INSIDE THIS ISSUE
On December 14, 2010, Judge Spatt, U.S. District Judge for the Eastern District of New York, en-tered an order finally approving a settlement brokered by Scott+Scott on behalf of consumers in Gunther v.Capital One,N.A. Under the terms of the settlement, New York, New Jersey, and Connecticut account hold-ers of Capital One will be repaid approximately 82% of fees the bank charged for undeliverable mail. After factoring in other monetary relief granted by the court, the total recovery is more than 100% of plaintiffs’ collective and individual injuries. In addition, Capital One changed its business practices during the course of the litigation and will no longer charge undeliverable mail fees to members of the class settlement. Scott+Scott LLP brought this suit along with co-counsel on behalf of a class of depositors of Capital One, N.A. and two other banks, North Fork Bank and Superior Bank, that had merged with Capital One. The lawsuit was filed on July 10, 2009, and alleged that Capital One violated state consumer protection laws and breached contracts with its depositors by charging undeliverable mail fees when the mail was in fact deliverable, or when Capital One had the correct mail-ing address in its possession. Each fee charged (with few exceptions) was $15, and the total amount alleged to have been wrongfully charged to the class by Capital One was over $3.3 million.
After several months of intense negotiation, the parties successfully reached a settlement agreement. Under the terms of the agreement approved by Judge Spatt, Capital One agreed to put aside approximately $2.7 million as a partial refund of undeliverable mail fees, an amount equal to 82% of the fees at issue in the case. In addition, Capital One agreed to pay all costs of notice, costs of administering the settlement, and attorneys’ fees—all over and above the amount set aside for consumer refunds. In all, Capital One agreed to pay over $3.6 million in the settlement. The benefits of this lawsuit extend beyond the direct monetary relief of the settlement. During the course of the litigation, Capital One made the decision to stop charging undeliverable mail fees to all members of the class. Thus, class members not only receive the direct benefit of the return of the fee but going forward will no longer be charged an undeliverable mail fee at all. This provision will spare class members an estimated $3 million or more in fees over the next three years. Table of Contents
2011 promises to be an interesting year in securities law developments. As in years past, the U.S. Supreme Court continues to take an interest in securities class action cases. In three cases, the Supreme Court is revis-iting core pleading standards relating to secondary-actor liability, materiality, and loss causation. Moreover, the regulatory agencies will continue their efforts to draw up rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act passed last year.
In Janus Capital Group, Inc. v. First Derivative Traders, the Supreme Court potentially could open the door to a private right of action against third parties, such as accountants, lawyers, and bankers, who play a role in the preparation of corporate financial documents for aiding-and-abetting securities fraud com-mitted by a primary violator. When a corporation violates the federal securities laws by making false statements in a public financial document, like a prospec-tus, the Supreme Court consistently has foreclosed claims against these third parties that assisted the corporation in writing the prospectus. In the Janus Capital Group case, the U.S. Court of Appeals for the Fourth Circuit ruled that in-vestors clearly would infer that the investment advisor for Janus Capital Group, on a group of mutual funds, played a role in preparing the prospectuses that contained allegedly fraudulent information; although the plaintiffs’ allegations of allocation were insufficient to implicate Janus Capital Group itself. If the Supreme Court crafts even a narrowly-tailored opinion affirming, cases against these secondary, actors likely would increase.
In Matrixx Initiatives, Inc. v. Siracusano, the question the Supreme Court will consider is whether a drug company violates federal securities laws by failing to disclose reports of patients having adverse reactions to its drugs when the number of incidents was not statistically significant. The Supreme Court previously has held that a fact is material if there is “a sub-stantial likelihood that a reasonable investor would view it as significantly altering the total mix of information made available.” This case will be watched closely by manufacturers of drugs and medical devices.
Finally, the Court has agreed to hear the Erica P. John Fund, Inc. v. Halliburton Co. case in the next term, opening in October 2011, to resolve a differ-ence of opinion among the U.S. Courtsof Appeals. In Halliburton, the Fifth Circuit declined to certify a class because the plaintiffs had failed to demon-strate by a preponderance of the evidence—prior to any discovery being taken in the case—that the alleged fraud caused a drop in the company’s stock prices and thereby caused investors to suffer losses. Should the Supreme Court determine this is an issue that should be left for resolution at trial, it would be positive news for investors.
