PSLRA Class Action Defense Cases–In re Vivendi Universal: Federal Court Certifies Securities Class Action Against Vivendi

In a lengthy decision issued on March 26, 2007, the United States District Court for the Southern District of New York granted plaintiffs’ motion to certify a class action in In re Vivendi Universal, S.A. Securities Litig., Case No. No. 02 Civ. 5571 (S.D.N.Y. March 26, 2007). The securities class action was filed against the French company Vivendi and two of its former officers, Jean-Marie Messier (former CEO) and Guillaume Hannezo (former CFO) on behalf of securities purchasers.

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SLUSA Class Action Defense Cases-In re Lord Abbett: Federal Court Grants Defense Motion To Dismiss Class Action Complaint With Prejudice Holding SLUSA Preemption Of One Claim Requires Dismissal Of Entire Class Action

New Jersey Federal Court Holds as Matter of First Impression that Dismissal of One Claim for Relief under Federal Securities Litigation Uniform Standards Act (SLUSA) Requires Dismissal of Entire Complaint

Plaintiffs filed a putative securities class action against various Lord Abbett entities and numerous other defendants as “a federal class action complaint based upon the failure of defendant Lord Abbett … to disclose excessive fees and commissions they siphoned from Lord Abbett mutual fund investors in order to improperly pay and induce brokers to steer investors into Lord Abbett mutual funds.” In re Lord Abbett Mut. Funds Fee Litig., 463 F.Supp.2d 505, 506-07 (D. N.J. 2006). The class action complaint contained 10 claims for relief under both state and federal law, all premised on the allegation that Lord Abbett “compensated brokers excessively as an incentive to steer new investors into Lord Abbett mutual funds,” id., at 507. Defense attorneys moved to dismiss the class action under Rule 12(b)(6); the district court granted the motion, ruling in part that the state law claims were preempted by the federal Securities Litigation Uniform Standards Act (SLUSA), but granted leave to amend with respect to two of the federal claims in the class action complaint. Id. Relying on Rowinski v. Salomon Smith Barney Inc., 398 F.3d 294 (3d Cir.2005), defense attorneys sought reconsideration on the ground that because the court dismissed Counts 7-10 under SLUSA, the court was required to dismiss the entire class action. Id., at 507-08. Ultimately, the district court vacated its order granting leave to amend and dismissed the class action complaint with prejudice.

The class action complaint advanced claims for relief under the Investment Company Act of 1940 (ICA) (Counts 1-4), the Investment Adviser Act of 1940 (IAA) (Count 5), the New Jersey Consumer Fraud Act (Count 6) which plaintiff later dismissed, and for unjust enrichment and alleged breaches of fiduciary duties and duties of good faith, loyalty, fair dealing, due care, and/or candor (Counts 7-10). In re Lord Abbett, at 507 and n.1. The district court dismissed Counts 1-5 for failure to state a claim, and dismissed Counts 7-10 as preempted by SLUSA. Id., at 507. However, the court also concluded that Counts 3 and 4 under ICA §§ 36(b) and 48(a) failed “because no direct cause of action exists under those statutes,” and granted plaintiffs leave to amend the class action complaint so as to replead them derivatively. Id. The defense moved the district court to dismiss the class action complaint with prejudice on the ground that preemption of one class action claim under SLUSA required dismissal of the entire class action complaint. Id., at 508.

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Class Action Defense Cases-Teachers’ Retirement v. Hunter: Fourth Circuit Affirms Dismissal of Securities Class Action Based On Heightened Pleadings Requirements Under Federal Private Securities Litigation Reform Act (PSLRA)

Securities Class Action Complaint Properly Dismissed for Failure to Meet Pleading Requirements Under Private Securities Litigation Reform Act (PSLRA) and for Failure to Adequately Allege Loss Causation Fourth Circuit Holds

