The D&O Diary is pleased to present the following guest blog post, written by Angelo Savino (pictured),  a partner at the Cozen & O’Connor law firm. Angelo is resident in the firm’s New York office. Angelo’s guest blog post follows:

　

As noted in prior posts (here), the U.S. Supreme Court is considering whether to grant certiorari in the National Australia Bank ("NAB") case, which involves foreign-cubed or f-cubed litigation. At the Court’s invitation, the Solicitor General and the SEC have now weighed in with the government’s position by submitting a joint brief.

 

Oddly, as noted by 10b-5 Daily, the government argues that (1) every Circuit Court that has considered the extraterritorial reach of the federal securities laws since Judge Friendly’s 1975 decision in Bersch has focused on the wrong issue and (2) there is currently a conflict among the Circuits regarding the standard to be applied to foreign-cubed cases under the cause test, but that the Court should nevertheless deny certiorari. Ironically, the government’s position may increase the likelihood that the Court will grant cert.

 

Background

NAB involved claims on behalf of a class of foreign purchasers of stock in NAB, an Australian corporation, on foreign exchanges. The complaint alleged accounting irregularities at NAB’s Florida mortgage servicing subsidiary, Homeside, that were transmitted to NAB headquarters in Australia and incorporated into NAB’s financial statements, which were then disseminated from outside the U.S. The District Court dismissed the claim for lack of subject matter jurisdiction and the Second Circuit affirmed.

 

In considering the extraterritorial reach of the U.S. securities laws, the Second Circuit applied the cause test, which the Court articulated as follows: "subject matter jurisdiction exists if activities in this country were more than merely preparatory to a fraud and culpable acts or omissions occurring here directly caused losses to investors abroad." Relying on two 1975 decisions by Judge Henry Friendly – Bersch v. Drexel Firestone Inc. and IIT v. Vencap Ltd., the Court sought to identify which actions constituted the fraud and directly caused harm, or as the Court stated elsewhere in the opinion "what is central or at the heart of a fraudulent scheme."

 

Applying the above standard, the Court held that subject matter jurisdiction did not exist because NAB, not Homeside, was the publicly traded company and its executives at the Australian headquarters were primarily responsible for the company’s public filings, relations with investors, and public statements. Thus, the conduct that directly caused any loss occurred outside the U.S.

 

Thereafter, the plaintiff petitioned for cert. and the Supreme Court invited the government to submit its view on the petition. Although the SEC had previously submitted an amicus brief to the Second Circuit siding with the plaintiff and asserting that subject matter jurisdiction existed in the case, its current brief urges the Supreme Court to deny cert. because, although the Second Circuit analyzed the wrong issue, it reached the correct result.

 

Discussion

The most striking aspect of the government’s analysis is the assertion, contrary to the jurisprudence of the last 34 years, that "the geography of an alleged fraudulent scheme – i.e., whether it was conceived and executed in whole or in part outside the United States – is irrelevant to the district court’s subject-matter jurisdiction." Instead, the government would engraft a geographical component onto the 10b-5 cause of action. The government notes that in cases of transnational fraud, a private plaintiff should be required to demonstrate a direct causal link between his injury and the U.S. portion of the alleged scheme. The government concluded that, in this case, the link between Homeside’s accounting numbers and the harm to the plaintiffs was too attenuated because, as the Second Circuit explained, the numbers had to pass through numerous checkpoints manned by NAB’s Australian personnel before reaching investors.

 

In an action by the SEC, however, the government asserts that the transnational nature of a fraudulent scheme is relevant only insofar as it has a sufficient connection to the United States to bring it within section 10(b)’s substantive prohibition. This begs the question what is a sufficient connection. The government’s answer this time is to characterize Homeside’s conduct as integral to the overall scheme and, therefore, sufficient to support an SEC enforcement action.

 

So after trashing the analytical method applied by every court to consider the extraterritorial reach of the securities laws over the last 34 years, the government next concludes that the conduct at Homeside is insufficient for foreign private plaintiffs but sufficient for an SEC action. This tends to give the government’s analysis the appearance of intellectual gymnastics designed to preserve or extend its own ability to bring cases. It seems more analytically satisfying to accept the traditional jurisdictional analysis as correct, and require foreign-cubed plaintiffs to satisfy the cause test while requiring the SEC to demonstrate satisfaction of the effects test, which focuses on harm to U.S. investors and U.S. markets. Moreover, to the extent that the SEC seeks, in a given case, to prevent export of fraud from the U.S., it should rightly bear the burden on a motion to dismiss of demonstrating that the resources of U.S. courts are appropriately being used, as it would if the issue is jurisdictional, but not if it is part of the 10b-5 cause of action. The government’s analytical model would shift that burden for private plaintiffs as well, making it more likely that they would bring more actions in U.S. courts.

 

The government’s brief also recognizes the existence of a split among the Circuits, but characterizes it as "much less pronounced than petitioners contend." Different Circuits have in fact articulated different formulations of the cause test, as noted in the brief. Add to that calculus, the Eleventh Circuit’s recent decision in the CP Ships case, affirming a District Court’s finding of subject matter jurisdiction in a case that, like NAB, involved alleged accounting irregularities at the Florida subsidiary of a foreign company whose stock traded predominantly on foreign exchanges. The apparent inconsistencies among the Circuits, of course, may simply be the product of the fact-intensive inquiry inherent in analyzing causation regardless of how courts articulate the cause test. But even then, it would be preferable to have a single nationwide standard. Nevertheless, the government concludes that NAB is not a suitable vehicle for resolving the conflict because the petitioners identify no case indicating that any other Circuit would allow their suit to go forward.

 

Conclusion

The government’s arguments seem motivated by a concern that analyzing foreign-cubed cases as a jurisdictional issue and using the Second Circuit’s short-hand formulation of the cause test (where did the heart of the fraud occur?) could prevent the SEC from bringing enforcement actions in certain cases. The government’s reasoning, however, seems to miss the mark. The cause test will have an impact primarily, if not solely, in the foreign-cubed context where there is a foreign plaintiff. The SEC will be bringing cases generally when it perceives an effect on U.S. investors or markets and may, therefore, be evaluated under the effects test. Alternatively, it will need to justify invoking the power of the U.S. courts to protect primarily foreign interests by demonstrating domestic conduct that directly caused the losses. In any event, the jurisdictional analysis rightly places the burden of demonstrating that the action should proceed on the party bringing the case, which the government’s suggested analytical model would not, at least at the motion to dismiss stage.

 

Despite believing that courts have been misanalyzing the issue for over three decades and despite recognizing a split in the Circuits, the government urges the Court to deny cert. By stressing these issues in its brief, however, the government may very well persuade the Court of the need to resolve these questions in an era of increasing globalization of the capital markets and increasing incidence of foreign-cubed litigation.

 

The D&O Diary is very grateful to Angelo Savino for submitting this article for publication on this site. I welcome draft proposed guest posts from other authors. Anyone interested in submitting a proposed guest post should just drop me a note using this blog’s contact function (see the Contact link in the right hand column, above).

　　　

Where securities class action lawsuits are concentrated tends to vary over time. At various times over the past several years, companies in the high tech sector, telecommunications category and, more recently, in the financial services industries, have found themselves for a period to be the most popular targets for plaintiffs’ securities class action attorneys. However, beginning in August of this year and accelerating since then, exchange-traded funds (ETFs) appear become among the hottest new targets for securities class action lawsuits. Signs are that there could be more ETF-related securities suits ahead.