On the regulatory front, corporate governance and disclosure continue to command attention. In September, business interests filed a lawsuit to block implementation of the SEC’s final rules re-quiring a corporation to include in its proxy mate-rials director nominees put forward by a shareholder (or group of shareholders) who have owned three percent or more of company stock for at least three years. Although increased share-holder proxy access appears stalled, the SEC prom-ulgated in January a final rule requiring companies to provide shareholders advisory votes on executive compensation and the frequency of these say-on-pay votes, as well as specific disclosures and an advisory vote regarding golden parachute com-pensation in merger proxies. Other forthcoming SEC corporate governance and disclosure rules will deal with required disclosures on pay-for-performance and the ratio between the CEO’s total compensation and the median total compensation for all other company employees; exchange listing standards regarding compensation committee in-dependence; recovery of executive compensation, directing the exchanges to prohibit the listing of securities of issuers that have not developed and implemented compensation claw-back policies; and hedging by employees and directors. The reg-ulatory agencies’ success in implementing Dodd-Frank, of course, hinges on continued congressional funding which could be withheld should the newly-installed Republican-led Congress disap-prove of any agency’s rulemaking direction. Table of Contents
On January 21, 2011, Scott+Scott Partner Christopher M. Burke spoke at the Bridgeport Contin-uing Education Seminar on Consumer Class Actions held in San Diego, California. Mr. Burke’s presentation, “The Effects of Tobacco II on California Consumer Class Actions,” reviewed state and federal law interpreting In re Tobacco II, the recent California Supreme Court decision on standing and class certification under Califor-nia’s Unfair Competition Law (the “UCL”).
In 2004, Proposition 64 amended section 17204 of the California Business and Professions Code, which prescribes who may sue to enforce the UCL. Before Proposition 64, section 17204 authorized suits “by any person, acting for the interests of it-self … or the general public.” After Proposition 64, a private person has standing to sue only if he or she has suffered injury in fact and has lost money or property as a result of acts of unfair competi-tion. To bring a UCL claim as a class action, the class representative must meet the statutory requirements of section 382 of the California Code of Civil Procedure, which authorizes class action suits in California. Mr. Burke explained that Proposition 64 only affected the procedure relating to the stand-ing of the class representative. It left the substan-tive rules governing business and competitive conduct unchanged. Tobacco II makes clear that the substantive elements of the UCL were unchanged by Proposition 64: to state a claim under the UCL based on false advertising or promotional practices, it is only nec-essary to show that members of the public are likely to be deceived.
In Tobacco II, the California Supreme Court fur-ther refined the standing requirement under section 17204. To meet the standing requirements outlined in Tobacco II, the class representative is required to plead and prove actual reliance but is not required to plead and prove individualized reliance on specific misrepresentations or false statements where those misrepresentations were part of an extensive and long-term advertising campaign. Actual reliance is a standing requirement for the class representative and should not be the subject of a com-monality argument at the class certification stage, argued Mr. Burke.
Mr. Burke concluded with remarks about UCL class actions post-Tobacco II. Proposition 64 was intended to limit frivolous UCL lawsuits while protecting the rights of individuals to file an action for relief. Tobacco II makes clear that Proposition 64 did not alter the substantive law of the UCL, only its standing requirements. The California Supreme Court in Tobacco II recognized the importance of class actions in protecting consumers from unscrupulous business practices while maintaining the Proposition’s intended purpose. Table of Contents
In 2010, after a decade-long legal battle, the Antitrust Division of the U.S. Department of Justice won the conviction of Ian Norris, a U.K. national and the former CEO of Morgan Crucible, for his role in attempting to destroy evidence and cover up his company’s participation in an interna-tional price fixing cartel. Hampering the Antitrust Division’s prosecution of Norris was the need to extradite Norris from the U.K. The case was closely watched as a test of the U.S.’s ability to extradite foreign nation-als to face criminal antitrust charges. The Antitrust Division has made the extradition of foreign nationals accused of fixing prices in U.S. mar-kets a centerpiece of its enforcement policy.
The legal battle began in 1999 when a grand jury began an investigation into evidence uncovered by the Antitrust Division of price fixing of carbon products used for transferring electrical currents in automobiles, trains, and other vehicles and products. In November 2002, a U.S. subsidiary of Morgan Crucible, Mor-ganite Inc., pleaded guilty to fixing the prices of carbon products. As part of the same plea agreement, Morgan Crucible pleaded guilty to two counts of witness tampering arising from its attempt to cover up the companies’ involvement in the international cartel, which was alleged to have been operative from 1990-2000. As part of the plea agreement, the companies paid $11 million in criminal fines. Four of the companies’ executives were “carved out” of the plea deal, and the Antitrust Division prosecuted those executives individually for their roles in the price fixing conspiracy and cover up. All but one of the individuals pleaded guilty and served jail time in the U.S. That is, all but Ian Norris.