Plaintiffs filed a putative securities class action against Cree, Inc., a high-technology business in Durham, North Carolina, for violations of Section 10(b) of the Securities Exchange Act of 1924 and Rule 10b-5 alleging it made misleading statements about its business transactions and that these misstatements were discovered when a former officer sued the company. Teachers’ Retirement Sys. of La. v. Hunter, 477 F.3d 162, 167 (4th Cir. February 20, 2007). Defense attorneys moved to dismiss the class action under Rule 12(b)(6) on the ground that the allegations in the class action complaint failed to satisfy the heightened pleadings requirements imposed by the Private Securities Litigation Reform Act of 1995 (PSLRA), id. The district court dismissed the class action, holding that “the complaint failed to allege facts sufficient to support the plaintiffs’ claims that Cree’s statements were misleading” and that “plaintiffs did not sufficiently allege that the statements were made with the requisite scienter or that plaintiffs’ losses were caused by the misrepresentations and omissions of which they complained.” Id. (italics in original). The Fourth Circuit affirmed, “concluding that plaintiffs are complaining only about market risks, not particularized securities fraud.” Id., at 168.

In June 2003, Cree’s co-founder Eric Hunter filed suit against Cree and various officers and directors, including his brother and co-founder F. Neal Hunter, for violations of state and federal securities laws, defamation and intentional infliction of emotional distress; the complaint additionally sought “a preliminary injunction against Cree and Neal Hunter to prevent alleged personal harassment that appeared to have attended an ongoing family fight.” Hunter, at 168. Eric had served as Cree’s CEO from 1987 to 1994, and news of his lawsuit caused Cree’s stock price to drop from $22.21 to $18.10 in a single day. Id. Eric’s lawsuit was resolved only two months later, but “the allegations in his complaint quickly spawned numerous class actions by purchasers of Cree stock who alleged securities fraud during a period beginning on August 12, 1999, when Cree filed an annual report on SEC Form 10-K, and ending on June 13, 2003, the day after Eric Hunter filed his suit, purportedly revealing the truth of Cree’s fraud during the previous years.” Id. Eventually the cases were consolidated in the Middle District of North Carolina, and the court named Teachers’ Retirement System of Louisiana as lead plaintiff. The first amended class action complaint alleged violations of § 10(b) and Rule 10b-5 (prohibiting false or misleading statements), § 20(a) (control person liability), § 18 (personal liability for making misleading statements), and Sarbanes-Oxley Act § 304 (reimbursement of accounting restatement costs due to misconduct). Id., at 168-69. The specific allegations of the complaint are set forth at page 169.

The Fourth Circuit summarized the district court order granting defendants’ Rule 12(b)(6) motion as follows: “The court concluded first that ‘plaintiffs adequately identif[ied] the statements [of Cree] they believe[d] to be false and the reasons why they believe[d] them to be false, but fail[ed] to state with particularity facts supporting a strong inference of fraud.’ Second, the district court concluded that plaintiffs did not adequately plead that the defendants acted with the requisite scienter because the complaint neither identified misleading statements or omissions nor alleged sufficient circumstantial evidence of scienter. Finally, the court found that ‘plaintiffs … failed to demonstrate a direct relationship between their losses and the alleged misrepresentations and have failed, therefore, to establish the required element of loss causation.’ [¶] Having dismissed the first count alleging a claim under § 10(b) and Rule 10b-5, the court also dismissed plaintiffs’ claims under §§ 20(a) and 20A . . . because these claims depended upon the liability alleged in the first count. Similarly, the court dismissed plaintiffs’ claim pursuant to § 18 . . . because plaintiffs failed to plead facts showing that Cree made false statements. Finally, the court dismissed plaintiffs’ claim under § 304 . . . because plaintiffs did not allege that Cree was required to issue any restatement of its financial reports.” Hunter, at 169-70.

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Enron Class Action Defense Case-Regents v. Credit Suisse: Certification Of Securities Class Action Seeking $40 Billion Overturned By Fifth Circuit Because Classwide Presumption Of Reliance Did Not Apply

Fifth Circuit Holds that District Court’s Erroneous Definition of “Deceptive Acts” Resulted in Mistaken Application of Presumption of Reliance in Certifying Class Action Against Banks, Necessitating Reversal of Class Certification Order

After Enron’s collapse in 2001, dozens of class action and individual lawsuits were filed against numerous defendants for violations of Section 10(b) of the Securities Exchange Act of 1924 and Rule 10b-5; more than 30 of these actions were consolidated in the district court for the Southern District of Texas and Regents of the University of California was named lead plaintiff. Regents of the Univ. of Cal. v. Credit Suisse First Boston (USA), Inc., 482 F.3d 372 (5th Cir. 2007) [Slip Opn., at 3]. “Years of discovery have ensued, and tens of millions of documents have been produced.” Id. In 2006, the district court granted plaintiff’s motion to certify the litigation as a class action, id., at 3-4. Defense attorneys sought and received permission from the Fifth Circuit to file an interlocutory appeal, id., at 2; the Circuit Court reversed.

