Scott+Scott LLP Commended By Southern District Of Texas

Upcoming Decision In Goldman Sachs Abacus Case Could Have Serious Implications On Securities Suits

Supreme Court To Determine Scope Of Liability In Private Securities Fraud Actions

The Dodd-Frank Act Increases Protections For Whistleblowers

Conferences and Events

(Flashlit version)

Scott+Scott LLP Commended By Southern District Of Texas

On September 29, 2010, the Honorable Keith P. Ellison of the Southern District of Texas, Houston Division, ordered final approval of a settlement reached in In re Tetra Technologies Securities Litigation, in which Scott+Scott served as lead counsel. The parties agreed to settle the case for $8.25 million for the class of investors, which represented an outstanding 41 percent recovery. In approving, the settlement, Judge Ellison recognized the professional and capable manner in which Scott+Scott represented the class, by stating:

[T]he professional fees being sought are, in fact, a lower percentage of the recovery than I'm accustomed to seeing. The Court would have been willing to approve more.

× × ×

I know this was a hard fought case, and the Court is grateful that we had attorneys who could fight hard but also fight fair, and I was very fortunate in having the benefit of both sides' excellent representation.


If I can ever do anything good in the way of providing a recommendation for aboard certification or anything like that, I hope you think of me. I'm happy to swing the bat for you.


Scott+Scott filed the operative complaint in August 2008 on behalf of investors who purchased TETRA Technologies stock between May 3, 2006 and October 16, 2007. The complaint alleged that defendants misrepresented a dispute with its insurance carrier over coverage for damage to its oil and gas wells and physical property from the 2005 hurricanes, Rita and Katrina. The complaint also alleged that the defendants inflated first quarter 2006 through second quarter 2007 earnings by failing to timely recognize expenses, and issued 2007 earnings guidances that were false because of the looming and yet to be expensed repair costs. Meanwhile, the Chief Executive Officer sold approximately $13 million of his stock in May 2007, days after the company issued its last rosy "record quarterly earnings report for first quarter 2007. When the truth leaked out through two disclosures made on August 3, 2007 and October 16, 2007, the stock declined, causing significant losses to its investors.

In July 2009, the Court denied, in part, defendants' motion to dismiss that complaint. Almost immediately following that order, Scott+Scott sought documents not only from defendants, but from related insurance entities, auditors, analysts, and other third parties. While the third parties timely produced documents, defendants objected and filed numerous intermediate motions before finally producing almost 100 boxes of documents, which Scott+Scott attorneys reviewed. Meanwhile, Scott+Scott took several key depositions in the action. Along the way, seemingly constant motions to compel were filed by both sides and it was clear that every part of the case needed to be disputed.

Based upon lengthy expert reports submitted by both sides on the amount of damages, the partied were eventually able to agree to an $8.25 million settlement during mediation. Scott+Scott immediately notified the class and received final approval from the Southern District of Texas. Scott+Scott was able to achieve a tremendous resolution on behalf of the class in an extremely complex case though hard fought but fair advocacy.

Table of Contents

Upcoming Decision In Goldman Sachs Abacus Case Could Have Serious Implications On Securities Suits

On October 13, 2010, the U.S. Securities and Exchange Commission SEC filed an opposition to Goldman Sachs & Co. executive Fabrice Tourre's attempt to obtain judgment on the pleadings in the agency's securities fraud suit against Tourre and the company. The action, styled Securities and Exchange Commission v. Goldman Sachs &Co. et al., No. 1:1O-cv03229, is before Judge Barbara S. Jones of the U.S. District Court for the Southern District of New York.

Relying on the June U.S. Supreme Court ruling in Morrison v. National Australia Bank, Tourre, the Goldman vice president responsible for structuring and marketing the notorious Abacus 2007-AC1 collateralized debt obligation at issue in the action, had previously argued that the CDO transaction at issue occurred overseas, beyond the reach of the anti-fraud provisions of the securities laws.

In its opposition, the SEC argues Morrison does not bar the action, because, even though Germany-based IKB Deutsche Industriebank AG (IKB) was the sole purchaser of the Abacus 2007-AC1 CDO, Tourre structured, fraudulently marketed and carried out the transaction from Goldman's headquarters in New York.


