Class Action Defense Cases-In re Initial Public Offering: Significant Defense Victory As Second Circuit Holds Federal Court Erred In Certifying Securities Class Action Against Wall Street Banks Arising Out Of Internet IPOs

Second Circuit Clarifies Standard of Proof for Certification of Class Action Under Rule 23 and Holds that IPOs are not “Efficient Markets” in Handing Defense Victory on Appeal

Beginning in 2001, hundreds of class action lawsuits were filed against Wall Street banks alleging violations of federal securities laws in connection with the initial public offerings of certain Internet companies. In re Initial Public Offering Securities Litig., 471 F.3d 24, 2006 WL 3499937, *1 (2nd Cir. December 5, 2006). Following the consolidation of 310 of the class action lawsuits, plaintiffs’ lawyers moved for class certification in six “focus cases.” Id., at *3. Defense attorneys objected to certification of a class action arguing primarily that individual issues predominate over common ones; the district court granted the motion finding that plaintiffs had made “some showing” of the elements required under Rule 23 to warrant certification, id., at *3-*5. The Second Circuit reversed, agreeing with defense attorneys that plaintiffs had not satisfied the requirements of Rule 23 and further that they could not satisfy those requirements.

The class action complaints alleged that underwriters, issuers and individual officers of the issuing companies defrauded investors through “tie-in arrangements, undisclosed compensation, and analyst manipulation” in connection with the IPOs of certain Internet companies, id., at *2. In certifying a class action, the district court perceived conflicting guidance in Supreme Court authority concerning the proper standard of proof required to warrant class action certification. Specifically, Supreme Court authority requires a “rigorous analysis” that may require the court to “probe behind the pleadings,” but a court may not “conduct a preliminary inquiry into the merits of a suit.” Id., at *4 (citations omitted). The district court rejected Fourth Circuit and Seventh Circuit authority requiring plaintiffs to “establish the requirements of Rule 23 by a preponderance of the evidence, even if resolving those issues requires a ‘preliminary inquiry into the merits . . ., or ‘overlap with issues on the merits.'” Id. (citations omitted). The court instead crafted an amorphous “some showing” test and, applying that new standard, concluded that plaintiffs had met their burden of proof. Id., at *4-*5.

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Class Action Defense News-Class Action Law Firm Lerach Ordered To Pay Defense Attorney Fees For Maintaining Frivolous Lawsuit

Judge Grants Defense Motion for Attorney Fees Against Plaintiffs’ Law Firm Following Successful Defense of Class Action Lawsuit Floyd Norris of the New York Times reports that federal district court judge Melinda Harmon awarded the defense in an Enron-related class action attorney fees against plaintiff class-action law firm Lerach, Coughlin, Stoia, Geller, Rudman & Robbins for maintaining class action claims against Alliance Capital, a money management firm, after it was apparent that the claims had no merit.

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Class Action Defense Cases-In re New York Bancorp: New York Federal Court Grants Defense Motion To Dismiss Securities Class Action And Rejects Plaintiffs’ Meritorious Remand Motion As Untimely

Court Holds Allegations in Securities Class Action Fail to Meet Heightened Pleadings Requirements Mandated by FRCP Rule 9(b) and the PSLRA (Private Securities Litigation Reform Act of 1995), and Denies Plaintiffs Request To Rule on its Year-Old Remand Motion as Untimely

Plaintiff investors filed separate putative class actions against New York Community Bancorp (NYCB) and several of its officers alleging violations of federal securities laws by making materially false and misleading statements to investors. In re New York Community Bancorp, Inc., Securities Litig., 448 F.Supp.2d 466, 469 (E.D.N.Y. 2006). The federal court eventually consolidated 11 such class action lawsuits, and appointed lead plaintiff and lead counsel. Following the filing of a Consolidated and Amended Class Action Complaint, defense attorneys filed a motion to dismiss and certain plaintiffs filed a motion for reconsideration of the consolidation order. Id. The district court denied the motion for reconsideration and granted the defense motion to dismiss.

