PSLRA Class Action Defense Cases-Makor v. Tellabs: Seventh Circuit Reaffirms That Class Action Complaint Created “Strong Inference” Of Scienter Required For Securities Class Action To Survive Defense Motion To Dismiss

On Remand from Supreme Court, Seventh Circuit Holds Allegations of Scienter in Securities Class Action Complaint Satisfied Requirements of Private Securities Litigation Reform Act (PSLRA) Warranting Reversal of District Court Order Granting Defense Motion to Dismiss Class Action

Plaintiffs filed a class action against Tellabs and its CEO alleging violations of federal securities laws; defense attorneys moved to dismiss the class action complaint on the grounds that the Private Securities Litigation Reform Act (PSLRA) required plaintiffs to plead facts sufficient to support a “strong inference” of scienter, and that the putative class action failed to do so. The district court granted the defense motion, but the Seventh Circuit reversed and reinstated the class action. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. , 127 S.Ct. 2499 (2007). The Supreme Court granted certiorari and reversed, and our article discussing that opinion may be found HERE. The High Court remanded the class action to the Seventh Circuit “with directions to consider whether the plaintiffs’ allegations of securities fraud in violation of section 10(b) of the Securities Exchange Act of 1934…and SEC Rule 10b-5…create the ‘strong inference’ of scienter, as defined by the Supreme Court in its opinion, that the [PSLRA] requires for the complaint to survive a motion to dismiss.” Makor Issues & Rights, Ltd. v. Tellabs, Inc., _ F.3d ___ (7th Cir. January 17, 2008) [Slip Opn., at 1-2]. On remand, the Seventh Circuit adhered to its prior determination and reinstated the class action.

The Supreme Court explained that the PSLRA “requires plaintiffs to state with particularity both the facts constituting the alleged violation, and the facts evidencing scienter, i.e., the defendant’s intention ‘to deceive, manipulate, or defraud.'” 127 S.Ct. at 2504 (citations omitted). Specifically, the PSLRA requires that the complaint “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind,” 15 U.S.C. § 78u-4(b)(2), and the Supreme Court held at pages 2504 and 2505: “It does not suffice that a reasonable factfinder plausibly could infer from the complaint’s allegations the requisite state of mind. Rather, … a court governed by § 21D(b)(2)…must consider, not only inferences urged by the plaintiff, as the Seventh Circuit did, but also competing inferences rationally drawn from the facts alleged. An inference of fraudulent intent may be plausible, yet less cogent than other, nonculpable explanations for the defendant’s conduct. To qualify as ‘strong’ within the intendment of § 21D(b)(2), we hold, an inference of scienter must be more than merely plausible or reasonable – it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent. (Italics added.) The newly-enunciated test requires a court “take into account plausible opposing inferences,” something the Seventh Circuit expressly refused to do. Id., at 2509. Accordingly, the High Court remanded the class action to the Seventh Circuit to consider these opposing inferences and answer, “would a reasonable person deem the inference of scienter at least as strong as any opposing inference?” Id., at 2511. Our summary of the Supreme Court opinion may be found here .

Class Action Court Decisions PSLRA/SLUSA Class Actions Uncategorized

Supreme Court Refuses To Hear Appeal In Enron Investor Class Action Lawsuit Against Wall Street Firms

Mark Anderson of The Wall Street Journal reports today that the United Supreme Court has agreed to hear an appeal of a decision by the United States Court of Appeals for the Fifth Circuit in a class action by Enron investors against numerous Wall Street firms, “striking a fatal blow against the class-action investor lawsuit.” Mr. Anderson notes that the High Court’s refusal to hear the class action appeal comes one week after the Court’s seminal decision in Stoneridge Investment Partners, LLC v.

