The Enforcement Of The Securities Laws - Securities Regulation

The Enforcement of the Securities Laws

1. Limits of Private Litigation

   1. Class Actions

      1. The class representative must establish that (1) common questions of law or fact predominate in the claims raised by the class members and (2) the claim of the class representative is typical of those of the class generally to conclude that he is the appropriate representative

      2. Class Certification Stage

         • What factual findings must the trial judge make to justify class certification?

           • (1) The securities were traded in an efficient market.

             • The most common way of conducting this inquiry is to apply the so-called Cammer factors. See Cammer v. Bloom (pg. 704)

               • (1) Extent of weekly volume;

               • (2) How many stock analysts follow the company;

               • (3) Number of market-makers and arbitrageurs;

               • (4) Status as an S-3 issuer; and

               • (5) Data showing close connection between release of information and prompt changes in stock price.

           • (2) Most courts also require a showing that the fraud in question actually distorted the stock price, even though this goes directly to the merits of the lawsuit.

         • The plaintiff does not have to show loss causation at the class certification stage. Erica P. John Fund v. Haliburton Co. (Supp. pg. 111)

         • Materiality does not have to be shown at the class certification stage. See Amgen

      3. Once the suit is certified as a class action, notice sent out to all potential class members of the action so they can opt out of the action and thus avoid the res judicata effects of that action on their rights.

      4. If the suit survives the motion to dismiss (and maybe a summary judgment), the parties will very likely settle.

         • The question then is whether the suit is fair.

           • "[T]he court starts from the familiar axiom that a bad settlement is almost always better than a good trial." In re Warner Comm. Sec. Lit.

      5. Attorneys Fees

         • (1) The classic method is the salvage value method, whereby the attorney receives a percentage of the fund recovered in the suit.

         • (2) There is also the lodestar method.

           • The court would first review the billable hours the attorney had logged in prosecuting the case and the customary hourly rate.

           • This figure would then be increased by a multiple to reflect considerations such as the novelty or riskiness of the suit as well as the relative skill of the attorney.

             • This has been recognized as appropriate in cases in which there is not common fund but conferred benefits on the class. See Mills v. Electric Auto-Lite Co. (pg. 749)

         • The PSLRA added § 27(a)(6) to the '33 Act and § 21D(a)(6) to the Exchange Act requiring that attorneys' fees and expenses should not exceed a reasonable percentage of any damages and prejudgment interest actually paid.

           • A further provision added by the PSLRA (§ 27(a)(7) of the '33 Act and § 21D(a)(7) of the '34 Act) requires extensive disclosure in the notice of settlement of the attorneys' fees that will be sought as well as the litigants' views on the recoverable amount if the plaintiff prevailed.

         • In Matsushita Electric Industrial Co. v. Epstein, the Court held that full faith and credit must be accorded to the state court's approval of a settlement notwithstanding that it released claims within the exclusive jurisdiction of the federal courts.

      6. Appointment of Lead Plaintiff

         • The PSLRA added § 27(a)(3) of the '33 Act and § 21D(a)(3) of the '34 Act that sets forth the procedures for appointing lead plaintiff.

           • The PSLRA provides a rebuttable presumption that the member of the purported class with the largest financial stake in the litigation is "most adequate plaintiff."

           • The new procedures require that notice be given to all the members of the purported class action so that they can request to be lead plaintiff.

           • Among the tasks for lead plaintiff is to select and retain counsel to represent the class.

   2. Addressing Strike Suits

      1. The PSLRA limits the number of class actions for which any person can serve as lead plaintiff to five securities class actions during any three-year period, caps attorneys' fees at a reasonable percentage of the amount of any damages recovered, expands disclosure to class members that must accompany any settlement submitted to the court for approval, and mandates that the class action court provide a finding respecting each party's and attorney's compliance with Rule 11(b) of the FRCP.

