Securities Litigation Blog
Over the last decade, many loan rates – from commercial debt to residential mortgages – have been tied, directly or indirectly, to LIBOR – the London Interbank Offered Rate. During the financial crisis of 2008-2010, however, LIBOR acted oddly, throwing off financiers’ expectations and preventing countless interest rate swap agreements from acting as intended.
In 2011, internal emails from LIBOR member banks came to light indicating that at least some member banks had manipulated their reported interest rates to artificially depress the published LIBOR rate. Numerous antitrust class actions were filed against the LIBOR member banks, alleging that the defendant banks had perpetrated a scheme to depress LIBOR rates so as to create the impression that the banks were financially healthier than one might otherwise have believed in the midst of the financial crisis, and further, to reduce the rates they would have to pay on their own debt obligations.
Dozens of antitrust and RICO class actions were consolidated by the Judicial Panel on Multi-district Litigation and transferred to the Southern District of New York. In re LIBOR-Based Financial Instruments Antitrust Litigation, MDL No. 2262.
On March 29th, however, the district court dismissed the antitrust allegations in their entirety, along with certain commodities manipulation claims (time-barred), RICO (applies only to U.S. enterprises), and all state law claims (for a variety of reasons).
It is difficult to explain the court’s reasoning, at least with respect to the antitrust claims. The court emphasized – quite correctly – that, among other things, plaintiffs must demonstrate “antitrust injury;” i.e., that plaintiffs’ injuries resulted from the anticompetitive nature of the defendants’ conduct. Slip op. at 27.
The court went on to conclude that “the process of setting LIBOR was never intended to be competitive,” and further, that it was merely “a cooperative endeavor wherein otherwise-competing banks agreed to submit estimates of their borrowing costs to the BBA each day to facilitate the BBA’s calculation of an interest rate index.” Slip op. at 31. The court then concluded that the plaintiffs’ injuries did not result from harm to competition, necessitating the dismissal of all antitrust claims.
It is difficult to comprehend how, even under the court’s characterization of LIBOR, the defendant banks’ concerted efforts to artificially set the interest rates they both pay and charge did not harm competition. While the process of reporting loan rates to create a combined LIBOR rate was not itself intended to be competitive, the banks were supposed to report competitive rates – and the allegation is that they did not quote competitive rates but instead collusively made up artificial rates.
Take a swap agreement, for example. Often, a commercial borrower takes out a loan with a variable rate of interest. To offset the risk of rising rates, the borrower simultaneously enters into an interest-rate swap agreement – based on LIBOR – that hedges against rising rates and, essentially, converts the variable rate loan into a synthetic fixed rate. But when the LIBOR banks allegedly colluded to artificially depress the LIBOR rate by quoting non-competitive rates, that upset the swap formula, so borrowers did not get what they bargained for due to the LIBOR banks’ collusion and failure to report true, competitive rates.
Similarly, investors in debt instruments tied to LIBOR were paid artificially depressed interest rates solely because the LIBOR banks allegedly did not report genuine, competitive rates but instead colluded to depress the LIBOR rate.
How is this different from any other price-fixing? When plywood or steel or computer manufacturers agree on a fixed price, they violate the law. The LIBOR banks did the same thing. Rather than quoting their actual rates when compiling a jointly published LIBOR rate, they rigged the bids, so to speak. They manipulated their published rates. They injured competition by not reporting competitive rates during the LIBOR process, thereby artificially depressing the published LIBOR rate, causing purchasers of interest rate swap agreements to not get what they paid for, and investors in LIBOR-denominated investments to be underpaid.
It will be interesting to see how the Second Circuit addresses this on the anticipated appeal.
Two companies related to SAC Capital Advisors just settled insider trading claims with the SEC for $614 million. The SEC’s complaint, filed last fall, alleged the entities traded on insider information relating to clinical drug trials for an Alzheimer’s medication. The SEC says this is their largest settlement ever of insider trading allegations. http://www.sec.gov/news/press/2013/2013-41.htm
Congratulations to University of Alabama School of Law for climbing to #21 in the US News & World Reports annual rankings. http://goo.gl/ZiBLP Count David Guin and Rex Slate of Guin, Stokes & Evans, LLC as proud alumni.
