July 2012 Newsletter


•  Foreign Investors Allow Securities Class Action Settlement Assets Go Unclaimed

•  U.S. Supreme Court To (Once Again) Address Fraud-On-The-Market Theory

•  Second Circuit Confirms Strong Protections For Investors Who Bought Securities In Registered Public Offerings

•  2Q2012Antitrust Developments

•  OnThe Record

•  Conferencesand Educational Seminars


Foreign Investors Allow Securities Class Action Settlement Assets Go Unclaimed

Securities law violations have an immediate effect on the bottom line for defrauded investors regardless of where those investors are located.  Private investor class actions have long been important in policing corporate misconduct and, recently, more foreign investors are becoming involved in the class action process.  Even though more foreign investors have become involved, it is clear that far too many foreign investors stand on the sidelines and allow easily recoupable assets go unclaimed.

In recent decades, foreign investment in U.S. financial markets has increased significantly.  According to the U.S. Congressional Research Service, foreign investors accumulated $582 billion in U.S. corporate stocks in the 2002-08 period and accumulated about $2.2 trillion in U.S. Corporate Bonds from 2001-07.  From these figures, it is apparent that citizens of foreign countries are free to participate in U.S. capital markets on par with U.S. citizens.  While foreign citizens are able to enjoy the benefits of the U.S. capital markets, they are also subject to the unfortunate drawbacks as well.  From the late 1990s through today, the financial news has been rife with high-profile corporate scandals.  Whether it be scandals involving companies like Enron and WorldCom in the early 2000s, or the banking failures and bailouts of the 2008 financial crisis, more and more seemingly legitimate investments in long-established companies are susceptible to being wiped out in a matter of days.

            Even though foreign investors lose millions of dollars each year as a result of corporate fraud, these investors are often not aware that they may pursue a variety of legal claims based on the losses they have suffered, some of which include becoming a lead plaintiff in a securities fraud class action lawsuit.  In 1995, Congress amended the federal securities laws to require courts to appoint lead plaintiffs in securities class action lawsuits, and establish a presumption that the member of the class with the largest financial interest in the litigation be appointed to this leadership position.  While some foreign investors have exercised their right to become lead plaintiffs, many non-U.S.-based investors are unaware that they have the ability to assert claims as a lead plaintiff or simply do not have a sufficient level of understanding or comfort with the process.

            One of the most common reasons for inaction on the part of foreign investors is that they are not aware of the benefits of taking a leadership role in securities class action litigation.  While taking on this role requires careful consideration, there are numerous benefits of becoming a lead plaintiff.  One of the biggest benefits to becoming a lead plaintiff is the opportunity to secure a larger recovery for the class, which in turn secures a larger recovery for the lead plaintiff itself.  Other benefits of becoming a lead plaintiff include being able to supervise the litigation, representing the legal rights of absent class members, devising legal strategies with counsel, and also the possibility of being eligible for reimbursement for time and expenses spent on the litigation.  There is no financial risk in serving as a lead plaintiff.  Lead counsel advances all costs and expenses incurred in the prosecution of the case and is reimbursed only if there is a successful settlement or judgment on behalf of the class.  There is never a time when the lead plaintiff would have to pay anything out of its own pocket.  Similarly, litigation in the United States also has numerous benefits that are not available in other countries.  The ability to sue on behalf of similarly situated persons is largely unique to the United States, and there is a well-developed system for certifying cases as class actions.  Furthermore, the legal system in the United States is devoid of “loser pays” fee-shifting rules which significantly increase the risk of initiating litigation in other countries.

