One of the great things about having this blog is that it has brought me into contact with a wide variety of interesting people, among them other bloggers, journalists, academics and writers. Among the interesting people I have come to know is Susan Beck, who is not only a Senior Writer for The American Lawyer, but also, it turns out, a neighbor of mine here in Northeast Ohio.

 

Over coffee with Susan recently, I decided it would be interesting to interview her for this blog. The fruits of my interview are reproduced below, with my questions in italics.

 

By way of further background, Susan has worked at the American Lawyer since 1987. She writes feature articles for the magazine (her most recent feature was about the Bratz doll dispute between Mattel and MGA Entertainment). She also writes items for and edits the Am Law Litigation Daily, and she write the weekly Summary Judgment opinion column for the Litigation Daily.

 

Here is my interview with Susan:

Q. I know that you went into legal journalism after several years of law practice. How did you get into legal journalism and why?

 

A. I was feeling dissatisfied and at first thought that I should change firms. But after a few interviews I realized that changing firms wouldn’t make things much better. I knew someone who had left his law firm job for the American Lawyer and talked to him. The job sounded exciting, especially the relative freedom it offered. .I got hired even though I had absolutely no journalism experience. I doubt I’d even get an interview today.

　

Q. The legal profession and the legal industry have changed quite a bit during the time you have been covering it as a journalist. From your perspective, how has the legal practice and legal industry changed and what do you think of the changes?

 

A.: To be honest, I’m still amazed at how little the legal profession has changed in the last 30 years. Law firms are still pretty much run the same way they were in the early 1980s, and so are law schools. The biggest change is that there are many more women in the profession, although they still are underrepresented at the top.

 

Q. I am a big fan of your Summary Judgment column, which you write with a little bit of an attitude. How did the column come about, and are you as cranky as you seem in that column? How do you decide what to write about in the column?

 

A.: Cranky! Me? Okay, I do have my cranky side, but I like to think of myself as generally a pretty easygoing, pleasant person. But I do have strong opinions, which can sound cranky in print.

The column came about from my work on the Litigation Daily. We all write with a bit of attitude in those items, but I wanted to go further and expound on subjects I care about. I get a lot of my ideas on my morning run. I tend to mull over things while I’m running (some might call it obsessing), and often an idea for a column will pop into my head. By the time I’m finished with my run, I’ll often have the column half written in my head.

I have to give a lot of credit to Alison Frankel, who edits the columns. She helps me identify topics, and does a wonderful job sharpening the pieces. She deserves all the credit for making the Litigation Daily such a great read.
 

　

Q. I am always impressed how you and your Am Law Litigation Daily colleagues find a number of interesting things to write about every day. How do you come up with your stories, and what sort of criteria do you use in choosing your stories?

 

A.: I wish it were more of a science, but we just keep our eyes open throughout the day for interesting litigation news. Some starts with other websites, some items are sent to us directly by lawyers, and some things come from checking court dockets. Our criteria, for the most part, are that is should be business litigation news that’s relevant to litigators at big firms.

 

Q. The legal journalism arena has changed quite a bit during your years of involvement. What do you think of the changes and where do you think it is heading?

 

A.: My job has certainly changed a lot. Just a few years ago I mostly wrote in-depth feature articles for The American Lawyer magazine, spending several months working on each article. I still write feature articles, but I spend about half my time on breaking news and commentary that goes right up on the web. Some days I crank out three stories a day, which is pretty grueling. I’m not sure where this is all headed, but obviously the trend is toward more immediate information.

 

Q.: Is there a story or a case you have always wanted to write about but you have never had the chance?

 

A.: I’ve been frustrated that I haven’t been able to find a good legal stories arising from the recent financial crisis that would work for our audience of big firm lawyers. I’ve been looking for a story that hasn’t already been covered by the mainstream press, and I’m not getting anywhere. (Any suggestions are welcome.) 

Q.: If you could interview one member of the legal profession, who would it be and why?   

A.: Marty Lipton on truth serum. He probably knows all the best secrets.  

