As the number of failed banks has mounted in the last couple of years, the question that has arisen is whether the FDIC will pursue claims against the directors and officers of the failed institutions. While we are still waiting to see what the FDIC will do, private litigants have been moving forward. In particular, in many cases the investors have pursued securities lawsuits against the directors and officers of the failed banks.

 

Unfortunately for some of these plaintiffs, however, a number of these cases have resulted in dismissals. By way of example, dismissal motions were granted in the BankUnited case, and Downey Financial case. However, a recent decision in the securities lawsuit surrounding the collapse of Corus Bankshares went the other way, in an opinion that is largely favorable to plaintiffs.

 

Until the bank was closed on September 11, 2009, Corus Bankshares operated as the holding company for Corus Bank, a depositary institution that concentrated its lending activities in commercial construction loans, particularly condominium construction and conversion loans. Investors sued Corus and two of its former officers alleging that Corus misrepresented its lending practices, capital position and loan loss reserves. As the court later stated "the complaint alleges that Corus misrepresented the nature and extent of its financial troubles and its ability to survive the downturn affecting the economy at the time." The defendants moved to dismiss.

 

In an order dated April 6, 2010 (here), Northern District of Illinois Judge Elaine Bucklo denied the motions to dismiss as to Corus and its former CEO, but granted the motion as to its former CFO.

 

In their dismissal motions, the defendants had argued that the plaintiff’s allegations represented nothing more than "fraud by hindsight," particularly with respect to plaintiff’s allegations about the inadequacy of the loan loss reserves. Judge Bucklo rejected these arguments, finding that "plaintiff here has alleged specific, concrete reasons for his contention that Corus should have known that its reserves were inadequate and needed to be increased, and that Corus’s statements about the adequacy of its reserves were misleading." Judge Bucklo also found that plaintiff’s allegations about other aspects of Corus’s financial condition were also sufficient.

 

Judge Bucklo also concluded that the plaintiff’s scienter allegations were sufficient, at least as to Corus and its former CEO. She said that "an inference of scienter is supported, first of all, by Corus’s awareness of the discrepancy between its public statements about its finances and the corporation’s true financial condition." The inference, she said, was "buttressed by many other allegations," including the company’s undisclosed use of special purpose entities.

 

The defendant had argued that the plaintiff’s scienter theory was undercut by the "frankness" of some of the company’s disclosures. Judge Bucklo said that

 

The argument is not without force, but it does not carry the day. Plaintiff does not contend that Corus sought to pull the wool over the public’s eyes by claiming that it would pass through the recession entirely unscathed. Instead, according to plaintiff, Corus’s fraud consisted largely in concealing the full extent of its financial difficulties. Thus, the fact that Corus disclosed certain of its difficulties during the class period does not necessarily negate any inference of scienter, for Corus’s statements may still have been intended to conceal the fact that its condition was substantially worse than it statements suggested.

 

Judge Bucklo also concluded that the scienter allegations were sufficient as to the company’s former CEO, largely in reliance on plaintiff’s allegations that the CEO was "deeply involved in every major aspect of the lending process." She concluded that plaintiff’s scienter allegations against the CFO were not sufficient, particularly where there were no allegations that the CFO was deeply involved in the lending process.

 

HomeBanc Corporation Securities Suit Dismissed: In a ruling that came out completely opposite from Corus case, on April 13, 2010, Northern District of Georgia Judge Timothy C. Batten, Sr. entered an order (here) granting with prejudice the defendants’ motions to dismiss the securities lawsuit pending against two former officers of HomeBanc Corporation.

 

HomeBanc was an Atlanta-based real estate investment trust in the business of investing in and originating residential mortgage loans. The plaintiffs alleged that prior to the company’s August 9, 2007 bankruptcy the defendants portrayed"overly rosy picture" of the company’s finances, and misrepresented the company’s underwriting practices, loan loss reserve model, and other aspects of the company’s lending and mortgage investment operations. The plaintiffs alleged that the company "loosened its underwriting standards and policies in response to slowing loan originations and shifted from its stated focus on conservative risk management to attempting to profit by selling poor quality loans." The defendants moved to dismiss.

 

In his April 13 order, Judge Batten agreed with the Defendants’ position that "the bulk of the statements upon which Plaintiff relies fail to satisfy the …standards for materiality." Among other things he found that the complaint "makes conclusory allegations of falsity without establishing contrary true facts." He also said that the complaint is "rife with forward-looking statements made by HomeBanc that were accompanies by meaningful risk disclosures."

 

Judge Batten also concluded that the plaintiff "has failed to allege sufficient facts to demonstrate a cogent and compelling inference of scienter," noting that "the complaint cites differences of opinion, conjecture and innuendo in an attempt to make the Defendants’ behavior look suspicious, but it conspicuously omits any facts that would require one to rule out an innocent explanation for the alleged behavior." Judge Batten also held that the plaintiff had not sufficiently pled loss causation.

 

Discussion

These are two completely different cases involving two completely different sets of parties and two completely different sets of allegations. But it is very hard to read them back to back and not come away with a strong impression of how different the two judges’ approaches were and how the difference of those approaches seemed to lead directly to the outcome. To be sure, the difference of the approach may be nothing more than a reflection of the relative merits of the two cases. On the other hand, it is hard to shake the impression that there were two different outcomes simply because there were two different judges involved.

 

Some might argue that I am being naïve to believe that merits outcomes ought not to turn simply of the luck of the judicial draw. And yet others might say that judicial draw has nothing to do with the difference in outcome of these two rulings, but rather the outcomes reflect the cases. And I suppose it could be said that the system requires only uniform principles not uniform outcomes. But all of that said, it really does seem sometimes that the most significant factor in determining the outcome of a case is the identity (and predisposition) of the judge.

 

At the risk of starting something, I do think it is interesting to note that Judge Bucklo, who denied the motion to dismiss in the Corus case, is a Clinton appointee, and Judge Batten, who granted the motion to dismiss, is a Bush (W) appointee. Not that that has anything to do with the outcomes, of course.

 

I have in any event added these rulings to my running tally of subprime and credit crisis related case resolutions, which can be accessed here.

 

Special thanks to the several readers who sent me copies of the Corus decision and to the loyal reader who sent me the HomeBanc decision.

 

PLUS Webinar: On April 22, 2010, at 2:00 P.M. EDT, I will be participating in a webinar sponsored by the Professional Liability Underwriting Society (PLUS) entitled "D&O Insurance and the Outcome and Timing of Securities Class Action Resolution: What New Data Shows." The purpose of the webinar is to discuss recent research completed by Stanford Law School Professor Michael Klausner on the impact of D&O insurance on securities class action resolutions. Professor Klausner’s research also addresses the timing of case resolution and factors affecting the eventual outcomes.

 

Joining me on the discussion panel, in addition to Professor Klausner, will be Steve Anderson of Beecher Carlson and Todd Greeley of C N A. The session will be moderated by Paul Lavelle of LVL Claims Services.

 

Information and Registration for this free webinar can be found here.

 

On April 14, 2010, the insurance information firm Advisen released its analysis of first quarter 2010 securities litigation filings and trends. The quarterly report, which is entitled "Securities Suits Ease Back to Normal Following a Frantic Two Years," can be accessed here. As detailed below, the Advisen report concludes that the securities lawsuit filing activity "floated back to earth in 2010, to a pre-credit crisis plateau."

 

 

 

Before any attempt can be made to try to read the Advisen report, it is absolutely indispensible to understand that the Advisen report uses its own terminology.　

 

The most important thing to understand is that the Advisen report uses the term "securities litigation" to include a very broad range of kinds of lawsuits, including not just securities class action lawsuits, but also derivative actions, regulatory and enforcement actions, individual lawsuits, and collective actions in courts outside the United States.　

 

The Advisen report also apparently includes within the category "securities lawsuits" cases that many readers might not think of as "securities claims," including claims alleging "common law torts, contract violations and breaches of fiduciary duties."

 

The Advisen report uses the term "securities lawsuits" basically to mean any type of corporate or securities litigation (other than ERISA litigation), regardless whether or not the legal action was commenced in the U.S. or even apparently whether it alleges a violation of the securities laws. Because of the enormous variety of litigation encompassed within this category, throughout this post I have put the phrase "securities lawsuits" or "securities litigation" in quotation marks.　

