Securities Snapshot
February 13, 2018

The Ninth Circuit Clarifies the Appropriate Standard for Pleading for Loss Causation

The Ninth Circuit clarifies the appropriate standard for pleading loss causation under the Securities Exchange Act of 1934; the District of Minnesota certifies shareholder class that had previously been dismissed; RMBS put-back case survives summary judgment in the Southern District of New York; a New York federal judge refuses to seal supplemental agreements in $3 billion securities class action settlement; and three district court judges deny class certification to investors in RMBS cases.

On January 31, 2018, the Ninth Circuit Court of Appeals, in Mineworkers Pension Scheme, et al., v. First Solar, Inc., affirmed a district court decision denying in part the defendants’ motion for summary judgment, holding that a plaintiff can establish loss causation by proving that “the defendant misrepresented or omitted the very facts that were a substantial factor in causing the plaintiff’s economic loss,” even if the alleged fraud was not itself disclosed to the market before the plaintiff suffered the loss. Shareholders of First Solar, a producer of photovoltaic solar panels, filed suit against First Solar and several of its officers and directors for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5, promulgated thereunder. The plaintiffs alleged that First Solar concealed product defects and reported false information in its financial statements. The plaintiffs further alleged that First Solar’s stock fell following disclosures of defects and disappointing financial results, although the alleged misrepresentations had not yet been revealed. After partially denying summary judgment, the district court certified for interlocutory appeal a question as to the correct test for loss causation under the 1934 Act in the Ninth Circuit. On appeal, the Ninth Circuit considered whether a plaintiff could prove loss causation “by showing that the very facts misrepresented or omitted . . . were a substantial factor in causing the plaintiff’s economic loss” or if the “market actually had to learn that the defendant engaged in fraud and react to the fraud itself.” In affirming the district court’s decision, the Ninth Circuit observed that the test for loss causation under the 1934 Act is the same as “the familiar test for proximate cause” and is “fact-specific.” According to the panel, a plaintiff can prove loss causation if the losses precede the revelation of a misrepresentation provided the plaintiff can show that its losses were caused by “the very facts about which the defendant lied.” The “ultimate issue,” the panel ruled, “is whether the defendant’s misstatement, as opposed to some other fact, foreseeably caused the plaintiff’s loss.” Because losses must be causally tied to the “very facts” that allegedly were misrepresented and not anything else, plaintiffs in the Ninth Circuit will continue to face substantial challenges in pleading and proving loss causation, particularly in cases where losses are not preceded by the disclosure of a misrepresentation.


The U.S. District Court for the District of Minnesota recently certified a shareholder class in West Virginia Pipe Trades Health & Welfare Fund, et al. v. Medtronic Inc., et al., after the plaintiffs’ claims were revived by the Eighth Circuit Court of Appeals. The plaintiffs originally filed suit in 2013, alleging that Medtronic concealed defects with its Infuse bone graft products and paid authors to overstate the effectiveness of Medtronic’s products, and asserting claims against Medtronic for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. Judge John R. Tunheim of the District of Minnesota had previously dismissed those claims as time-barred, holding that the necessary information for the investors’ complaint had been made available more than two years before the plaintiffs filed suit in news articles and in a previously settled shareholder class action suit concerning off-label uses of Infuse. But the Eighth Circuit subsequently reversed, holding that the plaintiffs could not have proven Medtronic acted with scienter until the U.S. Senate Finance Committee issued a report in 2012 saying the device maker was “heavily involved” in editing medical journal articles and paid doctors who authored such articles hefty royalties. Upon remand to the district court, the plaintiffs moved to certify a class of investors who purchased Medtronic stock between September 8, 2010 and August 3, 2011. Although Judge Tunheim granted the plaintiffs’ motion to certify, he terminated the class period on June 28, 2011, finding that a corrective disclosure publicly revealed Medtronic’s payments to journal authors on that date. 


