The 10b-5 Daily

The Sheriff of Orange County

Supreme Court Justice Sandra Day O'Connor may be retired, but she is not done creating securities law. Last year, she sat with the Fifth Circuit by designation and wrote an opinion on loss causation. In February, it was the Sixth Circuit and her opinion concerns the scope of the Securities Litigation Uniform Standards Act ("SLUSA"), which precludes certain class actions based upon state law that allege a misrepresentation in connection with the purchase or sale of nationally traded securities.

In Demings v. Nationwide Life Ins. Co., 2010 WL 364335 (6th Cir. Feb. 3, 2010), the Sheriff of Orange County Florida brought a class action on behalf of all public employers who sponsor § 457 deferred-compensation plans alleging that Nationwide implemented a scheme under which it improperly received revenue-sharing payments from mutual funds and mutual fund advisors that should have gone to the plan participants. The district court found that the case was precluded by SLUSA because the substance of the sheriff's claim was a covered class action alleging that "Nationwide misrepresented a relationship with mutual fund advisors, or, at a minimum, failed to disclose material facts about the relationship."

On appeal, the sheriff argued that his suit was subject to SLUSA's "state actions" exception, which exempts certain suits brought by states, political subdivisions thereof, and state pensions plans from SLUSA's preclusive effect. By its plain terms, however, the state actions exception only applies to a covered entity that brings an action "on its own behalf." Although the sheriff might be a "political subdivision," his complaint sought to bring an action on behalf of the deferred-compensation plan. In the absence of any allegation that the sheriff had the authority to bring an action as the plan, the district court was entitled not to consider that possibility. Moreover, the "state actions" exception requires the members of the proposed class to be "named plaintiffs . . . that have authorized participation, in such action." The sheriff was attempting to bring a class action on behalf of a prospective class of unnamed sponsors of deferred-compensation plans.

Holding: Affirmed dismissal based on SLUSA preclusion.

More NAB Developments

The respondents have filed their brief in the National Australia Bank case pending before the U.S. Supreme Court. The case concerns the extraterritorial application of the antifraud provisions of the federal securities laws. Links to all of the briefs filed to date, including the extensive amicus submissions, can be found here.

The respondents argue that the Exchange Act does not contain any language "that clearly expresses an affirmative intention of Congress to apply the statute extraterritorially." In the absence of this language, there is a presumption against extraterritoriality that the Court should apply.

Moreover, acts of Congress should be interpreted to be in conformity with international choice-of-law provisions absent any contrary statement. Based on the law of nations in 1934 (when the Exchange Act was enacted), "Congress must be presumed to have intended that transactions on foreign exchanges must be governed by foreign law." The extraterritorial application of Section 10(b) to foreign transactions also would improperly supplant the substantive laws and remedies that already exist in foreign countries.

Finally, the Court has previously held that because the private right of action under Section 10(b) is judicially created it should be subject to practical limitations. The threat to the sovereign authority of other nations posed by the extraterritorial application of the statute is significant and warrants the limitation of Section 10(b) actions to persons who purchased or sold securities in the United States.

For a summary of the petitioners' arguments, see this earlier post.

MoneyGram International Settles

MoneyGram International, Inc. (NYSE: MGI), a Minneapolis-based payment services company, has announced the preliminary settlement of the securities class action (and related derivative action) pending against the company in the D. of Minn. The case, originally filed in 2008, stems from subprime-related investment losses and is based on allegations that the company made false statements regarding its investment portfolio.

The settlement is for $80 million, with $60 million to be covered by insurance. Reuters has an article on the settlement.

The Halliburton Odyssey

One of the very first posts on this blog, way back in May 2003, was about the Halliburton securities class action settlement. Who knew what was to come? The judge recused himself, the settlement was eventually rejected, the lead plaintiff switched counsel, and the court declined to certify a class.

Now, nearly eight years after the case was originally filed, the U.S. Court of Appeals for the Fifth Circuit has issued an opinion affirming the denial of class certification. In The Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Co., 2010 WL 481407 (5th Cir. Feb. 12, 2010), the court considered whether the plaintiffs had adequately demonstrated the existence of loss causation. Based on Fifth Circuit precedent, the plaintiffs were required to show "(1) that an alleged corrective disclosure causing the decrease in price is related to the false, non-confirmatory positive statement made earlier, and (2) that it is more probable than not that it was this related corrective disclosure, and not any other unrelated negative statement, that caused the stock price decline."

The court found that the plaintiffs had failed to meet this standard based on the corrective disclosures they identified. The corrective disclosures either failed to indicate that any prior statements were misleading or the plaintiffs' expert was unable to adequately demonstrate that a particular corrective disclosure, as opposed to other negative news about the company, more probably affected the stock price.

Holding: Denial of class certification affirmed.

Quote of note: "Plaintiff asks us to draw an inference that the June 28, 2001 press release corrected prior allegedly false estimates of asbestos reserves merely because those reserves changed. But a company is allowed to be proven wrong in its estimates, and we can discern no indication from the June 28, 2001 press release that Halliburton's prior asbestos reserve estimates were misleading or deceptive."

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.