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.

　

　

The first subprime-related securities class action lawsuit was filed in February 2007, and so the subprime and credit crisis-related litigation wave will soon enter its fifth year. With the anniversary date just ahead, it seems like an appropriate time to step back for an updated interim status update. I have set out below a numerical overview of the case filings and case resolutions so far, followed by some observations about how the cases are developing.

 

New Case Filings

Though the depths of the financial crisis is now mercifully receding further into the past, credit crisis-related cases still continued to arrive during 2010, albeit in significantly diminished numbers.

 

As I noted in my overview of the 2010 securities class action lawsuit filings (here), the credit crisis cases were a significant part of all filings during the years 2008 (when there were 102 credit crisis-related lawsuit filings) and 2009 (62).

 

By contrast during 2010, there were only 23 new credit crisis-related securities lawsuits, representing about 13% percent of the total. Of these 23 new credit crisis cases, only nine of these cases were filed in the year’s second half, and only one was filed after August 2010. The subprime and credit crisis litigation wave, it seems, is winding down.

 

One factor complicating efforts to continue to track the filings is that over time it has become increasingly difficult to maintain definitional clarity about what exactly constitutes a subprime or credit crisis-related case. For that reason, published reports of the number of subprime and credit crisis securities suits vary. But the various reports generally agree that there are about 230 securities class action lawsuits have been filed since the beginning of the subprime litigation wave. For statistical simplicity, I have used the number 230 for analytical purposes in this post.

 

Dismissal Motion Rulings

Since the very first of these cases moved through the preliminary motions, I have tried to track the dismissal motions rulings. My running tally can be accessed here. As the number of rulings have accumulated it has become increasingly challenging to meaningfully sort out the rulings, but some generalizations are possible.

 

Not counting the handful of cases that have been voluntarily dismissed and not refiled, there have been dismissal motion rulings in a total of 106 of the cases, or about 46% of all of the subprime and credit crisis-related securities class action lawsuits lawsuits. (The counting gets a little complicated because some cases have had multiple rulings, and others have had only partial rulings).

　

For purposes of determining how the dismissal motions have been running, I have counted as dismissals all cases in which dismissal motions have been granted, regardless of whether the dismissal was with or without prejudice, but not counting as dismissals those cases where the dismissal motion was initially granted without prejudice and then subsequent dismissal motions were denied on rehearing. I count a case in which any part of the plaintiff’s claims survive as a dismissal motion denial, even though the motion may have been granted in substantial part.

 

Using these principles to categorize the various dismissal motion rulings, it appears that dismissal motion rulings have been granted in 53 cases, or half of all dismissal motion rulings so far. Of these 53 dismissals, 39 were granted with prejudice and 14 were granted without prejudice. In addition to these 53 dismissals, there were an additional seven cases in which dismissal motions were initially granted without prejudice but in which renewed motions to dismiss were subsequently denied.

 

Dismissal motions have been denied, in whole or in part, in 53 of the cases.

 

Based on the dismissal motions that have been heard so far, the dismissal rate on these cases is running at 50% compared to historical dismissal rates of securities class action lawsuits of about 40%.

 

Before jumping to any conclusions about the subprime lawsuit dismissal rate compared to more typical dismissal rates, it should be recalled that I have included in the subprime lawsuit dismissal rate even cases that were dismissed without prejudice. Some of these cases may yet survive renewed dismissal motions, as have several other subprime and credit crisis cases that were initially dismissed but that ultimately survived. Some prominent examples of these cases include the Washington Mutual case (refer here), the BankAtlantic case (here), the PMI Group case (here), and the Credit Suisse case (here).

 

It is also important to note that dismissal motions still have not yet been heard in over half of the subprime and credit crisis-related cases. It is entirely possible that the dismissal motions were ruled upon more quickly in many of the least meritorious cases, and that as other cases move toward ruling on the preliminary motions the dismissal rate move revert toward historical norms.

 

One final note about the dismissal motion rulings is that appellate courts have affirmed the dismissals of at least three cases: NovaStar Financial (here), Centerline (here) and Impac Mortgage (here).

 

Settlements (and a Trial)

So far, 17 of the subprime and credit crisis-related securities class action lawsuits have settled, representing aggregate settlement amounts of $1.930 billion. The average settlement amount is $113.54 million.

 

These settlement figures are substantially inflated by a few larger settlements. Indeed, just three settlements account for $1.335 billion of the aggregate settlement amount – Countrywide ($624 million), Merrill Lynch ($475 million) and Charles Schwab YieldPlus ($235 million). If these three jumbo settlements are removed from the calculation, the average settlement drops to $42.51 million – still a very large number but not quite as astonishingly large.

 

Only 17 cases have settled even though dismissal motions have been denied in 53 cases. Not only are there but a very few settlements overall, but the settlements are emerging at a very slow rate. Thus for example., during 2010, there were only eight settlements of subprime and credit crisis-related securities class action lawsuits, only two of which were announced after August 1, 2010.

 

It is worth keeping in mind that every now and then there is an occasional case that isn’t dismissed that doesn’t settle either. Not many securities class action lawsuits go to trial, but at least one subprime and credit crisis-related securities lawsuit so far has gone all the way through to a jury verdict.

 

In November 2010, a jury in federal court entered a plaintiffs’ verdict in the subprime-related securities class action lawsuit against BankAtlantic Bancorp and certain of its directors and officers. The jury awarded damages of $2.41/share, which published sources have suggested could be worth as much as $42 million. Interestingly enough, this case was one of those that was initially dismissed but that survived the renewed motion to dismiss.

 

Observations

Even if it is valid to observe that the subprime and credit crisis-related cases are being dismissed more frequently than is generally the case for securities class action lawsuits, it is also clear that the highest profile cases generally are surviving. Among other cases that have survived are those involving Citigroup (refer here), AIG (here), Countrywide (here), Fannie Mae (here), Washington Mutual (here), New Century Financial (here), Sallie Mae (here) and Bank of America (here).

 

In general, it seems that courts have proven to be wary of many allegations of fraud, in light of the global financial crisis. Courts have required specifics in order to allow cases to proceed. Where plaintiffs have been able to show, using internal documents or confidential witness testimony, that there was a mismatch between what a company was telling investors and what its people were saying internally, the cases have been allowed to proceed. Courts have been most receptive to this suggestion in the highest profile cases.

