The rating agencies have been among the targets in many of the lawsuits filed as part of the subprime-related litigation wave. By and large, the rating agencies have been successful in knocking out these cases in the early stages, particularly the lawsuits seeking to hold them liable as "underwriters" under the federal securities laws.

 

At the same time, there is a small but growing number of cases in which the rating agencies’ preliminary motions have been unsuccessful, and there is a definite sense in which these decisions are building on each other, particularly with respect to the issues surrounding the First Amendment defenses on which the rating agencies are seeking to rely.

 

The latest example of a case where the rating agencies’ preliminary motion on First Amendment grounds have been unsuccessful is the negligence suit that Calpers filed in California state court against the three principal rating agencies.

 

Background

In July 2009, Calpers sued the three main rating agencies in California state court. Calpers alleged that it had invested about $1.3 billion in instruments issued by three structured investment vehicles (SIV). The investments carried the rating agencies highest ratings, which ratings Calpers alleged were "wildly inaccurate." Calpers claims to have lost over $1 billion on the investments.

 

Calpers alleged that it would not have invested in the securities if the securities had not carried the highest investment ratings. Calpers alleged that the rating agencies "did not have a reasonable basis" for giving the SIVs the highest investment ratings.

 

The ratings were flawed, Calpers alleged, because they failed to account for "foreseeable scenarios" and failed to account for the SIVs’ critical risk – that is, that the were highly concentrated in certain types of residential mortgages and residential mortgage backed securities. Calpers also alleged that the rating agencies used "inadequate mathematical and statistical models" and "employed increasingly lax standards" while giving the SIVs the highest ratings, in order to be able to continue to secure business providing ratings for structured financial products.

 

The rating agencies demurred to Calpers’ complaint, asserting that the allegations were legally insufficient. In early May 2010, California (San Francisco County) Superior Court Judge Richard Kramer announced from the bench that he would be overruling the rating agency defendants’ demurrer to Calpers’ negligence claims, but that he was sustaining the demurrers with leave to amend as to Calpers’ allegations of negligent interference with prospective economic advantage. Judge Kramer indicated at the hearing that the reasons for his reasons would appear in a forthcoming opinion.

 

The May 24 Opinion

In an opinion dated May 24, 2010 and filed on June 1, 2010 (and which can be found here), Judge Kramer set out the reasons for his rulings on the rating agency defendants’ demurrers.

 

The most noteworthy aspect of Judge Kramer’s opinion is his statement of the bases on which he rejected the defendants’ argument that they could not be held liable for their ratings opinions because the opinions are protected under the First Amendment. Judge Kaplan said (citing and relying on Judge Shira Sheindlin’s opinion in the Cheyne Financial case, about which refer here):

 

The court rejects Defendants’ arguments that the First Amendment to the United States Constitution preempts Plaintiff’s claims. The right to free speech allows us to give our opinions to things of public concern. The issuance of these SIV ratings is not, however, an issue of public concern. Rather, it is an economic activity designed for a limited target for the purpose of making money. That is not something that should be afforded First Amenment protection and the Defendants are not akin to members of the financial press.

 

Judge Kaplan also rejected the rating agency defendants’ arguments that the plaintiff’s claims are precluded by New York’s Martin Act or by the Credit Rating Agency Defense Act. However, he did find that plaintiff’s claim of negligent interference with prospective economic advantage was legally insufficient, although he allowed plaintiff leave to attempt to replead the claim.

 

Discussion

There have only been a handful of preliminary motion rulings so far that have been unfavorable to the rating agencies. But Judge Kaplan’s opinion in the Calpers case demonstrates that each of these rulings, even though seemingly limited, creates an opportunity for later plaintiffs to try to exploit the rulings in other cases.

 

For example, Judge Kaplan expressly relied on Judge Sheindlin’s September 2009 opinion in the Cheyne Financial case. Judge Sheindlin’s rejection of the rating agencies’ First Amendment defense in that case was by its own terms narrow; she said only that credit rating that is not directed to the public at large, but that is "provided instead to a select group of investors," is not entitled to First Amendment protection.

 

Though Judge Kaplan expressly quoted this narrowing language, his opinion arguable is not as narrow. To be sure, he emphasized that the SIV itself was designed for a "limited target. But he also said that the rating agencies are not the equivalent of the "financial press," and he indicated that the opinions were not entitled to protection where the opinions are not of "public concern." This analysis may or may not be sufficient to bar the First Amendment defense in a public-at-large kind of claim, but it nonetheless does seen to constrain the availability of the defense in a wide variety of circumstances – and a wider variety of circumstances than would the standard in Judge Sheindlin’s case.

 

Whether plaintiffs in other cases will be able to build further on Judge Kaplan’s opinion remains to be seen. It particularly remains to be seen whether Judge Kaplan’s analysis will prove useful in a public-at-large case, as opposed to a "select group of investors" kind of case.

 

Nevertheless the plaintiffs in these cases have shown themselves capable of building on openings in the defense. However, even the plaintiffs that have already survived preliminary motions are all still a very long way from any actual recovery. But surviving the motions to live for another day is the name of the game for plaintiffs in these kinds of cases. The small but growing number of rulings favorable to the plaintiffs seem to offer some reason to suspect that a number of these cases against the rating agencies may yet go forward.

 

Special thank to Henry Turner of the Turner Law Offices for providing me with a copy of Judge Kaplan’s opinion in the Calpers case.

　

At least one prominent commentator has suggested that the reason for the accumulation during late 2009 of a significant number of belated securities suits, where the filing date came well after the proposed class period cut-off date, is that plaintiffs lawyers are "trying to fill the litigation pipeline by bringing older lawsuits that weren’t attractive enough to file" as subprime- related cases mounted during earlier periods.

 

The further suggestion was that "these lawsuits are more likely to be dismissed and can be characterized as lower quality claims."

 

Whether or not the belated cases in general are or are not likelier to be dismissed, and even whether or not the cases are "lower quality claims," at least one of the first of the belatedly filed cases recently survived a motion to dismiss, suggesting that at least some of the belated cases could represent serious claims exposures

 

Background

As discussed at greater length here, Ambassadors Group was first sued in a securities class action lawsuit in July 2009. The complaint, filed in the Eastern District of Washington, purported to be filed on behalf of persons who bought company stock during the period February 8, 2007 to October 23, 2007. In other words, the initial filing date came some 21 months after the proposed class period cut-off date.

 

Ambassadors is in the business of providing student travel trips, primarily to middle school students. The plaintiffs alleged that the defendants had omitted to disclose that in December 2006, the mailing list company from which Ambassadors purchased its middle school names list ended its relationship for undisclosed reasons. Ambassadors purchased a replacement middle school names list from a different company.

 

On October 22, 2007, when the company released poor financial results, among the reasons given was the unexpected underperformance of the replacement mailing list. The company’s share price declined 44% on the poor financial news.

 

The plaintiffs alleged that the defendants’ statements during the class period were materially misleading because the company knew as early as summer 2007 that response rates were poor and had known in late 2006 that it had lost access to a key mailing list. The defendants moved to dismiss.

 

The June 2, 2010 Ruling

In a June 2, 2010 order (here), Judge Justin Quackenbush denied defendants’ motions to dismiss as to the July 24, 2007 statement of the company’s Executive Vice President that the company’s was launching its 2008 marketing campaigns, which were "similar in timing and delivery as previous years."

 

Plaintiffs had argued that this statement was "simply untrue" because the 2008 marketing campaign was note similarly in delivery to previous years, owing to loss and subsequent replacement of the mailing list, which represented 90% of the company’s marketing leads and 45% of the company’s business.