 

Q.: When you write your book, what is it going to be about?   

A. How the Cleveland Indians, with an improbable, but lovable collection of unknown players, win the World Series.   

 

Q.: I know you moved back to Cleveland not too long ago after living in San Francisco and New York for many years. How is it being back in Cleveland after living in those other cities?  

A.: I love it. There are a lot of great things about New York and San Francisco, but I feel a level of comfort in Cleveland that I missed in those other cities. It’s a lovely place to live. The cost of living is so much better, the people are so nice and friendly, and I even prefer the weather. Those SF summers were way too cold and foggy, and I like snowy winters. On the down side, all our pro sports teams really suck right now. 

 I was surprised by Susan’s answer about the book she would write . I had not suspected her of being a writer of fantasy fiction.

According to EEOC information released on January 11, 2011, there were a record number of discrimination filings in the fiscal year that ended September 30, 2010. The number of filings approached 100,000, as economic challenges and high levels of unemployment boosted the number of filings.

 

The EEOC’s January 11 press release can be found here. The EEOC’s Enforcement and Litigation Statistics can be found here.

 

During the 2010 fiscal year, there were a total 99,922 charges filed, which represents an increase of about 7% over the number of filings in the 2009 fiscal year, and an increase of about 4.7% over the 2008 fiscal which previously had had the highest annual number of EEOC filings. The FY 2010 filings represent a 21% increase over FY 2007.

 

In the 2010 fiscal year filings, all major categories of charges increased (race, sex, national origin, religion, retaliation [all statutes], age, disability and equal pay act). During 2010, retaliation under all statutes was the most frequently alleged charge, for the first time exceeding race as the most frequent charge. Since the EEOC become operational in 1965 race consistently had been the most frequently alleged charge.

 

In addition to retaliation charges, another category of charges that has grown rapidly in recent years are charges of discrimination based on disability. There were 25,165 disability discrimination charges in fiscal 2010, which represents an increase of over 17% from fiscal year 2009 and an increase of nearly 42% over fiscal year 2007.

 

During the FY 2010, the EEOC filed 250 lawsuits, resolved 285 lawsuits and resolved over 104,000 private sector charges. According to its press release, the EEOC "secured more than $404 million in monetary benefits from employers" – the highest level of monetary relief ever obtained by the Commission through the administrative process.

 

A January 12, 2011 Wall Street Journal article describing the statistics can be found here. An Economix blog post discussion the question of whether these figures are the result of an increase in discrimination can be found here.

 

Today’s Cool Weblink of the Day: The Stanford Graduate School of Business has added a page to its website with a full list of its faculty’s various publications on corporate governance topics. What makes the page cool is that it includes links to powerpoint presentations that faculty members have prepared on a wide variety of governance topics (e.g., The Duties and Liabilties of Boards of Directors). The page can be found here.

 

In a January 11, 2011 ruling that for the first time extends the U.S. Supreme Court’s decision in Morrison v. National Australia Bank to claims under the Securities Act of 1933, and that for the first time rejects the "U.S. listing" theory by which plaintiffs in many cases had hoped to contain Morrison, Southern District of New York Judge Deborah Batts granted defendants’ motions to dismiss in the RBS subprime-related securities class action lawsuit. A copy of the opinion can be found here.

 

The ruling does not relate to the claims of investors who had purchased RBS preferred shares, which claims will proceed.

　

Background

The near failure and British government bailout of RBS was one of the highest profile features of the global financial crisis. RBS’s collapse follow a series of massive asset write-downs that occurred at RBS due to the companies substantial holdings in subprime and other mortgage-backed assets and as a result of the company’s disastrous October 2007 acquisition of 38% of ABN Amro.

 

In April 2008 the company announced a $11.6 billion write down of subprime assets, following which it launched a $23.7 billion Rights Issue, which was the largest in European history. The company was forced in January 2009 to report a loss of $41.3 billion, following which the price of its shares collapsed.