 

Some examples of cases where courts’ skepticism, arising from the extent of the global financial crisis, has been most pronounced have included the Security Capital Assurance case, in which (as discussed here), Southern District of New York Judge Deborah Batts wrote in her March 31, 2010 dismissal motion ruling that "defendants, like so many other institutions floored by the housing market crisis, could not have been expected to anticipate the crisis with the accuracy plaintiffs enjoy in hindsight."

 

Similarly, and as discussed here, in his March 17, 2010 opinion in the CIBC subprime-related securities suit, Southern District of New York Judge William H. Pauley III observed that:

 

The Complaint describes an unprecedented paralysis of the credit market and a global recession. Major financial institutions like Bear Stearns, Merrill Lynch, and Lehman Brothers imploded as a consequence of the financial dislocation. Looking back, a full turn of the wheel would have been appropriate. That CIBC chose an incremental measured response, while erroneous in hindsight, is as plausible an explanation for the losses as an inference of fraud. …CIBC, like so may other institutions, could not have been expected to anticipate the crisis with the accuracy Plaintiff enjoys in hindsight

　

An example of a case in which courts have been persuaded to allow cases to proceed, notwithstanding these kinds of concerns, due to alleged gaps between what was been communicated externally and what allegedly was being said or done internally, is the Citigroup subprime-related securities lawsuit, where Southern District of New York Judge Sidney Stein noted in his November 9, 2010 opinion that the company allegedly was "taking significant steps internally to address increasing risk to its CDO exposure but at the same time it was continuing to mislead investors about the significant risks those assets posed. This incongruity between word and deed establishes a strong inference of scienter."

 

Another case where a court found a similar "incongruity" is the Fannie Mae subprime related securities lawsuit, in which (as discussed here) Judge Paul Crotty said in his September 30, 2010 order denying the defendants’ motion to dismiss as to one part of the plaintiffs’ allegations that certain emails on which the plaintiffs rely showed that "Fannie may have been saying one thing while believing another."

 

One particular type of allegation that has had success in a number of cases involving mortgage originators and against the organizers of mortgage loan pools or trusts is that, contrary to public statements about the underwriting discipline utilized in creating the mortgages, the mortgage originators had "systematically disregarded" their mortgage underwriting guidelines. An example of a case in which this allegation was sufficient to allow a case to survive a dismissal motion is the DLJ Mortgage Capital/ Credit Suisse subprime-related securities lawsuit (about which refer here) in which Southern District of New York Judge Paul Crotty denied the motion to dismiss solely as to plaintiffs’ allegations that the mortgage originator’s alleged ""systematic disregard of the mortgage underwriting guidelines."

 

There have been a number of dismissal motion developments that seem likely to be relevant in other dismissal motion rulings.

 

The first is that the U.S. Supreme Court’s opinion Morrison v. National Australia Bank clearly will be relevant to Section 10(b) cases filed against foreign domiciled companies. In the Morrison case, the Court found that Congress had not intended the ’34 Act to apply extraterritorially and that Section 10(b) applies only to transactions on U.S. exchanges and to domestic transactions in other securities.

 

There have already been rulings in at least two subprime cases in which courts have, in reliance on Morrison, granted motions to dismiss cases pending against non-U.S. companies. As discussed here and here, respectively, the subprime-related securities cases against both Swiss Re and Société Générale were dismissed in reliance on Morrison.

 

Many of the subprime and credit crisis-related securities class action lawsuits involve companies domiciled overseas. It may be anticipated that foreign-domiciled defendants in pending ’34 Act cases will seek to have the cases dismissed, or at least narrowed, in reliance on Morrison, which could affect a number of pending cases.

 

Another dismissal motion ruling that could affect a number of pending cases is Southern District of New York Judge Miriam Goldman Cedarbaum’s October 14, 2010 ruling in the case pertaining to Goldman Sachs-related entities mortgage-backed securities. The court held that the plaintiffs had not alleged "cognizable injury" where they had not alleged that they failed to receive payments due under the securities, but rather they have alleged that their investments have declined in value or are now riskier than when purchased.

　

As far as I am aware, Judge Cederbaum’s ruling is the first in which mortgage-backed investors’ Section 11 claims have been dismissed for lack of cognizable injury based on a failure to allege that payments due under the securities had been terminated or interrupted. There were quite a few of these mortgage-backed securities lawsuits filed during 2008 and 2009, and Judge Cedarbaum’s decision potentially could be quite significant in these other cases, at least where the investors have not alleged that payments due under the instruments have failed.

 

Another recent ruling that may suggest problems that many plaintiffs asserting Section 11 claim may fact is the dismissal on statute of limitations grounds of many of the claims asserted in the Barclays subprime related class action lawsuit (about which refer here). The ruling suggests that the statue of limitations could be a significant issue in many ’33 Act cases, particularly where the referenced offerings may have taken place well before the filing date of the lawsuit.

 

Many of the subprime and credit crisis-related securities lawsuits are yet to reach to the dismissal motion ruling stage. From the comments of many of the judges who have issued rulings, it is clear that the courts are struggling with the complexity and magnitude of these cases..

　

For example, Judge William Pauley noted in denying the motion to dismiss in the Sallie Mae subprime related case that the complaint was a "behemoth" containing "labyrinthine allegations." Similarly, in his dismissal motion ruling in the Citigroup subprime-related securities suit, Judge Stein emphasized length and even the weight of the complaint, noting that it "536 pages long, contains 1,265 paragraphs, and weights six pounds." In his dismissal motion ruling in the Raymond James Financial subprime case, Judge Robert Patterson Jr. bemoaned the amended complaint’s "extreme length," which, he said, represents "an independent ground for dismissal."

 

The courts may feel oppressed by the sheer mass of the plaintiff’s pleadings, but plaintiffs do face formidable obstacles in trying to build complaints sufficient to overcome the initial procedural hurdles. And the fact is that many of these cases are highly complex, implicating as they do the most exotic creations of Wall Street’s fevered imaginations.

 

In addition to daunting the courts, the sheer size and complexity of many of these cases may be delaying case resolutions, including settlement. The relatively small number of settlements of these cases so far may well be a reflection of the complexity of the cases. Despite these challenges, the cases will continue to grind their way through the system. Certainly the remaining cases will move toward the dismissal motion stage. And it seems likely that many more case will move toward settlement. 2011 promises to be a year when many more of these cases are resolved – though this process is also likely to continue for many years to come.

　

U.S. Supreme Court Grants Cert in Halliburton Case: It used to be relatively rare for securities cases to come before the United States Supreme Court. Now it seems that there are two or three important securities cases every term. The Court has already agreed to hear several securities cases during this term. And now the Supreme Court has agreed to hear yet another securities case.