The amended class action complaint alleged violations of the Securities and Exchange Act of 1934 (“Exchange Act”) and the Securities Act of 1933 (“Securities Act”) on behalf of NYCB shareholders. In re New York Comm. Bancorp, at 469. NYCB went through a period of substantial earnings growth and acquired several financial institutions, building “a unique and profitable core lending business comprised of multi-family mortgage loans.” Id., at 470. Over time, however, market conditions changed and NYCB expanded into a ” risky, but common, leveraging strategy involving mortgage-backed securities known as the ‘carry trade.'” Id. The complaint alleged that NYCB diverted increasingly large sums away from conservative investments and to carry trade investments, but continually held itself out as a risk-adverse, conservative community bank. Id., at 471. The court summarized the material allegations of the complaint as follows: “In particular, the Plaintiffs allege that the Defendants: (1) falsely represented that NYCB was uniquely able to thrive in an environment of rising interest rates and that its business prospects remained strong; (2) highlighted a false strategy of deleveraging following the acquisition of Roslyn; and (3) failed to adequately disclose the extent of the risks of the carry trade activity.” Id.

The court first addressed the motion for reconsideration, which additionally sought to reinstate a motion that the plaintiffs had filed more than a year earlier to remand to state court one of the class action lawsuits. In re New York Comm. Bancorp, at 474. Plaintiffs had filed their class action in state court, and the defense removed the lawsuit to federal court. Plaintiffs filed a motion to remand arguing that the Securities Litigation Uniform Standards Act of 1998 (SLUSA) prohibits removal of cases based exclusively on the Securities Act. When the federal court consolidated the 11 securities class actions, it did not specifically address the remand motion but the practical effect of the court’s ruling was to deny the motion. Id., at 475. In evaluating the plaintiffs’ motion, the district court concluded that even though claim of improper removal appears to have merit, id., the fact remained that plaintiffs’ motion was too late, id., at 475-76.

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Class Action Defense Cases-Quaak v. Dexia: Massachusetts Federal Court Denies Defense Motion To Dismiss Securities Class Action Against Banker Because Of Alleged Involvement In Scheme To Inflate Stock Price

Defense Motion to Dismiss Class Action Complaint Denied Because Plaintiff Adequately Alleged Securities Laws Violations by Company’s Chief Commercial Banker

Plaintiff filed a securities fraud class action against Dexia Bank Belgium as successor to Artesia Banking Corp., “the former chief commercial banker for Lernout & Hauspie Speech Products N.V.,” alleging “that L&H could not have committed its wide ranging fraud without the intimate involvement of Defendant . . . as architect of the fraudulent scheme” and that Defendant “made numerous fraudulent loans to L&H in an effort to bolster L&H’s stock price.” Quaak v. Dexia, S.A., 445 F.Supp.2d 130, 134 (D. Mass. 2006). The district court denied a defense motion to dismiss the class action complaint, but certified several questions to the First Circuit because “the legal issues involved, particularly the question of scheme liability under the securities laws, were . . . quite cutting edge,” and the First Circuit accepted the appeal. Id. Before the Circuit Court heard oral argument, plaintiff sought and received leave from the district court to amend the class action complaint; the Circuit Court therefore vacated the appeal, and defense attorneys filed a new motion to dismiss. Id.

The district court explained that the amended complaint added “significant factual allegations” based on newly discovered documents that purportedly evidenced Defendant made millions in profits from the sale of L&H stock and that it “exercised absolute control over the operations of a wholly-owned subsidiary” and caused the issuance of reports that promoted the purchase of L&H stock based on false financial data. Quaak, at 135. According to the complaint, the scheme inflated the value of the stock or artificially caused it to retain its inflated value, but the stock plummeted once the company’s true financial condition was learned. Id. Based on the new allegations, the complaint alleged Defendant was a “controlling person” and therefore liable within the meaning of Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), and liable under Section 10(b) for the issuance of false and misleading reports. Id.

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15 U.S.C. § 77d–Transactions Exempted Under The Securities Act Of 1933

As a resource for the class action defense lawyer who defends against securities class actions, we provide the text of the Securities Act of 1933. While Congress set forth those securities that are exempt under the Act in 15 U.S.C. § 77c, section 77d addresses those transactions that are exempt and provides:

§ 77d. Exempted transactions

The provisions of section 77e of this title shall not apply to–

(1) transactions by any person other than an issuer, underwriter, or dealer.

(2) transactions by an issuer not involving any public offering.

