Tag: U.S. federal courts

Federal Court Dismisses Madoff Investors’ Claim

John F. Savarese is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savarese, Stephen R. DiPrimaEmil A. Kleinhaus, and Noah B. Yavitz

In a significant decision addressing claims arising out of Bernard Madoff’s Ponzi scheme, the U.S. District Court for the Middle District of Florida has dismissed federal securities and other claims asserted by Madoff investors. Dusek v. JPMorgan Chase & Co., No. 2:14-cv-184 (M.D. Fla. Sept. 17, 2015). The decision applies and enforces key principles of federal securities law that, taken together, limit the scope of liability for financial institutions sued in connection with frauds perpetrated by their customers, especially Ponzi schemes.


Circuit Split on Dodd-Frank Act Whistleblower Provision

Aaron M. Katz and Eva Ciko Carman are partners at Ropes & Gray LLP. This post is based on a Ropes & Gray Alert.

On Thursday, September 10, 2015, the United States Court of Appeals for the Second Circuit issued its highly anticipated decision in Berman v. Neo@Ogilvy LLC. The plaintiff-appellant, Daniel Berman, had been the finance director of Neo@Ogilvy. Mr. Berman’s lawsuit alleged that Neo@Ogilvy had unlawfully terminated him because he had reported internally, to senior company officers, supposed violations of GAAP and other accounting irregularities. The question of law presented was whether the Dodd-Frank Act’s whistleblower anti-retaliation provision offers protection to an employee who, like Mr. Berman, is fired after he reports possible financial misconduct internally but before he makes a report to the SEC. The district court had answered that question in the negative and dismissed Mr. Berman’s wrongful termination lawsuit. On appeal, the SEC, participating as amicus curiae, argued that the Dodd-Frank Act’s statutory language is ambiguous and that the SEC’s agency regulation answering that question in the affirmative, Exchange Act Rule 21F-2, is a reasonable interpretation of the statute. The Second Circuit agreed with the SEC, thereby creating a circuit split on the issue and raising the possibility that the Supreme Court will soon weigh in.


D.C. Circuit Rules Against Conflict Minerals Disclosure Requirement

The Honorable Mario Mancuso is a corporate partner and of the International Trade and Investment Practice at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication authored by Mr. Mancuso, Michael T. Gershberg, and Jocelyn Ryan.

On August 18, 2015, a divided three-judge panel of the U.S. Court of Appeals for the D.C. Circuit confirmed its earlier ruling striking down part of the Securities and Exchange Commission’s (“SEC”) Conflict Minerals Rule (the “Rule”) as unconstitutional. Nat’l Ass’n. of Mfrs. v. SEC, No. 13-5252 (D.C. Cir. Aug. 18, 2015). The court again held that requiring issuers to describe their products as “not been found to be ‘DRC conflict free’” in reports filed with the SEC and posted on issuers’ websites violates the First Amendment.

The Decision

The ruling dealt only with the requirement in the Rule that issuers characterize their products using the label “not been found to be ‘DRC conflict free,’” and the court held that this requirement amounts to compelled speech in violation of the First Amendment’s right to freedom of speech. The decision is a narrow one and leaves unaffected the remaining disclosures required under the Rule, such as disclosure of facilities used by the issuer, country of origin of the issuer’s products and the efforts undertaken by the issuer to obtain such information.


Price Impact in Securities Class Actions Post-Halliburton II

Jorge Baez and Dr. Renzo Comolli are Senior Consultants at NERA Economic Consulting. This post is based on a NERA publication authored by Mr. Baez and Dr. Comolli. Related research from the Program on Corporate Governance includes Rethinking Basic by Lucian Bebchuk and Allen Ferrell (discussed on the Forum here).

On July 25, 2015, the United States District Court for the Northern District of Texas issued the much-anticipated ruling on class certification in Erica P. John Fund, Inc. v. Halliburton Co. The economic analysis of price impact was front and center in the Court’s ruling.

This ruling follows the Supreme Court’s decision on price impact that is widely known as Halliburton II. Although this ruling involves facts that are unique to Halliburton’s particular disclosures, attorneys may look at it as a roadmap for guiding economic analysis of price impact in future cases in the post-Halliburton II world.


D.C. Circuit Court Upholds Conflict Minerals Decision

Richard J. Sandler is a partner at Davis Polk & Wardwell LLP and co-head of the firm’s global corporate governance group. This post is based on a Davis Polk client memorandum.

In the ongoing challenge to the SEC’s conflict minerals rule, the D.C. Circuit Court of Appeals, in a 2-1 decision, issued an opinion on August 18 upholding its April 2014 finding that a key aspect of the rule violates constitutional free-speech guarantees, a decision we discussed in this client newsflash.

Last year, the SEC asked the D.C. Circuit to rehear the case in light of the outcome of an unrelated First Amendment lawsuit, American Meat Institute v. United States Department of Agriculture, which addressed the proper standard of review for compelled commercial speech. Stating that it saw no reason to change its analysis in light of the American Meat decision, the court affirmed that it would adhere to its original judgment that portions of the Dodd-Frank Act, under which the rule was promulgated, and the SEC’s final rule, “violate the First Amendment to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have ‘not been found to be ‘DRC conflict free.’’”


Federal Court Injunction Against SEC Prosecution

John J. Falvey, Jr. and Daniel J. Tyukody are partners in the Securities Litigation & White Collar Defense Group at Goodwin Procter LLP. This post is based on a Goodwin Procter Financial Services Alert.