 

As reflected on The 10b-5 Daily blog (here), on January 7, 2011, the Supreme Court granted the petition for writ of certiorari in the Halliburton case out of the Fifth Circuit. The case will address the question whether or not loss causation is a relevant issue at the class certification stage. I hope to have an opportunity to review this development at greater length in a future blog post. In the meantime, The 10b-5 Daily has done a good job linking to all of the relevant materials.

 

The First Bank Closures of 2011: We can all hope that the worst of the current wave of bank failures is behind us, but banks are nevertheless continuing to fail. After taking control of 322 banks between January 1, 2008 and December 31, 2010, this past Friday night the FDIC completed the first two bank closures in 2011 when it took control of banks in Arizona and Florida, as reflected here. We can certainly hope that there will be fewer bank closures overall in 2011, after the 157 bank failures last year (the highest number of bank failures since 1992).

　

In a January 5, 2011 order, Southern District of New York Judge Paul Crotty granted the defendants’ motions to dismiss the consolidated Barclays Bank subprime-related securities class action lawsuit. A copy of Judge Crotty’s order can be found here. Although Judge Crotty’s order is in many respects just the latest in the series of subprime-related securities lawsuit dismissal motion rulings, there are a number of interesting things about this ruling, as discussed below.

 

Background

Between April 2006 and April 2008, Barclays completed four American Depositary Shares offerings through which it raised total proceeds of $5.45 million. The four offerings were dated April 21, 2006 (the Series 2 offering), September 10, 2007 (the Series 3 offering), November 30, 2007 (the Series 4 offering) and April 8, 2008 (the Series 5 offering).

 

These offerings were presented in reliance on two Shelf Registration statements, dated September 14, 2005 and August 31, 2007, as well as Supplemental Prospectuses dated as of the offering date of each of the four offerings.

 

On November 15, 2007, the company issues an unscheduled "Trading Update" in which it disclosed the company’s exposure to U.S. subprime mortgages and mortgage backed securities. In a series of subsequent disclosures the company disclosed various write-downs of these assets, culminating in significant impairments and write-downs disclosed in its 2008 interim results and 2008 annual report.

 

As detailed here, in March 2009, investors who had purchased securities in one or more of the four offerings filed the first of several securities class action lawsuits against the company, certain of its directors and officers, and its offering underwriters. The lawsuits, which ultimately were consolidated, alleged the offering documents contained materially misrepresentations in violation of the Securities Act of 1933.

 

In the plaintiffs’ consolidated amended complaint (here), the plaintiffs essentially alleged that Barclays had failed to disclose and properly account for the risky real estate business in which it was engaged.

 

Specifically, the plaintiffs alleged that the company had failed to timely and adequately disclose and write down its exposure to risky credit assets; had failed to comply with applicable accounting standards and SEC requirements; and misleadingly assured investors that Barclays’ risk management practices helped the company avoid the worst credit market risks.

 

The defendants moved to dismiss.

 

The January 5 Order

After first ruling that the plaintiffs lacked standing to bring claims under Section 12(a)(2) (because the plaintiffs had not alleged that they had purchased their shares directly from the defendants), Judge Crotty then ruled that the Securities Act claims of the plaintiffs that had purchased their shares in the first three of the four offerings were time barred.

 

Judge Crotty ruled that the Series 2 and Series 3 plaintiffs were on inquiry notice of their claims at least as of the November 15, 2007 Trading Update, which Judge Crotty said disclosed "precisely the information that Lead Plaintiffs claim Barclays should have disclosed earlier." Because these plaintiffs filed their claims more than a year after the Trading Update, Judge Crotty held their claims were untimely.

 

Similarly, Judge Crotty ruled the Series 4 plaintiffs were on inquiry notice of their claims on February 19, 2008, the date Barclays release its 2007 annual results. As the Series 4 plaintiffs also did not file their claims within a year of that release, Judge Crotty held that the Series 4 plaintiffs claims were also time barred.

 

Interestingly, Judge Crotty held that the U.S. Supreme Court’s ruling in Merck (about which refer here) was not controlling on the statute of limitations issues, but he went on to find that even if it did apply that the Merck standard had been satisfied.

 

Judge Crotty did reach the pleading sufficiency of the Series 5 plaintiffs’ allegations. However, Judge Crotty held that the Series 5 plaintiffs’ allegations were insufficient.

 

With respect to the plaintiffs’ allegations regarding the defendants’ alleged failure to timely disclose and write down the impaired real estate assets, he held that the plaintiffs had failed to allege "that Barclays did not truly believe its subjective valuations."

 

With respect to the plaintiffs allegations that Barclays had failed to adequately itemize the company’s mortgage-related assets exposures, Judge Crotty held that the company had not duty to further itemize its mortgage asset exposure.

 

Finally Judge Crotty held that the plaintiffs had not adequately alleged that the defendants’ did not comply with applicable accounting standards or that the company’s disclosures regarding its risk management practices were actionable.

 

Discussion

Even though Judge Crotty’s opinion does not contain any express statements on the subject, the opinion does seem to reflect a subterranean skepticism – Judge Crotty does, in fact, quote prior opinions for the propositions that Section 11 claims many not be pled "with the benefit of 20/20 hindsight" and that "a backward-looking assessment of the infirmities of mortgage-related securities… cannot help plaintiffs’ case."

 

Judge Crotty does not affirmatively state that he things the plaintiffs’ claims represent "misrepresentation by hindsight" allegations, but his reference to these propositions and this overall approach to the plaintiffs’ allegations could be interpreted to suggest that that is his view.

 

Notwithstanding Judge Crotty’s apparent predispositions, there are a number of features about his opinion.

 

First, his ruling on the statute of limitations issues could be instructive in connection with the many other offering-related securities class action lawsuits that have been filed as part of the subprime and credit crisis-related litigation wave. Many of these cases, like this case, were filed in 2009, well after the mortgage meltdown had already unfolded and well after the first of many disclosures about the problems that many companies were having with their mortgage related assets. Judge Crotty’s statute of limitations rulings suggest that many of these cases may fact strict timeliness scrutiny, particularly where the lag between the time of the offering and the initial filing date is the longest.

 

Second, the other things about Judge Crotty’s ruling is that, even though the Series 5 plaintiffs’ claims under the ’33 Act did not depend on scienter allegations, he nevertheless had little apparent difficulty concluding that those plaintiffs’’ allegations were insufficient. That is, many of the other subprime related securities cases that have failed to survive initial dismissal motions have failed due to the insufficiency of the plaintiffs’ scienter allegations. Here, even though the claims the Series 5 plaintiffs asserted did not require them to satisfy scienter requirements, their allegations nevertheless were found to be insufficient.