(3) transactions by a dealer (including an underwriter no longer acting as an underwriter in respect of the security involved in such transaction), except–

(A) transactions taking place prior to the expiration of forty days after the first date upon which the security was bona fide offered to the public by the issuer or by or through an underwriter,

(B) transactions in a security as to which a registration statement has been filed taking place prior to the expiration of forty days after the effective date of such registration statement or prior to the expiration of forty days after the first date upon which the security was bona fide offered to the public by the issuer or by or through an underwriter after such effective date, whichever is later (excluding in the computation of such forty days any time during which a stop order issued under section 77h of this title is in effect as to the security), or such shorter period as the Commission may specify by rules and regulations or order, and

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15 U.S.C. § 77c–Securities Exempt Under The Securities Act Of 1933

As a resource for the class action defense lawyer who defends against securities class actions, we provide the text of the Securities Act of 1933. Congress set forth those securities that are exempt under the Act in 15 U.S.C. § 77c, which provides:

§ 77c. Classes of securities under this subchapter

(a) Exempted securities

Except as hereinafter expressly provided, the provisions of this subchapter shall not apply to any of the following classes of securities:

(1) Reserved.

(2) Any security issued or guaranteed by the United States or any territory thereof, or by the District of Columbia, or by any State of the United States, or by any political subdivision of a State or territory, or by any public instrumentality of one or more States or territories, or by any person controlled or supervised by and acting as an instrumentality of the Government of the United States pursuant to authority granted by the Congress of the United States; or any certificate of deposit for any of the foregoing; or any security issued or guaranteed by any bank; or any security issued by or representing an interest in or a direct obligation of a Federal Reserve bank; or any interest or participation in any common trust fund or similar fund that is excluded from the definition of the term “investment company” under section 80a-3(c)(3) of this title; or any security which is an industrial development bond (as defined in section 103(c)(2) of Title 26) the interest on which is excludable from gross income under section 103(a)(1) of Title 26 if, by reason of the application of paragraph (4) or (6) of section 103(c) of Title 26 (determined as if paragraphs (4)(A), (5), and (7) were not included in such section 103(c) ), paragraph (1) of such section 103(c) does not apply to such security; or any interest or participation in a single trust fund, or in a collective trust fund maintained by a bank, or any security arising out of a contract issued by an insurance company, which interest, participation, or security is issued in connection with (A) a stock bonus, pension, or profit-sharing plan which meets the requirements for qualification under section 401 of Title 26, (B) an annuity plan which meets the requirements for the deduction of the employer’s contributions under section 404(a)(2) of Title 26, (C) a governmental plan as defined in section 414(d) of Title 26 which has been established by an employer for the exclusive benefit of its employees or their beneficiaries for the purpose of distributing to such employees or their beneficiaries the corpus and income of the funds accumulated under such plan, if under such plan it is impossible, prior to the satisfaction of all liabilities with respect to such employees and their beneficiaries, for any part of the corpus or income to be used for, or diverted to, purposes other than the exclusive benefit of such employees or their beneficiaries, or (D) a church plan, company, or account that is excluded from the definition of an investment company under section 3(c)(14) of the Investment Company Act of 1940 [15 U.S.C.A. § 80a-3(c)(14)], other than any plan described in subparagraph (A), (B), (C), or (D) of this paragraph (i) the contributions under which are held in a single trust fund or in a separate account maintained by an insurance company for a single employer and under which an amount in excess of the employer’s contribution is allocated to the purchase of securities (other than interests or participations in the trust or separate account itself) issued by the employer or any company directly or indirectly controlling, controlled by, or under common control with the employer, (ii) which covers employees some or all of whom are employees within the meaning of section 401(c)(1) of Title 26, or (iii) which is a plan funded by an annuity contract described in section 403(b) of Title 26. The Commission, by rules and regulations or order, shall exempt from the provisions of section 77e of this title any interest or participation issued in connection with a stock bonus, pension, profit-sharing, or annuity plan which covers employees some or all of whom are employees within the meaning of section 401(c)(1) of Title 26, if and to the extent that the Commission determines this to be necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of this subchapter. For purposes of this paragraph, a security issued or guaranteed by a bank shall not include any interest or participation in any collective trust fund maintained by a bank; and the term “bank” means any national bank, or banking institution organized under the laws of any State, territory, or the District of Columbia, the business of which is substantially confined to banking and is supervised by the State or territorial banking commission or similar official; except that in the case of a common trust fund or similar fund, or a collective trust fund, the term “bank” has the same meaning as in the Investment Company Act of 1940 [15 U.S.C.A. § 80a-1 et seq.];

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15 U.S.C. § 77b-1–Swap Agreements Under The Securities Act Of 1933

As a resource for the class action defense lawyer who defends against securities class actions, we provide the text of the Securities Act of 1933. Congress defined “swap agreements” in 15 U.S.C. § 77b-1: § 77b-1. Swap agreements (a) Non-security-based swap agreements The definition of “security” in section 77b(a)(1) of this title does not include any non-security-based swap agreement (as defined in section 206C of the Gramm-Leach-Bliley Act). (b) Security-based swap agreements