A federal judge in Manhattan recently granted a preliminary injunction against the Securities and Exchange Commission in the latest of a series of rulings raising issues with the SEC’s use of in-house proceedings before its administrative law judges (“ALJs”) rather than proceed with its charges in federal court. The SEC has prevailed more frequently in its administrative proceedings than it has in federal court, where defendants have more robust procedural rights. This ruling by a judge in the Southern District of New York indicates the federal courts’ ongoing concerns with the SEC’s increased preference for administrative proceedings before its own ALJs. But the SEC has the ability to correct the constitutional flaw that the court found to exist with its appointments of ALJs, suggesting that this and similar rulings will likely only raise a short-term disruption of the SEC’s use of its in-house courts.


Court Strikes NYC’s “Responsible Banking Act”

Robert J. Giuffra, Jr. is a partner in the Litigation Group at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication by Mr. Giuffra, H. Rodgin Cohen, Matthew A. Schwartz, and Marc Trevino.

On August 7, 2015, in a 71-page opinion, Judge Katherine Polk Failla of the United States District Court for the Southern District of New York struck down New York City Local Law 38 of 2012, entitled the “Responsible Banking Act” (“RBA”), as preempted by federal and state banking law. The RBA—enacted by the City Council on June 28, 2012, over Mayor Bloomberg’s veto—established an eight-member Community Investment Advisory Board (“CIAB”), charged with collecting data at the census-tract level from the 21 banks eligible to receive some of the City’s $150 billion in annual deposits. This data, which went beyond data required by federal and state banking regulators and would be disclosed publicly, covered a variety of categories ranging from the maintenance of foreclosed properties, to investment in affordable housing, to product and service offerings. Based on the data collected and feedback from public hearings, the CIAB was to develop “benchmarks and best practices” against which the deposit banks were to be evaluated, including against each other, in a publicly filed annual report. The report was to identify deposit banks that refused to provide the requested data. Finally, the RBA provided that the City’s Banking Commission—responsible for designating eligible deposit banks—“may” consider the CIAB’s annual report in making its designation decisions.


Securities Class Action Filings—2015 Midyear Assessment

John Gould is senior vice president at Cornerstone Research. This post is based on a report from the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research; the full publication is available here.

Plaintiffs brought 85 new federal class action securities cases in the first half of 2015, according to Securities Class Action Filings—2015 Midyear Assessment, a report compiled by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse. This represents a decrease from the second half of 2014, when plaintiffs filed 92 securities class actions. The number of filings in the first six months of 2015 remains 10 percent below the semiannual average of 94 observed between 1997 and 2014—the seventh consecutive semiannual period below the historical average.

Despite this period of little overall change in filing activity, securities class actions against companies headquartered outside the United States increased in the first half of 2015. Twenty filings, or 24 percent of the total, targeted foreign firms. Asian firms were named in more than half of these cases.


D.C. Circuit Upholds Privilege For Internal Investigation Documents

John F. Savarese is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savarese, Peter C. Hein, and David B. Anders.

Earlier this week, the D.C. Circuit Court of Appeals for the second time granted a writ of mandamus and vacated district court orders that would have provided for the disclosure of privileged documents created in the course of a company’s internal investigation. In Re Kellogg Brown & Root, Inc., No. 14-5319 (Aug. 11, 2015).

As noted in our prior memo, in a 2014 decision in this same case the D.C. Circuit granted a writ of mandamus and made clear that a proper application of privilege principles would protect documents created in the course of a company’s internal investigation—even if the investigation was conducted by in-house counsel without outside lawyers, even if non-attorneys (serving as agents of attorneys) conducted many of the interviews, and even if the internal investigation was conducted pursuant to a company compliance program required by a statute or government regulation (and thus arguably had in part a business purpose in addition to the purpose of obtaining or providing legal advice).


Court Rules on Halliburton II

Jonathan C. Dickey is partner and Co-Chair of the National Securities Litigation Practice Group at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication. Related research from the Program on Corporate Governance includes Rethinking Basic by Lucian Bebchuk and Allen Ferrell (discussed on the Forum here).

On July 27, 2015, the U.S. District Court for the Northern District of Texas issued its anticipated decision on remand from Halliburton, Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II“), where the United States Supreme Court held that a defendant in a securities fraud class action could introduce evidence of a lack of price impact at the class certification stage to show the absence of predominance. Although the case involved facts that arguably are unique to Halliburton’s particular public disclosures, the plaintiffs’ bar may look to the decision as a roadmap for how to meet the Supreme Court’s price impact test in future cases.

Based on the expert evidence presented on remand, the District Court granted the Plaintiffs’ motion for class certification as to one alleged corrective disclosure but denied the motion as to the other five alleged corrective disclosures. Erica P. John Fund, Inc. v. Halliburton Co., No. 3:02-CV-1152-M, slip op. at 1 (N.D. Tex. July 25, 2015). And as to that one disclosure, the court declined to entertain at the class certification stage Halliburton’s argument that the disclosure was not corrective of the alleged misrepresentation. While there may be continued debate regarding certain of the court’s legal conclusions—including whether a court may properly consider at class certification whether a disclosure was even corrective—the opinion demonstrates what most defendants argue Halliburton II requires: a careful and thorough analysis of defendant’s evidence of a lack of price impact. Beyond that, the court’s ruling may raise more questions than it answered.


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