 

The Advisen report also uses the phrase "securities fraud" lawsuits as a subset of the larger group of "securities lawsuits." Contrary to what you might expect, however, the category of "securities fraud" lawsuits does not include class action lawsuits alleging securities fraud – securities fraud class action lawsuits are their own separate category ("SCAS"). Instead, the phrase is used to refer to regulatory and enforcement actions — yet somehow also includes private securities lawsuits that are not filed as class actions.

 

So the "securities fraud" lawsuit category includes, in addition to regulatory and enforcement actions, lawsuits alleging fraud under the federal securities laws if the fraud is alleged by an individual but not if it is alleged on behalf of a class.

 

The Report’s Conclusions

Though the Advisen report’s title suggests that "securities litigation" is "back to normal," overall what the report seems to show is that "securities litigation" declined in the first quarter relative to recent periods.

 

Thus the report shows that there were 178 "securities lawsuits" (again, as that term is very broadly defined in the report). This first quarter filing rate for this broad category of litigation is down 34 percent from the final quarter of 2009 and 39 percent compared the year prior first quarter. This relative reduction in filing activity appears to be due to the decline in the number of credit crisis and Madoff-related lawsuits.

 

The 178 "securities lawsuits" in the first quarter represents an annualized filing rate of 712 "securities lawsuits," which would be 29 percent below the 2009 total number of "securities lawsuits" of 1,003.

 

This filing decline also affected the number of securities class action lawsuit filings as well. (Again, securities class action lawsuits, or "SCAS," represent a subset of "securities lawsuits.") According to the Advisen study, there were 38 securities class action lawsuits filed in the first quarter, which would represent an annualized filing rate of only 152 lawsuits. (Just by way of comparison, Cornerstone reports that the annual average number of securities class action lawsuits during the period 1996 to 2008 was 197.)

 

In continuation of a recent trend, the proportion of securities class action lawsuits as a percentage of all "securities lawsuits" continued to decline in the first quarter of 2010. Securities class action lawsuits represent 21 percent of all "securities lawsuits" in the first quarter of 2010, down from 23 percent in all of 2009, and 28 percent in 2004.

 

Though the decline in quarterly filing activity is attributable to the decline in Madoff and credit crisis-related lawsuit filings, financial firms remained the most frequently targeted. Financial firms were named as defendants in 31 percent of all "securities lawsuits," down from 39 percent in 2009 and 42 percent in 2008.

 

In addition to this still significant but declining level of filings involving financial companies, the report also notes "a wider spread of suits by industry sector," including the following sectors, indentified by their prevalence as targets as a percentage of all "securities suits"; "information technology (14 percent), consumer discretionary (13 percent), healthcare (11 percent), and industrials (11 percent).

 

Seventeen (or ten percent) of first quarter 2010 "securities lawsuits" were filed against non-U.S companies, down from 12 percent in all of 2009. The report states that there was "one large suit [against a non-U.S. company] filed in a non-U.S. court." The report does not define what is meant by "large."

 

Advisen Webinar: On Friday On Friday April 16, 2010, I will be participating in an Advisen webinar, entitled "First Quarter Securities Litigation Review," to discuss first quarter 2010 securities lawsuit filings as well as other first quarter securities litigation developments. Other participants in the webinar, which will take place at 11:00 am EDT, include Ken Ross from Willis, ACE’s Scott Meyer, Wilkie Farr’s Michael Young, and Advisen’s David Bradford. Advisen’s Jim Blinn will moderate. Registration information for the webinar can be found here.　

　

 

Reader Advisory: Terminology Matters!

Editor’s Note: The corrected post is being republished to remedy an error in the prior email notification. The National Australia Bank case now awaiting decision before the United States Supreme Court raises what the Second Circuit in that same case called "the vexing question of the extraterritorial application of the [U.S.] securities laws." But while we all await the outcome of the NAB case, the lower courts are continuing to wrestle with these "vexing" questions. In two recent decisions in separate cases, two federal district court judges found they lacked subject matter jurisdiction over claims under the U.S. securities laws against foreign domiciled companies. Each of these decisions involved different aspects of the jurisdictional question and each represents outcomes that are interesting in distinct ways.

 

These questions of the extraterritorial application of the U.S. securities laws are most apparent in cases involving so-called "f-cubed claimants" – that is, foreign domiciled investors who bought their securities in foreign domiciled companies on foreign exchanges. Many of the most noteworthy recent cases, including the NAB case itself, have arising in the context of f-cubed claimant cases. The Fairfax Financial Holding case discussed below represents another example of an f-cubed claimant case.

 

But the European Aeronautic Defence & Space Co. case discussed below also involved a foreign domiciled company whose shares trade on foreign exchanges, but the plaintiff and the putative class consisted exclusively of U.S.-based investors. Thus, the EADS case represents an example of an "f-squared" case, as described in an April 10, 2010 memo (here) by lawyers from the Wachtell Lipton firm (who represented the EADS defendants in the EADS case) on the Harvard Law School Forum on Corporate Governance and Financial Reform. Nevertheless, though the case represented a lower jurisdictional exponent (i.e., squared rather than cubed) the court nonetheless found that it lacked subject matter jurisdiction, as discussed below.

 

European Aeronautic Defence & Space Co.: EADS is a public company organized under Dutch law and headquartered in the Netherlands. Its shares trade on Paris and Frankfurt stock exchanges, as well as on four Spanish exchanges. Its disclosures are governed by the laws of the European Union and its member states.

 

EADS shares are not traded on any U.S. exchange, although three U.S. banks have unsponsored American Depositary Receipts in EADS shares. EADS does not make filings with the SEC.

 

Bristol County Retirement System (a Massachusetts-based municipal employee retirement system) filed a securities complaint against EADS and three of its officers in the Southern District of New York on behalf of "all persons and entities residing in the United States" who purchased EADS shares during the class period. The complaint alleges that the defendants misled investors about production delays in the Airbus A380 super jumbo aircraft.

 

The defendants moved to dismiss alleging that the court lacked subject matter jurisdiction.

 

In a March 26, 2010 ruling (here), Southern District of New York Judge William H. Pauley III granted defendants’ motion, finding that neither the alleged U.S.-based conduct nor the alleged U.S.-based effects were sufficient to support jurisdiction.

 

With respect to his finding that the plaintiffs’ allegations failed to meet the conduct test, Judge Pauley said:

 

This was a European fraud. EADS is headquartered in Europe. Its shares trade only on European exchanges. It is subject to regulation by the European Union and its member states. Its investor disclosures were prepared and disseminated in Europe. The A380 production difficulties transpired in Europe. Bristol County purchased EADS shares on a European exchange. The gravamen of the Complaint is that EADS’s fraudulent disclosures in Europe inflated its share price on European exchanges, causing Bristol County to lose Euros. The only thing American about this case is Bristol County.

 

Even though Bristol sought to represent a class only of U.S. investors, Judge Pauley concluded that the plaintiffs failed to meet the effects test as well, ruling that "none of the putative class members are alleged to have acquired EADS shares on domestic securities markets." Judge Pauley added that "absent allegations linking the effects of the fraud to the United States, the federal securities laws do not reach this predominantly foreign fraud."

 

Interestingly, Judge Pauley found the plaintiff’s allegations did not meet the effects test despite the plaintiff’s contention that "there are seventy-three U.S. investors who hold 7 percent of EADS’s total outstanding shares," noting that these investors bought their shares overseas, and that even if some class members acquired shares as ADRs, absent a showing of a "substantial" effect on the purchasers, the "Court could not conclude the effects test has been met."

 

Judge Pauley also indicated that the doctrine of foreign non conveniens also separately supported dismissal, finding, among other things that the plaintiffs had an "adequate alternative forum" in European courts, notwithstanding the absence of class action procedures and the absence of recognition of the fraud on the market theory in those jurisdictions.

 

Fairfax Financial Holdings Limited: Fairfax is a Canadian financial holding company with a U.S.-based reinsurance operating unit. A Canadian investment fund, which bought its Fairfax shares in Canada, sued Fairfax in the Southern District of New York in a securities class action lawsuit, alleging that Fairfax had manipulated its reported financial results by improperly accounting for certain reinsurance contracts entered by its U.S.-based unit.

 

Though the named plaintiff bought its shares in Canada, Fairfax’s subordinate voting shares trade on the NYSE, and Fairfax has filed reports with the SEC.

