Inside the
Cou r ts
An Update From Skadden Securities Litigators
March 2009 | Issue 1
Contents
Accountant Liability
2
In re Peregrine Sys., Inc. Sec. Litig., No. 06-55197 (9th Cir. Jan. 23, 2009)
In re Royal Ahold N.V. Sec., No. 1:03-md-01539 (4th Cir. Jan. 5, 2009)
Demand Futility
2
sanctions
3
4
6
7
7
8
Alliance Data Sys. Corp. v. Blackstone Capital Partners V.L.P.,
C.A. No. 3796-VCS (Del. Ch. Jan. 15, 2009)
Preemption
In re Lord Abbett Mut. Funds Fee Litig., No. 07-1112
(3d Cir. Jan. 20, 2009)
Settlements
11
8
12
In re Wm. Wrigley Jr. Co. S’holder Litig., C.A. No. 3750-VCL
(Del. Ch. Jan. 22, 2009)
Standing
In re Williams Sec. Litig.-WCG Subclass, No. 07-5119
(10th Cir. Feb. 18, 2009)
Merger & Acquisition Contracts
10
ECA v. JP Morgan Chase, No. 07-1786 (2d Cir. Jan. 21, 2009)
Zucco Partners, LLC v. Digimarc Corp., No. 06-35758
(9th Cir. Jan. 12, 2009)
Rohm & Haas Co. v. Dow Chem. Co., C.A. No. 4039-CC
(Del. Ch. Feb. 12, 2009)
Loss Causation
10
Beiser v. PMC-Sierra, Inc., C.A. No. 3893-VCL
(Del. Ch. Feb. 26, 2009)
Securities Fraud Pleading Standards
Asher v. Baxter Int’l, Inc., No. 02-CV-5608 (N.D. Ill. Feb. 4, 2009)
Legal Ethics
9
Del Giudice v. S.A.C. Capital Mgmt., LLC, No. 06-1413
(D.N.J. Feb. 19, 2009)
Section 220/Books and Records
Gantler v. Stephens, C.A. No. 132, 2008 (Del. Jan. 27, 2009)
Pfeffer v. Redstone, C.A. No. 115, 2008 (Del. Jan. 23, 2009)
In re Citigroup Inc. S’holder Derivative Litig., C.A.
No. 3338-CC (Del. Ch. Feb. 24, 2009).
Forward-looking statements
Removal
Madden v. Cowen & Co., No. 07-15900 (9th Cir. Feb. 11, 2009)
Katz v. Gerardi, No. 08-8031 (7th Cir. Jan. 5, 2009)
Beleson et al. v. Schwartz, No. 03-CV-6051 (S.D.N.Y. Feb. 24, 2009)
In re Morgan Stanley Sec. Litig., Nos. 02-CV-6153 and 02-CV-8579
(S.D.N.Y. Feb. 2, 2009)
Fiduciary Duties
9
Stark Trading v. Falconbridge Ltd., No. 08-1327
(7th Cir. Jan. 5, 2009)
Laborers Int’l Union of N. Am. v. Bailey, No. 07-56461
(9th Cir. Jan. 23, 2009)
In re Affiliated Computer Servs., Inc. S’holders Litig., C.A. No.
2821-VCL (Del. Ch. Feb. 6, 2009)
Duty to Disclose
Reliance
13
Charles Brooks Co. v. Georgia-Pacific, LLC, No. 07-3938
(8th Cir. Jan. 14, 2009)
In re Merrill Lynch & Co., Inc., Sec., Derivative and ERISA Litig.,
No. 07 Civ. 9633 (S.D.N.Y. Feb. 17, 2009)
Whistleblower Protection
Day v. Staples, Inc., No. 08-1689 (1st Cir. Feb. 9, 2009)
14
Inside the Courts | 2
Accountant Liability
In re Peregrine Sys., Inc. Sec.
Litig., No. 06-55197
(9th Cir. Jan. 23, 2009)
Click here to view the opinion.
In re Royal Ahold N.V. Sec.,
No. 1:03-md-01539
(4th Cir. Jan. 5, 2009)
Click here to view the opinion.
Ninth Circuit Clarifies Section 10(b) Liability for Non-Speaking Defendants
Applying the Supreme Court’s 2008 decision in Stoneridge Investment Partners, LLC v.
Scientific-Atlanta, Inc., the Ninth Circuit affirmed the dismissal of a securities fraud class action
alleging a violation of Section 10(b) of the Securities Exchange Act of 1934 against a “nonspeaking” defendant. The Ninth Circuit held, in In re Peregrine Systems, Inc. Securities Litigation,
that the KPMG defendants could not be liable under Section 10(b) for their role in allegedly
entering into transactions with Peregrine Systems, Inc. from which Peregrine improperly recognized revenue. The Ninth Circuit found that, while “there is no doubt that Peregrine committed
fraud, KPMG’s alleged conduct was non-actionable under Stoneridge. The Ninth Circuit found
that, while “there is no doubt that Peregrine committed fraud,” KPMG’s conduct was nonactionable under Stoneridge. In Stoneridge, the Supreme Court clarified that a non-speaking
defendant could only be held liable if a “‘member of the investing public had knowledge … of
the [non-speaking defendant’s] ‘deceptive acts’ sufficient to demonstrate ‘reliance upon any
of [the non-speaking defendant’s] actions.’” Although press releases documented KPMG’s
relationship with Peregrine, they did not “communicate any information about [KPMG and
Peregrine’s allegedly wrongful] transactions. … [N]ot one of the press releases announce[d] a
specific transaction between KPMG and Peregrine.” Absent such public dissemination, Section 10(b) afforded no basis to impose liability on the KPMG defendants.
Fourth Circuit Examines Accountant Liability for Client Fraud
In an important decision concerning accountants’ liability for the fraudulent acts of their clients,
the Fourth Circuit affirmed the district court’s judgment that the class action plaintiffs’ motion
for leave to file a second amended complaint was futile because the plaintiffs failed to allege
facts sufficient to meet the Private Securities Litigation Reform Act of 1995 (PSLRA) pleading
requirements as interpreted by the Supreme Court’s 2007 decision in Tellabs, Inc. v. Makor
Issues & Rights, Ltd. Plaintiffs claimed that accountants Deloitte & Touche LLP in the U.S. and
Deloitte Touche Accountants in the Netherlands were liable for securities fraud because the
accounting firms were, at a minimum, complicit in the fraud perpetrated by their client, Royal
Ahold, in connection with the client’s accounting and reporting practices. The Fourth Circuit
rejected this argument and reasoned that an accountant is not liable for securities fraud when
“its client actively conspires with others in order to deprive the accountant of accurate information about the client’s finances.” Applying Tellabs, the Fourth Circuit framed the relevant
inquiry as whether the totality of the allegations in the complaint allows the court to draw a
strong inference that the accounting firm “knowingly or recklessly” defrauded investors by
issuing false audit opinions. The Fourth Circuit noted that while the accountants’ procedures
may have been flawed and potentially negligent, that did not amount to a knowing or reckless
act in violation of the securities laws.