 

By my count there have been at least eight or nine and arguably as many as eleven (or more) new securities class action lawsuits filed against ETFs since August. (See my note below about the difficulty in counting these cases.) Though these lawsuits are separate and are separately filed on behalf of separate investors against separate ETFs, the allegations of these suits are quite similar – indeed, in many cases, virtually identical.

 

Two recent cases filed against ProShares Ultra Short Dow 30 Fund (refer here) and Direxion Shares Daily Financial Bear 3X Fund (refer here) illustrate the nature of this category of securities suits. The lawsuits overall, like these two, generally are filed against some variation of the funds themselves, the funds’ investment advisors or managers as well as the funds’ distributors, and the funds’ individual trustees. The ETFs themselves allegedly were designed to provide some multiple of the return (or of the inverse of the return) of some benchmark index or measure.

 

The complaints basically allege that the defendants failed to disclose to investors the risks associated with the investments, and in particular allegedly did not disclose the significant likelihood of losses to the value of the funds’ shares if held over time or even just for more than a single day, nor did the funds disclose the extent to which the funds’ results would likely diverge from their benchmark over time.

 

Though there have been many of these ETF-related securities lawsuits filed recently, there may be many more yet to come. Among other things, as inevitably seems to happen when plaintiffs’ lawyers start racing to stake out their piece of a hot property, at least one plaintiffs’ firm has issued a press release (here) announcing that it is investigating a whole raft of ETFs – indeed, the particular plaintiffs’ firm’s press release lists 75 different ETFs the firm is investigating.

 

Whether these cases will ultimately succeed or fail of course remains to be seen, but the plaintiffs’ firms’ actions clearly suggest that they think they are on to something.

 

These lawsuits already represent a significant part of the total number of securities class action lawsuits this year (depending on how you count, between five and ten percent of the total). If as seems likely at this point new ETF-related cases continue to be filed, the ETF cases will not only represent an even more significant portion of the total number of new securities cases this year, but they could also produce a material increase in the overall number of lawsuits that are filed this year.

 

But whatever the ultimate number of ETF-related cases ultimately proves to be, I believe that we have already reached the point where these cases represent their own separate phenomenon and therefore worthy of tracking on that basis.

 

Accordingly, I have created a separate list of the ETF lawsuit filings, which can be accessed here.

 

It is entirely possible that this list is incomplete, and I would be grateful if readers would let me know about any cases I may have missed. I will be updating this list as new ETF-related cases come in.

 

I should add that trying to keep track of these cases and to tell them apart is a particularly vexing task. Many of the ETFs have bewilderingly similar names, and some of the lawsuits purport to file claims on behalf of investors in multiple ETFs. Figuring out which suits are separate and which are duplicates is a considerable challenge. For each case presented separately on this list there have been multiple other apparently duplicate other filings that I have not listed. Some of these cases do overlap and there may well be consolidation of some (or, who knows, perhaps many or all) of these cases before all is said and done. I have tried as best as I can to identify separate cases separately. I welcome readers’ observations and comments about the list.

 

Though there have been a number of these suits, and though there could be many more, most of these suits are filed against ETFs within one single fund family. As a result, the extent of the contagion effect from this lawsuit outbreak so far has been relatively isolated. This concentration of many suits within a single fund family may diminish the insurance impact of this category event, as the single fund family likely carried only a single insurance program for all of the funds in the family. I stress that I have no direct knowledge one way or the other, but it is relatively unlikely that each new lawsuits represents a significant new insurance related loss or loss exposure.

 

Perhaps the Theory is "Better Late Than Never"?: In recent posts (most recently here),  I have noted another trend, which is the apparently belated filing of securities class action lawsuits, where the date of the proposed class period cut off is well in the past. For example, the new suit filed on October 28, 2009 against Pitney Bowes (refer here) has a proposed class period cut off date of October 29, 2007, suggesting that the case was filed just prior to the expiration of the two-year statute of limitations cut off date.

 

Well, if the cases I previously discussed could fairly be described as "belated," then the securities class action filed in the Southern District of California on October 30, 2009 against Avanir Pharmaceuticals and certain of its directors and officers can only be described as superannuated. Or more succintly, old. Perhaps even stale.

 

The actiion purports to be filed on behalf of persons who acquired shares of the company’s stock between July 1995 and October 31, 2006. That is, the complaint (a copy of which can be found here) was not filed until nearly three years after the proposed class action cutoff date.

 

There is no way of telling from the face of the complaint how the plaintiffs intend to try to overcome the rather obvious statute of limitations objection that the defendants will raise, expecially given that the complaint expressly alleges that the company’s true condition was revealed in an October 31, 2006 disclosure.  It will be interesting to see how the plaintiffs attempt to respond to the statute of limitations defense.

As a result of a November 2, 2009 ruling (here) by Northern District of California Judge Susan Illston, the PMI Group securities class action lawsuit is the latest subprime-related securities suit to survive a renewed motion to dismiss following plaintiffs’ filing of an amended complaint after the motion to dismiss their initial complaint had been granted. As was the case with respect to the recent ruling in the Washington Mutual subprime-related securities class action lawsuit (about which refer here), the PMI Group lawsuit plaintiffs overcame the shortcomings of their initial pleading with an amended complaint reliant upon added confidential witness allegations.

 

Background

The PMI Group, a residential mortgage insurer that also owns a controlling interest in bond insurer Financial Guaranty Insurance Corporation, as well as certain of PMI’s directors and officers, were first sued in a securities class action lawsuit in March 2008 (about which refer here). As discussed here, on July 1, 2009, Judge Illston granted in part and denied in part the defendants’ motion to dismiss the plaintiffs’ consolidated complaint.

 

In her July 1 order, Judge Illston held that the plaintiffs had adequately alleged material misrepresentation and loss causation, but she granted the motion with leave to amend on the grounds that the consolidated complaint did not adequately allege scienter. Among other things, Judge Illston observed that the complaint "falls short of showing that the defendants were aware that the statements were false and misleading when made."

 

On July 24, 2009, the plaintiffs filed their first amended complaint and the defendants renewed their dismissal motions.

 

November 2 Ruling

In her November 2 decision, Judge Illston denied the renewed dismissal motion. She noted that the plaintiffs’ amended complaint "differs from the original complaint in a number of ways." Among other things, she noted that the plaintiffs had "supplemented their allegations regarding previous confidential witnesses and added three new confidential witnesses." The plaintiffs also added additional allegations regarding admissions the defendants had allegedly made, as well as allegations PMI itself had made in a lawsuit against a third party, among other things.

 

Based on these amended allegations, Judge Illston found that the plaintiffs had "cured the deficiencies" in the prior complaint and that the amended complaint "sufficiently alleges a strong inference of scienter." Among other things, Judge Illston referenced the amended complaints’ allegation, through the confidential witnesses, of the defendants’ awareness of the alleged problems in PMI’s credit risk assessments, as well as rising defaults.

 

Discussion

Judge Illston’s denial of the renewed motion to dismiss in the PMI Group case follows the October 27, 2009 ruling in the Washington Mutual subprime-related securities suit in which the renewed motion to dismiss following an initial dismissal similarly was granted. In both cases, the plaintiffs’ amended complaint overcame the pleading shortcoming found in their initial complaint.