As the Circuit Court admitted, the facts of this case are “difficult to detail” so we simply quote the Court’s broad summary: “Plaintiffs allege that defendants Credit Suisse First Boston (“Credit Suisse”), Merrill Lynch & Company, Inc. (“Merrill Lynch”), and Barclays Bank PLC (“Barclays Bank”) (collectively “the banks”) entered into partnerships and transactions that allowed Enron Corporation (“Enron”) to take liabilities off of its books temporarily and to book revenue from the transactions when it was actually incurring debt. The common feature of these transactions is that they allowed Enron to misstate its financial condition; there is no allegation that the banks were fiduciaries of the plaintiffs, that they improperly filed financial reports on Enron’s behalf, or that they engaged in wash sales or other manipulative activities directly in the market for Enron securities.” Slip Opn., at 2. In essence, the class actions alleged that the banks knew Enron executives were manipulating financial information to inflate the company’s stock price to maximize their personal compensation. Id.

In certifying the class action, the district court concluded that a “deceptive act” under Rule 10b-5(c)3 includes participation in a “transaction whose principal purpose and effect is to create a false appearance of revenues,” and that Rule 10b-5(a)’s prohibition of any “scheme . . . to defraud” creates joint and several liability for individuals who commit deceptive acts in furtherance of such a scheme. Slip Opn., at 3. At the Fifth Circuit explained, “The court’s theory of scheme liability considerably simplified finding commonality among the plaintiffs with respect to loss causation. The court stated that ‘a reasonable argument can be made that where a defendant knowingly engaged in a primary violation of the federal securities laws that was in furtherance of a larger scheme, it should be jointly and severally liable for the loss caused by the entire overarching scheme, including conduct of other scheme participants about which it knew nothing.’” Id., at 3-4. The district court also concluded that plaintiffs could rely on “classwide presumptions of reliance for omissions and fraud on the market” because it believed the banks breached a “duty not to engage in a fraudulent ‘scheme,’” and concluded that plaintiffs need not demonstrate market efficiency or reliance to invoke the fraud-on-the market presumption of reliance under Rule 10-5(a) or (c), believing this to be required only for claims under Rule 10-5(b). Id.

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MBIA Class Action Defense Case-In re MBIA Inc. Securities Litigation: New York Federal Court Grants Defense Motion To Dismiss Securities Fraud Class Action Finding Class Action Claims Time-Barred By Inquiry Notice

Plaintiffs in Securities Fraud Class were on Inquiry Notice of Claims Against Company thus Rendering Class Action Complaint Barred by Statute of Limitations New York Court Holds

Several securities fraud class action lawsuits were filed in federal courts against MBIA and various individual defendants alleging that certain financial statements contained materially misleading statements in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The actions were consolidated in the Southern District of New York, and defense attorneys moved to dismiss on the grounds that claims were time barred and that the allegations in the class action complaints failed to satisfy the heightened pleading requirements for securities fraud cases. In re MBIA Inc. Securities Litig., ___ F.Supp.2d ___, 2007 WL 473708 (S.D.N.Y. February 13, 2007) [Slip Opn., at 1-2]. The district court concluded that the class action claims were barred by the applicable statute of limitations and dismissed the complaint.