 

In a March 29, 2010 opinion (here), Southern District of New York Judge George B. Daniels granted the defendants’ motion to dismiss for lack of subject matter jurisdiction. Judge Daniels found that "this case involves Canadian plaintiffs who bought shares of a Canadian company on a Canadian exchange" and that "neither the conduct nor the effects test provides a jurisdictional basis."

 

Judge Daniels found that the "allegations concerning United States based conduct are severely limited, both in number and jurisdictional significance." Though Fairfax’s U.S.-based reinsurance unit entered into the questioned transactions, the allegedly misleading financial statements were prepared in Canada. The U.S. unit’s conduct "may have contributed to the alleged scheme," but it was "Fairfax’s alleged conduct in Canada that defrauded investors and caused an inflated stock price."

 

Even thought the plaintiffs alleged an impact on U.S. markets and on U.S. investors, Judge Daniels found "the United States interest affected in this action is minimal, at best," particularly given that "this case involves foreign purchasers who acquired securities in a foreign exchange" and the lead plaintiff "fails to allege that any shares were bought or sold by investors on the New York Stock Exchange."

 

Though there are U.S. investors and though Fairfax has filed reports with the SEC, the lead plaintiff "fails to indicate that any conduct in Canada caused a United States investor to suffer a loss," and "conclusory allegations that Defendants’ fraud had a significant effect on unnamed Fairfax securities holders in the United States are insufficient."

 

Discussion

At least at the surface level, these cases are about nothing more than what the courts found the plaintiffs failed to allege. The inference is that with different allegations, the cases might have been permitted to proceed.

 

As a different level, however, these cases may be more about an unstated but evident judicial reluctance to impose U.S. securities laws on foreign companies in connection with securities transactions that took place outside the U.S. Because there is (at least not yet) no definitive legal authority that U.S. courts lack jurisdiction over extraterritorial transactions involving non-U.S. companies (whether or not the claimant is based in the U.S.), these courts both described their rulings in terms of the insufficiency of the plaintiffs’ allegations. However, in neither case were plaintiffs allowed to amend in order to attempt to cure the pleading defects.

 

Where you come out on the question whether or not these cases were correctly decided may well depend on how you feel about allowing U.S. courts to entertain cases under the U.S. securities laws against foreign domiciled companies, particularly with respect to transactions that took place outside the U.S. The plaintiffs in these cases may well feel aggrieved that a case, on the one hand, on behalf of exclusively U.S.-based investors, and, on the other hand, on against a company whose shares trade on U.S. exchanges and which files reports with the SEC, were not permitted to proceed in U.S. courts.

 

Defense-inclined observers may feel these courts appropriately declined jurisdiction. These observers may well contend that the mere presence of U.S-based investors alone without more arguably should not be enough to support jurisdiction, for the simple reason that there are very few investment vehicles of any kind any where in the world that do not have some U.S. investor involvement. If the mere presence of U.S. investors alone were sufficient to support jurisdiction, there would be few companies or transactions beyond the potential liability reach of the U.S. securities laws.

 

There is, however, a larger question here, which is whether U.S. securities laws appropriate should ever be applied to impose potential liability on non-U.S. companies and corporate officials in connection with transactions that took place outside the U.S. It might fairly be argued that to apply U.S.-based liability principles in this context might be an inappropriate extraterritorial extension of U.S. law to persons and transactions more appropriately regulated by the laws of other jurisdictions. One might argue that principles of comity and judicial restraint weigh against the U.S. courts’ exercise of jurisdiction.

 

The NAB base now awaiting decision at the U.S. Supreme Court may well address these larger principles, although the requirements of the specific case before the court may lead the court to rule narrowly, for example, declining jurisdiction without saying more about the circumstances under which jurisdiction is appropriate and how principles of comity might weigh in the analysis. These cases do raise difficult questions of legal authority and reach in a complex global economy.

 

As the cases above demonstrate, these issues will continue to arise, and absent definitive guidance from the Supreme Court – or Congress – the lower courts will continue to sort their way through these issues.

 

Andrew Longstreth’s March 31, 2010 AmLaw Litigation Daily article about these two cases can be found here. The 10b-5 Daily’s post about the EADS case can be found here. My initial post about the EADS case at the time the case was first filed can be found here.

 

Justice Stevens: The papers this weekend are full of articles about the retirement of Justice John Paul Stevens and his possible replacement. Perhaps in anticipation of these events, a couple weeks ago the New Yorker ran a March 22, 2010 biographical sketch of Stevens (here) written by the journalist and Court observer, Jeffrey Toobin. The article draws an interesting portrait of Stevens as the last of a dying breed, the moderate Republican. I recommend the article. It conveys a strong sense of the role that Stevens has played on the Court, particularly in recent years, as well as the possible consequences his departure may have going forward.

 

Advisen Quarterly Securities Litigation Webinar: On Friday April 16, 2010, I will be participating in an Advisen webinar, entitled "First Quarter Securities Litigation Review," to discuss first quarter 2010 securities lawsuit filings as well as other first quarter securities litigation developments. Other participants in the webinar, which will take place at 11:00 am EDT, include Ken Ross from Willis, ACE’s Scott Meyer, Wilkie Farr’s Michael Young, and Advisen’s David Bradford. Advisen’s Jim Blinn will moderate. Registration information for the webinar can be found here.

　

From time to time, the SEC reiterates its view of the critical role companies’ outside directors play in safeguarding investors’ interests. Nevertheless, it has been relatively rare for SEC to pursue enforcement actions against outside directors based on an alleged failure to fulfill that role, at least in connection with disclosure violations. A recent enforcement action in which the SEC charged an outside director as a primary violator for the company’s financial disclosures may suggest that the SEC is taking a more active enforcement approach against outside directors.

 

As reflected in the SEC’s March 15, 2010 press release (here), the SEC filed enforcement actions against three former senior executives and a former director of InfoGROUP. A copy of the enforcement complaint against the former director can be found here.

 

The actions arose out of allegations that the company’s CEO had used nearly $9.5 in corporate funds for a variety of personal expenses and that the company had entered into an undisclosed $9.3 million transaction with companies in which the CEO had a personal stake. The alleged personal expenses included personal travel on private jets; expenses related to the CEO’s yacht; personal credit card expenses, and other items.

 

The former director against whom the SEC pursued an enforcement action, Vasant Raval, had been chair of the board’s audit committee. Beginning in January 2005, Raval became aware of "red flags" concerning the CEO’s expenses and the related party transactions. The board asked Raval, in his capacity as audit committee chair, to investigate.

 

Ravel conducted his own investigation, without the assistance of independent counsel. His investigation revealed information suggesting inadequate documentation and explanations for many of the expenses and the related party transactions. He also received an unsolicited document from the company’s director of internal audit that questioned the business purpose of certain of the expenses. The SEC alleged that despite this information, "Ravel failed to take meaningful action to further investigate [the CEO’s] expenses."

 

Less than 2 weeks after beginning his investigation, Ravel presented he company’s board and its outside counsel the results of what he described as his "in-depth investigation," which, according to the SEC, failed to advise the board that he (Ravel) was aware of insufficient documentation for certain expenses.

 

During summer 2005, Ravel received additional information from the company’s new director of internal audit questioning some of the CEO’s expenses. The SEC alleged that Ravel failed to inform the board of these questions or to further investigate the issues himself.

 

The SEC alleged that Ravel had a duty to ensure the accuracy and completeness of the statements in the company’s SEC filings, but that he "failed to take appropriate action with respect to significant red flags" concerning the CEO’s expenses and the related party transactions. The SEC alleged that these improper expenses and transactions could have been uncovered sooner had Ravel further investigated the red flags or hired outside counsel or others to do so.

 

Ravel agreed to a bar to serving as an officer or director of a public company for five years and to pay a $50,000 civil penalty.

 

As discussed in a March 31, 2010 memo from the Bingham McCutchen law firm discussing this enforcement action (here), even though this case involves "particularly egregious allegations," it nevertheless represents "an important precedent." Though the case does not mean that "an outside director has a duty to investigate and verify all facts contained in SEC filings," it "certainly indicates that were a director is aware of ‘red flags’ concerning potential improper conduct, the director must conduct a thorough investigation."

 

It is not unprecedented for the SEC to pursue enforcement actions against outside directors. Among other things, the SEC has pursued claims for insider trading and other violations on numerous occasions. The SEC even pursued options backdating related allegations against three former directors of Mercury Interactive (about which refer here).