In Deutsche Bank Nat’l Trust Co. v. Morgan Stanley Mortgage Capital Holdings LLC, the U.S. District Court for the Southern District of New York denied the defendant’s motion for summary judgment, finding that there were disputed issues of fact that precluded resolution of the case prior to trial. Deutsche Bank, in its capacity as trustee for the MSST 2007-1 residential mortgage-backed securities (“RMBS”) trust, brought suit for damages it claimed the defendant caused to the trust by allegedly: (1) transferring materially breaching loans into the trust; and (2) failing to notify the trustee of those breaches. On summary judgment, defendant Morgan Stanley argued that the “sole remedy provision” in the Mortgage Loan Purchase Agreement, which provided that the “sole and exclusive” remedy for defective mortgages was to have the defendant “cure, purchase or substitute a qualifying replacement mortgage loan,” limited Deutsche Bank’s recovery in this action. The defendant argued that the plaintiff’s failures to comply with the strictures of the sole remedy provision “doom its claims for relief.” But Judge Katherine B. Forrest denied summary judgment, finding that the sole remedy provision may not be enforceable where the trustee has alleged gross negligence on the defendant’s part. Specifically, Judge Forrest noted that it is well-established under New York contract law that “a party may not insulate itself from damages caused by grossly negligent conduct.” And while acknowledging that the defendant disputed the trustee’s allegations, Judge Forrest held that it is “axiomatic that on summary judgment, the court’s task is to determine whether there exists a genuine dispute of material fact, not to weigh the evidence.” Just a few weeks earlier, Judge Forrest also decided to revive Deutsche Bank’s claim that Morgan Stanley had not fulfilled its obligations under the trust’s governing agreements to provide notice of breaching loans. This so-called “notice” claim had been dismissed by a different judge in 2015, but Judge Forrest held that “the law governing and interpreting RMBS contracts has been developing” and reinstated the claim. Finally, Judge Forrest ruled that statistical sampling is an appropriate method of attempting to prove both liability and damages at trial and declined to grant summary judgment on that issue, as well.


On February 6, 2018, the U.S. District Court for the Southern District of New York refused to seal three side agreements submitted by class counsel in connection with the motion to approve the proposed settlement in In re Petrobras Securities Litigation. The proposed $3 billion Petrobras settlement was submitted to the court for its approval on February 1, 2018. On February 5, counsel jointly telephoned the court and requested that two supplemental agreements and one side letter to the settlement be filed under seal or otherwise kept confidential. Two of the agreements provide mechanisms for certain of the defendants to terminate the settlement if opt-outs from the deal reach certain thresholds, while the third agreement includes provisions dealing with attorneys’ fees awarded by the court, such as what happens if those fees are later reduced or reversed on appeal. After U.S. District Judge Jed S. Rakoff denied the telephonic request, plaintiffs’ counsel sent the agreements to the court along with a letter laying out what were described as “strategic reasons” for seeking to keep the material confidential. The court, however, held that strategic concerns should play no role in determining whether or not documents should be sealed. In denying the request to seal, Judge Rakoff noted the “irony” in counsel requesting to seal agreements to settle a case that was premised on the defendants’ failure to disclose material information. It is unclear whether Judge Rakoff will require all supplemental agreements setting out the circumstances under which parties may exercise their rights to terminate securities class action settlements to be publicly filed going forward, or whether other judges in the Southern District of New York or elsewhere will follow suit, but such supplemental agreements have historically been allowed to remain confidential, and this ruling may signal a shift in that practice.


Judges in the U.S. District Court for the Southern District of New York recently found class certification inappropriate, on predominance grounds, in three different cases alleging damages from investments in residential mortgage-backed securities (“RMBS”). In Blackrock Core Bond Portfolio, et al. v. U.S. Bank National Association, the plaintiffs asserted various breach of contract and statutory claims against the trustee of 25 RMBS trusts, alleging almost $2 billion dollars in losses, and moved to certify a class of investors. Ruling from the bench, however, Judge Paul G. Gardephe found that class certification was inappropriate, because many of the potential class members had not suffered an injury. The court found there was no evidence of any injury for 21 of the 25 challenged trusts, leaving many of the class members without standing to sue. Similarly, a magistrate judge recommended that class certification be denied to plaintiffs alleging that Wells Fargo failed to properly manage RMBS in Royal Park Investments SA/NV v. Wells Fargo Bank, N.A. Magistrate Judge Sarah Netburn wrote that “the individual inquiries predominate[d] over issues common to the class,” because the proposed class members resided in different jurisdictions and owned the RMBS at different times, requiring fact intensive inquiries into which statute of limitations applied to each class member and which class members retained litigation rights, and which made valuation of class-wide damages difficult. Engaging in a similar analysis, Judge Lorna G. Schofield denied class certification to two proposed classes of investors in their RMBS claims against HSBC. The court held that the plaintiffs in Royal Park Investments SA/NV v. HSBC Bank USA, N.A. and Blackrock Balanced Capital Portfolio(FI), et al. v. HSBC Bank USA, N.A. failed to prove predominance, as some members of the proposed class were original certificate holders and others, including the named plaintiffs, sought losses incurred by previous certificate holders. Thus, similar to the proposed classes in U.S. Bank and Wells Fargo, there were individualized questions regarding standing and injury that made class certification inappropriate.