Pomerantz LLP

May/June 2015

Pomerantz Shatters the Glass Ceiling

Pomerantz Monitor, May/June 2015

 Pomerantz LLP is once again at the vanguard of the legal field. In a recent report, Law 360 has ranked the firm No. 1 in Top Law Firms for Women: Class Action Securities Firms. Pomerantz is proud to boast a 40% rate of female partners, 40% rate of female Of Counsel, and a 50% rate of female associates. These numbers put Pomerantz near the head of women overall in law firms in the United States, and at the forefront of women in class action securities firms in particular. 

Managing Partner Marc I. Gross shared his thoughts on this distinction, stating, “Pomerantz is proud that its efforts to maintain a diversified staff of attorneys and partners has been so successful. We hope other firms will follow.”

Pomerantz is no stranger to cutting edge accomplishments in the legal field, consistently finding new and innovative ways to fight for our clients’ rights; we are proud of this latest recognition of our success. At a time when the gender gap in America’s workforce is a source of national controversy, Pomerantz strongly stands by our hiring practices, which ensure the best attorneys are chosen for the job of representing our clients. 

Partner Murielle Steven Walsh says, “As a young associate at Pomerantz, I was mentored by a women partner. That experience had a positive impact on my development as an attorney.” Ms. Steven Walsh has prosecuted highly successful securities class action and corporate governance cases, and has argued, and won, cases before the Second Court of Appeals. 

Among recent accolades for Pomerantz attorneys, Partner Jayne Goldstein, who heads Pomerantz’s Florida office, was featured in a recent Law 360 article, “The Female Attorneys You Admire”; and Tamar A. Weinrib, Of Counsel, was chosen as a New York Metro Rising Star in 2014. 

Pomerantz looks forward to keep pushing the envelope in this arena and others as we continue the legacy our founder, Abe Pomerantz, began almost 80 years ago.  


Subprime Redux – Will Securitized Subprime Auto Loans Cause the Next Financial Crisis?



Much of the blame for the 2008 financial crisis belongs to subprime mortgage lending - making loans to people who had difficulty maintaining the repayment schedule, and then bundling those loans into securities and selling them to investors. Now some observers are concerned that a recent jump in subprime auto loans could also mean disaster for markets.

Right after the financial collapse auto loans almost dried up completely, threatening the auto industry. But since then the subprime auto loan market has sprung back to life, as millions of Americans with tarnished credit easily obtained auto loans. According to the Federal Reserve Bank of New York, the number of auto loans made to borrowers with credit scores below 660 has nearly doubled since 2009 – a much greater increase than in any other loan type. Some sources place the increase at an even greater figure. According to the New York Times, in the five years since the immediate aftermath of the financial crisis, roughly one in four new auto loans last year went to borrowers considered subprime. Figures from two consumer credit tracking firms, Experian and TransUnion, show record amounts of auto loans on the books at the end of 2014. Not only were drivers buying more cars than any year since 2006, but they were spending more on each car they bought. 

The subprime auto loan market has some characteristics in common with the mortgage loan market. Risky sub-prime auto loans are being bundled into complex bonds and then sold by banks to insurance companies, mutual funds and public pension funds, just like subprime mortgage loans were in the late 2000s. Also, many subprime auto lenders are loosening credit standards and focusing on the riskiest borrowers. Recently, there have been a number of claims of abuse or outright fraud, as some lenders are accused of forging data on their customers’ loan applications, or committing borrowers into loans with terms substantially different than what had been negotiated. But most are hesitant to call the rise in subprime auto lending a bubble. 

Luckily, the overall auto loan market is comparatively small -- $900 billion -- compared to $8 trillion of mortgage loans. Subprime currently makes up about 30% of overall car loans. A higher rate of auto loan defaults probably won’t cause a market decline on a scale comparable to the mortgage crisis. Second, according to some economists, borrowers tend to make car payments a higher priority than mortgage payments or credit card bills, since they need their cars to get to work, school and for many other daily necessities.

Still, the rise in subprime auto loans has caught the attention of regulators. This past summer, federal prosecutors began a civil investigation into the packaging and selling of questionable auto loans to investors. The probe is focusing on whether checks and standards were neglected as the subprime auto loan market surged and whether some borrowers’ loan applications had false information about income and employment. In addition, investigators want to know how the loans, which were pooled and assembled into securities, were represented to investors and whether the lenders fully disclosed to investors the credit-worthiness of the borrowers. 

One company that has been targeted during the investigation is the finance subsidiary of General Motors G.M. Financial Company. In August, the company disclosed that it had received a subpoena from the U.S. Department of Justice directing it to produce certain documents related to its origination and securitization of subprime automobile loan contracts since 2007. The United States attorney for the Southern District of New York is also looking into G.M. Financial, as well as other auto finance companies. 

G.M. Financial, has been one of the largest sellers of auto loan backed bonds, selling a total of $65 billion in securities. This year, G.M. Financial sold investors roughly $730 million in bonds made up of auto loans that carried an average annual interest rate of about 13 percent. Standard & Poor’s gave most of the bonds an AAA rating, but given what we know now about the ratings agencies, that rating is highly suspect. 

