The Future of Securities Litigation Post-Halliburton

ITLA 2014 Fall Seminar

The Future of Securities Litigation Post-Halliburton

Wendy Gerwick CoutureAssociate Professor

University of Idaho College of [email protected]

Slides available on SlideShare

mailto:[email protected]

Federal Prohibition of Securities Fraud

§ 10(b) of Securities Exchange ActIt shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, . . . – [t]o use or employ, in connection with the purchase or sale of any securities . . . 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.




Rule 10b-5It 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,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

Elements of a Private Securities Fraud Claim

• misstatement or omission of material fact

• scienter

• connection between misrepresentation or omission and the purchase or sale of a security

• reliance upon the misrepresentation or omission

• economic loss

• loss causation

Exposition

Rising Action

Climax

Falling Action

Dénouement

Exposition

Rising Action

Climax

Falling Action

Dénouement

There is a private right of action for damages, but it’s limited to purchasers and sellers of securities.Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 731-32 (1975).

Blue Chip Stamps v. Manor Drug Stores:

“[L]itigation under Rule 10b-5 presents a danger of vexatiousness different in degree and in kind from that which accompanies litigation in general.”

421 U.S. 723, 739 (1975).

The Beginning of the “Vexatiousness Rationale”

Blue Chip Stamps Court’s Bases for the Vexatiousness Rationale:

A plaintiff asserting an unmeritorious claim can nonetheless avoid dismissal and summary judgment, thereby extracting settlement value.

A plaintiff asserting an unmeritorious claim can extract settlement value by performing extensive discovery that disrupts the business.

A plaintiff can establish crucial elements of the claim with uncorroborated, oral testimony.

421 U.S. 723, 740-46 (1975).

Exposition

Rising Action

Climax

Falling Action

Dénouement

Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 731-32 (1975).

Federal Rule of Civil Procedure 23

(a) Prerequisites. One or more members of a class may sue or be sued as representative parties on behalf of all members only if:

(1) the class is so numerous that joinder of all members is impracticable;(2) there are questions of law or fact common to the class;(3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and(4) the representative parties will fairly and adequately protect the interests of the class. (b) Types of Class Actions. A class action may be maintained if Rule 23(a) is satisfied and if: …(3) the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.

Federal Rule of Civil Procedure 23

(a) Prerequisites. One or more members of a class may sue or be sued as representative parties on behalf of all members only if:

(1) the class is so numerous that joinder of all members is impracticable;(2) there are questions of law or fact common to the class;(3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and(4) the representative parties will fairly and adequately protect the interests of the class. (b) Types of Class Actions. A class action may be maintained if Rule 23(a) is satisfied and if: …(3) the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.



• scienter



• economic loss

• loss causation



• scienter



• economic loss

• loss causation

Market Price

All publicly disseminated information

Efficient market

Basic Inc. v. Levinson, 485 U.S. 224 (1988).

Market Price


Efficient market

Buys or sells stock relying on the “integrity of the market price.”


X

Market Price


Efficient market



X

Market Price


Efficient market



X

Market Price


Efficient market


Rebut presumption by severing one of these links!


X

Market Price


Efficient market



Basic Inc. v. Levinson, 485 U.S. 224 (1988).Dissent – is this true? Don’t investors

buy or sell because they think the market is improperly pricing a security?

Exposition

Rising Action

Climax

Falling Action

Dénouement


Classwide reliance can be established via the fraud-on-the-market presumption.Basic Inc. v. Levinson, 485 U.S. 224 (1988).

Securities Fraud Class Actions: Competing Policy Considerations

Compensation of injured investors, including small investors who would not otherwise bring an individual suit



Deterrence of fraudulent behavior because of specter of class liability




Transfer of wealth from one set of shareholders to another, with cut for attorneys





Potential for extortive settlements





421 U.S. 723, 740-46 (1975).





421 U.S. 723, 739 (1975).


Exposition

Rising Action

Climax

Falling Action

Dénouement



No private liability for aiders & abettors.Central Bank of Denver v. First Inter. Bank of Denver, 511 U.S. 164 (1994).

Exposition

Rising Action

Climax

Falling Action

Dénouement



Central Bank of Denver v. First Inter. Bank of Denver, 511 U.S. 164 (1994).

PSLRA (1995)





421 U.S. 723, 740-46 (1975).

Private Securities Litigation Reform Act (“PSLRA”) (1995).

Fed. R. Civ. P. 9(b) Fraud or Mistake; Conditions of Mind.

In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.

15 U.S.C.A. § 78u-4 (b)(2)(A) Requirements for securities fraud actions

[I]n 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.




15 U.S.C.A. § 78u-4 (b)(2)(A) Requirements for securities fraud actions

[I]n 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.



A plaintiff satisfies this pleading burden if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007).