The class action complaint alleges that in 1998 MBIA – which is in the “primary business [of] selling financial guarantee insurance to public finance and structured finance clients” – entered into retroactive reinsurance agreements to protect itself against an anticipated $170 million loss in order to avoid a downgrade of its AAA rating. MBIA, at 3-4. According to the complaint, MBIA entered into a series of side agreements with the reinsurance companies that were not publicly disclosed for the purpose of inducing the reinsurers to cover the $170 million loss; under these side agreements, “MBIA promised to transfer insurance policies on the highest rated bonds in its portfolio, along with the associated premiums, to the Reinsurers over a period of six years.” Id., at 4-5. The complaint also alleged that MBIA improperly booked these premiums as income rather than as loans. MBIA’s disclosures of these transactions painted a positive picture for the company, see id., at 5-6; however, in the months following MBIA’s disclosures, several published reports explained the trade-offs realized through the deals, some viewing the strategy as “the bond insurance equivalent to Houdini” and others viewing it as “innovative,” id., at 6-7. And in 2002, a 66-page research report by Gotham Partners on MBIA detailed credit concerns involving the company’s guarantee portfolio, which MBIA immediately criticized in a press release that “contained no factual discussion of the transactions related by the [research] report.” Id., at 8-10.

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Class Action Defense Cases-Goplen v. 51job: New York Federal Court Grants Defense Motion To Dismiss Securities Fraud Class Action For Failing To Plead With Particularity Required by PSLRA and Rule 9(b)

Defense Attorneys Established that Class Action Complaint Failed to Adequately Plead Securities Fraud with Particularity as Required by Rule 9(b) and the Private Securities Litigation Reform Act of 1995 (PSLRA) but New York Federal Court Gives Plaintiffs Leave to Amend their Complaint

Seven putative securities fraud class actions were filed against 51Job and several of its officers and directors alleging “false and misleading statements with respect to the company’s revenues and expected growth, in violation of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 . . ., and Rule 10b-5,” Goplen v. 51job, Inc., 453 F.Supp.2d 759, 763 (S.D.N.Y. 2006) (citations omitted). Defense attorneys filed a motion to dismiss the class action complaint on the ground that it failed to satisfy the heightened pleading requirements set forth in Rule 9(b) of the Federal Rule of Civil Procedure and in the Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u-4, for securities fraud. Id. The district court agreed with the defense and dismissed the class action complaint, but granted plaintiffs leave to file an amended complaint if they could allege facts sufficient to satisfy the PSLRA.

We do not here summarize the particular factual allegations in this case; the facts are quite detailed and an attorney interested in understanding the applicability of the PSLRA’s heightened pleading requirements for securities fraud class actions is well advised to read the opinion in its entirety. We provide only a broad summary of the legal arguments in the opinion. The district court concisely summarized at pages 765 and 766 the legal standard it was to apply as follows:

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Class Action Defense Cases-In re Spectrum: Georgia Federal Court Grants Defense Motion To Dismiss Securities Fraud Class Action Finding Allegations Fail To Meet Requirements Under Private Securities Litigation Reform Act (PSLRA)

Allegations in Securities Fraud Class Action Complaint Failed to Satisfy Heightened Pleadings Requirements Imposed by PSLRA (Private Securities Litigation Reform Act) But Plaintiffs Are Entitled To Leave To Amend Georgia Court Holds

In September 2005,, plaintiffs filed a putative securities fraud class action under the Securities Exchange Act of 1934 against Spectrum Brands (formerly known as Rayovac) and individual defendants – including its Chief Executive Officer and Chief Financial Officer/Executive Vice President – on behalf of purchasers of persons who purchased Spectrum Brands’s common stock between November 11, 2004, and November 13, 2005 alleging that defendants’ conduct “artificially affected the value of Spectrum Brands’s stock” through the practice of “channel-stuffing.” In re Spectrum Brands, Inc. Sec. Litig., 461 F.Supp.2d 1297, 1300-01 (N.D. Ga. 2006). Plaintiffs amended the complaint in February 2006, and defense attorneys moved to dismiss, id., at 1300. The district court granted the motion, finding that the class action complaint failed to plead securities fraud with sufficient particularity as required by the federal Private Securities Litigation Reform Act (PSLRA).

