Tag: Securities litigation


NY Court: RMBS Statute of Limitations Runs from Time of Securitization

Theodore N. Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton memorandum by Mr. Mirvis, George T. Conway III, Elaine P. Golin, Graham W. Meli, and Justin V. Rodriguez.

In an important decision for financial institutions and investors in residential mortgage-backed securities (RMBS), the New York Court of Appeals unanimously ruled yesterday (June 11, 2015) that claims for breach of representations and warranties made in an RMBS securitization accrue when the representations and warranties are made, which typically occurs when the securitization closes. ACE Securities Corp. v. DB Structured Products, Inc., No. 85 (June 11, 2015) (see our prior memo). The court held that New York’s six-year statute of limitations for breach-of-contract claims thus begins to run at that time—and not when the securitization sponsor refuses, possibly years or decades later, to comply with a securitization trustee’s demand for the contractual remedy of cure or repurchase of non-compliant loans. Accordingly, claims arising out of most pre-financial crisis RMBS securitizations are now time-barred.

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In re Kingate

David Parker is a partner in the Litigation and Risk Management practice at Kaplan, Kleinberg, Kaplan, Wolff & Cohen, P.C. The following post is based on a Kleinberg Kaplan publication by Mr. Parker and David Schechter.

The U.S. Court of Appeals for the Second Circuit, in In re Kingate Management Limited Litigation, recently made it significantly easier for plaintiffs in the Second Circuit and New York, Connecticut and Vermont state courts to bring class actions alleging violations of state law in litigation involving certain types of securities. By allowing these claims to proceed under state law, the Second Circuit has signaled that plaintiffs may now be able to avoid the rigorous pleading standards of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), which requires that pleadings contain robust fraud allegations pleaded with particularity. The PSLRA also requires that plaintiffs allege the defendant acted with scienter—in other words, that the defendant knew the alleged statement was false at the time it was made, or was reckless in not recognizing that the alleged statement was false.

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Increased Risk for Preferred Stockholders in Ensuring Mandatory Redemptions

Philip Richter is co-head of the Mergers and Acquisitions Practice at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication authored by Mr. Richter, Abigail Pickering BombaJohn E. Sorkin, and Gail Weinstein. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The Delaware Chancery Court’s holding in TCV v. TradingScreen (Feb. 26, 2015; redacted March 27, 2015) has increased the risk for preferred stockholders in their being able to exit their investments under mandatory redemption provisions. The decision is on interlocutory appeal to the Delaware Supreme Court.

The Chancery Court held that a corporation’s ability to redeem preferred stock upon the occurrence of an event triggering mandatory redemption is implicitly restricted by the common law limitation that a corporation may not take action that would result in its not having the ability to continue as a going concern or to pay its debts as they come due. Thus, based on TradingScreen, a company cannot legally redeem preferred stock if, in the board’s judgment, doing so would render it unable to continue as a going concern and to pay its debts as they come due—even if:

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How United States v. Newman Changes The Law

Jon N. Eisenberg is partner in the Government Enforcement practice at K&L Gates LLP. This post is based on a K&L Gates publication by Mr. Eisenberg. The complete publication, including footnotes, is available here.

In unsuccessfully seeking rehearing in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), reh’g denied, Nos. 13-1837, 13-1917 (2d Cir. Apr. 3, 2015), the Government acknowledged that the Second Circuit’s recent decision in Newman “will dramatically limit the Government’s ability to prosecute some of the most common, culpable, and market-threatening forms of insider trading,” and “arguably represents one of the most significant developments in insider trading law in a generation.” As we discuss below, Newman is a well-deserved generational setback for the Government. It reflects the Second Circuit’s reasonable reaction to Government overreach, and it establishes brighter lines to cabin prosecutorial and SEC discretion in bringing future criminal and civil insider trading actions.

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Implications of the Supreme Court Omnicare Decision

Boris Feldman is a member of Wilson Sonsini Goodrich & Rosati, P.C. This post is based on a WSGR alert authored by Mr. Feldman, Robert G. Day, Catherine Moreno, and Michael Nordtvedt.

On March 24, 2015, the U.S. Supreme Court issued its decision in Omnicare, Inc., et al. v. Laborers District Council Construction Industry Pension Fund et al., addressing when an issuer may be held liable for material misstatements or omissions under Section 11 of the Securities Act of 1933 for statements of opinion in a registration statement.

Among other things, the Supreme Court held that an issuer may be held liable under Section 11 for a statement of opinion, even one that is sincerely held, if its registration statement omits facts about the issuer’s inquiry into, or knowledge concerning, a statement of opinion and if those facts conflict with what a reasonable investor, reading the statement fairly and in context, would take from the statement itself.

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Supreme Court Clarifies Liability for Opinions in Registration Statements

Robert Giuffra is a partner in Sullivan & Cromwell’s Litigation Group. The following post is based on a Sullivan & Cromwell publication by Mr. Giuffra, Brian T. Frawley, Brent J. McIntosh, and Jeffrey B. Wall; the complete publication, including footnotes, is available here.

