Tag Archives: Securities

Is an Institutional Investor Subject to the PSLRA’s “Professional Plaintiff” Bar?

View David Wright's Complete Bio at robinsonbradshaw.comThe Private Securities Litigation Reform Act (“PSLRA”) establishes special rules in securities class actions. One such rule, found in 15 U.S.C. Sect. 78u-4(a)(3)(B)(vi) and known as the “Five-in-Three Provision,” prevents a “person” from serving as a lead plaintiff in “more than 5 securities class actions” during any three-year period. Does that rule, though, apply to institutional investors? The plain words of the statute certainly suggest so—it is difficult to argue that an institutional investor is not a “person,” and had Congress wanted to exclude institutional investors from this prohibition, it could easily have done so. The Arkansas Teacher Retirement System, an active lead plaintiff, lost this issue in the Eastern District of Virginia last fall, when Judge Ellis found that the statutory language was clear. See Knurr v. Orbitral ATK, Inc., No. 1:16-cv-1031, 2016 WL 661157 (E.D. Va. Nov. 10, 2016) (noting that “it is doubtful that Congress would have hidden a major exemption in a single word,” echoing Justice Scalia’s phrase that “Congress . . . does not . . . hide elephants in mouseholes”).

But, as Judge Ellis also acknowledged, “one purpose of the [PSLRA] is to encourage institutional investors to serve as lead plaintiff.” And the House Conference Report pertaining to the PSLRA states that “institutional investors seeking to serve as lead plaintiff may need to exceed [the limit of lead plaintiffs] and do not represent the type of professional plaintiff this legislation seeks to restrict.” H.R. Conf. Rep. 104-369, at 35 (1995). So how to square this tension?

Recently, in Ollila v. Babcock & Wilcox Enterprises, Inc., No. 3:17-cv-109 (W.D.N.C. May 25, 2017), Judge Cogburn acknowledged these competing lines of authority but ultimately side-stepped the issue. Arkansas Teacher Retirement System, which had lost its argument to serve as lead plaintiff in Knurr, had better success with Judge Cogburn. Judge Cogburn found Knurr “persuasive,” but found “similarly persuasive” “the number of other district court cases that have held that institutional investors are not subject to the ‘five-in-three’ limitation.” Indeed, Judge Cogburn cited case law emphasizing that “the ‘majority’ view is that institutional investors are not subject to the professional plaintiff ‘three-in-five’ bar.”

Ultimately, Judge Cogburn took refuge in a section of the PSLRA that permits the court to override the “professional plaintiff limitation.” See 15 U.S.C. Sect. 78u-4(a)(3)(B)(vi). The putative financial losses of ATRS, which exceeded $5 million in the case, “dwarf[ed] those alleged by the competing institutional plaintiff,” leading the court to exercise its discretion to appoint ATRS as lead plaintiff even in the face of its activism in shareholder class actions across the country.

It remains to be seen whether the textual argument of Judge Ellis will ultimately hold sway in the Fourth Circuit.

Securities Class Actions Continue To Rise

View Adam Doerr's Complete Bio at robinsonbradshaw.com Earlier this year, we reported that Multiple Studies Show Increase in Securities Class Actions. Cornerstone Research, one of the groups covered in our earlier report, recently issued its 2016 Midyear Assessment. This new analysis, which covers cases filed in January through June of this year, is consistent with several of the trends we reported previously, including the increasing number of securities class actions, the rise in the number of cases against smaller companies, and the increase in the number of Fourth Circuit cases.

Of particular interest is the significant increase in the number of merger & acquisition cases filed in federal courts. In the first half of 2016, there were 24 filings involving M&A transactions – a 167% increase from the second half of 2015. Given the size of this increase, it seems likely that this is related to significant changes in Delaware’s handling of merger objection litigation following the Trulia decision, and we will continue to monitor how this shift impacts merger litigation in federal courts in the Carolinas and the North Carolina Business Court.

Multiple Studies Show Increase in Securities Class Actions

View Adam Doerr's Complete Bio at robinsonbradshaw.comRecent studies by PricewaterhouseCoopers, NERA Economic Consulting, Cornerstone, and Kevin LaCroix of D&O Diary have all found that federal securities class actions are on the rise. According to PwC, the data shows a trend towards more cases filed against smaller companies, especially for claims regarding accounting irregularities. Smaller companies also face a significant risk of claims regarding inadequate internal controls over financial reporting, likely due to their smaller size and more limited resources.