From approximately July 2004 through April 2007, Goldman Sachs used the Abacus deals to off-load the risk of mostly subprime home loans and commercial mortgages to investors, either as hedges for similar positions or to bet against the mortgage securities themselves. During this time frame, the company issued at least $7.8 billion of Abacus notes.

The Abacus transactions married two financial technologies that contributed to the collapse of the financial markets: credit default swaps, used to transfer the risk of losses on debt, and securitization, used to slice the risk in a pool of assets into various new securities. The Abacus deals were backed by credit default swaps, which offered rich payouts to Goldman Sachs and clients if certain reference mortgage bonds didn't pay as promised, in return for regular stream of payments from the investment bank. The cash needed for the potential payouts to Goldman Sachs was raised from the securitization of the default swaps into Abacus CDOs and sale of the Abacus CDO notes to investors.

On April 16, 2010, the Securities and Exchange Com mission charged Goldman Sachs and Tourre for defrauding investors. The SEC charged that Goldman Sachs created and sold Abacus 2007-ACl without disclosing that Paulson &Co., a New York-based hedge fund, helped pick the underlying securities and also bet the CDO would default. Paulson was later proven correct, and the hedge fund eventually turned a$1 billion profit. CDO investors lost an equal amount. According to the SEC's complaint, Paulson &Co. paid Goldman Sachs approximately $15 million for structuring and marketing the 2007-AC1 deal.

Tourre’s Argument and the SEC response

Tourre, now an executive director in Goldman's London office, has been fighting the SEC's allegations despite Goldman's decision to settle the case against it for $550 million. Citing Morrison, Tourre said the SEC case must be dismissed because the 2007 Abacus transaction took place outside the United States.

The Supreme Court in Morrison ruled in June that Australian shareholders who bought that bank's stock outside the United States could not raise securities fraud claims in U.S. courts. Several judges have since applied the ruling to bar U.S. lawsuits in other scenarios, including where the plaintiffs are not foreign investors.

Tourre argued Abacus did not involve a purchase or sale in the United States or a security listed on a U.S. exchange, as required under Morrison's "transactional test," under which Section 10(b) reaches fraud in connection with the purchase or sale of securities "listed on an American stock exchange" and the "purchase or sale of any other security in the United States." Citing ten million pages of documents the SEC turned over in August and September, Tourre argued the CDOs were not listed on any exchange, and their sole investor was Germany's IKB, which invested overseas.

In its response, the SEC argued that Tourre can't seek shelter in the Morrison ruling because Tourre and Goldman fraudulently marketed and carried out the transaction from New York. "[O]perating from [Goldman's] headquarters in New York, Tourre and [Goldman] sold Abacus 2007-ACl securities and related securities-based swaps through false and misleading statements," the SEC argued, by, among other things sending offering documents overseas to IKB and personally speaking to IKB to solicit interest in Abacus.


Since the Supreme Court's decision in Morrison, proponents argue that it would bring more certainty to the law and would put a brake on "jurisdiction shopping," however, others suggest that it overly restricts the ability of the SEC to remedy frauds originally arising in the US. The forthcoming decision in this matter, as well as others pending, including Basis Yield v. Goldman Sachs, No.lO-cv04537 (S.D.N.Y.), in which the same Morrison-based defense was raised, have far-reaching implications. Tourre's thesis, if widely adopted, could bar the application of U.S. securities law in instances where a U.S. seller engages in fraud in effecting the sale of a security to a foreign purchaser.

Table of Contents

Supreme Court To Determine Scope Of Liability In Private Securities Fraud Actions

On December 7, 2010, the Supreme Court will hear oral arguments in Janus Capital Group, Inc. v. First Derivative Traders, in an attempt to resolve the issue of whether a service provider, acting as a secondary actor or aider and abettor, can be held primarily liable under Section 10(b) of the Securities Exchange Act of 1934. First Derivative Traders brought the initial action against Janus Capital Group Inc. ("JCG") and its wholly-owned subsidiary Janus Capital Management LLC ("JCM") on behalf of persons who bought shares of common stock in JCG between July 21, 2000 and September 2, 2003, and still held shares on September 3, 2003.