With total loans expected to cross the $1 trillion mark by the end of this year or early in 2016, this issue won’t disappear anytime soon. So far, the rise in subprime auto lending hasn’t slowed investors’ appetite for auto loan backed bonds, and most analysts don’t expect a rise in borrower defaults to cause a catastrophic market meltdown like the subprime mortgage crisis. On the regulatory front, aside from a settlement by one auto loan finance company over accusations that it increased the cost of auto loans for minority borrowers, there haven’t been any formal charges brought. However, regulators are clearly taking a closer look and should charges be brought in the future, it could dramatically change the way investors feel about buying securities back by subprime auto loans.

Pomerantz Takes a Bite Out of For-Profit College Scheme in Corinthian Colleges


On April 22, 2015, in Erickson v. Corinthian Colleges, Inc., Pomerantz scored a significant victory for investors against the much-criticized and poorly regulated for-profit college industry, when Chief Judge George King of the Northern District of California denied the defendant’s motion to dismiss the action. 

Corinthian Colleges was historically one of the largest for-profit college systems in the country, and when our firm filed an amended complaint in the case, the company was operating 111 campuses in 25 states. For-profit colleges are big business, making most of their profits from federal student aid programs. However, many for-profit colleges have come under fire in recent years for their deceptive practices (especially for their promises to adult students regarding the potential for gainful employment upon graduation), leading President Obama to implement new federal student loan and job placement guidelines. 

Our amended complaint alleges that Corinthian was misrepresenting its job placement rates, compliance with applicable regulations, and enrollment statistics. Our complaint relied on a host of sources: in addition to testimony from 15 confidential witnesses from all over the company, we also relied on documentary evidence cited in the California Attorney General’s complaint against the company (showing that job placement data was manipulated, errors were rampant, and placements were not verified consistently) and a Congressional report criticizing the for-profit college industry (especially with respect to Corinthian’s practice of constantly “churning” its student body to keep up enrollment rates, by enrolling massive numbers of new students each year to hide the fact that so many previous enrollees had dropped out after a short time). While the Court dismissed the regulatory compliance statements as too vague to be actionable, it upheld the job placement rate and enrollment statistic misrepresentations. 

The Court put all our allegations under a microscope and determined that the specific facts we alleged supported our claims that many of defendants’ public statements were false, and that the senior executive defendants knew it.

In addition, the Court agreed that we sufficiently alleged loss causation because public disclosures of the Attorney General’s lawsuit and the Congressional report raising these allegations led directly to significant drops in the market price for Corinthian’s securities.

This victory is especially noteworthy because Judge King has dismissed two prior lawsuits against Corinthian with similar allegations and because pleading loss causation in the Ninth Circuit has become particularly difficult in the wake of a recent decision by that court in another case.

How a Landmark Securities Case Helped Certify an Antitrust Class


Pomerantz currently acts as co-lead counsel for a class of third party payors and consumers in the antitrust action involving heartburn medication Nexium. The plaintiffs in this action allege that the branded dug company, AstraZeneca, and several generic drug makers violated antitrust laws by entering into agreements to delay entry of a generic version of Nexium. This type of case is often referred to as a pay-for-delay case where because the manufacturer of the brand name drug typically pays generic drug manufacturers to delay their entry to the market with a generic version of the brand drug. Such agreements have an obvious anti-competitive effect. 

These cases have been a hot topic in the legal community because the Supreme Court recently reviewed these types of cases and established a standard for analysis of such agreements. In June, 2013, the Supreme Court, in FTC v. Actavis, ruled that such pay-to-delay arrangements can run afoul of antitrust laws under a rule of reason analysis. The Court held that if plaintiffs could show that the brand name manufacturer made a large and unjustified payment to the generic drug makers that could be a violation of the antitrust laws. 

In late 2013, the District of Massachusetts granted plaintiffs’ motion for class certification of our Nexium case, finding that the “plaintiffs had adequately shown that (1) “prices [during the class period] for esomeprazole [the chemical name for Nexium] continued [to be] artificially high as a result of the defendants’ reverse payment agreements,” and (2) “that all class members have been exposed to purchasing or paying for [the drug] at a supracompetitive price.” The District Court also concluded that even though some members of the class did not suffer injury as a result of the alleged antitrust violation that was irrelevant because the vast majority of class members had been injured. 

Defendant appealed the District Court’s class certification ruling to the United States First Circuit of Appeals on the sole ground that the class included members who were not injured by the agreements. Defendants specifically gave the example that some individual consumers would continue to purchase branded Nexium for the same price even after generic entry – so called brand loyalists. Defendants relied on the First Circuit’s previous decision in In re New Motor Vehicles Canadian Export Antitrust Litigation, arguing that to obtain class certification Plaintiffs must show that, “each class member was harmed by defendant’s practice.” 

