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Class Action Defense Cases-In re Mutual Funds: Federal District Court Grants Defense Motion To Dismiss Class Action Because “Plaintiffs’ Artful Attempt At Avoiding SLUSA Preemption Ultimately Fails”

Sep 14, 2006 | By: Michael J. Hassen

Maryland Federal Court Grants Defense Motion to Dismiss Class Action Despite Plaintiffs’ Attempt to Plead Around Securities Litigation Uniform Standards Act of 1998 (SLUSA)

Plaintiffs filed putative class action lawsuits in Illinois state court alleging state law causes of action carefully pleaded “to avoid the preemptive scope of the Securities Litigation Uniform Standards Act” and focusing on the theory “that the defendants negligently breached state common law duties” by using “stale” mutual fund prices – that is, mutual fund prices not based on “the most recent market information.” In re Mutual Funds Investment Litig., 437 F.Supp.2d 439, 440 (D. Md. 2006). Defense attorneys removed the action to federal court, and the Judicial Panel on Multidistrict Litigation transferred the cases to Judge Motz of the Maryland district court. After the defense moved to dismiss the case as preempted by SLUSA, “plaintiffs filed amended complaints … that eliminate any explicit mention of misrepresentation and deception, and that plead only one cause of action: common law negligence.” Id., at 442.

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AOL Class Action Defense Case-Simpson v. AOL: Defense Motion To Dismiss Class Action Securities Claims Against Securities Issuer’s Business Partners Properly Granted Ninth Circuit Holds

Aug 16, 2006 | By: Michael J. Hassen

Class Action Securities Fraud Claims Against Business Partners of Internet Company Failed to Establish § 10(b) Liability for Secondary Actors

Plaintiff filed a putative class action against multiple defendants alleging securities fraud arising out of the overstating of revenues of an Internet company. Defense attorneys for several outside defendants and individual defendants successfully moved to dismiss the § 10(b) claims under the Securities Exchange Act of 1934 on the grounds that Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994) holds that § 10(b) does not permit recovery for aiding and abetting, and that the moving defendants were not “primary violators.” Simpson v. AOL Time Warner Inc., 452 F.3d 1040, 1042 (9th Cir. 2006). The Ninth Circuit disagreed with the interpretation of Central Bank proffered by the defense, but affirmed because plaintiff had not sufficiently alleged that defendants were primary violators of § 10(b). Id., at 1043. We do not here summarize the detailed fact pattern set forth in the Ninth Circuit opinion. Rather, we focus on the court’s holdings concerning Central Bank and § 10(b) liability.

Defense attorneys argued that “Central Bank limited primary liability under § 10(b) to defendants who personally made a public misstatement, violated a duty to disclose or engaged in manipulative trading activity, and not to those engaged in a broader scheme to defraud.” Simpson, at 1043. The Ninth Circuit disagreed. While the Supreme Court held that Rule 10b-5 liability “does not extend beyond the limits of § 10(b),” id., at 1046, it also cautioned “that secondary actors, other than the securities issuer, may be liable as primary violators under § 10(b) when all elements of the statute are satisfied,” id., at 1047. And while § 10(b) does not extend to the act of “merely ‘aiding and abetting’” a violation thereof, under Ninth Circuit authority one may be found to have primary liability under § 10(b) – even without making any statements – if they substantially participated or were intricately involved in preparing the fraudulent statements. Id., at 1048 (citing Howard v. Everex Sys., Inc., 228 F.3d 1057, 1061 n.5 (9th Cir. 2000).

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Schiller v. Tower Semiconductor: Order Granting Defense Motion to Dismiss Class Action Alleging Violation of Security Exchange Act’s Proxy Solicitation Requirements Affirmed By Second Circuit

Jul 5, 2006 | By: Michael J. Hassen

Second Circuit Reaffirms SEC’s Authority SEC Authority to Create Exemptions to Security Exchange Act’s Proxy Statement Requirements and Upholds Exemption For Foreign Private Issuers – Defense Motion to Dismiss Class Action Affirmed

On June 1, 2006, in Schiller v. Tower Semiconductor Ltd., 449 F.3d 286 (2d Cir. 2006), the Second Circuit addressed a “novel” challenge to exemptions for foreign private issuers to the proxy statement requirements of the Securities Exchange Act (“the Act”). The challenge came in the form of a putative class action premised on the allegation that a proxy statement issued by Tower Semiconductor “was materially misleading and therefore violated §§ 14(a) and 20(a) of the Securities Exchange Act of 1934 …, 15 U.S.C. §§ 78n(a), 78t, and certain regulations, including Rule 14a-9, 17 C.F.R. § 240.14a-9 (2004),” id., at 289. The defense moved to dismiss the class action on the grounds that Tower was a foreign private issuer (an Israeli corporation) and therefore exempt from § 14(a) by virtue of Rule 3a12-3 of the Act. See 17 C.F.R. § 240.3a12-3 (2004). Plaintiffs’ lawyer responded that the Securities Exchange Commission (SEC) “exceeded its authority in promulgating Rule 3a12-3,” id. The District Court agreed with defense counsel and dismissed the class action.

