March 2013 Newsletter


 Supreme Court Clarifies Role of Fraud-on-the-Market Presumption in Certification of Securities Fraud Class Actions

•  U.S. Department Of Justice Files Lawsuit Alleging Fraud Against Mcgraw-Hill, Standard & Poor’s

•  U.S. Supreme Court To Review Scope Of Preclusion Of State Law Securities Class Actions Under SLUSA

 A Review of the 2012 Securities Class Action Filings

•  On The Record

•  Conferences and Educational Seminars

Supreme Court Clarifies Role of Fraud-on-the-Market Presumption in Certification of Securities Fraud Class Actions

Under §10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §78j(b), and Securities and Exchange Commission Rule 10b-5, a private securities fraud action, requires proof that the plaintiff relied on the alleged misrepresentation.  In the class action context, the reliance requirement would ordinarily preclude class certification because individual reliance issues would overwhelm questions common to the class.  The “fraud-on-the-market” theory, however, facilitates class certification by recognizing a rebuttable presumption of class-wide reliance on public misrepresentations. 

In Basic Inc. v. Levinson, 485 U.S. 224 (1988), the U.S. Supreme Court held that a plaintiff may obtain a rebuttable presumption of reliance by invoking the “fraud-on-the-market”  theory if four predicates are established: (1) the security subject to the litigation traded in an efficient market; (2) the plaintiff's purchase of the security followed the alleged misrepresentation and predated the revelation of the truth; (3) the misrepresentation was public; and (4) the misrepresentation was material.  The fraud-on-the-market presumption assumes that the market price of a security traded in an efficient market reflects all public information, and therefore a buyer of the security is presumed to have relied on the truthfulness of that public information in purchasing the security.

Recently, in Connecticut Retirement Plans and Trust Funds v. Amgen Inc. (C.D. Cal.), relying on the fraud-on-the-market theory, the plaintiff alleged that Amgen violated §10(b) and Rule 10b-5 through certain misrepresentations and misleading omissions regarding the safety, efficacy and marketing of two of its anemia drugs, Aranesp and Epogen.  The district court certified a class of all investors who purchased Amgen stock during the claimed period of misrepresentation. 

On interlocutory appeal to the Ninth Circuit, appellant Amgen argued, among other things, that it was error to certify the class without first requiring the plaintiff to prove that the alleged misrepresentations and omissions were material.  Specifically, Amgen contended that the alleged fraudulent statements could not have been material because the truth about the safety of Amgen’s Aranesp and Epogen products had already been disclosed to the market at the time of the transactions.  Because, according to Amgen, the alleged misstatements were immaterial, by definition, they would not affect Amgen’s stock price in an efficient market. Thus, plaintiff could not invoke the fraud-on-the market presumption of reliance and no buyer could claim to have relied upon the alleged misstatements.  Amgen further argued that it should be allowed to present evidence to rebut materiality.

The Ninth Circuit rejected Amgen’s arguments and affirmed the district court decision to certify the class of investors.  The Supreme Court subsequently granted certiorari.  The particular questions presented by the Supreme Court’s grant of certiorari were, first, whether, in a misrepresentation case under Rule 10b-5, a securities fraud plaintiff alleging fraud-on-the -market must establish materiality of the misstatements in order to obtain class certification and, second, whether in such a case the district court must allow the defendant to present evidence rebutting the applicability of the fraud-on-the-market theory before certifying a plaintiff class based on that theory.

On February 27, 2013 in Amgen Inc. et al. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085, the Supreme Court ,in a 6-to-3 decision, held that a securities fraud plaintiff need not prove the materiality of an alleged fraudulent statement in order to invoke the fraud-on-the-market presumption of reliance to obtain class certification.  Justice Ruth Bader Ginsburg delivered the opinion of the court, Justice Samuel Alito concurred separately, and Justices Antonin Scalia, Clarence Thomas and Anthony Kennedy dissented.

The majority held that establishing the materiality of the alleged fraudulent statement cannot be required at the class certification stage.  The Court explained that “Rule 23(b)(3) requires a showing that questions common to the class predominate, not that those questions will be answered, on the merits, in favor of the class.... The alleged misrepresentations and omissions, whether material or immaterial, would be so equally for all investors composing the class.”

The Court dismissed Amgen’s contention that freeing plaintiffs from materiality challenges at the class certification stage would allow plaintiffs to use the in terrorem effect of massive potential §10(b) liability to force settlements even on weak claims.  The Court took the position that allowing immateriality to defeat the presumption of reliance for class certification purposes would impermissibly add to the restrictions to shareholder class action suits that Congress has already enacted, such as those in the Private Securities Litigation Reform Act of 1995 and the Securities Litigation Uniform Standards Act of 1998.  Amgen "would have us put the cart before the horse," Justice Ginsburg wrote. "Congress, we count it significant, has addressed the settlement pressures associated with securities-fraud class actions through means other than requiring proof of materiality at the class-certification stage."

