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Top Securities Rulings Of 2013 Have Defense Bar Flying High
By Max Stendahl
Law360, New York (July 16, 2013, 9:03 PM ET) -- Securities defense attorneys had plenty of reason to
celebrate in the first half of 2013, as Delaware courts dealt multiple jurisdictional blows to shareholders
and the U.S. Supreme Court curbed government fraud actions while threatening to nix a legal theory at
the heart of private class actions.
Reflecting on the most important securities rulings of the year so far, experts noted the high court's
landmark decisions in Gabelli v. U.S. Securities and Exchange Commission and Amgen Inc. v. Connecticut
Retirement Plans and Trust Funds. They also pointed to a pair of defense-friendly rulings by the
Delaware Supreme Court and newsmaking Chancellor Leo Strine.
"When the Supreme Court or Chancellor Strine speaks on securities litigation matters, everyone
listens," Willkie Farr & Gallagher LLP partner Todd G. Cosenza said.
Here are the rulings since Jan. 1 that have made waves in the securities bar.
Supreme Court Shortens SEC's Leash
The SEC typically enjoys broad leeway to go after fraudsters, but the agency saw its powers reined in by
a Feb. 27 Supreme Court ruling that nixed market-timing allegations against two Gabelli Funds LLC
officials, Marc J. Gabelli and Bruce Alpert. Overturning a controversial Second Circuit ruling, the high
court said the SEC’s five-year window for filing civil enforcement actions that seek penalties begins not
when the agency discovers an alleged fraud, but when the fraud itself occurs.
The unanimous 9-0 decision was a sharp rebuke to the SEC, as the court found the agency did not
deserve the kind of "discovery rule" used by private plaintiffs with limited powers to investigate and
reveal scams.
"There was the unanimous view that the court would not borrow from private litigation to write in a
discovery exception for government-imposed penalties," McDermott Will & Emery LLP partner Eugene
Goldman said. "The SEC has the power to investigate on a timely basis, so the court found it could and
should live within the five-year statutory period to seek penalties."
The ruling could factor into deliberations over whether to settle or litigate a case, and whether to
recommend that clients sign so-called tolling agreements to stop the clock on a limitations period,
according to Goldman, a former SEC senior counsel.
"It weighs on the thinking of both defense counsel and SEC enforcement staff as they frame discussions
for possible resolutions or litigation," he said.
Gabelli is represented by Lewis J. Liman and Katherine Wilson-Milne of Cleary Gottlieb Steen & Hamilton
LLP. Alpert is represented by Edward A. McDonald, Kathleen N. Massey and Joshua I. Sherman
of Dechert LLP.
The case is Gabelli et al. v. Securities and Exchange Commission, case number 11-1274, in the U.S.
Supreme Court.
Amgen Ruling Puts Fraud Theory in Jeopardy
Gabelli, a landmark case in its own right, was upstaged by the Supreme Court's ruling in Amgen on the
very same day. The court held that plaintiffs in a securities fraud action need only plausibly allege — not
prove — that allegedly misleading statements are material in order to win class certification. The
decision lowered the bar for plaintiffs, potentially making it easier for them to win certification and,
eventually, settlement cash.
But even as they lamented the ruling, defense attorneys cheered dissenting statements suggesting the
Supreme Court may consider abolishing the fraud-on-the-market theory, a 25-year-old doctrine behind
scores of securities actions. The theory assumes that investors who buy stock on an efficient market rely
on a company's alleged misstatements because they are accurately reflected in the stock price.
The defendants in the Amgen case admitted that the market for the company's stock was efficient. As a
result, the court didn't have a chance to address the theory, which was established in the Supreme
Court's 1988 decision in Basic Inc. v. Levinson. But the thorny issue could be teed up in the future,
according to Cosenza, the Willkie Farr attorney who is slated to become the chairman of the New York
City Bar Association's Securities Litigation Committee in September.
"Four justices appear ready to reconsider Basic, the overturning of which could drastically alter
securities fraud class actions by making it significantly more difficult for plaintiffs to certify a class,"
Cosenza said. "I think you're going to see a lot of articles discussing that possibility."
The investors are represented by David C. Frederick of Kellogg Huber Hansen Todd Evans & Figel PLLC.
Amgen is represented by Seth Waxman of WilmerHale.
The case is Amgen Inc. et al. v. Connecticut Retirement Plans and Trust Funds, case number 11-1085, in
the U.S. Supreme Court.
Plaintiffs' Luck Runs Out in Delaware
Delaware, a hotbed for securities litigation, has been the site of several fierce battles in 2013 over the
proper forum for shareholders to bring claims — with the defense bar winning two high-profile
decisions in the spring.
On April 5, the Delaware Supreme Court tossed a derivative suit against Botox maker Allergan Inc., citing
the dismissal of a similar action in California. The decision overturned a vice chancellor's finding that the
California case was inferior because the plaintiffs had rushed to the court to sue before conducting a key
books and records inspection.
The Allergan case struck a blow to plaintiffs who often seek to litigate claims across multiple
jurisdictions.
