December 2012 Newsletter

INSIDE THIS ISSUE

•  Scott+Scott Settles Securities Fraud Case Against Pharmacia Corporation For $164 Million

•  Supreme Court To Hear Appeal On Mandatory Arbitration Clauses

•  Seventh Circuit Decision Clarifies Rule 23 “Predominance” Is A Question Of Efficiency And Judicial Economy

•  Regulators Seek To Strengthen Ethical Guidelines For Securities Brokers

•  Conferences and Educational Events

•  On The Record

 

Scott+Scott Settles Securities Fraud Case Against Pharmacia Corporation For $164 Million

On October 12, 2012, after nearly a decade of work, Scott+Scott obtained preliminary approval for a $164 million settlement involving a class of investors who sued pharmaceutical giants Pharmacia Corporation and Pfizer Inc. for securities fraud in 2003.  The case, Alaska Electrical Pension Fund v. Pharmacia Corp., No. 03-cv-1519, filed in the U.S. District Court for the District of New Jersey, claimed that Pharmacia misrepresented the results of a critical clinical safety study involving one of its flagship drugs, Celebrex.  Celebrex is marketed and prescribed for individuals with long-term pain and inflammation who require frequent management of these symptoms.

The complaint alleged that Pharmacia touted the results of its clinical studies, showing Celebrex could be prescribed for chronic pain and inflammation without harmful side effects to the stomach and gastrointestinal (“GI”) tract, such as ulcers, which traditionally accompany long-term use of other drugs in this class.  According to Pharmacia, the key distinction for Celebrex was not just its analgesic efficacy, but also its GI protection, a unique trait for a pain reliever designed to be taken for long periods of time by a patient.  Celebrex was particularly well-suited for such patients, according to Pharmacia, because unlike ibuprofen (Advil) or naproxen (Aleve), Celebrex could provide similar pain and inflammation reduction while preserving the protective lining of the stomach and GI tract.

As such, the GI protective nature of Celebrex became the primary reason that Celebrex was prescribed by physicians and used by patients, despite its higher cost to comparable drugs.  Celebrex quickly became a multi-billion dollar drug for Pharmacia, and for Pfizer, which subsequently acquired Pharmacia in 2002 and continued manufacturing Celebrex.

However, unbeknownst to prescribing doctors, patients, and the investing public, plaintiffs alleged Pharmacia was misrepresenting the results of its clinical studies involving Celebrex, and was deliberately skewing the data to make Celebrex appear more GI protective than it actually was.  Specifically, plaintiffs alleged that Pharmacia selectively published only favorable early study data showing Celebrex’s protective nature and withheld later data that contradicted that conclusion.

Ultimately, plaintiffs argued that the entire universe of data from Pharmacia’s studies actually showed that Celebrex was only marginally more GI protective than comparator drugs, and was even equal in some cases.  Plaintiffs further alleged that the GI protective benefits of Celebrex were highly overstated to justify its increased relative cost and to obtain favorable labeling for Celebrex from the U.S. Food and Drug Administration.

Scott+Scott litigated the case, along with co-counsel, on behalf of a class of Pharmacia investors who purchased or otherwise acquired Pharmacia common stock from April 17, 2000, to August 5, 2001.  Investors who purchased or acquired Pharmacia stock during that time are eligible to make a claim as part of the settlement.  The case was on the verge of going to trial, but the parties reached agreement on settlement terms and obtained preliminary approval for the settlement from the court.  The court will conduct a final approval hearing on January 30, 2013, and if approved, the matter will be turned over to a Claims Administrator to begin the process of reviewing claims and disbursing funds to eligible claimants.

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Supreme Court To Hear Appeal On Mandatory Arbitration Clauses

On November 9, 2012, the U.S. Supreme Court granted certiorari in American Express Company vs. Italian Colors Restaurant, No. 12-133, to address the following question: “Whether the Federal Arbitration Act [(“FAA”)] permits courts, invoking the federal substantive law of arbitrability, to invalidate arbitration agreements on the ground that they do not permit class arbitration of a federal-law claim.” 

The Amex action arose when a restaurant filed a federal antitrust class action complaint against American Express in the U.S. District Court for the Southern District of New York.  In the action, plaintiffs are merchants alleging a Sherman Act tying claim against American Express for its alleged practice of requiring merchants to accept American Express credit cards and debit cards as a condition of accepting American Express charge cards, at higher rates than competing credit cards and debit cards.  American Express, based on an arbitration clause that included a waiver of class arbitration, subsequently moved to compel arbitration of the restaurant’s claim on an individual basis.  The district court enforced the agreement, but the Second Circuit reversed on appeal.  Over the objections of four judges who favored en banc review, the Second Circuit held that where the cost for an individual of vindicating a federal statutory right outweighs the single claimant’s potential recovery, the claimant cannot be compelled to arbitrate the claim on an individual basis.