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Dura Pharmaceuticals v. Broudo — Class Action Defense Cases

Jun 21, 2006 | By: Michael J. Hassen

Class Action Securities Fraud Cases Must Plead Economic Loss and Causal Connection Between Alleged Fraud and Loss

Class actions alleging securities fraud are commonplace. Whenever a publicly traded stock declines in value, an investor is ready to file a class action claiming that the stock price had been inflated or that he would not have invested in the company but for misleading representations made by the company. Congress enacted the Private Securities Litigation Reform Act of 1995 (PSLRA) hoping, in part, to stem the “abusive” practice of “the routine filing of lawsuits … with only a faint hope that the discovery process might lead eventually to some plausible cause of action.” H.R. Conf. Rep. No. 104-369, p. 31 (1995), U.S. Code Cong. & Admin. News 1995, pp. 679, 730.

Class action defendants had high hopes for the PSLRA: it imposes limits on damages and attorney fees, imposes limits on the way lead plaintiffs are selected and the amounts they can be awarded, imposes sanctions for frivolous litigation, provides companies with a “safe harbor” for certain statements, and allows courts to issue stays of discovery pending motions by a defendant to have the case dismiss. See, 15 U.S.C. § 78u-4. Also, Section 21D(b)(2) of the PSLRA requires that a plaintiff alleging securities fraud “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” SLUSA, discussed in a separate article, represents Congress’s attempt to fill in the loopholes in the PSLRA. Other holes, however, have been left to the judicial branch. The U.S. Supreme Court filled one such hole in Dura Pharmaceuticals v. Broudo, 544 U.S. 336, 125 S.Ct. 1627 (2005).

A class action alleging securities fraud was filed against Dura Pharmaceuticals in a California federal court. The complaint alleged that Dura falsely represented that a new product would secure FDA approval and that its drug sales would be profitable. The Supreme Court opinion sets forth the basic allegations of the complaint, which we do not repeat here. The Court stated at pages 339-40:

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Class Action Defense Cases: Kircher v. Putnam Funds Trust : Remand Of SLUSA Class Action To State Court Not Appealable Supreme Court Holds

Jun 16, 2006 | By: Michael J. Hassen

Remand to State Court of Case Removed Under SLUSA (Securities Litigation Uniform Standards Act of 1998) Not Appealable U.S. Supreme Court Holds

CAFA (Class Action Fairness Act of 2005) and SLUSA (Securities Litigation Uniform Standards Act of 1998) are discussed in various separate articles. Removal and remand issues also are discussed in various articles, which set forth the general rule recently reiterated by the United States Supreme Court: “28 U.S.C. § 1447(d) limits appellate review of a district court order remanding a case from federal to state court.” Kircher v. Putnam Funds Trust, 547 U.S. ___, 126 S.Ct. 2145, 2150 (2006). The Supreme Court addressed the scope of appellate review of remand orders in Kircher. As the Supreme Court summarized, “The question here is whether an order remanding a case removed under [SLUSA] is appealable, notwithstanding § 1447(d). We hold it is not.Kircher, at 2150 (italics added).

Kircher involves eight separate putative class actions by investors against mutual funds, investment advisers and an insurance company that alleged state law claims for damages (such as damages for negligence and breach of fiduciary duty) arising out of the practice of “market timing.” Kircher, at 2150 and n.4. The actions were removed to federal court on the grounds that they were “removable under and precluded by [SLUSA].” Id., at 2151. The investors moved to remand the lawsuits claiming the district court lacked subject matter jurisdiction; the district court agreed, and remanded the actions on the grounds that it lacked subject matter jurisdiction and that SLUSA did not preclude the claims asserted therein. Id.

The Seventh Circuit reversed, but only after concluding that it had appellate jurisdiction to hear the appeal. Kircher v. Putnam Funds Trust, 373 F.3de 847, 849-50 (7th Cir. 2004). In part, the Court concluded that the district court’s orders were not actually founded on lack of jurisdiction but on the substantive issue of whether the state law claims were precluded by SLUSA: accordingly, the Seventh Circuit concluded that appellate review was not barred by § 1447(d). Id., at 849-51. Having concluded that it had appellate jurisdiction, the Seventh Circuit then held further that SLUSA precluded the investors’ claims.