 

If nothing else, these cases demonstrate that it is possible for plaintiffs to overcome an initial dismissal. Though not all plaintiffs will be able to muster sufficient confidential witness testimony and other allegations to cure the initial pleading shortcomings, these rulings at least show that plaintiffs who are able to muster enough can overcome the initial pleading hurdles and survive the motion to dismiss, even if the initial motions were granted.

 

And though two case decisions alone may represent far too little data from which to generalize, the success of these plaintiffs on renewed dismissal motions following pleading amendments does suggest that it might have been mature for some commentators (including me perhaps) to suggest that plaintiffs are not faring well in the subprime-related securities class action lawsuits.

 

Even though a number of dismissal motions have been granted in these cases, many of the motions were granted without prejudice. The recent rulings in the PMI Group and WaMu subprime-related securities suits suggest that a certain number of these initially dismissed cases may well survive renewed motions, and so the scoreboard could look different, perhaps quite a bit different, when all the initial pleading processes in these cases have fully played out.

 

I have in any event added the November 2 ruling to my register of dismissal motion rulings in the subprime-related lawsuits. The register can be accessed here.

 

It is probably worth noting that another significant corporate investor in the Financial Guaranty Insurance Corporation, The Blackstone Group, has also been sued in a subprime-related class action lawsuit in connection with the company’s write-down of its investment in bond insurer, about which refer here.

 

Another Subprime Lawsuit Settlement: It appears that I may have missed an earlier settlement of a subprime-related securities class action lawsuit. As reflected here, on September 2, 2009, the parties to the Hovnanian Enterprises subprime-related securities suit entered an agreement to settle the case for $4 million. I have added this settlement to my list of subprime-related lawsuit case resolutions, here.

 

While I have long predicted (refer here) the possibility of litigation against directors and officers of public companies concerning global climate change-related disclosures, to date the lawsuits have not materialized. Which is not to say that there have not been relevant developments – to the contrary, there have been many, as discussed below. There just haven’t been any disclosure lawsuits.

 

However, recent case law developments in the Second and Fifth Circuits, though relating to an entirely different area of the law, suggest that there may be a new environment for climate change-related lawsuits, as a result of which climate change disclosure lawsuits have moved one step closer.

 

 

The Recent Decisions

 

As summarized in an October 29, 2009 memorandum entitled “Judicial Climate for ‘Global Warming’ Claims Getting Worse?” (here) by Theodore Howard and Jeremiah Galus of the Wiley Rein law firm, the two recent case law developments are the Second Circuit’s September 21, 2009 decision in Connecticut v. American Electric Power Co. (here) and the Fifth Circuit’s October 16, 2009 decision in Comer v. Murphy Oil USA (here).

 

 

In each of these cases, a variety of claimants asserted claims based on nuisance and other tort theories against a variety of utilities and energy related companies, claiming that the defendants’ carbon emissions had caused (or increased) the plaintiffs’ claimed harm. The claimants in the Comer case are victims of Hurricane Katrina, who basically claim the defendants’ activities exacerbated the hurricane damage. In each case, the district court held the plaintiffs’ claims could not surmount initial justiciability and standing hurdles.

 

 

However, in both cases, the appellate courts determined that the plaintiffs did have standing to assert their claims and held that their claims do not present non-justiciable political questions.

As the law firm memo notes, these rulings “may have removed significant hurdles from the paths of plaintiffs seeking to hold corporate emitters of greenhouse gases liable for harms allegedly caused by global warming.” But though the decisions “may signal a shift in the way courts view tort-based global warming claims,” it is “still too early to project the decisions’ significance.”

 

 

Among other considerations the memo notes as suggesting that the decisions’ significance ultimately may be reduced is the fact that at least one district court case already has expressly declined to follow the Second Circuit’s analysis in the American Electric Power case. The memo also notes that the “plaintiffs undoubtedly still face the potentially insurmountable task of proving how and to what extent a particular corporation’s contribution to global warming proximately caused a particular plaintiffs’ injuries.”

 

 

For these reasons, the memo notes, it “remains to be seen” whether the cases “pose a serious risk of liability exposure for corporate defendants,” but the corporations – and their insurers – “should be paying close attention to further developments in these cases.”

 

 

Discussion

 

On at least one level – and arguably on all levels – these developments have little to do with the possibility of claims against corporate directors and officers for climate change-related disclosures. These lawsuits raise claims only on tort and nuisance theories. Moreover, it does, as the law firm memo notes “remain to be seen” whether these cases will result in any liability even on those claims.

 

 

Nevertheless, I believe these cases represent potentially significant developments with respect to the possibility of climate change disclosure litigation. First, as the memo notes, these cases “may signal a shift in the way in which the federal courts view tort-related global warming claims.” The extent to which judicial perspectives have been changed and to which hurdles have been removed may not be limited just to the context of tort-related cases.

 

 

The context within which all climate change related cases are considered may have changed, particularly to the extent these courts “newfound willingness” to consider these cases is, as the memo suggests, “derived from a perceived failure on the part of the legislative and executive branches to address the issue.” If prospective plaintiffs believe that climate change-related claims may be more likely to receive a receptive hearing, they may be encouraged to bring further claims, whether based on tort or based on other theories.

 

 

Some readers may regard my generalization of these tort case developments to the world of D&O claims as analytically unwarranted, and they may be right. However, I think this recent case decisions are most properly viewed as the just the latest in a series of developments that have brought the climate change debate ever closer to the courts.

 

 

The first development in this chain was the U.S. Supreme Court’s 2007 decision in Massachusetts v. EPA (about which refer here). The chain continued with New York AG Andrew Cuomo’s climate change disclosure subpoenas to several utilities, which resulted in several of the utilities agreeing to certain disclosure principles (refer here). There have been several other extensions of the chain, including the National Association of Insurance Commissioners’ promulgation of climate change disclosure principles for insurance companies, as well as the EPA’s April 2009 endangerment finding (about which refer here). Similarly, there have been a variety of Congressional and other initiatives toward mandating climate change related disclosures (refer here).

 

 

These appellate decisions are just the latest event in this continuing chain of developments. In addition,  there are other reasons why I think we can expect to see disclosure related litigation. Among other things, the pattern for the kind of disclosure related case that may yet arise is already established. As I noted in a recent post (here), there is already a pattern for disclosure-related cases based on alleged misrepresentations or omissions related to environmental liabilities and contingent litigation exposures.

 

 

Moreover, there is an extensive network of activists who are politically motivated to bring these kinds of claims. Andrew Cuomo was attempting to appeal directly to this network when he filed the disclosure-related subpoenas against the utilities, and there are countless others whose political agenda would be served by similar initiative, including litigation. As the chain of developments outlined above continues to lengthen, these motivated actors, who already have demonstrated their willingness to pursue litigation to advance their goals, may well target concerned players concerning their climate change-related disclosure.

 

 

I know from prior communications with readers that there is some significant skepticism about the prospect for climate change-related disclosure litigation any time soon. These skeptics could well be right, since there that kind of litigation is unlikely to arise in the absence of a significant share price decline from a company’s disclosure of some climate change or greenhouse gas emission related issue. But I still think the possibility of these kinds of claims arising is merely a question of when, not if. (Some people I am sure assume I am afflicted with some unbreakable curse that compels me to make these predictions at least once every quarter.)