 

As reflected here, RBS investors launched a number of securities class action lawsuits. The plaintiffs’ consolidated amended complaint (here) presents four categories of claims:

 

(1) claims under Section 10(b) of the Securities Exchange Act of 1934 on behalf of purchasers of RBS ordinary (common) shares;

 

(2) claims under the Securities Act of 1933 on behalf of purchasers of RBS preferred shares;

 

(3) claims under the Securities Act of 1933 on behalf of those who tendered ABN Amro share in exchange for ordinary RBS shares; and

 

(4) claims under the ’33 Act on behalf of those who purchased RBS ordinary shares in the Rights Issue.

 

After the Supreme Court issued the Morrison ruling, the defendants’ moved to dismiss with respect to categories 1, 3 and 4. The defendants did not move to dismiss in reliance on Morrison with respect to the RBS preferred shares, and so the category 2 claims were not before the court in connection with the motion on which Judge Batts ruled on January 11.

 

As discussed at greater length here, the Supreme Court had held in Morrison that the ambit of Section 10(b) of the ’34 Act is to be determined according to a "transaction" test. The court said that Section 10(b) only to the purchase or sale of a security on a U.S. exchange or a domestic transaction in any other security.

 

The January 11 Ruling

The ’34 Act Claims Regarding RBS Ordinary Shares: RBS’s ordinary shares are listed on the London and Amsterdam stock exchanges. The defendants moved to dismiss in reliance on Morrison, contending that the amended complaint does not allege that RBS ordinary shares were purchased or sold on a U.S. exchange or that the ordinary shares were otherwise purchased in the U.S.

 

The plaintiffs opposed this motion on two ground: first, because RBS ADRs are listed on the NYSE, RBS shares are "listed" in the U.S. and therefore the ’34 Act applies to all transactions in RBS shares regardless of location; and second, because the named plaintiffs (two U.S.-based pension funds) are located in the U.S. and made their purchase from the U.S., the transaction took place in the U.S.

 

Judge Batts rejected the plaintiffs’ "listing" theory, stating

 

The idea that a foreign company is subject to a U.S. securities laws everywhere it conducts foreign transactions merely because it has ‘listed’ some securities in the United States is simply contrary to the spirit of Morrison. Plaintiffs seize on specific language without at all considering, or properly presenting, the context….The Court makes clear its concern is on the true territorial location where the purchase or sale was executed and the particular securities exchange laws that governed the transaction…. Plaintiffs’ interpretation would be utterly inconsistent with the notion of avoiding the regulation of foreign exchanges. (Citations omitted).

 

Judge Batts also observed in a footnote that the plaintiffs argument was also "badly undercut" by the fact that in the Morrison case itself, the National Australia Bank had ADRs that trade on the NYSE.

 

In rejecting plaintiffs’ argument that their own U.S. residence and U.S.-based decision to invest in the U.S. was sufficient to subject their transaction to the U.S. securities laws, Judge Batts said that this investor-specific, fact-specific approach "is exactly the type of analysis that Morrison seeks to prevent," adding that the Morrison court did not reject the "conduct and effects" test "to replace it with another difficult-to-employ, fact intensive case."

 

The defendants apparently conceded that the Exchange Act might reach RBS ADRs trading on the NYSE, but because the named plaintiffs had not purchased RBSs ADRs, Judge Batts held the named plaintiffs lacked standing to bring ADR claims. Because all claims relating to ordinary RBS shares were dismissed and because the two named plaintiffs lacked standing to assert the remaining claims, the two named plaintiffs were dismissed from the action. (A separate named plaintiff remains in the case with respect to the preferred RBS share claims, which remain pending.)

 

The ’33 Act Claims Relating to the ABN Amro Share Exchange: The defendants moved to dismiss the ABN Amro Share Exchange Claims on the ground the ordinary shares issued in the Share Exchange Offer were listed on foreign exchanges not U.S. exchanges. Judge Batts granted this motion, noting that the complaint is "void of any allegations that the purchase of RBS ordinary shares pursuant to the Exchange Offer actually took place in the United States." She affirmatively citing Morrison for the holding that the Securities Act "does not include ‘sales that occur outside the United States.’"

