chapter 24 securities fraud class action securities fraud class actions statutory basis comparison...
TRANSCRIPT
Chapter 24Securities Fraud Class Action
• Securities fraud class actions • statutory basis • comparison to fiduciary derivative suit• structure and recent use
• Elements• Materiality: Basic v. Levinson• Scienter: PSLRA / Tellabs• Reliance: Basic v. Levinson• Causation: which price event?
• Analysis• Lawyers as entrepreneurs?• Cross-subsidization - solutions?
Module VIII – Stock Trading
Citizen of world
Citizen of world
Law profession
Law profession
Corporate practice
Corporate practice
Bar examBar
exam
SFCA background …
Source: § 10(b)
Use of SFCA
Securities Exchange Act of 1934
Section 10 -- Manipulative and Deceptive Devices
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange--
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered … any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
Use of SFCA …
“King of Pain”
“Loathed because he's so mean, feared because he's so powerful, Bill Lerach is the lawyer everyone in Silicon Valley hates.”
Fortune Magazine, Sep. 2000
Formerly, • Milberg Weiss Bershad Hynes & Lerach• Lerach Coughlin Stoia Geller Rudman&Robbins
Currently• Coughlin Stoia Geller Rudman & Robbins
Stanford Class Action Clearinghouse
Securities Fraud Class Actions (“classic”)
188
Structure of SFCA (elements)
Securities Fraud Action
When we deal with private actions under Rule 10b-5, we deal with a judicial oak which has grown from little more than a legislative acorn.
Blue Chip Stamps v. Manor Drug Stores (US 1975)
William Rehnquist
10b-5 action• Parties
– Plaintiff– Defendant
• Elements1. Material omission or
misrepresentation of fact2. Scienter (intentional)3. Reliance4. Causation
• Transactional nexus– “in connection with”– Securities trading
• Jurisdictional nexus– Federal court– Statute of limitation
Materiality …
Basic Inc. v. Levinson (US 1988)
1. FACTS• What was transaction? • Who are plaintiffs? Kind of suit? • Allegations? Remedy sought?• Who are the defendants?
2. ISSUES• Defendant arguments?• Plaintiff responses?
3. HOLDING• Alternatives: “agreement in
principle"? "price and structure"?• "probability-magnitude" test? How do
stock markets determine value of info?
4. ANALYSIS• Why case-by-case definition of
materiality? • Why not bright-line test? • Advantages and disadvantages?
5. CONCLUSION• After this case, how should corporation
disclose merger negotiations?• After this case, can corporate executives
strategically misinform stock markets?
Basic IncCombustionEngineering
Shareholders(stock market)
merger negotiations
Three “white”
lies
Scienter …
10b-5 action• Parties
– Plaintiff– Defendant
• Elements1. Material omission or
misrepresentation of fact2. Scienter (intentional)3. Relianc4. Causation
• Transactional nexus– “in connection with”– Securities trading
• Jurisdictional nexus– Federal court– Statute of limitation
Plead “scienter” …
PSLRA [’34 Act § 21D(b)(1)]
In any private action arising under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.
Required “state of mind”? Compare to Rule 9(b)
How get pre-filing “facts”?
Tellabs v. Makor Issues & Rights (US 2008)
1. FACTS• What were misstatements? • Material – why? • Who are plaintiffs? Kind of suit?
2. ISSUES• Defendant arguments?• Plaintiff arguments?
3. HOLDING• Congress intended to “strengthen
pleading standard”• Must be “cogent and compelling” /
compare inferences: plaintiff wins tie
4. ANALYSIS• Why should plaintiff win tie? Wasn’t
PSLRA anti-plaintiff? • Why not same burden as at trial –
preponderance of inferences?
5. CONCLUSION• After this case, what “facts” will survive
motion to dismiss? • After this case, are internal reports of
company difficulties enough?
Tellabs(Notebaert)
Shareholders(stock market)
Misstatements about product /
“channel stuffing”
Ruth Bader Ginsburg(civil rights lawyer)
… PSLRA strong inference of state of mind (scienter) means … “a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference.”
… allegations must also be considered “holistically” [isolated insider sales not enough, must have unusual, broad sales]
… omissions and ambiguities [in the plaintiffs’ allegations] count against inferring scienter” [discount confidential witnesses]
Reliance and causation …
Basic Inc. v. Levinson (US 1988)
1. FACTS• Who are plaintiffs? Kind of suit? • Were individual suits be viable?
2. ISSUES• Reliance in fraud action?
3. HOLDING• Presumption necessary for class actions to
proceed • Market performs valuation process: absorbs
publicly-available information into price• Rebuttable presumption – unless market
knew or did not react OR individual plaintiffs would have traded anyway
4. ANALYSIS• Is ECMH part of law? • Do investors really trust market price – see
White dissent? • Shouldn’t Congress make policy decisions?
5. CONCLUSION• SFCA have life – compare to Delaware?• Presumption rebutted in small companies
with few analysts?
Basic IncCombustionEngineering
Shareholders(stock market)
merger negotiations
Three “white”
lies
“… in open and developed securities market .. Misleading statement defraud purchasers of stock even if the purchasers do not directly rely on the misstatements.”
“… reliance is an element of a Rule 10b-5 cause of action.
“Presumptions typically serve to assist courts in managing circumstances in which direct proof for one reason or another is rendered difficult.”
Justice Harry Blackmun[MN lawyer]
How can presumption be overcome?
“… I fear that the Court’s decision may have many adverse, unintended effects as it is applied and interpreted in the years to come.”
“… Court assumes buyers and sellers rely on the “integrity of the market price … which most mystifies me.”
Justice Byron White[former football player]
Class action counsel (business model)
Investigate corporate disclosures …
… identify corporate “fiction” …
… followed by “surprise” …
… resulting in price drop …
… identify “scienter” …
… file complaint …(e.g. Bay Networks, Inc)
… which must tell “fraud story” …
… to avoid “motion to dismiss”
Who pays?
Average settlement: $80 MMAverage attorney fees: 20%
2006 data2004 data2003 data
Atty feesoverview
Cross -subsidization …
Settlement
Buying shareholders(plaintiffs)
Selling shareholders(windfall winners!)
Holding shareholders(losers!)
Corporation
Payment
Corporate execs(D&O insurance)
Insiders(insider trading gains)
The end
Class Counsel – Business Model• Get started
– identify material corporate misrepresentations– find appropriate shareholders to act as class representatives– file a complaint in a court of class counsel’s choosing
• Take care of legalities– defend the complaint against motion to dismiss (on legal
grounds)– urge the judge to grant class action status to the litigation – send notice to class members, giving them an option to
withdraw from the lawsuit– undertake discovery of information from the company and
other sources• Close the deal
– enter into settlement negotiations with company officials – champion any settlement before the judge– administer settlement funds – appeal any adverse decisions by the trial court judge
Stanford Class Action Clearinghouse