It is and always has been a sine qua non of class actions that there be no preferential treatment for the representative plaintiffs who file the suit. Except in securities cases, where Congress has prohibited the practice, most courts allow the class representatives to receive a modest “incentive award” award as fair compensation for the time they put into the litigation, gathering documents, preparing for and providing deposition or trial testimony, meeting with and guiding counsel, and for the general headache. Such modest awards are generally viewed as allowable because they only compensate the plaintiffs for things they had to do that were not required of other class members. But aside from such court-approved allowances, settlements must not favor the representative plaintiffs in any meaningful way, lest the settement be subject to attack as collusive.
The parties to the settlement in Vasselle v. Midland Funding LLC, ___ F.3d ___, 2013 WL 673517 (6th Cir. Feb. 26, 2013) just found this out the hard way. Vaselle involved claims against Midland Funding for “robo-signing” affidavits in connection with home foreclosures. Midland’s affidavits represented that the affiant had personal knowledge that the homeowner owed money and had not paid, when in fact, Midland employees were signing hundreds of such affidavits a day without having any personal knowledge of the loans or the homeowners’ payment status. Plaintiffs sued under the Fair Debt Collection Practices Act and common law.
The parties settled for $5.2 million (about $18 per class member), plus fees and administrative costs and an injunction requiring Midland to improve its collection processes. That part of the settlement was fine and good. But the terms also waived collection of the class representatives’ debt, while prohibiting class members from using the falsity of Midland’s affidavits to oppose collection/foreclosure efforts against them. That is much more than a nominal difference in treatment; i.e., saving one’s home from foreclosure or not. And the Sixth Circuit saw it the same way. Settlement overturned due to inadequate representation by the named plaintiffs.
This should be easy to fix on remand, but it is a reminder that it behooves neither plaintiffs nor defendants to overstep their bounds in any classwide settlement.
In Meyer v. Greene, No. 12-11488, 2013 WL 656500 (11th Cir. Feb. 25, 2013), the Eleventh Circuit Court of Appeals recently affirmed the dismissal of a securities fraud class action against St. Joe Company.
St. Joe is a paper company that in recent years has profited nicely from real estate developments within its vast holdings of current or former timberland near the Florida coast. After the housing crash, a prominent hedge fund manager (who specializes in short-selling overvalued companies) made a presentation arguing that St. Joe had overstated the value of its real estate developments in view of the poor housing market and that it needed to write down the values for many of its holdings. In the two business days following that presentation, St. Joe stock fell 20%.
A few months later, the SEC announced its informal inquiry “into St. Joe’s policies and practices concerning impairment of investment in real estate assets,” and the stock fell another 7%. Six months later, the SEC announced a formal investigation regarding St. Joe’s compliance with federal securities antifraud laws, and the stock fell yet another 9%.
The case alleged a violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, which requires proof, among other things, of “loss causation,” i.e., that the plaintiff’s losses were caused by the defendant’s fraud, as opposed to other market conditions. The plaintiff sued, and the district court dismissed the complaint. On appeal, the Eleventh Circuit affirmed, concluding that the facts as alleged did not suggest “loss causation.”
The logic of the opinion is a bit difficult to square both with traditional jurisprudence defining “loss causation” and recent Supreme Court authority. In short, the court concluded that the hedge fund manager’s analysis was akin to that of any other stock analyst giving an opinion about a stock. The court, however, glosses over the fact that this analysis was about the veracity of statements already made by a company, not about a company’s future prospects.
The court then concludes that the SEC’s announcements of its investigations cannot support an allegation of loss causation because an investigation is just that – an investigation and not a finding of fraud. But this conclusion conflates proof (or an allegation, since this decision was made on a motion to dismiss before the plaintiff even had the ability to conduct discovery) that a misrepresentation was made with proof (allegation) that the investor’s loss is properly attributable to that alleged misrepresentation. The SEC was not investigating how St. Joe might value its properties in the future. Rather, the SEC’s informal and formal investigations were to determine whether St. Joe had lied when it had reported its balance sheet to the market and to the SEC. The stock prices fell because the market grew concerned that the value of St. Joe’s reported assets was less than St. Joe had represented. That is the very definition of loss causation, as it has been viewed since 1934.