421 U.S. 723, 740-46 (1975).

X

X


15 U.S.C.A. § 78u-4(b)(3) Motion to dismiss; stay of discovery

(A) Dismissal for failure to meet pleading requirementsIn any private action arising under this chapter, the court shall, on the motion of any defendant, dismiss the complaint if the requirements of paragraphs (1) and (2) are not met.

(B) Stay of discoveryIn any private action arising under this chapter, all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss, unless the court finds upon the motion of any party that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party.





421 U.S. 723, 740-46 (1975).

X

X

X

Exposition

Rising Action

Climax

Falling Action

Dénouement




PSLRA (1995) – heightened pleading & discovery stay

Securities Litigation Uniform Standards Act (“SLUSA”) (1998).

Defined to include a lawsuit in which damages are sought on behalf of more than 50 people, with respect to a security that is nationally traded and listed on a regulated national exchange.

15 U.S.C.A. § 78bb(f) Limitations on remedies

(1) Class action limitationsNo covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging--(A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or(B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.

(2) Removal of covered class actionsAny covered class action brought in any State court involving a covered security, as set forth in paragraph (1), shall be removable to the Federal district court for the district in which the action is pending, and shall be subject to paragraph (1)

Exposition

Rising Action

Climax

Falling Action

Dénouement




PSLRA (1995)

SLUSA (1998)

Exposition

Rising Action

Climax

Falling Action

Dénouement




PSLRA (1995)

SLUSA (1998)

Merrill Lynch v. Dabit, 547 U.S. 71 (2006).

As the Blue Chip Stamps Court observed, class actions brought by holders pose a special risk of vexatious litigation. . . . It would be odd, to say the least, if SLUSA exempted that particularly troublesome subset of class actions from its pre-emptive sweep.

Merrill Lynch v. Dabit, 547 U.S. 71 (2006).

SLUSA preemption applies to holder claims as well, even though holders do not have a private right of action under federal law.

As the Blue Chip Stamps Court observed, class actions brought by holders pose a special risk of vexatious litigation. . . . It would be odd, to say the least, if SLUSA exempted that particularly troublesome subset of class actions from its pre-emptive sweep.

Exposition

Rising Action

Climax

Falling Action

Dénouement




PSLRA (1995)

SLUSA (1998) Merrill Lynch v. Dabit, 547 U.S. 71 (2006).

Securities Class Actions Reaching a Ruling on MTD

(Cases filed & resolved 2000-2012)

NERA Economic Consulting, Recent Trends in Securities Class Action Litigation: 2012 Full-Year Review (Jan. 2013).

What percentage of motions to dismiss securities class actions are granted?

47 %

Cases Dismissed With Prejudice

1,811 Securities Class Actions Reach-ing a Ruling on

MTD(Cases filed & resolved 1996-2011)

43 %

Cases Dismissed & Terminated

Cornerstone Research, Securities Class Action Filings, “Year in Review” Report for 2011, at 18 (2012) (Figure 16).

460 Rulings on 12(b)(6) MTD(Excluding cases applying 9(b) & PSLRA)

(May 2009-May 2010)

Patricia Hatamyar Moore, An Updated Quantitative Study of Iqbal’s Impact on 12(b)(6) Motions, 46 BALT. L. REV. 603, 613 (2012).

COMPARE: What percentage of 12(b)(6) motions to dismiss are granted overall?

40 %

Granted Without Leave to Amend

2,137 Rulings on 12(b)(b) MTD

(Excluding Prisoner & Pro Se Cases)(2010)

40 %

Granted at Least in Part, Without Leave to Amend

Joe S. Cecil, George W. Cort, Margaret S. Williams & Jared J. Bataillon, Report to the Judicial Conference Advisory Committee on Rules: Motions to Dismiss for Failure to State a Claim After Iqbal, at 14 (March 2011) (Table 4).

2,415 Securities Class Actions(Cased filed & resolved

1996-2011)


96 % - Motion to Dismiss Filed

In what percentage of securities fraud cases are motions to dismiss filed and ruled upon?

96 %

2,415 Securities Class Actions(Cased filed & resolved

1996-2011)

75 % - Motion to Dismiss Ruled Upon

96 % - Motion to Dismiss Filed

In what percentage of securities fraud cases are motions to dismiss filed and ruled upon?


75 %

52,925 District Court Cases(Excluding Prisoner & Pro Se

Cases, 2009-2010)6.2 % - 12(b)(6) Motion to Dismiss Filed Within 90 Days of the Filing of the Case

Joe S. Cecil, George W. Cort, Margaret S. Williams & Jared J. Bataillon, Report to the Judicial Conference Advisory Committee on Rules: Motions to Dismiss for Failure to State a Claim After Iqbal, at 8 (March 2011).

COMPARE: In what percentage of cases are 12(b)(6) motions to dismiss filed?