 

It is, however, unusual for the SEC to pursue enforcement actions against outside directors for primary violations based on disclosure obligations. The SEC did, as discussed here, pursue an enforcement action against outside directors of Spiegel for actively and knowing participating in a decision to withhold filing the company’s 10-K, out of concern over revealing the company’s "going concern" audit opinion. That case also involved rather egregious facts (for example, there were facts suggesting the directors supported efforts to withhold the filing even after having been informed that withholding the filing might violate federal securities laws).

 

Though enforcement actions against outside directors for disclosure related issues may be relatively rare and may also involve unusual and arguable egregious circumstances, they nevertheless represent significant instances where outside directors faced significant exposures. The Bingham memo expresses the concern that the action against Ravel, and particularly the harshness of the sanctions imposed against him "may indicate a new aggressiveness by the SEC in its enforcement program against outside directors."

 

Though these examples of SEC enforcement actions against outside directors involve unusual circumstances, they do underscore the fact that outside board service does involve potential liability exposures for the outside board members. Among other implications from these exposures is the critical importance of the D&O liability insurance available to protect outside board members in the event these kinds of issues should arise.

 

The typical D&O policy would not provide coverage for the penalties that Ravel paid in resolution of the enforcement action against him. However, he undoubtedly incurred significant defense expense in connection with the SEC action. A director’s defense expenses incurred under these circumstances typically would be covered, at least with respect to expenses incurred in the enforcement action itself as well as in connection with any formal investigation preceding the action.

 

However, when a company encounters significant problems of the kind leading to SEC enforcement actions or even private securities litigation, there often are many demands on the D&O insurance policy. The concern that there will be sufficient funds available to protect outside directors when problems do arise raises very important implications about policy structure, as I discuss at greater length here.

 

The bottom line is that insurance questions surrounding these issues are critically important and they underscore the importance of having a knowledgeable and skilled insurance professional involved in the D&O insurance transaction.

　

　

　

As the various year-end securities litigation studies have all shown, cases against financial services companies have dominated securities lawsuit filings for the last several years. But throughout that period, the plaintiffs’ attorneys have also continued to pursue claims against companies in other industries, particularly companies in the life sciences sector. A recent memorandum from David Kotler of the Dechert law firm entitled "Dechert Survey of Securities Fraud Class Actions Brought Against Life Sciences Companies" (here) takes a closer look at the securities lawsuits that were filed against life sciences companies in 2009.

 

According to the memo, there were 19 life sciences companies sued in securities class action lawsuits in 2009, representing roughly 10% of all 2009 securities suits. The 2009 filings against life sciences companies represents a slight decline from the 23 that were filed in 2008, but the proportion of all filings as the same, as the 23 filing in 2008 also represented about 10% of all filing. These proportions are slightly down from but roughly equal with the immediately preceding years – 14% in 2007, 13% in 2006 and 16% in 2005.

 

Consistent with prior years, the majority of 2009 life sciences company filings (12 out of 19) were brought against companies with market capitalizations under $250 million. This is roughly proportionate to the representation of companies of that size among all life sciences companies, as companies with market capitalizations under $250 million represent about 65% of all life sciences companies.

 

By contrast to prior years, but perhaps consistent with the overall economic environment, the 2009 life sciences lawsuits were more focused on allegations of financial improprieties rather than claims of misrepresentations involving industry-specific issues such as product safety or efficacy. Nine of the nineteen cases involved allegations of accounting improprieties, compared to six alleging misrepresentations involving product safety and six involving the prospects for or timing of FDA approval.

 

One particularly interesting section of the memorandum is its analysis of the current status of the securities lawsuits that were filed against life sciences companies in 2007. The memo reports that of the 25 life sciences lawsuits filed that year, 13 (or more than half) have either been dismissed or had summary judgment entered for the defense. As the memo notes this is "an exceptionally high rate of dismissals" (compared, for example, to the historical norms of securities lawsuit dismissals in the 33-40% range).

 

According to the memo, this dismissal rate suggests that "the securities fraud complaints brought against life sciences companies (at least in 2007) were not particularly well founded." The basis for dismissal of a majority of the dismissed cases was the plaintiffs’ failure to adequately plead scienter.

 

The memo includes a reference to the possibility, based on statements of DoJ officials, of life sciences companies’ increased exposure to FCPA enforcement proceedings, which also includes the possibility of civil litigation following on in the wake of disclosures of FCPA actions.

 

The memo’s analysis of the outcomes of the 2007 cases squares with my own perception that life sciences companies are frequently sued, perhaps more frequently than other companies, but that plaintiffs’ lawyers often have a hard time making the allegations stick. The memos analysis suggests that even if life sciences companies are sued more frequently than companies in other industries, the claims against life science companies may be dismissed more frequently as well.

 

Special thanks to David Kotler, the author of the Dechert memo, for sending me a copy of the memo.

　

The sudden upsurge in the number of subprime and credit crisis-related securities lawsuit dismissal motion rulings, noted in yesterday’s post, is continuing. As outlined below, courts in four separate cases also recently issued rulings. Each of the cases involved ’33 Act claims brought by purchasers of mortgage-backed securities. In each case, a part of the plaintiffs’ cases survived the motions, although in two of the cases the outcome is at best a mixed bag for the plaintiffs.

 

Here are the four cases, in chronological order:

 

DLJ Mortgage Capital/Credit Suisse: In a March 29, 2010 order (here), Southern District of New York Judge Paul Crotty granted in part and denied in part the defendants dismissal motions in the subprime-related lawsuit that had been filed against DLJ Mortgage Capital, which had sponsored and sold the mortgage-backed securities; Credit Suisse Management, which had issued the offering documents; the offering underwriters; individual signatories to the offering documents and rating agencies.

 

Judge Crotty granted the motion to dismiss, on the grounds of lack of standing, with respect to four offerings referenced in the complaint in which the plaintiffs had not purchased securities.

 

Judge Crotty also granted the motion to dismiss regarding allegations based on the offering documents’ statements concerning the mortgage originators’ practices concerning appraisals, loan to value ratios and ratings, holding that these allegations are not actionable where "the Complaint fails to allege that the speaker did not truly believe the statements at the time it was made public."

 

However, Judge Crotty denied the motions to dismiss with respect to the plaintiffs’ allegations concerning the mortgage originators’ "systematic disregard of the mortgage underwriting guidelines." Judge Crotty rejected the defendants’ argument that the offering documents contained sufficient cautionary language, because "the disclosures fail to make clear the magnitude of the risk" adding that "the allegations here are extreme, yet plausible in light of the rapid and precipitous decline in market value, concurrent with skyrocketing mortgage loan delinquency rates and plummeting credit ratings."

 

Residential Capital LLC/RALI Certificates: In a March 31, 2010 order (here), Southern District of New York Harold Baer, Jr., citing his own prior ruling in the Royal Bank of Scotland/Harborview Mortgage Trust case (about which, refer to yesterday’s post, here), granted in part and denied in part the defendants’ motions to dismiss in the lawsuit brought with respect to mortgage-backed certificates issued by Residential Capital, known as RALI Certificates.

 

Judge Baer granted, based on lack of standing, plaintiffs’ allegations concerning 55 of the 59 offerings referenced in the complaint in which the plaintiffs had not purchased shares.

 

Judge Baer also granted the motions to dismiss with respect to the plaintiffs’ allegations that the offering documents failed to disclose that the credit rating model used to evaluate the securities was outdated and that the credit enhancements offered in connection with the securities were inadequate.

 

Judge Baer noted that "there is no allegation that these offerings did not receive the stated credit rating or credit enhancements detailed in the Offering Documents," and that "there is no factual allegation that indicates the ratings and credit enhancements described in the documents were incorrect at the time offered."

 

Judge Baer also granted the motion to dismiss with respect to the alleged failure to disclose material conflicts with the rating agencies, holding that the defendants had no duty to disclose this information.

 

However, Judge Baer denied the motion to dismiss with respect to the plaintiffs’ allegations that the originator of the mortgages collateralizing the RALI Certificates "systematically disregarded" the underwriting guidelines. Relying on his prior opinion in the Royal Bank of Scotland case, Judge Baer noted that that the allegations that about the mortgage originators "improper underwriting practices coupled with the loan pools’ near-total credit rating collapse and default rate spike are sufficient to create a fair inference that the [originator] totally disregarded the underwriting guidelines."

