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Securities Fraud Class Action Defense Cases–Vladimir v. Bioenvision: New York Federal Court Grants Motion To Dismiss Securities Fraud Class Action Holding Class Action Complaint Failed To Meet Heightened Pleading Requirements Of PSLRA

May 19, 2009 | By: Michael J. Hassen

Defense Motion to Dismiss Securities Fraud Class Action Granted because Defendants had no Duty to Disclose Merger Discussions Prior before Definitive Merger Agreement Reached and because Anonymous Source Insufficient to Satisfy Heightened Pleading Requirements of PSLRA (Private Securities Litigation Reform Act) New York Federal Court Holds

Plaintiffs filed a class action against Bioenvision and certain officers and directors, and Perseus-Soros Biopharmaceutical Fund (Bioenvision’s largest pre-merger shareholder) alleging violations of federal securities laws; the class action complaint alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, against Perseus-Soros under section 13(d) of the Exchange Act, and against the individual defendants and Perseus-Soros under section 20(a). Vladimir v. Bioenvision Inc., ___ F.Supp.2d ___, 2009 WL 857552, *1 (S.D.N.Y. March 31, 2009). According to the allegations underlying the class action, “defendants artificially deflated the value of Bioenvision’s stock by issuing and by failing to correct or update statements that contained material misrepresentations and omissions as to Bioenvision’s plan to enter into a merger with Genzyme.” Id. Defense attorneys moved to dismiss the class action on the grounds that the allegations in the class action complaint failed to meet the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 (PSLRA). Id. Defendants further argued that “they had no duty to disclose the merger discussions until May 29, 2007, the date when the merger was announced publicly.” Id. Plaintiffs countered that defendants’ failure to disclose the plan to sell Bioenvision to Genzyme had the practical effect of artificially suppressing Bioenvision’s stock price, causing damage to plaintiffs because they sold their stock before the merger was officially announced (at which time the stock price skyrocketed). Id., at 4. Essentially, the “false and misleading” statements consisted of disclosing that its “primary focus” was the development of cancer treatments when its real focus was to find a merger partner. Id., at *5. The district court granted the defense motion and dismissed the class action complaint.

Cutting to the heart of the federal court’s analysis, the district court held that under Second Circuit authority “‘a corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact.’” Vladimir, at *7 (citation omitted). Put simply, “[t]here is no specific duty to disclose merger negotiations under SEC rules until they become definitive agreements.” Id. (citations omitted). And since there was no duty to disclose, defendants’ silence could not be deemed misleading. Id. (citation omitted). Plaintiffs argued that the parties had reached a “definitive agreement” to merge in January 2007, thus creating the duty to disclose. Id. But as this allegation was supported only by an anonymous source, it failed to satisfy the PSLRA’s heightened pleading requirements. Id., at *7-*8. Further, as the federal court observed, “Under plaintiffs’ proposed rule, any public company that publicly described its core business or strategy – which is to say, every public company – would be required to disclose potential or actual merger negotiations. Statements that do not raise the subject of mergers, even tangentially, cannot impose a duty to disclose all material information concerning merger discussions.” Id., at *10. The district court ultimately concluded that the allegations in the class action complaint did not plead fraud with particularity as required by Rule 9(b), and in any event do not support a duty to disclose. Id., at *12. Accordingly, the court granted the motion to dismiss by the Bioenvision defendants. Id., at *13.

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Countrywide Class Action Defense Cases–In re Countrywide: California Federal Court Grants In Part Motion To Dismiss Securities Fraud Class Action Claims And Holds SEC Rule 430B Not Retroactive

Apr 21, 2009 | By: Michael J. Hassen

Amended Securities Fraud Class Action Complaint Against Countrywide and Various other Defendants Largely Survives Motion to Dismiss because Allegations in Class Action Complaint Generally Satisfied Heightened Pleading Requirements of Private Securities Litigation Reform Act (PSLRA) and, as Matter of First Impression, SEC Rule 430B is not Retroactive California Federal Court Holds

Plaintiff filed a putative class action against Countrywide and certain individual defendants alleging violations of federal securities laws; the class action was one of “several related securities actions” in the district court involving Countrywide, underwriter defendants and outside directors. In re Countrywide Fin. Corp. Sec. Litig., ___ F.Supp.2d ___ (C.D.Cal. April 6, 2009) [Slip Opn., at 1-2]. Plaintiff’s class action was consolidated with several other class action lawsuits “involving publicly traded Countrywide securities.” Id., at 2. The district court appointed lead plaintiffs, and a consolidated amended class action complaint was filed, id. By prior court order, dated December 1, 2008, the amended class action complaint was dismissed in part, but the district court granted leave to amend and a second consolidated amended class action complaint was filed. Id. Defense attorneys for various defendants again moved to dismiss, id. The district court granted the motions in part, but largely denied the motions.

