INSIDE THIS ISSUE
On Thursday, May 16, 2012, the Honorable Timothy M. Cain of the Judicial District of South Carolina ruled in favor of the Plaintiff, represented by Scott+Scott, in a case against UnitedHealth Care (“United”) and Michelin North America, Inc. (“Michelin”).
The complaint alleged that both United, as the administrator of a company offered health care plan, and Michelin, as the employer fiduciary of that plan – violated the Employee Retirement Income Security Act (“ERISA”). As background, health insurance plans offered by employers to employees and their beneficiaries are almost always governed by ERISA, which was enacted in 1974, in part, to regulate the operation of health benefit plans. ERISA provides standards in administering such health benefit plans and provisions whereby an individual participant or beneficiary of that plan can file suit for violations thereof.
This case alleges that United and Michelin breached certain obligations provided for by ERISA, as well as their fiduciary duties to Plaintiff as a plan participant, when reimbursing for given medical expenses. In particular, Plaintiff alleged that he was under reimbursed for doctor’s visits and therefore forced to pay an excessive out-of-pocket amount. He further alleged that the under reimbursement was systematic and, thus, brought the action on behalf of all persons who were likewise affected by the determination of United in reimbursing for medical claims and forced to pay more in medical expenses.
United and Michelin filed motion to dismiss the action alleging that the applicable complaint failed to state any claim. Simultaneously, they filed motions to have the case be considered on an individual basis, as opposed to as a class action. On May 16, 2012, the Court heard lengthy oral arguments. After two and a half hours of presentation, the Court made a ruling from the bench, stating on the record that all motions to dismiss were denied, and permitting the case to go forward as a class action. Scott+Scott is now actively engaging in discovery with all Defendants and will vigorously prosecute the case on behalf of those affected by the unfair calculation of health benefits by Michelin and United.
On May 3, 2013, Scott+Scott LLP filed an antitrust class action in the United States District Court for the Northern District of Illinois, seeking damages and other relief on behalf of a class of “buy-side” market participants in the market for credit default swaps (“CDS”). The lawsuit charges eleven “sell-side” market participants – the world’s largest CDS dealers – with anticompetitive conduct, including a group boycott, monopolization, and price fixing in the CDS market from 2008 to 2011. The dealer defendants include: Bank of America, Barclays, BNP Paribas, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan-Chase, HSBC, Morgan Stanley, Royal Bank of Scotland, and UBS. Also sued were Markit and ISDA, two entities—controlled by the dealers—which were critical to the operational infrastructure of the CDS market.
The CDS Market
A CDS is a contract between a buyer of credit protection for some “reference entity” and a seller of credit protection. The “protection buyer” pays a periodic fee to the “protection seller,” and in return, the protection seller agrees to compensate the protection buyer, should the reference entity experience a “credit event” during the life of the contract. CDS may have one reference entity, in which case they are called “single-name CDS,” or a basket of reference entities, in which case they are called an “index CDS.” CDS reference entities may include corporations, sovereigns, municipalities, bonds, or structured-finance vehicles (such as asset-backed securities (“ABS”) and collateralized debt obligations (“CDOs”)). Defined credit events are eventualities outlined in the contract and may include a reference entity’s bankruptcy, the acceleration of payments on its obligations, default on its obligations, the failure to pay its obligations, the restructuring of the entity’s debt, or a repudiation or moratorium on payments on its obligations.
In addition to the entity they reference, CDS are defined by the amount of protection purchased (the “notional amount”) and the term of the contract. The contract term often ranges from one to 10 years, with most standard CDS contracts having a five-year duration. The price of a CDS is the premium that the protection buyer pays to the protection seller. It is expressed as a percentage of a CDS’s notional amount and is denominated in basis points.
The dealer defendants dominate the sell-side of the CDS market, accounting for over 95% of U.S. CDS dealing by notional amount. The outstanding notional value of CDS increased from $100 billion in 1998 to $1 trillion in 2000, to $60 trillion in 2007, before dipping to approximately $28 trillion following the recession of 2008.