Norris, a U.K. national, was the CEO of Morgan Crucible during the operation of the cartel. In 2003, a grand jury indicted Norris on one count of price fixing, three counts of obstruction of justice related to his role in the cover up, and destruction of evidence. According to the Antitrust Division, Norris directed employees of Morganite and Morgan Crucible to prepare witnesses to answer questions from authorities using a false script, provide false information to the grand jury, and destroy incriminating evidence in the companies’ files.
After Norris’ indictment, Antitrust Division lawyers attempted to extradite him from the U.K. to stand trial on the price fixing and obstruction charges. Norris waged a high-profile fight in U.K. courts to block the extradition. Norris initially succeeded, blocking the Antitrust Division’s attempted extradition on the price fixing count. On March 23, 2010, however, the Antitrust Division succeeded in extraditing Norris on the obstruction counts.
The Antitrust Division’s legal right to demand extradition of Norris to the U.S. exists because of the extradition treaty signed between the U.S. and U.K. Under the 1972 treaty, the operative treaty at the time of Norris’ criminal activity, the U.S. and U.K. were obliged to extradite to each other any person who is wanted for a crime punishable by imprisonment for more than one year under the laws of both countries. The requirement that the crime be punishable under the laws of both countries is called the “dual criminality” requirement. Historically, countries have used extradition treaties to reach persons accused of heinous crimes against the person, such as murder, rape, and robbery, rather than for white-collar crimes such as price fixing.
Norris’ initial success in blocking extradition was due to the absence of dual criminality. At the time of the offense, 1990-2000, price fixing was not a crime in the U.K. and, thus, was not an extraditable offence under the treaty. Price fixing has been a crime in the U.S. for over 100 years, and today the crime of price fixing is criminally punishable by imprisonment for up to 10 years. In 2002, the U.K. passed a law making price fixing a crime punishable by imprisonment for up to five years.
The U.K. courts eventually determined that the obstruction charges against Norris were extraditable offences under the 1972 treaty and turned Norris over to the U.S. in March 2010, after he exhausted all his appellate avenues.
Norris stood trial on the obstruction charges. He faced the prospect of serious prison time: the statutory maximum incarceration was 45 years. By contrast, the three other executives carved out of the plea agreement signed their own plea agreements and each served between 4 and 6 months in prison.
On July 27, 2010, a federal jury in Philadelphia convicted Norris on one charge of conspiracy to obstruct justice. Norris was found not guilty on two other charges relating to the cover up. Immediately following the conviction, Norris began serving time in a federal detention center. The conspiracy count carried a maximum penalty of five years in prison and a $250,000 fine.
On December 10, 2010, a federal court judge in Philadelphia sentenced Norris to serve 18 months in prison and pay a $25,000 fine. Although the Antitrust Division won extradition for the obstruction charges, the U.K. courts determined that at the time of the offence, price fixing was not an extraditable offence. The Antitrust Division’s ability to seek extradition under treaties with other countries has been hindered by the dual criminality requirement, exemplified by the case of Ian Norris, until very recently. Histori-cally, the Antitrust Division could not credibly threaten extradition because of the dual criminality requirement of most treaties and the fact that the laws of most countries did not criminally punish price fixing. The U.S. and Canada were, until very recently, the only countries to criminally enforce antitrust laws. Thus, foreign nationals indicted in the U.S. for price fixing violations could escape prosecution by avoiding travel to the U.S.
In the last five years, however, criminal laws prohibiting price fixing have been adopted in the U.K., Brazil, Denmark, Ireland, Israel, Japan, and Korea. In coming years, many more countries are expected to enact criminal penalties for antitrust violations, including in Australia, South Africa, Mexico, Russia, and New Zealand. The U.S. also continues to sign extradition treaties with more and more countries. With the successful extradition of Ian Norris, the Antitrust Divi-sion has signaled its intent to aggressively seek the extradition and incarcera-tion of foreign nationals for fixing prices in the U.S. from abroad. Table of Contents
+ February 2-4, 2011
+ February 28-March
+ February 17-22, 2011
+ February 2, 2011