 

The ’33 Act Rights Issue Claim: Judge Batts also granted the defendants motion to dimiss the ’33 Act Rights Issue claim, holding that Morrison is "dispositive" of the Rights Issue claim "as no U.S. public offering is present and the Rights Issue did not involve a domestic securities transaction."

 

Discussion

It seems like each successive lower court application of Morrison represents further proof of the decision’s sweeping reach. Judge Batts’ rulings in the RBS case may represent one of the most significant applications of Morrison yet, because along the way she rejected a couple of the theories on which plaintiffs in this and other cases had hope to try to contain Morrison – particularly the plaintiffs’ argument that a company’s U.S. listing subjects all transaction in the company’s shares regardless of where it takes place to the U.S. securities laws.

 

Plaintiffs in a number of pending cased involving foreign domiciled companies have urged the same "domestic listing" theory. Tthe plaintiffs in the Vivendi case, eager to preserve the value of the jury verdict they obtained, have presented much the same argument in that case. Indeed, one of the plaintiffs’ counsel in the Vivendi case, Michael Spencer of the Milberg law firm, had detailed these contentions in a guest post on this blog (here).

　

This "listing" theory has been the subject of much spirited commentary, including a subsequent guest post on this blog by University of Minnesota law professor Richard Painter (here). George T. Conway III of the Wachtell Lipton law firm – who briefed and argued the Morrison case for the defendant bank –described the "listing" argument as "Completely nuts, N-U-T-S."

 

Out of respect for my friends in the plaintiffs’ bar I will allow the possibility that the debate on the "listing" theory may not yet be over. However, Judge Batts’ rejection of the theory in this case, and in particular the ease with which she rejected the theory, suggests that plaintiffs may face significant difficulty in persuading other courts to accept the theory. At a minimum, Judge Batts’ rejection of the "listing" theory is distinctly unhelpful to the Vivendi plaintiffs and could represent an ominous threat to their efforts to try to preserve the value of their jury verdict in that case.

 

Judge Batts’ ruling is also significant with respect to her affirmative holding that Morrison applies to claims under the ’33 Act as well as to claims under the ’34 Act. Morrison itself only ruled on claimants’ claims under Section 10(b) of the ’34 Act. I had speculated just the other day, when discussing the Barclays related subprime case, that defendants in other cases would likely try to argue that Morrison applied to ’33 Act claims. As far as I know, Judge Batts’ ruling in the RBS case is the first to hold that Morrison does apply to ’33 Act claims.

 

There is one other element of significance in Judge Batts’ comments about RBS’s ADRs, and in particular what she did not say about the ADRs. Judge Batts did not conclude, as did Southern District of New York Judge Richard Berman in the Societe Generale case that under Morrison even ADR transactions on a U.S. exchange are outside the ambit of the ’34 Act (about which refer here).

 

To the contrary, she seemed to accept (perhaps because the defendants in the RBS case apparently conceded as much) that the ’34 Act does reach ADR transactions in the U.S. Indeed, it seems apparent that had there been a named plaintiff in the RBS case with sufficient standing to assert RBS ADR claims, she would have been prepared to allow those claims to go forward (at least for purposes of the motions to dismiss under Morrison).

 

My final observations have to do with the fact that this is a subprime-related securities class action lawsuit. At one level, Judge Batts’ rulings are inconsistent with my recent observation that the highest profile subprime-related securities suits seem to be going forward. The RBS case definitely qualifies high profile. To be sure, the preferred securities claimants’ claims are going forward, at least to the next found of dismissal motions, but the other claims on behalf of the many RBS ordinary shareholders are not going forward (at least not in the U.S.)

 

The RBS case is the exception to the generalization about the highest profile subprime cases because it runs smack into the other generalization I recently noted about subprime cases, namely that Morrison is being relied on to try to dismiss the many subprime cases that have been filed against foreign domiciled companies.