 

The court concluded that the plaintiffs’ complaint "pleads sufficient facts, that when taking as true, create a genuine issue of material fact regarding whether the 2008 campaign was not, in fact, similar to delivery in previous years."

 

However, Judge Quackenbush found that the defendants’ remaining statements on which the plaintiffs sought to rely were "general and vague" and constituted puffery and therefore could not serve as a basis of liability.

 

In finding that the plaintiffs had sufficiently alleged scienter, Judge Quackenbush found, in reliance on the "core functions" doctrine, that the company’s mailing campaign was "so integral to the operations of [the company that knowledge thereof cannot be denied by senior executives." The company’s CEO and Executive Vice President were also alleged to have sold over $4 million of their personal holdings in company stock between May and August 2007. The court noted that the insider trading was the subject of an SEC investigation.

 

Judge Quackenbush went on to observe that:

 

Ambassadors is a small company. There is no reasonable argument that the Defendants were not aware of the mailing list issue. The core operations inference in this case is a strong one, as the Middle School names list accounted for 45% of the marketing leads for Ambassadors. The inference is strengthened by the allegations of the confidential witnesses, the SEC investigation, and the stock sales.

 

The Company’s CEO and CFO each separately moved to dismiss the claims against them on the grounds that they themselves were not alleged to have made the allegedly misleading statements. After reviewing case law relating to the "group pleading" doctrine, Judge Quackenbush rejected the two individual defendants’ separate dismissal motions, observing that:

 

Corporate officers, however, may not stand idly by as investors and analysts, upon whose recommendations other investors rely, are mislead [sic]. Corporate exeutiveship often carries with it substantial financial remuneration, but with such remuneration comes duties and obligations to the company and its stockholders that must not be ignored, as the economic catastrophes befalling the company in the past two years have harshly illustrated. Affirmative steps are required to prevent fraud or to even merely clarify when a statements veers into a dangerous grey area. [The CFO] may not cloak himself in his silence and avoid liability for the misleading statements of his co-defendants made to public stock analysts during a conference call at which he was present.

 

Discussion

A single ruling arguably represents little from which to try to make any generalizations about the belated cases as a group. Moreover, there may be those who might want to argue that this case is going forward on the basis of a single seemingly neutral statement about the initiation of the marketing campaign.

 

Some observers might also note that Judge Quackenbush’s ruling is heavily dependent both on the "core functions" doctrine and the "group pleading" doctrine, the applicability of both of which under the PSLRA have been the subject of considerable debate.

 

Nevertheless, the case did survive the initial dismissal motion. The time lag between the class period ending date and the initial filing date was irrelevant to the court’s decision. The dismissal motion ruling suggests that at least some of the belated failings will survive dismissal motion rulings and that the mere fact that a case was belatedly filed may not necessarily mean that the case will be unable to overcome initial pleading thresholds.

 

It is interesting to note that in his discussion of the responsibility of corporate officers to prevent fraud, Judge Quackenbush invoked both concerns about executive compensation and about the possible role of corporate officials in the financial crisis, suggesting a judicial context within which the activities of corporate officers may be viewed, even in the absence of allegations that the officers whose conduct is at issue received disproportionate compensation or contributed to the financial crisis.

 

The suggestion is that the popular outrage growing out the financial crisis may inform judicial decision-making, even in cases that seemingly do not directly involve the financial crisis.

 

One final observation is that, whatever the reason for the increase in belated securities class action lawsuit filings, and whether or not they represent "poorer quality claims," the plaintiffs’ lawyers continue to file them, as I noted in my recent discussion of recent securities lawsuit filing trends, here.

 

Special thanks to a loyal reader for sending me a copy of the Ambassadors Group decision.

　

In two separate decisions, two courts issued opinions in cases that each related in different ways to Credit-Based Asset Servicing and Securitization, LLC, also known as C-Bass. As discussed below, Judge Rakoff has issued an opinion substantiating his prior dismissal motion rulings in the C-Bass subprime-related class action securities litigation, and in a separate opinion, Judge Mary McLauglin has dismissed with prejudice the subprime-related ERISA class action involving Radian Group and its investment in C-Bass.

 

The C-Bass Subprime-Related Securities Suit

 

As previously noted here, in a two-page March 31, 2010 order (here), Southern District of New York Judge Jed Rakoff issued an order denying in part and granting in part the defendants’ motions to dismiss in the C-Bass subprime-related securities suit. Judge Rakoff did not issue an opinion detailing his reasons for his rulings at the time. However, on June 1, 2010, Judge Rakoff issued his opinion substantiating his rulings. The opinion can be found here.

 

 

The most noteworthy aspect of Judge Rakoff’s decision is that he granted the rating agency defendants’ motion to dismiss, following Judge Kaplan’s ruling in the Lehman Brothers subprime-related securities suit that the rating agencies cannot be held liable under the ’33 Act as “underwriters.” Andrew Longstreth’s June 1, 2010 Am Law Litigation Daily article discussing this aspect of Judge Rakoff’s opinion can be found here.

 

 

Judge Rakoff said that similar reasoning requires him to dismiss three defendants (including C-Bass itself) who were merely “sponsors” of the offerings referenced in the plaintiffs’ complaint, as these defendants merely originated the mortgages underlying the securitizations, and therefore did not qualify as statutory underwriters. Judge Rakoff dismissed without prejudice the plaintiffs’ complaints against Merrill Lynch, holding that the specific allegations in the plaintiffs’ complaint were not sufficient to state a Section 11 claim against Merrill as an underwriter.

 

 

As to the defendants who actually were offering underwriters in connection with the offerings in dispute, Judge Rakoff said that the plaintiffs’ allegations that the mortgage originators had, contrary to representations in the offering documents about the originators compliance with underwriting guidelines, were sufficient to state a claim under the ’33 Act.

 

 

However, Judge Rakoff also granted the motion to dismiss plaintiffs’ claims as to 65 of the 84 securities offerings, in which the named plaintiffs had not purchased securities, on the basis of lack of standing.

 

 

One particularly interesting part of Judge Rakoff’s opinion is his ruling rejecting the defendants’ motion to dismiss on statute of limitations grounds. The defendants had argued that the plaintiffs were on inquiry notice prior to December 5, 2007 (that is, more than a year before the first complaint was filed) of their claims, and therefore the plaintiffs’ claims were time-barred.

 

 

In making this argument, the defendants had argued, as paraphrased by Judge Rakoff, that prior to December 2007, “questions about the bona fides of mortgage-backed securities were the subject of news reports, government investigations, public hearings, and civil complaints.” The plaintiffs argued that virtually none of these references referred to the defendants or to the securities at issue. Judge Rakoff said that at most, plausible inferences might be drawn for either side, making the issue inappropriate for resolution at the dismissal motion stage.

 

 

In reaching this ruling, Judge Rakoff expressly referenced the Supreme Court’s recent statute of limitations-related opinion in the Merck case (about which refer here). Judge Rakoff noted that Merck had addressed statutes of limitations issues under the ’34 Act, adding that the Second Circuit had not yet had occasion to determine how Merck might change statute of limitations issues under the ’33 Act.

 

 

However, with respect to Merck, Judge Rakoff noted that the Supreme Court had “rejected arguments of the defendants quite similar to the arguments made by the defendants here,” summarizing the Supreme Court’s ruling in Merck as holding that “a plaintiff would not be barred by the statute of limitations unless a reasonably diligent plaintiff similarly situated would have actually discovered facts showing the violations alleged in the plaintiffs’ complaint.”