 

One final observation about this case is that it involves a foreign-domiciled company. This consideration is not mentioned in Judge Crotty’s opinion. I am sure that the possible effect of the Morrison v. National Australia Bank case was not addressed because this case involved only claims under the ’33 Act and Morrison was addressed only the question of extraterritorial application of Section 10(b) under the ’34 Act.

 

Even though Morrison was addressed only to the ’34 Act, it would not surprise me if defendants in a similar case, involving a foreign domiciled defendant, might not try to argue that Morrison’s territorial limitations on the ambit of Section 10(b) are also relevant to claims under the "33 Act. There may be considerations specifically relevant to the ’33 Act that might militate against this argument, but absent some absolutely preclusive consideration, it seems to me that defendants would have an incentive to try to extend Morrison in this type of context. Defendants certainly have not been hesitant to urge the applicability of Morrison in a wide variety of kinds of cases.

 

I have in any event added the Barclays dismissal to my running tally of subprime and credit crisis related lawsuit dismissal motion rulings, which can be accessed here.

 

David Bario’s January 6, 2011 article on Am Law Litigation Daily about the case can be found here.

 

Special thanks to the several readers who sent me copies of the Barclays opinion.

 

Anticipated Developments in Antibribery-Related Litigation Activity and D&O Insurance Coverage: Because of the Dodd-Frank Act’s whistleblower provisions and the coming changes under the UK Bribery Act, there could be significant amounts of antibribery-related enforcement and litigation activity ahead. For that reason, it is a good idea for companies to review their D&O insurance in light of these concerns, as discussed in a January 2011 memo from the Squire Sanders law firm entitled "Directors’ and Officers’ Insurance Policies Should Be Reviewed in Light of Anticipated Increase in Whistleblowing Activity Instigated by Dodd-Frank Act and the UK Bribery Act." (here).

 

The memo contains a number of helpful considerations public companies should take into account in connection with their next D&O insurance renewal.

　

The year-end vacation days are over, the holiday decorations have been taken down, and last year’s wall calendars have been replaced. We are now into the Narnia season (at least here in Cleveland), where it is always winter but never Christmas. The New Year has entered with a bang, and that means more than just inexplicable piles of dead birds. It also means there are lots of newsworthy developments to report. Here’s the latest:

 

FDIC Increases Number of Authorized Lawsuits: Earlier this week, the FDIC updated the Professional Liability Lawsuits page on its website to reflect that the number of lawsuits that it has authorized has been increased. The FDIC has now authorized lawsuits against 109 directors and officers of failed financial institutions, up from 82 as of the end of November 2010. The website also reports that the claims against these individuals represent claimed damages of $2.5 billion.

 

The web page includes a monthly table at the end, showing how the number of individuals against whom lawsuits are authorized has increased since the end of the third quarter. The page also reports that the FDIC has authorized four fidelity bond and attorney malpractice lawsuits.

 

The page reflects a number of interesting details regarding the FDIC’s approach to litigation and litigation history. Among other things, the page reports that the investigation preceding the decision whether or not to bring a lawsuit is usually completed "within 18 months," which explains in part why there have been relatively few FDIC lawsuits against directors and officers of failed banks so far (only two lawsuits against 15 individuals).

 

The page also includes some general information about the legal theories on which the FDIC can seek to recover, the applicable statute of limitations, and the FDIC’s prior history of D&O litigation during the S&L crisis.

 

Many thanks to the several loyal readers who sent me links to the New York Times Dealbook blog’s January 5, 2010 post about the updated FDIC web page.

 

2011’s First Filed Securities Suit Continues 2010 Trend: As far as I can tell, 2011’s first filed securities class action lawsuit is the lawsuit filed on January 3, 2011 in the Eastern District of New York against Tongxin International, Inc. and certain of its directors and officers. The plaintiffs’ lawyers corrected press release describing the suit can be found here and a copy of the complaint can be found here.

 

The lawsuit alleges that the defendants misled investors with respect to its financial reports. The plaintiffs allege that the company initially withheld its financial statements, and then was forced to withdraw previously reported results as unreliable. The company later sued its former CEO and CFO for wrongfully transferring the Company’s funds.

 

As I noted in my analysis of 2010 securities class action lawsuits, one of last year’s noteworthy securities suit filing trends was the significant number of lawsuits involving Chinese companies. From a practical perspective (if not strictly as a formal matter), the new Tongxin lawsuit appears to represent a continuation of that filing trend.

 

Tongxin itself is incorporated in the British Virgin Islands. However, it was formed as subsidiary of a special purpose acquisition company (SPAC) that was formed to acquire an automotive manufacturing company in China. In April 2008, the SPAC acquired Hunan Enterprise Co., Ltd, a Chinese automotive supplier, and the SPAC merged into Tongxin. Tonxin’s operating company, and the events referenced in the complaint, all are or took place in China.

 

The litigation trend of new securities lawsuits involving Chinese companies seems to have carried over into the New Year.

 

Record Number of FCPA Enforcement Actions in 2010: According to the Gibson Dunn law firm’s January 3, 2010 memorandum entitled "2010 Year-End Update" (here), 2010 was a record setting year for FCPA enforcement activity. The memo reports that both the SEC’s and DoJ’s 2010 enforcement actions – which were essentially double the prior year’s record levels – "dwarfed the tally from any prior year in the statute’s 33-year history."

 

According to data reflected in the memo, during 2010 there were 48 DoJ FCPA enforcement actions (compared to 26 in 2009) and 26 SEC FCPA enforcement actions (compared to 14 in 2009). The memo also reports that "nearly every FCPA enforcement action from the past 12 months can be traced to multi-defendant, if not industry-wide investigation that involved numerous companies or persons engaged in coordinate or parallel schemes."

 

FCPA-related settlements in 2010 also were at record setting levels. According to a January 5, 2010 post on The FCPA Blog (here), eight of the top ten FCPA settlements of all time were reached in 2010. As it happens, eight of the top ten FCPA settlements involve non-U.S. companies as well.

 

As I have observed numerous times on this blog, FCPA enforcement activity increasingly is accompanied by follow-on civil litigation, a phenomenon that the Gibson Dunn memo notes "saw a marked increase in activity amongst the plaintiffs’ bar." The memo goes on to observe that "hardly an FCPA investigation or resolution was announced during the past year that was not followed in swift succession by a press release from any number of plaintiffs’ firms from any number of plaintiffs’ law firms that have creased a cottage industry for private FCPA enforcement."

