Highlights from the September 2016 Issue of the Securities Reform Act Litigation Reporter

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The most noteworthy decisions this month are the following:

  • In In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, No. 12-4671 (2nd Cir. June 30, 2016, the U.S. Court of Appeals for the Second Circuit reversed the district court’s approval of a settlement of antitrust class actions brought a decade ago by millions of merchants against Visa and MasterCard. In the original actions in the district court, plaintiffs alleged that the networks’ interchange fee and other rules were illegal restraints in violation of the Sherman Act. After years of litigation, the parties reached a settlement that would have released all claims in exchange for monetary relief of up to $7.25 billion—the largest antitrust cash settlement in history—and injunctive relief relating to future conduct. The re-opening of the settlement will result in further delay in resolution of a litigation involving the disparate interests of millions of retailers.
  • In Cottrell v. Duke, No. 15-1869 (8th Cir. July 22, 2016), owners of shares of Wal-Mart Stores, Inc. (Wal-Mart) sued directors and officers of the corporation, accusing them of breaking state and federal law by permitting and then covering up pervasive bribery committed on behalf of Wal-Mart’s Mexican subsidiary, Wal-Mart de Mexico (Wal-Mex). Because the shareholders sought to enforce rights belonging to Wal-Mart, Federal Rule of Civil Procedure 23.1 required them to explain why they did not first ask the board of directors to cause the corporation to pursue the suit itself. The shareholders claimed it would have been futile to go to the board with such a demand because a majority of the directors would face “‘a substantial likelihood’” of personal liability from a lawsuit brought by the corporation. The Court agreed with the district court that the shareholders’ allegations were insufficient because they did not support “reasonable factual inferences,” that a majority of the directors learned of the suspected bribery before word of a New York Times investigation got out and Wal-Mart began scrambling to do what it allegedly should have been doing from the beginning. The shareholders had not identified any particular meetings or reporting between Hernandez, the audit committee, and the rest of the board, either individually or as a whole. Instead, the Court concluded, “they ask this court first to assume that Hernandez made such reports, because he was supposed to under the audit committee charter, and then to rely on the same reporting obligation to draw further inferences about what his hypothesized reports said. That is more than the Delaware decisions can support.” The Court therefore affirmed the dismissal of the complaint.
  • In In re Deutsche Bank AG Sec. Litig., No. 09 cv 1714 (DAB) (S.D. N.Y. July 25, 2016), after several failed attempts to assert Section 11 claims against an issuer for several securities offerings between 2006 and 2008, plaintiffs finally were able to adequately allege that the issuer—which had significant holdings of mortgage-backed securities and collateral debt obligations—failed to disclose its exposure to risk from the falling mortgage-based securities market for two offerings in November 2007 and February 2008. Denying in part the defendants’ motion to dismiss, District Judge Batts held that the plaintiffs plausibly alleged facts sufficient to show that the issuer, by the fall of 2007, knew of trends or uncertainties that would be reasonably likely to have a material impact on the issuer. By failing to disclose such trends or uncertainties in the offering materials, the issuer failed to satisfy its duty under Item 303 of Regulation S-K. The court ruled that disclosures in the company’s SEC filings were too generic and unconnected to the company’s financial position to fulfill its duty under Item 303.
  • In KBC Asset Management NV v. 3D Systems Corp., No. 0:15-CV-02393-MGL (D. S.C. July 25, 2016), an investor serving as lead plaintiff was able to adequately allege securities fraud claims that the defendants made statements that misled the market about the progress of an acquisition strategy and the ongoing strength of the company. Denying the defendants’ motion to dismiss, District Judge Lewis held that the plaintiff had identified several alleged misrepresentations and omissions concerning the company’s manufacturing capacity, product quality, sales and revenue growth projections, inventory control, and booking and shipping practices with adequate particularity. The statements and omissions were material because they would have altered the total mix of information available to investors. Contrary to the defendants’ position, not all of the alleged statements were forward-looking, and therefore the PSLRA’s safe harbor did not apply.
  • In Menzies v. Seyfarth Shaw LLP, No. 15 C 3403 (N.D.Ill. July 15, 2016), a plaintiff who allegedly was defrauded into using a tax avoidance scheme in an ultimately unsuccessful attempt to avoid capital gains taxes—leaving him with a tax bill for over $10 million—failed to adequately allege a pattern of racketeering. Dismissing the RICO claims with leave to replead, District Judge Blakey held that, though the plaintiff had alleged complex transactions involving multiple acts of mail and wire fraud over a substantial period, he had alleged only a single scheme with a single victim. Any amended complaint would be assessed with a view to whether the plaintiff alleged the existence of other victims or the manner in which he or others suffered distinct injuries resulting from the alleged scheme.
  • In In re Bear Sterns Companies, Inc. Securities, Derivative and ERISA Litigation, Master File No. 08 MDL 1963 (RWS) (S.D. N.Y. July 25, 2016), the Southern District of New York rejected the materialization of the risk “leakage” theory of loss causation. It found that the leakage theory is not generally accepted by the courts or the scientific community, and that plaintiff’s expert’s methodology was fatally flawed because it failed to adequately account for the impact of non-fraud related information. Plaintiff’s expert’s report that relied on the leakage theory of loss causation was excluded. However, even though plaintiff failed to establish loss causation via the leakage theory, the court found that there was a genuine issue of material fact with respect to loss causation as a result of the alleged corrective disclosures.
