January 2014 Newsletter


•  Scott+Scott Wins Reversal Of District Court’s Decision To Stay Shareholder Derivative Lawsuit Against Wal-Mart Stores, Inc. Board Of Directors

•  Consumer Financial Protection Bureau Presents Preliminary Findings Of Study On Arbitration Clauses

•  The Federal Reserve Board Of Governors Solicits Public Comment On Proposed Rules Implementing The Dodd-Frank Act.

•  European Commission Fines Eight Banks €1.71 billion For Libor, Euribor, And Tibor Cartel

•  On The Record

•  Conferences and Educational Seminars

Scott+Scott Wins Reversal Of District Court’s Decision To Stay Shareholder Derivative Lawsuit Against Wal-Mart Stores, Inc. Board Of Directors

            The U.S. Court of Appeals for the Eighth Circuit issued a decision on December 18, 2013 in a shareholder derivative lawsuit against the board of directors of Wal-Mart Stores, Inc. (“Wal-Mart”), reversing the District Court’s decision to stay the action in favor of related lawsuits pending in the Delaware Chancery Court.  The Eighth Circuit held that the District Court erred in staying the case under the Colorado River doctrine, which permits courts to stay a federal court proceeding in favor of a parallel state court proceeding.

            The plaintiff, represented by Scott+Scott, filed a shareholder derivative lawsuit arising out of a bribery scheme involving Wal-Mart’s Mexican subsidiary and Mexican government officials, indicating that Wal-Mart violated the Foreign Corrupt Practices Act.  The lawsuit, filed in the Western District of Arkansas (the “Federal action”), alleges that Wal-Mart’s Board of Directors breached their fiduciary duties by failing to sufficiently respond to, and in fact, covering up, this wrongdoing. 

            Similar shareholder derivative lawsuits were filed in both state and federal court, several of which were filed in the Delaware Chancery Court (the “Delaware actions”).  The Defendants moved the District Court to stay the Federal action in favor of the Delaware actions.  The District Court granted the Defendants’ motion, and stayed the case under two different theories.  First, under the Colorado River abstention doctrine, the District Court determined that the Federal action and Delaware actions were parallel.  In the alternative, the District Court decided that it would exercise its inherent powers of controlling its docket to stay proceedings. 

Scott+Scott partner, Judith S. Scolnick, argued before the Eighth Circuit panel that the Federal action and the Delaware proceedings were not parallel, and that the stay was improper.  The Eighth Circuit agreed, holding that the Federal and Delaware actions were not parallel proceedings because the Federal action contained an exclusively federal cause of action under the Securities Exchange Act of 1934 that was not at issue in the Delaware actions.  The Eighth Circuit concluded that the Colorado River doctrine “may not be used to stay or dismiss a federal proceeding in favor of a concurrent state proceeding when the federal proceeding contains a claim over which Federal courts have exclusive jurisdiction.”  The Eighth Circuit also rejected the District Court’s conclusion that, under these circumstances, it could invoke its inherent powers to stay the case.

            Litigation will soon resume in the case back before the United States District Court for the Western District of Arkansas on remand. 

            This decision represents the second victory by Scott+Scott before United States Courts of Appeals in a shareholder derivative lawsuit in 2013 alone.  Scott+Scott recently achieved similar appellate success in Westmoreland County Employee Retirement System v. Parkinson, et al., 727 F.3d 719 (7th Cir. 2013).

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Consumer Financial Protection Bureau Presents Preliminary Findings Of Study On Arbitration Clauses

The Consumer Financial Protection Bureau (“CFPB”), which began operation on July 21, 2011, is primarily responsible for enforcing federal consumer protection laws.  Created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) in response to the late-2000s recession and financial crisis, the CFPB is tasked with the responsibility to “promote fairness and transparency for mortgages, credit cards, and other consumer financial products and services.”

Section 1028 of the Dodd-Frank Act the requires the CFPB to “conduct a study of, and to provide a report to Congress concerning, the use of agreements providing for arbitration of any future dispute between covered persons and consumers in connection with the offering or providing of consumer financial products or services.”  In April 2012, nearly one year following the U.S. Supreme Court’s landmark decision in AT&T Mobility LLC v. Concepcion, 563 U.S. ___ (2011), in which the Court held that the Federal Arbitration Act preempts California’s “Discover Bank rule,” under which class action waivers in arbitration agreements were generally deemed unconscionable and unenforceable, the CFPB initiated its study on mandatory arbitration clauses—the type at the center of Concepcion.