            When foreign investors have moved for lead plaintiff in securities class actions, other potential lead plaintiffs have tried to use these investors’ status as foreigners to claim that their injury is not typical of other investors.  These attempts have unanimously failed.  One court stated, “In light of today’s travel and communication methods, the geographical location of the [prospective foreign lead plaintiff is] irrelevant.”  Newman v. Eagle Bldg. Technologies, 209 F.R.D. 499, 505 (S.D. Fla. 2002).  In the Goodyear Tire & Rubber Co Securities Litigation, the court even declared that “to exclude a foreign investor from lead plaintiff status on nationality grounds would defy the realities and complexities of today’s increasingly global economy.”  In re The Goodyear Tire & Rubber Co. Sec. Litig., No. 5:03-cv-2166, 2004 WL 3314943, at *5 (N.D. Ohio, May 12, 2004).

            Although foreign investors are not excluded from becoming lead plaintiffs, many foreign investors are not aware that certain actions are filed until after the deadline for filing a lead plaintiff application has passed, or even after an action has been resolved favorably for the class.  Similarly, foreign investors often fail to take part in recovering some or all of their financial losses when a lawsuit settles or a judgment is reached, as a result of the proper claim for not being submitted in a timely fashion.  Missing valuable opportunities to pursue claims is not necessary or fiscally prudent.

            As investor losses continue to rise, it is necessary for investors to take steps to protect their portfolios and recover the highest percentage of monies lost as a result of corporate malfeasance.  Foreign investors should have a reliable system in place to identify instances of securities fraud that have impacted the fund’s portfolio.  One easy and reliable system is participation in a portfolio monitoring system that can electronically identify losses arising from corporate fraud.  Scott+Scott’s portfolio tracker system monitors clients’ investment portfolio for securities fraud and investigates whether it is prudent to become involved in a securities class action.  Scott+Scott attorneys analyze the merits of the allegations in the complaint and any additional evidence that pertains to the securities litigation to determine whether further action by the client is necessary.  Scott+Scott attorneys then counsel investors on their litigation and non-litigation options and track the securities fraud action from its inception to ensure that the client recovers any money it is owed at settlement.  Similarly, the portfolio tracking system allows easy recovery of investment assets from class action settlements.

Scott+Scott has extensive experience working with all types of investors, including investors located outside the United States, such as in Europe, Asia, Canada, South America, and the Caribbean.  The Firm offers the same professional services to all of its clients, regardless of their geographic location.  For more information on the services Scott+Scott offers to investors located outside the United States, please contact David Scott at drscott@scott-scott.com.

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U.S. Supreme Court To (Once Again) Address Fraud-On-The-Market Theory

Reviving important 13-year-old precedent on securities fraud law, on June 6, 2011, the U.S. Supreme Court blocked the efforts of some lower courts to narrow investors’ ability to jointly challenge a company’s alleged manipulation of the market price of its stock.  Investors, the Court ruled unanimously in Erica P. John Fund v. Halliburton Co., 131 S.Ct. 2179, may use the class action device to claim securities fraud without first proving that market manipulation actually caused them to lose money on their investment. 

The ruling put a solid foundation under the Court’s 1988 ruling in Basic Inc. v. Levinson, 485 U.S. 224 (1988), and under the “fraud-on-the-market” theory that the Court first outlined in that decision.  In the process, the Court removed doubts that had crept into the courts about Basic and its fraud theory, producing conflicting rulings.

Under the fraud-on-the-market theory, investors are understood to rely generally upon the stock market’s valuation of a stock before buying or selling.  If the market is functioning properly, according to the theory, all publicly available information is taken into account in setting stock values—both good and bad.  Therefore, if a company reports flawed information, the market will absorb that information in the auctioning of that company’s stock.

By relying on the market, investors are spared the duty in their class action fraud case of proving one critical element of their legal claim: that each investor in the class actually relied on the flawed information the company allegedly reported.  By asserting “reliance” in this way, investors are given the benefit of a “presumption” that they depended upon the market.  The company being sued can counter, or “rebut,” that presumption.  Still, the survival of the theory of demonstrating market efficiency provides a significant advantage to the investors as a class because they can try the entire classes’ claims together as a certified class action. 