We do not discuss in detail the intensively detailed and fact-driven opinion. In broad terms, after summarizing recent Ninth Circuit authority, see In re Countrywide, at 3-5, and addressing certain evidentiary matters, see id., at 5-6, the district court turned to the merits, following the Ninth Circuit opinion in Glazer Capital Mgmt., LP v. Magistri, 549 F.3d 736 (9th Cir. 2008), which held that a securities fraud complaint must plead facts that constitute strong circumstantial evidence of scienter. The federal court summarily found that the accounting-related allegations against Countrywide, KPMG, and the Individual Defendants, as well as those against the Underwriters, in the second amended class action complaint were sufficient to satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA). Id., at 6. However, the same could not be said for the insider trading-related allegations: the district dismissed these claims in the original class action complaint, with leave, because of the “weak support” of scienter; the second amended class action complaint “does nothing to alter the insider trading-based scienter analysis” in the prior order, so the federal court dismissed the Section 20A claims with prejudice (except for the claims against Mozilo that post-date October 26, 2006). Id., at 6-7.

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PSLRA Class Action Defense Cases–In re Authentidate Holding: New York Federal Court Grants Motion To Dismiss Securities Class Action Holding Class Action Allegations Failed To Satisfy PSLRA

Apr 9, 2009 | By: Michael J. Hassen

Securities Class Action Warranted Dismissal with Prejudice because Allegations in Second Amended Class Action Complaint Failed to Establish Duty to Disclose New York Federal Court Holds

Plaintiffs filed a class action against Authentidate Holding Corporation and individual defendants (collectively “Authentidate”) alleging violations of federal securities laws; the class action complaint asserted that defendants “failed to make proper disclosures regarding performance metrics in an agreement (‘the Agreement’) the Company had with the United States Postal Service to serve as the preferred provider of the Postal Service’s electronic postmark (‘EPM’), thereby artificially inflating the price of Authentidate common stock in order to, inter alia, attract capital and avoid insolvency.” In re Authentidate Holding Corp. Sec. Litig., ___ F.Supp.2d ___ (S.D.N.Y. March 23, 2009) [Slip Opn., at 1]. The class action alleged that defendants’ misconduct violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5, id. Defense attorneys moved to dismiss the Consolidated Second Amended Securities Class Action Complaint for failure to meet the heightened pleading requirements established by the Private Securities Litigation Reform Act (PSLRA). Id. The district court determined that allegations in the class action complaint failed to satisfy the PSLRA and dismissed the class action with prejudice.

After summarizing the well established law governing Rule 12(b)(6) motions to dismiss securities class action complaints, see In re Authentidate, at 2-3, including Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955 (2007), the district court turned first to the duty to disclose and noted that for purposes of Section 10(b) “‘[s]ilence, absent a duty to disclose, is not misleading,’ Basic Inc. v. Levinson, 485 U.S. 224, 239 n.17 (1988), and an omission is actionable under the securities laws only when the Defendant was subject to a duty to disclose.” Id., at 3 (additional citation omitted). The class action complaint alleged that defendants were under a duty to disclose Authentidate’s “low level of EPM sales and their continuing or likely failure to meet the revenue metrics.” Id. The federal court disagreed. First, it rejected the claim that Item 303 of SEC Regulation S-K (17 C.F.R. § 229.303) created a duty to disclose. See id., at 4-5. Item 303, entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” requires, inter alia, that a registrant “describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.” 17 C.F.R. § 229.303(a)(3)(ii). Id., at 4. Plaintiffs’ allegations that “virtually nonexistent EPM sales and the likely failure to meet upcoming revenue metrics were ‘known trends or uncertainties’” were not supported by “any particularized factual allegations making it plausible that these omissions caused any piece of existing ‘reported financial information’ to misleadingly indicate a specific future result or financial condition.” Id., at 5. This was particularly true since EPM sales were not “a significant percentage of the reported monthly revenues.” Id. (citation omitted).