 

 

Judge Rakoff’s ruling, though not dependent on the Merck case, is at least consistent with the general view that Merck itself could have a beneficial impact for plaintiffs in other securities class action lawsuits.

 

 

The Radian Group Suprime-Related ERISA Class Action

 

In a May 26, 2010 order (here), Eastern District of Pennsylvania Judge Mary McLaughlin granted with prejudice the defendants’ motion to dismiss in the Radian Group subprime-related ERISA class action.

 

 

The plaintiffs had alleged, on behalf of participants in the Radian Group benefits plan, that the defendants had misled the plan participants about the risks associated with investments in the plan in Radian stock due to Radian’s investment in C-Bass. The plaintiffs claimed that the plan participants were harmed with the value of the plan investments in Radian stock fell in value after Radian announced that its investment in C-Bass was materially impaired.

 

 

Judge McLaughlin had previously granted defendants’ motion to dismiss, without prejudice, and the plaintiffs amended their complaint. In her May 26 opinion, Judge McLaughlin granted the motions with prejudice, finding that the plaintiff has “once again failed to plead a breach of fiduciary duty.”

 

Judge McLaughlin specifically held that the plaintiff’s new allegations “do not demonstrate the inapplicability of the presumption of prudence, nor do they rebut the presumption.” She also found that the plaintiff had failed to state a claim for breach of the duty of disclosure.

 

 

I have added both of these rulings to my running tally of subprime-related litigation dismissal motion rulings, which can be accessed here.

 

 

Fifth Circuit Makes a Hash of the Climate Change Case: As I noted in a prior post, the October 2009 Fifth Circuit opinion in the Comer v. Murphy Oil Co. case, overturning the district court’s dismissal of the plaintiffs’ climate change related claims, raised the possibiltiy that other climate change cases might follow. However, the Fifth Circuit granted the defendants’ petition for rehearing en banc, in the process vacating the October 2008 opinion of the initial Fifth Circuit panel.

 

 

That’s when things started to get messy. One by one, different Fifth Circuit judges recused themselves, evenutally reaching the point where there weren’t enough judges left to take up the en banc rehearing.

 

 

As discussed in Alison Frankel’s June 1, 2010 Am Law Litigation Dailiy article here, the lack of a quorum for en banc review has left the case in a procedural netherword that she aptly describes as "weird."  It seems that the Fifth Circuit has dismissed the appeal, effectively reinstating the ruling of the district court. In its order dismissing the appeal, the Fifth Circuit expressly declined to reinstate the opinion of the three-judge panel. The Fifth Circuit said that there is no rule permitting them to reinstate a vacated opinion.

 

 

(You are excused if you feel a bit confused right now.)

 

 

 

My weekend reading over the Memorial Day holiday included a hefty selection from the stack of law firm memos that accumulated in my inbox in recent weeks. Many of the most recent memos related to the Senate’s passage of its version of the financial reform legislation, but the memos also reflected a variety of other developments, including recent significant case developments and the passage of the UK bribery bill. I have set out below some of the more noteworthy recent law firm memos that have crossed my desk.

　

The Senate Financial Reform Bill

The Senate’s passage of the Restoring American Financial Stability Act of 2010 has triggered a flood of law firm memos. Though many of the memos have attempted to provide an overall description of the sweeping legislation, some have concentrated on focused on a narrow part of the bill. Several law firms have released memos focused just on the bill’s proposed corporate governance.

 

A May 24, 2010 memo from Sullivan & Cromwell provides an overview of the bill’s corporate governance reforms, including the bill’s provisions relating to majority voting for directors, "say on pay," executive compensation clawbacks, compensation committee independence and disclosures, and limitations on broker non-votes. The Sullivan & Cromwell memo points out that a number of the provisions in the bill – whistleblower protections, amendments relating to whistleblowers, private placement provisions and broker voting—would apply to non-U.S. issuers.

 

A May 28, 2010 memo from the Bingham McCutchen law firm also discusses the bill’s corporate governance reforms. Of particular interest, the Bingham memo contains an extensive discussion of the proposed "say on pay" reforms, with particular emphasis on concerns about "the amount of power the change would place in the hanks of proxy advisory firms," which provide compensation guidelines in connection with the proxy advice.

 

The Morgan Lewis firm also issued a May 27, 2010 memo about the Senate bill, here. The Morgan Lewis firm memo has an interested in discussion about the provision in the Senate bill that would require the securities exchanges to include the adoption of a compensation clawback policy as a listing requirement (by which incentive based compensation would be clawed-back from company officials in the event of a financial restatement of the financial statement of prior periods to which the compensation relations). The memo details the way that this provision the existing clawback requirements promulgated by SOX.

 

A May 27, 2010 memorandum from the Sidley Austin firm also provides an overview of the corporate governance reforms in the bill, and notes that that the bill contains additional compensation limitations for bank holding companies, and a separate provision requiring public companies to file a special SEC report of they using certain specified mineral products that may have originated in the Democratic Republic of Congo.

 

　

The Senate bill contains provisions designed to encourage corporate employees to blow the whistle on securities fraud. A May 21, 2010 Morgan Lewis memo (here) points out that these new provisions "give whistleblowers significant enhanced incentives to make a report" as part of the SEC’s new whistleblower program, and also provides extensive additional retaliation protections. The provisions would allow whistleblowers to receive rewards of between 10% and 30% of the monetary recovery. The provisions would also allow the whistleblower claiming retaliation to bypass existing administrative procedure requirements and proceed directly in federal court. The provisions also proposed a much longer statute of limitations and would create a double-back-pay remedy for retaliation claims, which created an incentive to bring retaliation claims.

 

Finally, a May 25, 2010 memo from the Faegre & Benson firm reports that the Senate’s financial reform bill "may give plaintiffs little to celebrate," noting that Congress "largely has chosen not to empower private parties" to enforce the rules. Indeed, the House bill’s provisions that would create the new consumer protection agency specifies that "nothing" in the provision establishing the new consumer protection "shall be construed to create a private right of action."

 

The Faegre & Benson memo does note that both the House and the Senate versions of the bill have "carved out a role for private litigants" to "help safeguard the integrity of the rating process" by allowing investors to sue credit rating agencies for securities fraud. The two versions disagree on the standard of liability to be required. Though the two versions must now be reconciled, some allowance private civil litigation against the rating agencies seems likely.

 

Securities Law Case Developments

A number of law firms have written memoranda discussing the Second Circuit’s April 27, 2010 opinion in the Pacific Investment Management Co. v. Meyer Brown case. Though the case outcome, in which the Second Circuit affirmed the dismissal of the securities fraud lawsuit against Refco’s lawyer, may have been unsurprising given the Supreme Court’s decision in Stoneridge, the law firm memos make the point that we may not have heard the last of the case.

 

As detailed in Arnold & Porter’s May 2010 memo about the case (here), the Second Circuit rejected the "creator theory" that both the plaintiffs and the SEC (in an amicus brief) had urged the court to adopt and instead held that "a secondary actor can only be held liabile for false statements in a private damages action for securities fraud only if the statements are attributed to the defendant at the time the statements are disseminated."

 

The Arnold & Porter memo points out that the decision, adopting the attribution test and rejecting the creator theory, has "two crucial limitations"; that is that it relates only to private civil actions under Rule 10b-5 and "does not speak" to government enforcement actions; and the Second Circuit refrained from addressing the question whether attribution is required for claims against corporate insiders.

 

The memo also notes that "perhaps most significant" is the fact that the decision was accompanies by Judge Barrington Parker’s concurring opinion, essentially calling for en banc review and even inviting the Supreme Court to weigh in on the matter. In other words, the memo notes, the Second Circuit’s recent opinion may not be the "final word on the subject."

