June 2012 Newsletter


•  Shareholders Bring Actions Based On Violations Of The Foreign Corrupt Practices Act

•  Facebook IPO Sparks Investor Lawsuits, Regulatory Scrutiny

•  Scott+Scott Wins Victory In 11th Circuit Appeal

•  Scott+Scott’s Appellate Practice Group Uniquely Equipped To Handle Tough Appeals

•  On The Record

•  Conferences and Educational Seminars


Shareholders Bring Actions Based On Violations Of The Foreign Corrupt Practices Act

            After a series of U.S. Securities and Exchange Commission (“SEC”) investigations in the mid-1970s revealed that over 400 U.S. companies admitted to making questionable or illegal payments to foreign government officials, Congress passed the Foreign Corrupt Practices Act (“FCPA”) to stem the tide of corrupt activity of U.S. companies overseas.  Since then, the FCPA—passed in 1977—has prohibited U.S. companies from making payments to government officials in order to secure improper advantages in obtaining or retaining business.  The FCPA also created accounting transparency requirements to regulate how companies account for such payments.

            Federal enforcement of the FCPA has increased in the recent years.  As of March 31, 2012, at least 81 companies are the subject of ongoing and unresolved FCPA-related investigations.  On April 21, 2012, the FCPA became front page news when The New York Times reported retail giant Walmart covered up potential FCPA violations in Mexico.  According to the article, a former executive with Walmart de Mexico alleged in 2005 that the company had paid bribes to officials throughout Mexico to obtain construction permits and that Walmart executives in the United States “hushed up” the allegations.  On April 27, 2012, Scott+Scott filed suit against Walmart executives on behalf of an institutional shareholder in Arkansas federal court.

            Although the text of the FCPA itself does not contain a private cause of action that allows individuals or institutions to bring lawsuits for violations of the FCPA, conduct that violates the FCPA also violates several other laws.  For example, the Department of Justice maintains a “Lay Person’s Guide” to the FCPA that explicitly states, “Conduct that violates the anti-bribery provisions of the FCPA may also give rise to a private cause of action for treble damages under the Racketeer Influenced and Corrupt Organization Act (RICO), or to actions under other federal or state laws.”

            Conduct which violates the FCPA can also give rise to shareholder derivative lawsuits.  Shareholder derivative lawsuits are brought by shareholders against officers and directors of the companies that have breached their fiduciary duties owed to the companies.  Fiduciary duties require officers and directors to put the interests of the company above personal interests and to manage the company with the care that they would put into their own personal business.  Initiating or covering up bribes and improper payments overseas undoubtedly is a breach of these duties.  As such, it is imperative for shareholders to take action to rectify this behavior through the shareholder derivative mechanism.

            Scott+Scott has been on the forefront of investigating and pursuing breaches of fiduciary duties by officers and directors for directing or allowing their companies to violate the FCPA.  For more information on the FCPA or shareholder derivative actions, please contact David Scott at (800) 404-7770 or drscott@scott-scott.com.

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Facebook IPO Sparks Investor Lawsuits, Regulatory Scrutiny

To date, at least three shareholder class actions have been filed in California and New York charging Facebook and three of its underwriters, Morgan Stanley, JPMorgan Chase & Co., and Goldman Sachs Group, Inc., with misleading investors ahead of the company’s May 18th initial public offering (“IPO”).  The shareholder complaints allege Facebook and its bankers violated sections 11, 12, and 15 of the Securities Act of 1933 in the offering. The suits stem from reports that lead underwriter Morgan Stanley tipped certain of the bank’s clients that it had reduced revenue forecasts for Facebook.  A key Morgan Stanley analyst had reportedly lowered the firm’s revenue estimates because Facebook has been struggling to monetize its mobile applications.

On May 9, three days into its road show—in which Facebook executives and the underwriters discussed the IPO with prospective investors—the company filed a late amendment to its registration statement with the U.S. Securities and Exchange Commission (“SEC”), adding convoluted language acknowledging the issue that was vexing its underwriters.  “To the extent that increasing usage of Facebook through mobile apps or our mobile website substitutes for the use of Facebook through personal computers where we do show ads, the number of ads that we deliver to users and our revenue may be negatively affected unless and until we include ads or sponsored stories on our mobile apps and mobile website,” the company wrote.

After filing the updated document, Facebook contacted sell-side research analysts to discuss the contents.  A majority of them revised their estimates on revenue and earnings according to a report by The Wall Street Journal.  Morgan Stanley and Facebook’s other underwriters promptly informed the banks’ key clients, certain large hedge funds, mutual funds, and wealthy individuals, of the declining revenue prospects at Facebook.  The WSJ reported:

            The Wall Street firms prepared talking points for their salespeople outlining downward revisions on Facebook revenue for the second quarter and full year, people familiar with the matter said.  The salespeople scrambled to make as many calls as possible to key clients, reading out the new numbers.

