Firm News - Securities Newsletter April 2013

Materiality Need Not Be Proven at Class Certification Stage
In a 6-3 decision in February, the Supreme Court ruled for investors in the class-action case Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11- 1085. The question in the case was whether plaintiffs in securities fraud cases should be required to prove that the defendant had made a material misstatement before a class action may be certified.
Material information, the court has explained, is the sort of thing that reasonable investors would believe significantly alters the total mix of available information.
The court has also said that materiality may be presumed when a company makes public statements in an efficient securities market, or a market that reflects all publicly available information about a company. That presumption is known as the “fraud on the market” theory.
Justice Ruth Bader Ginsburg, writing for the majority, said the plaintiffs’ assertion was enough for purposes of class certification because the question at that stage was merely whether, in the words of the relevant rule of civil procedure, “questions of law or fact common to class members predominate over any questions affecting only individual members.”
Several of the concurring and dissenting Justices stated, however, that it may be time to reconsider the fraud-on-themarket theory in light of research suggesting that it may sometimes rest on a faulty premise. Without the “fraud on the market” presumption, securities fraud class actions would face a near-certain death.
Without Comment Supreme Court Broadens Size of Classes Represented in MBS Litigations
Late last year, the 2nd U.S. Circuit Court of Appeals in New York ruled against Goldman Sachs in its attempt to limit those represented in MBS class actions. The Court ruled that a union pension fund appropriately represented all purchasers of MBS securities from various offerings, including securities the union fund did not itself purchase. The offerings were all allegedly backed by the same loans.
The decision was controversial nationwide. It contradicted a decision by an Appeals Court and two district courts. Those courts had held that MBS class actions were limited to purchasers of the exact same certificates or tranches.
Surprisingly just last month, the U.S. Supreme Court refused to consider Goldman Sach’s appeal. Goldman responded, stating the decision allowed the plaintiffs to bring claims regarding securities worth several billion dollars, rather than the $500,000 in securities that the fund directly purchased. In our opinion, this decision rightfully expands those MBS investors represented in MBS class actions.
S.E.C. Must File Suit Within Five Years From When Fraud Occurs
In a unanimous opinion in Gabelli v. Sec. & Exch. Comm’n, No. 11-1274 (U.S. Feb. 27, 2013) the U.S. Supreme Court held that the five-year limitations period that governs S.E.C. enforcement actions begins to run immediately when the alleged fraud is complete. This limitation is not extended by the S.E.C.’s failure to discover the fraud, as the Second Circuit found.
Ordinarily the deadline to file suit begins to run upon a party’s injury, but in cases of fraud, when the injury itself is concealed, courts have protected individuals, who are after all not required to be in a constant state of investigation. The Supreme Court explained, however, that rationale does not apply to the S.E.C. because its mandate is to investigate and prevent fraud and it has statutory authority to demand detailed records, including extrajudicial subpoenas.
In deciding that the S.E.C. has a set window to investigate and file suit, the Supreme Court did not address other doctrines, available to the S.E.C. and other private litigants. For example, an applicable limitations period can be extended when the defendant takes steps beyond the challenged conduct itself to conceal that conduct.
This decision means that there will be more and more occasions where the only source of securities fraud enforcement will be private lawsuits.