 

Chadbourne & Parke also has a May 6, 2010 memo on the case, here. The Paul Hastings firm’s May 2010 memo on the case can be found here.

 

Finally, a May 26, 2010 memo from the Pillsbury Winthrop law firm discusses the Second Circuit’s May 18, 2010 decision in Slayton v. American Express , in which the Second Circuit held that even though forward-looking statements in the defendant’s SEC filing was not accompanied by meaningful cautionary disclosure, the plaintiffs failed to show that the statements were made with actual knowledge that they were misleading.

 

The Pillsbury firm memo identifies two "key takeaways" from the case: first, that "meaningful cautionary language must be specifically tailored to the statement at issue," as "boilerplate disclosure can be turned against a registrant because of its inherent lack of specificity." The Second Circuit’s holdings confirm the importance of "regularly reviewing the cautionary statements and risk factor disclosures contained in their public filings to ensure that the disclosure continue to be current and meaningful."

 

Second, the Second Circuit considered it to be a close call whether the plaintiffs had carried the burden of proving actual knowledge of falsity, "executive officers should remain vigilant and thoughtful when evaluating whether they have a reasonable basis for a particular forward-looking statement."

　

The U.K.’s Bribery Act 2010

The Morgan Lewis firm has a May 2010 memo entitled "The New UK Regime on Bribery" (here) describing the "far reaching implications" of the U.K.’s Bribery Act 2010. Among other things, the memo notes that the new law expands the scope of behavior that is targeted; no longer limited just to bribes paid to foreign officials, the new law applies to all bribes including purely commercial bribes, and applies to both the person paying and the person accepting the bribe.

 

Even more significant, the Act’s new Section 7 creates a new strict liability offense for organizations if a person associated with the organization bribes another person with the intent of benefiting the organization. However, organizations have a defense if they can show that they have in place "adequate procedures" to prevent bribery. In essence, the new Act is mandating compliance programs, to create controls against improper payments.

 

The Act has what the memo describes as a "wide territorial scope," applying of an act or omission forming part of the violation occurs in the U.K, or if in is carried out by a person with a "close connection" to the U.K.

 

A May 24, 2010 memo from the Weil Gotshal firm says that the new Act "provides the UK with one of the toughest regimes for regulating corruption in the world.

 

The subprime and credit crisis-related litigation wave may now be in its fourth year, but lawsuits continue to come in. The latest of these suits – a securities class action lawsuit involving Las Vegas Sands – has a number of interesting features, and it also raises the question whether we may see even further new filings related the credit crisis in the months ahead.

 

On May 24, 2010, plaintiffs’ attorneys filed a securities class action lawsuit in the United States District Court for the District of Nevada against Las Vegas Sands Corp., its Chairman and CEO, Sheldon Adelson, and its former President and COO, William Weidner. The complaint can be found here. A May 24, 2010 Las Vegas Sun article describing the lawsuit can be found here.

 

The complaint alleges that the defendants’ misled investors concerning developments at the company’s Asian casino properties, as well as with respect to the company’s liquidity and the company’s vulnerability to the economic downturn. Specifically, the plaintiffs allege that defendants’ statements during the class period were false and misleading because, according to plaintiffs’ lawyers May 25, 2010 press release about the case:

 

(i) increasing competition in Macau was steadily eroding the Company’s foothold in the region, which undermined defendants’ representations that everything was proceeding according to plan; (ii) the Company was facing a significant liquidity crisis as a result of its ongoing expenditure of capital in Macau and Singapore, which forced the Company to divert funds from other operations to develop its Asian properties; (iii) that the Company, could not, in fact, weather the economic downturn, because the credit markets were drying up and Las Vegas Sands had failed to timely access those markets; and (iv) increasing visitor restrictions in Macau, which defendants represented would not impact the Company as significantly as its competitors, were expected by defendants to have just as devastating an effect on Las Vegas Sands.

 

There are several very interesting things about this new lawsuit. The first is that it follows in the wake of an unsuccessful shareholders’ derivative suit based largely on the same circumstances and similar allegations. The first of these lawsuits was filed in January 2009. A copy of the complaint can be found here. 

 

According to a November 6, 2009 Las Vegas Sun article (here), Clark County (Neb.) District Judge Allan Earl granted the defendants’ motions to dismiss these cases, citing, among other things, Adelson’s investment of over $1 billion of his personal fortune to try to rescue the company. Judge Earl found that the company’s predicament was the result of "reasonable business decisions," that, while risky, and that may have brought the company to the "brink of financial instability," might in the future "provide the economic stability to ensure the future success of the company."

 

Judge Earl also noted that the events played out against a "backdrop" that involved "a deteriorating global economy that struck with such frightening speed and force that it engulfed nearly every major banking, investment and gaming company in the world."

 

The other interesting thing about the new lawsuit, and that might be a direct consequence of the fact that it follows after the unsuccessful derivative suit, is that this case falls in the category of "belated lawsuits." This complaint was filed on May 24, 2010 but the class period is August 1, 2007 to November 6, 2008. In other words, the complaint was filed 18 months after the date of the proposed class period cutoff.

 

As I recently noted (here), belated lawsuit filings, where the filed date is more than a year after the proposed class period cut-off, have been a key component of 2010 securities class action lawsuits. The phenomenon first emerged in mid-2009, but the earliest cases related to nonfinancial companies. The speculation about the emergence of this filing trend has been that up until mid 2009, plaintiffs’ lawyers were preoccupied filing credit crisis lawsuits against financial firms, and a backlog of cases against nonfinancial firms built up.

 

The Las Vegas Sands securities lawsuit seems to represent something different – a belated case that is related to the credit crisis. Of course, Las Vegas Sands is not a financial company, and in that respect the new lawsuit is not inconsistent with the whole belated lawsuit filing phenomenon. But the case and its allegations about the company’s real estate developments, liquidity and funding problems are all related to the credit crisis.

 

For that matter the Las Vegas Sands case is not the first belatedly filed credit crisis-related securities suit in 2010. Cases filed earlier this year against The Hartford Financial Group (refer here) and the Morgan Keegan funds (refer here) each also were first filed more than a year after the proposed class period cutoff date and both reflect subprime meltdown or credit crisis related allegations.

 

The consensus view has been that the subprime and credit crisis-related litigation wave has largely ended, but the fact is that a number of subprime and credit crisis related securities suits have been filed in 2010—as many as 13, by my count. The possibility of further belated filings, relating back to events that unfolded a significant time ago, raises the prospect that there could be even further subprime and credit crisis-related cases yet to come.

 

Bottom line: it may be premature to suggest that the subprime and credit crisis-related litigation wave has ended. It may have quite a bit further to run.

 

I have in any event added the Las Vegas Sands case to my table of subprime and credit crisis-related lawsuit filings, which can be accessed here. I note that the list, which I first began compiling in April 2007, is now 214 cases long. I certainly never foresaw how lengthy or long-lived the list would be when I first began it so long ago.

 

Special thanks to Adam Savett of the Securities Litigation Watch blog for providing a copy of the Las Vegas Sands securities class action complaint.

 

The strange sequence of legal events surrounding R. Allen Stanford has taken yet another bizarre turn. The latest developments began earlier last week when Stanford yet again sought to fire his criminal defense lawyers. Then on May 21, 2010, Stanford, representing himself pro se in coverage litigation arising out of his and fellow criminal defendants’ efforts to secure insurance coverage for their defense expenses, wrote a letter to the court in the coverage action asserting that the insurers "have thwarted my every attempt to obtain counsel of my choosing." He also protests the insurers are controlling his defense and denying payments through a "reasonable and necessary" shield.