On March 24, 2015 in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No. 13-435, the U.S. Supreme Court addressed the requirement in Section 11 of the Securities Act of 1933 that a registration statement not “contain[] an untrue statement of a material fact” or “omit[] to state a material fact … necessary to make the statements therein not misleading.” Specifically, the Court considered what plaintiffs need to plead under each of those phrases with respect to statements of opinion. The Court’s guidance is significant in light of the importance of pleading standards and motions to dismiss in securities litigation. The Court held, consistent with a majority of the federal courts of appeals, that a pure statement of opinion offered in a Section 11 filing is “an untrue statement of material fact” only if the plaintiff can plead (and ultimately prove) that the issuer did not actually hold the stated belief. At the same time, the Court held that the omission of certain material facts can render even a pure statement of opinion actionably misleading under Section 11. But the Court emphasized that pleading an omissions claim will be difficult because a plaintiff must identify specific, material facts whose omission makes the opinion statement misleading to a reasonable person reading the statement fairly and in context. The Supreme Court’s decision should curtail Section 11 litigation over honestly held opinions that turn out to be wrong, but it may cause the plaintiffs’ bar to bring claims that issuers have not accompanied their opinions with sufficient material facts underlying those opinions. To ward off the risk of such lawsuits, issuers should consider supplementing their disclosure documents with information about the bases of their opinions that could be material to a reasonable investor.

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SEC Enforcement Developments in 2014, and a Look Forward

The following post comes to us from Bill McLucas, partner and chair of the securities department at Wilmer Cutler Pickering Hale and Dorr LLP, and is based on a WilmerHale publication by Mr. McLucas; the complete publication, including footnotes, is available here.

As we noted last year in our memorandum focused on 2013 developments, Securities and Exchange Commission Chair Mary Jo White has called for the SEC to be more aggressive in its enforcement program. By all accounts, the Enforcement Division has responded to that call. The past year saw the SEC continue the trend, started under Enforcement Director Robert Khuzami in 2009, of transforming the SEC’s civil enforcement arm into an aggressive law enforcement agency modeled on a federal prosecutor’s office. This should not come as a surprise since both Andrew Ceresney, the current Director, and George Cannellos, Ceresney’s Co-Director for a brief period of time, like Khuzami, spent many years as federal prosecutors in the Southern District of New York. And the Commission itself is now led for the first time by a former federal prosecutor, Mary Jo White, the US Attorney for the Southern District of New York from 1993 to 2002. Given the events of the past decade involving the Madoff fraud and the fallout from the 2008 financial crisis, we believe both the aggressive tone and positions the SEC has taken in recent years will continue.

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A Modest Strategy for Combatting Frivolous IPO Lawsuits

Boris Feldman is a member of Wilson Sonsini Goodrich & Rosati, P.C. The views expressed in this post are those of Mr. Feldman and do not reflect those of his firm or clients.

With a minor change to the customary lock-up agreement, issuers and underwriters may be better able to fight frivolous IPO lawsuits. By allowing non-registration statement shares to enter the market, underwriters may prevent Section 11 strike-suiters from “tracing” their shares to the IPO. This could enable ’33 Act defendants to knock out the lawsuits against them.

Basics of Section 11 Standing and Tracing

Section 11 of the Securities Act of 1933, 15 U.S. Code § 77k, provides a private remedy for those who purchase shares issued pursuant to a registration statement that is materially false or misleading. The remedy applies to “any person acquiring such security.” Section 11(a). That is, a person may assert a claim with respect to shares issued pursuant to the particular registration statement.

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Shareholder Litigation Involving Acquisitions of Public Companies

John Gould is senior vice president at Cornerstone Research. This post discusses a Cornerstone Research report by Olga Koumrian, titled “Shareholder Litigation Involving Acquisitions of Public Companies,” which is available in full here.

A new report shows that the percentage of 2014 lawsuits filed by shareholders in M&A deals remained consistent with the previous four years, while other key indicators suggest a slowdown. The report, Shareholder Litigation Involving Acquisitions of Public Companies, released February 25, 2015 by Cornerstone Research, reveals that investors contested 93 percent of M&A transactions in 2014. Despite this typically high percentage, shareholders brought a smaller number of competing lawsuits per deal and in fewer jurisdictions, challenged fewer deals valued below $1 billion, and took slightly longer to file lawsuits.

In a significant shift from recent years, 60 percent of contested M&A deals had lawsuits filed against them in only one jurisdiction. Just 4 percent of these deals were challenged in more than two courts, the lowest number since 2007.

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California Court Clarifies Scope of Class Action Judgment Reduction Provision

Brad Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum.

In Rieckborn v. Velti plc, 2015 WL 468329 (N.D. Cal. Feb. 3, 2015) (Orrick, J.), the United States District Court for the Northern District of California clarified the scope of the judgment reduction provision that is found in almost all class action settlement agreements by holding that nonsettling defendants are entitled to a judgment reduction measured by the proportion of fault of all settling defendants, not just a dollar-for-dollar judgment reduction, on all settled claims under the Securities Act of 1933 (the “Securities Act”). In so holding, the court handed a major victory to nonsettling defendants in actions under the Securities Act by granting them a favorable form of judgment reduction on claims not explicitly covered by the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). The court’s opinion also makes clear that bar orders cannot preclude “independent claims” and that bar orders must be “mutual,” thereby giving guidance to the drafters of class action settlement agreements.

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