September 2013 Newsletter


•  Scott+Scott Wins Reversal Of District Court’s Dismissal Of Shareholder Derivative Lawsuit Against Baxter International Inc.’s Board of Directors

•  Court Holds Company Statements Not Protected by PSLRA’s Safe Harbor Provisions

•  Appeals Court Clarifies Class Certification Standards

•  The Public Company Oversight Board Proposes Improved Audit Report Disclosures

•  On The Record

•  Conferences and Educational Seminars

Scott+Scott Wins Reversal Of District Court’s Dismissal Of Shareholder Derivative Lawsuit Against Baxter International Inc.’s Board of Directors.

            The U.S. Court of Appeals for the Seventh Circuit issued a decision on August 16, 2013 in a shareholder derivative lawsuit against the board of directors of Baxter International, Inc. (“Baxter”), reversing the district court’s dismissal of the action. The Seventh Circuit held that plaintiff, represented by Scott+Scott, alleged particularized facts that casted a reasonable doubt that the Baxter board of directors’ conduct was the product of a valid exercise of business judgment.

            Plaintiff filed a shareholder derivative lawsuit arising out of the prolonged and ultimately unsuccessful efforts of Baxter to remedy various problems with its Colleague Infusion Pump. Partner Judith S. Scolnick of Scott+Scott argued before the Seventh Circuit panel that the Baxter board of directors breached their fiduciary duties by consciously disregarding their responsibility to bring Baxter into compliance with a Consent Decree entered into with the U.S. Food and Drug Administration (“FDA”) in 2006, as well as with related health and safety laws. These breaches cost Baxter more than $550 million after the FDA ordered a recall of the Colleague Infusion Pumps in 2010.

            The Seventh Circuit determined that the district court improperly dismissed the action on the ground that plaintiff failed to allege facts to establish that it should be excused from the demand requirement for bringing a shareholder derivative action. Delaware substantive law, which applies to Baxter, a Delaware corporation, requires that a plaintiff plead demand futility to bring a derivative action where the plaintiff does not issue a pre-suit demand on the company’s board of directors. That is, Delaware law excuses the failure to make a pre-suit demand when a reasonable doubt exists that the challenged conduct was the product of a valid exercise of business judgment. Plaintiff, according to the Seventh Circuit, made particularized allegations that the Baxter board of directors’ actions amounted to “bad faith,” and thus, pre-suit demand was excused.

Furthermore, the Seventh Circuit noted that plaintiff’s lawsuit “bears strong similarities to” the illegal conduct challenged by an earlier shareholder derivative action that came before U.S. Court of Appeals, In re Abbott Laboratories Derivative Shareholders Litigation, 325 F.3d 795 (7th Cir. 2003) (“Abbot Labs”). The district court erroneously distinguished plaintiff’s action from Abbott Labs. In fact, the Seventh Circuit noted that “the arguments for ‘bad faith,’ and thus for demand futility, are even stronger” in plaintiff’s lawsuit.

            The case will now be remanded back to the district court for further proceedings, after having cleared what the Seventh Circuit called “a significant hurdle.”

            The decision of the Seventh Circuit represents the latest in a line of many victories by Scott+Scott before United States Courts of Appeals. Other recent appellate successes achieved by Scott+Scott include Chavez v. Nestle USA, Inc., 511 Fed. Appx. 606 (9th Cir. 2013); Novak v. Gray, 469 Fed. Appx. 811 (11th Cir. 2012); and Pfeil v. State Street Bank & Trust Co., 671 F.3d 585 (6th Cir. 2012).

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Court Holds Company Statements Not Protected by PSLRA’s Safe Harbor Provisions

In enacting the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), Congress specifically intended to encourage companies to make forward-looking statements concerning, for example, projections of revenues, plans, and objectives for future products, services, and economic performance. Congress did not want corporate officers to be inhibited from providing such statements, as they often contain information that is highly relevant to investment decisions. Therefore, in order to lessen potential liability for forward-looking statements, Congress enacted various safe harbor provisions in the PSLRA, which insulate certain forward-looking statements – that later turn out to be false – from liability under the securities laws.

Specifically, the PSLRA provides that liability will not lie for a forward-looking statement, as defined in the statute, if: (1) the statement is identified as a forward looking statement and is accompanied by meaningful cautionary language identifying important factors that could cause results to differ materially from those in the statement; or (2) the statement was made without “actual knowledge” that the statement was false or misleading.