 

Citigroup Mortgage Loan Trust: In an April 6, 2010 order (here), Southern District of New York Judge Leonard Wexler held granted in part and denied in part the motions to dismiss in the lawsuit relating to mortgage-backed securities issued by Citigroup Mortgage. As in the cases discussed above, Judge Wexler dismissed the allegations relating to the 16 of 18 offerings referenced in the complaint in which the named plaintiff had not purchased securities.

 

With respect to the remaining allegations that the offering documents had misrepresented the underwriting standards used in connection with the underlying mortgages, including in particular the loan to value ratios, appraisals and debt to income ratios, Judge Wexler said that "the strong nature of the cautionary language contained in the disclosure materials brings this case very close to the dismissal line."

 

However, "given the length of the Complaint" and "the fact that most of the Plaintiffs’ claims have been dismissed," Judge Wexler concluded that he "will not dismiss the case at this time." Rather Judge Wexler gave the plaintiffs’ leave to replead the remaining causes of action, according to his very specific guidelines, which "will put the court in a better position from which to evaluate the merits of the claim alleged."

 

Deutsche Alt-A Securities: In a second opinion also issued on April 6, 2010 (here), Judge Wexler on substantially similar grounds as stated in connection with the Citigroup Mortgage Loan Trust case, granted in part and denied in part the defendants’ motions to dismiss in the securities suit relating to the mortgage-backed securities issued by Deutsche Alt-A Securities. As in the Citigroup case, Judge Wexler gave the plaintiffs leave to replead the remaining claims that were not dismissed due to lack of standing.

 

Discussion

Certain generalizations emerge from the recent surge in subprime and credit crisis securities lawsuit dismissal motions rulings. The first and most obvious is that plaintiffs are not going to be allowed to raise ’33 Act claims in connection with offerings in which they did not purchase securities. This could substantially narrow many of these cases.

 

On the other hand, the winning allegation for plaintiffs (which appears to have been repeated verbatim in many of these mortgage-backed securities offering cases) seems to be that the mortgage originators "systematically disregarded" the underwriting guidelines. Courts seem skeptical of allegations concerning outdated credit rating models, inadequate credit enhancements and rating agency conflicts of interest.

 

The name of the game for plaintiffs in these cases is to survive a dismissal motion, and the plaintiffs will generally put a dismissal motion ruling in the win column even if only a small part of the case survives. So even though big chunks of all of these cases were dismissed, there may be enough in each of these cases for these plaintiffs to live for another day.

 

However in the two opinions of Judge Wexler referenced above, in which he said he would not dismiss the remaining allegations "at this time," the plaintiffs’ position arguably is more precarious, as the plaintiffs must replead their remaining allegations, after which their remaining and repled claims apparently must again withstand judicial scrutiny.

 

The sudden cascade of dismissal motion rulings is quite remarkable. It is not entirely clear why there has suddenly been such an onslaught of rulings in these subprime and credit crisis related securities suits. To some extent, it may just be coincidental. It may also be due to the fact that many of these cases are now maturing and are reaching the stage where they are now finally ripe for dismissal motion rulings.

 

In addition, a number of these rulings seem to be emerging now because there is a developing body of case law providing guidance on how these cases should be sorted out. Each of the rulings cited recent decisions in similar cases. There is a certain sense that the basic ground rules have now been worked out, making it a lot more straightforward to work out the remaining cases.

 

But whatever the reason may be, there certainly are an awful lot of decisions coming down all of a sudden. It is getting hard just to keep track.

 

I have in any event added all of these recent rulings to my running tally of subprime and credit crisis securities suit dismissal motion resolutions, which can be accessed here.

 

Many thanks to a loyal reader for copies of the decisions in the Citigroup and Deutsche cases. Thanks also to Joel Laitman of the Cohen Milstein firm for providing copies of the rulings in the Residential Capital and DLJ Mortgage cases. Cohen Milstein is sole lead plaintiffs’ counsel in these latter two cases.

 

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On April 6, 2010, PricewaterhouseCoopers issued this year’s version of its annual study of securities class action litigation (here). The PwC report differs in certain particulars from previously released studies of the 2009 securities lawsuit filings, but the overall findings are directionally consistent with the prior reports. PwC’s April 1. 2010 press release about its 2010 study can be found here.　

 

My own analysis of the 2009 securities lawsuit filings can be found here. Cornerstone’s previously released study of 2009 filings can be found here and Cornerstone’s study of the 2009 securities lawsuit settlements can be found here. NERA’s 2009 study can be found here and Advisen’s can be found here.

 

According to the PwC study, there were only 155 securities class action lawsuits in 2009. As discussed below, PwC’s lawsuit count differs materially from all other published account. Consistent with the other studies, however, PwC reports that the number of 2009 filings represented a significant decline from 2008, when, according to PwC, there were 210 filings.

 

With respect to the 2009 filings, PwC notes a "noteworthy trend" involving "the incidence of long delays between the end of the class period and the filing date of the case." The study notes that the 2009 average time lag of 219 days is almost double the average number of 114 days since the PSLRA was enacted.

 

The study also reports that a total of 34 cases were filed one year or more after proposed class period cutoff date, and also notes that most of these delayed cases were not related to the financial crisis. The study suggests that "plaintiffs’ attorneys may now be returning to where they left off before the financial crisis began." (My own most recent post concerning the belated lawsuit filings can be found here.)

 

For the second consecutive year, financial services companies were the most frequent securities lawsuit targets. Financial services companies were named in 41 percent of all filings, compared to 48 percent in 2008.

 

The concentration on financial services companies has meant a "two-year reprieve" for companies in the high-technology sectors. Traditionally these companies have been a favored target, representing, for example, 55 percent of all companies sued in 2001. By contrast, in 2009, high-tech companies were named in only 12 percent of all 2009 filings.

 

Filings against pharmaceutical companies have remained consistent. Since the enactment of the PSLRA, pharmaceutical companies have represented an annual average of eight percent of all filings, and since 2002, the average percentage of filings against pharmaceutical companies has represented double digit percentages. In 2009, new filings against pharmaceutical companies presented 14 percent of total filings.

 

New lawsuit filings against Fortune 500 companies represented 20 percent of all 2009 filings. Almost half of the Fortune 500 companies named in new securities suits in 2009 were financial services companies.

 

The average securities class action settlement in 2009 was $34.6 milllion, which is 20 percent lower than the $43.4 million settlement average in 2008, is above both the ten-year average of $31.5 million and the $30.7 million average since the enactment of the PSLRA. The average settlement value of cases that settled for $1 million or more and up to $50 million is $10.8 million, up slightly from $11.2 million in 2008. The median 2009 settlement was $9.5 million, up from $8.5 million in 2008.

 

(The settlement values, averages and medians exclude "outliers" but the study does not specify how outliers are defined. The PwC study assigns settlements to the year in which they were announced, by contrast to other studies which assign settlements to the year in which they are approved.)

 

The PwC study ends with the observation that though the number of securities class action lawsuits declined, companies should by no means "relax their guard." The study comments that the 2009 decline "may simply be a lull as the plaintiffs’ bar refocuses following two years of intense financial-crisis related filings."

 

Discussion

PwC is one of several organizations providing a substantial public service by making its annual securities litigation surveys publicly available, for free. The firm’s willingness to share its analysis and insights is a boon for which the rest of us should be very grateful.

 

There is a certain audience that is very keenly interested in these reports. Virtually every member of this audience reads all of these reports as they are published. For example, the typical reader of the PwC report has already read all of the other annual reports that I listed and linked to above.

 

Because of this general audience familiarity with all of these published reports, it is probable that most readers are fully aware of the material difference between the lawsuit count published in PwC’s report and those that appeared in the other published versions. By way of example and by contrast to the 2009 lawsuit count of 155 that PwC reported, my own count was 189. Cornerstone’s latest updated 2009 lawsuit count is 178. NERA’s projected number (released before year end) was 235.

 

In the absence of explanation, these differences can vexing and frustrating for the readers of these reports, who, as I mentioned, will typically read all of these reports.

 

There is absolutely no reason why the counts should agree. I know from maintaining my own count that reasonable minds can differ about how to count and whether or not to include certain kinds of cases. But though the counts almost as a matter of course will differ, the authors of the various counts owe it to their audience – which, again is going to be reading all of the various studies – to at least say why their counts differ from other published accounts.

