The 10b-5 Daily

Where To Next

As the U.S. Supreme Court begins its October term, a securities litigator's fancy naturally turns to what cases the court might take next. A leading indicator is cert petitions where the Court has asked the government to provide its input. On Monday, the Court made this request in two separate cases: Halliburton (5th Cir.) and Omnicare (6th Cir.).

(1) The question presented in Halliburton is to what extent plaintiffs must demonstrate the existence of loss causation as part of the class certification process. The 10b-5 Daily's summary of the 5th Circuit's decision can be found here. Scotusblog has all of the cert petition materials.

(2) The question presented in Omnicare is whether the heightened pleading standard of FRCP 9(b) should be applied to '33 Act claims (i.e., strict liability/negligence claims based on misstatements in a prospectus or registration statement) that "sound in fraud." The 10b-5 Daily's summary of the Sixth Circuit's decision can be found here. Scotusblog has all of the cert petition materials.

Stay tuned for the governments' responses.

Disclosure: The author of The 10b-5 Daily represents Halliburton in an unrelated matter and his firm - Dewey & LeBoeuf - represents Omnicare in this case.

A Step Too Far

While defendants have had the better of the post-NAB decisions to date, a court in the S.D.N.Y. may have gone a step too far this week. In In re Societe Generale Sec. Litig., 08 Civ. 2495 (S.D.N.Y. Sept. 29, 2010), the court found that NAB's prohibition on claims based on the purchase of securities on foreign exchanges also extends to claims based on the purchase of American Depository Receipts in the U.S. Because Societe Generale's ADRs "were not traded on an official American securities exchange," the court held that trading in them was a "predominately foreign securities transaction" and Section 10(b) was inapplicable. The D&O; Diary has a lengthy post on the decision and expresses some skepticism about the court's reasoning.

Line Drawing

It has been several years since the Second Circuit has addressed the scope of the bespeaks caution doctrine. The bespeaks caution doctrine holds that a "forward-looking statement accompanied by sufficient cautionary language is not actionable because no reasonable investor could have found the statement materially misleading." In Iowa Public Employees' Retirement System v. MF Global, Ltd., 2010 WL 3547602 (2d Cir. Sept. 14, 2010), the Second Circuit found that the district court had failed to properly sever the forward-looking and non-forward-looking aspects of the alleged misstatements. Accordingly, the case was remanded for further analysis.

Quote of note: "A forward-looking statement (accompanied by cautionary language) expresses the issuer's inherently contingent prediction of risk or future cash flow; a non-forward-looking statement provides an ascertainable or verifiable basis for the investor to make his own prediction. The line can be hard to draw, and we do not now undertake to draw one. However, a statement specifying the risk of default is distinct from a statement of present or historical financial instability, even though they both bear upon the same risk. And a statement of confidence in a firm's operations may be forward-looking - and thus insulated by the bespeaks-caution doctrine - even while statements or omissions as to the operations in place (and present intentions as to future operations) are not."

Around the Web

A couple of items from around the web.

(1) Professor John Coffee has a New York Law Journal column (Sept. 17 - subscrip. req'd) on the impact of the National Australia Bank (NAB) decision on SEC and private actions. The column discusses a factual scenario in which a U.S.-based stock promoter defrauds U.S. investors in a transaction that is consummated overseas. Post-NAB, the U.S. investors cannot bring an action under Section 10(b)/Rule 10b-5, but "they could sue in the United States based on a cause of action under foreign law."

(2) The American Lawyer has an article on an unusual order (to say the least) issued in the Gildan Activewear securities class action. Although lead counsel was appointed two years ago and the parties have entered into a preliminary settlement, the court instructs the two plaintiffs firms to "make every effort" to assign at least one minority and one woman to the case. The order states that this is warranted because the class has thousands of members "arguably from diverse backgrounds" and it is "therefore important to all concerned" that lead counsel also be diverse.

Trip Delayed

No one should pack their bags for Shangri-La quite yet. The defendants in the UBS case have received a huge boost from another S.D.N.Y. court regarding the scope of the National Australia Bank (NAB) decision.

At issue is whether a foreign issuer listed on both a foreign exchange and a U.S. exchange can be subject to suit in the U.S. by investors who purchased their shares on the foreign exchange. In In re Alstom SA Sec. Litig., 03 Civ. 6595 (VM) (S.D.N.Y. Sept. 14, 2010), the court found that NAB's use of the phrase "listed on domestic exchanges" did not, based on the existence of a dual listing (U.S. and France), create a U.S. cause of action for investors who purchased their Alstom shares on the French exchange.

The court also declined to exercise supplemental jurisdiction over the claims of the foreign purchasers and apply French law to adjudicate them. Among other things, the court noted that "Plaintiffs have not given any indication that the French claims were unavailable when they began this action and the Court is not now persuaded they should be allowed to press the reset button here, particularly where, by Plaintiffs' own reckoning, France's ten-year statute of limitations allows the claims to be brought in France."

Holding: Claims of plaintiffs who purchased securities on foreign exchanges dismissed.

Quote of note: "That the transactions themselves must occur on a domestic exchange to trigger application of Sec. 10(b) reflects the most natural and elementary reading of [the NAB decision]."

On The Road To Shangri-La

The scope of the National Australia Bank (NAB) decision on the extraterritorial application of Section 10(b) continues to be tested in the lower courts. A case to keep an eye on is In re UBS AG Sec. Litig. (S.D.N.Y.), where the issue is what the Supreme Court meant when it stated that Section 10(b) applies to "the purchase of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States." To wit, does it mean that if a foreign issuer is listed on both a foreign exchange and a U.S. exchange it can be subject to suit in the U.S. by investors who purchased their shares on the foreign exchange?

The AmLaw Litigation Daily has a post (subscrip. req'd) on the case, which includes a link to UBS's recent motion to dismiss. Not surprisingly, UBS argues that reading "listed" to authorize U.S. securities class actions based on the purchases of securities on a foreign exchange would "fly in the face" of the Supreme Court's conclusion that Section 10(b) does not regulate foreign exchanges. Stay tuned.

Quote of note (UBS brief): "Over 850 foreign issuers, including NAB and UBS, list and register their shares on both a foreign exchange and a U.S. exchange. It defies logic to believe that Justice Scalia, without explanation and contrary to the rest of his majority opinion, included the word 'listed' to expand Section 10(b) in a way that will discourage foreign issuers from listing their shares on U.S. exchanges and make the United States the 'Shangri-La' for worldwide securities class actions."

Satisfy Your CLE Requirements!

Do you have some availability on Tuesday, Sept. 21 in New York? It is not too late to sign up for PLI's Securities Litigation & Enforcement Institute 2010. All of the details can be found here.

Lyle Roberts of Dewey & LeBoeuf (the author of The 10b-5 Daily) is co-chairing the program. The outstanding faculty will cover a wide range of topics, including financial crisis litigation, the latest corporate governance litigation issues, case management and settlement techniques, SEC and DOJ trends, and practical advice on handling government investigations.

Hope to see you there.