 

 

A Couple of Securities Class Action Settlement Notes: The long-running securities class action lawsuit involving Adams Golf and certain of its directors and officers has finally settled. The case, which was went all the way through discovery and which suffered from delays owing to judicial vacancies,  was first filed in June 1999 and related to the company’s July 1998 IPO. More details about the case can be found here.

 

 

According to the company’s November 3, 2009 press release (here), the settlement provides for a payment to the plaintiff class of $16.5 million, of which Adams Golf itself has agreed to contribute $5 million.

 

 

Readers of this blog may be interested in the statement in the press release that Adams was "forced" to contribute the $5 million "because one of its former insurers refused to contribute to teh settlement based on the alleged late notice of the claim." The press release states that Adams has commenced coverage litigation against the former insurer and against its former insurance broker. The settlement requires Adams to pay the class action plaintiffs the first $1.25 million of any recovery, net of fees and expenses, that Adams recovers in the ongoing litigation with the former insurer and former broker. Further details about the settlement and the coverage litigation can be found on Adams Golf’s November 3, 2009 filing on Form 8-K (here).

 

 

In a separate development, in a November 3, 2009 press release (here), Quest Software announced that it has settled the options backdating related  securities class action lawsuit that had been filed against the company and certain of its directors and officers. The case settled for $29.4 million. Background regarding the case can be found here. I have added the Quest Software settlement to my running tally of options backdating related settlements, which can be found here.

 

 

Special thanks to Adam Savett of the Securities Litigation Watch blog (here) for providing the information about the Quest settlement.

 

In an October 29, 2009 order (here, Hat Tip: Am Law Litigation Daily), Ontario Court of Justice judge Paul Perell ruled that the direct involvement of the U.S.-based law firm Milberg LLP was permissible in the securities class action lawsuit filed against Timminco Limited and pending before the court.

 

Timminco had been sued in two separate proposed class actions under Part XXIII.1 of the Ontario Securities Act. The first filed action (about which refer here) was brought by Toronto-based Kim Orr Barristers P.C. The second was brought later (refer here) by the London (Ont.)-based Siskinds law firm. Each of the respective law firms filed cross-motions to stay the other action. (The motions were presented as "carriage motions," the purpose of which is "to stay all other present and future class proceedings relating to the subject matter.")

 

The Kim Orr law firm argued that because of its association with Milberg, which it described in its motion papers as "a pre-eminent American class action firm," it is "in the best position to prosecute the action." In a response that the Ontario court characterized as "unkindly," the Siskinds law firm drew attention to the "serious stain on the reputation of Milberg LLP," and also raised concerns about the American law firm’s involvement in an Ontario class action.

 

Calling it a "very difficult decision and a very close call," the Ontario court ruled in favor of the Kim Orr firm and stayed the Siskinds action.

 

The court did observe that the Siskinds firm is "one of the pre-eminent class action firms in Canada." The Kim Orr firm, founded in January 2008 was formed by attorneys from other firms that the court described as "pre-eminent."

 

The Ontario court did note the criminal misconduct in which certain Milberg partners had been involved, but also noted that all of the criminally charged attorneys had left the firm. He further noted that the two Milberg attorneys proposed to be involved in the Timminco case were "untainted" by the wrongdoing.

 

The two Milberg attorneys are Michael C. Spencer (currently involved in the trial of the Vivendi securities class action lawsuit in New York) and Arthur Miller (who among other things is an NYU law professor and previously a law professor at Harvard Law School). In support of its motion to lead the Timminco case, a Kim Orr partner submitted an affidavit stating that Milberg’s "experience and resources will greatly enhance our ability to prosecute the case."

 

In reaching its decision to allow the Kim Orr firm action to proceed, the court said it found the involvement of the Milberg firm to be a "neutral factor." The court observed that Milberg "does not bear the mark of Cain," and the two Milberg attorneys "have fine reputations and excellent credentials."

 

The court also noted that while "one can posit examples where the involvement of an American law firm would be grounds for disqualifying an Ontario firm," this is not one of those cases. The court found that Milberg’s proposed role of providing "investigative services, document management services, and strategic advice" not to be disqualifying.

 

After a detailed review of the two law firms’ respective class action claims, the court decided to favor the application of the Kim Orr firm and granted its motion to stay the Siskinds action.

 

An October 30, 2009 Am Law Litigation Daily article about the ruling can be found here.

 

Over the past several years, many of the leading U.S. plaintiffs’ securities class action law firms have launched various initiatives to expand their practice internationally. (Refer, for example, here.) As the Timminco case appears to demonstrate, one consequence seems to be the export to other countries of U.S.-based securities class action experience and expertise.

 

These developments not only seem to be producing an expanded universe of opportunities for the U.S. law firms, but also, given that what the U.S. firms are contributing is their "experience," seem to threaten the possible overseas extension of many attributes of U.S.-style securities class action litigation.

 

The decision in the Timminco case discussed above underscores that there are limitations for U.S. attorneys’ involvement. Indeed, the Am Law Litigation Daily article linked above describes a prior case in which the purely financial involvement of the U.S.-based Motley Rice law firm in a prior Ontario class action lawsuit was disallowed. But the fact that Milberg firm will be participating in the Timminco case does suggest that U.S. plaintiffs’ securities class action attorneys may and sometimes will play a role in the prosecution of securities actions outside the U.S., a development that undoubtedly will be unwelcome for the potential litigation targets in other countries.

 

These developments will also be unwelcome to the potential targets’ D&O insurers as well. Along those lines, it is worth noting that in the October 29 opinion in the Timminco case, Judge Perell expressly noted that "the Timminco directors carry insurance policies that may be available to partially compensate class members if the litigation is resolved in their favor."

 

Timminco’s D&O insurance limits would potentially exposed whether or not the Milberg firm was involved in the case. But the prospect of U.S.-based securities class action plaintiffs’ attorneys aiding securities class action litigation outside the U.S. does seem to present some unwelcome additional possibilities, both in this case as well as other cases yet to come, in Ontario or elsewhere.

 

To be sure, the local attorneys appear highly motivated to develop their own securities class action practices, and it could be, as Judge Perell observed in the Timminco case, that the U.S. plaintiffs’ attorneys presence or involvement really is just a "neutral factor." From my perspective, though, the U.S. securities plaintiffs’ attorneys’ involvement could represent an additional force advancing the development of securities class action litigation outside the U.S.

 

In what is the largest number of banks closed on a single day in years, this past Friday night the FDIC seized nine related lending institutions. The nine banks, based in California, Illinois, Texas and Arizona, had been owned by FBOP Corp., a privately held Illinois-based bank holding company. U.S. Bancorp agreed to assume all of the combined banks assets of $19.4 billion and deposits of $15.4 billion.

 

The latest round of closures brings the 2009 YTD total number of bank closures to 115, already the highest annual total since 1992, when 181 lending institutions failed during the S&L crisis. 31 banks failed just in September and October 2009 alone, more than the 25 banks that failed during all of 2008. Indeed, the FDIC has closed 16 banks just in the last two weeks. The FDIC’s complete list of failed banks can be found here.

 

Though certain states have seen higher numbers of bank failures this year, the current banking woes are not contained to just one state or region. The failed banks are quite dispersed geographically. 31 different states have had at least one bank closed this year. The states with the highest numbers of bank failures are Illinois (20), Georgia (19), California (13), Texas (5) and Minnesota (5). The Wall Street Journal has a nifty interactive map of the U.S. showing the location of the bank failures, with scaled markers indicated the relative size of each failed bank.