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PSLRA Class Action Defense Cases–Akerman v. Arotech: New York Federal Court Denies Motion To Dismiss Securities Fraud Class Action Finding Class Action Complaint Adequately Alleged Materiality, Scienter And Particularity

Apr 8, 2009 | By: Michael J. Hassen

Securities Fraud Class Action Survives Motion to Dismiss because Class Action Complaint Adequately Alleged that Defendants Failed to Timely Discover and/or Disclose Material Adverse Information New York Federal Court Holds

Plaintiffs filed a class action against Arotech Corporation, a defense contractor, and three of its officers alleging violations of federal securities laws; the class action complaint violations Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and seeking to hold the individual defendants liable as “control persons” under Section 20(a) of the Act. Akerman v. Arotech Corp., ___ F.Supp.2d ___ (E.D.N.Y. March 30, 2009) [Slip Opn., at 1]. According to the allegations underlying the class action, defendants made materially false statements and withheld materials facts concerning Arotech’s financial condition, id. The class action centered on Arotech’s acquisition of Armour of America (AofA) in August 2004 for $19 million in cash “with additional possible earn-outs if AofA is awarded certain material contracts” up to a maximum of $40 million. Id., at 2-3. Arotech’s total revenue in 2003 was only $17.3 million, but its revenue in 2004 increased to $50.4 million, id., at 3-4. Defense attorneys moved to dismiss the class action complaint “principally on the grounds of materiality, scienter and particularity” as required by the Private Securities Litigation Reform Act (PSLRA). Id., at 1. The district court concluded that the class action complaint adequately alleged securities fraud.

The class action complaint cited various confidential witnesses who alleged that “Arotech’s pre-acquisition due diligence did not reveal all material information about AofA before the acquisition.” Akerman, at 4. In particular, the confidential witnesses cited the federal government’s cancellation of a substantial helicopter contract with AofA based on a “termination for default” (T4D), that is, the government’s belief that AofA had overstated the armor weight of the helicopters. Id., at 4-5. The T4D, together with stigma accompanying the T4D, created a “domino effect” at AofA that seriously impacted sales, id., at 5. The class action alleged that defendants had access to this information, despite the fact that AofA did not disclose it, id., at 5-6. Additionally details may be found in the district court opinion at pages 6 through 11.

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PSLRA Class Action Defense Cases–In re Downey: California Federal Court Dismisses Securities Class Action Holding Class Action Complaint Failed To Adequately Plead Actionable Misrepresentations By Individual Defendants

Apr 1, 2009 | By: Michael J. Hassen

Class Action Complaint Alleging Securities Laws Violations Failed to Satisfy Heightened Pleading Requirements of Private Securities Litigation Reform Act (PSLRA) California Federal Court Holds

Plaintiffs filed a class action against Downey Financial and certain current and former officers and directors alleging violations of federal securities laws; the class action complaint asserted that defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10(b)-5, and of Section 20(a) of the Act. In re Downey Securities Litig., ___ F.Supp.2d ___ (C.D.Cal. March 18, 2009) [Slip Opn., at 1-2]. The class action was consolidated with a similar class, and lead plaintiff filed a first amended consolidated class action complaint. Id., at 2. According to the allegations underlying the class action, “the decline in Downey’s shareholder value resulted from alleged misrepresentations made to the investing public by Downey’s current and former officers and/or directors, and not from the current economic climate,” id. Defense attorneys for the individual defendants moved to dismiss the class action, id., at 1-2; defendants argued that the complaint failed to meet the heightened pleading requirements of the Private Securities Litigation Reform Act (PSLRA), id., at 4. The district court agreed and dismissed the class action.

After discussing the PSLRA, the district court turned to the misstatements or omissions attributed to the individual defendants. See In re Downey, at 4-5. The federal court noted that generally “only those defendants who actually make a false or misleading statement will be liable under section 10(b) or Rule 10(b)-5,” id., at 5 (citation omitted), but under Ninth Circuit authority “‘an individual may become a primary violator through “substantial participation or intricate involvement in the preparation of fraudulent statements” even if he did not actually make the statements,’” id., at 5-6 (citation omitted). And based on the Supreme Court opinion in Stoneridge Investment Partners, LLC v. Scientific-Atlantic, Inc., 128 S.Ct. 761 (2008), courts “dismiss actors (including insiders) who have not made any misleading statements, either explicitly or implicitly because plaintiffs could not prove reliance on their actions.” Id., at 6 (citation omitted). The district court found that the complaint failed to state claims against the individual defendants because “there is not a single actionable misrepresentation or omission in the 161 pages of the [class action complaint] attributed to the Individual Defendants.” Id. The district court further concluded that the class action complaint failed to adequately plead scienter. See id., at 8-15. And finally, the court found that plaintiff failed to adequately plead loss causation. See id., at 15-16.