Background on the Enforceability of Mandatory Arbitration Clauses

Mandatory arbitration clauses are often found in standard form contracts and most often prohibit consumers from pursuing class-wide litigation.  Historically, under the generally applicable contract law of twenty states, mandatory class action waivers that functioned to release a party from liability have held unenforceable.  In June 2005, the California Supreme Court issued a consumer-friendly decision in Discover Bank v. Superior Court, 30 Cal. Rptr. 3d 76 (2005), in which it held that class action waivers in consumer contracts of adhesion were unconscionable and unenforceable under certain circumstances.  The Court in Discover Bank further held that the Federal Arbitration Act, which provides that such agreements are enforceable, does not preempt a state from prohibiting such waivers.  Under the “Discover Bank rule,” an arbitration clause containing a class action waiver is unenforceable if: (a) it is in a contract of adhesion; (b) the potential disputes are predictably ones involving small sums of money; and (c) the party with superior bargaining power was alleged to have “deliberately cheat[ed] large numbers of consumers out of individually small sums of money.”  According to Discover Bank, such a clause is procedurally and substantively unconscionable, because it is an adhesive contract that insulates a defendant from liability--a “‘get out of jail free card’ while compromising important consumer rights.”

Until Concepcion, the question of whether the Federal Arbitration Act preempts state contract law on the enforceability of class action waivers embedded in arbitration agreements has been a frequent point of contention in complex consumer cases.  Concepcion held that the Federal Arbitration Act preempts state rule of law and, thus, arbitration agreements must be enforced even if the agreement requires that consumer complaints be arbitrated individually (instead of on a class action basis).  Accordingly, Concepcion has cleared the way for broad class arbitration waivers in all types of agreements, including consumer finance contracts.

The CFPB’s Study and Preliminary Findings

The CFPB’s Study consisted of a review of hundreds of consumer contracts and filings from the American Arbitration Association (“AAA”).  The CFPB looked at AAA filings regarding credit cards, checking accounts, payday loans, and prepaid cards between 2010 and 2012.  The CFPB observed that fewer than 1,250 arbitrations involving those four products were filed.  Many of these concerned debt collection.  Consumers filed around 900 of these disputes.  The remaining disputes were filed by companies or submitted jointly by both sides.  In comparison, in the same three-year time period, over 3,000 cases were filed by consumers in federal court concerning credit card issues alone.  More than 400 of these cases were filed as class actions.

Other CFPB findings include:

(a)    Arbitration clauses are more complex than the rest of the contract.  For example, the CFPB found that in credit card contracts, the arbitration clause section of the contract is almost always more complex and written at a higher grade level than the rest of the contract.

(b)   Approximately 9 out of 10 arbitration clauses expressly bar consumers from filing class arbitration.  Of the products the CFPB studied, almost all of the market that is subject to arbitration is also subject to terms that effectively preclude class actions in court or in arbitration.

(c)    Consumers do not choose arbitration over class action settlements.  The CFPB identified a number of class actions involving credit cards, deposit accounts, or payday loans in which the contract allowed for arbitration before the AAA.  More than 13 million class members made claims or received payments under these settlements, while 3,605 individuals opted out of participating in the settlements, which gave them the right to bring their own cases.  At most, only a handful of these individuals chose instead to file an arbitration case.

(d)   Consumers do not file arbitrations for small-dollar disputes.  The CFPB observed that almost no consumers filed arbitrations about disputes under $1,000.  For arbitration filings other than debt disputes, the average consumer claim was for over $38,000.

The CFPB study is ongoing and intends to look at a number of areas, such as whether consumers are aware of the terms of arbitration clauses and whether arbitration clauses influence consumers’ decisions about which products to purchase.

Implications of the CFPB Study

Among other things, the long-term effect of Concepcion depends on the outcome of the CFPB’s review of arbitration clauses.  Dodd-Frank requires the CFPB to present its findings to Congress.  Apart from any potential congressional action, Dodd-Frank also gives the CFPB the authority to prohibit or limit the use of arbitration clauses through its rulemaking powers if the CFPB “finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers.”  In his remarks concerning the preliminary findings of the study, Director Richard Cordray did not specifically acknowledge that the CFPB would pursue rulemaking to limit the use of consumer arbitration.  He did, however, reiterate the authority conferred to the CFPB by the Dodd-Frank Act to adopt rules that could limit or prohibit the use of arbitration clauses that are “in the public interest and for the protection of consumers.”  Notably, the CFPB has recently amended Regulation Z to implement amendments to the Truth in Lending Act made by the Dodd-Frank Act, including, among other things, a ban on mandatory arbitration provisions in certain mortgage loans.


