Securities Fraud
Rule 10b-5
Exclusive?
Class action – business model
(last updated 19 Mar 13)
Schedule
• Tues, Mar 19 - Assignment 29 & 31 (including 10b-5 hypos)
• Thurs, Mar 21- Assignment 32 / visit of Coleman Cowan (WF
law grad and 60 Minutes producer - please
watch http://www.cbsnews.com/video/watch/?id=6945451n
• Tues, Mar 26 - Please read attached E&E (insider trading) / visit
of Beth Southern (Associate General Counsel - Hanesbrands /
Securities)
• Thurs, Mar 28 - Assignment 35 & 36
Coleman Cowan
WebEx
60 Minutes
• European debt crisis
• High-frequency
–
–
–
Transcript
How grew
SEC investigating (Mar ‘12)
Securities Fraud Action
William Rehnquist:
When we deal with private
actions under Rule 10b-5, we
deal with a judicial oak which
has grown from little more than
a legislative acorn.
Blue Chip Stamps v. Manor Drug
Stores (US 1975)
Fan of Gilbert and Sullivan operas
(Lord Chancellor stripes)
Securities Exchange Act of 1934
Section 10 -- Manipulative and
Deceptive Devices
It 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--
(b) To use or employ, in
connection with the purchase or
sale of any security registered
on a national securities
exchange or any security not so
registered … 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.
Securities Fraud Action
Rule 10b-5
• Transaction (“in connection with
• purchase
Plaintiff or sale of securities”)
•• Plaintiff
(“purchasers or sellers” /
Defendant
unless SEC)
• Elements
• Defendant (“primary violator” /
• Procedure
including company)
• Elements
–
–
–
–
–
Material misrep or omission
Scienter
Reliance
Causation
Damages
• Procedure
– Jurisdictional nexus (federal court)
– Limitations / repose: 3 yrs / 5 yrs
– Special rules for class actions
Compare to other private actions
Exchange Act
Rule 10b-5
Fraud icw
purchase
or sale of
security
Securities Act
§ 18(a)
§ 9(c)
§11
§12(a)(1)
§12(a)(2)
Materially
false
statement
in SEC
filing
Specified
manipulative
practice
(pools, etc)
False
statement
in
registration
statement
Offer or
sale of
unregister
ed, nonexempt
securities
Offer or
sale by
means of
materially
false
prospectus
Compare to other private actions
Exchange
Act
Securities
Act
Rule 10b-5
§11
Fraud icw
purchase
or sale of
security
False
statement
in RS
statement
Herman & MacLean v. Huddleston (US 1983):
1969 – IPO / 1970 – bankruptcy / 1972 – class action
Accounting firm concealed TIS financial condition
• Section 11 (’33 Act)
– False statements in RS
– Due diligence defense
– 1-year statute of limitations
• Rule 10b-5 (’34 Act)
– Fraud icw sale of securities
– [prior law} state S/L
Securities Fraud
Class Action
“when talk is not cheap”
“King of Pain”
“Loathed
because
Curriculum
Vitae he's so mean,
because
he's so powerful,
• feared
1946:
born
in
working-class
Bill Lerach is the lawyer everyone in
Pittsburgh
Silicon
Valley hates.”
• 1970: U Pittsburgh law grad
• 1976: joins
Milberg
Weiss Sep.
(San 2000
Fortune
Magazine,
Diego)
•“"In
2004:
to Lerach
10 ormoves
15 years
you willCoughlin
be holding
another
Stoia Geller
hearing
Rudman
about&aRobbins
debacle in
the
(Sansecurities
Diego) market that will make
remember
therecovery
S&L mess
with
• you
2005:
$7.2
billion
in
Enron
fondness."
litigation ($45 over career)
• 2007: pleads guilty to obstruction
of
Bill Lerach,
justice
(later Milbergtestimony
Weiss) (1995)
congressional
• 2009: disbarred by California State
Bar
• 2010: released from prison / “Circle
of Greed” published
Federal Securities Fraud Class Action Litigation
(lawsuits filed)
Pre-Reform
Post-Reform
Stanford Class Action Clearinghouse
Anatomy of 10b-5 class action …
Class Counsel – Business Model
• Get started
– identify material corporate misrepresentations
– find appropriate shareholders to act as class representatives
– file a complaint in a court of class counsel’s choosing
• Take care of legalities
– defend the complaint against motion to dismiss (on legal
grounds)
– urge the judge to grant class action status to the litigation
– send notice to class members, giving them an option to
withdraw from the lawsuit
– undertake discovery of information from the company and
other sources
• Close the deal
–
–
–
–
enter into settlement negotiations with company officials
champion any settlement before the judge
administer settlement funds
appeal any adverse decisions by the trial court judge
Effect of settlement
(circularity)
Settlement with
“corporation”
Selling shareholders
(windfall winners!)
Buying shareholders
(plaintiffs)
Shareholders
Payment
Nominal
payments
subsidy
Corporation
Corporate execs
(insider trading)
Corporate execs
(D&O insurance)
Why pay lawyers to move money
between shareholder pockets?
(Is Bill Lerach hero or knave?)
How do you become
“lead counsel”?