In another defense-friendly Delaware ruling on jurisdiction, Chancellor Strine found on June 25 that
public companies may require shareholders to sue them only in Delaware court, upholding bylaws
enacted by Chevron Corp. and FedEx Corp. to that effect.
"Once you get all the shareholder suits relating to similar facts or conduct in a single forum, it will
decrease the expense and inefficiency of defending multiple suits in multiple jurisdictions," Cosenza
said. "For the plaintiffs bar, it may create some challenges because these cases will likely proceed in
Delaware and limit any ability to engage in forum shopping."
The plaintiffs are represented by Michael Hanrahan and Paul Fioravanti of Prickett Jones & Elliott PA,
Marc Topaz and Lee Rudy of Kessler Topaz Meltzer & Check LLP and Klausner Kaufman Jensen &
Levinson.
Chevron is represented by William Chandler III, Tamika Montgomery and David Berger of Wilson Sonsini
Goodrich & Rosati PC. FedEx is represented by Kenneth Nachbar and A. Gilchrist Sparks III of Morris
Nichols Arsht & Tunnell LLP.
The cases are Boilermakers Local 154 Retirement Fund et al. v. Chevron Corp. et al., case number 7220;
and ICLUB Investment Partnership v. FedEx Corp. et al., case number 7238; both in the Delaware Court
of Chancery.
New York Courts Tinker with FCPA's Reach
High-profile court decisions in cases involving the Foreign Corrupt Practices Act, a 1977 law that outlaws
bribery of foreign government officials, are a rarity. So a pair of New York federal court rulings in
February on jurisdictional issues raised eyebrows among government enforcement pros.
Both suits raised the question of how far the SEC may go to pursue FCPA claims against foreign
nationals. In SEC v. Straub, the court found that foreign nationals who sign false statements that are
later included in agency filings are subject to FCPA liability. In SEC v. Sharef, the court rejected
jurisdiction over a former Siemens AG executive who was not directly involved in paying bribes and did
not personally sign misleading financial statements.
Attorneys starved for new developments in the slow-moving FCPA arena welcomed the insights. The SEC
and U.S. Department of Justice have ramped up FCPA prosecutions in recent years, thrusting the law
into the limelight and raising concerns over which individuals may be targeted and for what specific
conduct.
"Although the SEC won one and lost one, the substance of the rulings really deal with the same
issue," Dorsey & Whitney LLP partner Thomas O. Gorman said. "They will be important going forward to
people who practice in this space."
In the Sharef case, Herbert Steffen is represented by Erich T. Schwartz, Amanda Grier and Milli K.
Hansen of Skadden Arps Slate Meagher & Flom LLP. In the Straub case, Elek Straub is represented by
Amanda Grier and Saul M. Pilchen of Skadden Arps Slate Meagher & Flom LLP, Andras Balogh is
represented by John A. McMillan and William Michael Sullivan Jr. of Pillsbury Winthrop Shaw Pittman
LLP and Tamas Morvai is represented by Michael Louis Koenig and Victoria Pauline Lane of Greenberg
Traurig LLP.
The cases are Securities and Exchange Commission v. Sharef et al., case number 1:11-cv-09073; and
Securities and Exchange Commission v. Elek Straub et al., case number 1:11-cv-09645; both in the U.S.
District Court for the Southern District of New York.
Sixth Circuit Offers Opinion on 'Opinions'
One of the biggest securities battles of 2013 may just be getting started. On May 23, the Sixth Circuit
created a split with the Second and Ninth circuits by finding that plaintiffs suing under Section 11 of the
Securities Act of 1933 — a claim at the crux of many class actions — do not have to show a defendant
knew that its statements of opinion were false when made.
The controversial decision revived a putative class action alleging drug giant Omnicare Inc. artificially
inflated its stock price by concealing a kickback scheme. More importantly, attorneys said, it set up a
potential showdown in the U.S. Supreme Court over the issue of liability in stock fraud suits. The Second
and Ninth circuit rulings relied on the high court’s own 1991 precedent in Virginia Bankshares Inc. v.
Sandberg.
If the Sixth Circuit's view becomes the law of the land, defense attorneys may need to rethink their
approach to certain Section 11 claims, according to Douglas W. Greene, a shareholder at Lane Powell
PC who co-chairs the firm's securities litigation group.
"This is an important issue," Greene said. "Statements of opinion are often challenged in securities
cases, and if the Sixth Circuit's view holds and spreads, it will change the governing approach to litigating
statements of opinion."
Omnicare is represented by Harvey Kurzweil, Richard W. Reinthaler and John E. Schreiber of Winston &
Strawn LLP along with William T. Robinson III and Michael E. Nitardy of Frost Brown Todd LLC.
The plaintiffs are represented by Eric Alan Isaacson, Henry Rosen, Jennifer L. Gmitro and Amanda M.
Frame of Robbins Geller Rudman & Dowd LLP.
The case is Indiana State District Council et al. v. Omnicare Inc. et al., case number 12-5287, in the U.S.
Court of Appeals for the Sixth Circuit.
--Editing by John Quinn and Katherine Rautenberg.
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