 

One of the banks closed this past Friday night was California National Bank. With assets of $7.8 billion and $6.2 billion in deposits, CNB is the fourth largest bank to fail this year, according to the Los Angeles Times (here).

 

The FBOP banks had their share of troubled loans, but the collapse of FBOP’s banks was, according to the Chicago Tribune (here), the result of "an abrupt reversal of fortune last year when the government takeover of Fannie Mae and Freddie Mac exposed the holding company’s large concentration of Fannie and Freddie preferred stock." According to the Los Angeles Times article linked above, the holding company had owned $855 million in preferred Fannie and Freddie shares that became worthless when the government placed the companies in receivership in September 2008.

 

U.S. Bankcorp’s acquisition of the nine banks’ deposits and assets seems to be a pretty sweet deal. U.S. Bancorp acquired the assets under a loan-sharing plan with the FDIC, which will absorb 80% of the first $3.5 billion in losses and 95 percent of any additional losses.

 

The swelling numbers of failed banks is certainly worrisome, particularly as the pace of bank closures seems to have quickened recently. This year’s aggregate numbers are starting to rival those for the later years of the S&L crisis.

 

There are, however, important differences between the current circumstances and the earlier era. The first is the geographic dispersion of the bank failures. During the S&L crisis, many of the failed institutions initially were concentrated in the southeastern part of the country, although as the bank crisis evolved, the bank closures moved up the coast to the northeastern states. By and large, the rest of the country experienced relatively few bank failures.

 

Another significant difference is the cause of many of the current bank failures. During the S&L crisis, bad loans caused most of the bank failures. Bad loans are clearly a significant factor in many of the current closures as well. But a significant contributing cause of many of the current closures is the presence of troubled assets in the failed banks’ investment portfolios. FBOP’s problems from its soured investments in Fannie and Freddie represent one example where troubled investment assets triggered a bank closure. Similarly, as discussed at length here and here, some banks that have failed this year were weighed down by their investment in other banks’ trust preferred securities.

 

Another difference is that this time around – at least so far – there does not seem to have been the same surge of FDIC-led failed bank litigation. Of course, it remains to be seen whether the FDIC will once again unleash a wave lawsuits against the former directors and officers of the failed institutions. There has been a certain amount of investor driven involving banks that have failed (refer for example here), but so far at least the FDIC has not been prominently pursuing litigation.

 

The one thing that seems for certain is that, particularly in light of the recent acceleration of the pace of bank closures, the number of failed banks seems likely to grow as this year ends and we head into next year.

 

D&O insurance policyholders typically do not have to provide "fresh warranties" when they renew their policy of the kind they provided when they originally purchased the coverage – that is, they do not have to represent to the insurer that at the time of the renewal they are not aware of any facts or circumstances that could give rise to a claim. However, when policyholders increase their limits of liability at the time of renewal, they often are required to provide "fresh warranties" as to the increased limits, whether in the form of an increased limits application or in a separate warranty letter.

 

An October 26, 2009 Tenth Circuit opinion (here) illustrates the potential pitfalls for policyholders required to provide fresh warranties for increased limits. In its recent opinion, the Tenth Circuit held that an increased limits warranty exclusion precluded coverage for the defense fees of insured persons that fell within the amount of the increased limits. The Tenth Circuit held that the allegations in a later SEC complaint showed that at the time the policyholders’ representatives signed the letter, individual insured persons had knowledge of accounting improprieties that might (and subsequently did) give rise to claims.

 

Background

Fisher Imaging carried $5 million of primary D&O insurance, as well as an excess D&O policy providing an additional $2.5 million of insurance. At the time of the company’s April 2002 D&O insurance renewal, the company sought to increase the excess policy’s limits of liability from $2.5 million to $5 million.

 

In order to obtain this additional $2.5 million of excess coverage, Fisher supplied the excess insurer with a warranty letter signed by the then-CFO and the CEO representing that "no person or entity for whom this insurance is intended has any knowledge of information of any act, error, omission, fact or circumstance which may give rise to a claim which may fall within the scope of the insurance." The warranty letter stated further that it was an "express warranty for all insureds." (This last sentence is capitalized in the original.)

 

In April 2003, Fisher was sued by its shareholders in two securities class action lawsuits, both of which were later dismissed. In addition, in June 2005, the SEC filed a civil enforcement action against five officers and directors of Fischer. The SEC amended its complaint in May 2008. The amended complaint alleges that from January 2000 through September 2002, the officials had engaged in a scheme to fraudulently inflate the company’s share price by improperly recognizing revenue, misstating financial reports and misleading the company’s outside auditors.

 

Defense expenses incurred in connection with these actions exhausted the primary $5 million as well as the first $2.5 million of the excess layer. (The primary insurer and the excess insurer advanced these amounts subject to a reservation of rights to challenge these payouts later) However, the excess insurer took the position that the allegations in the SEC’s complaint triggered the exclusionary language in the warranty letter and therefore that it had no obligation to advance defense fees that fell within the "top" $2.5 million layer.

 

The individual directors and officers who are defendants in the SEC enforcement action filed a separate action against the excess insurer seeking a judicial declaration of coverage for their fees within the top $2.5 million, or in the alternative for a declaration that the excess insurer had a duty to advance defense fees within the layer.

 

The parties cross moved for summary judgment. The district court held that the allegations in the SEC’s amended complaint triggered the warranty letter exclusion, because "when read together," the SEC complaint and the exclusion show that certain of the individual SEC enforcement action defendants "knew of the wrongful activities at Fischer that could give rise to a claim."

 

The court granted summary judgment in favor of the insurer and the plaintiffs appealed.

 

The Tenth Circuit’s Opinion

On appeal, the plaintiffs argued that in reaching its conclusion that the warranty letter exclusion had been triggered, the district court improperly considered matters developed in discovery in the underlying SEC action, and that therefore represented matter "extrinsic" to the question whether the SEC’s amended complaint triggered the exclusion. The Tenth Circuit rejected this argument, stating that "we … confident that the court confined its legal analysis to the allegations in the SEC’s amended complaint."

 

The plaintiffs next argued that the district court had improperly used an "objective" standard in determining that the exclusion had been triggered – that is, the plaintiffs argued, the district court based its decision on what the plaintiffs (or some of them) must have known, rather than what they subjectively knew. The Tenth Circuit found that the district court properly used the required subjective standard, rather than an improper objective standard. The Tenth Circuit noted:

 

While the district court did not use the term "subjective knowledge" when it recounted the allegations, its reliance on those allegations about each director’s or officer’s knowledge about and participation in Fischer’s irregular accounting practices establishes that the court properly applied a subjective knowledge standard.

 

The plaintiffs raised several additional arguments, each of which the Tenth Circuit rejected with a variation on its conclusion that "the district court correctly concluded that the SEC’s claims, when read together, compelled the conclusion that the SEC’s allegations were within the exclusion in the Warranty Letter."

 

Discussion

Upon initial review, I found a number of things about the Tenth Circuit’s opinion puzzling. The first is that the opinion refers throughout to a warranty "exclusion" – yet there is nothing in the warranty letter language quoted in the Tenth Circuit opinion that would or even could affirmatively precludes coverage. Without any expressly exclusionary language, the excess carrier would lack any contractual basis to disclaim coverage within the top $2.5 million layer, even if there were warranty letter misrepresentation.