Arguably an issue left open in Halliburton was whether those same investors needed to demonstrate “materiality,” another important element to a securities violation, at the class certification stage, and, if so, how.  Significantly, in Halliburton, the defendants argued before the Supreme Court that investors had failed to demonstrate their alleged misstatements “moved” the market price of Halliburton’s stock price in the first place, i.e. to demonstrate “price impact.”  This, they claimed, must be demonstrated at the class certification stage to preclude defendants from having to defend at trial claims for misstatements that were potentially not material.  The Supreme Court in Halliburton refused to reach the issue, pointing out that the defendants had not argued this point until too late into the proceedings.

However, on June 11, 2012, the Supreme Court granted review in Connecticut Retirement Plans and Trust Funds v. Amgen, Inc., 660 F.3d 1170 (9th Cir. Nov. 8, 2011), cert. granted, ___ U.S. ___, (June 11, 2012), on this very point in an appeal from the Ninth Circuit Court of Appeals.

At issue in Amgen is a split in authority among the federal circuits over whether a plaintiff must prove that alleged misstatements were sufficiently material to invoke the fraud-on-the-market theory in support of class certification.  Three circuit courts (Second, Fifth, and, to a lesser extent, the Third) previously have held that this is a requirement of the fraud-on-the-market analysis when evaluating whether a class should be certified.  The Ninth Circuit joined a decision from the Seventh Circuit, however, in rejecting that position.  The court held that materiality is a merits question that does not affect whether class certification is appropriate.

The Amgen case also picks up threads from another recent Supreme Court decision.  In Matrixx Initiatives, Inc. v. Siracusano, 131 S.Ct. 1309 (2011), the Court addressed the issue of materiality, but in the context of what must be pled to survive a motion to dismiss.  There, the Court squarely held materiality presented an issue of fact for the jury: “It is substantially likely that a reasonable investor would have viewed [the alleged truthful but concealed] information “as having significantly altered the ‘total mix’ of information made available,’” Matrixx, 131 S.Ct. at 1312 (citing Basic, 485 U.S. at 232).

In Halliburton, conversely, the Supreme Court found that a plaintiff does not have to prove loss causation to invoke the fraud-on-the-market presumption at the class certification stage, but arguably left open the question of whether the plaintiff must demonstrate that the misstatement had a “stock price impact,” which is often used as a proxy for determining whether the misstatement was material.  As a practical matter, if the Supreme Court were to find that lower courts should be evaluating whether alleged misstatements are material in determining whether to grant class certification, it will introduce fact finding on a very significant element into the class certification process.  And an important issue of fact—those typically reserved only for juries—will be made by judges, and often on an incomplete factual record prior to the close of formal discovery.

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Second Circuit Confirms Strong Protections For Investors Who Bought Securities In Registered Public Offerings

            On May 25, the United States Court of Appeals for the Second Circuit issued an important decision in Panther Partners Inc. v. Ikanos Communications Inc., No. 11-63-cv, 2012 WL 1889622 (2d Cir. May 25, 2012), confirming that companies that issue stocks and bonds through registered public offerings must comply with the stringent requirements of Item 303 of U.S. Securities and Exchange Commission Regulation S-K and disclose “known uncertainties.”  A company’s failure to disclose such uncertainties may support a securities claim under Sections 11, 12, and 15 of the Securities Act of 1933.

            In Ikanos, the lower court dismissed the complaint alleging violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, and denied the plaintiffs leave to amend.  The complaint alleged that, in connection with a secondary offering of the firm’s securities, Ikanos Communications was required to disclose, and failed to adequately disclose, the known defects in the company’s semiconductor chips.

            Ikanos learned in January 2006 that there were quality issues with its chips.  Specifically, the chips would develop a problem called “Kirkendahl voiding,” resulting in the mingling of gold wires and the aluminum pad and causing the connection between the components to fail over time when exposed to different temperatures.  These defects were a substantial problem and the company was unable to determine which of the chip sets it sold to customers contained the defective chips.  The plaintiff alleged that the board of directors met and discussed the defect issue when it arose, and that company representatives flew to Japan to meet with third-party manufacturers to discuss the problem.  The complaint alleged that the company did not disclose the magnitude of the defect issue in the Registration Statement or Prospectus for the Secondary Offering.  Instead the offering documents stated in generalized terms that “[h]ighly complex products . . . frequently contain defects and bugs….  In the past we have experienced, and may in the future experience, defects and bugs in our products.”  Feb. 22, 2007 U.S. Securities and Exchange Form 10-K at 32.  When the truth about the defective chips was reported, the company’s share price dropped 30%.