6.2 %

• 15% reach a motion for class cert.

• Of those, class cert. is granted 77% of the time.


Securities Class Actions Filed Jan. 2000 – Dec. 2013

Halliburton v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014).

Exposition

Rising Action

Climax

Falling Action

Dénouement




PSLRA (1995)



Exposition

Rising Action

Climax

Falling Action

Dénouement




PSLRA (1995)


ATTACK!!!

Asked the Supreme Court to overrule Basic’s fraud-on-the market presumption of reliance.






Potential for extortive settlements



421 U.S. 723, 739 (1975).






421 U.S. 723, 740-46 (1975).

X

X

X

X

Market Price


Efficient market





X

Market Price


Efficient market





X

Market Price


Efficient market






Asked the Supreme Court to require the plaintiff to prove “price impact” at the class certification stage in order to invoke the fraud-on-the-market presumption of reliance.


NO

X

Market Price


Efficient market




Does plaintiff have to prove price impact

to obtain class cert?

Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011); Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013).

Plaintiffs wishing to proceed through a class action must actually prove – not simply plead – that their proposed class satisfies each requirement of Rule 23, including the predominance requirement of Rule 23(b)(3).



Asked the Supreme Court to allow the defendant to rebut the fraud-on-the-market presumption of reliance at the class certification stage by showing the absence of “price impact.”


NO

NO

X

Market Price


Efficient market




Can the defendant rebut the presumption of reliance by showing the absence of price impact at the class cert stage?

Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014).

“Under Basic’s fraud-on-the-market theory, market efficiency and the other prerequisites for invoking the presumption constitute an indirect way of showing price impact. . . . But an indirect proxy should not preclude direct evidence when such evidence is available.”

Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014).

“Under Basic’s fraud-on-the-market theory, market efficiency and the other prerequisites for invoking the presumption constitute an indirect way of showing price impact. . . . But an indirect proxy should not preclude direct evidence when such evidence is available.”

“[D]efendants must be afforded an opportunity before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock.”



Asked the Supreme Court to allow the defendant to rebut the fraud-on-the-market presumption of reliance at the class certification stage by showing the absence of “price impact.”


NO

NO

YES


Exposition

Rising Action

Climax

Falling Action

Dénouement




PSLRA (1995)



Exposition

Rising Action

Climax

Falling Action

Dénouement




PSLRA (1995)


??????

Securities Class Actions Filed Jan. 2000 – Dec. 2013

• 15% reach a motion for class cert.

• Of those, class cert. is granted 77% of the time.



Alleged misrepresentation



PRICE IMPACT


Alleged “confirmatory”

misrepresentation


Alleged “confirmatory”

misrepresentationTruth disclosed

PRICE IMPACT???

HINT: “Basic itself ‘made clear that the presumption was just that, and could be rebutted by appropriate evidence,’ including evidence that the misrepresentation (or its correction) did not affect the market price of the defendant’s stock.”

ABSENCE OF PRICE IMPACT???



PRICE IMPACT

Truth disclosed

HINT: “Basic itself ‘made clear that the presumption was just that, and could be rebutted by appropriate evidence,’ including evidence that the misrepresentation (or its correction) did not affect the market price of the defendant’s stock.”


“Now suppose the district court determines that, despite the defendant’s study, the plaintiff has carried its burden to prove market efficiency, but that the evidence shows no price impact with respect to the specific misrepresentation challenged in the suit. The evidence at the certification stage thus shows an efficient market, on which the alleged misrepresentation had no price impact.”


“Now suppose the district court determines that, despite the defendant’s study, the plaintiff has carried its burden to prove market efficiency, but that the evidence shows no price impact with respect to the specific misrepresentation challenged in the suit. The evidence at the certification stage thus shows an efficient market, on which the alleged misrepresentation had no price impact.”

Is the defendant’s rebuttal burden one of production or persuasion?


MAJORITY OPINION: “[D]efendants must be afforded an opportunity before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock.”


MAJORITY OPINION: “[D]efendants must be afforded an opportunity before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock.”

CONCURRING OPINION: “But the Court recognizes that it is incumbent upon the defendant to show the absence of price impact.”


Fed. R. Evid. Rule 301. Presumptions in Civil Cases Generally

In a civil case, unless a federal statute or these rules provide otherwise, the party against whom a presumption is directed has the burden of producing evidence to rebut the presumption. But this rule does not shift the burden of persuasion, which remains on the party who had it originally.


Exposition

Rising Action

Climax

Falling Action

Dénouement




PSLRA (1995)


??????

Opt-Outs

ITLA 2014 Fall Seminar

The Future of Securities Litigation Post-Halliburton

Wendy Gerwick CoutureAssociate Professor

University of Idaho College of [email protected]

Slides available on SlideShare

mailto:[email protected]

Law

The Future of Securities Litigation Post-Halliburton