Businesses usually include a disclaimer in their public communications stating that any instance of a forward-looking statement found in their material is only true at the time it was made. Whether a statement is forward-looking is often subject to debate, especially in instances where the statement references present facts.

Recently, in IBEW Local 98 Pension Fund v. Best Buy Co., Inc., No. 11 Civ. 429 (D. Minn.), a U.S. District Court considered this question in evaluating whether a company’s statements were subject to the PSLRA’s safe harbor provisions. The plaintiffs in Best Buy charge that, between September 14, 2010, and December 13, 2010, Best Buy made false and misleading statements to investors in violation of federal securities laws. Specifically, plaintiffs allege the company touted strong sales and projected fiscal year 2011 earnings per share of $3.55-$3.70. As a result, the complaint alleges, Best Buy stock prices were artificially inflated during this time frame, reaching a high of $44.81.

When Best Buy released its third-quarter results, however, it revealed that its product sales were falling, a trend that began in June 2010, according to the complaint. The company told investors that its growth assessments had been “too aggressive” and that certain new products had been slow to take hold. As a result, Best Buy lowered its earnings forecast to $3.20-$3.40 per share. On this news, Best Buy’s share price sharply declined by 14%, closing at $34.52 on December 14th.

District Judge Donovan Frank evaluated whether Best Buy’s statements that it was “on track to deliver and exceed [its] annual EPS guidance’ and that its “earnings are essentially in line with [its] original expectations for the year” were forward-looking. The company argued that these statements were forward-looking because they were simply affirmations of the projected guidance. The court concluded, however, that they really were statements of present condition, and accordingly, the statements were not subject to the PSLRA’s safe harbor provision.


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Appeals Court Clarifies Class Certification Standards

            On August 22, 2013 Judge Richard Posner of the Seventh Circuit Court of Appeals issued a significant decision clarifying the standards courts should use in determining whether a case is maintainable as a class action. The case, Butler et al. v. Sears, Roebuck and Co., had already been certified as a class action in November 2012, but the U.S. Supreme Court vacated the ruling after its class certification-related decision in Comcast Corp. v. Behrend.

            At issue in the Sears case were allegedly defective washing machines that cause mold and that stopped inopportunely. Sears argued that because the manufacturer of the washing machines made a number of design modifications, the different models were differently defective, making class certification inappropriate under Comcast. The Seventh Circuit disagreed, and once again certified the class of consumers, stating that a “determination of liability could be followed by individual hearings to determine the damages sustained by each class member.” The decision is being hailed as a milestone for consumers and consumer advocates.

             Perhaps most significant about the Sears decision is its analysis of the Supreme Court’s Comcast decision. The Seventh Circuit ruled that the Comcast decision was based on narrow grounds, and even stated that if it were to accept Sears’ reading of the decision, that “[i]t would drive a stake through the heart of the class action device, in cases in which damages were sought […] to require every member of the class to have identical damages.”

            The Seventh Circuit’s decision comes on the heels of a similar decision affirming class certification post-Comcast by the Sixth Circuit Court of Appeals in another case involving washing machines, In re Whirlpool Cor. Front-Loading Washer Products Liability Litigation. The Whirlpool certification had also been vacated by the Supreme Court. Class certification in a third case, RBS Citizens, N.A. v. Ross, was also vacated by the Supreme Court and is currently pending in the Seventh Circuit.  

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The Public Company Oversight Board Proposes Improved Audit Report Disclosures

On August 13, 2013, the Public Company Accounting Oversight Board (“PCAOB”) proposed two changes to the audit report to improve transparency for investors. Under the proposal, auditors of publicly-traded companies would be required to disclose “critical audit matters” and to describe the auditor’s evaluation of “other information.” If these proposals are ultimately adopted, the quality and transparency of the independent auditor’s report, and an investor’s ability to evaluate a company’s financial statements and disclosures, will greatly improve.

These proposed changes come after the PCAOB recognized that there exists an expectations gap between the investing public and independent auditors. This expectations gap is characterized by common misconceptions of the investing public  regarding an auditor’s responsibilities and the adequacy of information contained in an audit report.