 

In order to try to answer to this puzzle, I tracked down the parties’ appellate briefs on PACER. Upon review of the briefs, it turns out that there was additional, critically important language in the warranty letter that the Tenth Circuit opinion neglects to even quote (a rather astonishing oversight, given that but for this exclusionary language in the warranty letter, there would have and could have been no coverage dispute).

 

That is, as described in the excess insurers’ appellate brief (here, see page 5), the warranty letter contains additional language, following the warranty statement in which the applicants disclaim the existence of knowledge of any facts or circumstances that may give rise to a claim, providing that "it is agreed that if such knowledge or information exists, any claim arising therefrom…is excluded from the proposed coverage." (The original is in all capital letters.)

 

So, you wouldn’t know it from the text of the Tenth Circuit’s opinion, but there was critically important exclusionary language in the warranty letter, and that language was in fact the language that the Tenth Circuit was deciding whether or not to apply.

 

The other thing that puzzled me about the Tenth Circuit’s opinion (and for that matter, the district court’s opinion) is that it seems to make an awful lot out of what are unproven allegations. Merely because the SEC has alleged some things doesn’t mean they are true. Yet the Tenth Circuit repeatedly says the district court properly relied on what the courts themselves both acknowledge were just pleading allegations. Both courts concluded that the mere allegations were enough for the excess insurer to withhold payment of defense fees that fell within the top $2.5 million.

 

A review of the plaintiffs’ appellate brief (here) did little to help clarify this puzzle. The plaintiffs never quite seem to get around to arguing that just because the SEC has thrown up a bunch of allegations that doesn’t mean that any of individual actually had knowledge of the facts or circumstances that might give rise to a claim at the time the warranty letter was signed.

 

Indeed, in its brief the excess insurer notes how far away from this argument the plaintiffs stayed, observing that the plaintiffs "understandably have nothing to say about the detailed litany of wrongdoing alleged in the SEC’s Amended Complaint" adding later that the plaintiff "never address this litany of facts." Instead, the plaintiffs seem (to me at least) to get hung up on arcane arguments about whether the objective or subjective standard should apply. It seems to me that only facts are sufficient to satisfy either an objective or a subjective standard, but that mere unproven allegations cannot suffice to satisfy either standard, regardless of which one applies.

 

This puzzling aspect of the opinion is all the more bewildering (to me at least) given the Tenth Circuit’s conclusion that the "subjective" test is the proper standard to apply. That is, the exclusion could be triggered only if the insured persons had subjective knowledge of the triggering facts. How can a test of subjective knowledge be satisfied by mere allegations rather than upon the proof of actual knowledge? Particularly if, as the Tenth Circuit further held, extrinsic matter is irrelevant — nothing outside the complaint can be relied upon to show that the allegations are true.

 

Claimants assert all sorts of bizarre things, but mere allegations alone should not be enough to trigger policy exclusions, particularly an exclusion that is triggered only by what insured persons subjectively knew. Readers who may be able to explain to why I should not be troubled by this aspect of the Tenth Circuit’s decision are strongly encouraged to clarify this for me and other readers using this blog’s comment function. I am particularly interested to know how mere allegations could possibly provide a sufficient basis to trigger an exclusion requiring subjective knowledge of the triggering facts.

 

One possible explanation does occur to me. It may well be that the plaintiffs did not make the argument that the SEC amended complaint represents mere allegations because they felt they simply couldn’t make an argument premised on the suggestion that they did not have knowledge of some or all of the facts described in the complaint.

 

Indeed, it probably should be noted in that regard that the company itself had in 2004 voluntarily entered a cease and desist order with the SEC (refer here).Among other things, the agreed order recited that the company, "acting through certain of its officers and personnel," had improperly recognized revenue, overstated inventory, improperly classified expenses, among other things. The plaintiffs may felt under these circumstances that there were limitations on how much they could argue that the SEC’s complaint against them represented "mere allegations."

 

However, the existence of the cease and desist order might (or then again, might not) explain why the plaintiffs’ may not have raised the argument that the SEC complaint represents mere alletgations; they don’t really explain why the Tenth Circuit concluded that mere pleading allegations were sufficient to trigger the exclusion.

 

It is worth noting that the circumstances involved in this coverage dispute may be a vestige of the time period in which these events took place. The excess insurer’s warranty letter used provisions that would be unlikely to be used today. Specifically, the excess insurer’s warranty letter was set up so that if any one insured had knowledge of the preclusive facts or circumstances, the top $2.5 million would be unavailable to any insured person, even those without knowledge.

 

A well-crafted increased limits application or increased limits warranty letter today would likely provide (or the policy to which it referred would provide) that no knowledge of any person would be imputed to any other person. This nonimputation language would operate to preserve coverage for those without knowledge of the preclusive facts, which is clearly a preferable arrangement from the standpoint of insured persons.

 

In an October 28, 2009 opinion (here) in a case in which the Ninth Circuit found the plaintiffs’ allegations met the heightened pleading standards of Twombley and Tellabs, the appellate court reversed the district court’s dismissal of the plaintiffs’ complaint in the Matrixx Initiatives securities class action lawsuit. The decision is significant not only because the appellate court reversed the lower court’s prior dismissal of the case, but also because of what the Ninth Circuit’s opinion implies about the heightened pleading requirements.

 

The plaintiffs sued Matrixx and three of its officers in April 2004, alleging that the defendants were aware that numerous users of Matrixx’s intranasal cold remedy, Zicam, had developed anosmia (loss of the sense of smell), but that they had failed to disclose the risk and instead issued false and misleading statements regarding Zicam. The complaint alleges that the defendants were aware of these problems because of various calls to the company’s customer service line; because of certain academic research, the results of which were communicated to the company; and because of product liability lawsuits that had been filed against the company.

 

The district court granted the defendants’ motions to dismiss, finding that the complaint failed to adequately allege materiality, because the number of anosmia-related complaints of which Matrixx was aware was not "statistically significant." The district court also found that the complaint failed to allege scienter adequately because it "fails to allege any motive of state of mind with relation the alleged omissions."

 

The Ninth Circuit first held that the district court "erred in relying on the statistical significance standard" in concluding that the plaintiffs had not adequately alleged materiality, finding that a court "cannot determine as a matter of law whether such links [between Zicam and anosmia] were statistically insignificant because the statistical significance is a question of fact."

 

Instead the Ninth Circuit said that the appropriate "fact-based inquiry" is (citing Twombley and its progeny) whether the complaint states a claim that is "plausible on its face" – and, with respect to the issue of materiality, whether "the possible link between Zicam and anosmia was information that a reasonable investor would have found significant."

 

After reviewing the plaintiffs’ allegations, the Court found that the complaints allegations were sufficient to meet the PSLRA’s pleading requirements for materiality and, citing Twombley, to "nudge" the plaintiffs’ claims "across the line from conceivable to plausible."

 

The Ninth Circuit further held, with reference to Tellabs standard for pleading scienter, that the inference that the defendants "withheld information intentionally or with deliberate recklessness is at least as compelling as the inference that [the defendants] withheld the information innocently."