Demand Futility
Laborers Int’l Union of
N. Am. v. Bailey, No. 07-56461
(9th Cir. Jan. 23, 2009)
Click here to view the opinion.
Ninth Circuit Affirms Dismissal of Backdating Stock Option Derivative Case
In a recent backdating case, the Ninth Circuit affirmed, in Laborers International Union of North
America v. Bailey, the dismissal with prejudice of a shareholder derivative suit brought against
the directors of Computer Sciences based on allegations of illegal backdating of stock options.
The Ninth Circuit held that the district court, relying on Delaware state law, correctly dismissed
the claims because the complaint did not include “particularized allegations raising a reasonable doubt that, as of the time the original complaint was filed, a majority of CSC’s board ‘could
have properly exercised its independent and disinterested business judgment in responding to
a demand.’” The Ninth Circuit also affirmed the district court’s holding that the PSLRA stay of
discovery applies to derivative suits.
Inside the Courts | 3
In re Affiliated Computer
Servs., Inc. S’holders Litig.,
C.A. No. 2821-VCL
(Del. Ch. Feb. 6, 2009)
Click here to view the opinion.
Chancery Court Dismisses Challenge to Going-Private Offer
The Court of Chancery dismissed a derivative action challenging an offer made by the founder,
chairman and significant stockholder of Affiliated Computer Services, Inc. (ACS) (in conjunction
with a private equity firm) to take the company private. A dispute arose between the founder
and the members of the special committee over the terms of certain lock-up arrangements
to which the founder had agreed, making negotiations with any other suitor more difficult.
Despite months of efforts, the deal fell apart, and the founder demanded the resignation of
the special committee members, which at that time, comprised a majority of the full board.
This led to litigation between the founder and the special committee members that ultimately
settled. Their dispute, however, prompted a stockholder to amend an existing lawsuit challenging the founder’s original offer in order to add derivative breach of fiduciary duty claims
against the entire board relating to the failed deal. Thereafter, the special committee members
resigned and were replaced by new independent directors constituting a majority of the board.
The stockholders then filed a second amended complaint and continued to assert that demand was excused over their claims. The court determined that the first amended complaint
was the appropriate focus for determining whether demand was futile. (Plaintiffs had tacitly
admitted that demand was not futile with respect to the newly constituted board.) The court
held that “[e]ven considering the unusual circumstances that existed when the first amended
complaint was filed, there are no well pleaded allegations of fact from which the court could
infer that a majority of the directors then in office could not have validly considered a demand,
had one been made.” The court also held that plaintiffs failed to allege that a majority of ACS’s
directors in place when the first amended complaint was filed were conflicted. The court then
considered a novel issue “in the demand excusal context: can a board in the midst of internal
warfare, with the majority of its members preparing to resign, be expected to properly consider
a stockholder demand?” The court held that plaintiffs had not adequately alleged that a majority of the board abandoned their fiduciary duties during this turmoil, such that making demand
upon them would be futile. Finally, the court found that plaintiffs had not pled facts rebutting
the business judgment presumption, holding that all the complaint essentially established was
“that the plaintiffs would have run things differently,” but “[t]he business judgment rule … is
not rebutted by Monday morning quarterbacking.”
Duty to disclose
Beleson et al. v. Schwartz,
No. 03-CV-6051
(S.D.N.Y. Feb. 24, 2009)
Click here to view the opinion.
S.D.N.Y. Rules That Distressed Company Was Not Obligated to Disclose Potential
Bankruptcy Plans
A recent ruling from the Southern District of New York holds that a financially distressed company was not obligated to disclose its potential bankruptcy plans. The United States District
Court for the Southern District of New York granted summary judgment in favor of the former
CEO of Loral Space & Communications, Ltd. because he did not breach a duty to disclose
information about the company’s contingency bankruptcy plan. Class plaintiffs claimed that the
defendant violated securities laws when he failed to reveal the company’s contingent bankruptcy plan to correct allegedly misleading statements about the company’s viability. The court
rejected that argument and reasoned that the challenged statements were not misleading as
a matter of fact and, therefore, there was no duty to disclose the bankruptcy plan because
the company had “put the market on notice of its dire financial circumstances” based on its
prior SEC filings and analysts’ reports. The court further reasoned that public policy allows for
a company to withhold information concerning a potential bankruptcy filing because revelation
of such a plan would inevitably drive down the stock price and the disclosure of a contingency
bankruptcy plan would become a “self-fulfilling prophecy.”
Inside the Courts | 4
In re Morgan Stanley Sec. Litig.,
Nos. 02-CV-6153 and 02-CV8579 (S.D.N.Y. Feb. 2, 2009)
Click here to view the opinion.
S.D.N.Y. Grants Dismissal in Case Alleging Conflicts Between Investment Banking and
Research Departments
The United States District for the Southern District of New York granted a motion to dismiss
two class actions filed against Morgan Stanley, and certain affiliates, because the defendants
did not have a duty to disclose the alleged conflicts of interest. The plaintiffs contended that
Morgan Stanley violated Sections 11, 12, and 15 of the Securities Act of 1933 when it failed
to disclose purported conflicts of interest that arose when its “Chinese wall” between its
investment banking and research departments failed. The plaintiffs argued that the defendants
had numerous roles concerning companies whose shares were in the mutual funds including:
(1) underwriting for companies in the funds; (2) performing investment banking and corporate
finance duties for companies in the funds; (3) preparing and distributing research reports and
recommendations on companies in the funds; and (4) attempting to obtain business concerning the previously mentioned duties for companies in the funds. The plaintiffs also argued that
Morgan Stanley engaged in “laddering,” which resulted in inflated share prices of IPO offerings
when Morgan Stanley offered customers “hot” IPOs if they agreed to buy additional shares in
the aftermarket.