The Auditor’s Reporting Model Proposal Fact Sheet (the “Fact Sheet”) describes critical audit matters as “those matters the auditor addressed during the audit of the financial statements that:

·         Involved the most difficult, subjective, or complex auditor judgments;

·         Posed the most difficulty to the auditor in obtaining sufficient appropriate evidence; or

·         Posed the most difficulty to the auditor in forming an opinion on the financial statements.”

Though critical audit matters are defined in a largely subjective manner, the Fact Sheet provides a list of factors that should be considered when being evaluated by an auditor. Perhaps the most significant aspect of this proposal is that the auditor would be required to describe why a matter is a critical audit matter and identify the relevant portions of the financial statements and discussions related to the critical audit matter.

Under the PCAOB’s second proposal, auditors would be required to implement procedures concerning, and describe in the audit report, certain “other information.” Among the changes, auditors would be required to describe their independence and their tenure as a company’s independent auditor. Most significantly, however, the auditor would be required to describe its “responsibilities for, and the results of, the auditor's evaluation of other information outside the financial statements.”

When auditing a public company, an auditor often receives information not directly related to a particular financial statement disclosure. This new proposal would require an auditor to evaluate this “other information for a material misstatement of fact as well as for a material inconsistency with amounts or information, or the manner of their presentation, in the audited financial statements.” The investing public has mistakenly believed that this was included in the scope of an audit.

The deadline to submit comments related to these proposals is December 11, 2013. On a date to be determined, the PCAOB will hold a public roundtable to discuss these proposed changes and the comments received.

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“Next to the right of liberty, the right of property is the most important individual right guaranteed by the Constitution and the one which, united with that of personal liberty, has contributed more to the growth of civilization than any other institution established by the human race.”


Former President William H. Taft

DOB: September 15, 1857

Popular Government: Its Essence, Its Permanence and Its Perils, chapter 3 (1913)



September Events


Conferences and Educational Seminars



+September 9-10, 2013


Native American Finance Officers’ Association (NAFOA)

Sheraton Seattle Downtown

Seattle, Washington


The title of this year’s fall finance and Tribal economies conference is “Expanding Horizons.”  NAFOA’s mission is to improve the quality of financial and business management of tribal governments and their business entities.  NAFOA advocates for tribes on issues affecting sovereignty and supports the development of Native American financial professionals.  NAFOA invests in Native American communities by building the next generation of Native American financial leaders through educational and networking opportunities in finance.  Board members are elected by the membership and serve staggered two-year terms.  Members of this governing board are volunteers who hold financial management positions within their organizations and are members of a federally recognized tribe.  Expert speakers will illustrate market relationships, policy effects, forecast the near- and long-term global trends, weigh in on tax reform, new accounting standards and offer ideas on governmental best practices for navigating outside influences and protecting Native American assets.




+September 10-12, 2013


  Kentucky Labor Management Conference-35th Anniversary

Kentucky Dam Village State Park Resort

Gilbertsville, Kentucky


Established in 1977, the conference is governed by a Board of Directors and co-sponsored by the Kentucky Labor Cabinet and the Kentucky Cabinet for Economic Development.  The Kentucky Labor-Management Conference serves as the centerpiece of the state's effort to promote labor-management cooperation as an enhancement to economic development.  The event provides participants a relaxed atmosphere, apart from the work environment, that is conducive to positive, meaningful dialogue between labor and management.  The conference begins with two days of interactive educational opportunities in which the participants are given the chance to talk directly with the presenters on a wide variety of topics of mutual interest to labor and management.




+September 10-12, 2013


International Business Managers Membership Conference (IBEW)

The Paris Las Vegas Hotel

Las Vegas, Nevada


More than 1,300 IBEW delegates attended last year’s conference which could effectively expose participating organizations to the leaders of more than 700,000 IBEW members.  This is the largest annual networking event with decision makers and industry leaders of the   IBEW who value the USA service providers.  The program agenda will be innovative, dynamic, and educational.



+September 12-13, 2013


7th Annual Pennsylvania Association of Public Employee Retirement Systems (PAPERS)

The Sheraton Station Square

Pittsburgh, Pennsylvania


The annual PAPERS fall workshop, a conference held alternately in the Pittsburgh and Philadelphia areas, provides another opportunity beyond the PAPERS Forum education and networking to those individuals who work in or provides services to Pennsylvania’s public pension funds.  This year’s focus will be on expecting change and preparing for the 2014 changes, potential implications and sponsor considerations over the next five years. The closing panel will discuss Trustee duty to their plan participants and the political body that appointed or requires them to service in their capacity as Trustee to their Pension Plan.