The operative complaint alleges that defendants violated: (i) Sections 10(b) and 20(a) of the Securities Exchange Act of 1934; and (ii) SEC Rule 10b-5. Specifically, the complaint alleges that statements in the prospectuses regarding market timing were misleading because KG and JCM have subsequently admitted that they had entered into secret arrangements to allow several hedge funds to engage in market timing transactions in various Janus funds.

The district court reviewed the complaint and granted defendants' motion to dismiss. The district court made four conclusions: (1) that that plaintiffs failed to state a claim against KG under Section 10(b) because there can be no aiding and abetting liability in private securities actions; (2) that JCG's alleged dissemination of the prospectuses did not rise to the level of making a misstatement; (3) that plaintiffs failed to state a claim against KM because a mutual fund investment advisor owes no duty to its parent's shareholders and could not be held primarily liable; and (4) that plaintiffs failed to state a claim of control person liability against KG pursuant to Section 20(a). On appeal, the Fourth Circuit reversed the district court's dismissal. The Fourth Circuit explained that plaintiffs pled a viable claim of primary Section 10(b) liability under against JCM and have adequately pled that KG may be liable as a control person of JCM under Section 20(a).

In a private Section 10(b) securities claim a plaintiff must allege, among other things, that it relied on the defendant's false or misleading statement in purchasing or selling the defendant's securities and that the defendant's conduct was a substantial cause of its injury. Here, the Fourth Circuit concluded that even though the prospectuses did not explicitly name KM, JCM's publicly disclosed role as investment advisor to the Janus mutual funds would lead interested investors to infer that KM played a role in preparing or approving the content of the prospectuses. Additionally, the court concluded that the drop in share price of KG's common stock from $17.68 to $15.60 following the news of market timing indicated a substantial causal link between the misleading prospectuses and the value of JCG's stock.

The Fourth Circuit, however, declined to extend primary Section 10(b) liability to JCM's parent company, JCG. The court reasoned that JCG's role in the dissemination of the fund prospectuses on the Janus website, taken alone, was insufficient to lead interested investors to believe JCG prepared or approved the prospectuses. However, the Fourth Circuit explained that plaintiffs' allegations of complete ownership of JCM by KG, overlapping management between JCG and KM, control of JCM by JCG electives, and presumptive authority by KG to regulate market timing activity in the Janus funds was sufficient to plead a prima facie case of control person liability.

Defendants petitioned for a writ of certiorari on October 30, 2009 and the petition was granted on June 28, 2010. The Supreme Court will resolve two issues: first, whether a service provider can be held primarily liable in a private securities-fraud action for helping or participating in another company's misstatements; and second, whether a service provider can be held primarily liable in a private securities-fraud action for statements that were not directly and contemporaneously attributed to the service provider. The Supreme Court's decision in this case should resolve a circuit split as to the issue of whether an aider and abettor can be held primarily liable under Section 10(b) for participating in the writing and dissemination of the prospectuses of a different company.

Table of Contents

The Dodd-Frank Act Increases Protections For Whistleblowers

The Dodd-Frank Act ("the Act") provides increased protections for whistleblowers, realizing their importance in preventing another financial crisis. Senate Report 11-176 notes that tips from whistleblowers identified 54.1% of uncovered fraud in public companies, while external auditors, including the Securities and Exchange Commission ("SEC"), uncovered only4.1% of fraudulent schemes, making whistleblower tips 13 times more effective than external audits. Recognizing the importance of whistleblowers, the Act includes added incentives and protections for whistleblowers.

For instance, the Act requires that whistleblowers who provide original information resulting in a judicial or administrative action brought by the SEC leading to a settlement exceeding $1 million receive an award of no less than 10% and no more than 30% of the collected monetary sanctions. In determining the amount of award, the SEC will consider the significance of the information provided, the degree of assistance provided, and programmatic interest of the SEC in deterring violations by making awards and such additional relevant factors the SEC may establish. The SEC may not consider the size of the SEC Investor Protection Fund, created by the Act to pay these awards through the collection of monetary sanctions, in determining awards. The Act prohibits employers from retaliation against whistleblowers who provide information to the SEC or assist in investigations.