The Supreme Court further held that the district court properly refused to consider rebuttal evidence concerning materiality in connection with plaintiff’s invocation of the fraud-on-the-market presumption of reliance at the class certification stage.  The Court found held that evidence to rebut materiality does not disprove commonality because materiality is an objectively determined fact that is either present or absent for the whole class.

As a practical matter, the Supreme Court decision will permit plaintiffs to invoke the fraud-on-the-market presumption at class certification without proving materiality so long as the stock in question is traded on an efficient market and the statements at issue are public, delaying the burden of proving materiality to a later stage in the case -- summary judgment or trial.

The Supreme Court’s holding affirmed the Ninth Circuit, resolving an existing split between the First, Second, and Fifth Circuits and the Third, Seventh, and Ninth Circuits.

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U.S. Department Of Justice Files Lawsuit Alleging Fraud Against Mcgraw-Hill, Standard & Poor’s

            On February 4, 2013, the U.S. Department of Justice (the “DOJ”) filed a lawsuit against Standard & Poor’s Financial Services LLC (“S&P”) and its parent company, McGraw-Hill Companies, Inc., accusing the credit ratings agencies of fraud for knowingly inflating credit ratings for residential mortgage-backed securities (“RMBS”) and collateralized debt obligations (“CDOs”).

            The DOJ sued under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”).  The lawsuit charges that between 2004 and 2007, S&P deliberately misstated the risks of RMBS and CDOs, the collapse of which helped to launch the credit crisis.  The DOJ lawsuit seeks $5 billion in damages, and alleges mail fraud, wire fraud, and two forms of financial institution fraud under FIRREA.

            RMBS and CDOs are structured debt securities that were collateralized by pools of either residential mortgage loans (for RMBS) or existing debt securities (for CDOs).  RMBS and CDO issuers pooled these residential mortgages or debt securities, structured different classes of notes, (known as “tranches,”) securitized by the pools, and engaged S&P, in its capacity as a credit rating agency, to provide credit ratings for the various tranches.  S&P derived substantial revenue from performing credit ratings regarding RMBS and CDOs.

            The DOJ alleges that S&P represented that its credit ratings reflected its current opinion of creditworthiness, and were objective, independent, and uninfluenced by any conflicts of interest.  However, S&P knowingly and with the intent to do so, engaged in a scheme to defraud investors in RMBS and CDO tranches.  Specifically, the DOJ alleges that S&P limited, adjusted, and delayed updates to the ratings criteria and analytical models that it used to assess the credit risks posed by RMBS and CDO tranches.  This rendered S&P’s criteria and models substantially flawed.

            The DOJ alleges that S&P knew of these heightened credit risks and the flaws in its own ratings criteria and analytical models.  Undaunted, however, S&P continued to tout its credit ratings, knowingly weakened them or allowed them to grow out of date, and continued to issue highly flawed credit ratings on new RMBS and CDO tranches.

            By maintaining these higher, severely defective credit ratings for particular tranches, S&P attracted more RMBS and CDO issuers to utilize its services, thereby increasing S&P’s earnings.  Thus, S&P’s desire for increased revenue and market share (of the RMBS and CDO credit ratings market) motivated S&P to downplay and disregard the severity of the credit risks posed by RMBS and CDO tranches to the detriment of the investing public.

            The complaint filed by the DOJ contains numerous, seemingly incriminating, email exchanges and other internal communications between S&P executives and analysts.  In one particular exchange, two S&P analysts opined that the S&P CDO rating model “does not capture half of the . . . risk,” that S&P “should not be rating it,” and that S&P “rate[s] every deal . . . it could be structured by cows and [S&P] would rate it.”

            According to the DOJ, one of the principal victims of S&P’s fraudulent conduct is federally insured financial institutions, such as federally chartered community banks.  RMBS and CDO tranches were marketed and sold primarily to such institutions, as well as other sophisticated institutional investors.

            The DOJ action is pending in the U.S. District Court for the Central District of California, No. 13-cv-00779.  Connecticut, Illinois, and Mississippi already have related lawsuits pending against S&P and other ratings agencies while 13 states have joined the DOJ’s lawsuit.

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U.S. Supreme Court To Review Scope Of Preclusion Of State Law Securities Class Actions Under SLUSA

            Recently, the U.S. Supreme Court granted certiorari to resolve a circuit court split concerning when the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) preempts state law class actions that indirectly arise from securities claims.  The Court will consider three related cases on appeal, all of which stem from a March 19, 2012 decision by the Fifth Circuit.