The district court rejected the plaintiffs’ arguments and held that there was neither a statutory
or regulatory duty to disclose the alleged conflicts of interest nor was there a duty to disclose
based on the requirement to correct misleading statements in a prospectus with additional information. Applying In re Merrill Lynch & Co., 272 F. Supp. 2d 243, 248-49 (S.D.N.Y. 2003), the
court first reasoned that there was no duty to disclose the alleged conflicts of interest pursuant
to mutual fund registration form N-1A because “Form N-1A … does not require Defendants
to disclose that the Fund invested in the securities of companies with which [Morgan Stanley]
had an investment banking relationship.” The court further reasoned that (1) the plaintiffs proffered insufficient evidence to “support their allegations that Defendants chose certain companies for the Fund in order to enhance [Morgan Stanley’s] investment banking business,” and (2)
the plaintiffs failed to “identify any legal authority that would require disclosure” of the Chinese
wall’s failure. The court further noted that there was “no rule or regulation that contains a requirement that mutual funds separately identify a transaction with its affiliates or provide other
information about the business activities of relationships of those affiliates.” Finally, the court
held that the prospectus materials were not misleading because the plaintiffs failed to allege
(1) “any facts demonstrating that the companies held by the Fund did not satisfy the Funds’
criteria,” and (2) “that any of the Funds’ investor advisors were aware of the alleged conflicts
of interest between” the research departments and the investment banking subsidiary of Morgan Stanley. Therefore, the complaints were dismissed because the plaintiffs “failed to plead
any material omissions or misstatements that Defendants had a duty to disclose.”
Fiduciary Duties
Gantler v. Stephens,
C.A. No. 132, 2008,
(Del. Jan 27, 2009)
Click here to view the opinion.
Delaware Supreme Court Clarifies Doctrine of Stockholder Ratification
In Gantler, the Supreme Court reversed and remanded a Court of Chancery dismissal pursuant
to Rule 12(b)(6) of a shareholder “complaint alleg[ing] that the defendants, who are officers and
directors … , violated their fiduciary duties by rejecting a valuable opportunity to sell the Company, [and] deciding instead to reclassify the Company’s shares to benefit themselves … .” The
court concluded that “the complaint pleads sufficient facts to overcome the business judgment
presumption, and to state substantive fiduciary duty and disclosure claims.” Three aspects of
the opinion have garnered a significant amount of attention. First, the court confirmed that
“[r]ejecting an acquisition offer, without more, is not ‘defensive action’ under Unocal.” The
court further held that although a board’s decision not to pursue a merger is typically reviewed
under the presumption of the business judgment rule, plaintiffs had adequately alleged that
a majority of the board members were materially conflicted based on an alleged threat of
personal financial loss if the merger were completed. Therefore, the court concluded that
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for pleading purposes the business judgment presumption was rebutted and the standard of
entire fairness should be applied to a decision by the board to abandon a sales process. In so
holding, the court commented that “[a]lthough it may be problematic to determine the fair
price of a transaction that was never finalized, our decisions have applied the entire fairness
standard in a non-transaction context.” Second, the court held, in what it described as a matter of first impression, that officers of a company owe shareholders the same fiduciary duties
as directors. The court also commented that officers, unlike directors, are not protected by
exculpatory charter provisions adopted pursuant to 8 Del. C. § 102(b)(7). Third, the Delaware
Supreme Court significantly curtailed the use of shareholder ratification as a defense to breach
of fiduciary duty claims. Specifically, the court limited the doctrine of shareholder ratification
“to circumstances where a fully informed shareholder vote approves director action that does
not legally require shareholder approval in order to become legally effective. Moreover, the only
director conduct that can be ratified is that which the shareholders are specifically asked to approve. With one exception, the ‘cleansing’ effect of such a ratifying shareholder vote is subject
to the challenged director action to business judgment review, as opposed to ‘extinguishing’
the claim altogether….” The one exception is when the doctrine is used to extinguish “a claim
that the directors lacked the authority to take action that was later ratified.”
Pfeffer v. Redstone,
C.A. No. 115, 2008,
(Del. Jan. 23, 2009)
Click here to view the opinion.
In re Citigroup Inc. S’holder
Derivative Litig.,
C.A. No. 3338-CC
(Del. Ch. Feb. 24, 2009).
Click here to view the opinion.
Delaware Supreme Court Holds That Entire Fairness Review Not Required When
Company Engages in Voluntary, Noncoercive Offer
The Delaware Supreme Court recently reaffirmed that Delaware law does not require an
entire fairness review where a company makes a voluntary, noncoercive exchange offer to its
shareholders. In Pfeffer, the Delaware Supreme Court affirmed a dismissal with prejudice of
claims in a class action brought against directors of Viacom, Blockbuster and others. Sumner Redstone owned a controlling stake in National Amusements, Inc. (NAI), which, in turn,
owned a 71 percent voting interest in Viacom. Viacom owned 82 percent of the equity value
of Blockbuster. Among other things, the litigation challenged an offer made by Viacom to its
shareholders to exchange their Viacom stock for Blockbuster stock. The Delaware Supreme
Court first rejected an argument that the Viacom directors had breached their fiduciary duties
in structuring the transaction, confirming that Delaware law does not require entire fairness
scrutiny where a corporation engages in a voluntary, noncoercive offer. The Viacom directors
had a duty to structure the terms of the exchange offer in a manner that was noncoercive and
to disclose all material facts, and the Supreme Court determined that Viacom’s directors had
satisfied that duty. The court held that the exchange offer was purely voluntary, and the board
clearly disclosed that NAI would not participate in the offer. The court also rejected a series of
disclosure claims, including the argument that Blockbuster’s internal cash flow analysis, created by a “midlevel treasury manager,” should be disclosed, emphasizing that the plaintiff did
not sufficiently plead any facts to support the inference that Viacom directors were aware of
the analysis. The court concluded that an assertion that the Viacom directors knew of the cash
flow analysis because Blockbuster’s chairman and CEO would have told Sumner Redstone
about it “could not be more conclusory.”
