2014 YEAR IN REVIEW: SECURITIES LITIGATION HAYNES AND BOONE, LLP

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1 2014 YEAR IN REVIEW: SECURITIES LITIGATION HAYNES AND BOONE, LLP

Nicholas Even is Chair of the firm s Securities Litigation group. He currently represents the Board of AT&T, Inc. in shareholder derivative litigation pending in Texas state court.

of its merger with affiliates of National Entertainment Collectibles Association, and gained dismissal of the suit.

He is AV Peer Review Rated Preeminent by Martindale-Hubbell Law Directory. MEET THE AUTHORS Thad Behrens is Chair of the firm s Class Action Defense practice.

In 2014, he again scored major victories for his clients, including a dismissal in the Delaware Chancery Court of a shareholder derivative suit involving an exploration and production company, and a

Thad is a past president of the Dallas Federal Bar Association, and has been recognized as a Texas Super Lawyer.

In 2014, among other matters, he obtained a denial of class certification and voluntary dismissal of the remaining individual claims in a putative class action arising out of the collapse of a hedge

In December 2014 Dan was honored as Young Attorney of the Year by the Cardozo Society of the Attorney s Division of the Jewish Federation of Greater Dallas.

2 Nicholas Even is Chair of the firm s Securities Litigation group. He currently represents the Board of AT&T, Inc. in shareholder derivative litigation pending in Texas state court. In 2014, among multiple merger litigation matters in Texas, Delaware and Maryland, he represented a special litigation committee of Hastings Entertainment, successfully argued against an injunction of its merger with affiliates of National Entertainment Collectibles Association, and gained dismissal of the suit. He also successfully advocated for a zero fee award to plaintiffs counsel in merger litigation filed against FirstCity Financial and Värde Partners. He is AV Peer Review Rated Preeminent by Martindale-Hubbell Law Directory. MEET THE AUTHORS Thad Behrens is Chair of the firm s Class Action Defense practice. He has successfully defended companies, directors and officers in securities class actions, derivative suits, M&A litigation, and proxy contests. In 2014, he again scored major victories for his clients, including a dismissal in the Delaware Chancery Court of a shareholder derivative suit involving an exploration and production company, and a partial summary judgment for the National Football League in a consumer action arising from Super Bowl XLV. Thad is a past president of the Dallas Federal Bar Association, and has been recognized as a Texas Super Lawyer. Dan Gold is a partner in the firm s class action and securities and shareholder litigation practices. In 2014, among other matters, he obtained a denial of class certification and voluntary dismissal of the remaining individual claims in a putative class action arising out of the collapse of a hedge fund, succesfully resolved his clients counterclaims for attorneys fees in a fiduciary duty and breach of contract case, and played a leading role in obtaining partial summary judgment for the NFL. In December 2014 Dan was honored as Young Attorney of the Year by the Cardozo Society of the Attorney s Division of the Jewish Federation of Greater Dallas. Kit Addleman chairs the firm s Government Investigations and Litigation section and is a member of the Investment Funds Practice group. Kit defends companies, executives and directors against government charges of misconduct, particularly investigations and litigation by the Securities and Exchange Commission and Department of Justice. Many of her matters involve allegations of accounting and financial fraud, insider trading, hedge fund and advisor fraud, and Foreign Corrupt Practices Act violations. Prior to joining Haynes and Boone in 2009, Kit was the regional director of the Atlanta Regional Office of the SEC and spent more than 20 years prosecuting matters at the SEC. George W. Bramblett, Jr. has been involved in high stakes litigation with significant experience in securities and shareholder litigation. He was named in Best Lawyers of America for Commercial Litigation, Securities Law, and Bet the- Company Litigation in He was named Best Lawyers Dallas Litigation Lawyer of the Year for He has been recognized by Chambers USA as a leading practitioner for General Commercial Litigation. In 2013, he was awarded the Luther (Luke) H. Soules Award for Outstanding Service to the Practice of Law by the Litigation Section of the State Bar of Texas. Carrie Huff is a partner with more than 25 years of experience in class action, shareholder and fiduciary litigation. A major part of her practice is advising attorneys on ethics issues, and in 2014, Carrie became an assistant general counsel of the firm. She also has continued to represent the trustees of family trusts involved in a high-profile, multi-court dispute, and in 2014, secured favorable rulings by the Fifth Circuit affirming the comprehensive settlement of the dispute. Carrie is AV Peer Review Rated Preeminent by Martindale-Hubbell Law Directory. Odean Volker is Chair of the firm s International Arbitration Practice, and previously served as Co-Chair of the Litigation Department. His practice includes securities and complex litigation, and domestic and international commercial arbitration. He has extensive experience in conducting internal investigations and addressing governance issues for public and private companies. Odean is AV Peer Review Rated Preeminent by Martindale-Hubbell Law Directory, was named a Texas Super Lawyer, and recognized as a Best Lawyer in America in Arbitration in Special thanks to the following attorneys and staff for their contributions and assistance: Michael Dill, David Dodds, Scott Ewing, Richard Guiltinan, Andrew Guthrie, Kathy Gutierrez, David Harper, Taryn McDonald, Matt McGee, Casey McGovern, Sarah Mallett, William Marsh, Tim Newman, Scott Wallace, and Jennifer Wisinski. This paper is for informational purposes only. It is not intended to be legal advice. Transmission is not intended to create and receipt does not establish an attorney-client relationship. Legal advice of any nature should be sought from legal counsel Year in Review: Securities Litigation, HAYNES AND BOONE, LLP i