            All three lawsuits arise from the $7 billion Ponzi scheme operated by R. Allen Stanford and companies he controlled.  This particular scheme involved the issuance of certificates of deposit (“CDs”) from Stanford International Bank.  The plaintiffs alleged that the bank falsely claimed the CDs were backed by safe, liquid investments when, in fact, they were not.  The three cases are Chadbourne and Parke LLP v. Troice, No. 12-79, Willis of Colorado Inc. v. Troice, No. 12-86, 133 S.Ct. 977 (U.S. Jan. 18, 2013) and Proskauer Rose LLP v. Troice, No. 12-88, 133 S.Ct. 978 (U.S. Jan. 18, 2013).  Each plaintiff filed a separate lawsuit in state court.  Shortly thereafter, the defendants removed the lawsuits to the U.S. District Court for the Northern District of Texas, and the district court consolidated the individual actions into one case.

            At issue is the scope of a provision of SLUSA, 15 U.S.C. §78bb(f)(1)(A), which precludes class actions based on state law that involve “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.”  The Stanford CDs are not “covered securities,” a point which the defendants conceded before the Fifth Circuit.  Thus, the plaintiffs argue, the SLUSA does not apply to their actions.

            The defendants, however, assert that SLUSA does preclude plaintiffs’ claims because the conduct alleged involves misrepresentations that the CDs were backed by covered securities.  The heart of the issue is, therefore, how courts must construe the SLUSA phrase “in connection with” when the investments at issue are not covered securities, but the core allegations relate, in varying degrees, to the purchase or sale of covered securities.

            The district court recognized that circuit court authority was split over the meaning of “in connection with” under SLUSA.  It chose to follow the standard promulgated by the Eleventh Circuit, that a state law class action is precluded if the plaintiffs’ allegations “depend upon” the purchase or sale of SLUSA-covered securities, or if the plaintiffs were “induced” to invest through misrepresentations regarding covered securities.  The district court concluded that the plaintiffs’ allegations satisfied the second prong of this test, and granted the defendants’ motions to dismiss.

            The Second, Sixth, Seventh, Eighth, and Eleventh Circuits have adopted different, though similar, views to that embraced by the district court, however it is unclear if the plaintiffs’ allegations would have been preempted under the approaches of these other circuits that interpret “in connection with” language more broadly.

            The Fifth Circuit reversed the district court in Roland v. Green, 675 F.3d 503 (5th Cir. 2012).  Espousing a standard used by the Ninth Circuit, the Fifth Circuit held that SLUSA did not apply because the plaintiffs’ lawsuits also contained other alleged misrepresentations that did not relate to Stanford’s alleged portfolio of covered securities.  The Fifth Circuit determined that the misrepresentations regarding the covered securities underlying the CDs were only “tangentially related” to the crux of the alleged fraud.  The Fifth Circuit, therefore, took a narrower view of the “in connection with” language in SLUSA.

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A Review of the 2012 Securities Class Action Filings

On January 29, 2013, NERA Economic Consulting released its Recent Trends in Securities Class Action Litigation: 2012 Full-Year Review.  This article summarizes some of the key findings in that report.


In 2012, the number of securities class action filings totaled 207, slightly below the 221 average for 2007-2011.  Of these only four cases were related to the credit crisis – credit crisis related filings have steadily declined from a high of 103 filings in 2008.  Merger objection cases comprise slightly over 25% of the securities class action cases, representing very small change from 2011.  The balance, 150 cases, include various claims under Rule 10(b)(5), Section 11, or Section 12.

From 2008 through 2012, the majority of filings have been in the Second Circuit or the Ninth Circuit.  In 2010 and 2011, the majority of filings were in the Ninth Circuit.  However, the Second Circuit has once again overtaken the Ninth Circuit as the preferred jurisdiction for securities class action filings in 2012 with 56 and 34 filings, respectively.

Investor Losses

Investor losses totaled $240 billion in 2012, down by $10 billion from 2011, and up by $43 billion from 2010.  Of the 2012 investor losses,

·         approximately 58% of the cases involve investor losses of more than $10 billion;

·         approximately 4% of the cases involve investor losses of between $5 billion and $10 billion;

·         approximately 30% of the cases involve investor losses of between $1 billion and $5 billion; and

·         approximately 8% of the cases involve investor losses of less than $1 billion.