Class Actions In The News Uncategorized

FLSA Class Action Defense Cases-Roe-Midgett v. CC Services: Seventh Circuit Affirms Summary Judgment In Favor Of Defense In FLSA Class Action Holding Employees Covered By Class Action Complaint Were Exempt

District Court Properly Granted Defense Motion for Summary Judgment as to Class Action Claims on Behalf of Insurance Claims Adjusters because Undisputed Facts Established that Class of Employees Covered by Action Fell Within FLSA’s Administrative Exemption Seventh Circuit Holds

Plaintiffs filed a class action lawsuit against their employer, CC Services, alleging violations of the federal Fair Labor Standards Act (FLSA); specifically, the class action complaint alleged that defendant misclassified the class of employees on whose behalf the action was brought (four classes of insurance claims adjusters) in order to avoid paying them overtime. Roe-Midgett v. CC Services, Inc., ___ F.3d ___ (7th Cir. January 4, 2008) [Slip Opn., at 1-2]. Defense attorneys moved for summary judgment as to all of the class action claims, _id._, at 6. The district court granted the defense motion, _id._ In ruling against plaintiffs’ class action claims, the federal court applied “the Department of Labor’s so-called ‘short test’ for determining whether employees fall within the FLSA’s administrative exemption,” and “concluded that the primary duties of all four claims-processing positions involved matters (1) ‘directly related to management policies or general business operations’ and (2) ‘requiring the exercise of discretion and independent judgment.’” _Id._, at 2. Plaintiffs appealed, and the Seventh Circuit affirmed.

CC Services processes insurance claims for auto, home, commercial and farm insurers. Slip Opn., at 3. It operates out of 37 field offices, and in 2004 settled $600 million in claims, id. Each field office is staffed with Property Specialists, Field Claims Representatives, and Material Damage Appraisers (MDAs). Id. The Seventh Circuit noted that plaintiffs presented only limited arguments on appeal with respect to the district court’s summary judgment order concerning Property Specialists and Field Claims Representatives (II and III), id., at 2; as to those three classes, plaintiffs argued that material issues of disputed fact precluded summary judgment on the class action claims, “[b]ut they failed to identify any real factual dispute specific to these employees,” id. The Circuit Court focused, therefore, on the claim that the duties of MDAs failed to meet the requirements for exemption under the short test. Id. The Seventh Circuit summarized the jobs performed by MDAs and its conclusion at pages 2 and 3 as follows:

Class Action Court Decisions Employment Law Class Actions Uncategorized

ERISA Class Action Defense Cases-Nelson v. Hodowal: Seventh Circuit Affirms Defense Judgment In ERISA Class Action Holding Plan Fiduciaries Not Required To Disclose “Facts That May Lead To Idiosyncratic Reactions”

Employee Retirement Income Security Act (ERISA) does not Impose Legal Duty on Fiduciaries to Disclose to Participants that they are Selling Most of Their Own Stock in Company Seventh Circuit Holds

Plaintiffs, participants in the defined-contribution supplemental pension plan of their employer Indianapolis Power & Light Company (the Thrift Plan), filed a class action against the Plan’s fiduciaries alleging breach of duties under ERISA (Employee Retirement Income Security Act) based on defendants’ failure to disclose to Plan participants that they had sold most of their own stock in the company. Nelson v. Hodowal, ___ F.3d ___, 2008 WL 90057, *1 (7th Cir. January 2, 2008). The district court certified the litigation as a class action and the class action proceeded to trial. _Id._, at *2. The district court found in favor of defendants and plaintiffs appealed, _id._ The Seventh Circuit affirmed.