NERA found that standard federal securities class actions – complaints alleging violations of Rule 10b-5, Section 11, or Section 12 – increased for the third straight year. Both PwC and NERA determined that the number and proportion of federal cases challenging mergers and acquisitions also increased in 2015. It is unclear whether this is a result of Delaware’s increased scrutiny of merger litigation settlements, but we will monitor this trend, which also affects merger litigation in state courts, including the North Carolina Business Court.

Cornerstone analyzed the timing and progress of cases and found that the time to resolution appears to be increasing. Fewer cases were dismissed within the first year after they were filed, and the percentage of cases settled within three years also decreased. Despite this, only a small proportion of cases – just 26% — made it to a motion for class certification. The other 74% of cases were dismissed or resolved prior to class certification. When courts actually decided class certification motions, they granted them 75% of the time.

The studies were not consistent in identifying the number of cases filed in the Fourth Circuit, but all agreed that filings here are well behind those filed in the Second and Ninth Circuits, which saw more than 60% of securities class action filings. Although the Fourth Circuit did not see as much volume as these courts, one of the 10 largest settlements of 2015, a $146.3 million settlement of misrepresentation claims against an energy company, took place in the Western District of North Carolina.

Trends in Shareholder Class Actions Challenging Corporate Mergers

View Adam Doerr's Complete Bio at RBH.com In two recent studies of shareholder class actions over corporate mergers, the authors reached conclusions consistent with our experience with such cases in North Carolina: that nearly every acquisition of a public company results in shareholder litigation. The Cornerstone Research report found that 93% of public company acquisitions were challenged. Takeover Litigation in 2014, a separate study by Matthew Cain of the SEC and Steven Solomon of UC Berkeley, found that 94.9 of deals were challenged. (The two studies used slightly different cutoffs for their samples.)

Both reports found that the number of cases filed in multiple jurisdictions is on the decline, and they speculate that this may result from an increase in companies with forum selection clauses in their bylaws. Both reports also found that the average number of suits challenging each transaction had declined slightly, from over 5 to 4.3 (Cain & Solomon) or 4.5 (Cornerstone).

The vast majority of these shareholder class actions, over eighty percent, settled for additional disclosures of information to shareholders. Most of the remaining cases were resolved for changes to deal protection provisions or reductions in termination fees. Few cases involved monetary payments to shareholders.

The reports do not provide information on specific states apart from Delaware. Although our experience in North Carolina is generally consistent with these findings, North Carolina law differs from Delaware law in important respects, and our sample size is not large enough to confirm national trends.

(Robinson Bradshaw has represented companies, boards of directors, and private equity purchasers in numerous shareholder class actions challenging corporate mergers, including the defense of suits against the Duke Energy/Progress Energy merger, the Wells Fargo/Wachovia merger, and multiple going private transactions between public companies and private equity firms.)

Supreme Court Upholds Fraud on the Market Presumption

View David Wright's Complete Bio at RBH.comEarly in May, we reported on the Supreme Court’s review of the Basic v. Levinson presumption of reliance in securities fraud cases. In an opinion today by Justice Roberts, the Court declined the invitation to overrule Basic’s presumption of reliance in an efficiently traded market. Three justices (Thomas, Scalia and Alito) were prepared to overrule Basic. The majority held that there was no “special justification” to overrule Basic, noting the absence of “the kind of fundamental shift in economic theory that could justify overruling a precedent on the ground that it misunderstood or has since been overtaken by economic realities.” The Court did, however, continue to emphasize that “plaintiffs wishing to proceed through a class action must actually prove—not simply plead—that their proposed class satisfies each requirement of Rule 23.” The Court emphasized that “the Basic presumption does not relieve plaintiffs of the burden of proving—before class certification—that this requirement is met.” But the Court also emphasized that defendants’ ability to rebut reliance did not mean that individual questions will necessarily overwhelm common ones and render class certification inappropriate under Rule 23(b)(3). As to abuses attendant to securities class actions, Justice Roberts said—in effect—“write your Congressional representative”—observing that Congress had enacted the Private Securities Litigation Reform Act (PSLRA) to combat some of those perceived abuses.

Critically, the Court held that defendants must be allowed to defeat the reliance presumption of Basic at the class certification stage. The “price impact” of an alleged misrepresentation is crucial to the operation of the Basic presumption, Justice Roberts observed, and “thus has everything to do with the issue of predominance at the class certification stage.” And if the Basic presumption is rebutted, “class certification [is] inappropriate.” Look for a plethora of event studies at the class certification stage.