Channel-stuffing refers to the act of persuading customers to purchase more inventory than they presently require – a practice the Eleventh Circuit recognizes “is not fraudulent per se.” Garfield v. NDC Health Corp., 466 F.3d 1255, 1261 (11th Cir. 2006). The practice, however, causes a company to realize as revenue monies that would otherwise be received later, assuming that the customer did not decide to switch suppliers. In re Spectrum Brands, at 1301. The class action complaint alleged Spectrum “engaged in aggressive channel-stuffing during the fourth quarter of 2004 and the first quarter of 2005, which allowed Spectrum Brands’s performance in the battery market to appear better than it should have and caused an artificial spike in the company’s stock price.” Id. As the district court summarized at page 1301, the class action hinged on the theory that “[company] statements of strong battery sales growth and positive earnings guidances were misleading because Defendants concealed that battery sales reported during the Class Period were generated at the expense of sales in future quarters.” The complaint asserts senior management engaged in channel-stuffing for the purpose of artificially inflating the company’s stock price. Id., at 1301-02.

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Deloitte & Touche Class Action Defense Case-Lattanzio v. Deloitte: Second Circuit Affirms Dismissal of Securities Class Action Against Outside Accountant

Second Circuit Holds that District Court Properly Granted Defense Motion to Dismiss Securities Class Action Against Outside Accountant Because (1) Claims fell Outside Class Period, (2) Accountant is under no Duty to Correct Financial Statement for which it Provided no Public Opinion, and (3) Plaintiffs’ Failed to Adequately Allege Loss Causation

Plaintiffs filed a putative securities class action against Deloitte & Touche in its capacity as outside accountant for Warnaco Group for violations of Section 10(b) of the Securities Exchange Act of 1924 and Rule 10b-5 alleging that Deloitte misstated Warnaco’s financial condition and breached its duty to correct previous misstatements once it learned that they were inaccurate. Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 2007 WL 259877, *1 (2d Cir. January 31, 2007). Defense attorneys moved to dismiss the class action under Rule 12(b)(6). The district court granted the motion finding that “[i] Deloitte was not liable for Warnaco’s quarterly statements, which it did not audit; [ii] Deloitte had no duty during the class period to correct statements or misstatements made by Deloitte prior to the class period; and [iii] Plaintiffs inadequately alleged loss causation in connection with the statements that Deloitte made during the class period.” Id. On appeal, the Second Circuit affirmed the “thorough and well-reasoned opinion” of the district court. Id.

Deloitte began serving as Warnaco’s outside accountant in November 1999. Plaintiffs filed this class action after Warnaco declared bankruptcy in June 11, 2001 seeking to represent those who purchased Warnaco’s common stock from August 15, 2000 through June 8, 2001 (defined as “the Class Period”). Lattanzio, at *1. The class action complaint alleged that Warnaco’s 1999 Form 10-K (filed in March 2000) overstated total shareholder equity by $30 million, and that in February 2000 Deloitte learned of $26 million of this sum but did not correct Warnaco’s financial statements until March 2001. Id. Deloitte allegedly learned of the additional $4 million mistake “sometime in fall 2000” but did not correct the financial statements until August 2001 (by which time Warnaco was in bankruptcy). Id., at *2. The complaint also complained that the three quarterly statements Warnaco filed during the Class Period contained material misstatements; Deloitte did not audit these statements but “reviewed” them as required by federal law and, allegedly, learned of the errors but failed to correct them. Id. Finally, the complaint alleged that Warnaco’s 2000 Form 10-K contained material misstatements Id., at *3. However, Deloitte’s audit opinion expressed a “going concern” that the company “was not in compliance with certain covenants of its long-term debt agreements” and that the company “was a working capital deficiency as of December 30, 2000” which “raise substantial doubt about its ability to continue as a going concern.” Id. As noted above, the district court granted the defense Rule 12(b)(6) motion and dismissed the class action complaint.