The Seventh Circuit summarized the factual underpinnings of the class action as follows. The Thrift Plan “initially limited employees to holding stock of IPALCO Enterprises, Inc., the employer’s parent corporation, or bonds issued by the United States,” but was subsequently amended to permit participants “to diversity their investments” and, ultimately, nine (9) options ranging “from very conservative (a money-market fund) to risky (IPALCO stock and nothing else).” Nelson, at *1. “The Plan hired Merrill Lynch, Pierce, Fenner & Smith, Inc., to advise the participants about appropriate investments; Merrill Lynch stressed the benefits of diversification. The Plan allows participants to change investments among the nine options daily, with no need for advance notice.” Id. However, “all of the employer’s matching contributions were allocated to IPALCO stock; the Plan’s terms made this mandatory.” Id. IPALCO merged with global energy company AES Corporation in 2001, and “AES offered a premium of 16% relative to the price at which IPALCO’s stock had traded the day before the announcement.” IPALCO stock climbed following the announcement, and by the time the merger closed “about 64% of investments in the Thrift Plan were held as IPALCO stock ($145.4 million of the Plan’s total assets of $228.1 million).” Id. Because AES is significantly larger than IPALCO, IPALCO’s performance does not significantly impact the market value of AES stock. Nelson, at *1. “When the merger closed, AES was trading for $49.60 a share,” but it began a rapid descent and on February 21, 2002 it “reached a low of $4.11.” Id. The record does not reflect the reasons for the stock’s decline but does confirm that “it continues to be a substantial enterprise” with $6.7 billion in revenues in 2000 and “a profit of roughly $1.40 a share” and $12.3 billion in revenues in 2006. Id. “The stock closed on December 18, 2007, at $21.58.” Id.

Plaintiffs filed a class action against the Plan’s fiduciaries alleging ERISA violations. Nelson, at *2. “The principal contention was that the fiduciaries (all of whom were executives at Indianapolis Power & Light) should have seen the decline coming, or at least should have understood that AES is too volatile to be a suitable investment for pension holdings, and therefore had to compel all of the participants to exchange their IPALCO stock for the Plan’s other investment options before the merger closed.” Id. The class action proceeded to a bench trial, and the district court “found essentially every disputed fact in defendants’ favor.” Id. (citing 480 F.Supp.2d 1061 (S.D. Ind. 2007)). Specifically, the district court “concluded that the defendants had no reason to foresee any decline in the price of AES’s stock (had, indeed, no inside information about AES) and that reasonable fiduciaries would have deemed AES a suitable stock.” Id. Further, the judge “concluded that an ERISA fiduciary is not obliged to strip participants of the ability to make their own decisions, for good or ill” and that “the fiduciaries [were not] obliged (or even allowed) to disregard the Plan’s provision requiring all of the employer’s contributions to be held as IPALCO (and then AES) stock.” Id.

Employment Law Class Actions Uncategorized

Supreme Court Agrees To Hear Appeal In Class Action Alleging Deceptive Advertising Of Light Cigarettes And Decision Will Impact Numerous Class Action Lawsuits Based On Identical Challenges

Mark Anderson of The Wall Street Journal reports today that the United Supreme Court has agreed to hear an appeal of a decision by the United States Court of Appeals for the First Circuit in a class action against Phillip Morris involving advertising of light cigarettes. The class action is but one of numerous class action lawsuits in state and federal courts alleging, in essence, that Phillip Morris and other tobacco companies falsely advertised “light” cigarettes as being safer than regular cigarettes.

Class Actions In The News Uncategorized

Labor Law Class Action Cases Retain Top Spot But New Truth-In-Lending Act (TILA) Class Action Lawsuits Run A Close Second In New Class Action Filings In California State And Federal Courts

As a resource for California defense attorneys so that they may anticipate the types of class action lawsuits against which they will have to defend, we provide weekly, unofficial summaries of the legal categories for new class action lawsuits filed in California state and federal courts in the Los Angeles, San Francisco, San Jose, Sacramento, San Diego, San Mateo, Oakland/Alameda and Orange County areas. We include only those categories that include 10% or more of the class action filings during the preceding week.

Class Actions In The News Uncategorized

Class Action Defense Cases-In re Refco: Judicial Panel On Multidistrict Litigation (MDL) Grants Defense Motion To Centralize Class Action Litigation In Southern District of New York

Judicial Panel Grants Defense Request, Over Plaintiff Objection, for Pretrial Coordination of Class Action Lawsuits Pursuant to 28 U.S.C. § 1407 and Agrees With Defense Request to Transfer Class Actions to Southern District of New York Ten individual and class action lawsuits, nine (9) in New York and one (1) in Illinois, were filed against various defendants alleging federal securities laws violations arising out of the collapse of Refco, Inc. In re Refco Securities Litig.

