INSIDE THIS ISSUE
On December 14, 2010, National Economic Research Associates, Inc. (NERA) released its year-end 2010 securities class action litigation study. According to the study, federal securities class action filings in the second half of 2010 were filed at a higher rate than the first part of the year, ensuring that the total number of filings will exceed 2009’s total. In fact, the study reports, the number of new class action filings in September alone, which was 25, represents the highest monthly total of new filings since August 2004. As a result of this acceleration in filings during the second half of 2010, filings for the year are projected to reach 239, compared to 220 in 2009.
Significantly, NERA reported that the median settlement value, an indicator of the size of a typical settlement, for 2010 reached over $10 million for the first time ever. Indeed, the median settlement value jumped 30% from 2009 to reach an all-time high of $11.1 million. which not only represents an all-time high, but is more than a third higher than the 2009 median of $8.5 million. Average settlements for securities class actions also reached a new record in 2010. The average settlement was $109 million, well above the previous high of $80 million in 2006. Excluding outliers, the average settlement for cases settled in 2010 was $42 million, which is in line with 2009’s record high but well above the $30.4 million average for the period 2003 to 2010. Although the average and median settlements in 2010 settlements represent record highs, the settlements as a percentage of investor losses, 2.4%, was consistent with similar ratios dating back to 2002.
The report concluded that “the near future may bring some very large settlements as pending credit crisis cases with high levels of investor losses work their way through the litigation pipeline.” Although there were only 31 credit crisis related filings in 2010, compared to 57 in 2009 and 103 in 2008, companies in the financial sector remain the most frequently named as defendants in 2010. In fact, more than half of the new lawsuits against companies in the financial sector in 2010 were unrelated to the credit crisis. The health technology, electronic technology, technology services and for-profit education in-dustries also saw significant amounts of securities class action litigation in 2010. Among trends in factual allegations, NERA reports that filings of cases alleging breach of fiduciary duty more than doubled in 2010. Most frequently, however, cases filed in 2010 alleged undisclosed product and operational defects. Table of Contents
On December 15th, the Securities and Exchange Commission set forth new rules designed to provide transparency in the over-the-counter derivatives market. The proposed SEC regulations require, among other things, that most derivative transactions – from swaps used to hedge interest rates to instruments used to protect against credit defaults – be funneled through central clearinghouses. The new rules for derivatives also include requirements for reporting of data and stringent capital requirements. The proposals — approved by SEC commissioners at a meeting and released for public comment — are in response to the financial reform legislation passed in the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires an overhaul of the $600 trillion private derivatives market. OTC derivatives were blamed heavily for the recent financial crisis, and many of the firms initially bailed out by the government through the Troubled Asset Relief Program were large derivatives dealers.
The Dodd-Frank Act established a comprehensive framework for regulating the over-the-counter swaps markets — a market that previously had been excluded from regulatory oversight and that has grown exponentially in recent years. Among other things, Title VII of the Act authorizes the SEC to regulate security-based swaps and to take steps to encourage accountability and transparency.
The proposals pushed forward by the SEC are similar to those adopted recently by the U.S. Commodity Futures Trading Com-mission. Under the proposed rules, clearing agencies --entities called “swap execution facilities” --would act as a middleman between the parties in a transaction and assume risk in the event of a default. The clearinghouses would have to obtain SEC ap-proval for any group or type of security-based swap they are planning to accept for clearing. The SEC proposal describes the information the clearinghouses would have to submit so the SEC can decide whether the swap should be subjected to mandatory clearing. The submissions would then have to be posted on the clearinghouses’ public websites.
The rules also address the procedure the Commission will use to exempt a party from the clearing requirement. As with the CFTC rules, exemptions will only be granted if a transaction is designed to mitigate risks that occur over the course of regular business and can cover assets a company owns, produces or manufactures, or arises from fluctuations in currency markets. End users would have to notify the SEC of how they will meet their financial obligations when engaging in an exempt securities-based swap transaction. "This proposal lays out who must do security-based swap reporting, what information must be reported, and where and when it must be reported," said SEC Chairman Mary L. Schapiro. "These rules would provide for post-trade transparency in the security-based swap markets, and are designed to provide all market par-ticipants access to transaction information at the same time."
The SEC, which advanced the proposal in a 4-to-1 vote, will now consider
public comments on the rules before it becomes final. The Commission expects to
finalize its derivative rules by July 2011. The CFTC's rules are also open to
public comment. Table of Contents >>>>>
In mid-August, the Financial Fraud Enforcement Task Force under President Obama launched “Operation Broken Trust”— leading to a 3month investigation into financial fraud. The investigation was undertaken in conjunction with various Department of Justice components– including the U.S. Attorney Offices, the FBI, the Criminal and Civil Divisions and the U.S. Trustee Program—as well as several other government agencies. This represents the largest fraud investigation in the nation's history. On December 6, 2010, the results of that investigation were announced.