 

Despite the absence of a private right of action under the FCPA, plaintiffs continue to "shoehorn" FCPA-related claims under a wide variety of theories, including securities fraud, breach of fiduciary duties, torts and breach of contract. The law firm memo sets out a long list of various cases that plaintiffs have pursued or are pursuing on FCPA-related allegations.

 

As I previously detailed (refer here), FCPA-related claims represent a growing area of D&O exposure, with important D&O insurance coverage implications.

　

Are Bylaw Forum Selection Clauses Unenforceable?: Many corporate litigants prefer the friendly confines of the Delaware Court system. It is not just that many companies are organized in Delaware and its courts are viewed as business friendly, but also the judges who serve on the Court of Chancery are viewed as both highly skilled and as experienced on complex business litigation issues.

 

Earlier this year, in the Revlon Shareholders’ Litigation, the Delaware Court of Chancery suggested that corporations organized under Delaware law are "free" to adopt "charter provisions selecting an exclusive forum or inter-entity disputes." In the wake of this suggestion, many lawyers began to recommend that their client companies adopt charter provisions designating the Delaware Court of Chancery as the preferred forum.

 

However, on January 3, 2011, Northern District of California Judge Richard Seeborg held, in a case of first impression, that a forum selection clause in Oracle’s bylaws was not enforceable, at least in the absence of shareholder approval. Significantly, Judge Seeborg did not reach issues of Delaware law; his ruling of unenforceability was reached as a matter of federal common law. A copy of Judge Seeborg’s opinion can be found here.

 

As might be expected, plaintiffs’ lawyers have welcomed Judge Seeborg’s ruling – refer for example to David Bario’s January 5, 2011 Am Law Litigation Daily article, here, quoting the plaintiffs’ lawyers in the case as saying that

 

The insertion of these forum selection clauses in bylaws, rather than by amending a company’s charter with shareholder approval, has been increasing….I think this decision will help to pull the cover off the practice. It shows that passing a bylaw on normal company business is one thing, but when you’re going to pass a bylaw that limits shareholders’ rights, that’s something much different, and I think that’s at the core of the decision.

 

Others have been more critical of the decision. Rebecca Beyer’s January 5, 2010 Daily Journal article (here, registration required) about the decision quotes Stanford Law School Professor Joseph Grundfest as saying that "the distinction as to shareholders who hold shares prior to the bylaw amendment and after the bylaw amendment makes no sense….Every bylaw amendment has to bind all shareholders or it can’t work."

 

Grundfest said when people buy shares in a company they agree to allow directors to amend bylaws. "If shareholders don’t like the unilateral amendment, the shareholders can – by shareholder vote – overrule the board," he said. Grundfest also said that there likely will be further litigation on this issue, and that the issue could eventually make its way to the U.S. Supreme Court.

 

Time Out for A Couple of Technology Questions: What do you do when your Blackberry isn’t working? And why does the march of technological "progress" involve so many different kinds of fruit? (Special thanks to a loyal reader for a link to the video.)　

https://youtube.com/watch?v=kAG39jKi0lI%3Ffs%3D1%26hl%3Den_US

2010 was an eventful year in the world of D&O liability. Congress passed massive financial reform legislation, the Supreme Court issued landmark decisions in important cases and numerous claims emerged as the litigation landscape continued to evolve. With so much going on, it is a challenge to narrow the year’s events down to just the ten most significant developments.

 

With appropriate humility about the limitations of all year-end inventories, here is my list of the top ten D&O developments of 2010.

 

1. Securities Suits Pick Up in Year’s Second Half: As I detailed in my 2010 securities litigation overview (here), after a filing downturn in the year’s first half, the number of securities lawsuit filing picked up in the last six months of the year. Among other things, as the year progressed, filing activity shifted away from credit crisis-related cases and toward a broader range of other types of cases.

 

Although at least some of the litigation activity in the year’s second half was driven by limited or short term events (as was the case, for example, in the rash of cases filed against for-profit education companies and against Chinese domiciled companies), the shift away from credit crisis cases could suggest that the heightened pace of securities suit filings may continue as we head into 2010.

 

2. The Changing Mix of Corporate and Securities Lawsuits: As insurance information firm Advisen has well documented, the mix of corporate and securities lawsuits has been evolving over the past several years. The most important feature of this changing mix of cases has been the decreasing prevalence of class action securities lawsuits as a percentage of all corporate and securities cases.

 

As the percentage of class action securities lawsuits has declined, other types of lawsuits, particularly breach of fiduciary duty cases, have grown in relative frequency. Many of these breach of fiduciary duty cases are related to mergers and acquisitions activity. Indeed, as I noted in my year-end review of 2010 securities lawsuit filings, even many of the cases that are categorized as securities class action lawsuits involve merger objection cases.

 

　

It is important to keep this changing mix of cases in mind when considering the various year end reports on securities litigation activity. These reports will show that overall 2010 securities class action lawsuit filings are down compared to post-PSLRA averages. However, it would be mistake to conclude that the relatively reduced number of securities class action lawsuits means that claims activity in general is down. To the contrary, overall claims activity is actually up. The mere fact that securities class action lawsuits are down does not mean that fewer companies are being sued or that overall claims exposure has diminished, either for companies or insurers. Rather, what is happening is that the claims exposure is changing, away from securities class action lawsuits and toward other types of claims.

 

This shift away from traditional securities class action lawsuits as a percentage of all claims activity has important implications for the insurance marketplace. The shift toward higher frequency, lower severity type of claims could have a significant impact both on primary and excess carriers. Primary carriers may experience an increase in overall claims frequency, with consequences for their loss experience. Excess carriers, particularly higher excess carriers, may experience relatively fewer claims piercing their layers, possibly producing a positive impact on the excess carriers’ results.

 

　

3. Banks Fail, Lawsuits Loom: 157 banks failed during 2010, the largest annual number of bank failures since 1992. The total number of bank closures since January 1, 2008 is 322. In addition, in the FDIC’s most recent Quarterly Banking Profile (refer here), the FDIC identified 860 banks, or about one out of nine of all banks, as "problem institutions."

 

Given the magnitude of these problems in the banking industry, it is hardly surprising that litigation involving failed and troubled banks is increasingly significant. Indeed, 13 of the 177 securities class action lawsuits filed in 2010 involved failed or troubled banks. In addition, aggrieved investors in failed or troubled privately held banks also filed a variety of other lawsuits, primarily in state courts.