 

In his letter, Stanford requested that the court order the lead insurer to "approve and compensate my criminal attorneys and coverage attorneys of my choice."

 

In their May 24, 2010 response (here), the lead insurers contend, contrary to Stanford’s assertion  that they have "thwarted" his defense,  "nothing could be further from the truth," noting that he has "cycled through more than 10 different law firms (all of his own choosing and all at Underwriters’ expense) in the course of the SEC and Criminal Actions" adding that they have paid these attorneys "more than $ 6 million dollars."

 

The lead insurer further argues that it has withheld consent to Stanford’s latest defense counsel "only due to extraordinary and alarming circumstances" – including disagreements among Stanford’s own counsel, leading to Stanford’s latest criminal defense attorney to withdraw "only a month after entering an unconditional appearance" and while publicly asserting that the lawyer with which Stanford seeks to replace him is "often times" acting "against Stanford’s best interests." The lead insurer asserts that has "no obligation" and "in fact cannot in good faith approve counsel that has been fired by an insured or counsel that is alleged to have acted against an insured’s best interest."

 

The lead insurer bemoaned the "chaos" and "turmoil" surrounding Stanford’s choice of counsel, which threatens "serious harm" to the insurers’ interests as well as those of all other claimants to the policy. The insurer also pointed out that Stanford has no right under the policy to coverage counsel.

 

As discussed in greater detail here, the insurers have sought to deny coverage under the policy on the grounds that the criminal defendants’ conduct violated the policy’s Money Laundering exclusion. In a March 15, 2010 decision (here), the Fifth Circuit ordered that the question of whether or not the exclusion has "in fact" been triggered must be determined in a separate judicial proceeding, to take place on an expedited basis, so that the fundamental question of coverage for the criminal defendants’ attorneys’ fees can be determine.

 

In the meanwhile, Stanford remains jailed pursuant to a ruling by Judge David Hittner, denying Stanford bail.

 

In a May 25, 2010 Am Law Litigation Daily article (here), David Bario describes the May 25 hearing before Judge Nancy Atlas on these issues, at which Stanford apparently appeared shackled and unshaven. Stanford apparently argued that either his choice of criminal defense attorney should be approved or he should be released in order that he can prepare his defense.

 

According to a May 25, 2010 Bloomberg article (here), Judge Atlas said that she would urge Judge Hittner to "reconsider" his bail ruling. She proposed an arrangement subjecting Stanford to "very, very, very tight house arrest" so he can prepare his defense in the insurance case. "I would not be opposed to that," she said.

 

Judge Atlas reportedly told the insurers’ attorneys, as a warning that they will have to sustain their coverage defense in court, "You’ve got to prove there was some criminal act that gave rise to criminal property. And then you’ve got to prove what role each of these executives had to do with that."

 

According to the Am Law Litigation Daily article, Judge Atlas set a hearing date for early June to "sort through the crowded field of former, current and future Stanford lawyers to determine how they managed to rack up the $6 million tab." The Houston Chronicle reports that the hearing will take place on June 3, at which Atlas says, "We are going to get to the bottom of why so much money is being spent in Mr. Stanford’s defense."

 

Judge Atlas set an August 24, 2010 date for the hearing on the coverage issues, and said that Bob Bennett, Stanford’s current defense counsel, might represent him at that hearing. The criminal trial against Stanford and his co-defendants is set for January 2011.

 

On May 20, 2010, the U.S. Senate passed the Restoring American Financial Stability Act of 2010 (S. 3217) by a vote of 59 to 39. The Senate websites latest version of the Bill can be found here, and the Senate Banking, Housing and Urban Affairs Committee’s link to the most current version can be found here. Though these may be the most current versions available they do not necessariliy represent the final text of the bill, which was substantially amended and is not yet publicly available.

 

The Senate Bill must now be reconciled with the financial reform legislation the House passed last December (about which refer here). The reconciliation committee will be selected this upcoming week, and the plan is to have the reconciled version available for President Obama’s signature before July 4.

 

The massive Senate bill weighs in a 1566 pages. It is in many important ways substantially similar to the House bill, although there are also critical differences. Among the differences is the Senate bill’s controversial provision, sponsored by Sen. Blanche Lincoln, requiring financial firms to separate derivatives trading from banking operations and even spin them off under certain circumstances.

 

Among other measures that were not included in the Senate bill is the amendment proposed by Senator Arlen Specter that would have legislatively overturned Stoneridge and created a private right of action for aiding and abetting securities fraud. Theoretically, the measure could be included during the reconciliation process, but that seems highly unlikely at this point. Susan Beck’s May 21, 2010 Am Law Litigation Daily article reporting on the amendment’s defeat can be found here.

 

Another provision not included in the Senate bill is the measure incorporated in the House version (Section 7216) to provide extraterritorial jurisdiction for securities cases involving conduct within the U.S. constituting significant steps in furtherance of the securities violation, even if the transaction occurs outside the U.S. and involves only foreign investors. This provision, if incorporated in the reconciled version of the legislation, would legislatively address the "f-cubed" securities suit raised in many cases, included the National Australia Bank case now before the U.S. Supreme Court.

 

On the other hand, the Senate bill, like the House version, does incorporate a number of statutory corporate governance reforms. Among other things, the Senate version provides for non-binding shareholder votes on executive compensation (Section 951). The Senate bill also includes a measure requiring clawbacks from "any current or former officer" of incentive compensation awarded in the three year period prior to a financial restatement (Section 954). The Senate bill also adds additional disclosure requirements regarding compensation and regarding employee and director hedging (Sections 952 and 955)

 

In addition the Senate bill also specifies rules governing director elections (Section 971), among other things mandating that in uncontested elections, directors receiving a majority of votes are deemed elected. The measure further provides that directors receiving less than a majority in an uncontested election shall resign, with the board to consider whether or not to accept the resignation.

 

The Senate bill also requires companies to disclose the reasons why they have or have not chosen to have the same person serve both as board chair and CEO (Section 973)

 

The Senate bill also adopts a number of measures under the heading of "Investor Protection and Improvements to the Regulation of Securities." Among other things, the Senate bill, like the House version, includes measures providing protection and rewards for whistleblowers who report securities law violations to the SEC (Sections 922-24). The Senate bill also creates an Investor Advisory Committee that would consult with the SEC on matters pertaining to protecting investor interests (Section 911). The Senate bill also creates an Office of Investor Advocate within the SEC (Section 914).

 

Of particular interest to readers of this blog, the Senate bill, like the House bill, has a number of provisions relating specifically to insurance. The Senate Bill creates an Office of National Insurance (Section 502), which is in form substantially similar to the Federal Insurance Office in the House version. Like the agency created in the House version the agency created in the Senate bill would be housed within the Treasury Department. Neither the House nor the Senate version envisions that that the new federal agency would replace state insurance regulation. Instead, the new agency would monitor the industry in order to identify systemic risks; oversee TRIA; and coordinate international insurance regulatory efforts, among other things.

 

The Senate bill also contains a number of other insurance-related provisions, including a section addressing reporting, payment and allocation of premium taxes (Section 521); and another section relation to the regulation of non-admitted insurance (Section 522). Yet another measure specifies streamlined non-admitted insurance procedures for certain commercial insurance buyers (Section 525)

 

There are many other measures of more general interest in the massive Senate bill, including "improvements" to the regulation of rating agencies (Section 931 et seq.); increased disclosure requirements in connection with municipal securities (Section 975 et seq.); the creation of a Bureau of Consumer Financial Protection (Section 1001 et seq.); provision for the regulation of hedge fund advisors and others (Section 401 et seq.); and the institution of regulation for swap markets (Section 721 et seq.).