Court of Chancery Issues Guidance on Caremark Duties and Director Oversight Liability
The Court of Chancery recently issued an opinion that provides important guidance about
Caremark duties and director oversight liability in the subprime lending context. The plaintiffs,
shareholders of Citigroup, brought the case derivatively against certain former and current
directors and officers of Citigroup. The plaintiffs alleged that the defendants breached their
fiduciary duties by failing to properly monitor and manage risks the company faced from problems in the subprime lending market and for failing to properly disclose Citigroup’s exposure to
subprime assets. The plaintiffs also alleged that there were extensive “red flag” warnings that
should have given defendants notice of the problems that were brewing in the real estate and
credit markets, and that the defendants ignored these warnings in the pursuit of short-term
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profits and at the expense of the company’s long-term viability. The court, however, noted
that the “red flags” identified in the complaint amounted to little more than portions of public
documents that reflected the worsening conditions in the subprime mortgage market and in
the economy generally. The plaintiffs also raised certain waste claims, including one focused
on the payment and benefit package provided to Citigroup’s former CEO upon his retirement in
November 2007. After declining to stay the case in favor of a similar New York action, the court
dismissed all of plaintiffs’ claims, except for the claim for waste relating to the former CEO’s
payment and benefits package.
As for the oversight claims, the court first noted that, based on Delaware Supreme Court
authority, the test for director oversight liability “is rooted in concepts of bad faith” and that “a
showing of bad faith is a necessary condition to director oversight liability.” The court remarked
that “Plaintiffs’ theory of how the director defendants will face personal liability is a bit of a
twist on the traditional Caremark claim” because plaintiffs’ claims “are based on defendants’
alleged failure to properly monitor Citigroup’s business risk, specifically its exposure to the
subprime mortgage market.” The court noted that it would not engage in the “kind of judicial
second guessing” that “the business judgment rule was designed to prevent, and even if a
complaint is framed under a Caremark theory, this Court will not abandon such bedrock principles of Delaware fiduciary duty law.” The court found that the plaintiffs had failed to show
that the defendants were presented with “red flags” alerting them to potential misconduct at
the company.
Critically, the court held that simply because “the director defendants knew of signs of a
deterioration in the subprime mortgage market, or even signs suggesting that conditions could
decline further, is not sufficient to show that the directors were or should have been aware of
any wrongdoing at the Company or were consciously disregarding a duty somehow to prevent Citigroup from suffering losses. Nothing about plaintiffs’ ‘red flags’ supports plaintiffs’
conclusory allegation that ‘defendants have not made a good faith attempt to assure that
adequate and proper corporate information and reporting systems existed that would enable
them to be fully informed regarding Citigroup’s risk to the subprime mortgage market.” The
court further explained that “[i]t is well established that the mere fact that a company takes on
business risk and suffers losses — even catastrophic losses — does not evidence misconduct,
and without more, is not a basis for director liability. That there were signs in the market that
reflected worsening conditions and suggested that conditions may deteriorate even further
is not an invitation for this Court to disregard the presumptions of the business judgment rule
and conclude that the directors are liable because they did not properly evaluate business risk.
What plaintiffs are asking the Court to conclude from the presence of these ‘red flags’ is that
the directors failed to see the extent of Citigroup’s business risk and therefore made a ‘wrong’
business decision by allowing Citigroup to be exposed to the subprime mortgage market.”
The court held that plaintiffs had failed to state an oversight claim, and that “[o]versight duties
under Delaware law are not designed to subject directors, even expert directors, to personal
liability for failure to predict the future and to properly evaluate business risk.”
forward-looking statements
Asher v. Baxter Int’l, Inc.,
No. 02-CV-5608
(N.D. Ill. Feb. 4, 2009)
Click here to view the opinion.
Baxter Wins Summary Judgement in N.D. Ill. Regarding Its Financial Projections
Following a lengthy legal battle, the United States District Court for the Northern District of Illinois granted summary judgment in favor of health care company Baxter International, Inc. and
two of its former officers in a securities fraud lawsuit alleging false and misleading statements
concerning the company’s financial projections for 2002. Plaintiffs argued that the Baxter
defendants artificially inflated the value of Baxter’s shares by issuing continued assurances that
sales growth forecasts would be met despite allegedly knowing that such goals were unattainable due to: (1) economic volatility in the Latin America and Asia markets; (2) discontinuation
of one of Baxter’s products; (3) consumers purchasing such discontinued product from Baxter
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competitors; and (4) economic volatility in foreign markets. The court rejected plaintiffs’ assertions, stating that “none of the cited evidence support[ed] the plaintiffs’ assertion that Baxter’s
revised projections lacked good faith or a reasonable basis in fact.” Applying Seventh Circuit
law, the Court reaffirmed that, for a plaintiff to demonstrate that a forward-looking statement
is false and misleading, the plaintiff must show that, not only did the forward-looking statement contain a material misstatement or omission, but that such forward-looking statement
was “not made in good faith or that it was made without a reasonable basis in fact” at the
time the challenged statement was made. The court further held that, when inquiring into the
good faith of and reasonable basis for the challenged statements, courts should only consider
evidence “that could have been known by the defendants at the time” they made the challenged statements. Therefore, the court held that “the financial reports and other documents
and testimony cited simply do not establish that the defendants ignored relevant information
when reaffirming and revising Baxter’s financial commitments.”
Legal Ethics
Rohm & Haas Co. v.
Dow Chem. Co.,
C.A. No. 4039-CC
(Del. Ch. Feb. 12, 2009)
Click here to view the opinion.
Chancery Court Examines Conflicts Issues for Law Firms
The Court of Chancery recently considered a motion to disqualify counsel for Rohm & Haas
Co. (Rohm) from participating in a litigation against its merger partner The Dow Chemical Company (Dow). The motion was premised on Dow’s claim that Rohm’s counsel, Wachtell, Lipton,
Rosen & Katz (Wachtell), had a conflict of interest because Dow is a current client of Wachtell, and because Wachtell had represented Dow in matters that were substantially related to
the current proceeding, through which Wachtell obtained confidential information that would
materially advance Rohm’s litigation effort. The court rejected these arguments and denied the
motion to disqualify. First, the court noted that a moving party is not entitled to disqualification
merely by showing a violation of the ethical rules. The appropriate consideration is whether allowing the law firm to continue its representation would affect the fair and efficient administration of justice. The court must weigh the interest of the former client in protecting confidences
against the prejudice that would be caused to the current client if the firm were disqualified.
The court also noted that because of the risk that the ethical rules may be invoked by opposing parties as procedural weapons, courts impose a significant burden on the party seeking
disqualification. The court held that it was not convinced that Dow believed it was a current
Wachtell client, or that Wachtell possessed confidential information that it obtained during its
representation of Dow that would materially enhance the position of Rohm in the litigation. The
court also noted that “[t]o justify disqualification, the Court must find that allowing the representation to continue would threaten the fair and efficient administration of justice, a threat that
is greatly reduced by a credible representation to the Court that [Wachtell] will ensure that the
attorney’s working on this matter do not have access to Dow’s client confidences.”