 

The interesting question is whether the disappointed RBS claimants, like the disappointed investors who with claims against Fortis (the other participant in the disastrous ABN Amro transaction) whose U.S. claims were also dismissed by a U.S. court, will now seek to pursue their claims against the RBS defendants in a non-U.S. jurisdiction.

 

I have in any event added the RBS ruling to my running tally of subprime-related securities class action lawsuit rulings, which can be accessed here.

 

Special thanks to George Conway of the Wachtell Lipton firm for providing me with a copy of the January 11 ruling.　

　

One of the questions posed in the wake of the U.S. Supreme Court’s landmark decision in Morrison v. National Australia Bank is whether the Court’s holding might encourage securities claimants foreclosed by Morrison from U.S. court to attempt to pursue their claims in their home countries or in other jurisdictions.

 

The January 10, 2011 action of two U.S. law firms in filing a claim in the Netherlands against Belgian financial services giant Fortis on behalf of a specially formed foundation suggests the process of looking outside the U.S. may have begun.

 

Background

As detailed here, in October 2008, Fortis shareholders filed a securities class action lawsuit against Fortis, certain of its directors and officers, and its offering underwriters in the Southern District of New York, seeking damages based on alleged violations of the U.S. securities laws.

 

Fortis is a Belgium-based financial company that in late 2008 received a massive bailout from the governments of Belgium, the Netherlands and Luxembourg. Fortis’ shares trade on several European exchanges and its ADRs trade over-the-counter in the U.S.　

 

In their amended complaint, the plaintiffs alleged that the defendants misrepresented the value of its collateralized debt obligations; the extent to which its assets were held as subprime-related mortgage backed securities; and the extent to which its ill-fated decision to acquire ABN-AMRO had compromised the company’s solvency.

 

In a February 2010 decision (discussed here), then-District Judge Denny Chin entered an order, applying the then-applicable jurisdictional standards under the Second Circuit’s opinion in the Morrison case, granting with prejudice the defendants’ motion to dismiss.

 

The Investors’ Dutch Claim

In a January 10, 2011 press release (here), two U.S. securities law firms announced that they had filed an action in Utrecht Civil Court on behalf of a specially formed foundation, Stichting Investor Claims Against Fortis. An English translation of the lawsuit can be found here (Hat Tip to the Am Law Litigation Daily for the copy of the complaint.) Netherlands law allows foundations to bring collective actions on behalf of investors who affirmatively join the action.

 

The lawsuit is filed against Ageas NV/BV, as Fortis is now known, certain of its directors and officers, and its offering underwriters.

 

As described in the press release, the Dutch lawsuit’s allegations largely mirror the allegations in the previously dismissed lawsuit U.S law. Owing to the peculiarities of the relevant Dutch laws however, the recently filed lawsuit does not directly seek damages; rather, according to the press release, it seeks a judicial declaration that Fortis defrauded investors in the 2007 rights issue the company conducted to acquire ABM Amro. If the Foundation succeeds in establishing liability, the case will proceed to a claims phase in which investors can attempt to recover compensatory damages.

 

The press release states that more than 140 institutional investors – "including many of the largest pension funds in Europe" – and over 2,000 individual claimants have joined the foundation. The press release also asserts that shareholders’ collective losses are in the tens of billions of euros.

 

The press release states that the foundation represents investors in Europe, the Middle East, Australia – and, interestingly enough, the U.S. The press release also states that the Foundation’s director previously worked with one of the two U.S. law firms in negotiating the $450 million class action settlement in the Netherlands in 2007 in the Royal Dutch Shell lawsuit. (Background regarding the Royal Dutch Shell settlement, including further background regarding the Dutch collective action statute can be found here.)

 

Discussion

Now that investors who purchased shares on foreign exchanges can no longer seek damages in U.S. courts under the U.S. securities laws, these same investors may find the remedies available in other countries more attractive. There is no doubt that this recently filed Fortis action is a first step in that direction – perhaps the first of many.