 

Though the ultimate shape of the legislation that will be presented to President Obama remains to be seen, the likely scope of many measures is already relatively clear, as both versions of the legislation include numerous substantially similar provisions. Whether or not the provisions ultimately enacted into law will suffice to prevent future financial crisis is a separate question but there can be little doubt that the financial system is about to face some enormous changes.

 

It is probably worth emphasizing here, as it may be overlooked elsewhere given the other high-profile issues the legislation involves, that the reform legislation, when enacted, will entail significant federal government involvement in areas previously viewed as the province of state regulation. Specifically, both insurance and corporate governance have until recently been regarded as matters with respect to which state interests should control.

 

Though significant levels of regulatory responsibility will remain at the state level both for insurance and corporate governance, this reform legislation significantly increases the federal government involvement. It doesn’t seem too suspicious to conjecture that these measures represent significant milestones in what is likely to be continued growth of federal responsibility in these areas.

 

The bill’s provisions relating to insurance could be of practical significance for insurance professionals. I did not review the provisions at length in this post, but if they survive in some form in the final bill, I will undertake a detailed review at that time.

 

Rating Agencies in the Crosshairs: The financial reform bill’s provisions relating to the rating agencies represent only one of a variety of developments that is raising the heat for those firms. David Segal’s May 23, 2010 New York Times article entitled "Suddenly, the Rating Agencies Don’t Look Untouchable" (here) takes a look at the assaults the rating agencies are facing on a variety of directions, including on the litigation front.

 

The article makes the point that though the rating agencies are prevailing in most of the credit crisis related cases in which they have been involved, there have also been a small handful of cases that have survived initial motions to dismiss. The article makes the point that as the litigation evolves, the plaintiffs’ lawyers are learning from every decision, including the dismissals, and are refining their arguments in subsequent cases.

 

The author of The D&O Diary is quoted briefly toward the end of the article.

 

More Deepwater Horizon Securities Litigation: As I have previously noted, the Deepwater Horizon disaster has already produced significant corporate and securities litigation, including the BP shareholders derivative suit (about which refer here) and the Transocean securities class action lawsuit (refer here). Now this litigation also includes a securities class action lawsuit filed against BP and certain of its directors and officers.

 

On May 21, 2010, plaintiffs’ lawyers filed a securities class action lawsuit in the Western District of Louisiana against BP and nine of its directors and officers. A copy of the complaint can be found here. The case is brought on behalf of purchasers of BP’s American Depositary Receipts "based on Defendants’ repeatedassurances of BP’s safe operations, reflected in the ADR price, have seen the value of their shares plummet 20% overnight – representing about $30 billion in market capitalization – as the truth about BP’s operations has emerged."

 

The complaint alleges that "by touting the growth potential of its Gulf of Mexico operations… and highlighting the safety of the operations, BP convinced investors, including Plaintiffs, that BP would be able to generate tremendous growth with minimal risk." However, the plaintiffs allege, "The truth was that BP was cutting comers and reducing its spending on safety measures in an effort to maximize profits in the Gulf of Mexico."

 

Interestingly, the plaintiffs’ Louisiana counsel is the law firm of Domengeuax, Wright, Roy & Edwards, a Lafayette, Louisiana firm that has already been very active in pursuing Deepwater Horizon claims on behalf of commercial fisherman, shrimpers, oystermen, and charter boat operators, as well as on behalf of families of persons suffering injuries or death in the initial platform explosion, as reflected here.

 

Special thanks to Adam Savett of the Securities Litigation Watch blog for providing a copy of the BP complaint.

 

O.K., Who Invited the Actuary?: In his rambling biography of Pablo Picasso, Norman Mailer describes an opium-laced party at Le Bateau-Lavoir, Picasso’s Montmartre rooming house, where the guests included such luminaries as Guillaume Apollinaire and numerous avant- garde sculptors, painters and poets. Mailer also reports that the guests included "Maurice Princet, the actuarial mathematician for insurance companies, who would give them his own popular introduction to Einstein’s work before long."

 

Say what?

 

I mean no disrespect to my many insurance actuary friends, but even were I to have access to Picasso’s opium, I don’t think I could imagine how an actuary wound up in this particular scene. I mean, can you picture Princet trying to bring down the house with the old story about the guy "who couldn’t disprove the null hypothesis"?

 

In fairness, I should acknowledge that Princet was to play in important role in the later development of "cubism," and indeed has been described by one of the principal actors in the drama as the "godfather" of cubism, for having introduced Picasso to certain mathematical concepts. I don’t think I would be alone, however, in finding it startling that the cast of characters in this particular production includes an insurance actuary.　

 

According to the FDIC’s Quarterly Banking Profile for the 1st Quarter of 2010, released on May 20, 2010 (here), results for reporting banks "contained positive signs of recovery for the industry," reflecting "clear improvement in certain performance indicators." Nevertheless, the number of "problem" institutions at quarter end increased to 775, up from 702 at the end of 2009 and representing 10% of all reporting institutions.

　

The positive signs include such things as lower provisions for loan loss reserves and reduced expenses for goodwill impairment. These and other factors contributed to reported earnings at FDIC-insured institutions of $18 billion, the highest quarterly total since the first quarter of 2008.

 

However, some of these positive sign look somewhat less reassuring on closer scrutiny. Thus, for example, though the reporting institutions reported $10.2 less in loan loss reserve increases than they had in the first quarter of 2009, only about one-third of all institutions reported year-over-year declines, with most of the overall reduction concentrated among a few of the largest banks.

 

In addition, there are indicators that some concerns have not yet started to improve. For example, the total number of loans at least three months past due climbed for the 16th consecutive quarter. The Wall Street Journal quotes FDIC chairman Sheila Bair as saying that "The banking system still has many problems to work through, and we cannot ignore the possibility of more financial market volatility,"

 

This uneven distribution of the positive signs and the continuing concerns in some areas helps explain at least in part how the number of "problem" institutions continues to grow despite the positive signs in the industry.

 

The FDIC defines "problem" institutions as those with "financial, operations or managerial weaknesses that threaten continued financial viability." These institutions are rated as "4" or "5" on the FDIC’s 1-to-5 scale of financial and operational criteria.

 

As of March 31, 2010, there were 725 "problem" institutions, which is the highest number since 1993. The 775 institutions represent total assets of $431,189 million. These figures also represent increases in the number of "problem" institutions and total assets of 154% and 96% respectively over the equivalent figures as of March 31, 2009, when there were 305 "problem" institutions representing $220,047 million in assets.

 

This increase over that period is all the more striking given that during the same 12 month period, the number of "problem" institutions was being reduced as some of those institutions changed their status from "problem" to "failed." During the period March 31, 2009 to March 31, 2010, the FDIC took control of 160 banks, which makes the growth in the number of "problem" institutions during that period all the more striking.

 

The March 31, 2010 "problem" institution figures also represent increases of 10% and 7%, respectively, in the number of institutions and total assets since December 31, 2009, when there were 702 "problem institutions" representing $402,782 in total assets.

 

Though the number of "problem" institutions continues to grow, the pressure on the FDIC may be beginning to ease. According to a May 19, 2010 New York Times article (here), the growing willingness of private investors to step in with financial investments in some trouble institutions is a positive sign that may mean fewer failed banks.

 

Interestingly, among the specific institutions the Times article mentions as having attracted private investment capital are banks that have also recently attracted securities class action lawsuits, including Synovus Financial, Sterling Financial, and Pacific Capital Corporation. (Perhaps the investment explains in part why the class action plaintiffs voluntarily dismissed their suit against Pacific Capital Bancorp, about which refer here.)