Buy-side participants in the CDS market include commercial banks, hedge funds, asset managers, pension funds, insurance and financial guaranty firms, and corporations. Buy-side market participants typically use CDS as a tool to manage credit risk, which is called hedging, or to profit from anticipated movements in the market prices of the reference entity, which is called speculating.
Buy-side market participants, for example, may enter into CDS transactions as a hedging strategy to offset exposure to the risk of loss inherent in lending arrangements or the acquisition of debt securities. A protection buyer might also purchase an index CDS for hedging purposes. For example, an investor with a large portfolio of bonds might hedge its credit exposure with an index CDS that includes bonds or bond issuers as reference entities. An index CDS may be a more cost-efficient way to hedge a broad portfolio than buying single-name CDS for each bond.
CDS also offer buy-side participants the ability to express a view on the creditworthiness of, for example, a corporation. A buy-side participant with a positive view on the credit quality of a corporation can sell protection and collect a periodic fee from a protection buyer. A buy-side participant with a negative view of the corporation’s creditworthiness can buy protection and receive payment if the corporation defaults on its bonds or experiences some other credit event during the term of the contract.
CDS, thus, allow credit risk to be isolated and traded. CDS simulate the return of the underlying financial product, where the buyer of credit protection has the equivalent of a short position on the credit asset and, the seller holds a long position. Accordingly, CDS are derivatives, as their value is based on the value of the underlying credit asset to which they reference.
Some derivatives are standardized contracts that trade on exchanges. Others are customized contracts that include negotiated terms. When contracts are not traded on an exchange, they are called over-the-counter (“OTC”) derivatives. As originally designed, CDS are bilateral contracts that are sold OTC. However, there is no reason why CDS could not trade on an exchange today.
Financial products with high trade volume that are relatively standard, for example, certain liquid single-name CDS and index CDS, are natural candidates for exchange-based trading. OTC dealing of CDS has remained only because of the anticompetitive agreements and conduct of the defendants in the market.
Manipulation of the CDS Market
The OTC market in CDS provides the dealer defendants with significant advantages over buy-side participants. In the OTC market, counterparties engage directly, transacting with one another without the public disclosures involved in trading on an exchange or other formal trading platform. Further, federal regulation historically did not require OTC market participants to register or record their transactions nor did the sell-side participants make real-time trade data available to the buy-side of the market. Accordingly, pricing in the OTC market for CDS was opaque, and the flow of pricing information was controlled by the dealer defendants.
The dealers publish to buy-side market participants “indicative runs” for various CDS types. Indicative runs set out non-binding prices at which a dealer would consider buying or selling credit production on particular CDS. The only other pricing data available to the buy-side was offered by Markit, an entity owned, in part, and controlled by the dealer defendants. Markit collects “marks” on the books of the dealers and aggregates this data for retail to customers. Dealer marks are the prices ascribed by traders, at their discretion, to positions on their books at the end of the day. This data does not provide a real-time picture of market prices, since it is not based on actual transactions and is delivered at a lag to actual market transactions. Accordingly, buy-side participants could not discover actual prices paid or bid by other participants in the market.
The OTC market in CDS stands in stark contrast to the securities and futures markets where the public can observe, in real time, the price of the last transaction traded on the exchanges, as well as current, binding, and executable bids and offers. The lack of real-time price information in the CDS market allowed the dealer defendants to profit from the inflated bid-ask spreads published in their indicative runs.
One attempt at bringing market forces to bear was the 2008 introduction of a CDS exchange – called CMDX – created by Citadel, a large buy-side market participant, and CME Group, which operates other derivative exchanges. The dealers viewed CMDX as disruptive to the current dealer business model. The exchange threatened the dealer defendants’ monopoly over the CDS market because it would have allowed buy-side participants to transact directly, bypassing the dealers. The exchange would also have compressed the bid-ask spread on any given CDS trade.