Class Action Court Decisions Multidistrict Litigation Uncategorized

FCRA Class Action Defense Cases-Killingsworth v. HSBC: Seventh Circuit Reverses District Court Orders Dismissing Of FCRA Class Action Lawsuits Holding FCRA Amendment Barring Private Rights Of Action Not Retroactive

Class Action Complaints Alleging FCRA Violations Erroneously Dismissed because FACTA Amendments Eliminating Private Rights of Action for FCRA § 1681m Violations cannot be Applied Retroactively to Class Action Claims Premised on Violations that Occurred Prior to FACTA’s Effective Date Seventh Circuit Holds

Plaintiff Linda Killingsworth filed a class action against Household Bank (now HSBC Bank Nevada) alleging that the prescreened credit card offer extended to her by the Bank prior to August 20, 2004 violated the federal Fair Credit Reporting Act (FCRA), and plaintiff Erick Sawyer separately filed a class action against his auto insurance carrier, Ensurance Insurance Services, alleging that in connection with issuing him an auto policy in October 2004 it “violated the FCRA by charging him a higher rate based on negative information in his credit report without giving him notice of that adverse action, and also by using his initial credit information for subsequent renewals of his policy when corrected credit information would have qualified him for a lower rate.” Killingsworth v. HSBC Bank Nevada, N.A., 507 F.3d 614, 616 (7th Cir. 2007). The class action complaints were filed in the Northern District of Illinois, and defense attorneys in each class action moved to dismiss the complaint based on Section 311 of the federal Fair and Accurate Credit Transactions Act (FACTA), which amended the FCRA to eliminate certain private rights of action under the FCRA. Id., at 617 (citing 15 U.S.C. § 1681m(h)(8)). In each case, the district court agreed and dismissed the class action complaint, id. Both plaintiffs appealed and the Seventh Circuit consolidated the appeals and issued a single opinion address the question of whether Section 311, which became effective on December 1, 2004, “impairs rights [plaintiffs] possessed prior to the new statute’s effective date and therefore has an impermissible retroactive effect if applied to them.” Id. The Seventh Circuit reversed the dismissal of Killingsworth’s class action, concluding that the retroactive application of Section 311 was improper as to her claims, but the Circuit Court remanded for further proceedings as to Sawyer’s class action complaint, concluding that “the retroactivity question cannot be decided at the pleading stage because the conduct alleged in his [class action] complaint straddles FACTA’s effective date.” Id.

The issue before the Seventh Circuit was “whether an amendment to the [FCRA] eliminating private rights of action has an impermissible retroactive effect when applied to FCRA claims that accrued prior to the amendment’s effective date.” Killingsworth, at 616. Section 311 of FACTA added subsection (h) to FCRA § 1681m so as to eliminate private rights of action for violations of § 1681m. Killingsworth received an offer of credit prior to August 20, 2004, but did not file her class action lawsuit until October 2005. Id., at 617. Her class action alleged a violation of § 1681m(d), and defense attorneys moved to dismiss the class action on the ground that no private right of action existed based on Section 311’s amendment to the FCRA. Id., at 617-18. The district court agreed and dismissed Killingsworth’s class action, id., at 618. For his part, Sawyer applied for auto insurance in October 2004, his auto policy took effect on December 20, 2004, and it was renewed twice at six-month intervals. Id., at 618. Sawyer also filed his class action lawsuit after the effective date of Section 311; his class action alleged a violation of § 1681m(a). Id. However, the class action alleged further that “Ensurance failed to consider interim changes to his credit rating and instead relied on his initial credit score when subsequently renewing his policy,” thus implicating acts taken after Section 311’s effective date. Id. As in Killingsworth, defense attorneys moved to dismiss Sawyer’s class action on the ground that no private right of action existed; the federal court agreed and dismissed Sawyer’s class action. Id.