 

Once consequence of the improving banking industry conditions and the increasing willingness of private investors to step in is that there may be few total number of bank failures than some observers had previously projected. Thus, even those who had predicted 1,000 bank failures (a figure I questioned at the time they were first pronounced), now, according to the Times article, "foresee perhaps 500 to 750 bank failures."

 

If the continued pace of bank failures continues unabated through the end of 2011, we could perhaps reach a total number of bank failures of as many as 500 to 750 banks. (There have been 357 bank failures since January 1, 2008.) However, the positive signs indicating improvements in the banking sector and the return of private investors offers some hope that at some point the number of bank failures may begin to decline. Indeed, the Journal article quotes FDIC officials as saying that the bank failures will probably peak in 2010.

 

But for now, with the most current FDIC figures indicating an increase in the number of "problem" institutions, signs are that bank failures will continue to accumulate, at least for the near term.

 

"Beyond Tone Deaf": Though the $250 million punitive damages award in the Novartis class action gender discrimination case is outside of The D&O Diary’s usual bailiwick, it still caught our attention. There undoubtedly will be further proceedings in the case, but for eye-popping jury verdict is attracting scrutiny.

 

Those interested in trying to understand what the company may have done to get his with a punitive damages award of that magnitude will want to read Susan Beck’s scathing May 19, 2010 Am Law Litigation Daily column (here).

 

According to Beck, referring to the company’s trial counsel Richard Schnadig of the Vedder Price firm, "this was a company – and a lawyer – that simply didn’t know how to deal with the plaintiffs’ accusations. Their response to the women’s testimony was beyond tone deaf. It was, to put it bluntly, insulting and stupid."

 

As support for this statement, Beck cites Schnadig’s characterization in his closing arguments of the testimony of one the named plaintiffs, who testified that her manager had pressured her not to have children. Schnadig dismissed the plaintiff as hysterical, stating "I’ve never seen anybody cry so much on the witness stand in my life…She didn’t have very much to cry about…It’s like she had been knifed. Honestly, what’s wrong with this woman? She was so fragile." Her manager, Schnadig argued, was more credible because according to Schnadig, he was "a nice Southern guy."

 

Beck cites numerous other statements in closing arguments very much in the same vein.

 

Novartis may have had many other things to say in its defense, but these kinds of statements apparently did not play well with the jury. Jurors are scary enough as it is, but trying to convince a jury that the plaintiffs are just a bunch of crazy hysterics seems like a particularly ill-advised strategy.

 

　

As the subprime litigation wave evolved in late 2008, among the many cases arising were cases I described at the time as "new wave" subprime-related cases, where the target company’s financial problems were due not to the company’s own exposure to subprime-related assets, but rather due to the company’s exposure to other companies that suffered reverses because of the subprime meltdown.

 

One particular type of these new wave cases involved companies that were sued because of the target companies’ exposure to Lehman Brothers. In a May 17, 2010 order (here), Southern District of New York Judge John G. Koeltl ruled on the motion to dismiss in a case pending against JA Solar Holdings and certain of its directors and offices, in which it was alleged that the company had misrepresented its exposure to Lehman Brothers. In what is as far as I know the first ruling in one of the Lehman exposure cases, Judge Koetltl denied the defendants’ motion to dismiss.

 

As discussed at greater length here, JA Solar was sued in December 2008, after the company announced on November 12, 2008 that it was recording an impairment for the entire principal value of a Note the company had purchased from Lehman Treasury, a Netherlands-based affiliate of Lehman Brothers.

 

In July 2008, JA Solar completed a $400 million financing, following which it purchased a $100 million note from Lehman Treasury with an October 9, 2008 maturity date. The note was supposed to have 100% principal protection and was guaranteed by Lehman Brothers.

 

The plaintiffs alleged that the company made two sets of misrepresentations or omissions about the Note. First, in an August 12, 2008 press release and subsequent conference call, the company and its CFO mentioned that Lehman brothers was managing its cash but did not mention the purchase of the Note, or the nature of the company’s relationship to Lehman as a result of the company’s investment in the Note.

 

Second in a September 16, 2008 press release and conference call, on the day following the Lehman bankruptcy, the company disclosed the $100 million Note for the first time, but stressed that the Lehman unit that had issued the Note had not filed for bankruptcy and emphasized that the note was "principal protected." In the subsequent conference call, the company’s CFO stated that the company expected that at the end of the Note’s term "there will be principal and interest returned to us."

 

In the same call, but only in response to analysts’ questioning, the CFO acknowledged that the only recourse if the Lehman affiliate company does not repay the Note was a guarantee by Lehman, which was in bankruptcy.

 

On November 12, 2008, the company recorded a $100 million impairment charge for the value of the Note.

 

The defendants moved to dismiss the complaint, arguing that the company had no duty to disclose the Note in the August communications and that the total information in the September call adequately disclosed the information about the Note and the Lehman guarantee.

 

Judge Koeltl found that the plaintiffs had adequately alleged that in the August conference call the company’s CEO had made a misleading statement about Lehman’s role with the company. He found that the statements misrepresented "how JA Solar’s cash was invested and the truthful nature of JA’s Solar’s relationship with Lehman Brothers."

 

Judge Koeltl also found that the plaintiff had adequately alleged misrepresentations in connection with the September statements. Among other things, the company’s CEO had stressed that the Note has "100% principal protection" without stating that "any possible protection was provided solely by the bankrupt Lehman Brothers." Judge Koeltl added that "it is difficult to understand how JA Solar could have assured investors that the Note was fully protected when the only protection was provided by a company in bankruptcy."

 

Judge Koeltl rejected the defendants’ arguments that, in response to the analysts’ questions, the CFO had clarified the full effect of the Lehman Brothers bankruptcy. Judge Koeltl said that whether the statements effectively counterbalanced the prior statements is a factual question "that cannot be resolved in a motion to dismiss," adding that the plaintiffs "have pleaded sufficient facts at this stage to call in to question whether Mr. Lui’s statements cleansed the allegedly misleading statements. "

 

Finally Judge Koeltl found that the plaintiffs had adequately alleged scienter, finding that the plaintiffs had adequately alleged that the defendants knew in August that "JA Solar had not simply engaged Lehman Brothers to manage its cash, but rather than JA Solar had purchased the $100 million Note" which was guaranteed by Lehman from a Lehman affiliate. He also found the defendants knew "in spite of their statements in September 2008 that the Note had 100% principal protection and that they expected the principal and interest to be returned, that Lehman Brothers was the only guarantor of the Note and that Lehman Brothers was, in fact, in bankruptcy."

 

Judge Koeltl found that the defendants’ knowledge of these facts, in contradiction of their public statements, "satisfies the scienter requirement."

 

While a lot might be said about this decision, the overall impression is that Judge Koeltl was persuaded that the company had simply not been candid about its exposure to Lehman Brothers. Of course, it is hard now to recall how tumultuous and uncertain things were in the days in early fall 2008, but alleged facts create the impression that the company was straining to avoid disclosing how exposed it was to Lehman Brothers. Whether the defendants actually believed they would be able to redeem the Note at maturity, notwithstanding Lehman’s bankruptcy, is one issue that will have to be sorted out in this case as it goes forward.

 

I have in any event added the ruling in the JA Solar case to my running tally of subprime-related dismissal motions rulings, which can be accessed here.

 

Special thanks to a loyal reader for providing a copy of the JA Solar opinion.