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In re Edward Jones Class Action Defense Case: California Federal Court Denies Motion To Remand Securities Class Action And Grants Defense Motion To Dismiss Finding Class Action Complaint Preempted By SLUSA

California Court Holds that Plaintiffs’ Procedural Objections to Removal are Waived as Untimely and that Federal Securities Litigation Uniform Standards Act (SLUSA) Preempted Class Action Claims Requiring Dismissal of Complaint

In 2004, plaintiffs filed a putative class action against Edward D. Jones & Co., one of the largest brokerages in the United States, for violations of California’s unfair competition laws (UCL) and breach of fiduciary duties alleging that it “entered into agreements with certain mutual fund companies whereby Defendant placed the companies on an internal ‘Preferred Funds’ list and received retention ‘kickbacks’ based on the amount of money held by Plaintiff and the Class members in those funds.” In re Edward Jones Holders Litig., 453 F.Supp.2d 1210, 1211 (C.D. Cal. 2006). Defense attorneys removed the action to federal court on the ground that the state law claims were preempted by the federal Securities Litigation Uniform Standards Act (SLUSA), but the district court granted plaintiffs’ motion to remand finding that SLUSA did not apply “because the alleged wrongdoing . . . was not ‘in connection with the purchase or sale of covered securities.'” Id., at 1212. Two years later, after the Supreme Court issued its opinion in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 548 U.S. —-, 126 S.Ct. 1503 (2006), defense attorneys removed the class action to federal court anew on the ground that Dabit “compels a finding that Plaintiffs’ claims are in fact preempted by SLUSA.” Id. Plaintiffs again moved to remand the complaint to state court, but the district court denied the motion.

First, the district court held that plaintiffs’ procedural objections to removal were waived because the motion to remand the class action to state court was untimely under 28 U.S.C. § 1447(c). In re Edward Jones, at 1212-13. Plaintiffs had argued that the removal was defective in two ways: (1) as untimely under 28 U.S.C. § 1446(b), and (2) as an improper “successive” notice predicated on the identical legal ground previously raised and rejected by the district court. Id., at 1212. An untimely notice of removal is a procedural defect, not a jurisdictional defect, id., at 1213 n.3 (citation omitted), and Rule 6(e) does not extend the time for filing a motion to remand so the motion – filed 32 days after removal – was untimely, id., at 1213.

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Class Action Defense Cases-In re PolyMedica: Massachusetts Federal Court Refuses To Certify Securities Fraud Class Action For Contested Period Because Plaintiff Failed To Establish “Cause And Effect” And “Market Efficiency”

Defense Defeats Class Action Certification for Contested Time Period Because Plaintiff’s Evidence Failed to Demonstrate “Cause and Effect” and Only “Weakly” Showed Market Efficiency Massachusetts Court Holds

Plaintiff investors filed a putative class action against PolyMedica and others alleging securities fraud, relying on the “fraud on the market” doctrine to establish the reliance element of their securities fraud claim. In re PolyMedica Corp. Securities Litig., 453 F.Supp.2d 260, 264-65 (D. Mass. 2006). A Massachusetts federal court certified a class action for the time period of October 26, 1998 to August 21, 2001; the First Circuit reversed with respect to the time period of January 1, 2001 to August 21, 2001, and remanded the case for further proceedings. Id., at 264. The new district court explained at page 264, “The sole issue for further adjudication here is whether Rule 23(b)(3) can be satisfied in the circumstances of this case.” (Broadly, Rule 23(b)(3) requires that common questions of law or fact predominate over individual issues and that the class action device be the superior method for resolving the dispute.) The court agreed with defense attorneys that it could not, and refused to certify a class for the 2001 time period.

The federal court began by noting the special problem created by securities fraud class actions, explaining at page 264: “In the context of securities fraud allegations, the nature of Rule 23(b)(3) analysis is quite particularized. Securities frauds, like all frauds, entail proof of reliance. . . . While reliance is typically demonstrated on an individual basis, the Supreme Court has noted that such a rule would effectively foreclose securities fraud class actions because individual questions of reliance would inevitably overwhelm the common ones under Rule 23(b)(3). . . . To avoid this result, the Supreme Court has recognized the fraud-on-the-market theory, which relieves the plaintiff of the burden of proving individualized reliance on a defendant’s misstatement, by permitting a rebuttable presumption that the plaintiff relied on the ‘integrity of the market price’ which reflected that misstatement.” (Citations omitted.) The fraud on the market doctrine requires that the market be “efficient” – that is, “‘one in which the market price of the stock fully reflects all publicly available information,'” id., at 265 (quoting In re PolyMedica Corp. Securities Litig., 432 F.3d 1, 14 (1st Cir. 2005)).

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