The dealers boycotted the launch of CMDX by Citadel and CME. They refused to participate in the exchange and prevented CMDX from obtaining necessary intellectual property licenses from Markit and ISDA, a trade association of derivatives market participants. These efforts killed the exchange, and thus, the inefficient and opaque OTC market in CDS persists.
A wide array of government agencies, including the U.S. Department of Justice and the European Commission, are investigating anticompetitive conduct in the CDS market. The investigations are reportedly focusing on price data manipulation by Markit and the dealers. The investigations are also reportedly examining the ability of potential competitors to enter the CDS market, including the dealers’, Markit’s, and ISDA’s roles in preventing exchange trading from coming to market.
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If you engaged in CDS transactions between January 1, 2008 and December 31, 2011 and wish to discuss this action, or have any questions concerning your rights, please contact David R. Scott at (800) 404-7770 or email@example.com.
Pacific Biosciences of California (NASDAQ: PACB) has agreed to pay at least $7,685,000 to purchasers of its common stock in (or traceable to) its October 26, 2010 initial public stock offing to settle claims the offering documents used to conduct the offering contained false and misleading information and omitted key facts. Pacific Biosciences is a company that develops, manufactures, and markets an integrated platform for genetic analysis. The Scott+Scott lawyers who represented the investors consider this a great result, and on June 3, 2013, California Superior Court Judge Marie Seth Weiner preliminarily approved the settlement.
On or about October 26, 2010, Pacific Biosciences went public, with its common shares sold to the public at $16 per share. The Plaintiffs alleged the registration statement and prospectus used to conduct the offering were false and misleading in violation of the federal securities laws. Plaintiffs alleged the statement and prospectus concealed and misstated the effectiveness of its DNA sequencing technology in that it was plagued by serious bugs, defects, and lacked commercial viability. When these adverse facts were revealed to the investing public, the price of Pacific Biosciences’ shares dropped dramatically. Plaintiffs first filed suit in October of 2011 and withstood numerous procedural and legal challenges to the viability of their claims. The defendants in the case were Pacific Biosciences, several officers and directors of the company, as well as JP Morgan Securities LLC, Morgan Stanley & Co. Inc., Deutsche Bank Securities Inc., and Piper Jaffrey & Co.; the underwriters that participated in the offering.
Following lengthy negotiations, the parties reached a preliminary settlement in January. The parties’ preliminary settlement agreement is subject to certain conditions, including court approval of a final settlement agreement at a hearing later this year.
The case is In re Pacific Biosciences of California Securities Litigation, Case No. CIV 509210 in the Superior Court of the State of California, County of San Mateo.
Scott+Scott served as executive sponsor of the Securities Class Actions conference for institutional investors in May 2013 in London. At the conference, Scott+Scott Managing Partner David R. Scott, Esq. presented European institutional investors with options for recouping institutional investor portfolio losses in U.S. courts after the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank. Morrison restricts actions under the U.S. federal securities laws to those relating to either transactions in securities listed on a U.S. exchange or U.S. transactions in other securities. In short, investors in U.S. securities purchased on a U.S. exchange remain protected by the U.S. securities laws, while investors in non-U.S. securities, such as exchange-traded ADRs, and other instruments, such as derivatives, still may satisfy Morrison depending on the circumstances surrounding the transaction.
Mr. Scott advised the conference participants that European institutional investors that are not barred from bringing a U.S. securities class action under Morrison possess the same traditional options for participation through seeking lead plaintiff appointment, opting out of a class settlement to bring an individual action, or monitoring settlements. Mr. Scott further explained that those that are barred under Morrison from prosecuting claims under the U.S. securities laws nonetheless can seek redress by bringing state common law fraud and misrepresentation claims in U.S. courts.
Conference attendees showed particular interest in Mr. Scott’s discussion of U.S. MBS-related litigation trends. Mr. Scott highlighted Scott+Scott’s recent successes in prosecuting MBS-related actions under the Trust Indenture Act, which is not subject to Morrison. A claim under the Trust Indenture Act essentially is a breach of contract claim against the trustee of the trust that holds the securitized mortgages that make up the MBS instrument. Such an action has several benefits, according to Mr. Scott, including: a longer statute of limitations than the U.S. securities laws; a lower pleading standard than a securities fraud claim; and trustee defendants that often are more solvent than many subprime exposed MBS sellers.
