Securities Snapshot
September 26, 2017

Barclays Obtains Summary Judgment in Litigation Over 2008 ADS Offering

Southern District of New York grants summary judgment to defendants in long-running ADS offering case; mortgage company and CEO ordered to pay treble damages and civil penalties for FCA and FIRREA violations; Southern District of New York rejects Securities Exchange Act claims based on former employee’s fraudulent conduct; Central District of California finds that protective order in U.S. multidistrict litigation prevents sharing discovery with law firm representing DOJ in German litigation; Securities Exchange Act claims related to violations of FCPA withstand motion to dismiss; Southern District of New York dismisses shareholder suit alleging misleading disclosures about tax implications of possible divestiture; Northern District of California rules that defendants waived privilege by disclosing investigatory report to SEC.

Barclays Obtains Summary Judgment In Litigation Over 2008 ADS Offering

The U.S. District Court for the Southern District of New York recently granted summary judgment in favor of the defendants in In re: Barclays Bank PLC Securities Litigation, a case that has been pending for more than eight years.  The plaintiff filed suit on behalf of purchasers of the April 8, 2008 public offering of American Depository Shares by Barclays, claiming violations of Sections 11 and 15 of the Securities Act of 1933 based upon alleged misrepresentations and omissions in the offering documents concerning “Barclays’ exposure to risky credit market assets.”  Specifically, among the various alleged misstatements, the plaintiff claimed that Barclays failed to disclose that only some of its CDOs were insured and that the securities had lost approximately $2 billion in value over the course of four months.  Taking each alleged misstatement in turn, Judge Paul A. Crotty concluded that the alleged misrepresentations were not actionable when read in context of the entire disclosure or were immaterial as a matter of law.  With respect to the alleged omissions, the court found that Barclays either had no duty to disclose the allegedly omitted information or that the disclosure at issue fulfilled Barclays’ duty.   Judge Crotty also found that, even if some of the alleged misstatements were actionable, they were nonetheless barred based on Barclays’ affirmative defense of negative loss causation.  Specifically, Barclays had submitted an expert report by Dr. Allan Kleidon, which described an event study and concluded that the ADS price declines were attributable to factors other than the misrepresentations alleged by the plaintiff.  The court found this report persuasive and held that summary judgment based on negative loss causation was appropriate because the alleged misstatements had “minimal materiality” and the market failed to react in any discernible way to the collective revelations.

Southern District of Texas Orders Treble Damages in FCA/FIRREA Suit

In U.S. v. Americus Mortgage Corp., following a five-week trial, the U.S. District Court for the Southern District of Texas recently ordered Americus Mortgage Corporation (formerly known as Allied Home Mortgage Capital Corporation) and its CEO Jim C. Hodge to pay treble damages and maximum civil penalties for violations of the False Claims Act and Financial Institutions Reform, Recovery and Enforcement Act.  The evidence at trial revealed that defendants had engaged in a scheme to issue fraudulent FHA-insured mortgage loans, which eventually caused the federal government to sustain more than $90 million in damages.  Judge George C. Hanks, Jr., concluded that treble damages were warranted, in part, because “[r]ather than making an isolated or occasional mistake, [defendants] engaged in a prolonged, consistent enterprise of the defrauding the United States.”  The court also found significant and credible evidence that the damages were the foreseeable consequence of the defendants’ misconduct.  Accordingly, the court ordered that the FCA damages be trebled to nearly $280 million.  In addition, the court imposed civil penalties of $10,000 for each of the 1,192 FCA violations, for a total of nearly $12 million.  Finally, the court imposed FIRREA civil penalties of $1.1 million for each false annual certification and false quality control document.  In total, the defendants were ordered to pay $298 million in damages and penalties as a result of the FCA and FIRREA violations.

Southern District of New York Dismisses SeCURITIES Exchange ACt Claims based on Former Employee’s Fraudulent Conduct

In a recent decision, the U.S. District Court for the Southern District of New York granted defendants’ motion to dismiss in Barrett v. PJT Partners, Inc.  PJT is a New York-based investment bank, and its Park Hill unit provides placement and secondary advisory services to private equity funds, hedge funds, and real-estate investment funds.  Between 2014 and 2016, one of Park Hill’s partners, Andrew W. W. Casperson, defrauded investors of approximately $38.5 million.  Following disclosure of the fraud, PJT’s stock price dropped 10%, and the plaintiff filed suit against PJT and certain of its officers and directors, asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.  In particular, the plaintiff alleged that the defendants had failed to disclose Casperson’s fraud and made misleading statements about PJT’s internal controls and client relationships.  Judge Valerie Caproni found that the plaintiff had failed to plead adequately any material omission or false statement, concluding that PJT’s statements about its “deep and long-standing investor relationships” and the statements contained in PJT’s Code of Conduct were mere puffery.  The court further rejected the plaintiff’s allegation that the company’s Sarbanes-Oxley Act certifications concerning its internal controls were materially false.  Finally, the court also held that none of the complaint’s circumstantial evidence of inadequate controls and alleged “red flags” supported a cogent inference of scienter.  Judge Caproni granted leave to move to file a second amended complaint but expressed skepticism that the plaintiff could cure the fundamental flaws in his pleading.

