The 10b-5 Daily

Knowing The Details

Courts can be skeptical about statements from confidential witnesses. One way to express that skepticism is to wonder why, if the witness knows so much about what went on at the company, he or she is unable to provide details about the alleged fraud.

In Konkol v. Diebold, Inc., 2009 WL 4909110 (6th Cir. Dec. 22, 2009), the defendants allegedly had access to internal financial reports demonstrating the falsity of their public statements. These reports included, as described by confidential witnesses who worked at the company, days sales outstanding reports and revenue scorecards.

In evaluating whether the confidential witness allegations contributed to a strong inference of scienter, the court reiterated its previous holding that statements from confidential witnesses should be “discounted,” especially when there is a lack of information about the witnesses in the complaint. Moreover, the court noted that “because the investors had confidential witnesses who provided generalized statements about the reports, one would reasonably expect those witnesses to be able to provide more details about the reports and to be able to specifically connect them to the Defendants.” In the absence of this specific information, the court declined to credit statements from the confidential witnesses about the fraudulent scheme being “openly known” or taking place at a “high level” within the company.

Holding: Dismissal affirmed.

Vivendi Verdict

The big news today is the plaintiffs' victory in the Vivendi trial. A few key points about the verdict have already emerged:

(1) The jury agreed with the plaintiffs that Vivendi made 57 false or misleading statements concerning its financial status. As to damages, however, it found that the company's fraud was only responsible for half of the daily stock price inflation that plaintiffs had proposed.

(2) Counsel for the plaintiffs has stated that the overall damages in the case, depending on the number of shareholders who make claims and the amount of pre-judgement interest, could reach $9.3 billion.

(3) Perhaps surprisingly, the jury found that Vivendi's former CEO and CFO (i.e., the individual defendants) were not liable.

(4) Vivendi already has announced that it plans to appeal the jury's decision. Moreover, the release sets forth some of the proposed grounds, including "the Court’s decision to include French shareholders in the class, its rulings on jurisdiction and the plaintiffs’ erroneous method of proving and calculating damages, as well as the numerous incorrect rulings made during the course of the trial."

Additional coverage can be found in Reuters, the Associated Press, and the WSJ Law Blog.

NAB Developments

A couple of items related to the National Australia Bank case. The case is pending before the U.S. Supreme Court and concerns the extraterritorial application of the antifraud provisions of the federal securities laws. Oral argument has been scheduled for March 29, 2010.

(1) The petitioners have filed their merits brief. In their brief, the petitioners argue that the "express terms" of Section 10 of the Exchange Act create subject matter jurisdiction for securities frauds involving the "use of any means or instrumentality of interstate commerce or of the mails" and there is no extraterritorial limitation. Moreover, any issues of foreign relations law or international comity can be addressed by the adoption of the "conduct" test suggested by the SEC and Solicitor General: “the scheme involves significant conduct within the United States that is material to the fraud’s success.”

(2) The National Law Journal has a column (subscrip. req'd) noting that the Supreme Court and Congress are on a "collision course" regarding the question of extraterritorial application. While the Court considers the National Australia Bank case, the House of Representatives has just passed the "Wall Street Reform and Consumer Protection Act" containing a provision similar to the conduct test urged by the petitioners (but arguably even broader because it does not contain the "materiality" requirement). Under Section 7216 of H.R. 4173 - an earlier version of the provision was discussed here - jurisdiction exists if there is "conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors." Whether the Senate will embrace this provision remains to be seen.

Around The Web

A few items of interest from around the web.

(1) CFO.com examines whether the new year will bring regulatory reforms that could reverse the recent drop in securities class action filings.

(2) One entity that may have an effect on the world of securities litigation is the Financial Crisis Inquiry Commission, which started its work this week. The Wall Street Journal has an article (and related blog post) on the close ties between some of the Commission's members and the securities plaintiffs' bar.

(3) But the real action relating to the securities plaintiffs' bar was in Florida, where the State Board of Administration selected five firms for its securities class action panel. It was a hard fought contest, with the St. Petersburg Times reporting that "[i]n the previous 14 months, lawyers and others tied to 51 firms interested in representing the SBA have spent at least $850,000 on Florida politics." Moreover, the American Lawyer has obtained a number of the firms' responses to the SBA's detailed request for proposals. The responses include, among other things, information on billing, fees, settlements, portfolio monitoring, and disciplinary actions.

Vivendi Alert

There have been only seven securities class actions tried to a verdict where the conduct at issue took place after the passage of the PLSRA in 1995. Are we about to see one more added to the list?

The American Lawyer reports that closing arguments have begun in the Vivendi securities class action trial, which started last October. (For more coverage on the trial, see these Reuters and Bloomberg articles from last year on the testimony of ex-Vivendi CEO Jean-Marie Messier.) The jury is scheduled to get the case later this week.

Quote of note: "The plaintiffs alleged, among other things, that Vivendi failed to disclose a liquidity crisis, but [counsel for the defendants] told the jury there was no such crisis to disclose. He said that his side had 'proved it in spades,' citing the testimony of Vivendi witnesses who said the company was able to meet its debt obligations."

Cornerstone And Stanford Release Report On Filings In 2009

Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse have released a report on federal securities class action filings in 2009. The findings include:

(1) A total of 169 federal securities class actions were filed in 2009, a 24% decrease from the previous year. In particular, filings related to the credit crisis were down sharply (from 100 filings in 2008 to 53 filings in 2009).

(2) The filing activity was more concentrated, with only 114 unique issuers sued (a decrease of 32%, as compared to the overall filing decrease of 24%). The study states that this was the result of a large number of filings against certain groups of mutual and exchange-traded funds.

(3) Despite the decline in credit crisis related filings, the financial sector continued to have the highest level of litigation activity with 84 filings.

(4) Given the long timeline of securities class actions, it takes several years to reach conclusions about the breakdown between settlements and dismissals. The study notes, however, that with more than 90 percent of the 2004 and 2005 filings resolved, there appears to have been an increase in the percentage of dismissed class actions compared to earlier years leading to a nearly 50-50 split. Whether that trend continues remains to be seen.

The joint press release announcing the report can be found here.

Quote of note (Professor Grundfest): "As predicted in last year’s report, the rate of litigation overall and particularly against financial firms declined from the financial crisis-fueled levels observed in 2008. Plaintiffs simply ran out of financial firms to sue, and the rising stock market made it harder for plaintiffs to assert claims."