+September 15-17, 2013


Louisiana Association of Public Employees Retirement System (LAPERS)

New Orleans Marriott

New Orleans, Louisiana


Organized in 1985, the Louisiana Association of Public Employees’ Retirement System (LAPERS) is a nonpartisan, nonprofit organization that brings together individuals employed by state, statewide, and local public employees’ pension plans to exchange information, ideas, and experiences with others facing the same challenges.  By uniting Louisiana public retirement systems, LAPERS works for their common interests, monitors state and federal legislative activities, and enhances public pension fund management and administration by providing educational and informational services to its more than 347,000 members with 26bn in assets.  This year’s conference will feature, “Opportunities in Europe, Myth vs. Reality.”




+September 16-17, 2013


Annual Texas Local Fire Fighters’ Retirement Act Pension Conference (TLFFRA)

Overton Hotel and Conference Center

Lubbock, Texas

During the Great Depression, the Texas Legislature created the Office of the Fire Fighters’ Pension Commissioner (FFPC) to protect the pensions of fire fighters throughout Texas.  This legislative foresight resulted in a sound statutory framework and a strong partnership between the state of Texas and local communities in providing pension benefits to fire fighters and their families.  Through an annual conference fund administrators and boards of trustees are provided training by qualified entities in the fields of investment management, administration and fiduciary responsibility.  This year’s theme of the TLLFFRA educational conference is “There are No Guarantees: Except Writing the Benefit Checks.”



+September 21-24, 2013


Michigan Association of Public Employees Retirement System (MAPERS)

Amway Grand Plaza

Grand Rapids, Michigan


“Tomorrow’s Future Through Today’s Education” is MAPERS motto and theme for conferences.

The Michigan Association of Public Employee Retirement Systems is recognized as the principal educational, legislative forum for trustees, plan administrators, and other retirement and financial professionals in the State of Michigan.  MAPERS was established to provide educational training and legislative updates to trustees of Public Employee Retirement Systems within the State of Michigan.  MAPERS employs the service of a full-time professional lobbyist (Capitol Services, Inc.) to monitor legislation that may affect the more than 670,000 members and retirees of public pension plans in the State of Michigan.  This outstanding conference is geared toward educating local pension board members and administrators.



+September 22-25, 2013


66th Annual Fall Conference of the New England States Government Finance Officers’ Association (NESGFOA)

Equinox Resort

Manchester Village, Vermont


The New England Government Finance Officers Association (NESGFOA) is a regional professional association for government finance managers from the six New England States who work together to develop a closer relationship and understanding among public officials whose responsibilities and duties involve state and municipal problems; and to facilitate discussion, analysis, and solutions of such problems under the laws existing in the New England States.  The fall conference is annually held in September or October on a six-state rotating basis and shall provide continuing education programs for public finance officials and employees.



+September 23-25, 2013


International Foundation of Employee Benefit Plans and Certified Employee Benefit Specialists

Westin Copley Place

Boston, Massachusetts


The IFEBP symposium provides resources critical to the benefits industry.  The sessions are informative, thought provoking, and infused with discussion opportunities with colleagues.  Attendees include investment and administration firms, law firms, consulting firms, banks and insurance companies jointly trusteed and public employee benefit plans.  IFEBP makes education a priority for its North American  members.




+September 24-26, 2013


Georgia Association of Public Pension Trustees (GAPPT)

Evergreen Marriott Conference Center

Stone Mountain, Georgia


In the summer of  2009 administrators and trustees of several of the public pension plans in Georgia gathered together to form an association to provide a forum for support and information for education, training, advancement and accreditation for public plan trustees and personnel.  GAPPT is a nonprofit association formed solely to promote and support the education and development of the Trustees and Administrators of Georgia’s Public Pension Plans in the areas of: fiduciary responsibility and liability, board governance, investment acumen, and plan administration.