In that announcement, United States Attorney General Eric Holder stated that the government had filed countless suits against 343 criminal defendants and concerning $83.8 billion in losses to investors. In addition to the criminal cases, the government has filed numerous civil cases with estimated losses of over $2 billion. Several of the schemes unearthed alone con-cerned hundreds of millions of dollars in losses. For example, the government filed suit in Texas against an oil and gas investment scheme whereby almost 8,000 investors were defrauded through an elaborate scheme and suffered $485 million in damages.
While the initiative targeted a broad array of investment fraud, the results seem to indicate that the majority of cases concerned Ponzi schemes and scams that preyed on immigrants, the disabled and religious groups. In addi-tion, the announcement concerning Operation Broken Trust indicated that hedge funds would be investigated, in particular regarding any insider trading.
As a result of the opera-tion, eighty-seven persons associated with the various frauds have been sentenced. Attorney General Holder hopes that Operation Broken Trust will serve as a warning that cheating investors and robbing them of their savings “is no longer a safe business plan.” To that end, the government hoped to alert the public about phony investment scams and warn them to ask for written information, consult unbiased third parties, and to be weary of exaggerated earnings claims.
While these results may be, according to Attorney General Holder, “staggering, staggering numbers,” Operation Broken Trust has actually received some criticism in the media and on financial blogs because it did not target any large companies or “big-time” corporate officials. However, even if this is true, the ramifications for financial institutions appear to be large. For instance, persons who profited from illegal schemes would have placed their money in banks. Those banks and their senior management may be named in these cases, or in subsequent cases, for failing to investigate the depositors and to adhere to internal compliance standards. In fact, one such case in Florida has already alleged similar claims against a private bank and trust.
Operation Broken Trust and these recently filed cases should help protect
investors from future schemes, including the often publicized “Ponzi” schemes,
and help restore investor confidence in both the investment markets and the
government’s ability to protect investors and monitor fraud. Table of Contents >>>>>
The United States Supreme Court recently adopted amendments to the Federal Rules of Civil Procedure that were reviewed by Congress and took effect on December 1, 2010. The most substantive changes were made to Rule 26 which governs initial disclosures and Rule 56 on applications for summary judgment.
Rule 26 governs the way in which parties conduct discovery of documents, ma-terials and testimony to be proffered as evidence at trial. An often important item of discovery in complex and representative litigation, is material relied on by expert witnesses who seek to testify in support of a party’s claims or defenses. Prior to the amendments, the prevailing Circuit Court opinion was that Rule 26 created a “bright-line rule” requiring disclosure of all information pro-vided to experts, including attorney opinion work product.
The amended Rule 26 now specifically extends attorney work-product protec-tion to communications between expert witnesses and their retaining counsel, subject to only three exceptions. These limitations require the disclosure of com-munications that (i) identify compensation for the expert’s study or testimony; (ii) identify facts or data that the party’s attorney provided and that the expert considered in forming the opinions to be expressed; or (iii) identify assump-tions that the party’s attorney provided and that the expert relied on in form-ing the opinions to be expressed.
The amended Rule 26 also provides work-product protection for any draft report or draft disclosure required under Rule 26(a)(2), regardless of the form in which the draft is recorded. The amendments further clarify that only expert wit-nesses “retained or specially employed to provide expert testimony in the case or one whose duties as the party’s employee regularly involve giving expert testimony,” must provide a written expert report outlining their opinions, con-clusions and the facts or data underpinning those. Expert witnesses who are nei-ther retained nor specially employed are not required to submit a report. These witnesses are obligated only to disclose the subject matter upon which they expect to give evidence, and a summary of the facts and opinions to which the witness is expected to testify.
Extensive amendments were also made to Rule 56 summary judgments. Sum-mary judgments provide a means by which courts can expeditiously dispose of claims where intricate adjudication of the issues is not required. It avoids the need for a full trial, and parties often file for summary judgment in an at-tempt to avoid the risk of losing at trial, or having to provide extensive discov-ery to the other side. Rule 56 allows parties to file and obtain summary judgment in federal court, where there is no genuine issue as to any material fact, and the party is entitled to judgment as a matter of law.
The amendments to Rule 56 do not alter the substance of summary judgments, but provide procedural rewrites that more accurately reflect the state of sum-mary judgment practice in federal courts. The amendments to Rule 56 include, inter alia:
1 recognizing that “partial summary judgment” may be entered;
2 recommending that a court should state the reasons for granting or denying the motion on the record;
3 providing that the timeline in which to file a summary judgment motion is subject to variation by local rule or court order in the case;
4 clarifying that parties may object that material relied on to support or oppose summary judgment could not be presented in the form of ad-missible evidence;
5 that a party asserting a fact that cannot be genuinely disputed must provide specific citations to materials in the record supporting that fact;
6 providing a range of options to the court when an assertion of fact has not been properly presented, supported or responded to. These include considering the fact undisputed for purposes of the motion, granting summary judgment if supported by the motion and sup-porting materials, or affording the party an opportunity to amend the motion; and
7 specifically allowing a court to grant summary judgment for a non-moving
party, grant a summary judgment on grounds not raised by a party, or consider
summary judgment on its own after identifying ma-terial facts that may not be
genuinely in dispute. Table of Contents
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