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Class Action Defense Cases—In re Lehman Brothers: Judicial Panel For Multidistrict Litigation (MDL) Grants Defense Motion To Centralize Class Action Litigation In Southern District Of New York

Mar 20, 2009 | By: Michael J. Hassen

Judicial Panel Grants Defense Request for Pretrial Coordination of Individual and Class Action Lawsuits Pursuant to 28 U.S.C. § 1407, Over Opposition of Majority of Plaintiffs, and Transfers Actions to Southern District of New York Seventeen (17) individual and class actions – nine in New York, five Arkansas, two California and one in Arkansas – were filed against Lehman Brothers and various other defendants alleging that defendants had made materially false and/or misleading statements that negatively impacted the value of Lehman Brothers securities.

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SLUSA Class Action Defense Cases–Kurz v. Fidelity Management: Seventh Circuit Affirms Removal Of Class Action And Subsequent Defense Judgment In Class Action Holding Class Action Complaint Fell Within SLUSA

Mar 16, 2009 | By: Michael J. Hassen

Class Action Premised on Violations of “Best Execution” Duty Fell within Scope of SLUSA (Securities Litigation Uniform Standards Act of 1998) so Properly Removed and then Properly Dismissed because Time-Barred and no Proof of Injury Seventh Circuit Holds Plaintiffs, former investors in portfolio managed by Fidelity Management & Research and FMR Co. (collectively “Fidelity”), filed a class action in state court against Fidelity alleging violations of state law and breach of contract based on the allegation that “some of [Fidelity’s] employees placed trades through Jeffries & Co.

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Class Action Defense Cases—In re Bank of America Auction Rate Securities (ARS): Judicial Panel On Multidistrict Litigation (MDL) Grants Defense Motion To Centralize Class Action Litigation But Transfer Class Actions To California

Feb 27, 2009 | By: Michael J. Hassen

Judicial Panel Grants Defense Request for Pretrial Coordination of Class Action Lawsuits Pursuant to 28 U.S.C. § 1407, Opposed by Responding Class Action Plaintiffs, but Transfers Actions to Northern District of California Three class actions – one each in California, Illinois and New York – were filed against Bank of America Investment Services, Inc.; Bank of America Securities, LLC; Bank of America Corp. (collectively “BofA”) alleging “that Bank of America entities and/or its employees made misrepresentations in the context of the sale of auction rate securities (ARS).

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PSLRA Class Action Defense Cases–Public Employees’ Retirement Ass’n v. Deloitte & Touche: Fourth Circuit Affirms Dismissal Of Securities Class Action Without Leave To Amend For Failure To Adequately Plead Scienter

Feb 23, 2009 | By: Michael J. Hassen

Securities Fraud Class Action Claims Against Accountants Properly Dismissed for Failure to Plead Scienter Required by Private Securities Litigation Reform Act (PSLRA) because Evidence Showed Company Concealed Information from Accountants Fourth Circuit Holds

Plaintiffs filed a class action against various defendants alleging securities fraud violations; the class action complaint alleged that Royal Ahold, N.V., a Dutch corporation, and U.S. Foodservice, Inc. (USF), a Maryland-based Ahold subsidiary, engaged in improper accounting practices. Public Employees’ Retirement Ass’n of Colorado v. Deloitte & Touche LLP, 551 F.3d 305, 306 (4th Cir. 2009). The class action also alleged that Ahold’s accountants, Deloitte & Touche LLP (Deloitte U.S.) and Deloitte & Touche Accountants (Deloitte Netherlands) – which are two legally distinct entities, participated in Ahold’s alleged fraud, id. Defense attorneys for the Deloitte defendants moved to dismiss the class action on several grounds, including for failure to satisfy the heightened pleading requirements established by the Private Securities Litigation Reform Act (PSLRA). In pertinent part, the PSLRA requires that plaintiffs plead facts alleging a “strong inference” that the defendant in a securities fraud lawsuit acted with the requisite scienter. Id., at 306. The district court granted the defense motion and dismissed the class action complaint as to the Deloitte defendants without leave to amend, id., at 307-08. The Fourth Circuit affirmed, finding “the inference that the Deloitte defendants lacked the necessary scienter more compelling than any competing inference that they knowingly or recklessly perpetrated a fraud on Ahold’s investors” and that the proposed second amended class action complaint was futile. Id., at 306.