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The Federal Reserve Board Of Governors Solicits Public Comment On Proposed Rules Implementing The Dodd-Frank Act.

On December 23, 2013, the Federal Reserve Board of Governors issued a press release inviting public comment for proposed rules governing emergency lending under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”).

The Dodd-Frank Act was signed into law on July 21, 2010 in response to the financial crisis. Its purpose, as stated in the preamble, is to “promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.” The Dodd-Frank Act was enacted after significant public debate following the government bailout of large financial institutions and corporations.

The Dodd-Frank Act amended the Federal Reserve Act, which authorized the Federal Reserve Board to provide liquidity in “unusual and exigent” circumstances. The proposed regulations make clear that Congress intended for the Dodd-Frank Act to provide liquidity under a broad-based program to a market or sector of the financial system rather than any particular company, and the program may not be established to help an individual company avoid bankruptcy.

The Dodd-Frank Act requires a recipient of emergency funding to pledge collateral. In extending credit under such a program, the proposed regulations provide a means for discounting the value of assets pledged as collateral to the “lendable value.”  This requirement helps to ensure that any credit that is extended is adequately supported.

A program to provide emergency lending under the Dodd Frank Act must be terminated in a “timely and orderly fashion.” The proposed regulations require that the Federal Reserve Board periodically review an emergency lending program and describe numerous factors that the Board should consider when making its decision.

The Federal Reserve Board of Governors has requested comment on these and other aspects of the proposed rules implementing the Dodd-Frank Act.  The public comment period closes on March 7, 2014.


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European Commission Fines Eight Banks €1.71 billion For Libor, Euribor, And Tibor Cartel

Over the last two years, the U.S. government and its counterparts in Europe and Asia have unearthed information indicating that the largest banks in the world manipulated the London Interbank Offered Rate (Libor), the Euro Interbank Offered Rate (Euribor), and the Tokyo Interbank Offered Rate (Tibor).  These rates are benchmarks used in countless financial instruments, from asset-backed securities to interest rate swaps. 

Libor, Euribor, and Tibor are benchmark interest rates that are critical to pension funds and investor portfolios.  Libor, for example, is the primary benchmark for short-term interest rates around the world.  The rates are set by panels of banks that report the daily interest rate they are charged by other banks to borrow money in specific currencies for specific periods of time.  Each panel consists of about 12 to 16 banks, and the rate is set by discarding the top and bottom quartiles of rates and then averaging the remaining rates.  This process of discarding the highest and lowest rate submissions is supposed to insulate the rates from manipulation.  The government investigations have found, however, that the banks were able to manipulate the various rates. 

Before and after the financial crisis, banks would communicate with each other and discuss what rates to submit.  This conduct was improper because even within any given bank, the bank’s trading operations are not supposed to contact the department responsible for their panel submissions.  The investigations found instances where the banks engaged in such misconduct for their own benefit on trades, at the expense of their counterparties.  In addition, the investigations also found that during the height of the financial crisis, panel banks made artificially low submissions.  It appears the motivation for doing so was to present a better financial condition than was actually the case.  In other words, if a bank reported that it had to pay a high interest rate to borrow money, this would signal that the bank had poor credit and might cause investors and lenders to stop doing business with the bank. 

Over the last decade, Libor, in particular, has become critical to anyone who participates in the financial markets.  With the banks responsible for Libor, Euribor, and Tibor touting these as reliable interest rate benchmarks, these rates have been incorporated into almost every type of financial instrument.  The investigations have revealed that Libor, Euribor, and Tibor were anything but reliable. 

Throughout 2012 and 2013, law enforcement agencies across the globe reached settlements with banks and brokers accused of manipulation.  Barclays paid $450 million in penalties in June 2012, UBS paid $1.5 billion in December 2012, and RBS paid $612 million in February 2013.  In September of 2013, the U.S. Commodity Futures Trading Commission and U.K. Financial Conduct Authority announced that broker ICAP PLC will pay $87 million to resolve a civil probe concerning the brokerage firm’s involvement in the rigging of Libor.  In addition, seven individuals face criminal charges.

On December 4, 2013, the European Union antitrust regulators announced a record €1.7 billion ($2.3 billion) fine on eight financial institutions for their roles in rate-rigging and manipulation Libor, Euribor, and Tibor.  Barclays, Deutsche Bank, Société Générale, RBS, UBS, JPMorgan, Citigroup, and RP Martin will pay fines to settle charges that the financial institutions were part of two separate cartels that conspired to manipulate Libor, Euribor, and Tibor to benefit their own positions in Euro- and Japanese yen-denominated interest rate derivative markets.  The European Commission stated: “The cartel aimed at distorting the normal course of pricing components for these derivatives.  Traders of different banks discussed their bank’s submissions for the calculation of the Euribor as well as their trading and pricing strategies.”

