On October 7, 2016, Judge Anthony J. Battaglia of the United States District Court for the Southern District of California dismissed a putative class action against Celladon Corporation and two of its executives.  Tadros v. Celladon Corporation et al., No. 15-cv-01458 (S.D. Cal. Oct. 7, 2016).  The Court held that plaintiff failed to meet the heightened pleading requirements under the Private Securities Litigation Reform Act of 1995 (“PSLRA”) in alleging a material misrepresentation or omission and scienter in support of its securities fraud claims under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Securities and Exchange Commission Rule 10b-5.  Plaintiff alleged that Celladon and its executives intentionally misled investors through false or misleading statements regarding the success of early clinical trials of Mydicar, the company’s prospective cardiovascular drug.  According to plaintiff, Celladon’s stock price declined by 80% after announcements by the company in April 2015 that Mydicar failed to meet its goals in the second phase of the trial.  Plaintiff brought this action in July 2015.

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On September 30, 2016, Judge Richard J. Sullivan of the United States District Court for the Southern District of New York dismissed with prejudice a putative securities class action brought against MDC Partners, Inc. (“MDC”)—an advertising agency holding company—and several of its current and former officers and directors.  N. Collier Fire & Rescue Dist. Firefighter Pension Plan v. MDC Partners, Inc., No. 15 Civ. 6034 (S.D.N.Y. Sept. 30, 2016).  Plaintiffs claimed that defendants violated Section 10(b) of the Securities Exchange Actmisstating the amount of compensation paid to MDC’s founder and former CEO. The Court held that the alleged misrepresentations regarding the CEO’s compensation were not qualitatively material and dismissed the claims.   

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On September 7, 2016, the Court of Appeals for the 11^th Circuit affirmed the Southern District of Florida’s dismissal of shareholder securities fraud claims against The ADT Corporation (“ADT”).  IBEW Local 595 Pension and Money Purchase Pension Plans, et al v. The ADT Corporation et al, No. 15-13595, 2016 WL 4660814 (11th Cir. Sept. 7, 2016).  Plaintiffs claimed that ADT misrepresented and failed to disclose that its board’s motivation for approving a leveraged repurchase of company stock was to protect itself from threats of replacement by an activist hedge fund (the “Fund”) and that ADT and the Fund engaged in deceptive conduct in executing the repurchase plan, in violation of Section 10(b) of the Securities Exchange Act of 1934.  The Court held that ADT was not required to disclose its motives for the repurchase and the defendants had not engaged in manipulative conduct.

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On August 24, 2016, a three-judge panel of the United States Court of Appeals for the Second Circuit affirmed the dismissal of claims brought by putative class members under Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5 against defendants BlackBerry Ltd. and certain of its officers.  Pearlstein, et al. v. BlackBerry, et al., No. 15-3991 (2d Cir. August 24, 2016).  The Court, however, vacated U.S. District Court Judge Thomas P. Griesa’s denial of plaintiffs’ motion for leave to amend, noting that the record was “insufficient” to determine whether leave was proper.  The Court remanded the case for reconsideration of the motion for leave to amend “[b]ecause the district court did not explain its basis for denying leave to amend.”

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On August 22, 2016, the United States Court of Appeals for the Third Circuit affirmed the lower court’s dismissal of a putative securities class action filed against Cooper Tire & Rubber Company (“Cooper”) and two of its officers.  OFI Asset Mgmt. v. Cooper Tire & Rubber Co., No. 15-2664 (3d Cir. Aug. 22, 2016).  The Third Circuit held that plaintiffs’ lengthy allegations amounted to nothing more than claims of fraud-by-hindsight and thus did not meet the requirement that claims of securities fraud be pled with particularity.  

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On August 18, 2016, Judge Kimba Wood of the United States District Court for the Southern District of New York dismissed a putative class action against FXCM Inc., a currency brokerage firm, and its two co-founders, with leave to replead.  Ret. Bd. of the Policemen’s Annuity and Benefit Fund of Chi. v. FXCM Inc., 15-cv-3599 (S.D.N.Y. Aug. 18, 2016).  In dismissing plaintiff’s claims under Sections 10(b) and 20(a) of the Securities Exchange Act (the “Exchange Act”), the Court found that plaintiff failed to plead allegations sufficient to give rise to a strong inference of scienter, holding that the complaint failed to allege either “motive or opportunity” or “strong circumstantial evidence of conscious misbehavior or recklessness.”  Judge Wood’s decision joins the well-established Second Circuit precedent that plaintiff cannot meet the heightened pleading requirement merely by alleging that the defendant was motivated by a common desire to keep the corporation’s profits or by alleging “fraud by hindsight,” and confirmed that the standard for pleading scienter on the basis of recklessness is high.