3 Table of Contents I. Supreme Court Summary: Halliburton II and Beyond...1 II. Loss Causation...4 III. Scienter...6 IV. Duty to Disclose and Materiality...8 V. Pleading Alleged Misstatements...10 VI. Civil Liability for Insider Trading...12 VII. Extraterritoriality/Post-Morrison...13 VIII. Class Certification Issues...15 IX. SEC and Other Regulatory Enforcement Activities...16 X. Notable Developments in State Law Actions and Fiduciary Litigation Year in Review: Securities Litigation, HAYNES AND BOONE, LLP ii

4 I. Supreme Court Summary: Halliburton II and Beyond Halliburton Co. v. Erica P. John Fund, Inc. Foremost among the past year s securities decisions was the Supreme Court s highly anticipated opinion in Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S., 134 S.Ct (2014) (Halliburton II). In this case, the Court considered whether to abandon the fraud-on-the-market theory in securities fraud class actions, a presumption that makes it easier for shareholder plaintiffs to prove class-wide reliance and obtain class certification. Although the Court declined to take such a drastic step, which would have effectively ended securities fraud litigation as we know it, the Court held that defendants may rebut the presumption at the class certification stage by showing that the alleged misrepresentations did not impact the stock price. Halliburton II ensures that class certification will remain a major battleground in securities fraud cases as defendants try to refute the foundational premise of class-wide reliance. Background and procedural history. The plaintiffs filed a putative class action suit alleging that Halliburton made false and misleading statements about various aspects of its business. The district court denied class certification in 2008 after finding that plaintiffs had not established loss causation, as required by then-binding Fifth Circuit authority, and the Fifth Circuit affirmed. However, the Supreme Court reversed and vacated that ruling, holding that securities fraud plaintiffs do not need to prove loss causation at the class certification stage. Erica P. John Fund, Inc. v. Halliburton Co., 563 U. S., 131 S.Ct (2011) (Halliburton I). On remand, the district court certified a class of shareholders after finding that plaintiffs satisfied the requirements for invoking the fraud-on-the-market theory. On appeal, Halliburton argued that it should have been allowed to rebut the fraud-on-the-market presumption at the class certification stage by showing that the alleged misrepresentations did not impact the stock price. The Fifth Circuit rejected this argument and affirmed the district court. Halliburton appealed. Halliburton II presented two questions to the Supreme Court: (1) whether the Court should overrule or substantially modify Basic v. Levenson s long-standing fraud-on-the-market presumption of class-wide reliance; and (2) whether defendants may rebut that presumption at class certification by introducing evidence that the alleged misrepresentations did not distort the market price of the stock. The Supreme Court Upholds Basic and the Fraud-on-the-Market Presumption. With respect to the first question, the Court declined to overturn Basic or modify the prerequisites for invoking the fraud-on-the-market presumption. Justice Roberts, writing for the majority, noted that overturning a long-settled precedent requires special justification, not just an argument that the precedent was wrongly decided. The Court found that the criticisms of Basic and the presumption did not reach that standard. The Court further rejected Halliburton s argument that plaintiffs should be required to show price impact at class certification to invoke the fraud-onthe-market presumption. By refusing to overrule the fraud-on-the-market theory, the Court preserved the mechanism used by most securities fraud plaintiffs to seek class certification Year in Review: Securities Litigation, HAYNES AND BOONE, LLP 1