The Act also provides monetary incentives determined at the discretion of the Commodity Futures Trading Commission ("CFTC") for whistleblowers who provide information to the CFTC resulting in monetary sanctions exceeding $1 million. The Act establishes that the amount of the award is determined by the CFTC, although there is no mandatory 10-30% range. Furthermore, any determination of an award is appealable. The Act prohibits employers from retaliation against whistleblowers who provide information to the CFTC or assist in investigations.

With regard to financial services employees, the Act prohibits retaliation and provides a private right of action for "any individual performing tasks related to the offering of provision of a consumer financial product or service" who has: (1) provided, caused to be provided, or is about to provide or cause to be provided, information to the employer, the Bureau, or any other State, local, or Federal government authority or law enforcement agency relating to any violation of, or any act or omission that the employee reasonably believes to be a violation of, any provision of this title or any other provision of law that is subject to the jurisdiction of the Bureau of Consumer Financial Protection (the "Bureau") or any rule, order, standard, or prohibition prescribed by the Bureau; (2) testified or will testify in any proceeding resulting from the administration or enforcement of any provision of this title or any other provision of law that is subject to the jurisdiction of the Bureau, or any rule, order, standard, or prohibition prescribed by the Bureau; (3) filed, instituted, or caused to be filed or instituted any proceeding under any Federal consumer financial law; or (4) objected to, or refused to participate in, any activity, policy, practice, or assigned task that the employee (or other such person) reasonably believed to be in violation of any law, rule, order, standard, or prohibition, subject to the jurisdiction of, or enforceable by, the Bureau.

A person who believes they have been discriminated against may file their complaint with the Secretary of labor not more than 180 days after the alleged violation occurred. A covered person merely needs to show by a preponderance of the evidence that his or her protected activity was a contributing factor in the retaliatory action.

If one is found to have violated this section, the Secretary of labor shall order that person to: (i) take affirmative action to abate the violation; (ii) reinstate the complainant to his or her former position, together with compensation (including back pay) and restore the terms, conditions, and privileges associated with his or her employment; and (iii) provide compensatory damages to the complainant.

The Act also clarifies that whistleblower protections under the Sarbanes-Oxley Act apply to employees of subsidiaries of publicly traded companies. This expands Sarbanes-Oxley's coverage to employees of nationally recognized statistical ratings organizations, recognizing the role these organizations played in exacerbating the 2008 financial crisis.

Finally, the Act clarifies that the statute of limitations for the False Claims Act retaliation claims is 3 years and expands the definition of protected acts to "lawful acts done by the employee, contractor, agent or associated others in furtherance of an action under this section or other efforts to stop 1or more violations of [the False Claims Act]."

Table of Contents

Conferences and Events

+       November 9 – 12, 2010
SACRS – State Association of County Retirement Systems
Sheraton Universal Hotel
Universal City, CA

SACRS is an association of 20 California county retirement systems. This year’s conference promises to provide practical training and education to enhance fiduciary responsibility for Administrators and Trustees alike.

+       November 14 – 17, 2010
IFEBP – International Foundation of Employee Benefit Plans
Honolulu, HI

The 2010 Annual Conference is bringing together professionals from the industry to provide attendees with essential and imperative information needed to fulfill fiduciary obligations as well as new legislation and recent regulation issues.

Government Finance Officers Association Conferences


+       November 15- 17, 2010
Alaska GFOA
Juneau, AK

+       November 16- 19, 2010
Colorado GFOA
Colorado Springs, CO

Scott + Scott LLP is a nationally recognized law firm headquartered in Connecticut with offices in New York City, Ohio and California. The firm represents 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 schedule a presentation to fund trustees, fund advisors or asset managers, please contact:    

David R. Scott + Toll Free: 800.404.7770     email: + UK Tel: 0808.234.1396