Loss Causation
In re Williams Sec. Litig.-WCG
Subclass, No. 07-5119
(10th Cir. Feb. 18, 2009)
Click here to view the opinion.
Tenth Circuit Affirms Dismissal Based on Absence of Loss Causation
Applying the key teachings of the 2005 Supreme Court decision in Dura Pharmaceuticals Inc.
v. Broudo, the Tenth Circuit affirmed the district court’s grant of summary judgment in defendants’ favor in In re Williams Securities Litigation-WCG Subclass, a class action brought under
Sections 10(b) and 20(a) of the Securities Exchange Act. Relying on Dura, the Tenth Circuit
held that the district court properly excluded plaintiffs’ expert testimony on “loss causation.”
Both of the expert’s loss causation theories failed to satisfy Dura because they did not show
that the revelation of the purported truth, as opposed to “one of the ‘tangle of factors’ that
affect price,” caused the loss. The court found that the risk that caused the actual loss was
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not “within the zone of risk concealed by the misrepresentations and omissions.” With the
expert’s testimony on loss causation excluded, the plaintiffs failed to satisfy their “burden of
showing that [their] losses were attributable to the revelation of the fraud, and not the myriad
of other factors that affect a company’s stock price. Without showing a causal connection that
specifically links loses to misrepresentations, [they could not] succeed.”
Merger & Acquisition Contracts
Alliance Data Sys. Corp. v.
Blackstone Capital Partners
V L.P., C.A. No. 3796-VCS,
(Del. Ch. Jan. 15, 2009)
Click here to view the opinion.
Chancery Court Analyzes Scope of Contract Terms in Mergers Involving Acquisition
Subsidiaries
This Court of Chancery decision provides guidance to dealmakers about the scope of certain
contract terms in merger transactions involving acquisition subsidiaries formed by private equity
companies. In Alliance, the court considered a claim by Alliance Data Systems (ADS) against
defendants Aladdin and Blackstone Capital Partners V L.P. (BCP) after their agreement to acquire
ADS was terminated. Aladdin was formed by BCP for the purpose of acquiring ADS. BCP in turn
was controlled by the Blackstone Group L.P. (Blackstone). In the merger agreement, Aladdin
promised to use its reasonable best efforts to obtain approval of the deal by the Office of the
Comptroller of the Currency (OCC). ADS sued Aladdin and BCP, arguing that Aladdin breached
the merger agreement by failing to cause its parent companies to assent to the demands of the
OCC. The court granted the defendants’ motion to dismiss, finding that any contractual claim
against the defendants must be predicated on a breach by Aladdin because it was the only party,
aside from ADS, that signed the merger agreement. The court concluded that Aladdin was not
required by the terms of that agreement to force its parent companies to enter into an arrangement with the OCC in order to satisfy a condition of the merger. The merger agreement’s best
efforts clause required Aladdin, and not BCP or Blackstone, to use its reasonable best efforts.
Those companies did not have any contractual obligation to enter into an arrangement with the
OCC, and Aladdin made no contractual promise that it would compel them to do so.
Preemption
In re Lord Abbett Mut. Funds
Fee Litig., No. 07-1112
(3d Cir. Jan. 20, 2009)
Click here to view the opinion.
Third Circuit Holds That SLUSA Preempts Claims, Not Entire Actions
The Third Circuit vacated and remanded the district court’s dismissal of plaintiffs’ state law claims
and Investment Company Act (ICA) claims because the Securities Litigation Uniform Standards
Act (SLUSA) “does not mandate dismissal of an action in its entirety where the action includes
only some pre-empted claims.” Plaintiffs filed a consolidated amended class action complaint
that asserted four state law claims, which the district court dismissed pursuant to SLUSA, as
well as claims for violations of the ICA, which the district court initially dismissed without prejudice. Plaintiffs then filed a second amended complaint asserting only derivative claims pursuant
to the ICA, which the district court dismissed with prejudice pursuant to SLUSA. On appeal,
plaintiffs argued that the district court erred when it concluded that SLUSA requires dismissal of
an entire action that includes some claims that are not preempted by SLUSA. The Third Circuit
agreed and reasoned that SLUSA does not require dismissal of an entire action because there is
no evidence that Congress intended an action to “be dismissed in its entirety when it includes
pre-empted claims.” The court noted that SLUSA does not refer to actions that are based in part
on state law and overruled dictum in one of its previous decisions that stated SLUSA “does not
preempt particular ‘claims’ or ‘counts’ but rather preempts ‘actions,’ … suggesting that if any
claims alleged in a covered class action are preempted, the entire action must be dismissed.”
Inside the Courts | 9
Reliance
Stark Trading v. Falconbridge Ltd.,
No. 08-1327
(7th Cir. Jan. 5, 2009)
Click here to view the opinion.
Seventh Circuit Examines Availability of Fraud-on-the-Market Reliance Presumption
The Seventh Circuit, in Stark Trading v. Falconbridge Limited, affirmed the dismissal of a Rule
10b-5 claim because the plaintiffs, sophisticated hedge funds, tendered their shares with
knowledge of the alleged misrepresentations. In an opinion authored by Judge Richard A. Posner,
the Seventh Circuit confirmed that the plaintiffs could not benefit from the fraud-on-the-market
theory of reliance because the plaintiffs were aware, at the time of the tender offer, of the purported inaccuracies in the offering documents. Among other things, the plaintiffs wrote a letter
to the Ontario Securities Commission including “most of the facts that their complaint charges
as fraud.” The court also found that the plaintiffs could not take advantage of the fraud-on-themarket theory by alleging that other tendering shareholders were actually deceived. Finally, the
court found that the plaintiffs could not benefit from the fraud-on-the-market theory by arguing
that the plaintiffs were forced to tender their shares, notwithstanding their knowledge of the alleged misstatements, to avoid getting squeezed out by the company’s majority shareholder. As
Judge Posner observed, “the federal law of securities fraud does not provide for a remedy for
oppression of minority shareholders.”
Removal
Madden v. Cowen & Co.,
No. 07-15900
(9th Cir. Feb. 11, 2009)
Click here to view the opinion.
Katz v. Gerardi, No. 08-8031
(7th Cir. Jan. 5, 2009)
Click here to view the opinion.