            The Second Circuit ruled that the district court applied the wrong standard in assessing whether the complaint alleged a failure to comply with Item 303.  The district court framed its dismissal in terms of whether Ikanos knew the defect rate of its chips was “above average” before filing the Registration statement.  The Second Circuit held that the complaint successfully stated a claim because it plausibly alleged that the defects constituted “a known trend or uncertainty that the Company reasonably expected would have a material unfavorable impact on revenues.”  Ikanos, 2012 WL 1889622, at *1.

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2Q2012 Antitrust Developments

            Second Circuit Denies En Banc Review Of Amex Arbitration Ruling

            On May 29, 2012, the U.S. Court of Appeals for the Second Circuit denied en banc review of the court’s January 31, 2012 ruling that American Express Co. cannot enforce arbitration agreements containing class action waivers against merchants pursuing antitrust tying claims against the company in In re American Express Merchants’ Litigation.  The January decision was significant because it followed the U.S. Supreme Court’s rulings in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), and Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S.Ct. 1758 (2010), in which the Court enforced class action waivers found in arbitration agreements.  The Second Circuit held that enforcement of the class action waivers in American Express would preclude the merchants’ ability to bring antitrust claims because individually arbitrating the claims would be cost-prohibitive, effectively depriving the merchants of the protection of the antitrust laws.

            The Court’s denial of en banc review was split with 5 of the 13 judges dissenting from the decision to deny rehearing. Chief Judge Jacobs, with whom Judge Cabranes and Judge Livingston joined, would have granted denial because in their view, the panel misapplied Concepcion and did not properly apply the Federal Arbitration Act’s policy favoring enforcement of arbitration agreements. Judge Cabranes also wrote separately urging the Supreme Court to take review of the case.  Judge Raggi, joined by Judge Wesley, dissented from the denial, pointing out a split in the circuits, citing Coneff v. AT&T Corp., 673 F.3d 1155 (9th Cir. 2012).

            Second Circuit Refines Antitrust Pleading Standard

            On April 3, 2012, the Second Circuit issued a ruling in Anderson News, LLC v. American Median, Inc., 680 F.3d 162 (2d Cir. Apr. 3, 2012), interpreting the level of detail required to state a claim under Section 1 of the Sherman Act.  In a major victory for antitrust plaintiffs, the Second Circuit reversed a district court order, which had required a high level of detail to state an antitrust claim.  The district court had dismissed the case after weighing the plaintiff’s allegations of a violation against the defendant’s purported business justifications and concluded that the defendant’s interpretation of events was more plausible.  The Second Circuit reversed, holding that factual determinations were inappropriate for a motion on the pleadings; it was “not the province of the court to dismiss the complaint on the basis of the court’s choice among plausible alternatives. . . . [T]he choice between or among plausible interpretations of the evidence will be a task for the factfinder.”  Anderson News, 680 F.3d at 190.

            DOJ and Consumers Bring Enforcement Actions Against E-Book Publishers

            On April 11, 2012, the U.S. Department of Justice, Antitrust Division, filed a civil complaint accusing Apple and five large book publishers—Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster—of fixing prices for e-books. 

            The complaint follows changes in the publishing industry brought by the introduction of Amazon’s Kindle reading device and other e-readers.  Amazon began pricing e-books at $9.99 to drive demand for the Kindle.  The complaint alleges that the publishers feared Amazon’s aggressive pricing on e-books would drive down prices for print books.  The publishers reacted by selling e-books to retailers using an “agency model” under which the publishers determined the retail price for books.  Each of the publishers was alleged to have entered into an identical agency contract with Apple.