 

Indeed, the press release quote one of the U.S. plaintiffs’ securities attorneys as saying that the new action in the Netherlands "offers an innovative avenue to address securities fraud claims outside the U.S. following the restrictions imposed on international investors by the Supreme Court’s decision in Morrison v NAB. We believe this action could be a model for future investor claims outside the United States."

 

David Bario’s January 10, 2011 Am Law Litigation Daily article about the new lawsuit (here) quotes the same U.S. attorney as saying that "our clients are increasingly looking for forums where they’re going to be able to receive compensation for their non-U.S. losses," adding that ‘we’re looking at other cases that in are in various stages of analysis."

 

In other words, the new Fortis action may be the first, but it almost certainly will not be the last. I also wonder whether enterprising attorneys will seek to pursue this same initiative in other countries – for example, in Ontario, where at least one court was willing to certify a global class, in the Imax securities class action, under the province’s newly revised securities laws.

 

Finally, I wonder whether this effort to find a substitute for claims in U.S. courts under U.S. laws will force some institutional investors in other countries to press for reforms in their home countries to provide better means for attempting to recoup losses based on alleged fraud.

 

It has already become apparent that the Morrison decision has very important implications for securities litigation in the U.S. The filing of the Fortis case underscores the fact that the Morrison decision also has important implications for securities litigation outside the U.S.

 

Without meaning to sound too cynical, I have to say that from one perspective, what has happened is that as a result of Morrison, the U.S. has lost its former advantage on a highly specialized kind of service product that is now being "offshored" to other jurisdictions. U.S.-based plaintiffs’ lawyers are trying to position themselves to take advantage of this development, but I wonder how long they will be able to insinuate themselves into legal proceedings in other countries’ courts involving other countries’ processes, companies and investors.

 

More About Halliburton: As I noted in yesterday’s blog post, the U.S. Supreme Court has granted the petition for a writ of certiorari in the Halliburton securities class action lawsuit. Nate Raymond has a good summary of the issues in the case in his January 10, 2011 Am Law Litigation Daily article, here.

 

A Cautionary Note About Merger Lawsuits and Forum Selection Bylaws: If you have not yet seen it, you will definitely want to take a look at the January 10, 2011 Wall Street Journal article about merger-related litigation (here). The article, which was definitely making the rounds on the email circuit today, numerically demonstrates that litigation is becoming an almost invariable accompaniment to corporate mergers and acquisitions.

 

There is one point mentioned in the article that I think requires explanation, or at least some further information. The article closes with a comment from one lawyer that some companies are putting provisions in their bylaws designating Delaware as the forum in which fiduciary litigation must be heard.

 

A bylaw forum selection clause may be a good idea, but it might not be enforceable. The article neglects to mention that just last week Northern District of California Judge Richard Seeborg held that the forum selection clause in Oracle’s bylaws is unenforceable. Please refer to my January 6, 2011 post (here, scroll down) for a link to the Oracle decision and for a discussion of the case.

 

Momma, Don’t Let Your Babies Grow Up to Be Law Students: If you or anyone you care about is thinking about going to law school, you will definitely want to read the article that appeared in Sunday’s New York Times entitled "Is Law School a Losing Game?" (here). A very depressing, stark portrait of an academic racket that is definitely out of whack.

 

Points of Reference: As explained on Wikepedia (here), the Netherlands are often referred to as Holland, although North and South Holland are actually only two of its twelve provinces. Holland itself was one of the seven provinces that in 1581 formed the Republic of the Seven United Netherlands. Refer also to this longer explication of the terminology surrounding the Netherlands and its language — among other things, the t in the Netherlands is not capitialized.

 

In the early 19th Century, what is now the Netherlands  was part of  The United Kingdom of the Netherlands, until what is now Belgium split off to form a separate country in 1830. And now, at least according to a January 10, 2011 New Yorker article (here), Belgium itself is in danger of further subdividing, as its Dutch-speaking Northern Flemish territories strain to draw away from the Southern francophone Wallonia.