Ninth Circuit Addresses Scope of ‘Delaware Carve-Out’
The Ninth Circuit, in an opinion authored by Judge Ikuta, held in Madden v. Cowen & Co. that
plaintiffs’ state-law claims fit within SLUSA’s savings clause — known as the “Delaware carveout” — and, thus, were not removable under SLUSA. The Ninth Circuit, therefore, reversed
the district court and ordered the lawsuit remanded back to California state court. For an action
to fit within the “Delaware carve-out,” the action must: (1) be based on the law of the state in
which “the issuer” is incorporated; (2) involve a “communication with respect to the sale” of
the issuer’s securities; (3) that was made “by or on behalf of” the issuer or its affiliate to the
shareholders of the issuer; and (4) that “concerns” specified shareholder decisions, including a
“response to a tender or exchange offer.” According to the Ninth Circuit, the “Delaware carveout” applied to plaintiffs’ California state-law claims, even though the issuer of the covered
securities was not incorporated in California; and Cowen & Co. was not an “officer, director or
employee” of the issuer. It was enough, according to the Ninth Circuit, that the claims were
brought under the laws of the state of incorporation of an issuer of securities involved in the
transaction at issue, even if not the issuer of the “covered security” involved in the lawsuit; and
that Cowen, although not an “officer, director, or employee” of the issuer, made the allegedly
false or misleading statements “in the interest of, or as a representative of” the issuer.
Seventh Circuit Holds That CAFA Removal Provision Trumps Securities Act Anti-Removal
Provision
In a decision that creates a clear split among circuits, the Seventh Circuit held in Katz v. Gerardi
that the Class Action Fairness Act of 2005 (CAFA) permits the removal of securities class actions brought under the Securities Act of 1933 notwithstanding that Section 22(a) of the ‘33
Act contains an anti-removal provision. In so holding, the Seventh Circuit expressly rejected the
Ninth Circuit’s recent decision in Luther v. Countrywide Home Loans Servicing LP. In an opinion
authored by Judge Frank Easterbrook, the Seventh Circuit found that the list of enumerated
exceptions to removal found in CAFA makes clear that CAFA trumps the ‘33 Act’s anti-removal
provison because the list of exceptions does not include any exception for the removal of ‘33
Act claims. Therefore, according to the Seventh Circuit, the list of enumerated exceptions in
CAFA — a provision whose “existence” the Ninth Circuit “did not acknowledge” — leaves “no
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doubt about how the 1933 Act, [the Securities Exchange Act of 1934], and [CAFA] fit together.” In rejecting the Ninth Circuit’s Luther decision, the Seventh Circuit held that that the canon
of statutory construction relied on by the Ninth Circuit in Luther to resolve the tension between
the two statutes — the canon that an earlier, specific statute trumps a later, more general
statute — does not resolve whether the removal provision in CAFA trumps the anti-removal
provision in the ‘33 Act because CAFA and the ‘33 Act are simultaneously both broader and
more narrow than each other. As the Seventh Circuit described, CAFA is broader because it
applies to all actions and the ‘33 Act only applies to securities actions. However, CAFA is narrower because it applies only to “large, multi-state class actions” and the ‘33 Act applies to “all
securities actions — single-investor suits as well as class actions.”
sanctions
Del Giudice v. S.A.C. Capital
Mgmt., LLC, No. 06-1413
(D.N.J. Feb. 19, 2009)
Click here to view the opinion.
D.N.J. Dismisses Copy-Cat Securities Suit and Imposes Sanctions
Due to conduct deemed by the court to be “so egregious” and the futility of imposing an
alternative sanction “so clear,” the United States District Court for the District of New Jersey
dismissed a putative class action on behalf of sellers of stock of the drug company Biovail
Corp., without prejudice and without leave to amend, and further imposed Rule 11 sanctions
on lead counsel, liaison counsel and the lead plaintiff. Understanding the context of the court’s
rulings requires a brief summary of two previously filed and related civil actions. First, a securities fraud suit was filed in a New York federal court against Biovail for alleged artificial inflation
of Biovail’s stock through market misrepresentations. Later, Biovail itself filed a lawsuit in New
Jersey state court against numerous hedge funds and stock analysts based on alleged violations of RICO laws. The New York federal court would subsequently note that Biovail’s RICO
complaint was based on discovery materials obtained and improperly utilized in violation of
that court’s protective order. As a result, defendants in the Del Giudice action, who were also
named in the RICO suit, argued that the plaintiff should withdraw the amended complaint because it relied, almost verbatim, on the allegations in the RICO complaint. The court ultimately
dismissed the Del Giudice action based on Rule 11 violations committed by the lead plaintiff
and lead plaintiff’s counsel because counsel knowingly filed the amended complaint without
personally investigating the amended complaint’s allegations. The court noted that counsel’s
complete reliance on the investigation of Biovail’s attorneys in connection with the RICO action
prior to filing the amended complaint in the Del Giudice action was sanction-worthy in itself.
Furthermore, counsel’s attempt to avoid sanctions by moving to withdraw from the case, following Biovail’s settlement with the SEC of a civil enforcement and its guilty plea to criminal
charges, was inconsequential because their initial wrongdoing occurred ab initio when they
filed the amended complaint and the lead plaintiff’s “continuing prosecution of the Amended
Complaint … perpetuates the Rule 11 violation.” The court also noted “that it is a rare situation
in which a case is dismissed as a Rule 11 sanction without an evaluation of the substantive
merit of the claims. … Here, however, the conduct is so egregious, and the futility of imposing
alternate sanctions is so clear, that dismissal is the only appropriate sanction.”
Section 220/Books and Records
Beiser v. PMC-Sierra, Inc.,
C.A. No. 3893-VCL
(Del. Ch. Feb. 26, 2009)
Click here to view the opinion.