+September 25-27, 2013


Council of Institutional Investors (CII)

JW Marriott Hotel

Chicago, Illinois


The Council of Institutional Investors is known as “The Voice of Corporate Governance” and will host approximately 400 institutional investors, asset managers, governance professionals and other industry leaders for collaborative discussions about issues and trends in corporate governance, financial regulation and investing.  As a nonprofit association of public, union and corporate pension funds the council’s mission is to educate its members, policymakers and the public about corporate governance and that environmental, social and corporate governance (ESG) issues can affect the performance of investment portfolios.   The theme of this year’s fall conference is, “Lessons Learned.”




+September 25-27, 2013


The 19th Annual Institutional Investment Conference (Investment Trends Summit produced by OPAL)

The Four Seasons, The Biltmore

Santa Barbara, California


This year’s conference will serve as an educational forum focused on analyzing trends for the future, as well as exploring ways to implement new strategies in particular investment plans.  In this period of dynamic change it is more important than ever to stay abreast of future investment opportunities and winning strategies, upcoming regulation and asset allocation plans from leading allocators, out-performing managers and industry experts.  Speakers from across the globe will present during the 3 day conference.




+September 29-October 2, 2013


National coordination Committee for Multiemployer Plans (NCCMP)

Westin Diplomat Hotel and Conference Center

Hollywood, Florida


 The NCCMP is an organization of national, regional and local multiemployer pension and health and welfare plans, International and Local Unions, national and local employer associations, individual local employers, and multiemployer fund professionals.  For more than 30 years, it’s been representing the interests of multiemployer plan participants in the halls of Congress, in regulatory arenas, and in the courts.  The NCCMP has saved multiemployer plans hundreds of millions of dollars in regulatory and administrative costs.




+September 29-October 2, 2013


Florida Public Pension Trustees Association (FPPTA) Fall Trustees School

PGA National Resort

Palm Beach Gardens, Florida


The FPPTA Certification Program for Public Pension Plan Trustees run by the FPPTA, the Florida Public Pension Trustee Association is the premier training program and has become the model for funds and state organizations across the nation.  The goal of the CPPT program is to provide an educational setting that is conducive to the development of well-informed individuals, so that they will be able to actively and meaningfully participate in the management of their retirement boards. Courses range from basic to advanced and are open to all including service providers.  The FPPTA also offers an annual conference at the beginning of summer where trustees are encouraged to bring their families.  The FPPTA has been in existence 29 years. 




Union Progress Meetings


+ September 17-20, 2013

 IBEW Sixth District Progress Meeting

 Grand Kahler Hotel, Rochester, MN


+September 24-26, 2013

IBEW Third District Progress Meeting

Atlantic City, NJ



Government Finance Officer’s Association Conferences


+September 8-10, 2013

Illinois GFOA            

Bloomington-Normal Marriott, Normal, IL



+September 9-13, 2013

Wyoming Association of Municipal Clerks and Treasurers

Casper, WY



+September 11-13, 2013

Ohio GFOA   

Hilton Columbus at Easton, Columbus, OH


+ September 12-14, 2013

North Dakota League of Cities         

Ramkota Hotel, Bismarck, ND



+September 17-20, 2013

Washington Finance Officers Association    

Tulalip, WA



+September 17-19, 2013

Oklahoma Municipal League   

Tulsa, OK


+September 18-19, 2013

California Municipal Treasurers Association (CMTA)

Pomona, CA



+September 18-20, 2013

Minnesota GFOA      

Arrowhead Resort, Alexandria, MN



+September 18-20, 2013

Idaho City Clerks, Treasurers & Finance Officers Association (ICCTFOA)

The Riverside Hotel, Garden City, ID



+September 25-27, 2013

New Jersey GFOA      

Sheraton Convention Center, Atlantic City, NJ



+September 26-27, 2013

Wisconsin GFOA

Holiday Inn Conference Center, Stevens Point, WI




+September 26-27, 2013

Ohio Municipal League         

Sheraton Capitol Square, Columbus, OH




+September 29-October 2, 2013

 Georgia GFOA 

 Lake Lanier Islands & Resort, Buford, GA






+September 18-20, 2013

Western Canadian Government Finance Officers’ Association

Radisson Hotel, Saskatoon, SK  



+September 25-27, 2013

Municipal Finance Officers’ Association (MFOA) of Ontario

Deerhurst Resort, Muskoka, ON  


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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: + UK Tel: 0808.234.1396