5 Defendants May Rebut the Fraud-on-the-Market Presumption at Class Certification. Although the Court sided with the plaintiffs on the first question, the Court ruled in Halliburton s favor on the second question, holding that defendants may rebut the presumption of reliance at the class certification stage by showing that the alleged misrepresentations did not impact the company s stock price. Justice Roberts recognized that the prerequisites for invoking the fraudon-the-market theory namely, the alleged misrepresentations were publicly known and material, and the stock traded in an efficient market serve as an indirect proxy for price impact. Under Basic, that indirect showing of price impact provides the requisite causal connection between the alleged misrepresentations and the plaintiff s transaction in the stock. That presumed causal connection is severed where a defendant shows that the alleged misstatements did not actually impact the stock price. In the absence of price impact, Basic s fraud-on-themarket theory and presumption of reliance collapse, and the suit cannot proceed as a class action because [e]ach plaintiff would have to prove reliance individually. Although Halliburton II makes any existential challenges to the fraud-on-the-market theory unlikely in the near future, securities fraud defendants nevertheless will use the decision as another basis to oppose class certification. Even after Halliburton s two trips to the Supreme Court, there are class certification issues that remain to be clarified in the lower courts. Most notably, although defendants bear some burden to show no price impact, Halliburton II did not specify which party bears the ultimate burden of persuasion on the issue of class-wide reliance. Going forward, this may become a major point of contention in securities fraud cases. Chadbourne & Parke LLP v. Troice On February 26, 2014, the Supreme Court held that state-law fraud class actions brought against attorneys, insurance brokers and others arising from Ponzi-scheme claims involving R. Allen Stanford could proceed. In a 7-2 decision in Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058, 571 U.S. (2014), the Court held that such claims were not prevented by the Securities Litigation Uniform Standards Act ( SLUSA ), a federal law that precludes certain state-law securities class actions in which the alleged fraud was perpetrated in connection with the purchase or sale of covered securities. The Court s decision narrowed the extent of the preclusive effect of SLUSA on state-law fraud claims that bear some relationship to nationally traded securities. The plaintiffs in Chadbourne & Parke alleged that the defendants participated in Stanford s alleged Ponzi scheme through the sale of certificates of deposit ( CDs ) issued by Stanford International Bank ( SIB ) while misrepresenting that those CDs would be backed by investments in highly marketable securities issued by stable governments, strong multinational companies and major international banks. In reality, the plaintiffs alleged, the CDs were backed by illiquid investments or no investments at all. The district court dismissed these claims as precluded by SLUSA, acknowledging that the CDs purchased by the plaintiffs were not themselves covered securities under SLUSA, but nevertheless finding SLUSA preclusion appropriate because the defendants allegedly induced the purchase of the CDs by misrepresenting that the CDs were backed by covered securities acquired by SIB. On appeal, the Fifth Circuit reversed, Roland v. Green, 675 F.3d 503, 521 (5th Cir. 2012), finding the references to SIB s portfolio being backed by covered securities to be merely tangentially related to the heart, crux, or gravamen of the defendants fraud Year in Review: Securities Litigation, HAYNES AND BOONE, LLP 2

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