It is difficult to understand the court’s reasoning that the sudden drops in the trading price of St. Joe stock that immediately followed the questioning, both by an analyst and the SEC, of St. Joe’s state asset valuations did not reflect a loss “caused” by (i.e., relating to) St. Joe’s alleged overstatement of those same property values. It is equally difficult to comprehend how an analyst’s conclusion that a company had lied about the value of its assets, followed by a drop in the price of the stock, does not suggest that the stock drop was caused by fears that the asset values, were, in fact, overstated.
Of course, it should ultimately be up to the plaintiff to prove at trial that St. Joe should have written down some of its properties’ values to a material degree, and that its prior representations as to those values was therefore misleading (not to mention that the misstatement did not reflect an honest disagreement as to valuation, but instead was intended to mislead). But the Eleventh Circuit did not give the plaintiff that opportunity.
It remains to be seen whether the plaintiff seeks rehearing of this decision, and if so, whether the court agrees to rehearing. If rehearing is not granted, the Supreme Court should grant certiorari to clarify just what “loss causation” means. Indeed, this opinion seems in conflict with the Supreme Court’s recent decisions in Halliburton and Dura, which reflect a very different understanding of what “loss causation” means.
A number of our business clients and friends have been asking about the BP Oil Spill Settlement and whether they can be compensated even if they don’t think their business was hurt by the spill or if they are located in the northern part of the state away from the coast.
The lawyer ads have been running on TV and across social media, and they sound almost too good to be true – but they largely are, in fact, true. Any business in Alabama – from the coast all the way to Tennessee – that meets certain business-friendly criteria is eligible to be paid under the settlement.
Business do NOT have to show that any downturn they experienced during 2010 (when the spill occurred) was due to the oil spill. Rather, if your business had a downturn in any 3 month period from May to December of 2010 versus either (a) the same 3 months in the prior year (2009), or (b) the average of the same 3 months in 2008 and 2009, or (c) the average of the same 3 months in 2007, 2008 and 2009, the settlement presumes that your downturn was due to the spill. And if you think about it, it very may well have been. The spill took an awful toll on the coast and on businesses that dealt with coastal residents or businesses or travelers, and much of that toll trickled through the rest of the state. Deliveries were delayed. Energy prices were affected. The spill generally slowed business throughout the region.
If your business meets this test (or some others in the agreement), you are eligible to recover 125% or more of your lost profits in 2010. Businesses have even more flexibility for choosing the periods during 2010 for which they seek compensation.
The settlement includes alternative methods of establishing a claim that are more complicated. So even if your business does not meet the test above, you may still qualify for settlement funds, especially if you lost any contracts due to the spill or are located on the coast.
If you think your business might qualify for a share of the settlement, or if you just don’t know and want to find out, our firm is helping our clients through the process.
As some of our recent posts have addressed, Congress and many federal courts have been chipping away at investor rights, seemingly oblivious both to established precedent and to the harm caused to our capital markets by further reducing accountability for securities frauds. But in an opinion authored by Justice Ginsburg, the Supreme Court put a stop to one of the latest anti-investor trends in the courts.
In Amgen, Inc. v. Connecticut Retirement Plans & Trust Funds, the Court reasoned that while a securities plaintiff must ultimately prove that an alleged misstatement or nondisclosure was “material,” the plaintiff need not establish materiality to have the case certified to proceed as a class action on behalf of similarly situated investors. Rather, materiality is a question for the jury.
What some federal courts have been doing is accelerating the proof requirements for plaintiffs, and thereby taking the case away from juries. Thus, some courts had essentially required plaintiffs to prove their case to the satisfaction of the judge at the class certification stage of the litigation, rather than letting the case go to a jury to decide disputed questions of fact. Fortunately – this time – the Supreme Court put a stop this effort.
Class certification is not the place to decide cases – juries are supposed to do that. The court at class certification simply decides whether the jury will decide any disputed question of materiality (or any other disputed fact issue) on an individual basis or for all similar investors. Since materiality has always been an objective rather than subjective test (the question is not whether the defendant’s representation or nondisclosure was material to this investor, but whether it would be material to any reasonable investor; i.e., whether a reasonable investor would have placed significance on the representation or nondisclosure), it is properly addressed by the jury on behealf of a class instead of on an investor-by-investor basis.
This decision is welcome news for investors. While they have seen their rights diminished over the last twenty years by both Congress and the courts, the Supreme Court in Amgen held firm on the materiality standard and rejected recent attempts by activist courts to conflate materaility with reliance, and thereby convert an objective standard to a subjective one.
