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Good Faith Would Not Defeat False Opinion Claim Under Securities Act, Sixth Circuit Holds

The Sixth Circuit split with the Second and Ninth Circuits today on what a plaintiff must plead under section 11 of the Securities Act of 1933 in cases that involve opinions, views, and other "soft" info.

The panel looked at a claim that Omnicare violated Section 11 by publicly stating its judgment that its drug-care services for people who live in long-term care complied with the law when in fact the services didn't comply. Omnicare argued on appeal that the district court rightly kicked the case on the ground that the complaint failed to allege that Omnicare knew it hadn't met its legal duties. But the panel held that plaintiffs met their pleading burden simply by calling the opinion false. Section 11 does not require proof of scienter (intent to defraud), it pointed out, although it does allow a good faith defense (which didn't matter because the court needed to assess only whether plaintiffs had stated a valid claim).

The threesome also noted their own opinion that colleagues in New York and San Francisco had gotten the law on the point wrong. Indiana State District Council of Laborers and Hod Carriers Pension and Welfare Fund v Omnicare, Inc., No. 12-5287 (6th Cir. May 23, 2013) (declining to follow Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011), and Rubke v. Capitol Bancorp Ltd., 551 F.3d 1156, 1162 (9th Cir. 2009)).

Irony lives.

Quote of the Day: Blawgletter

The wise thing for me to say . . . is that I don't have evidence to contradict it.

David Ingram, "Q&A: Plaintiffs' Lawyer Barry Barnett on the Comcast class action", Thomson Reuters News & Insight, May 13, 2013 (referring to "the academic study spotlighted in The New York Times that found that this Supreme Court is the most pro-business in modern history").

Bonus:    Lee Epstein, William M. Landes, and Richard A. Posner, "How Business Fares in the Supreme Court", 97 Minn. L. Rev. ___ (2013).

Second Bonus:    "It's not all skittles and beer."

Forget It, Jake. It's Kabletown.

At the end of the one of the Best Movies Ever, Evelyn Mulwray (Faye Dunaway) drives with her young daughter towards safety down a Los Angeles street. Will they escape? Yes, we think they just might!

A Los Angeles police lieutenant (Perry Lopez) steps onto the pavement. He aims his pistol and fires. Mulwray's car glides into a wall. The horn blares. It keeps blaring, as Mulwray's lifeless body presses against the steering wheel.

A look of crazy anguish pierces the face of Jake Gittes (Jack Nicholson), a private detective who has fallen in love with his client Mulwray. One of Jake's associates grabs him. He faces his boss and says:

"Forget it, Jake. It's Chinatown."

That pretty much sums up what Adam Liptak writes today in the Sunday NYT, on the front page of the Business section, about the rulings in business cases by the Roberts Court. Liptak titles his piece "Friend of the Corporation" (in the print version) and "Corporations Find a Friend in the Supreme Court" (online), and he opens it thus:

Not long after 10 a.m. on March 27, a restless audience waited for the Supreme Court to hear arguments in the second of two historic cases involving same-sex marriage. First, however, Justice Antonin Scalia attended to another matter. He announced that the court was throwing out an antitrust class action that subscribers brought against Comcast, the nation's largest cable company.

Almost no one in the courtroom paid attention, despite Justice Scalia's characteristically animated delivery, and the next day's news coverage was dominated by accounts of the arguments on same-sex marriage. That was no surprise: the Supreme Court's business decisions are almost always overshadowed by cases on controversial social issues.

But the business docket reflects something truly distinctive about the court led by Chief Justice John G. Roberts Jr. While the current court's decisions, over all, are only slightly more cnservative than those from the courts led by Chief Justices Warren E. Burger and William H. Rehnquist, according to political scientists who study the court, its business rulings are another matter. They have been, a new study finds, far friendlier to business than those of any court since at least World War II.

Liptak goes on to tell about the study, which appears in the Minnesota Law Review, by Wiliam M. Landes and Richard A. Posner, as well as "a despairing overview", in the New York University Law Review, by Arthur R. Miller.

Blawgletter says check it out.

You'll note that the case Liptak uses to kick off the article, Comcast Corp. v. Behrend, No. 11-864, holds a special place in our heart. We argued it to the Court last November, and in our giddiness afterwards dared to hope the Court would concede what became obvious during the argument -- that Their Honors had made a mistake in thinking, when they took the case, that it properly raised a question of admissibility of expert opinion evidence under the Daubert line of decisions.