            Three publishers settled the charges via a proposed consent decree also filed on April 11. The consent agreement will force the settling publishers—Hatchette, HarperCollins, and Simon & Schuster—to terminate its agency model contracts with Apple and other e-book retailers.

            Consumers also brought antitrust claims against Apple and the publishers.  On May 15, 2012, the U.S. District Court for the Southern District of New York denied the defendants’ motion to dismiss the complaint.  The court held that the plaintiffs plausibly alleged concerted action and a restraint of trade under Section 1 of the Sherman Act.  The complaint alleged specific conversations between competitors, as well as parallel conduct suggestive of an agreement, including a sudden and unprecedented shift in the business models of the publishers.

            NFL Defeats Antitrust Claims Brought By Former Players

            On June 13, 2012, the U.S. District Court for the District of Minnesota dismissed retired NFL football players’ class action antitrust claims against the NFL.  The players alleged that the NFL’s refusal to allow retired players to use their likenesses as NFL players restrained trade and monopolized the market for their likenesses.  The court held there was no Sherman Act “agreement,” distinguishing the case from American Needle v. NFL, 130 S.Ct. 2201 (2010), where the Supreme Court held that the NFL, a joint venture, was capable of entering into a Sherman Act agreement for certain kinds of activities.  The court held that the NFL and its teams act as a single entity for purposes of licensing NFL programming because the production of NFL programming requires the participation of all teams if it is to be available at all.  The court also found the complaint’s market definition allegations insufficient and dismissed the complaint with prejudice.

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On The Record


“By uniting we stand, by dividing we fall.”

John Dickinson, American Lawyer and Politician


Excerpt from “The Liberty Song,” first published in the Boston Gazette on July 18, 1768.

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Conferences and Educational Seminars


+July 11-13, 2012

Missouri Association of Public Employee Retirement Systems (MAPERS) Annual Conference

Tan-Tar-A Resort

Osage Beach, MO

MAPERS began in October 1987.  Since that time, the organization has worked to bring together individuals and organizations interested in expanding their knowledge of pension and investment issues.  The purpose of the association is to provide education, information, and ideas to strengthen and protect Missouri’s public employee retirement systems.  Plan Sponsor membership is open to trustees and administrators of all public pension funds in the State of Missouri.  Corporate membership is open to commercial financial and investment groups.  Associate membership is open to organizations affiliated with public retirement systems including unions, lobbying groups, etc.  MAPERS’ annual conference is held each summer and attended by members from all three membership categories.  The agenda includes nationally-known speakers from the financial, legal, and retirement arenas.


+July 21-27, 2012

International Association of Fire Fighters (IAFF) 51st Convention

The Sheraton Philadelphia Downtown

Philadelphia, PA

The IAFF’s mission is to build and grow a stronger union while educating its members with free credit evaluations and certifications.  Firefighters keep abreast of state and federal politics, including pending legislation through the IAFF outreach programs.  This year’s convention is expected to include a segment regarding successful collective bargaining strategies.


+July 22-26, 2012

Pennsylvania State Association of County Controllers (PSACC) Summer Conference

Seven Springs Mountain Resort

Seven Springs, PA

The PSACC is an organization of county government finance professionals whose purpose is to encourage the discussion and resolution of issues arising in the discharge of the duties and functions of the office of County Controller.  The organization advances the professional development of its members through a conscientiously applied program of continuing professional education and training.


+July 23-25, 2012

OPAL Financial Group presents Public Funds Summit East

Newport Marriott

Newport, RI

“Navigate The Future” is the theme of this year’s conference.  The summit will address the processes for selection and evaluation of investment managers, legal advisors, as well as management policies in light of new reform legislation.  This conference is very informative, particularly with current industry trends.


Government Finance Officers Association Conferences


+July 15-17, 2012

North Carolina GFOA

Wrightsville Beach, NC

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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