   3. The Securities Litigation Uniform Standards Act (SLUSA)

      1. SLUSA amended § 28(f) of the Exchange Act to confer exclusive jurisdiction over most securities class actions.

      2. SLUSA preempts state court jurisdiction for class action suits involving "covered securities," a term defined in § 18(b) of the Securities Act that includes NYSE and AMEX as well as Nasdaq/National Market System securities and securities issued by a registered investment company.

      3. Class actions are defined as suits that seek relief on behalf of 50 or more persons.

      4. SLUSA excludes certain types of suits from the preemptive effects.

         • The most notable exclusion is the Delaware carve-out that preserves the state court's jurisdiction to hear certain state law fiduciary claims focused on misrepresentations by the firm's officers, directors, or control persons.

           • Such suits primarily arise in connection with statements involving tender offers, mergers, and other acquisitions.

   4. Primary and Secondary Liability

      1. In General

         • A primary violator commits the act proscribed by the statute or rule.

         • A secondary violator either assists or supports the primary violator or is liable because of a relationship with the violator.

      2. Aiding and Abetting

         • "[A] private plaintiff may not maintain an aiding and abetting suit under § 10(b)." Central Bank of Denver v. First Interstate Bank of Denver (pg. 757)

         • BUT The SEC can maintain an action for aiding and abetting.

           • The PSLRA added § 20(e) to the Exchange Act which authorizes SEC enforcement actions in the courts against "any person that knowingly provides substantial assistance to another person" committing a securities violation.

      3. Scheme Liability

         • There is no scheme liability in a private action under § 10(b). Stoneridge Investmenet Partners, LLC v. Scientific-Atlanta, Inc. (pg 758)

           • In that case the Court determined that since "Respondents had no duty to disclose, and their deceptive acts were not communicated to the public," there could be no reliance. (pg. 760)

      4. Primary Participants - Attribution/Maker of a Statement

         • "[S]econdary actors can be liable in a private action under 10b-5 for only those statements that are explicitly attributed to them." Pacific Brown Management Company LLC v. Mayer Brown LLP (Supp. pg. 118)

           • "The mere identification of a secondary actor as being involved in a transaction, or the public's understanding that a secondary actor 'is at work behind the scenes' are alone insufficient." Pacific Brown Management Company LLC v. Mayer Brown LLP (Supp. pp. 118-19)

         • "To be cognizable, a plaintiff's claim against a secondary actor must be based on the actor's own 'articulated statement,' or on statements made by another that have been explicitly adopted by the secondary actor." Pacific Brown Management Company LLC v. Mayer Brown LLP (Supp. pg. 119)

         • "For purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement including its content and whether and how to communicate it." Janus Capital Group Inc. v. First Derivative Traders (Supp. pg. 125)

           • "Without control, a person or entity can merely suggest what to say, not 'make' a statement in its own right. One who prepares or publishes a statement on behalf of another is not a maker." Janus Capital Group Inc. v. First Derivative Traders (Supp. pg. 125)

      5. Control Person Liability

         • In General

           • § 15 of the Securities Act and § 20(a) of the Exchange Act provide for control person liability.

             • Control person liability reaches "every person who, directly or indirectly, controls" any person who violates a statute or rule of the Act.

           • TWO-PRONG TEST

             • "First, the 'control person' needs to have actually exercised general control over the operations of the wrongdoer, and second, the control person must have had the power or ability - even if not exercised - to control the specific transaction or activity that is alleged to give rise to liability." Donohoe v. Consolidated Operating & Production Corp. (pg. 775)

           • Attorneys and accountants are not control persons simply by virtue of their ability to counsel and persuade the primary violator. See Barker v. Henderson (pg. 778)

         • Affirmative Defense

           • § 15 of the Securities Act provides for an affirmative defense where it is established that "the controlling person had no knowledge of or reasonable grounds to believe in the existence of the facts" upon which the liability of the control person is alleged to exist.

             • This language is consistent with the defense provided for in § 11 and § 12(a)(2) of the Securities Act

           • § 20(a) of the Exchange Act provides for an affirmative defense where "the controlling person acted...