Securities Litigation Outline

University of San Diego School of Law
Securities
Professors Michael P. McLoskey & John Stiska
Author Coffee
Fall 2011
 
 
INTRODUCTORY CASES
Mutual Funds Investment Litigation v. Janus – 4th Cir (Janus, Central Bank of Denver, Stoneridge Analysis)
 
Janus Capital Group v. First Derivative Traders
Facts:
First Derivative Traders bought shares of Janus Capital Group and filed a complaint against JCG and JCM (investment advisor to JCG)
Alleged 10b5 action – that JCG and JCM made a misleading material misrepresentation when they said they did not engage in market timing, that caused investors to lose money when the truth came out
Alleged that they bought shares at an inflated price due to the fraud that dropped when AG sued JCG.
Lots of evidence that Janus did engage in market timing
Market timing:
Foreign market closing prices are established before the NAV calculation, therefore the US fund prices do not take into account the changes that affect the foreign security.  If foreign securities increase in value, the NAV would be at an artificially low price.  The market timer can buy the shares at a low price and sell to make a profit.
Procedural History:
District court said that JCG’s distribution of the prospectus’ wasn’t enough to rise to “making a statement” for 10b5 (because they didn’t actually make the statement) and no claim against JCM because mutual fund investment advisors owe no duty to its parent’s shareholders.
Rule:
10b – unlawful for any person, directly or indirectly, to use IC to employ, in connection with a purchase or sale, any manipulative or deceptive device
10b5-  unlawful to employ any device, scheme or artifice to defraud, to make a material misstatement or omission, to engage in any act which operates as a fraud or deceit in connection with purchase or sale of security.
Elements of 10b
Material misrepresentation or omission by D
Scienter
Connection between the fraud and the purchase or sale
Reliance on the fraud or omission
Economic loss
loss causation (loss proximately caused by the misrepresentation or omission)
Issue here – Reliance and Loss Causation
Issue: 
To satisfy a 10b5 action, to prove reliance using the fraud on the market theory, a plaintiff must prove that the defendant made a public misrepresentation, or, in other words, a public statement that is attributable to defendants. 
When entities do not explicitly name themselves as drafters of the misrepresentation, can attribution to defendants be satisfied when interested investors would have known that the defendant was responsible for the statement at the time it was made (even when the statement on its face is not directly attributable to the D)?
Held:
Attribution of the statement (to satisfy the FOTM presumption and reliance) is analyzied by considering whether interested investors would attribute a substantial role in preparing or approving the alleged misleading statement to the D.
Therefore, because JCM was an investment advisor to JCG, because it was responsible for the day to day management of the portfolio, furnished advice re the funds’ investments, and runs JCG with the same excecutives, and because most of a mutual funds operations are carried out by an advisor, and because JCG and JCM held themselves out as “Janus”, interested investors would infer that JCM played a role in preparing or approving the content of the Janus prospectuses, particularly the part about the funds policies.
Interested investors would infer that even if JCM had not written the policies, it would have approved them.
(Court also finds Loss Causation).
Analysis – Janus and Central Bank of Denver
 Janus is an extension of the proposition in CBOD:
A defendant can’t be liable under 10b5 absent a showing that the plaintiff relied on the defendants statements or actions (CB was just a trustee)
Court also says that secondary actors in the markets can be liable (like a lawyer, accountant or bank) when they employ a material device or makes a misstatement on which a purchaser or seller of securities relies as long as they satisfy all of the elements of 10b5.
Wright: interprets CB to say that a defendant ahs to make a false or misleading statement to be liable under 10b5 – anything else is aiding and abetting.
CB and Wright left open the question that, in order ot have reliance in a 10b5 by a “secondary actor” – does the defendant have to actually make the statement, or is it enough that the investor would infer that the statement was attributable (drafted or approved by ) to the secondary actor?
2nd circuit holds that “a defendant must know or should know that his representation would be communicated to investors” – leans towards latter
11th cirtuit and 1st circuit also use the “public attribution test” to see whether the D made a statement to satisfy reliance
the 9 th circuit does not require public attribution to plead reliance – only substantial involvement or intricate involvement in preparing the statement is sufficient to state a primary violation of 10b.
This court says that in order for “other” parties to be liable under 10b5, we should follow central bank and see when the “other party” makes a misstatement which the P relies and satisfies the elements of 10b5.
In order to prove reliance, we can say that the statement must be publicly attributable to the D – and this includes when an investor would infer that the statement was made by or approved of “another group”
Janus and Stoneridge
Stoneridge held that suppliers could not be liable under 10b5 because there were too many intervening events between the fraud and the statements. Didn’t rule out scheme liability but the connection here was too remote to satisfy reliance
Can argue that in Janus the scheme was more related to JCM and can satisfy reliance because they drafted or approved the statement
Can say that the JCM were the proximate cause because they drafted the statement
This case differs from SR – in that case the suppliers didn’t make the statements, they were only responsible for the transactions under the statements –
SR said FOTM doesn’t apply to transactions but this doesn’t control to a situation where the misstatements are public and only wondering whether the public would have attributed the statemetns to a D
 