 

One explanation for the difference between the PwC count and some other published counts is that PwC (as explained on the study’s "methodology" page) counts "multiple filings against he same defendant with similar allegations" as one case. Some other studies, for example, the NERA study, will count separate filings against the same defendant as separate lawsuits. But that distinction does not account for the difference between the PwC study and, for example, the Cornerstone study and my own count, both of which count related filings only once.

 

The PwC 2009 lawsuit count comes in at some 20 to 30 cases lower than Cornerstone’s and my count. Obviously, PwC counted something differently or left some things out. Obviously, PwC knows its counts are different and they know why, or could easily determine why, because Cornerstone publishes on the web the identities each of the cases that it counts. Given how easy it is for PwC to identify these differences and how easy it would have been to tell its audience of readers, it would have been far preferable if they could have acknowledged and explained these differences.

 

As I said before, the rest of us should be grateful that PwC and other firms are willing to share their data and analysis. But it doesn’t seem too much to suggest that these various publications could do a little bit more for their audience and acknowledge that their publication does not appear in a vacuum. Its audience is going to read each report in the context of the other reports.

 

The firms publishing these reports would substantially enhance the value of their annual studies to their intended audience if they would simply explain their counting methodology in greater detail and in particular how that methodology may explain differences from other published reports.

 

Again, there is absolutely no reason why the reports should be the same. There is absolutely no reason why the reports should use the same or even similar methodologies. But the reports’ audience would be grateful if they might better understand why they differ.

 

These various publishers would significantly enhance the value of their publications to their intended audience if they would simply acknowledge that each other exists.

 

Note to Subscribers: I recently changed the service I use for delivery of email notifications to subscribers. If you have not been receiving email notifications, the most expeditious thing to do at this point may be to resubscribe by entering your email address in the Subscribe dialog box in the right hand column, clicking Go, and then clicking on the subscription confirmation link. It is my hope the new service will be more reliable and more timely. I apologize for any inconvenience the change may cause.

 

I was only away from the office for a few days last week, but while I was away, an absolute cascade of dismissal motion rulings in subprime and credit crisis-related securities cases arrived. A number of the rulings were sufficiently favorable to the defendants that Alison Frankel commented in an April 1, 2010 article in the AmLaw Litigation Daily that "it’s been a truly lousy week for plaintiffs’ lawyers in the securities bar."

 

But while the defendants did indeed prevail in there motions to dismiss in a number of very high profile subprime and credit crisis-related securities lawsuits, not all of the rulings were favorable to the defendants. In several cases, the dismissal motions were denied, and in other cases enough of the case survived the dismissal motion rulings that the plaintiffs probably consider themselves to have been successful. As discussed further below, there arguably are certain discernable trends amongst all of these rulings.

 

Dismissal Motions Granted

The dismissal motion rulings that are most favorable to the defendants undoubtedly are the highest profile cases amongst the latest rulings. Here is a brief summary of the defense friendly rulings:

 

American International Group Derivative Litigation: In a March 30, 2010 opinion (here), Southern District of New York Judge Laura Taylor Swain granted the motion to dismiss the shareholders’ derivative suit that had been filed against American International Group and certain of its individual officers and directors. The plaintiffs claimed that the defendants had failed to properly oversee the company’s credit default contracts and had made certain material misstatements and omissions regarding the company’s financial health and risk management. The plaintiffs also allege waste and breach of fiduciary duty with regard to the company’s dividend increase and share buybacks instituted in the month’s preceding the company’s near collapse and government rescue.

 

The defendants moved to dismiss on the grounds that the plaintiffs failed to make presuit demand. The plaintiffs contended that because it would have been futile, demand was excused.

 

Judge Swain granted the defendants’ motion, concluding that because at least of five of the company’s nine June 2009 directors were sufficiently disinterested and independent, demand was not excused.

 

Of particular interest, in granting the defendants’ motion with respect to plaintiffs’ allegations concerning the alleged failure to oversee the company’s credit default swap exposures, the court specifically observed (in reliance on the Delaware Chancery Court’s February 2009 dismissal of the subprime-related derivative suit filed against Citigroup) that a plaintiff "may not support a claim based on the duty of oversight…merely by identifying signs of general difficulty in the market in which the company participates and asserting that the defendants should be held liable for exercising their business judgment in a manner that appears to have been inconsistent with those indications." Rather a plaintiff must allege that the directors "knew they were not discharging their fiduciary obligations" or "demonstrated a conscious disregard for their obligations."

 

Merrill Lynch Auction Rate Securities Litigation: In a March 31, 2010 ruling (here), Judge Loretta Preska granted the motion of defendants to dismiss the auction rate securities litigation that had been filed against Merrill Lynch and related entities. Judge Preska’s ruling is the latest in a series of auction rate securities lawsuit dismissals. However unlike many of the dismissals (for example, the dismissal of the UBS auction rate securities lawsuit), the dismissal did not depend alone on the Merrill Lynch’s entry into a regulatory settlement. The dismissal was, rather, on the merits.

 

Specifically, Judge Preska held, citing the recent ruling in the Raymond James auction rate securities litigation (refer here), that the plaintiffs had failed to allege with sufficient specificity, with respect to the allegedly misleading statements about the securities, "which financial advisors made such statements or when, where and to whom the statements were made."

 

Judge Preska also rejected the plaintiffs’ arguments that the defendants had engaged in manipulative conduct, holding that as a result of the defendants’ 2006 auction rate securities settlement with the SEC and related disclosures, the defendants’ market-related conduct was fully disclosed. Judge Preska also found that the plaintiffs had not sufficiently pled reliance.

 

In addition to the ruling in the Merrill Lynch case, in a March 30, 2010 order (here), Southern District of New York Judge Robert Patterson granted the motion of defendant Morgan Stanley to dismiss the individual action Ashland Inc. and related entities had filed against the company, alleging securities violations in connection with the plaintiffs’ purchase of over $66 million of auction rate securities. Judge Patterson found that certain allegations do not involve the "purchase or sale of securities," as they involved only the alleged inducement to hold securities. Judge Patterson also found that the plaintiffs’ allegations failed to support a strong inference of scienter. He also held that the plaintiffs had failed to establish that they had reasonably relied on the supposedly misleading statements.

 

Fremont General Corporation: In a March 29, 2010 order (here), Central District of California Judge Jacqueline Nguyen granted with prejudice the motion of defendants to dismiss the subprime related securities class action lawsuit that had been filed against Fremont General Corporation.

 

As noted here and here (scroll down), the court had previously granted the defendants’ motions to dismiss in the Fremont General case. In granting the renewed motion to dismiss, Judge Nguyen noted that renewed pleading "still fails to allege the causes of action with sufficient specificity," observing further that the plaintiffs’ third amended complaint "sets forth virtually no new facts, disregards [the court’s] order not to include certain allegations, and constitutes ‘puzzle pleading’ that made the [prior complaints] so difficult to decipher."

 

BankUnited Financial Corporation: On March 30, 2010, Southern District of Florida Judge Marcia Cooke entered an order (here), granting the motion of the individual defendants to dismiss the subprime related securities lawsuit that had been filed in connection with the events leading up to the May 21, 2009 closure of BankUnited FSB (for more about which refer here).

 

In granting the motion, Judge Cooke held that that certain of the statements on which plaintiffs sought to rely were "general, vague, unverifiable statements of corporate puffery." She found that other statements on which plaintiffs sought to rely were forward looking and protected by the safe harbor. She also found that various statements about the bank’s loan underwriting practices on which the plaintiffs sought to rely were not false and misleading. Judge Cooke also concluded that the plaintiffs had not sufficiently pled scienter, holding that the "generalized allegations" on which the plaintiffs sought to rely "do not support a strong inference of scienter, let along a strong one. "

 

Security Capital Assurance: In a March 31, 2010 order (here), Southern District of New York Judge Deborah A. Batts entered an order granting without prejudice the defendants’ motions to dismiss in the subprime-related securities class action lawsuit that had been filed against Security Capital Assurance, its Corporate parent XL Capital, certain of its individual directors and officers and its offering underwriters.

 

SCA is a holding company for financial guaranty insurance and reinsurance. SCA was formed by and was still partially owned by XL. As reflected here, the plaintiffs alleged that the defendants had misled investors about SCA’s exposure, through its insurance operations, to securities backed by subprime residential mortgages.