 

It may be anticipated that the FDIC will also actively pursue claims against failed banks’ former directors and officers. However, to date, the FDIC has instituted only two D&O claims as part of the current round of failed banks (refer here and here).

 

It appears that it will only be a matter of time before the FDIC launches further suits against former officials of failed banks. Widely circulated news reports have quoted FDIC officials as saying that the FDIC has authorized civil actions against more than 80 directors and officers of failed banks. In addition, the Wall Street Journal reported in November that the FDIC is conducting fifty criminal investigations against directors, officers and employees of failed banks.

 

While we may hope that the current round of bank failures may begin to wane as we head into 2011, it appears that the failed bank litigation may only just be getting started.

 

4. Credit Crisis Lawsuit Settlements: The Dog that Didn’t Bark This Year: The subprime and credit crisis-related litigation wave will be heading into its fifth year early in 2011. Since 2007, there have been over 230 subprime and credit crisis related securities lawsuits filed. Many of these cases continue to work their way through the system.

 

As some of these cases have survived the preliminary motions, they have moved toward settlement. There were several noteworthy credit crisis related securities class action lawsuit settlements during 2010, including Countrywide ($624 million, refer here), Schwab Yield Plus ($235 million , refer here), and New Century Financial ($124 million, refer here).

 

But while there have been a few noteworthy settlements of these cases this year, the more striking observation is how few of these cases have settled so far, particularly given how far along we are in the subprime and credit crisis litigation wave.

 

By my count, only 17 of the over 230 subprime and credit crisis-related securities class action lawsuit have settled, and only eight of these 17 settlements were announced in 2010. (My list of subprime and credit crisis-related lawsuit resolutions can be accessed here.)

 

NERA Economic Consulting stated in its year-end report on securities litigation that of the approximately 230 credit crisis securities suits, only 8% have settled, 29% have been dismissed, and 63% remain unresolved.

 

Of the 63% of unresolved cases, some of course will wind up being dismissed. But many more will settle, eventually. Given the now long duration of the credit crisis litigation wave, it can be anticipated that there may be many more settlements of these cases in 2011. The likelihood is that D&O insurers’ aggregate claims losses for these claims will mount, perhaps rapidly.

 

The question is whether the materialization of these losses will come as a surprise or has already been fully anticipated in the carriers’ prior years’ loss reserves. This answer to this question could have important implications for the D&O insurers’ 2011 calendar year results.

 

5. Megasettlements of Shareholders’ Derivative Lawsuits Surge: There was a time when the settlement of a shareholder derivative lawsuit involved the payment of little or no money, other than in connection with the payment of the plaintiffs’ attorneys’ fees. However, one of the more striking developments in recent years has been the emergence of jumbo settlements of shareholders derivative lawsuits, in which millions of dollars are paid to or on behalf of the company involved.

 

This emerging trend continued to develop in 2010, with at least two huge shareholder derivative lawsuit settlements: the $90 million AIG/Greenberg settlement (about which refer here) and the $75 million Pfizer settlement (refer here).

 

These 2010 settlements join a growing list of other jumbo derivative settlements in recent years, including the UnitedHealth Group settlement ($900 million, refer here); Oracle ($122 million, refer here); Broadcom ($118 million, refer here); and the first AIG derivative settlement (refer here).

 

The striking thing about these settlements is not only their size, but also the fact that in each case the company involved is solvent. The significance of this fact is that these settlements represent instances in which the companies’ D&O insurance potentially could have been called upon to fund an A Side loss outside of the insolvency context. These kinds of settlements provide concrete evidence of the value to policyholders of Side A insurance protection even outside of the insolvency context, and underscore the importance of added Side A protection in a well-designed D&O insurance program.

 

From the carriers’ perspective, these settlements suggest that Side A losses can mount outside of insolvency. Only the carriers themselves can answer the question whether or not they are actually pricing their Side A products for this loss exposure.

 

One final note about the Pfizer derivative lawsuit settlement concerns the unusual funding mechanism the settlement implemented. In many derivative lawsuit settlements the companies involved agree to institute corporate governance reforms. What was unusual about the Pfizer settlement is that the settlement agreement created a dedicated fund intended to finance the company’s agreed upon governance reforms. If the advance funding of corporate governance reforms were to become a standard feature of derivative lawsuit settlements, the cash cost of derivative settlements could increase substantially. This is a potential development worth watching closely.

 

6. Rare Securities Lawsuit Trials Result in Plaintiffs’ Verdicts: Very few securities class action lawsuits actually go trial. Most are settled or dismissed. But in 2010, two cases made it all the way through to jury verdicts. In January, the jurors in the Vivendi case entered a verdict on behalf of the plaintiffs against the company (about which refer here), and in November, the jurors entered a verdict for the plaintiffs in the BankAtlantic subprime-related securities suit (refer here).

 

In addition to these jury verdicts, in June 2010, the Ninth Circuit issued an opinion overturning the trial court’s post trial ruling in the Apollo Group case, a ruling that had set aside the jury’s $277.5 million jury verdict in that case. Refer here regarding the Ninth Circuit’s opinion in the Apollo Group case.

 

All three of these cases remain subject to further proceedings. The Vivendi case in particular is the subject of significant post-trial motions having to do with the composition of the plaintiffs’ class in the wake of the U.S. Supreme Court’s decision in the Morrison v. National Australia Bank case (about which refer to these prior guest blog posts, here and here. See also item 10, below).

 

The defendants in the Apollo Group case have filed a petition with the U.S. Supreme Court for a writ of certiorari (about which refer here). And the BankAtlantic case has now moved on to post-trial motions, and depending on the motions’ outcome, possible appeal.

 

But while the ultimate outcome of these cases remains to be determined, it is striking that all three of these cases not only involve rare trials, but all three resulted in jury verdicts for the plaintiffs. To be sure, there have also been recent securities lawsuit trials that have resulted in defense verdicts, as was the case for example in the JDS Uniphase trial (about which refer here).

 

According to information compiled by Adam Savett, the Director of Securities Class Actions at the Claims Compensation Bureau, there have now been ten securities class action lawsuit trial post-PSLRA and involving post-PSLRA facts. The scoreboard currently reads: Plaintiffs 6, Defendants 4. The scoreboard is of course subject to revision pending further proceedings. Nevertheless, the juries themselves seem to have been favoring the plaintiffs, a phenomenon that may make plaintiffs’ threats to push a case to trial represent a particularly threatening tactic.