  • In SEC v. Goldstone, No. 12-0257 (D. N.M. June 13, 2016), the U.S. Securities and Exchange Commission (SEC) brought an enforcement action alleging securities fraud against the former officers of the now defunct Thornburg Mortgage, once the second largest independent mortgage company in the country. The SEC claimed the defendants intentionally misrepresented the financial state of the company in its annual filings with the agency in 2008. The defendants moved to prevent the government from introducing any evidence at trial about the defendants’ wealth, and to exclude evidence about their salaries from 2007 to 2009. The court granted the motion in part, excluding all evidence of assets as irrelevant to the dispositive issues in the case. However, the court ruled that it would allow evidence on income because the defendants “earned high salaries, dividends on earnings and bonuses which were directly dependent upon the inflated numbers and financial data that they allegedly misrepresented.” As such, the probative value of the income evidence outweighed the potential prejudicial effect to the defendants.
  • In Meyer v. Kalanick, No. 15 Civ. 9796 (S.D.N.Y July, 29, 2016), the Defendant, Uber, filed a motion to compel arbitration in an anti-trust lawsuit, arguing that the plaintiff consented to binding arbitration when he registered to use the mobile ride-sharing application. At issue is whether the contract provided the plaintiff with “reasonably conspicuous notice” of the contract terms and whether the plaintiff manifested assent to those terms. The court ultimately concluded that the manner in which Uber presented its “Terms of Service” did not put the plaintiff on notice that by using the application, he agreed to binding arbitration, effectively waiving his right to a jury trial. In particular, the court noted the following deficiencies in Uber’s registration process: (1) the plaintiff’s consent to the contract terms, including the arbitration clause, was not a condition of using the Uber application; (2) the contract terms did not appear on the user’s screen and could only be accessed by clicking through two sets of hyperlinks; and (3) the size and placement of the hyperlink to the user agreement was considerably less prominent than other prompts on the registration screen. Therefore, the court held that the arbitration clause was not binding on the plaintiff, finding that Uber failed to provide reasonable notice of contract terms.
  • In Jeter v. Revolutionwear, Inc., C.A. No. 11706-VCG (Del. Ch. July 19, 2016), Vice Chancellor Glasscock of the Delaware Chancery Court said that the “unique marketing strategy” involved in this case provided “a cautionary tale of the mixing of roles in a corporate-governance setting.” Revolutionwear Inc. brought Yankee shortstop Derek Jeter into the company as a 15% owner and director in order to use Jeter’s position in the company as a marketing tool. Jeter made representations in his Director Agreement that he would allow Revolutionwear to promote his role with the company, and that such marketing would not conflict with his pre-existing contract with Nike. The company alleged that Jeter nevertheless refused to allow a pledged promotional press release, and that Jeter’s material representations regarding the Nike contract were false. It also alleged that Jeter tried to use his position as director to promote his own business interests and get control of the company.
  • In In re Riverstone National Inc. Shareholder Litigation, Consol. C.A. No. 9796-VCG (Del. Ch. July 28, 2016), the Chancery Court of Delaware allowed ex-shareholder plaintiffs’ suit to go forward against directors who allegedly facilitated a merger that extinguished a derivative shareholder action against them for usurpation of a corporate opportunity. The plaintiffs adequately pleaded that the directors received a material benefit from the merger that was not shared by the common stockholders, and that the entire fairness standard applied to the merger. Defendants’ motion to dismiss was denied.
  • In In re Xoom Corp. Shareholder Litigation, Consol. C.A. No. 11263-VCG (Del. Ch. Aug. 4, 2016), the Chancery Court awarded $50,000 in attorneys’ fees to plaintiffs who had requested $275,000 for bringing a stockholder lawsuit that resulted in four supplemental disclosures, mooting those claims. The Court noted that in such mootness cases, where other class members are not precluded from bringing suit, the standard is benefit to the class, not materiality; here, the disclosures produced a “modest benefit” to stockholders. The plaintiffs voluntarily dismissed the action with prejudice as to the plaintiffs only, reserving the right to a mootness fee. Plaintiffs then filed an application requesting $275,000 in fees for 63 attorney hours, or approximately $4100 per hour. The court awarded fees of approximately $800 per hour.
  • In Sandquist v. Lebo Automotive, No. S220812 (Cal. July 28, 2016), the plaintiff was a former employee of the Defendant, Lebo Automotive, where he worked as a car salesman. As a condition of employment, he signed a contract in which he agreed to arbitrate disputes arising out of his employment with the company. In 2012, the plaintiff filed suit alleging racial discrimination “on behalf of a class of current and former employees of color.” The parties disputed whether a court or an arbitrator had jurisdiction to decide if class-wide arbitration was permissible in this case where the agreement was ambiguous. Relying on long-standing rules of contract interpretation, the Supreme Court of California held that an arbitrator must decide the question on the availability of class-wide arbitration.


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