Northern District of California Rejects DOJ’s Request to Share VOLKSWAGEN Discovery with German Law Firm

On September 15, 2017, the U.S. District Court for the Northern District of California rejected the U.S. Department of Justice’s request to share discovery obtained in connection with the In re: Volkswagen “Clean Diesel” Marketing, Sales Practices, and Products Liability Litigation.  The emissions test scandal has spawned numerous lawsuits not only in the United States, but in Germany as well, including a suit brought by the Civil Division of the U.S. DOJ on behalf of federal employees seeking to recover losses to their retirement plan that traded on the Frankfurt Stock Exchange.  The DOJ sought permission to share discovery obtained pursuant to the U.S. multidistrict litigation with the law firm representing the United States in the German lawsuit.  Analyzing the protective order governing discovery in the multidistrict litigation, Magistrate Judge Jacqueline S. Corley found that the default rule under Section 7.5 of the protective order expressly prohibits disclosure of discovery in actions outside the United States.  In reaching this conclusion, the court noted that German discovery laws are stricter than their United States counterparts and that any discovery shared with the DOJ’s German law firm would like become part of the public record accessible to plaintiffs in more than 1,600 other German lawsuits filed against Volkswagen.  Accordingly, the court denied the DOJ’s request. 

Southern District of New York Permits SECURITIES Exchange Act Claims based on Violations of FCPA to go Forward

In In re VEON Ltd. Securities Litigation, the U.S. District Court for the Southern District of New York denied defendant’s motion to dismiss for failure to state a claim.  The plaintiff filed suit against VEON and a number of its executives alleging claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, based on VEON’s violations of the Foreign Corrupt Practices Act.  In particular, the plaintiff alleged that the telecommunications company’s payment of more than $32 million in bribes to the daughter of Uzbekistan’s president in exchange for access to the Uzbek market rendered the company’s disclosures concerning its financial success false and misleading. The defendants moved to dismiss, arguing that the complaint was an improper attempt to enforce the FCPA, which has no private right of action, and that a company is not required to disclose uncharged wrongdoing.  Judge Andrew L. Carter, Jr., rejected the defendant’s argument that the plaintiff failed to state a claim because the FCPA provides no private right of action, finding that the alleged misstatements in the company’s public filings were “sufficiently distinct to avoid any potential concern that [p]laintiffs are seeking to enforce the FCPA.”  Noting that accurately reported income derived from illegal sources is not actionable while false or misleading disclosures that implicate the source of such income are, the court concluded that statements about the reasons for the company’s growth in the Uzbek market fell squarely in the second category.  The court went on to hold that the plaintiffs’ internal controls allegations were specific and backward-looking, and were therefore not mere puffery, nor were they protected by the safe harbor for forward-looking statements.  Finally, the court went on to find that the plaintiffs had adequately pleaded both scienter and loss causation.

Southern District of New York Rejects Shareholder Claims Following Controversial Tax Inversion Merger

On September 20, 2017, the U.S. District Court for the Southern District of New York granted the defendants’ motion to dismiss the complaint in In re Eaton Corporation Securities Litigation.  The plaintiffs had alleged claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connection with Eaton Corporation plc’s 2012 tax inversion merger with Irish-headquartered electrical products manufacturer, Cooper Industries, plc.  Following the merger, industry analysts began speculating whether Eaton would divest its automotive business.  Despite discussion in the industry of the possible spin-off, the company never disclosed any intention of doing so and repeatedly reassured the market that it had no plans to spin-off the vehicle business.  Nevertheless, the plaintiffs argued that Eaton defrauded shareholders by failing to disclose until 2014 that the merger between Eaton and Cooper effectively eliminated any possibility of divestiture because doing so would not be tax-free.  At the outset, Judge John G. Koeltl rejected the plaintiffs’ attempt to expand the class period from eight months to over two years, finding that the plaintiffs essentially sought to add parties to the suit which is not permitted by the Federal Rule of Civil Procedure governing amendment of pleadings except where there is a mistake in identity, an argument plaintiffs did not assert.  Further, the court concluded that none of the alleged misstatements or omissions were materially false or misleading, explaining that the “defendants were under no duty to disclose the hypothetical tax consequences of a potential spin-off of Eaton’s automotive business because the defendants themselves repeatedly made clear that the ‘indicated probability’ of such a spin-off was zero.”    

Northern District of California Compels Defendant to Turn Over Work Papers Underlying Investigation BECAUSE REPORT DISCLOSED TO THE SEC

In a recent decision in Luna v. Marvell Technology Group Ltd., the U.S. District Court for the Northern District of California granted the plaintiffs’ motion to compel, ordering the defendants to produce interview memoranda and KPGM work papers underlying Marvell’s audit committee investigation and subsequent presentation to the SEC concerning its accounting practices in late 2015 and early 2016.  In the civil litigation, the plaintiffs allege that the defendants issued materially false and misleading statements about the company’s accounting practices and internal controls in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.  In reaching his determination, Judge William H. Alsup concluded that the defendants had waived the privileged nature of the underlying work papers by disclosing the final investigatory report to the SEC.