Although Morrison certainly presents challenges, Mr. Scott emphasized that the case does not represent an absolute bar to European institutional investor recovery of investment losses in U.S. courts. It remains imperative that institutional investors understand and put in place the right systems to manage the risks and maximize the opportunities to secure meaningful monetary recoveries for investors, obtain corporate governance reform, and satisfy fiduciary obligations. As Mr. Scott counseled, U.S. court actions still remain a viable litigation strategy for European institutional investors, even after Morrison.
Events in the
+June 2-4, 2013
Shanty Creek Resort
provide educational training and legislative updates to trustees of Public Employee Retirement
Systems within the State of Michigan. The legislative updates are issued by a full time professional
lobbyist, hired thru Capitol Services, Inc. Trustees, administrators, and staff representing
Michigan public pension plans as well as state officials, investment, financial and legal
consultants attend the annual spring and fall conferences. MAPERS motto is “Tomorrow’s Future
Through Today’s Education.”
+June 2-5, 2013
Massachusetts Association of Contributory Retirement Systems (MACRS)
Conference Center at Hyannis
The four day conference will focus on a variety of issues of particular importance to the Massachusetts retirement community including a special presentation by Hank Kim, executive director and general counsel for the National Conference on Public Employees Retirement Systems (NCPERS), who will provide the national pension update.
+June 2-5, 2013
107th Government Finance Officers’ Association Annual Conference (GFOA)
Moscone Center North
San Francisco, CA
This year’s theme is “Bridges to Financial Sustainability.” 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 and Canada. Ben Stein will deliver Monday’s keynote address.
+June 5-8, 2013
Oklahoma State Firefighters Association’s 119th Annual Convention (OSFA)
The Oklahoma State Firefighters Association provides its members with financial, legislative and educational advisory programs and pension seminars as well as many firefighter specific training tools and resources.
+June 11-12, 2013
Council is made up of 16 Regional Council and more than 115 Local Unions from
+June 23-26, 2013
Florida Public Pension Trustee Association’s 29th Annual Conference (FPPTA)
Omni Orlando at Champions Gate
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 resource for educational purposes forth public pension industry including topics such as the political reality of public pension plans and private sector public sector plans.
+June 24-26, 2013
International Foundation of Education, Benefits for Public Pensions (IFEBP)
Hilton San Francisco, Union Square
The Trustees and Administrators Institutes are the premier educational programs for those who serve multiemployer trust funds. IFEBP conferences offer concurrent seminars for new trustees, advanced trustees and administrators. Each features a module for handling fiduciary responsibilities, government reporting, disclosures and how the economic political and regulatory environment impacts plans.
+June 24-26, 2013
24th Annual National Association of Securities Professionals Annual and Financial Services Conference (NASP)
Crowne Plaza Times square
New York, NY
NASP is the advocate for minorities in the financial services industry. This year’s annual co-chairs are the Honorable Denise L. Nappier, Treasurer of the state of Connecticut and the Honorable Thomas P. Di Napoli, Comptroller of the state of New York.
+June 26-28, 2013
National Association of Public Pension Attorneys (NAPPA)
Hilton Sante Fe at Buffalo Thunder
Sante Fe, NM
“The National Association of Public Pension Attorneys is a legal professional and educational association”.
Government Finance Officers’ Association Conferences
+ June 19-21, 2013
Maryland Government Finance Officers’ Association (MDGFOA)
Clarion Conference Center
Ocean City, MD
+ June 19-21, 2013
Nebraska League of Municipalities
+ June 22-26, 2013
Florida Government Finance Officers’ Association
Boca Raton Resort and Conference Center
Boca Raton, FL
+ June 13-14, 2013
Association of Municipal Administrators of Nova Scotia
Town of Yarmouth, NS
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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.
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