 

In reaching this conclusion, the Ninth Circuit noted that the company’s disclosures were "misleading because [they] spoke of the risk of product liability actions without revealing that lawsuits had already been filed." The Ninth Circuit observed that the inference that "high level executives such as [the individual defendants] would know that the company was being sued in a product liability action is sufficiently strong to survive a motion to dismiss."

 

The Ninth Circuit also referenced the various customer complaints and academic studies the results of which were communicated to the company’s director of research and development.

 

Based on its conclusions about materiality and scienter, the Ninth Circuit reversed the lower court’s dismissal and remanded the case for further proceedings.

 

The Ninth Circuit’s decision in the Matrixx case is interesting in a number of respects, not least of which is because the decision reversed the district court’s prior dismissal of the case, although it is certainly interesting in that respect as well.

 

Among other things, the decision is also interesting for its application of the Twombley "facial plausibility" standard to the question of the sufficiency of the plaintiffs’ allegations of materiality. In a prior post (here), I discussed the question whether the "facial plausibility" test of Twombley and its more recent companion case, Iqbal, would have much impact on securities cases, given the PSLRA’s heightened pleading standards. The Matrixx decision suggests that the Twombley standard could indeed impact securities cases, even with respect to elements of a securities claim for which heightened pleading standards are defined in the PSLRA, since the Ninth Circuit cited both the PSRLA’s materiality pleading requirements and Twobley in determining the sufficiency of the plaintiffs’ allegations.

 

The further significance of the Ninth Circuit’s citation to Twombley is the fact that the court also found that the Twombley standard had been satisfied here. Though many objections to Twombley and Iqbal have been raised, the fact is that the "facial plausibility" standard can be satisfied and cases will still be going forward, notwithstanding the pleading standard articulated Twombley and Iqbal.

 

Another interesting thing about the Ninth Circuit’s decision is the way in which the court found that the scienter pleading requirements to have been satisfied, particularly with respect to the individual defendants. The court seems to have put great weight on the individual defendants’ positions, and was less focused on the question whether or not there were allegations of knowledge or awareness as to each of the individual defendants.

 

Thus, for example, with respect to the existence of product liability litigation, the court was willing to draw an inference of scienter as to the individual defendants because "high-level executives… would know" the company had been sued. – without apparent consideration of the question whether the individual defendants did know about the litigation, or even what the company’s practices were for circulating information about new litigation to the company’s senior officials.

 

Similarly, the allegations of scienter based on the alleged awareness of the existence of customer complaints and academic studies was found sufficient as to all three individual defendants, though the allegations refer only to communications of these matters to the company’s director of research. The court’s decision does not refer to what the other two individual defendants are alleged to have known, or even what they would have known in light of the company’s processes for communicating this kind of information internally.

 

If nothing else, the Ninth Circuit’s finding that the scienter allegations were sufficient represents a suggestion that in at least some circumstances (and in at least some courts) allegations that individual defendants held a certain office or position may be sufficient to support a finding of scienter, even where no supporting allegations about what the defendants know or what information they were provided or had access to.

 

Readers may be interested to know that on June 16, 2009, the FDA warned consumers (here) to stop using three Zicam intranasal products because the products may cause a loss of smell. As reflected here, a second securities class action lawsuit was filed after the company’s share price plunged following this announcement.

 

Iqbal on the Hill: Meanwhile, the Iqbal debate arrived on Capitol Hill this week, as the House Committee on the Judiciary Subcommittee on the Constitution, Civil Rights and Civil Liberties held hearings on October 27, 2009. The hearing was entitled "Access to Justice Denied – Ashcroft v. Iqbal." The Committee’s page about the hearing, including links to the witnesses’ testimony can be found here. An October 29, 2009 AmLaw Daily article by Alison Frankel about the hearings can be found here.

 

In a detailed October 27, 2009 opinion (here), Western District of Washington Judge Marsha J. Pechman substantially denied the defendants’ motions to dismiss the plaintiffs’ amended complaint in the Washington Mutual subprime securities class action lawsuit. Judge Pechman’s ruling is noteworthy in and of itself, but perhaps even more because Judge Pechman had previously granted the defendants motions’ to dismiss all of the plaintiffs’ ’34 Act claims and all but one of defendants’ ’33 Act claims.

 

As discussed here, in granting the prior motions to dismiss, Judge Pechman had been sharply critical of the clarity and organization of the plaintiffs’ initial consolidated amended complaint, which she characterized as "verbose and disorganized." and as embodying "puzzle pleading."

 

By contrast, in her October 27 ruling, Judge Pechman stated that the second amended complaint (hereafter, the "complaint") presents "cogent and concise allegations against Defendants." She also stated that the Plaintiffs have "largely succeeded in remedying the deficiencies of their initial complaint."

 

As described in the October 27 opinion, the complaint alleges that the defendants "(1) deliberately and secretly decreased the efficacy of WaMu’s risk management policies; (2) corrupted WaMu’s appraisal process; (3) abandoned appropriate underwriting standards; and (4) misrepresented both WaMus’ financial results and internal controls."

 

The complaint’s ’34 Act claims assert claims for securities fraud against the seven officer defendants, although the complaint also alleges Section 20 control person liability against the outside director defendants as well as the officer defendants.

 

With respect to the plaintiffs’ ’33 Act claims, the complaint alleges different specific allegedly misleading statement as to each of the individual officer defendants. The defendants moved to dismiss these allegations on the grounds that the complaint does not sufficiently allege that the statements are false and misleading and failed to allege "particularized facts giving rise to a strong inference of scienter."

 

In reviewing the adequacy of the plaintiffs’ allegations, Judge Pechman reviewed each of the alleged misstatements with respect to each of the individual officer defendants, grouping the allegedly false statements in four categories "(1) risk management; (2) appraisals; (3) underwriting; and (4) internal controls."

 

Other than with respect to two statement of WaMu’s former CEO, Kerry Killinger, which Judge Pechman found to "lack sufficient clarity to state a claim," Judge Pechman found that the plaintiffs’ ’34 Act claims were sufficiently pleaded, and therefore (other than with respect to two of the CEO’s statements), the motion to dismiss the ’34 Act claims was denied. Judge Pechman also denied the motion to dismiss the Section 20 control person liability claims against the individual officer defendants and the outside director defendants.

 

In denying the motion to dismiss, Judge Pechman referred repeatedly to the allegations drawn from internal memoranda and on testimony from confidential witnesses. With respect to the plaintiffs’ scienter allegations, Judge Pechman found with respect to each of the statements (other than the two statements of the CEO that were dismissed) that the "defendants have not raised a competing inference of innocence that outweighs the strong inference of scienter."

 

In her prior ruling in the case, Judge Pechman had granted the defendants’ motions to dismiss the ’33 Act claims, finding that the plaintiffs at that time did not have standing to assert ’33 Act claims in connection with WaMu’s August 2006, September 2006 and December 2007 securities offerings. The most recent amended complaint purports to add several additional plaintiffs, in an effort to establish standing to assert ’33 Act claims as to the August 2006, September 2006 and December 2007 offerings.

 

Judge Pechman found none of the new plaintiffs had standing to assert claims as to the August 2006 offering of 5.50% Notes. Judge Pechman also found that the plaintiffs’ lacked standing to assert Section 12(a)(2) claims as to both 2006 offerings. She otherwise found that the plaintiffs had standing to assert ’33 Act claims as to the other offerings. She also found that the complaint’s allegations met the ’33 Act’s substantive pleading requirements.