The Supreme Court granted certiorari in the matter after the Second Circuit held, for the third time, that a class action waiver in an arbitration agreement between American Express and plaintiff merchants was unenforceable because it would effectively preclude plaintiffs from vindicating their federal statutory rights under the federal antitrust laws.

The high court’s decision to grant certiorari at this time has created much speculation.  The Court’s recent decisions seem to favor strictly enforcing the terms of arbitration agreements.  In addition, the Court used broad language in its most recent decision on the enforcement of class bans in arbitration agreements, AT&T Mobility v. Concepcion (2011), in which the Court held that the purpose of the FAA “is to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings.”  The Court in Concepcion rejected the principle that class action proceedings are necessary to prosecute small-dollar claims that might otherwise slip through the legal system.  In Concepcion, the Supreme Court ruled, by a 5-4 margin, that the FAA preempts state laws that prohibit contracts from disallowing class action lawsuits.  By permitting contracts that exclude class action arbitration, the Court’s decision will make it effectively more difficult for consumers to file class action lawsuits.

Notably, however, Concepcion did not squarely address the enforceability of class action waivers in cases involving federal claims, and the Court’s earlier decisions in Green Tree Financial Corp-Ala. v. Randolph (2000) and Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. (1985) established a potentially applicable exception to the enforceability of class action waivers when “effective vindication” of federal statutory rights is impossible without class procedures.  For instance, in the antitrust context, direct purchaser plaintiffs almost always rely on class procedures to effectively vindicate their rights under Section 1 of the Sherman Act, where the disparity between individual damages and the cost to prove those damages is typically far greater than in other types of cases.

In its petition for writ of certiorari, American Express asserted that the Second Circuit, in holding that the FAA permits courts to ignore class action waivers in cases involving federal law claims, disregarded the Supreme Court’s recent decisions, including Concepcion, creating a “sweeping, unwritten loophole” to the FAA. 

Plaintiffs countered that because they had proven that the cost of proving individual claims would “dwarf” each claimant’s possible recovery, the class action waivers were unenforceable.  Plaintiffs characterized the effective vindication doctrine—under which the effectuation of the FAA policy in favor of arbitration does not come at the expense of important policies embodied in other federal statutes—as a “fundamental” principle that the Court had “repeatedly reaffirmed” in a number of decisions through the years.  Plaintiffs also noted that the effective vindication rule sets a very high bar, one that is “almost never met.” 

The Supreme Court’s decision in Amex could have an important impact on whether courts may decline to enforce parties’ express agreement to arbitrate and may be its most important decision yet in the area of arbitration agreements and class action waivers, clarifying the scope of earlier decisions, including Concepcion, Mitsubishi, and Green Tree, among others.

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Seventh Circuit Decision Clarifies Rule 23 “Predominance” Is A Question Of Efficiency And Judicial Economy

Under Federal Rule of Civil Procedure 23(b)(3), plaintiffs seeking certification of a class for money damages must show, among other things, that questions of law or fact common to the class members “predominate” over any individual issues.  The Seventh Circuit Court of Appeals recently clarified the question of predominance in class action lawsuits in Butler v. Sears, Roebuck and Co., No. 11-8029, on appeal from the U.S. District Court for the Northern District of Illinois, Eastern Division.

In Butler, plaintiffs filed a class action lawsuit against Sears, Roebuck and Co., alleging that washing machines manufactured by Whirlpool Corporation, and sold by Sears under the Kenmore brand, suffered from two defects.  First, plaintiffs claimed that the “Kenmore-brand frontloading ‘high efficiency’ washing machines,” operate at a lower temperature and use less water than standard top-loading washing machines.  As a result, the washing machines are unable to adequately clean themselves and an odor-emitting mold develops in the washing machine’s drum.  Second, Butler alleged that Kenmore washing machines suffered from a defective control unit following a change in the supplier’s manufacturing process, which damaged a layer of solder.  This “caus[ed] some of the control units mistakenly to ‘believe’ that a serious error had occurred and therefore to order the machine to shut down even though nothing was the matter with it.”

The district court granted class certification to class members with respect to the control unit allegations, but not the allegations concerning mold.  In declining to certify the mold class, the district court accepted Sears’ argument that Whirlpool made a number of modifications to the washing machine, which were defective in different ways among class members, if at all.  The court held that common questions of fact did not predominate over individual defects of washing machines with the various modifications.

The Seventh Circuit disagreed, finding that “[t]he basic question in the litigation—were the machines defective in permitting mold to accumulate and generate noxious odors?—is common to the entire mold class, although the answer may vary with the differences in design.”  Judge Posner, writing for the court, determined that “[p]redominance is a question of efficiency” and that resolving this question using class action procedures would conserve judicial resources.  The court noted that the class action mechanism was appropriate in the case, as the lawsuit involved “a defect that may have imposed costs on tens of thousands of consumers, yet not a cost to any one of them large enough to justify the expense of an individual suit.”  Judge Posner also noted that the Seventh Circuit’s opinion was consistent with a recent opinion by the Sixth Circuit—an identical case in which a single mold class was certified.