Janus Appeal Analysis
In Central Bank, the Supreme Court eliminated aiding and abetting liability in private lawsuits under 10b5, holding that “other parties,” or “secondary actors” can only be liable under 10b5 if all the elements of primary liability are met
An “other party” is a party that assists in the making of a public statement by drafting or approving statements made before their publication, but doesn’t publish the statement or is not the group about whom the statements are about.
Plaintiffs have argued that Central Bank leaves an open question as to when an “other party” satisfies the elements of primary liability under 10b
Fourteen years later, in Stoneridge, the Court held that a secondary actor that does not make a misstatement or engage in a manipulative act can’t be held liable under 10b5 (Scientific Atlanta and Motorolas “transactions” were not statements). Court held that for 10b liability to attach in cases alleging fraud on the market theory of reliance, the actor has to make a public statement.
Janus raises 2 questions:
Whether an entity assists or participates in the drafting of a misrepresentation “makes” a misrepresentation for the purposes of 10b5 liability (like in Stoneridge).
Whether the misrepresentation must be “on its face” attributed to the defendant, or whether its sufficient htat an investor would infer that the defendant made the statement to satisfy the fraud on the market theory of reliance?
4th circuit:
JCM “made the statements” for 10b5 liabilty, and satisfied reliance under FOTM theory because it was reasonable that investors would attribute the statements to JCM. JCM effectively “ran the funds,” holding itself out as a single entity with JCG, and so its reasonable to infer that even if JCM did not draft the statements, they approved them.  Therefore, investors could have attributed the statement to JCM, and therefore JCM made a public statement upon which investors could rely.
SC:
Going to have to decide when “assisting in the drafting of, or approving” a material misstatement can constitute making a statement and therefore a secondary actor can be liable under 10b5.
This is the issue left open in CBOD  – that says that a secondary actor can be liable under 10b5 when it makes a statement.
o   Kruase thinks the plaintiffs will prevail – JCM made the statements and JCG is liable because of controlling person liability. Manager is responsible for what the fund disclosed.
 
Siracusano v. Matrixx – 9th Cir
Facts
P’s sued as a class under PSLRA 10b5 for failing to disclose information (filed lawsuit, studies) regarding Zicam cold rememdy in their prospectus
Good morning america show caused shares to drop 23%
P’s claimed that omitting information re link between zicam and asnomia was the omission of a material fact
K good facts: Matraixx said don’t use our name in a study or we will sue the drs making the study, also press release saying “insufficient evidence” that theres a link between their product and asnomia
Procedural History
DC dismissed the complaint because the allegations of complaints were not material because they were not statistically significant
Issue: Should courts reject a bright line approach to materiality or adopt  the statistically significant standard? Who decides materiality? Judge or jury?
 Will the statistically significant test for materiality prev