The First Circuit ultimately rejected that argument, concluding that “class certification is permissible even if the class includes a de minimis number of uninjured parties.” On the topic of the requirement that all class members be harmed the court stated, “[t]o the extent that New Motor Vehicles is read to impose such a requirement, it has been overruled by the Supreme Court’s Halliburton decision. But, in fact, New Motor Vehicles imposes no such requirement. 

In Halliburton, the Supreme Court addressed the treatment of potentially uninjured class members. Halliburton was a landmark securities case that reviewed the presumption of reliance in securities cases. Halliburton found that a securities class can presume that the investors relied on defendant’s misrepresentation when deciding to purchase or sell a stock rather than prove direct reliance of defendant’s misrepresentations for each individual class member and defendants can rebut this presumption. The Supreme Court stated, “[w]hile [the rebuttal] has the effect of leaving individualized questions of reliance in the case, there is no reason to think that these questions will overwhelm common ones and render class certification inappropriate under Rule 23(b)(3).” As a result, the First Circuit in In re Nexium, found that because Halliburton “contemplated that a class with uninjured members could be certified if the presence of a de minimis number of uninjured members did not overwhelm the common issues for the class,” the Nexium class can also be certified despite a de minimis number of uninjured members.  

Our Securities Fraud Case Survives Barclays’ Motion to Dismiss


Pomerantz largely defeated defendants’ motion to dismiss our complaint against Barclays bank and several of its officers and directors. Our action accuses Barclays of making false and misleading statements about the operations of its “dark pool.” A “dark pool” is an alternative trading system that does not display quotations or subscribers’ orders to anyone other than to employees of the system. Dark pools were first established to avoid large block orders from influencing financial markets and to ensure trading privacy. Trading in dark pools is conducted away from public exchanges and the trades remain anonymous, lowering the risk that the trade will move the market price. About 15% of U.S. equity-trading volume is transacted in dark pools.

Precisely because these trades are conducted “in the dark,” institutional investors trading in these venues rely upon the honesty and integrity of their brokers and the dark pool operators to act in their clients’ best interest.

If given information about impending customer trades, high frequency traders in the dark pools can trade ahead of those customers and then profit at their expense by reselling the shares to complete the order. Studies seem to show that, as of 2009, high frequency trading accounted for 60%-73% of all U.S. equity trading volume. Keeping such traders away from the dark pools could help protect other investors from their front-running and other predatory trading practices.

After a series of scandals, and in particular disclosure of its manipulation of the LIBOR benchmark interest rates, Barclays commissioned an independent investigation of itself. As a result of the findings, it publicly pledged, among other things, to act with transparency and to impose strict controls over trading in its dark pool. These pledges, it turns out, were a sham. Barclays actually embarked instead on a campaign to make itself the largest dark pool in the industry, by hook or by crook.

An investigation by the New York Attorney General revealed that, in order to grow the dark pool, Barclays increased the number of orders that it, acting as broker, executed in the pool. This required that Barclays route more client orders into the dark pool, and ensure that there was sufficient liquidity to fill those orders. To convince the market of the safety of trading in its dark pool, Barclays represented that it would monitor the “toxicity” of the trading behavior in its dark pool and would “hold traders accountable if their trading was aggressive, predatory, or toxic.” Such “toxic” trading activity included high frequency trading, which it pledged to keep out of its dark pool.

But these alleged controls were illusory. One former director explained that Barclays “purports to have a toxicity framework that will protect you when everybody knows internally that [they don’t]”. Another former director described these controls as “a scam.” Our complaint alleged that Barclays representations about establishing a monitoring program to eliminate “toxic” trading from the dark pool were misleading because Barclays did not disclose that it did not eliminate traders who behaved in a predatory manner, did not restrict predatory traders access to the dark pool, did not monitor client orders continuously, and did not monitor some trading activity in the pool at all. In fact, plaintiffs allege, Barclays encouraged predatory traders to enter the dark pool.

The court’s decision is significant because of its emphasis on the importance to investors of corporate integrity. Barclays' motion to dismiss relied heavily on the contention that its misrepresentations about the dark pool were immaterial to investors because revenues from the dark pool were far less than 5% of the company’s total revenues. This figure is a statistical benchmark often used to assess materiality. In fact, revenues from the dark pool division contributed only 0.1% of Barclays total revenues. The court rejected Defendants’ myopic view of materiality and found that the misrepresentations went to the heart of the firm’s integrity and reputation, which had been jeopardized by its past well-publicized transgressions. The court’s decision means that misrepresentations about management’s integrity can be actionable even if the amounts of money involved in these transgressions falls below a presumptive numerical threshold. 

The court also held that Defendant William White, the Head of Barclays’ Equities Electronic Trading, was a sufficiently high-ranking official that his intent to defraud could be imputed to the company itself. The court explained that “there is strong circumstantial evidence of conscious misbehavior or recklessness on [his]part. “Not only was White the source of many of the allegedly false allegations about [the dark pool] but he was the head of Equities Electronic Trading at Barclays, “the driving force behind the Company’s goal to be the number one dark pool,” and he “held himself [out] to the public as intimately knowledgeable about LX’s functions and purported transparency.”