News of the estimated cut was passed on only to a handful of big investor clients, not everyone else who was considering an investment in Facebook.  The New York Times’ Dealbook reported:

One investor, after being briefed on Facebook’s revised forecast, unloaded all of its holdings in the first hour of trading, according to Scott Sweet, founder of the IPO Boutique, who advises mutual funds, hedge funds and individuals.  The investor sold hundreds of thousands of shares at about $42.

The investor suits charge that the revised analyst estimates were not adequately disclosed to the public prior to Facebook’s offering.  On the Monday following the IPO, Facebook shares plunged 11%, declining a total of 19% in a two-day span.  The company lost over $19 billion in market capitalization from the $38 per share offering price when it closed at $31 per share on May 22nd.

Beyond the shareholder lawsuits, the IPO is being reviewed by key U.S. regulators.  The Financial Industry Regulatory Authority (“FINRA”), Wall Street’s industry-funded brokerage watchdog, and the SEC are reviewing issues around Facebook’s IPO.  In particular, Morgan Stanley will be probed regarding reports of the firm’s selective disclosure of the negative news about Facebook.  “If true, the allegations are a matter of regulatory concern” to FINRA and the SEC, stated FINRA Chairman and Chief Executive Officer Richard Ketchum in an email to reporters at Bloomberg.  In addition, Massachusetts Secretary of Commonwealth William Galvin has issued a subpoena to Morgan Stanley seeking information related to analysts’ discussions with institutional investors regarding Facebook’s revenue prospects.

In the face of the charges lodged against the bank, it was reported that Morgan Stanley would adjust prices on thousands of trades made in the IPO and that certain limit orders wouldn’t be filled at $43 a share or higher because of low volume at that price range.

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Scott+Scott Wins Victory In 11th Circuit Appeal

Scott+Scott Partner Walter Noss and Associate Penelope Abdiel achieved a victory in a case recently brought before the 11th Circuit Court of Appeals.  The team won a $4.1 million dollar jury verdict in April 2011 in the case of Novak v. Gray, Case No. 09-08880, before the U.S. District Court for the Middle District of Florida, Tampa Division.  The appeal, brought by the defendant in that case, was denied by a panel of three circuit judges in a per curium opinion on April 10, 2012.

The case originally brought before the district court concerned the existence and breach of an oral agreement between two business partners to share the value of the net proceeds of stock options held in the name of the defendant.  In return for sharing the proceeds, the plaintiff alleged that he continued to participate in business opportunities through which he incurred additional risk and costs, including working for years without a paid salary with the prospect of higher returns for both partners.  The plaintiff also pled a cause of action for fraud regarding statements made by the defendant with respect to the stock options.  The jury found that the defendant had breached his agreement with the plaintiff to share the proceeds of the stock options and awarded the plaintiff over $1.3 million in damages.  The jury further found that the defendant made fraudulent statements to the plaintiff concerning the stock options, and the plaintiff had suffered damages for which the jury awarded him over $2.7 million.

The defendant appealed the jury’s verdict and the district court’s decision to deny his post-trial motions on five separate grounds: (1) the parties’ contract was illegal under Florida law and federal securities laws; (2) the contract was barred by Florida’s parole evidence rule; (3) the plaintiff’s claim of fraud must fail under Florida’s economic loss doctrine; (4) the jury instructions on fraudulent inducement were incorrect; and (5) the damages award was speculative.  The 11th Circuit court rejected Appellant-Gray’s arguments in the first four instances, finding that the district court did not err in its decision to deny the defendant’s post-trial motions on those grounds.  On the fifth, the court clarified that the amount of damages should be half of the total net proceeds of the stock options in dispute for both of the fraud and breach of contract claims.  The court remanded that issue to the district court for remittitur, noting that the judgment should be adjusted to the “maximum amount established by the evidence… the outer limit of the damages Novak claimed in his sworn testimony that he was entitled to receive.  In all other respects, the district court’s judgment is affirmed.”

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Scott+Scott’s Appellate Practice Group Uniquely Equipped To Handle Tough Appeals

            Scott+Scott’s appellate practice group recently obtained a significant appellate victory in the Sixth Circuit United States Court of Appeals on behalf of employees and retirees who had invested their retirement savings in General Motors’ (“GM”) two main 401(k) plans.