Class Action Court Decisions FCRA Class Actions Uncategorized

Securities Class Action Defense Cases-Stoneridge Investment v. Scientific-Atlanta: Supreme Court Affirms Dismissal Of Securities Class Action Claims Against Third Parties Finding No Reliance By Investors On Third Party Statements

Class Action Claims Alleging Securities Exchange Act of 1934 § 10(b) and Rule 10b-5 Violations Against Customers and Suppliers of Charter Communication for Allegedly Aiding Charter’s Scheme to Publish Misleading Financial Statements Properly Dismissed because Class Action Plaintiffs-Investors did not Rely on any Representations by Customers/Suppliers U.S. Supreme Court Holds

Plaintiffs filed a class action lawsuit against Charter Communications and others, including Scientific-Atlanta and Motorola as customers and suppliers of Charter Communications, alleging securities violations under § 10(b) of the Securities Exchange Act of 1934 (the Act) and SEC Rule 10b-5; specifically, the class action alleged that the customers/suppliers “agreed to arrangements that allowed the investors’ company [Charter Communications] to mislead its auditor and issue a misleading financial statement affecting the stock price.” Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., ___ U.S. ___, 128 S.Ct. 761, 2008 WL 123801, * 2 (January 15, 2008). Defense attorneys for Scientific-Atlanta and Motorola moved the district court to dismiss the class action complaint against them for failure to state a claim, and the court granted the defense motion. _Id._, * 4. Plaintiffs’ appealed, and the Eighth Circuit affirmed concluding, “the allegations did not show that [Scientific-Atlanta and Motorola] made misstatements relied upon by the public or that they violated a duty to disclose,” _id._ The Supreme Court granted review of this issue, critical to numerous class actions pending throughout the country, to “consider the reach of the private right of action…implied in § 10(b) [of the Act]…and SEC Rule 10b-5.” _Id._, at *2. The High Court affirmed the Eighth Circuit’s decision.

The class action complaint alleged that Charter Communications, a cable operator, “engaged in a variety of fraudulent practices so its quarterly reports would meet Wall Street expectations for cable subscriber growth and operating cash flow.” Stoneridge, at *3. As the Supreme Court explained at page *3; “The fraud included misclassification of its customer base; delayed reporting of terminated customers; improper capitalization of costs that should have been shown as expenses; and manipulation of the company’s billing cutoff dates to inflate reported revenues.” The theory underlying the class action claims against Scientific-Atlanta and Motorola was that in 2000, after Charter realized that it would miss cash flow estimates by $15-$20 million despite the fraud described above, Charter altered its arrangements with Scientific-Atlanta and Motorola in an effort to mislead Arthur Andersen: specifically, “Respondents [Scientific-Atlanta and Motorola] supplied Charter with the digital cable converter (set top) boxes that Charter furnished to its customers. Charter arranged to overpay respondents $20 for each set top box it purchased until the end of the year, with the understanding that respondents would return the overpayment by purchasing advertising from Charter. The transactions, it is alleged, had no economic substance; but, because Charter would then record the advertising purchases as revenue and capitalize its purchase of the set top boxes, in violation of generally accepted accounting principles, the transactions would enable Charter to fool its auditor into approving a financial statement showing it met projected revenue and operating cash flow numbers.” Id. Scientific-Atlanta and Motorola allegedly agreed to this arrangement, and participated in drafting documentation “to make it appear the transactions were unrelated and conducted in the ordinary course of business.” Id. Neither Scientific-Atlanta nor Motorola played any role “in preparing or disseminating Charter’s financial statements,” and both of them “booked the transactions as a wash, under generally accepted accounting principles.” Id., at *4.

Class Action Court Decisions PSLRA/SLUSA Class Actions Uncategorized

Securities Class Action Defense Cases–U.S. Supreme Court Affirms Judgment In Securities Class Action Seeking To Hold Customers And Suppliers Of Charter Communication Liable For Misleading Financial Statements

In a case of considerable importance to numerous securities class action lawsuits presently pending throughout the country, the United States Supreme Court today issued its opinion in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., and affirmed the decision of the Eighth Circuit Court of Appeals. The underlying class action alleged securities fraud claims under, inter alia, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 based on misleading financial statements concerning Charter Communications.

Class Actions In The News Uncategorized