 

7. Assessing Coverage for "Bump Up" Claims: As noted above, a significant and growing number of corporate and securities lawsuits arise out of merger and acquisition activity. Often, the goal of this litigation is to try to increase the transaction consideration. One recurring question is the availability of D&O insurance coverage for amounts paid in settlement of so-called "bump up" claims.

 

In October 2010, the First Circuit entered an opinion in coverage litigation involving Genzyme Corporation, discussing the question of the preclusive effect of a D&O policy’s "bump up" exclusion. The First Circuit overturned the lower court’s decision that had held that the company’s D&O insurance policy did not provide coverage for additional amounts paid to claimants who asserted they did not received adequate consideration in a share exchange.

 

Though the First Circuit reversed the lower court’s holding of noncoverage, the First Circuit did not invalidate the bump up exclusion and agreed that the exclusion precluded entity coverage for bump up amounts.

 

The First Circuit remanded the case to the lower court for further allocation proceedings (that is, because the First Circuit held that the bump up exclusion precluded coverage only under the policy’s entity coverage provision, further proceedings are required to determine whet portion if any of the underlying settlement is allocable to settlement of liabilities of persons insured under other insuring provisions of the policy).

 

Of critical importance is that the First Circuit found that exclusion is enforceable and is effective to preclude coverage according to its terms. The holding clearly will be relevant to questions of coverage in future cases involving settlements of "bump up" claims, at least where the implicated D&O insurance policies include bump up exclusions.

 

8. D&O Insurance Coverage for Informal SEC and Internal Investigations: Among the perennial D&O insurance issues are the questions of coverage for informal SEC investigations and for internal investigations. In either case, the question is whether or not there is a "claim" as required to trigger coverage under the policy.

 

In one of the year’s most noteworthy D&O insurance coverage decisions, Southern District of Florida Judge Kenneth Marra, applying Florida law in a summary judgment ruling in coverage litigation involving Office Depot, held there is no coverage under the company’s D&O insurance policies for either of these categories of expenses.

 

Though the holding in the Office Depot case is direct reflection both of the specific policy language involved and the facts presented, the decision nevertheless could be influential in future claims involving questions of coverage for informal SEC investigations and internal investigations. The Office Depot decision suggests that policy definitions of the terms "Securities Claim" and "Claim" are critical, particularly with respect to the definitional references to "investigations" and "proceedings." Refer here for a more detailed discussion of the case and the decision.

 

The Office Depot ruling is hardly the final word on these issues, but it clearly will loom large in future consideration of questions of coverage for these kinds of expenses. Insurers undoubtedly will seek to rely on the decision to try to preclude coverage for costs incurred in connection with informal SEC investigations and internal investigations.

 

On a related note, a separate court held in the MBIA coverage case that there is coverage under the D&O insurance policy at issue for special litigation committee expenses, as discussed here.　

 

9. Is a Whistle the Sound of the Future?: The massive Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 enacted in July will affect virtually every aspect of our financial system, in ways that may only become clear over time. But among the Act’s innovations that seem likeliest to have a significant litigation impact are the Act’s new whistleblower provisions.

 

The whistleblower provisions include the creation of a new whistleblower bounty pursuant to which persons who first bring securities law violations to the attention of the SEC will receive between 10 percent and 20 percent of any recovery in excess of $1 million.

 

Give the magnitude of the fines paid in many recent SEC enforcement actions, particularly those involving Foreign Corrupt Practices Act violations (about which refer here), the prospective size of potential bounties is enormous. These bounty provisions seem likely to encourage a flood of whistleblower reports to the SEC. This could create an administrative nightmare for the SEC, and the agency is already struggling with funding limitations that may constrain its ability to implement the whistleblower requirements. On the other hand, the SEC, under pressure to rehabilitate its regulatory credentials after its failure to detect the Madoff scheme, will face significant pressure to pursue whistleblower claims.

 

Another 2010 development that seems likely to encourage an entirely different sort of whistleblower activity is the series of WikiLeaks disclosures. The extensive media attention give to the disclosures, as well as the suggestions of WikiLeaks founder Julian Assange that future disclosures will expose corporate misconduct, raise the possibility of that other self-appointed corporate scourges will launch similar guerilla campaigns involving the disclosure of internal corporate communications.

 

These two types of prospective whistleblower risks arguably represent an entirely new level of corporate exposure that could leave companies and their senior officials susceptible to claims of wrongdoing based on public or regulatory disclosures by persons inside the company with access to sensitive information. Indeed, companies and their senior officials could even be susceptible to claims for the alleged failure to implement and maintain sufficient controls to prevent embarrassing or harmful disclosures. Regardless, companies could face the prospect of significant risks involving person inside (or with access to) their own operations.

 

10. Foreign Companies, U.S. Courts: In June 2010, the U.S. Supreme Court issued its long-awaited decision in the Morrison v. National Australia Bank case, holding that Section 10(b) of the Securities Exchange Act of 1934 applies only to transactions taking place on the U.S. securities exchanges, or domestic transactions in other securities.

 

Among other things, the Morrison decision seems to represent the end of so-called "f-cubed" claims, involving foreign claimants who bought their shares in foreign companies on foreign exchanges.

 

Lower courts are now wrestling with Morrison’s implications, including, for example, the question of whether or not Morrison precludes claims under the U.S. securities laws against companies whose American Depositary Receipts trade on U.S. exchanges. (Surprisingly, at least one court has held that case has that effect, as discussed here.) Other courts have struggled to determine what falls within Morrison’s second prong relating to "domestic transactions in other securities." Clearly, there will be much further lower court activity as these kinds of issues are sorted out.

 

In the meantime, one consequence that seemed likely in the wake of Morrison is that there might be fewer (or at least only narrower) cases filed in U.S. courts involving non-U.S. companies. Contrary to expectations, however, there were quite a number of securities cases filed in U.S. courts involving foreign-domiciled companies in 2010, including many filed after the Supreme Court issued its Morrison opinion.

 

As reflected in my recent year-end analysis of 2010 securities lawsuit filings, there were 19 new securities class action lawsuits filed in 2010 involving foreign domiciled companies, representing 10.7% of all 2010 securities lawsuit filings. Of these 19 cases, 12 were filed after the Supreme Court issued its opinion in Morrison.

 

One possibly temporary factor driving many of these filings is the rash of new cases filed against Chinese- domiciled companies. There were ten new lawsuits against Chinese companies in 2010, eight of which were filed post-Morrison. It should be noted that the shares of many of these Chinese companies trade on U.S. exchanges and in fact many of the cases directly relate to the companies’ securities offerings in the U.S., facts which made these companies susceptible to securities lawsuits in this country even under Morrison.