So far, penalties related to the global Libor, Euribor, and Tibor investigations have reached almost $6 billion.  Several brokers and major investment banks remain under investigation.  Regulators expect to reach settlements or bring charges against additional firms in 2014.

Penalties, however, may not compensate investors harmed by the wrongful conduct.  Such investors may be able to bring antitrust, breach of contract, and other claims to address their losses.  Scott+Scott continues to investigate Libor, Euribor, and Tibor manipulation as more information becomes available and to pursue remedies for investors.  Please contact David R. Scott (david.scott@scott-scott.com or 800-404-7770) if you have questions about the impact on your portfolio.


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On The Record

“Obedience to the law is demanded as a right; not asked as a favor.”
Theodore Roosevelt, United States President

Third State of the Union Address, December 7, 1903


January Events


Conferences and Educational Seminars

+January 7th-9th, 2014

Public Funds Conference produced by Opal Financial Group

The Phoenician Hotel & Conference Center

Scottsdale, Arizona

“Opal Financial Group’s annual Public Funds Conference addresses issues that are relevant to public pension plans.  More than 100 U.S. public and foreign government and municipal funds generally attend the 3 day conference.  The conference offers presentations, panels and networking with industry peers where discussions will focus on the state of the U.S. Retirement System, New Styles and Strategies for Investing, Challenges facing Public Pension Plans, and Choosing the Right Service Provider.”  There will be several Plan Fiduciary sessions designed particularly for Pension and Taft Hartley Representatives, Trustees, Administrators, Commissioners and Staff members.  The conference serves a comprehensive resource for ongoing education for plan fiduciaries and plan participants.

+January 8th-10th, 2014

Metropolitan Baltimore Council AFL-CIO Unions 23rd Annual Leadership Conference

Bally’s Hotel

Atlantic City, NJ

This regional conference is planned for the decision makers of the more than 200 locals affiliated with the Metropolitan Baltimore AFL-CIO.  This is an excellent opportunity to network with Baltimore’s labor community.  The American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) is a voluntary federation of 57 national and international labor unions.  The AFL-CIO was created in 1955 by the merger of the AFL and the CIO.  The AFL-CIO union movement represents 12.2 million members, including 3.2 million members in working America.  Members  are from various professions i.e. teachers, miners, firefighters, farm workers, bakers, engineers, pilots, public employees, doctors, nurses, painters and plumbers and more.

+January 11th-13th, 2014

National Institute of Pension Administrators (NIPA)

The Sanctuary on Camelback Mountain

Scottsdale, Arizona

“The National Institute of Pension Administrators is a national association representing the retirement and employee benefit plan administration profession.  It was founded with the idea of bringing together professional benefit administrators and other interested parties to encourage greater dialogue, cooperation and educational opportunities.  This year’s Business Management Conference will feature a unique peer-to-peer knowledge exchange examining the latest industry developments”.

+January 23rd-24th, 2014

The Los Angeles Benefits Conference (ASPPA)

Hilton Los Angeles Universal City

Universal City, CA

The American Society of Pension Professionals and Actuaries in conjunction with the National Institute of Pension Administrators, the IRS and the Western Pension Benefits Conference provides an opportunity for attendees to gain knowledge about current regulatory, legislative, administrative and legal topics.  This conference focuses on addressing the educational needs of pension and employee benefits professionals particularly in the western part of the United States.  Emphasis will be placed on recent developments in ERISA litigation where Supreme Court rulings conflict with plan documents and the types of remedies that may be available in breach of fiduciary duty cases as well as plan fee cases.  Third party administrators and related service providers should find this conference very informative.

+January 27th-29th, 2014

National Conference on Public Employees Retirement System (NCPERS) Legislative Conference

Capital Hilton Hotel

Washington, DC

The NCPERS Legislative Conference takes place annually in Washington, DC and allows public fund trustees an opportunity to visit Capitol Hill and meet with their legislators.  Conference topics will highlight federal regulatory issues affecting public funds.  This year NCPERS will include in its agenda a Healthcare Symposium focusing on the Affordable Care Act (ACA).  New policies and procedures required to implement healthcare reform regulations will be addressed.  The outlook on the midterm Congressional elections will be featured as well as PEPTA and other pension legislation in Congress.

Government Finance Officers’ Association Conferences

+January 24, 2014

Maryland Government Finance Officer’s Association (MDGFOA)

BWI Marriott

Linthicum, MD



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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