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15 U.S.C. § 77b–Definitions Applicable To Lawsuits Under The Securities Act Of 1933

As a resource for the class action defense lawyer who defends against securities class actions, we provide the text of the Securities Act of 1933. Preliminarily, Congress set forth the applicable definitions in 15 U.S.C. § 77b:

§ 77b. Definitions; promotion of efficiency, competition, and capital formation

(a) Definitions

When used in this subchapter, unless the context otherwise requires–

(1) The term “security” means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

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Class Action Defense Cases-Glauser v. EVCI: New York Federal Court Grants Motion To Consolidated Class Action Lawsuits Under Private Securities Litigation Reform Act (PSLRA) And to Appoint Lead Plaintiff And Lead Counsel

Federal Court Grants Motion to Consolidate PSLRA Class Actions, and Pursuant to PSLRA Appoints Plaintiff With Largest Financial Investment as Lead Plaintiff and Confirms Lead Plaintiff’s Choice of Lead Counsel

Six securities fraud class action lawsuits were filed against a corporation and three of its officers and directors alleging that defendants violated §§ 10(b) and 20(a) of the federal Securities Exchange Act of 1934 and Rule 10b-5 by making false and misleading statements concerning the corporations earnings and enrollment growth. A separate derivative action also was filed. Plaintiffs’ attorneys in five of the class actions sought consolidation of the lawsuits and appointment of Lead Plaintiff and Lead Counsel. Glauser v. EVCI Career Colleges Holding Corp., 236 F.R.D 184, 186 (S.D.N.Y. 2006). The defense apparently took no position on the motions, each of which were granted by the district court.__

With respect to the consolidation motion, the federal court held that “consolidation is particularly appropriate in the context of securities class actions if the complaints are ‘based on the same “public statements and reports.”’” Glauser, at 186 (citation omitted). Because the class actions involved “common issues of law and fact” the Court consolidated those lawsuits “for all purposes,” including trial; the derivative action was consolidated for all pretrial purposes, and the Court reserved a decision on whether to consolidate it for trial as well. Id.

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Class Action Defense Cases-Wagner v. First Horizon: Eleventh Circuit Holds As A Matter Of First Impression That If Nonfraud Securities Claim Is Part Of Allegedly Fraudulent Conduct Then It Must Be Pleaded With Particularity

Federal Securities Claims Without Fraud Element Must Still be Pled with Particularity if Nonfraud Securities Claim is Part of Defendant’s Alleged Fraudulent Conduct Under the Exchange Act and Rule 10(b)-5

Plaintiffs filed a putative class action under the Securities Act, 15 U.S.C. § 77a et seq., and the Exchange Act, 15 U.S.C. § 78a et seq., alleging that defendant “employed a fraudulent scheme to control the revenue growth; defense attorneys filed a motion to dismiss for failure to meet the pleading requirements of FRCP Rule 9(b) and the federal Private Securities Litigation Reform Act (PSLRA), 15 U.S.C. § 78u-4(b). The federal court granted the motion to dismiss, and required that plaintiffs pay defense costs and fees incurred in connection with the motion to dismiss as a prerequisite to plaintiffs’ filing a motion to amend their class action complaint. Wagner v. First Horizon Pharm. Corp., 464 F.3d 1273, 1275-76 (11th Cir. 2006). Rather than pay these defense costs, plaintiffs allowed the complaint to be dismissed and then appealed. Id., at 1276.

The Eleventh Circuit first observed that Section 11 of the Securities Act creates “virtually absolute [liability], even for innocent misstatements,” as does Section 12(a)(2); thus, “neither allegations of fraud nor scienter are necessarily part of either of these claims.” Wagner, at 1277. The Circuit Court therefore characterized claims under Sections 11 and 12(a)(2) as “nonfraud” claims, and noted: “The question presented . . . [is] whether there are circumstances when [Rule 9(b)] would require nonfraud securities claims to be pled with particularity.” Id. While noting that sister circuits are split on this issue, the Eleventh Circuit adopted the conclusion of the majority of the circuits that have addressed the question and held “Rule 9(b) applies when the misrepresentation justifying relief under the Securities Act is also alleged to support a claim for Fraud under the Exchange Act and Rule 10(b)-5, id. The Circuit Court explained its holding at page 1278 as follows:

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