In the lawsuit, GM’s employees and retirees, represented by Scott+Scott, had argued that State Street Bank and Trust Company breached its fiduciary duties by failing to eliminate GM stock as an investment option in the plan in the months leading up to GM’s bankruptcy filing in 2009.  The district court had dismissed the case, but on appeal the Sixth Circuit reversed and remanded the suit back to the district court.  In the suit, the Sixth Circuit made it clear that State Street owed the GM employees and retirees a fiduciary duty to eliminate GM stock in the event that GM stock became an imprudent investment for the 401(k) plans.

The GM case is one of several cases that Scott+Scott’s appellate practice group has appealed to the United States circuit courts over the past several years.  The Firm has handled appeals in the Second, Third, Sixth, Seventh, Ninth, and Eleventh Circuit U.S. Courts of Appeals, making it one of the few plaintiff-side securities firms with an active appellate practice.  The majority of Scott+Scott’s appellate cases are securities class action cases where the district court has dismissed the suit for failing to plead the case with sufficient particularity.

According to Geoff Johnson, who heads Scott+Scott’s appellate practice group, there are unique challenges when appealing a case to the U.S. circuit courts.  “On appeal, the case typically turns on one or two discrete issues.  The key is to identify and then argue the issues that are most likely to persuade the appellate court to find in your favor.  Identifying the key issues are especially important when you are appealing, as opposed to defending, the district court’s decision, as the vast majority of cases that get appealed to the circuit courts are affirmed.”

Scott+Scott’s strong appellate practice group is one of the areas distinguishing the Firm in securities class action litigation.  Scott+Scott has both the experience and resources to see class action cases through to their very end, and has the ability to appeal cases in the event that the Firm receives an unfavorable ruling in the district court.

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On The Record


“L[aws] and institutions are constantly tending to gravitate.  Like clocks, they must be occasionally cleansed, and wound up, and set true to time.”

--Life Thoughts: Gathered from the Extemporaneous Discourses of Henry Ward Beecher (Boston: Phillips, Simpson, and Co., 1858), 129.


Henry Ward Beecher,

American Clergyman, Social Reformer

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Conferences and Educational Seminars


+June 3-6, 2012

Massachusetts Association of Contributory Retirement Systems (MACRS)

Hyannis Resort and Conference Center

Hyannis, MA

The four-day conference will focus on a variety of issues of particular importance to the Massachusetts retirement community, including several sessions regarding the recent passage of Chapter 176 (“Pension Reform lll”).


+June 5-6, 2012

Michigan Pipe Trades Association 100th Convention

Atheneum Hotel and Convention Center

Detroit, MI

Attending the convention will be 110 delegates including business managers, financial secretaries, business agents, and elected officers of the 13 UA Local Unions making up the association.  Also in attendance will be officers and guests from UA Local Unions in Ohio, Indiana, Wisconsin, and Washington, DC.


+June 10-13, 2012

Government Finance Officers Association (GFOA) 106th Annual Conference

McCormick Place West

Chicago, IL

This year’s theme is “Winds of Change: Public Finance in Transition.”  Dedicated to the sound management of government financial resources, the GFOA provides professional development training opportunities to state and local government finance professionals each year, as well as an ideal venue for meeting and networking with colleagues and experts from across the nation.


+June 11-13, 2012

International Foundation of Employee Benefit Plans (IFEBP) Presents the Benefit Plan Professionals Institute for Accountants

Hilton San Francisco Union Square

San Francisco, CA

Earn continuing professional education (CPE) credit at this three-day conference offering the latest health and pension fund industry information for accountants and auditors.


+June 12-13, 2012

The Pennsylvania State Building and Construction Trades Council (PABCTC) Convention

Harrisburg Hilton Hotel and Conference Center

Harrisburg, PA

The Council is made up of 16 regional council and more than 115 local unions from 15 international building trades unions.  The focus of this conference is to provide a comprehensive overview of current legislative and regulatory issues facing the members, including job creation, fiduciary measures, construction industry standards, and defensive battles occurring on the federal and state level.


+June 24-27, 2012

Florida Public Pension Trustees Association (FPPTA) 28th Annual Conference

Hilton Walt Disney

Lake Buena Vista, FL

FPPTA’s primary purpose in conducting an annual educational forum is to provide the basis for improved financial and operational performance of the public employee retirement systems in the state.  FPPTA acts as a central educational resource for the public pension industry, including topics such as the political reality of public pension plans and private sector plans.


Government Finance Officers Association Conferences


+June 7, 2012

Connecticut GFOA

Tunxis Plantation

Farmington, CT


+June 20-22, 2012

Maryland GFOA

Clarion Fontainebleau Hotel

Ocean City, MD


+June 28-July 1, 2012

Municipal Association of South Carolina (MASC)

Marriott Hilton

Hilton Head Island, SC


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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