Court of Chancery Holds That Plaintiffs Cannot Use Section 220 Claim to Assist in
Federal Action
In Beiser v. PMC-Sierra, Inc., the Court of Chancery dismissed with prejudice a complaint
seeking books and records pursuant to 8 Del. C. 220, holding that a plaintiff does not plead a
proper purpose for the books and records request when the only end use for the requested
documents is to assist in the prosecution of a federal action where discovery is stayed under
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the PSLRA. The plaintiff in Beiser was also the lead plaintiff in a federal lawsuit raising derivative claims in which discovery was stayed pursuant to the PSLRA. The court acknowledged
that the plaintiff had alleged in a conclusory manner generally accepted purposes for seeking
books and records (i.e., “investigating possible wrongdoing”), and also noted that the end
game “in cases such as this, is to determine whether sufficient evidence exists to support
the filing of a derivative lawsuit.” However, the court found that plaintiff “failed to plead any
proper end to the purposes he set forth … .” Among other things, the court noted that the
plaintiff waited nearly 20 months after filing his federal case to pursue his books and records
action, and after the defendant had already expended considerable resources in defense of the
federal action. The court observed that “[t]hough the dilatory nature of [plaintiff’s] filing of the
Section 220 action is not, in and of itself, fatal to his [Section 220] case, the timing does make
it more difficult for [plaintiff] to plead a proper purpose because the most obvious end use (to
aid in filing a subsequent action) is no longer available.” The court recognized that, under some
circumstances, Delaware courts have permitted Section 220 actions to proceed in the face
of a PSLRA stay when (1) the plaintiff was not currently involved in the federal action, (2) the
plaintiff’s counsel was not currently involved in the federal action, and (3) the plaintiff agreed
to enter into a confidentiality agreement preventing him from sharing the information obtained
with the plaintiff or counsel in the federal action. The court found that none of these safeguards were present in this case, and further determined that “it is evident that the purpose of
the Section 220 action is to obtain documents for use in the Federal Action,” and that plaintiff’s
“only purpose appears to circumvent the mandates of the PSLRA.” According to the court,
“[attempting] to obtain discovery for use in a case where such discovery is clearly prevented
by federal law, without more, will not satisfy the ‘proper purpose’ requirement of Section 220.”
Securities Fraud Pleading Standards
ECA v. JP Morgan Chase, No.
07-1786 (2d Cir. Jan. 21, 2009)
Second Circuit Affirms Rule 12(b)(6) Dismissal Where Allegations Are Neither Qualitatively
Nor Quantitatively Material
Click here to view the opinion.
The Second Circuit recently affirmed the dismissal of securities fraud claims against JP Morgan Chase (JPMC) arising out of JPMC’s connection with a certain aspect of Enron Corporation’s financial irregularities. The district court dismissed plaintiffs’ first amended complaint and
second amended complaint, the latter with prejudice. On appeal, plaintiffs argued that JPMC
made material misrepresentations and omissions by failing to properly report certain alleged
disguised loan transactions involving Enron and a JPMC-created Special Purpose Entity called
Mahonia Ltd. Plaintiffs alleged a (1) SFAS 57 violation regarding the Mahonia related-party
transactions and (2) failure to properly disclose the prepay transactions as loans rather than
trades. The Second Circuit rejected plaintiffs’ arguments and, applying the test first articulated
in Ganino v. Citizens Utilities Company, reasoned that the loan transactions at issue lacked
quantitative or qualitative materiality. Concerning the alleged SFAS 57 violation, the Second Circuit reasoned that alleged violations of accounting principles must be coupled with additional
evidence of fraudulent intent to state a claim for securities fraud. The court further reasoned
that the alleged mischaracterization of the related-party transactions as loans rather than
trades was immaterial as a matter of law after conducting a quantitative and also a qualitative
analysis of the allegations. In conducting the qualitative analysis, the Second Circuit looked to
enumerated factors in Securities and Exchange Commission Staff Accounting Bulletin No. 99
(SAB No. 99), which include, inter alia, (1) concealment of an unlawful transaction by the misstatement; (2) the significance of the misstatement related to the company’s operations; and
(3) management’s expectation that the misstatement will cause a significant market reaction.
The court held that plaintiffs failed to show that proper characterization of the loan transactions
was quantitatively material because the difference in accounting was insignificant. Acknowledging SAB No. 99’s 5 percent threshold for accounting difference materiality, the court noted
that although JPMC’s $2 billion in prepay transactions seemed large, reclassifying those transContinued on next page
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actions would have resulted in only a 0.3 percent change in JPMC’s total assets, which totaled
$715 billion. The court also held that proper characterization of the transactions was qualitatively immaterial because plaintiffs failed to sufficiently allege (1) that the related-party transactions were unlawful; (2) that the transactions were a significant aspect of JPMC’s operations;
and (3) that JPMC management expected the misclassification to result in a significant market
reaction.
Zucco Partners, LLC v.
Digimarc Corp., No. 06-35758
(9th Cir. Jan. 12, 2009)
Click here to view the opinion.
Ninth Circuit Sheds Light on Pleading Requirements After Tellabs
The Ninth Circuit issued an important decision in mid-January that clarifies the pleading requirements for securities claims in the wake of the Supreme Court’s 2007 decision in Tellabs,
Inc. v. Makor Issues & Rights, Ltd. In the decision, authored by Judge Jay Bybee, the Ninth
Circuit affirmed the dismissal with prejudice of a securities class action complaint for failure to
state a claim under Federal Rule of Civil Procedure 12(b)(6).
In Zucco Partners, LLC v. Digimarc Corporation, the Ninth Circuit affirmed the district court’s
dismissal based on the plaintiffs’ failure to plead scienter with the level of particularity required
by the PSLRA. In so doing, the Ninth Circuit addressed the outstanding question whether, and
to what extent, the Tellabs decision modified the Ninth Circuit’s methodology for scrutinizing
alleged violations of the securities laws.
The Ninth Circuit held that Tellabs “does not materially alter the particularity requirements for
scienter claims established in our previous decisions.” The Ninth Circuit did find, however, that
Tellabs compels an “additional ‘holistic’ component” to the scienter inquiry, which was absent from its pre-Tellabs framework. In light of Tellabs, the Ninth Circuit announced that it will
adhere to a two-step analysis: “first, [it] will determine whether any of the plaintiff’s allegations
standing alone, are sufficient to create a strong inference of scienter; second, if no individual allegations are sufficient, [it] will conduct a ‘holistic’ review of the same allegations to determine
whether the insufficient allegations combine to create a strong inference of intentional conduct
or deliberate recklessness.”
Employing the new dual-inquiry framework, the Ninth Circuit held that the plaintiffs failed to
plead scienter with the requisite particularity. First, none of the alleged misrepresentations
individually supported a showing of scienter. The court found that the following statements, as
pled, could not support a showing of scienter: statements attributed to confidential witnesses;
the company’s restatement of earnings; the resignation of the company’s auditor and CFO; the
boilerplate language contained in the company’s Sarbanes Oxley certifications; the structure
of the company’s executive compensation package; the officers’ securities transactions during
the class period; and the company’s private placement during the class period. Next, the court
found that the allegations, when viewed collectively, still were not “as cogent or compelling
as a plausible alternative inference — namely, that although [defendant] was experiencing
problems controlling and updating its accounting and inventory tracking practices, there was no
specific intent to fabricate the accounting misstatements at issue.” Accordingly, the complaint
failed both aspects of the post-Tellabs dual inquiry and, accordingly, required dismissal.