We do not here discuss in detail the nature of the improper accounting practices underlying the class action claims. See Deloitte, at 306-08. In brief, the two frauds Ahold alleged perpetrated involved (1) the improper consolidation of revenue from various joint ventures, in violation of GAAP, that resulted in substantial overstatement of earnings, and (2) the premature recognition of income from promotional allowances. Id., at 307. The actions led Ahold to restate earnings for fiscal years 2001 and 2002, and revealed that Ahold’s accounting practices had overstated earnings by more than $500 million. Id. The announcement led to a 60% drop in stock price, and to SEC civil enforcement actions against Ahold and various individual defendants. Id. Moreover, at least 21 private class action lawsuits were filed alleging securities fraud, and the Judicial Panel on Multidistrict Litigation centralized the class actions for pretrial purposes in the District of Maryland, id. The district court appointed Public Employees’ Retirement Association of Colorado and Generic Trading of Philadelphia, LLC as Lead Plaintiffs, and a Consolidated Amended Securities Class Action Complaint was filed against Ahold entities, the Deloitte defendants, and others. Id. Lead Plaintiffs settled the class action as to the non-Deloitte defendants, and then filed a motion to amend the class action complaint to assert new claims against the Deloitte defendants. Id., at 308. The district court denied the motion on the basis of futility, and the Fourth Circuit affirmed.

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GM Class Action Defense Cases–J & R Marketing v. General Motors: Sixth Circuit Affirms Dismissal Of Securities Class Action Holding Class Action Plaintiff’s Claims Were Meritless

Feb 9, 2009 | By: Michael J. Hassen

Securities Class Action Claims Meritless because GMAC’s Representations Concerning Its Bonds were not False or Misleading and GMAC was not Required to Learn and Disclose Information Concerning the Financials of its Parent Company GM Sixth Circuit Holds

Plaintiffs, as purchasers of bonds registered by GMAC, filed a class action against GMAC, GM and others alleging violations of federal securities laws; specifically, the class action complaint advanced claims under Sections 11 and 12(a)(2) of the Securities Act of 1933, and that GMAC failed to disclose required information and made material misstatements in its registration statements and prospectuses for various bond offerings. J & R Marketing, SEP v. General Motors Corp., 549 F.3d 384, 387 (6th Cir. 2008). According to the allegations underlying the class action, GMAC’s offering materials filed violated Sections 11 and 12(a)(2) of the Securities Act of 1933 because they contained “material omissions and misstatements” by failing to disclose GM’s (in addition to GMAC’s) performance and credit rating, even though matters adversely affecting GM could also adversely affect GMAC’s credit rating. Id., at 388. The class action also alleged that GMAC materially misstated its 2004 financial results, id. Defense attorneys moved to dismiss the class action for failure to state a claim; the district court granted the motion and dismissed the class action, finding that plaintiffs lacked standing to prosecute class action claims on behalf of purchasers of bonds which plaintiffs themselves had not purchased. Id., at 387. Additionally, the district court held that the non-disclosure claim failed because defendants were not required to disclose the information at issue, and because GMAC’s statements were not misleading and were not false, id. Accordingly, the district court dismissed the class action complaint. Id. The Sixth Circuit affirmed because it found “that the named plaintiffs’ own claims are without merit,” id.

Briefly, GMAC borrowed money from several sources, including the general public through publicly offer debt securities. J & R Marketing, at 387. “The debt securities had a coupon rate, which is the rate of interest GMAC would pay, as well as a yield, which was the payments GMAC would make over the life of the security not including the return of the principal. At the time the last interest payment was due, GMAC would return the principal to the investor.” Id., at 387-88. The class action plaintiffs had purchased “Second SmartNotes,” which were bonds registered by GMAC in September 2003, but the class action sought to define a class of all investors who purchased GMAC bonds sold from July 2003 through November 2005 “alleg[ing] that GMAC’s conduct similarly injured all members of the purported class.” Id., at 388. According to plaintiffs, once GM’s financial risks became known, its credit rating fell, as did GMAC’s credit rating, id. Defense attorneys argued that the named plaintiffs lacked standing to prosecute the class action as to any bonds other than those purchased by them, and that the offering materials concerning the Second SmartNotes did not contain material omissions or misstatements. Id., at 388-89. The district court granted the motion and dismissed the class action, id., at 389. The Sixth Circuit affirmed, but it did not address the standing issue because it found that plaintiffs’ class action claims lacked merit. Id., at 389-90.

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