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Class Action Provisions of the Securities Litigation Uniform Standards Act of 1998 (SLUSA) – A Brief Overview: Class Action Defense Issues

Jun 12, 2006 | By: Michael J. Hassen

SLUSA (Securities Litigation Uniform Standards Act) was enacted by Congress in 1998. SLUSA followed the Private Securities Litigation Reform Act of 1995 (PSLRA), 109 Stat. 737 (codified at 15 U.S.C. §§ 77z-1 and 78u-4). The House Conference Report accompanying the PSLRA enumerated ways in which abusive class actions have hurt the U. S. economy. See, H.R.Rep. No. 104-369, p. 31 (1995). To address these concerns, Congress enacted sweeping changes to federal securities laws class actions, covering pleading, class representation, discovery, liability, attorney fee awards, expenses and more. This article discusses the salient points of class action provisions of SLUSA; SLUSA is discussed in more detail in a separate article.

One powerful change concerned new requirements for pleading fraud. As the Sixth Circuit explained,

Congress heightened the pleading standard for securities fraud. Before 1995, a plaintiff had to allege fraud “with particularity.” Fed.R.Civ.P. 9(b). Under the PSLRA, a plaintiff must now “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2) (emphasis added).

Helwig v. Vencor, Inc., 251 F.3d 540, 548 (6th Cir. 2001); see also, Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 345, 125 S.Ct. 1627 (2005).

The PSLRA also imposed limits on damages and attorney fees, imposed limits on the way lead plaintiffs were selected and the amounts they could be awarded, imposed sanctions for frivolous litigation, provided companies with a “safe harbor” for certain statements, and allowed courts to issue stays of discovery pending motions by a defendant to have the case dismiss. See, 15 U.S.C. § 78u-4.

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Brief Overview of Class Action Issues Under SLUSA (Securities Litigation Uniform Standards Act) For The Defense Lawyer

May 12, 2006 | By: Michael J. Hassen

SLUSA (Securities Litigation Uniform Standards Act) was enacted by Congress in 1998 to affect sweeping changes to federal securities laws class actions. SLUSA addresses numerous federal securities laws class actions issues including pleading, class representation, discovery, liability, attorney fee awards, expenses and more. SLUSA also sought to pre-empt state law securities class action litigation, but the Circuit Courts disagreed on the breadth of that pre-emption.

In Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, __ U.S. ___, 126 S.Ct. 1503 (2006), the United States Supreme Court issued its opinion. This opinion addresses whether the Securities Litigation Uniform Standards Act (SLUSA) “only pre-empts state-law class-action claims brought by plaintiffs who have a private remedy under federal law,” as the Second Circuit held in Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 395 F.3d 25 (2005), or whether SLUSA “also pre-empts state-law class-action claims for which federal law provides no private remedy,” as the Seventh Circuit held in Kircher v. Putnam Funds Trust, 403 F.3d 478 (7th Cir. 2005). The Supreme Court agreed with the Seventh Circuit, holding that SLUSA’s pre-emption provision was intended to be read broadly, and pre-empted state-law class-action claims brought not only by purchasers and sellers of securities, but also by holders of securities. As so read, SLUSA pre-empted state-law claims alleging the fraudulent manipulation of stock prices.

As the Supreme Court observed,

Title I of the Securities Litigation Uniform Standards Act of 1998 (SLUSA) provides that “[n]o covered class action” based on state law and alleging “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security” “may be maintained in any State or Federal court by any private party.” § 101(b), 112 Stat. 3227 (codified at 15 U.S.C. § 78bb(f)(1)(A)).

Merrill Lynch v. Dabit, 126 S.Ct. at 1506-07.

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Merrill Lynch v. Dabit Class Action Defense Case

Apr 3, 2006 | By: Michael J. Hassen

SLUSA (Securities Litigation Uniform Standards Act) and Pre-emption

SLUSA (Securities Litigation Uniform Standards Act) was enacted by Congress in 1998 to affect sweeping changes to federal securities laws class actions. SLUSA addresses numerous federal securities laws class actions issues including pleading, class representation, discovery, liability, attorney fee awards, expenses and more. SLUSA also sought to pre-empt state law securities class action litigation, but the Circuit Courts disagreed on the breadth of that pre-emption.

In Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, __ U.S. ___, 126 S.Ct. 1503 (2006), the United States Supreme Court issued its opinion. This opinion addresses whether the Securities Litigation Uniform Standards Act (SLUSA) “only pre-empts state-law class-action claims brought by plaintiffs who have a private remedy under federal law,” as the Second Circuit held in Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 395 F.3d 25 (2005), or whether SLUSA “also pre-empts state-law class-action claims for which federal law provides no private remedy,” as the Seventh Circuit held in Kircher v. Putnam Funds Trust, 403 F.3d 478 (7th Cir. 2005). The Supreme Court agreed with the Seventh Circuit, holding that SLUSA’s pre-emption provision was intended to be read broadly, and pre-empted state-law class-action claims brought not only by purchasers and sellers of securities, but also by holders of securities. As so read, SLUSA pre-empted state-law claims alleging the fraudulent manipulation of stock prices.

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