Settlements
In re Wm. Wrigley Jr.
Co. S’holder Litig.,
C.A. No. 3750-VCL
(Del. Ch. Jan. 22, 2009)
Click here to view the opinion.
Chancery Court Confirms Precedent Regarding Settlement of Breach of Fiduciary Duty Claims
The Court of Chancery recently confirmed well-established precedent relating to the settlement of breach of fiduciary duty claims arising in the merger context. In Wrigley, shareholders
of Wrigley filed lawsuits challenging a proposed merger with Mars, Inc., pursuant to which
they would receive $80 in cash for each share of stock. After a consolidated complaint was
filed and the parties began to engage in motion practice, a settlement of the litigation was
reached whereby defendants agreed to: (1) reduce the termination fee by 10 percent; (2) shortContinued on next page
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en the “tail” period for payment of the termination fee from 12 months to nine months; and (3)
issue supplemental proxy materials with additional information requested by plaintiffs. During
the settlement process, a Wrigley shareholder filed an objection, complaining about the lack
of an opt-out provision in the proposed class structure, and because the settlement did not provide an additional monetary payment to shareholders. The court rejected these objections and
determined that the settlement was fair and reasonable to the class. First, the court held that
settled United States Supreme Court and Delaware Supreme Court authority does not prevent certification of non-opt out classes in actions that do not “wholly or predominantly” seek
money damages. Because nearly all of the remedies sought in the complaint were equitable in
nature, including demands for injunctive relief and additional disclosures, the court determined
that a non-opt out settlement was appropriate under Court of Chancery Rule 23(b)(2). In addition, the court held that the nonmonetary benefits offered by the settlement adequately compensated the class, holding that “[w]here the transaction challenged is or appears to be fully
and fairly priced, it is not the case that a settlement must include a monetary element in order
to pass muster as fair and reasonable.” As a result, the court certified the class, approved the
settlement and awarded plaintiffs’ counsel $690,000 in fees.
Standing
Charles Brooks Co. v.
Georgia-Pacific, LLC,
No. 07-3938
(8th Cir. Jan. 14, 2009)
Click here to view the opinion.
In re Merrill Lynch & Co.,
Inc., Sec., Derivative and
ERISA Litig., No. 07 Civ. 9633
(S.D.N.Y. Feb. 17, 2009)
Click here to view the opinion.
Eighth Circuit Reinforces Shareholders’ Limited Right to Bring Suit
The Eighth Circuit held that a shareholder lacks standing to personally sue based on wrongs
committed against a corporation, even if the corporation lacks capacity to sue and the plaintiff
is the sole shareholder. In Charles Brooks Co. v. Georgia-Pacific, LLC, the Eighth Circuit held
that a shareholder can only maintain a personal suit if he “suffered an injury separate and distinct from the corporation’s.” The fact that the corporation no longer had capacity to sue was,
according to the Eighth Circuit, of no legal moment. Equally unavailing was the plaintiff’s status
as sole shareholder in the defunct corporation: “Brooks’s mere status as sole shareholder …
does not confer upon him standing to sue.”
S.D.N.Y. Addresses Whether Delaware or Federal Common Law Applies to Questions
of Standing
In a case of first impression, the United States District Court for the Southern District of New
York dismissed a consolidated derivative action with prejudice against Merrill Lynch & Co., Inc.
for lack of standing based on Delaware law and addressed whether Delaware law or federal
common law applies to questions of standing in federal court. Before the court were a number of related actions, including derivative actions, arising from alleged losses experienced by
Merrill Lynch allegedly as a result of investment in collateralized debt obligations and similar
mortgage-backed securities. The derivative actions asserted claims based on Delaware law,
that Merrill Lynch, among other violations, breached its fiduciary duties. Defendants moved to
dismiss the actions for lack of standing, pursuant to Delaware law and the “continuing ownership” rule, because plaintiffs were no longer shareholders of Merrill Lynch after Bank of America’s stock-for-stock acquisition of Merrill Lynch. Plaintiffs argued that “federal common law”
should determine standing based on the doctrine of Erie R.R. Co. v. Tompkins because the
issue of standing, in this context, was “procedural.” The court rejected that argument and reasoned that Delaware law determined standing to assert a derivative action against a Delaware
corporation in federal court because “[standing] is far more akin to a substantive policy determination than to a mere procedural nicety.” As the court described, according to Delaware
law, a plaintiff who ceases to be a shareholder, whether by reason of a merger or for any other
reason, loses standing to continue a derivative suit. In so holding, the court acknowledged that
neither of the two narrow exceptions to Delaware’s standing rule applied and the Third Circuit’s
decision in Blasband v. Rales, “has subsequently been marginalized, if not disapproved, by the
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Delaware courts themselves.” Finally, the court stated that, even had it opted to apply federal
common law, “it is far from clear that plaintiffs would retain any more standing under federal
common law than they would have under Delaware law.”
Whistleblower Protection
Day v. Staples, Inc., No. 081689 (1st Cir. Feb. 9, 2009)
Click here to view the opinion.
First Circuit Examines SOX Whistleblower Protections
In a case of first impression concerning whistleblower protection under the Sarbanes-Oxley
Act (SOX), the First Circuit affirmed the district court’s summary judgment decision in favor of
defendant Staples, Inc. because the plaintiff, a former Staples employee, failed to demonstrate
that he was protected by the SOX whistleblower protection provision. The plaintiff argued
that he was fired for reporting allegedly fraudulent accounting practices concerning inefficient
spending in Staples’s product return process and was, therefore, entitled to whistleblower
protection. After internal investigations, the plaintiff’s supervisors informed him that there were
legitimate business reasons for the accounting practices. The First Circuit rejected his claim for
whistleblower protection and reasoned that “[a] complaint about corporate efficiency is … not
within the intended protection of SOX.” The First Circuit noted that for a plaintiff to avail himself of the SOX whistleblower protection provision he must demonstrate a “reasonable belief
there has been shareholder fraud.” To demonstrate a “reasonable belief,” the plaintiff “must at
least approximate the basic elements of a claim of securities fraud.” Here, the plaintiff’s belief
was not reasonable because Staples had legitimate business reasons for engaging in the accounting practices, even if those practices were arguably inefficient.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates
for educational and informational purposes only and is not intended and should not be construed
as legal advice. This memorandum is considered attorney advertising in some jurisdictions.
Inside the Courts | 15
Attorney Contacts
Editors
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