 

Apologies: My apologies that this blog site was unavailable almost the entire day on May 17, 2010. Once again my hosting service, LexBlog, experienced server problems that managed to take the entire site offline for an extended period of time. I apologize to anyone inconvenienced by this hosting service failure.

 

 

Though some observers have reported a downturn in 2010 securities class action lawsuits compared to prior years, at least very recently there has been a flurry of filing activity, with six new securities suits in the past week, by my count. With these latest filings coming in, it seemed worthwhile to take a look at the most recent cases, to try to get a handle on where these latest suits are coming from. It does in fact appear that certain discernable factors are driving the recent filings.

 

1. The Headline Hit Parade: It is a truth universally acknowledged that a public company facing a public relations crisis must be in want of a securities class action lawsuit – or at least that seems to be the perspective of the plaintiffs’ bar. This pattern started earlier this year when Toyota’s sudden acceleration debacle led to a host of securities class action lawsuit filings (refer here). The pattern has been perpetuated in connection with the most recent public relations disasters.

 

Massey Energy sustains a coal mining disaster? Wham, in comes the securities class action lawsuit.

 

Goldman Sachs is target in a high profile SEC enforcement action: Pow, in comes the securities class action lawsuit.

 

Transocean is prominently involved in what may be the worst oil spill in U.S. history? Of course, a securities class action lawsuit filing followed closely behind. (The Transocean securities class action lawsuit filing follows closely on the heels of the shareholders’ derivative lawsuit filed against BP in connection with the Deepwater Horizon disaster, which I previously noted here.)

 

To find out which company will be next in line for one of these insult-to-injury lawsuits, just keep a close eye on the headlines – that seems to be what the plaintiffs’ lawyers are doing.

 

2. The Delayed Reaction Phenomenon: Another category of recent lawsuits look completely opposite from the headline driven lawsuits described above. Beginning around the middle of 2009, one phenomenon that developed was the emergence of belated lawsuits, where the filing date was as much as a year or more after the proposed class period cutoff date. Several of the most recent filings reflect this belated filing pattern.

 

For example, on May 11, 2010, plaintiffs’ lawyers initiated a securities class action lawsuit in the Southern District of New York against Pfizer and certain of its directors and officers. The proposed class period cutoff date is January 23, 2009, nearly 16 months prior to the initial filing date.

 

Similarly on May 12, 2010, plaintiffs’ lawyers initiated a securities class action lawsuit in the Western District of North Carolina against CommScope and certain of its directors and officers. The proposed class period cutoff date is October 30, 2008, more than 18 months before the initial filing date.

 

And on May 6, 2010, plaintiffs’ lawyers filed a complaint in the District of Delaware against Heckmann Corporation and certain of its directors and officers, in which the proposed class period cutoff date is May 8, 2009, just short of one year before the filing date.

 

Similarly belated filings have been an important aspect of the 2010 YTD securities class action lawsuit filings. Of the approximately 60 securities class action lawsuit filings this year, eleven (or about 18%) have been first filed at least one year after the proposed class period cutoff date. Perhaps more significantly, many of the most recent filing in May 2010 have been among these belated cases.

 

An interesting question related to these belated filings is whether the U.S. Supreme Court’s recent statute of limitations decision in the Merck case (about which refer here) will lead to the filing of even more superannuated suits. Reliable sources have suggested to me that it will.

 

3. Because That’s Where the Money Is: Since the beginning of the subprime-related litigation wave in 2007, lawsuits against financial services companies have predominated all filings. Though the proportion of filings against financial firms began to diminish around mid-2009, lawsuits against financial companies still represent the largest proportion of securities class action filings so far in 2010.

 

Thus, while the roughly 60 entities against which securities class action lawsuits have been filed so far this year represent 29 different Standard Industrial Classification (SIC) Code categories (and ten of the 60 lack any SIC Code classification), 17 of the 60 (or about 28%) involve companies in the 6000 SIC Code series (Finance, Insurance and Real Estate). Indeed, most of the entities lacking SIC Code designations are also financially related, and lawsuits filed against these two groups (that is, the 6000 SIC Code series entities and the entities without SIC Code designations) represent about 45% of all 2010 lawsuits.

 

The most noteworthy difference among the 2010 lawsuit filings involving financial companies compared to the most recent prior years’ filings is the number of commercial banks among the financial companies that have been sued. Indeed, several of the most recent filings have targeted failed or troubled banks, including, for example, the May 12, 2010 lawsuit filed against BancorpSouth (here), the May 7, 2010 lawsuit against First Regional Bancorp (here), and the April 15, 2010 lawsuit against Frontier Financial (here).

 

As I have recently noted, this lawsuit trend involving failed and troubled banks is likely to continue in the months ahead.

 

4. When All Else Fails: Though lawsuit filings against financial companies have continued to predominate among all securities suit filings, lawsuits against life sciences remain a familiar and important accompanying theme. With six lawsuits so far this year in the 283 SIC Code series (Drugs) and four more in the 384 SIC Code series (Surgical, Medical and Dental Instruments), lawsuits against life sciences companies remain an important part of 2010 lawsuit filings, as they have been in the past.

 

Several of the most recent lawsuit filings have involved life sciences companies, including the May 11, 2010 filing against Pfizer noted above, and the May 11, 2010 filing against NBTY. Indeed, 2010 filings that don’t involve either a financial services company or a life sciences company are in the distinct minority.

 

NERA Updates Options Backdating Securities Settlement Study: Earlier on in the evolution of the Options Backdating litigation, NERA Economic Consulting had reported (refer here), based on the handful of settlements at that time, that the options backdating cases were settling for lesser amounts than NERA’s analysis of all securities class action lawsuit settlements would predict. At the time, NERA proposed two possible alternative explanations – either the weaker backdating cases were settling first or suits alleging backdating were weaker than securities cases as a whole.

 

With many more of the options backdating securities class action lawsuits having settled (including the recent $173 million Maxim Integrated Product options backdating securities suit settlement), NERA has updated its analysis. In a May 12, 2010 report entitled "Do Options Backdating Class Actions Settle for Less – May 2010 Update" (here), NERA has taken a look at the 31 options backdating settlements and compared them to what their database model would predict.

 

Based on their analysis, NERA concluded that actual settlements were about 71% of predicted settlements. As a statistical matter they are unable based on the data to reject the hypothesis that "settlements in backdating class actions are, on average, no different than settlements in other shareholder class actions." This conclusion supports the corollary hypothesis that the "early settlements were relatively low because the weakest backdating class actions tended to settle most quickly."

 

The report includes a detailed list of each of the 31 options backdating related securities class action settlements to date.

 

Special thanks to Branko Jovanovic of NERA for permission to cite and link to the NERA backdating article.

 

SEC Settlements Update: And speaking of NERA updates, on May 14, 2010, NERA released its latest update on SEC settlement trends (here). In it last semiannual report, NERA reported that the SEC settled with 354 defendants in the first half of fiscal 2010, compared to 328 defendants in the second half of fiscal 2009 and 290 in the first half of 2009.

 

The first half of fiscal 2010 included two particularly noteworthy SEC settlements, the $314 million State Street settlement and the $150 million Bank of America settlement. The State Street settlement is the seventh largest SEC settlement since the passage of the Sarbanes Oxley Act.

 

Who’s On First/ In Whose Possession is First Base?: When I first conceived the title for this blog post, I recognized that I must construct the caption carefully or I would earn the scorn of vigilant grammarians. After careful review of the vast literature addressing the who’s/whose conundrum, I believe the caption is correct. It is always hard to tell who’s right and who’s wrong on these issues. But after all, whose blog is this? Who’s to tell? Whose views should prevail?