In 2012, breach of fiduciary duty allegations (31%) led allegations related to earnings guidance (29%), accounting (24%), and customer/vendor issues (13%).  The most significant change from prior years has been in the accounting-related allegations which fell from 39% in 2011 and a high of 44% in 2009.  Breach of fiduciary duty claims are also down from 2010 (42%) and 2011 (32%).  Insider trading allegations under Rule 10b-5 increased from 18% in 2011 to 19% in 2012, but remain considerably lower than the high of 52% in 2007.  Nearly 60% of securities class actions filed in 2012 were accompanied by a parallel derivative action with similar allegations.


Among the most notable statistic for 2012 is that only 153 securities class actions were resolved.  This is down considerably from prior years.  Of those, 93 were settled and 60 were dismissed.  None were resolved by a verdict.  Despite the relatively low number of resolutions, the median settlement amount is at its highest – $12 million, up from $7.5 million in 2011 and $11 million in 2010.

Since 2005, the average time to resolution has remained fairly constant, fluctuating between 2.3 years and 2.5 years.

Plaintiffs’ Attorneys’ Fees and Expenses

Compared to the years ended 1996 through 2009, plaintiffs’ attorneys’ fees as a percentage of the settlement value has declined with the exception of settlements greater than $1 billion.  Typically, as the value of the settlement increases, plaintiffs’ attorneys’ fees as a percentage of the value of the settlement decreases.


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On The Record

“A word is not crystal, transparent and unchanging, it is the skin of a living thought and may vary greatly in colour and content according to the circumstances and time in which it is used.”

Towne v. Eisner,

245 U.S. 425 (1918)


Oliver Wendell Holmes Jr.

United States Supreme Court Associate Justice


Born, 3/8/1841


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Conferences and Educational Seminars


March Events in the USA


+March 2-6, 2013

Texas Public Employees Retirement System (TEXPERS)

Sheraton Austin Hotel and Conference Center

Austin, Texas


The Texas Public Employees Retirement System is sponsoring their 24th Annual conference.  The primary goal is for trustees to receive educational information about investment options, fiduciary duties, governance, ethics, investment terms and practices, and actuarial and legal matters.  The Austin conference offers and encourages attendees to participate in Wednesday’s session at the Texas House of Representatives where legislative representatives will discuss significant legislation and issues affecting pensions.  Many attendees use this opportunity to visit their state legislators’ offices. 


+March 2-5, 2013

California Association of Public Retirement Systems (CALAPRS)

InterContinental Hotel Conference Center

San Francisco, CA


The main focus of CALAPRS General Assembly conference is to provide an educational and informational forum for the public retirement systems in the state of California.  Various service providers, university professors, as well as professional retirement organizations such as National Institute on Retirement will give educational presentations.


+March 4, 2013

Investment Consultants Forum produced by Opal Financial Group

Crowne Plaza Times Square

New York, New York


This annual forum will provide a unique environment for developing dialogue between plan sponsors, managers and consultants, and will feature panel-driven discussions.  Topics will include marketing to plan sponsors-from RFPs to Finals Presentations, the evolving role of investment service providers and fiduciaries and the 2013 market outlook. Complimentary registration for representatives of public pension and Taft-Hartley funds.


+March 11, 2013

Investment Consultants Forum sponsored by Opal Financial Group

The Princeton Club

New York, NY


Opal is an innovative, forward thinking organization aimed at bringing public pension leaders up-to-date with the latest information regarding public pension management.  This event will focus on the role of the consultant which is evolving into more than evaluating investment managers.


+March 13, 2013

12th Annual Public Pension fund Awards for Excellence by Money Management Intelligence

Hyatt Regency Conference Center

Huntington Beach, California


The public Pension Fund Awards dinner and Ceremony is held on conjunction with the Annual   Public Funds Summit.  It has become the premier celebration and networking event for the U.S. public pension fund investment community.  The awards recognize the people and organizations across the industry that have excelled in their professions during the previous year.


+March 14-15, 2013

18th Annual Public Funds Summit produced by Information Management Network

Hyatt Regency Conference Center

Huntington Beach, California


This event brings together leading pension trustees, board chairs, executive directors, investment officers, investment consultants and money managers from around the country for in-depth educational content and extensive networking opportunities.  The conference provides attendees with a comprehensive overview of the public pension fund landscape, with in-depth, interactive discussions on asset allocation, investment strategies, manager selection, trustee issues and governance issues.  This summit runs in conjunction with the 8th Annual Foundations and Endowments conference where Plenary sessions may be shared.


Government Finance Officers’ Association Conferences


+February 27 -March 1-2, 2013

Government Finance Officers’ Association of Alabama (29th Annual conference)

Montgomery, Alabama


+March 6-8, 2013

North Carolina Government Finance Officers Association (NCGFOA)

Research Triangle Park, NC



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