The majority instead posed and answered a different question, one that it seems to have formulated after the briefing concluded. That explains the dissenters' view that the majority had engaged (per Liptak) in "unseemly judicial gamesmanship" by "refram[ing] the legal issue in the case so that they could rule for Comcast."

It's Kabletown.

Prof. Epstein Explains Why We Should Have Won Comcast Corp. v. Behrend

NYU Law School Professor Richard A. Epstein -- "an advocate of minimal legal regulation" and "one of the most influential legal thinkers of modern times" -- thinks the U.S. Supreme Court got its ruling wrong in Comcast Corp. v. Behrend, No. 11-864 (U.S. Mar. 27, 2013) (post here).

Leaving to one side the separate point that (according to a "stinging dissent by Justices Ginsburg and Breyer") "the writ of certiorari was improvidently granted because of a set of procedural wrangles on the question presented", Professor Epstein criticizes the majority's criticism of the regression analysis that estimated class-wide damages in Behrend:

No matter what regression is used, it is still the case that all the individual members of a given class will suffer somewhat different injuries that could never be picked up or measured if each person were to bring his own separate lawsuit. But in this instance, the class action offers a better vehicle for analysis because it attempts to measure aggregate social harm. That calculation in turn sets the stage for determining optimal deterrence against a defendant, by taking the total amount of antitrust injury that their actions caused and dividing it among the plaintiffs in a form that is certain not to reflect the exact injuries that each member of the class sustained. Yet at the same time, these errors do not systematically favor any identifiable class members and thus tend to cancel out. Allowing averaging across the plaintiffs, therefore, does improve the position of every member of the class, for each does far better off with a pro rata recovery than with nothing at all.

 

Supreme Court Reverses Cable Class

Today the Supreme Court, by 5-4, reversed a ruling that upheld certification of an antitrust case against Comcast as a class action. The majority disagreed with the district court and court of appeals on whether the plaintiffs' damages model showed class-wide losses from Comcast's efforts to thwart "overbuilder" competition in the Philadelphia area.

Justice Scalia wrote the majority opinion, in which Chief Justice Roberts and Justices Kennedy, Thomas, and Alito joined.

Blawgletter understands that Justices Ginsburg and Breyer took the unusual, if not extraordinary, steps of writing a joint dissent and reading it this morning from the bench. Justices Sotomayor and Kagan joined in the dissenting opinion.

The dissent urged that the Court should have dismissed the writ as improvidently granted and, failing that, should have affirmed the Third Circuit.

Class cousnel respectfully disagree with the majority's ruling. We look forward to satisfying the Court's narrow methodological concerns on remand to the trial court and to trying the case on the merits as soon as practicable.

I had the honor of arguing the case for the class in November. You hate to lose, but it was a terrific experience.

Clearing Broker Escapes Bear Trap

Standing nearby when what our banker friends call a liquidity event takes place can result in an influx of wealth. Who doesn't want that.

The opposite feeling takes hold for what we'll refer to as liability events. These usually involve the disappearance of money that belongs to Other People. Bankers like to distance themselves in those instances.

Sometimes they succeed. 

Witness Levitt v. J.P. Morgan Securities, Inc., No. 10-4596-cv (2d Cir. Mar. 15, 2013). In that case, the Second Circuit panel threw out a class action that accused a "clearing broker" of securities fraud in connection with a scheme by an investment banker, Sterling Foster, to scam investors in five initial public offerings. Sterling Foster had cut a deal with insiders of the IPO firms to release them from standard "lock-up" agreements shortly after their IPOs hit the market so that SF could buy their shares for below-market prices and sell them right away for a huge profit.

 J.P. Morgan's predecessor, Bear Stearns, served as the clearing broker for SF. But it expressly disclaimed any duties towards SF's customers. And, even though Bear seems to have Gotten the Idea that SF was up to no good, its keeping its distance led the court to rule it had no obligation to disclose the fraud and that therefore the class of SF customers couldn't invoke a presumption of reliance on SF's misrepresentations and nondisclosures. The district court thus erred in certifying the case as a class action, the panel decided.