 

In her 84-page March 31 order, Judge Batts granted defendants’ motion on the grounds that plaintiffs had not sufficiently alleged either scienter or loss causation. In concluding that plaintiffs scienter allegations were insufficient, Judge Batts stated that "plaintiffs’ broad allegations that Defendants received and were aware of information contradicting their public statements because they held management roles is not enough to allege scienter." Judge Batts also noted, based on plaintiffs’ own allegations, "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."

 

In finding that plaintiffs had not adequately alleged loss causation, Judge Batts stated that "Plaintiffs have not with this Complaint effectively shown that it was the incremental revelation of Defendants’ fraudulent misrepresentations, and not the actions of third parties or other circumstances of the market that caused the decline in SCA’s share price over the Class Period." She adds that "Plaintiffs leave wide periods unaccounted for, and select inconsistent date spreads and wide event windows that permit market noise, and suggest Plaintiffs may be cherrypicking dates that suit their argument."

 

With respect to whether or not she should allow plaintiffs leave to amend, she noted that "it is not likely that Plaintiffs will be able to establish loss causation." But because "amendment might not be futile," the court allowed plaintiffs leave to amend their complaint.

 

Dismissal Motion Granted in Part and Denied in Part

In addition to the dismissal motion rulings described above in which the defendants’ motions prevailed, there were also a group of rulings in which the defendants prevailed in part. In some cases, the defendants were successful in having substantial parts of the plaintiffs’ cases dismissed. Nevertheless, in each of the following cases, the plaintiffs were able to preserve at least a part of their case, at least as to some defendants.

 

Harborview Mortgage Loan Trusts: In a March 26, 2010 order (here), Southern District of New York Judge Harold Baer, Jr. granted in part and denied in part the defendants’ motions to dismiss in the subprime related securities class action lawsuit involving the Harborview Mortgage Loan Trusts. The Trusts had issued certain mortgage backed securities, of which defendant Royal Bank of Scotland was the primary issuer and underwriter. Certain rating agencies that provided ratings of the securities were also named as defendants.

 

Judge Baer granted the rating agencies’ motions to dismiss on the grounds that they could not, as the plaintiffs’ sought to allege, be held liable under the Securities Act, as underwriters. Judge Baer also dismissed, on the basis of lack of standing, plaintiffs claims based on offerings in which the plaintiffs had not purchased securities. Judge Baer also dismissed plaintiffs’ claims that the RBS defendants had not disclosed conflicts of interest with the rating agencies or the dependence of the ratings on outdated ratings models.

 

However, while as a result of the rulings described in the preceding paragraph, substantial parts of plaintiffs’ claims did not survive the motion to dismiss, Judge Baer denied defendants motions to dismiss related to "misstatements and nondisclosure of mortgage originators’ ‘disregard’ for loan underwriting standards."

 

The loan originators in question included certain mortgage lenders whose names "are now synonymous with sub-prime lending and the housing market collapse," including Countrywide, American Home Mortgage Corporation, IndyMac, BankUnited, and Downey Savings. Judge Baer concluded that "plaintiffs have pled sufficient factual allegations to plausibly infer that the underwriting guidelines were disregarded by mortgage originators, and in conflict with the disclosures made in the Offering Documents." Judge Baer found the plaintiffs had alleged that the originators "systematically ignored their stated underwriting practices" and that "plaintiffs have also sufficiently, albeit just barely, connected these allegations to the offerings in question."

 

Credit-Based Asset Servicing & Securitization, LLC: In a terse, two-page March 31, 2010 order (here), Southern District of New York Judge Jed Rakoff granted in part and denied in part the defendants’ motion to dismiss that had been filed in the C-BASS subprime related securities lawsuit. Background regarding the lawsuit can be found here. The plaintiffs had alleged that the defendants had made material misrepresentations and omissions in the offering documents related to the sale of certain mortgage pass-through certificates.

 

For reasons that Judge Rakoff will elaborate upon in a forthcoming order, Judge Rakoff granted in part and denied in part the defendants’ dismissal motions. Judge Rakoff granted the dismissal motion as to claims involving offerings in which the plaintiffs had not purchased securities. Judge Rakoff also granted with prejudice the dismissal motions of the underwriter defendants, C-Bass itself and certain mortgage originator defendants. Judge Rakoff also granted without prejudice the dismissal motions of the offering underwriter defendants, as well as the Section 15 claims against certain individual defendants.

 

Though these rulings resulted in the elimination from the case of a substantial part of plaintiffs’ case, Judge Rakoff went on to rule that, other than the parts dismissed, "all other claims survive." According to an AmLaw Litigation Daily article discussing the decision (here), though Judge Rakoff’s ruling dismissed with prejudice plaintiffs claims on 65 offerings, his ruling also "keeps Merrill and other defendants exposed to liability on 19 mortgage-backed securities offerings."

 

MBIA: In a March 31, 2010 order (here), Southern District of New York Judge Kenneth Karas granted in part and denied in part the dismissal motions that had been filed in the subprime related securities class action lawsuit that had been filed against MBIA and certain of its directors and officers. MBIA provides insurance to traditional bond and structured finance issuers. As discussed at greater length here, the plaintiffs allege that the defendants misrepresented MBIA’s risk exposure to certain collateralized debt obligations containing residential mortgage-backed securities.

 

In his March 31 order, Judge Karas granted without prejudice the motions to dismiss of the two individual defendants, finding that the plaintiff had failed to "allege particularized facts sufficient to state a claim based on recklessness against" the two individuals. Judge Karas also dismissed without prejudice plaintiffs’ allegations against MBIA as to claims based on the company’s alleged failure to disclose the lack of certain structural protections for in the insurer in certain of the CDO transactions.

 

However, Judge Karas otherwise denied MBIA’s motion to dismiss, holding that even though the plaintiff had failed sufficiently to allege scienter as to the two individual defendants, the plaintiff "has alleged particularized facts supporting a strong inference of recklessness as to MBIA." He went on to find that "the inference that MBIA’s officers knew or likely knew that their statements were materially misleading" is "at least as plausible an inference that they were not aware of the potential importance of CDOs-squared to investors."

 

Dismissal Motions Substantially Denied

In addition to the motions described above in which a least a portion of plaintiffs claims survived the motions to dismiss, there were at least a couple recent dismissal motion rulings in which the plaintiffs’ claims substantially survived the dismissal motions rulings.

 

iStar Financial, Inc.: In a March 26, 2010 order (here), Southern District of New York Judge Richard Sullivan substantially denied the defendants’ motion to dismiss in the subprime-related securities lawsuit that filed against iStar Financial, certain of its directors and officers, and its offering underwriters. iStar is a real estate investment trut providing commercial real estate loans. The plaintiffs alleged that iStar had failed to disclose losses on certain investments, losses in its loan portfolio, and had misrepresented the carrying value of certain nonperforming loans.

 

Judge Sullivan denied the defendants motions to dismiss, other than with respect to the Section 12 claims against the individual defendants and the Section 11 claims as to one individual defendant.

 

In otherwise denying the motion to dismiss plaintiffs’ ’33 Act claims, Judge Sullivan rejected the defendants’ arguments that the quarterly reports and earnings calls preceding the company’s secondary offering put the market on notice of deteriorating loan performance. He stated that the Court is "unable to hold that there was sufficient information in the marketplace to render iStar’s nondisclosures in the registration statement immaterial as a matter of law." Judge Sullivan specifically rejected the underwriter defendants’ motions to dismiss.

 

Judge Sullivan also found that the plaintiffs had adequately alleged a claim under the ’34 act, specifically finding that the plaintiffs had adequately pleaded scienter, relying on plaintiffs’ allegations that defendants needed to conceal iStar’s deteriorating performance "to secure financing and mating an investment-grade rating."

 

Evergreen Ultra Short Opportunities Fund: In a March 31, 2010 ruling (here), District of Massachusetts Judge Nathaniel Gorton substantially denied the defendants’ motions to dismiss in the subprime-related securities class action lawsuit filed on behalf of investors who purchased shares of Evergreen Ultra Short Opportunities Fund. The plaintiffs sued the trust that issued the fund’s shares, the fund’s investment manager and its corporate parent, as well as individual members of the trust’s board of trustees. The plaintiffs alleged that the defendants had violated the securities laws by representing the fund as a "safe, liquid and stable investment" when, it was alleged, "it was comprised of illiquid, risky and volatile" mortgage-backed securities.