 

The lower courts will continue to interpret and apply Morrison in the months ahead. In the meantime, it seems that lawsuits involving non-U.S. companies will continue to arise, at least where the companies’ shares trade on U.S. exchanges.

 

A Final Note: Readers of this blog post may also be interested in my September 2010 post entitled "What to Watch Now in the World of D&O," which can be found here.

　

Ten Top Ten Lists: Top ten surveys proliferated at year end, and so it seems like a list of ten top ten lists would be the appropriate accompaniment to The D&O Diary’s own top ten list:

The Year’s Top Ten Insurance Coverage Decisions

Top Ten YouTube Videos of 2010

Top Ten Annoying Things British Men Do While Abroad

Top Ten New Species (International Institute for Species Exploration)

Top Ten Goals from the 2010 World Cup

Top Ten TV Commercials of 2010

Top Ten Encyclopedia Britannica Queries 2010

Top Ten Must-Reads in the Law, 2010

Princeton Review Top College Ranking 2010-2011

Time Magazine’s Top Ten of Everything List

　

　

In the latest demonstration of just how far the U.S. Supreme Court’s holding in Morrison v. National Australia Bank may restrict Section 10(b) claims involving foreign companies, on December 30, 2010, Southern District of New York Judge Harold Baer held that U.S.-based hedge funds could not pursue the claims that Porsche and certain of its officers had misrepresented Porsche’s intent to take over Volkswagen, which the hedge funds claim put them in a "short squeeze" that cost them $2 billion.

 

A copy of Judge Baer’s December 30 ruling in the Porsche case can be found here.

 

Background

The plaintiff hedge funds had entered security based swap agreements that referenced the price of VW shares. The swaps did not trade on any exchanges. The swap agreements generated gains for plaintiffs as VW’s shares decline and produced losses as the price of VW shares rose.

 

The plaintiffs allege that all of the steps necessary to transact the swap agreements were carried out in the United States. The swap agreements contain choice of law and forum selection provisions that designate New York law and a New York forum.

 

In the lawsuits, the hedge fund plaintiffs allege that the defendants had caused a dramatic rise in VW stock prices by buying nearly all of the few freely-traded shares as part of a secret plan to take over the company. The plaintiffs allege that after months of denying that it sought to take over VW, Porsche on October 26, 2008 disclosed the extent of its accumulated holdings in VW stock, as a result of which the VW share price shot up, causing the plaintiffs losses on their share agreements.

 

The defendants moved to dismiss in reliance on Morrison, on the grounds that the transaction was not within the ambit of Section 10(b) of the Securities Exchange Act of 1934.

 

The December 30 Holding

Morrison had held that Section 10(b) applies only to "transactions in securities listed on domestic exchanges, and domestic transaction in other securities." Because the plaintiffs’ swap agreements do not trade on U.S. exchanges, the relevant inquiry, according to Judge Baer, is whether the swap agreements constitute "domestic transactions in other securities."

 

The plaintiffs argued that because they signed confirmations for securities-based swap agreements in New York, they engaged in "domestic transactions on other securities" within the scope of Section 10(b).

 

Judge Baer held that these arguments were "inconsistent" with the "Supreme Court’s intention" to "curtail the extraterritorial application of Section 10(b)." He added that if the argument were allowed, it "would extend extraterritorial application of the Exchange Act’s antifraud provisions to virtually any situation in which one party to a swap agreement is located in the United States."

 

Judge Baer found this situation to be indistinguishable from one in which a U.S.-based investor bought securities in a non-U.S. company on a foreign exchange, circumstances that other courts previously have held to be outside the ambit of Section 10(b) in the wake of Morrison.

 

Looking to what he described as the "economic reality" of the swap transaction, Judge Baer found that "Plaintiffs’ swaps were the function equivalent of trading the underlying shares on a German exchange," noting that "the swap agreements were transacted with undisclosed counterparties who may well have been located outside the United States," and that both the issuer and the perpetrator of the alleged fraud were also located outside the United States.

 

Judge Baer noted that he is "loathe to create a rule that would make foreign issuers with little relationship to the U.S. subject to suits here simply because a private party in this country entered a derivatives contract that references the foreign issuer’s stock. Such a holding would turn Morrison’s presumption against extraterritoriality on its head."

 

Discussion

Perhaps the most telling line in Judge Baer’s opinion is his statement that the U.S. Supreme Court’s intention in Morrison had been to "curtail the extraterritorial application of Section 10(b)," Clearly, that has been the lower courts’ approach, effectively "curtailing" the reach of Section 10(b) in a wide variety of circumstances.

　

With this presumption about Morrison’s intention as his starting point, Judge Baer seems very clear that the swap transaction at issue here did not satisfy the Morrison "domestic transaction" test. But while the mere U.S. location of one swap counterparty may not be sufficient to subject a foreign-domiciled issuer to U.S securities laws, Judge Baer’s analysis still does beg several questions left unanswered in his opinion, namely: if this transaction is not a U.S. "domestic transaction," of what jurisdiction is it a domestic transaction? If the transaction details here are not sufficient to constitute a "domestic transaction," what transaction details are sufficient?

 

It remains for other courts to work through these kinds of questions. In the meantime, Judge Baer’s analysis, if followed by other courts, could restrict other prospective plaintiffs’ ability to rely on Morrison’s second prong to try to bring Section 10(b) claims involving foreign companies. Judge Baer’s analysis, along with that of other courts, suggests that courts will take a narrow view of what constitutes a "domestic transaction in other securities."

 

Certainly, a court proceeding, as did Judge Baer, on the assumption that Morrison intended to "curtail the extraterritorial effect of Section 10(b)" arguably will be predisposed against finding that a transaction involving a foreign company’s securities not traded on U.S. exchanges is a "domestic transaction in other securities." Morrison’s second prong may not prove to be as valuable to plaintiffs as they initially thought it might.

 

Allison Frankel’s January 3, 2011 Am Law Litigation Daily article about the Porsche decision can be found here. The Sullivan & Cromwell firm, which argued the case on behalf of Porsche, has a detailed January 3, 2011 memorandum about the case here.

 

Special thanks to the several readers who provided me with copies of Judge Baer’s opinion.

 

Editorial Note: In my January 3, 2011 post, I mentioned that I would be publishing a list of the top ten D&O stories of 2010 today (January 4, 2011). However, because of the several time sensitive developments (including the above), I will postpone the publication of the top ten list until later in the week. Sorry for any confusion.