The 10b-5 Daily

Impounding Information

There was an interesting appellate decision last month in one of the few securities class actions to be tried to a verdict.

In 2005, Thane International won a bench trail in a case concerning the company's 2002 acquisition of Reliant Interactive Media. A class of Reliant investors brought Securities Act claims seeking recission of the merger. In particular, they alleged that Thane's pre-merger prospectus contained misrepresentations because it implied that Thane shares would list on the Nasdaq National Market. The company actually commenced trading on the OTCBB.

The Ninth Circuit subsequently found that the district court had erred in holding that the prospectus did not contain material misrepresentations, but remanded so that the district court could address the issue of loss causation. On remand, the district court granted judgment for Thane because the company's stock price did not decline below the merger price until nineteen days after trading began on the OTCBB. The plaintiffs appealed again.

In Miller v. Thane Int'l, Inc., 2010 WL 3081488 (9th Cir. Aug. 9, 2010), the court found that "stock price evidence may be used in loss causation assessment" even if the market for the stock was inefficient. In the instant case, Thane's expert demonstrated that that the company's "stock price could and did impound [i.e., absorb] information about Thane during this nineteen-day period, including the listing on the OTCBB." Accordingly, the court declined to find that the district court erred in holding that the misrepresentations did not cause any loss.

Holding: Judgment affirmed.

Quote of note: "[T]he materiality inquiry concerns whether a 'reasonable investor' would consider a particular misstatement important. It is hypothetical and objective. By contrast, the loss causation inquiry assesses whether a particular misstatement actually resulted in loss. It is historical and context-dependent."

Thanks to John Letteri for sending in the decision.

Fated To Lose

He's back. Judge Easterbrook has authored a new securities litigation decision for the U.S. Court of Appeals for the Seventh Circuit and, as always, it is interesting and contentious.

In Schleicher v. Wendt, 2010 WL 3271964 (7th Cir. Aug. 20, 2010), the court considered to what extent plaintiffs must establish the existence of loss causation before a class can be certified. Defendants argued, based in part on Fifth Circuit precedent (Oscar Private Equity), that the plaintiffs needed to demonstrate that the alleged false statements materially affected the company's stock price and therefore caused some loss. The court disagreed and held that when and to what extent the alleged false statements affected the stock price are "merits questions" that cannot be resolved as part of the class certification process. Moreover, the Fifth Circuit's approach would "make certification impossible in many securities suits, because when true and false statements are made together it is often impossible to disentangle the [price] effects with any confidence."

Holding: Certification of class affirmed.

Quote of note: "Unlike the fifth circuit, we do not understand Basic to license each court of appeals to set up its own criteria for certification of securities class actions or to 'tighten' Rule 23's requirements. Rule 23 allows certification of classes that are fated to lose as well as classes that are sure to win. To the extent it holds that class certification is proper only after the representative plaintiffs establish by a preponderance of the evidence everything necessary to prevail, Oscar Private Equity contradicts the decision, made in 1966, to separate class certification from the decision on the merits."

Appellate Roundup

A trio of notable appellate decisions have been issued in the last ten days.

(1) In In re Mercury Interactive Corp. Sec. Litig., 2010 WL 3239460 (9th Cir. Aug. 18, 2010), the court addressed the common settlement practice of requiring attorneys' fees objections to be filed prior to the filing of the actual fees motion and supporting papers. The court found that "the practice borders on a denial of due process because it deprives objecting class members of a full and fair opportunity to contest class counsel's fee motion." Accordingly, courts must set a schedule that allows objections to made after the class has an adequate opportunity to review its counsel's fees motion.

(2) In Malack v. BDO Seidman, 2010 WL 3211088 (3rd Cir. Aug. 16, 2010), the court considered the validity of the fraud-created-the-market theory. Under this theory, a presumption of reliance is established if "the defendants conspired to bring to market securities that were not entitled to be marketed." The plaintiff must allege both that the existence of the security in the marketplace resulted from the successful perpetration of a fraud on the investment community and that he purchased in reliance on the market. In a long and thorough opinion, the court declined to endorse the theory, finding that common sense and a lack of empirical support "calls for rejecting the proposition that a security's availability on the market is an indication of its genuineness and is worthy of an investor's reliance."

(3) In In re Aetna, Inc. Sec. Litig., 2010 WL 3156560 (3rd Cir. Aug. 11, 2010), the court found that the PSLRA's safe harbor for forward-looking statements mandated the dismissal of the case. In particular, the statements were accompanied by meaningful cautionary language and were too vague to be material to investors. The 10b-5 Daily's summary of the lower court decision can be found here.

Break In The Action

There will be no new posts on The 10b-5 Daily until after August 16.

New Century Financial Settles

Thirteen former officers and directors of New Century Financial Corp., an Irvine, California-based mortgage finance company that collapsed in 2007, have agreed to the preliminary settlement of the securities class action pending against them in the C.D. of California. The case, originally filed in February 2007, was one of the first subprime cases and stems from disclosures relating to the company’s loan-repurchase losses.

The settlement is for $65 million, which will be funded by the individuals' insurers. In addition, KPMG will pay $45 million and the underwriter defendants will pay $15 million to settle the related claims against those entities.

Around The Web

A couple of interesting items from around the web.

(1) A former Grant & Eisenhofer ("G&E") attorney has sued the firm on behalf of Tyco investors. The suit alleges that G&E collected excessive fees for its role as lead counsel in the Tyco securities class action. Tyco settled for nearly $3 billion. G&E subsequently requested and received (over the objections of three institutional investors) an attorneys' fees award of $464 million. The new suit alleges that G&E actually had a contract with the Teachers Retirement System of Louisiana, one of the co-lead plaintiffs, to limit its fee request to $210 million and to oppose anything higher. Bloomberg has an article on the suit, while Am Law Daily raises some questions about its validity.

(2) In the wake of the National Australia Bank ("NAB") decision, plaintiffs have argued that the Court's limitation on the extraterritorial reach of Section 10(b) does not apply to U.S. purchasers who purchase foreign securities on foreign exchanges. The early returns, however, favor the defendants. In the Credit Suisse securities class action, the court found that NAB precludes these "f-squared" claims. Meanwhile, according to a National Law Journal article, the judge in the Toyota securities class action has indicated that any "f-squared" claims may not be allowed to proceed. In light of that determination, the judge appointed a lead plaintiff based on which applicant had the greatest loss associated with trading in Toyota's American Depositary Shares (i.e., ignoring any trading in Toyota securities that did not take place on a U.S. exchange).

PMI Settles

The PMI Group, Inc. (NYSE: PMI), a Walnut Creek-based holding company that though its subsidiaries provides residential mortgage insurance and credit enhancement products, has announced the preliminary settlement of the securities class action pending against the company in the N.D. of California. The case, originally filed in March 2008, stems from allegations that PMI and certain of its officers and directors made materially misleading statements regarding the company’s business, including its investment in Financial Guaranty Insurance Company, Inc., and that the company materially overstated its financial results.

The settlement is for $31 million and will be paid by the company's insurers. Interestingly, PMI also disclosed the terms of the "blow" provision in the settlement agreement: "Defendants will have the option to terminate the settlement if 4% or more of the class members or shares opt out of the settlement class."