Although we normally post on securities litigation matters, we also follow antitrust litigation regularly, since it makes up a significant part of our practice. Especially interesting are jury verdicts in class action antitrust matters, since they are relatively uncommon (but occurring with greater frequency).
They may occur with even greater frequency after the plaintiffs’ victory in the urethane price-fixing litigation against Dow Chemical. In that case, Dow was hit hit last week with a $400 million jury verdict in a federal jury trial in Kansas City, KS. The judge may treble the verdict to $1.2 billion under the Sherman Act.
The verdict follows earlier settlements with Bayer A.G ($55.3 million); BASF S.E. ($51 million); and Huntsman International, LLC ($33 million).
The plaintiffs contended that the alleged conspiracy began when the urethane manufacturers had excess inventory. Dow, however, contended that there was no direct evidence of a conspiratorial agreement among the manufacturers and that prices dropped during the time-frame of the alleged conspiracy. The jury apparently sided with the plaintiffs, but Dow has promised an appeal.
Congratulations to the victorious plaintiffs’ counsel!
For several decades and with exceptional success, lobbying organizations for large public companies, such as the US Chamber of Commerce, have engaged in concerted efforts to whittle away at federal and state securities laws. Thus, they persuaded Congress to pass (and to override a presidential veto of) the Private Securities Litigation Reform Act (PSLRA), which made it more difficult for investors to recover stolen monies. When state regulators tried to fill the enforcement gap left by the PSLRA, Congress passed the National Securities Markets Improvement Act (NSMIA) to strip state regulators of enforcement authority. Then, when investors turned to state laws for relief, they persuaded Congress to enact the Securities Litigation Uniform Standards Act (SLUSA) to legislatively “preempt” state securities regulation, thereby forcing defrauded investors back under the PSLRA.
As a result of these and similar legislative campaigns and increasingly anti-investor court decisions, the capital markets have lost much of their credibility. Investors arguably have less confidence in our markets, and in the ability of our judicial system to right financial wrongs, than they have since the Great Depression.
But even after leading the world into financial crisis, the financial powers have not changed course. They continue to push to not just reduce, but eliminate, the accountability found in securities antifraud laws. Throughout their anti-investor campaigns, the anti-regulation (anti-free markets, really, in favor of protected markets) crowd has chanted that enforcement of securities laws is best left to regulators, rather than to entrepreneurial private attorneys.
Their hypocrisy is revealed, however, by their present effort to prevent even state Attorneys General from seeking restitution on behalf of defrauded investors as a part of their own, limited enforcement capabilities. In People v. Greenberg, (Index No. 401720/05), the New York Court of Appeals will soon consider whether a state enforcement action that seeks both civil penalties and restitution under the state’s regulatory power is really just a class action in disguise, subject to SLUSA (thus requiring dismissal).
If the defendants are successful in persuading the court that actions by regulators fall into the same traps as those by private investors, they will have succeeded in eliminating the last vestige of hope for defrauded investors to recover en masse their stolen funds under state securities laws. While SLUSA does not (yet) prohibit individual actions, the costs inherent in securities litigation make most individual cases impractical. SLUSA has banned class actions under state securities laws, and People v. Greenberg will test whether even state Attorneys General or securities commissions may still protect their citizens from financial crooks.
Although the SEC did not prevail on its fraud-based claims against Morgan Keegan regarding its retail sales of auction-rate securities (“ARS”), a federal district court in Atlanta did conclude that “[b]rokers apparently were lulled into describing [their ARS] too broadly and neglected in their discussions with the customers … to discuss the practical and technical requirements of an auction and the consequences of an acution failure….. As a result, the evidence in this case was that the Morgan Keegan brokers … neglected to fully inform investors of the ARS risk when marketing the ARS production, to include informing them of the risk of auction failures, the concomitant loss of liquidity, and varying interest rates.”
The court’s opinion followed a non-jury trial in November 2012 in which the SEC put on evidence that Morgan Keegal told client that the more than $2 bilion in ARS it sold to its clients had “zero risk,” even as the ARS market was collapsing in 2007 and 2008.
The case is SEC v. Morgan Keegan & Co., Inc., 1:09-cv-01965 (N.D. Ga.).