Pomerantz LLP

Supreme Court Has a Full Plate of Securities Cases

Pomerantz Monitor, March/April 2014 

In our last issue, we devoted much space to discussion of Halliburton, which presents the issue of whether the “fraud on the market” theory, which underpins much of securities class action practice, is still the law of the land. As we said, since the Court’s decision in Basic v. Levinson about 25 years ago, securities class action plaintiffs have relied on this theory to obtain class certification. The theory helps investors establish the essential element of reliance on a class wide basis. It presumes that all investors rely on the market price of a security as reflecting all available material information about the security, including defendants’ alleged misrepresentations. By agreeing to reconsider this question, the Court threw the securities bar, on both sides, into a frenzy. 

On March 5, the Supremes held oral argument in Halliburton, and most observers thought that the Justices seemed unwilling to throw out Basic altogether. Instead, it seems likely that they intend to tweak it a bit, by allowing defendants to rebut the fraud on the market presumption at the class certification stage, with evidence that the false or misleading statements issued by the company did not actually distort the market price of its stock. If this prediction is accurate, investors will be able to live with the new Halliburton rule, and corporations will have to. 

Another venerable Supreme Court precedent in the class certification arena is American Pipe, a 1974 decision concerning the statute of limitations. In that case, plaintiffs filed a class action, but after the statute of limitations had expired the court refused to certify the class, and various would-be class members then tried to file individual claims. The Court held that for those people the statute of limitations was “tolled” – stopped running– while the class certification motion was still pending. That ruling made it unnecessary for potential plaintiffs to start filing individual lawsuits to protect themselves while the class certification motion was still undecided. Under American Pipe, only if class certification is denied would individual actions be necessary in order to protect a plaintiff’s rights from expiring. 

American Pipe talks about limitations periods which start to run when plaintiffs knew, or should have discovered, facts establishing their claim. The new case, Indymac, involves a so-called statute of repose, which in this case says that, under §11 of the Securities Act, the action must be brought within three years after the initial public offering that is the subject of the action, regardless of when investors knew or should have known of their claim. 

Class certification motions are usually not decided within three years, so the same problem that caused the Court to create the American Pipe tolling rule would arise with statutes of repose: as the three year limitation approaches, if the class certification motion is still not decided, individual investors would have no choice but to file individual actions in order to protect themselves from expiration of the “repose” period. A multitude of separate, duplicative lawsuits is not something investors or the courts want to see. 

All appeals courts that have considered the question until last summer had concluded that the three year statute of repose for §11 is tolled by the pendency of a class action motion; but then, in Indymac, the Second Circuit disagreed, setting up this Supreme Court appeal. 

Fifth Third Bancorp.
This case, to be argued in April, concerns the duties of fiduciaries of employee benefit plans governed by ERISA. Many of those plans invest participants’ contributions in stock of the employer corporation, or provide employer stock as an investment option. If the corporation then makes a “corrective” disclosure of negative information, plan participants who invested in company stock can suffer big losses. Sometimes they bring class actions against plan fiduciaries for ignoring warning signs that something was amiss. 

The issue the Court will consider in Fifth Third Bancorp is what plaintiffs in these cases must plead in order to survive a motion to dismiss. ERISA imposes on plan fiduciaries the obligation to act prudently and reasonably. Under one line of cases, plaintiffs must plead facts sufficient to rebut a presumption that the fiduciaries acted reasonably. In cases involving allegedly imprudent investments in company stock, the facts alleged have to show that the company was in dire straits for that presumption to be rebutted. In Fifth Third Bancorp, however, the Sixth Circuit held that this presumption of prudence does not apply at the motion to dismiss stage, but only later, when there is a fully developed evidentiary record. According to the Sixth Circuit, a plaintiff need only allege that “a prudent fiduciary acting under similar circumstances would have made a different decision”. Class actions against plan fiduciaries are a regular accompaniment to securities fraud litigations. Whatever the Court holds will have a major impact in the industry.