Private Securities Litigation Reform Act
Lead plaintiff
• Notice of lawsuit to class
members
• Appointment of lead
plaintiff
–
–
Presumption: “largest
financial interest”
Rebut: “Not adequately
represent class”
• Selection of lead counsel
–
–
Most adequate plaintiff
Subject to approval of
court
Elliott Weiss
Univ of Arizona
PSLRA
Appointment of “lead plaintiff”
Not later than 90 days after the date on which a notice [of class action]
the court shall consider any motion made by a purported class member
in response to the notice, … and shall appoint as lead plaintiff the
member or members of the purported plaintiff class that the court
determines to be most capable of adequately representing the interests
of class members (hereafter in this paragraph referred to as the "most
adequate plaintiff")
Who is “lead plaintiff”?
…the court shall adopt a presumption that the most adequate plaintiff in
any private action arising under this title is the person or group of
persons that-–
–
–
has either filed the complaint or made a motion in response to a notice under
subparagraph (A)(i);
in the determination of the court, has the largest financial interest in the relief
sought by the class; and
otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil
Procedure.
The presumption described in subclause (I) may be rebutted only upon
proof by a member of the purported plaintiff class that the presumptively
most adequate plaintiff-–
–
will not fairly and adequately protect the interests of the class; or
is subject to unique defenses that render such plaintiff incapable of adequately
representing the class.
Selection of lead counsel
The most adequate plaintiff shall, subject to the approval of the court,
select and retain counsel to represent the class.
Restrictions on professional plaintiffs
Except as the court may otherwise permit, consistent with the purposes
of this section, a person may be a lead plaintiff, or an officer, director, or
fiduciary of a lead plaintiff, in no more than 5 securities class actions
brought as plaintiff class actions pursuant to the Federal Rules of Civil
Procedure during any 3-year period.
The end
Anatomy of 10b-5 class action …
(1) Investigate corporate
disclosures …
(2) Identify corporate “fiction” …
followed by “surprise” …
resulting in “price drop”
(3) Identify “scienter” – such as …
(4) File a complaint (in federal
court) … that must tell “fraud”
story … … to withstand “motion
to dismiss”
(5) If so, start settlement
negotiations …
Anatomy of 10b-5 class action …
(1) Investigate corporate
disclosures …
(2) Identify corporate “fiction” …
followed by “surprise” …
resulting in “price drop”
(3) Identify “scienter” – such as …
(4) File a complaint (in federal
court) … that must tell “fraud”
story … … to withstand “motion
to dismiss”
(5) If so, start settlement
negotiations …
Anatomy of 10b-5 class action …
(1) Investigate corporate
disclosures …
(2) Identify corporate “fiction” …
followed by “surprise” …
resulting in “price drop”
(3) Identify “scienter” – such as …
(4) File a complaint (in federal
court) … that must tell “fraud”
story … … to withstand “motion
to dismiss”
(5) If so, start settlement
negotiations …
Anatomy of 10b-5 class action …
(1) Investigate corporate
disclosures …
(2) Identify corporate “fiction” …
followed by “surprise” …
resulting in “price drop”
(3) Identify “scienter” – such as …
(4) File a complaint (in federal
court) … that must tell “fraud”
story … … to withstand “motion
to dismiss”
(5) If so, start settlement
negotiations …
Anatomy of 10b-5 class action …
(1) Investigate corporate
disclosures …
(2) Identify corporate “fiction” …
followed by “surprise” …
resulting in “price drop”
(3) Identify “scienter” – such as …
(4) File a complaint (in federal
court) … that must tell “fraud”
story … … to withstand “motion
to dismiss”
(5) If so, start settlement
negotiations …
Anatomy of 10b-5 class action …
(1) Investigate corporate
disclosures …
(2) Identify corporate “fiction” …
followed by “surprise” …
resulting in “price drop”
(3) Identify “scienter” – such as …
(4) File a complaint (in federal
court) … that must tell “fraud”
story … … to withstand “motion
to dismiss”
(5) If so, start settlement
negotiations …
(e.g. Bay Networks, Inc)
Anatomy of 10b-5 class action …
(1) Investigate corporate
disclosures …
(2) Identify corporate “fiction” …
followed by “surprise” …
resulting in “price drop”
(3) Identify “scienter” – such as …
(4) File a complaint (in federal
court) … that must tell “fraud”
story … … to withstand “motion
to dismiss”
(5) If so, start settlement
negotiations …
Anatomy of 10b-5 class action …
(1) Investigate corporate
disclosures …
(2) Identify corporate “fiction” …
followed by “surprise” …
resulting in “price drop”
(3) Identify “scienter” – such as …
(4) File a complaint (in federal
court) … that must tell “fraud”
story … … to withstand “motion
to dismiss”
(5) If so, start settlement
negotiations …
Anatomy of 10b-5 class action …
(1) Investigate corporate
disclosures …
(2) Identify corporate “fiction” …
followed by “surprise” …
resulting in “price drop”
(3) Identify “scienter” – such as …
(4) File a complaint (in federal
court) … that must tell “fraud”
story … … to withstand “motion
to dismiss”
(5) If so, start settlement
negotiations …