Turning to the control unit class, the Seventh Circuit upheld the district court’s decision to certify the control unit class because “the principal issue is whether the control unit was indeed defective.”  The court further affirmed that “[t]he only individual issues—issues found in virtually every class action in which damages are sought—concern the amount of harm to particular class members.”

Judge Posner suggested for both the mold class and the control unit class that if liability is established, the district court may conduct individual hearings to determine damages because this lawsuit involves the law of six states, some of which permit a plaintiff to recover for breach of warranty even though a product defect has not yet caused any harm.

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Regulators Seek To Strengthen Ethical Guidelines For Securities Brokers

            Following a 2010 study conducted by the Securities Exchange Commission (“SEC”), federal regulators have sought to strengthen ethical guidelines when securities brokers sell products to their clients.  The study was prompted by the passage of the Dodd-Frank Consumer Protection Bill and concluded that many investors are confused about the different ethical standards that are imposed on securities brokers and advisors.  As a result, regulators are in the process of reforming ethical standards to require both brokers and advisors to act in their clients’ best interests.

            Currently, different ethical rules apply to different types of financial advisors.  Financial advisors that are required to register with the SEC already must act solely in their clients’ best interests.  This standard is often called the fiduciary standard.  Brokerage firm advisers, on the other hand, who register with the Financial Industry Regulatory Authority (“FINRA”), are only required to suggest investments that are “suitable” to the investor, based on factors like a client’s risk tolerance.  Because these advisors may earn more from some investment options they pitch to clients, an advisor may be motivated to pitch a more profitable product.  The new ethical rules would extent the fiduciary standard to brokerage firm advisors in order to prevent potential conflicts of interest.

            In 2009, SEC Chairperson Mary Shapiro raised concerns about potential conflicts of interest with respect to broker and advisor compensation practices, stating, “Some types of enhanced compensation practices may lead registered representatives to believe that they must sell securities at a sufficiently high level to justify special arrangements that they have been given.”  While the securities brokerage industry maintains that it supports a change, it seeks a standard that would allow certain business practices like selling securities branded with a brokerage’s name.  Brokers and firms usually make more money by selling branded products and investments.

            On November 26, 2012, Chairperson Shapiro announced that she would step down from the Commission.  SEC Commissioner Elisse Walter has already been appointed to serve as chairman-designate.  Although Shapiro was one the biggest advocates of the ethical reform, Walter, who is a former FINRA executive and official at the SEC and Commodities Futures Trading Commission, is seen by investor advocates as an ideal selection to continue Shapiro’s efforts.

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On The Record

“Obedience to the law is demanded as a right, not asked as a favor.”

Theodore Roosevelt, U.S. President, died January 6, 1919.

Third State of the Union Address, December 7, 1903


U.S. Conferences And Educational Seminars

+December 2-5, 2012

Global Indexing and ETFs: The Preeminent Investment Management Conference

Arizona Biltmore Resort & Spa

Phoenix, AZ

Information Management Network (IMN) presents the Global Indexing and ETFs conference formerly known as the Super Bowl of Indexing.  The theme of this year’s name change is reflected in the agenda topics; however, there will be little or no impact on the conference attendees who remain much the same as in previous years.  Topics of interest include the “Pillars of Dodd-Frank” and the effect of Dodd-Frank on public fund investing, managing pension risk, and governance.

Government Finance Officers Association Conferences

+December 7, 2012

Washington Metro Area GFOA                                       

Washington Marriott at Metro Center

Washington, DC

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Scott + Scott LLP is a nationally recognized law firm headquartered inConnecticut with offices in New York City, Ohio and California. The firmrepresents individual as well as institutional investors who have suffered from corporate stock fraud. Scott+Scott has participated in recovering billions of dollars and achieved precedent-setting reforms in corporate governance on behalf of its clients. In addition to being involved in complex shareholder securities and corporate governance actions, Scott+Scott also has a significant national practice in antitrust, ERISA, consumer, civil rights and human rights litigation. Through its efforts, Scott+Scott promotes corporate social responsibility.

Scott+Scott’s PT+SM System is the firm’s proprietary investment portfolio tracking service. Carefully combining the firm’s proprietary computer-based portfolio monitoring software with Scott+Scott’s hands-on approach to client  relations is a proven method for institutional investors and their trustees to successfully

  • Monitor their investment portfolios  
  • Identify losses arising from corporate fraud    
  • Consider what level of participation any given situation requires   
  • Recover funds obtained on their behalf through investor litigation action  

To obtain more information about Scott+Scott’s PT+SM services or to schedulea presentation to fund trustees, fund advisors or asset managers, please contact:    David R. Scott + Toll Free: 800.404.7770     email: drscott@scott-scott.com + UK Tel: 0808.234.1396