 

Judge Gorton denied the defendants’ motions to dismiss, except that he granted the trustees’ motion to dismiss the Section 12 claims that had been filed against them. Judge Gorton specifically found as sufficient plaintiffs’ allegations concerning the offering documents’ statements about the fund’s objectives; the offering documents’ statements about the fund’s limited holdings of illiquid assets; and the offering documents’ statements comparing the fund to certain indices which reflected longer average portfolio durations than the fund.

 

Discussion

There is little doubt that this line up of dismissal motion rulings reflects some significant defeats for the plaintiffs. The impact of these decisions undoubtedly is magnified by the high-profile nature of several of the cases in which the dismissals were granted.

 

But while the plaintiffs in some of these cases took some substantial hits, the overall outcome of this long list of dismissal motion rulings is far from just one-sided. There are of course the cases noted above in which the dismissal motions were substantially denied. Moreover, in the cases in which the dismissal motions were denied at least in part, the plaintiffs at least preserved the right to live for another day. Since the name of the game for the plaintiffs’ attorneys in these kinds of cases is just to get past the dismissal motion, the plaintiffs in these cases have preserved at least enough of their case to press on.

 

Though the plaintiffs did not come away empty handed in all of these cases and won some other motions more or less outright, the balance of these cases still do seem to be running in the defendants’ favor. As I noted in my recent status update on the subprime and credit crisis related securities litigation, the dismissal motion rate on these cases is running far higher than the 33-40% dismissal rate that generally applies to securities class action litigation.

 

To be sure, as I have frequently noted in the past, there are still many of these cases in which dismissal motions have not yet been heard. But with this recent wave of dismissal motion ruling described above, a significantly greater number of dismissal motions have been addressed, and the rulings do still seem to be running in defendants’ favor, disproportionately to historical norms.

 

Of course, it should be noted that there have been cases in which plaintiffs have managed to survive renewed dismissal motions based on amended pleadings filed after initial motions have been granted (as noted, for example, here, in connection with the Credit Suisse case).

 

I have in any event added all of these recent rulings to my now substantially updated register of subprime and credit crisis-related securities class action lawsuit dismissal motion rulings, which can be accessed here.

 

Very special thanks to the several readers who sent along copies of one or more of the above referenced decisions.

 

Subscription Update: As I have tried to let everyone know, I recently changed the service that I use for email subscription notices. It is my hope that the new service will afford more timely and more reliable service. Readers who subscribed in the past to receive email notices should have received during the past week a reminder to reconfirm their subscription. If you did not receive a notice, or if you deleted it without reconfirming, the most expeditious thing to do is to resubscribe by entering your email address in the Subscribe box in the right hand column and click Go. As an antispam measure, you will then be asked to confirm your subscription.

 

As I said, it is my hope that by switching services, I will be able to provide more reliable email notifications. I apologize for any inconvenience that the change may cause.

 

Last week (of March 29, 2010), I changed the service I use to distribute my email notifications. My hope is that this new email distribution service will provide subscribers with more timely and more reliable email notifications. In order to ensure continued receipt of email notification, subscribers will need to reconfirm their subscription.

On Monday, March 29, 2010, or within a day or two thereafter, all subscribers should have received an email from me at The D&O Diary, with instructions on how to resubscribe. This process should be relatively simple and should involve little more than clicking on al link and entering your email address. Again, all subscribers will need to resubscribe in order to continue to receive email notifications.

As you have probably noticed, I didn’t add any new content last week, while these changes were taking place, so the first email notifications from the new service will not appear until this week, of April 5, 2010.

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I look forward to communicating with readers again this week.

Oral argument in the Morrison v. National Australia Bank case, now before the U.S. Supreme Court on a petition for writ of certiorari, is scheduled to take place next week, on Monday March 29, 2010. The case presents questions about the extraterritorial application of the U.S. securities laws, questions of growing importance in light of increasing globalization of financial activity. My prior discussion of the Second Circuit’s ruling in the case can be found here.

 

While the NAB case represents the first time the U.S. Supreme Court will directly address these issues in the context of the U.S. securities laws, this is far from the first time the Court has been called on to address the extraterritorial application of U.S. law.

 

For example, the court has previously addressed the extraterritorial application of the U.S. antitrust laws. Most recently in the Court’s 2004 decision in Hoffman-LaRoche Ltd. v. Empagran S.A. (here), the Court held that it was unreasonable to apply U.S. antitrust laws to foreign conduct where the resulting foreign injury was independent of any domestic injury.

 

However, thought the Empagran case does address questions of extraterritorial application of U.S. laws, it may provide relatively little insight into how the Court might address the issues in the NAB case, since the Court in the Empagran case was interpreting an express statutory provision addressing the extraterritorial application of the U.S. antitrust laws, the Foreign Trade Antitrust Improvement Act of 1982. There is no equivalent statutory provision with respect to the securities laws – at least not yet. A brief overview of the extraterritorial application of the U.S. antitrust laws can be found here.

 

The question of extraterritorial application of U.S. laws comes up in a variety of contexts. Stetson Law Professor Ellen Podgor points out on her White Collar Crime Prof Law Blog (here) that a February 2010 petition for a writ of certiorari in the British American Tobacco case raises the question of the extraterritorial application of RICO. A copy of the cert petition can be found here.

 

In addition, according to a March 2010 paper by the Hughes Hubbard law firm (here), the question of extraterritoriality also comes up in the bankruptcy context. Just as there are practical advantages that would lead a foreign investor to pursue securities claim in U.S. courts under U.S. laws, there are reasons why a foreign domiciled debtor might decide to "enjoy the shelter of chapter 11 of the U.S. bankruptcy code," which the foreign debtor apparently can do if it has assets in the U.S. and a U.S. bankruptcy court accepts jurisdiction.

 

The fact is that in a complex global economy where cross-border business transactions are an integral part of financial activity, questions involving the extraterritorial application of law are inevitable.

 

Because of these fundamental considerations, the NAB case is both an important case and a closely watched case. The case has attracted fifteen amicus briefs, including briefs filed, among others, on behalf of the governments of Australia and of France. The United Kingdom and Northern Ireland also filed an amicus brief, here. The foreign governments urge that principles of comity and respect for the sovereign rights of nations to govern their internal affairs militate against the exercise of jurisdiction by U.S. court over the claims non-U.S. claimants against non- U.S. companies. All of the Supreme Court briefs in the NAB case can be found here.

 

Among the briefs is an amicus brief filed by the U.S. Solicitor General. The SG has urged that a transnational securities fraud violates the U.S. securities laws if "significant conduct material to its success" occurs in the United States and if the U.S.-based component of the fraud directly causes the claimant’s injury. (The SG’s brief also argues that the questions before the court are not jurisdictional at all, but rather simply the plaintiffs are entitled to relief under the relevant statutory scheme.)

 

I am going to go out on a limb here and make a prediction that the test that emerges from the Supreme Court is going to look a lot like that urged by the Solicitor General. That is, it will not be enough for claimant to allege merely that the U.S. conduct to be "a substantial component of the fraud," but rather the U.S. conduct must have directly caused the claimant’s injury. That is, the court will look at some sort of nexus to the injury test.

 

By way of illustration, in the NAB case itself, the alleged underlying financial fraud took place in Florida but the allegedly misleading disclosures were issued in Australia. Under the test urged by the SG, the misleading disclosures caused the claimant’s injury, not the underlying financial misconduct, and therefore the case should not go forward in U.S. courts.

 

Hiatus: The D&O Diary will be taking a break from its usual publication schedule for the next few days. Normal publication activities will resume the week of April 5, 2010.

 

Service Announcement: I just wanted to remind readers that I will be changing the service that I use for email notifications. The change will take place during the week of March 29, 2010.

 

The critical message here is that current email subscribers who wish to continue to receive email notifications will have to reconfirm their subscription.

 

If all goes according to plan, on March 29, readers will received an email message from me at The D&O Diary. The email message will require you to resubscribe in order to continue to receive email notifications from The D&O Diary. Please follow the links in the resubscription email in order to continue to receive email notifications.

Because of the break in the publication schedule, the first email notification from the new service will not arrive until the week of April 5.