 

In short, virtually all of the plaintiffs’ most recent amended complaint survived the renewed dismissal motions. This is a fairly dramatic turnaround from the outcome of the initial motions, in which the initial dismissal motions were substantially granted, other than with respect to the ’33 Act claims in connection with the August 2007 offering. The turnaround is all the more noteworthy given how critical Judge Pechman was of the plaintiffs’ initial complaint. It is a very long way from Judge Pechman’s assessment that the prior complaint was "verbose and disjointed" to her assessment that the most recent complaint is "cogent and concise."

 

But the difference in outcomes is not attributable solely to the improved organization of the amended complaint. It is also clear that the added allegations, particularly those drawing on confidential witness testimony, were instrumental in bringing about the different outcome.

 

This turn of events could be significant in connection with the many other pending subprime and credit crisis related securities class action lawsuits, particularly those in which initial motions to dismiss have been granted with leave to amend. If nothing else, Judge Pechman’s October 27 opinion shows that plaintiffs can successfully amend their complaints in order to remedy initial pleading deficiencies. This possibility underscores the fact that initial dismissals without prejudice are indeed provisional, and no one should assume that a case in which initial motions have been granted is done – the plaintiffs in those cases, like the plaintiffs in the WaMu case, may yet succeed in overcoming the initial pleading hurdles.

 

A couple of aspects of the way in which the WaMu plaintiffs overcame the initial pleading hurdles are instructive for other plaintiffs in subprime and credit crisis-related securities lawsuits. Clearly, Judge Pechman preferred the more organized presentation of the amended complaint to the "puzzle pleading" presented in the prior complaint. Clarity and brevity are indeed virtues, in pleading cases as in all other endeavors, which is a consideration other plaintiffs might well want to heed.

 

Another clear implication from Judge Pechman’s October 27 order is the value of allegations based on the testimony of well-placed confidential witnesses. This lesson was also apparent from the recent ruling on the renewed motion to dismiss in the Dynex Capital case (about which refer here). While not every plaintiff will be similarly able to present allegations based on the testimony of well-place confidential witnesses, that clearly is one way to overcome the steep pleading hurdles that plaintiffs face at the outset of these cases. And, as I noted in connection with the Dynex Capital ruling, even the rigorous requirements for pleading scienter under the Tellabs case can be overcome with the right kind and quantum of confidential witness testimony.

 

But perhaps the greatest significance of the ruling on the renewed motions to dismiss is that the motions were denied in a high profile case like the WaMu suit. As I have noted elsewhere on this blog, the defendants generally have seemed to be doing better on the motions to dismiss in the subprime and credit crisis cases. However, the WaMu ruling adds a significant counterweight to the plaintiffs’ side of the ledger, along with the dismissal denials in the Countrywide (refer here) and New Century Financial subprime suit (refer here). The WaMu ruling may be even more significant, given that the dismissal motion had previously been substantially granted.

 

One final note about the October 27 order in the WaMu case is that the motion was denied as to all defendants, including the offering underwriters and WaMu’s auditors, Deloitte. The fact that the gatekeepers have been kept in the case is significant if for no other reason that its suggestion that gatekeepers generally will continue to be a part of the subprime and credit crisis-related litigation, which could have important implications for how these cases are resolved, as well as what the aggregate costs of these cases might eventually be.

 

In any event, I have added the October 27 ruling in the WaMu case to my running tally of the dismissal motion rulings in the subprime cases, which can be accessed here.

 

Special thanks to a loyal reader for providing me with a copy of the October 27 opinion. I get my best material from readers and I am always grateful when readers take the time to send things along to me.

 

Andrew Longstreth’s October 28, 2009 article on AmLaw Daily about the WaMu decision can be found here.

 

Another Belated Securities Suit Filing: In several prior posts (most recently here), I have noted the recurring phenomenon during 2009 of new securities class action lawsuit filings in which the proposed class period cutoff is well in the past, in some cases nearly two years before the filing.

 

The securities class action lawsuit filed on October 28, 2009 against Pitney Bowes and certain of its offices pushes this belated filing phenomenon to its furthest edge of its theoretical possibilities. As reflected in the plaintiffs’ counsel’s October 28 press release (here) , the proposed class period in the case runs from July 30, 2007 to October 29, 2007. In other words, the plaintiffs filed their complaint on what appears to be the last day before the two-year statute of limitations would have expired. A copy of the complaint in the case can be found here.

 

The Pitney Bowes case is merely the latest (and arguably most extreme) example of this phenomenon. I have long speculated that this rash of seemingly belatedly filed lawsuits may be attributable to a backlog of case filings that built up over prior periods in which plaintiffs lawyers were concentrating on filing subprime and credit crisis related lawsuits as well as lawsuits related to the Madoff scandal. Now that the new filings in those other areas are dying down, the plaintiffs’ lawyers may be getting around to working off the backlog.

 

The Pitney Bowes case, as is the case with many of these other seemingly belated cases that have been filed during the latter half of 2009, was filed against a company outside the financial sector. This feature of the phenomenon seems to suggest that as the plaintiffs’ counsel work off what seems to be a backlog of cases, the mix of companies sued will shift back toward the more usual spread of kinds of companies, and away from the concentration in the financial sector that characterized filings during the period from mid-2007 through the first part of 2009.

 

The one thing about these belated filings is that it does create a challenge in trying to determine when a company is "out of the woods" with respect to any adverse developments the company might have had.

 

Lawsuits seeking to recover large amounts of money are commonplace. But how about a claim that seeks to recover more money than exists in the entire world?

 

According to a September 24, 2009 order (here) by Southern District of New York Judge Denny Chin, the complaint of plaintiff Dalton Chiscolm, Jr. against the Bank of America seeks to recover "1,784 billion trillion dollars," to be deposited in his ATM account "the next day." Oh, and in addition, another $200,164.

 

Judge Chin states that in Chiscolm’s complaint (which Chin describes as "incomprehensible"), the plaintiff "seems to be complaining" that his checks apparently have been rejected because of incomplete routing numbers and when he placed a series of calls to the bank he "received inconsistent information from ‘a Spanish wom[a]n.’"

 

Judge Chin’s September 24 Order directs Chiscolm to show cause in writing by October 23, 2009 the basis on which his claim, which purported to be filed in reliance on federal question jurisdiction, is brought in federal court, or the complaint will be dismissed. As of October 25, 2009, PACER did not show that any statement had been filed.

 

The astonishing quantum of damages sought is more than just a random large number. As it turns out, 1,784 billion trillion – equal to 1.784 multiplied by 10 to the twenty-fourth power, or 1,784 followed by 21 zeroes – corresponds to a value in the International System of Units known as a "Yotta." According to Wikipedia (here), Yotta currently is the largest unit in the system of measurement. In other words, the plaintiff is literally seeking to recover the largest describable number of dollars.

 

An October 23, 2009 BBC News article (here) about Chiscolm’s lawsuit quotes Kevin Houston, a University of Leeds mathematics professor, as saying that "the guy wants more money than there is in the entire world."

 

Well, yeah, but the customer service really was terrible.

 

Judge Chin, who recently was nominated to the Second Circuit, of course is the judge that sentenced Bernard Madoff to 150 years of imprisonment, and so Chin knows a thing or two about large amounts of damages, but the amount of damages that Chiscolm has claimed even managed to get Judge Chin’s attention.