Lack of Motive Dooms Conspiracy Claim in Auction Rate Securities Market, Second Circuit Holds

We've known at least since Bell Atl. Co. v. Twombly, 550 U.S. 544 (2007), that competitors can engage in parallel conduct -- charging the same price, offering the same product features, setting identical contract terms -- without running afoul of the Sherman Act. A plaintiff claiming a violation of section 1, which bars conspiracies in restraint of trade, must allege, in addition to parallel behavior, "plus factors" that point to an agreement between competing firms not to compete.

The Second Circuit ruled on March 5 that a section 1 claim failed because the complaint's thrust -- that financial institutions agreed to stop propping up "auction rate securities" and all at once exit the ARS market -- didn't make sense:

Indeed, Defendants' alleged actions -- their en masse flight from a collapsing market in which they had significant downside exposure -- made perfect business sense. . . . In their brief on appeal, with its repeated mention of the February 13 auction failures, Plaintiffs seem to be suggesting that the ARS market had been healthy until that day and imploded in a sudden and unexpected collapse. But the allegations in their complaints reveal otherwise. Indeed, according to Plaintiffs themselves, ARS auctions started failing as early as the summer of 2007. Compl. 80. More auctions failed during the fall and winter, putting Defendants on notice that "the market for [ARS] was in danger of failing." Compl. 81. Thus by early 2008, each defendant was faced with the same dilemma. Continuing to prop up the auctions with support bids generated commissions for successful auctions; but if enough auctions failed, ARS would be seen as poor investments, the markets would dry up, and Defendants' support purchased would turn into major liabilities. As the complaints vividly demonstrate, each defendant was well aware of these dynamics -- the market as a whole was essentially holding its breath waiting for the inevitable death spiral of ARS auctions. In such an environment, it is unsurprising, and expected, that once failures reached a critical mass, defendants would exit the market very quickly. In fact, at that point abandoning bad investments was not just a rational business decision, but the only rational business decision.

Mayor and City Council of Baltimore v. Citigroup, Inc., No. 10-0722-cv (L), slip op. at 15-16 (2d Cir. Mar. 5, 2013) (emphasis in original).

U.S. Supreme Court Upholds Amgen Class

The legal landscape for class actions has gotten harder for plaintiffs to cross in the last decade or so. Today it got no worse. And plaintiffs and their counsel rejoice at that.

In Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, No. 11-1085 (U.S. Feb. 27, 2013), the Court ruled 6-3 that a class of plaintiffs who allege a fraud on the market claim under federal securities law need not prove the materiality element in order to obtain class certification under Rule 23(b)(3).

Justice Alito joined in the majority opinion (by Justice Ginsburg) but wrote a concurrence to suggest the Court may someday want to toss the Basic, Inc. v. Levinson, 485 U.S. 224 (1988), presumption that people who buy securities in an "efficient" market rely on the accuracy of information the market believes and therefore incorporates into the market price of securities.

Justices Scalia and Thomas wrote dissents. Justice Kennedy joined in the Thomas dissent, and Justice Scalia joined in it except for part I.B.

Another class case, Comcast Corp. v. Behrend, No. 11-864 (U.S.), remains under advisement. Blawgletter had the honor of arguing Behrend on the same day as Amgen.

Preview of Italian Colors Argument at UCL Practitioner

Kimberly Kralowec offers a preview of the oral argument this morning in Am. Express Co. v. Italian Colors Restaurant, No. 12-133 (U.S.). Check it out.

The case deals with whether a court may strike down an arbitration clause under federal law (the Arbitration Act) on the ground that it makes getting relief under substantive federal law (the Sherman Act) all but impossible. See "Class Arbitration Ban Fails in Second Circuit; Evidence Showing 'Frustration' of Rights Key".

Thanks, Kimberly!

Texas Justices Agree on Class

The Supreme Court of Texas held last week that the courts below shouldn't have refused to certify a "takings" case as a class action on the ground that the class representatives couldn't adequately represent the interests of all class members. Riemer v. Patterson, No. 11-0548 (Tex. Feb. 22, 2013).

That doesn't amount to saying the courts below should on remand certify the case as a class action. Only that if they do again decline certification they'll have to find another ground.

The case relates to the "takings" of surface and mineral rights without due process and payment of compensation by virtue of where the State of Texas deemed the boundaries of the Canadian River to lie. The State owns the surface and minerals beneath the bed of streams and therefore has an interest in, shall we say, exaggerating the width of Texas waterways.

Yes, this counts as progress.