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On August 11, 2016, the New York Appellate Division, First Department, affirmed the New York Supreme Court’s denial of a motion to dismiss fraud claims asserted against sponsors and underwriters of twenty-three residential mortgage backed securities (“RMBS”).  IKB International, S.A. v. Morgan Stanley, 2016 WL 4217814 (1^st Dep’t Aug. 11, 2016).  Defendants argued that the plaintiff had not adequately alleged its justifiable reliance on any alleged misrepresentation and that, when acting solely as underwriters of certain of the challenged transactions, they made no actionable misrepresentations.  The Court held that the plaintiff had adequately pleaded justifiable reliance on the purported misstatements and that the underwriters’ participation in the RMBS at issue, as pleaded, was sufficient to withstand a motion to dismiss.

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On July 25, 2016, Judge David Carter of the United States District Court for the Central District of California dismissed, without prejudice, a putative class action brought by shareholders of El Pollo Loco Holdings, Inc. (“El Pollo”).  See Turocy v. El Pollo Loco Holdings, Inc. No. SA CV 15-1343-DOC (KESx) (C.D. Cal. July 25, 2016).  Plaintiffs alleged that El Pollo and certain of its executives made false statements concerning expected sales by failing to disclose the negative sales impact of recent changes in menu prices and offerings, in violation of Section 10(b) of the Securities Exchange Act of 1934.  The Court held, however, that plaintiffs had not alleged any actionable false statements, nor pleaded particularized facts creating a sufficiently compelling inference that El Pollo executives made the challenged statements with scienter.

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On July 20, 2016, the U.S. Court of Appeals for the Sixth Circuit revived a putative class action against Federal Home Loan Mortgage Corporation (“Freddie Mac”).  Ohio Public Employees Retirement Sys. v. Federal Home Loan Mortgage Corp., et al., No. 14-4189, 2016 WL 3916011 (6th Cir. Jul. 20, 2016).  In reversing the U.S. District Court for the Northern District of Ohio, the Court found that plaintiff’s allegations regarding loss causation were sufficient to sustain a claim against Freddie Mac under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) for making materially false and misleading statements and omissions concerning its financial health.  

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On July 19, 2016, the U.S. Court of Appeals for the Tenth Circuit upheld the dismissal of a proposed shareholder class action against Deloitte & Touch LLP.  Sanchez et al. v. Crocs, Inc. et al., No. 11-1116 (10th Cir. July 19, 2016).  The Court held that plaintiffs had not “established a strong inference that Deloitte acted recklessly, and consequently, their . . . claim fail[ed].” Plaintiffs had alleged that Crocs, Inc. hid increasingly unsellable inventory totals in 2006 and 2007 before announcing a $70 million inventory write-down in 2008, and that Deloitte knew about or recklessly disregarded “red flags” that should have alerted the auditing firm to the company’s impending financial troubles. 

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On July 6, 2016, Judge Paul A. Engelmayer of the United States District Court for the Southern District of New York dismissed with prejudice federal securities class claims against the former CEO of an Australian pharmaceutical company, QRx Pharma Ltd. (“QRx”). Gillis v. QRx Pharma Ltd., No. 15 Civ. 4868 (S.D.N.Y. July 6, 2016).  Plaintiffs alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connections with statements about the FDA approval process made while one of the company’s drugs was under review.  Judge Engelmayer granted the CEO’s motion to dismiss the claims on the grounds that the alleged misrepresentations about the FDA’s process and the likelihood of approval were inactionable opinion and/or forward-looking statements and because the complaint failed to allege scienter adequately.  This decision signals continuing skepticism of securities claims against pharmaceutical and medical device companies that are brought when developmental products are not successful in trials and/or do not receive regulatory approvals.

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On July 5, 2016, the Tenth Circuit Court of Appeals affirmed the dismissal of a putative securities fraud class action complaint filed by shareholders of airplane part manufacturer Spirit AeroSystems, Inc.  See Anderson et al. v. Spirit AeroSystems Holdings et al., No. 15-3142 (10th Cir. July 5, 2016). Plaintiffs asserted claims under Section 10(b) of the Securities Exchange Act of 1934. In the wake of defendants’ October 2012 announcement of a forward loss of $434.6 million in connection with specified projects, plaintiffs alleged that defendants had knowingly overstated the success of their efforts to cut costs and meet production deadlines for those projects in more than 40 statements in 2011 and 2012. The Court held that plaintiffs’ complaint was properly dismissed because they had failed to allege facts creating an inference of scienter that was cogent and compelling in light of the alternative inference that defendants had merely been overly optimistic.

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On June 8, 2016, the United States Court of Appeals for the Ninth Circuit and the United States District Court for the Southern District of New York issued decisions as to separate securities class action lawsuits, dismissing complaints against defendants Peregrine Pharmaceuticals, Inc. and Cellceutrix Corporation, in Fahey v. Peregrine Pharmaceuticals, Inc., et al., No. 14-5582, slip op. (9th Cir. Jun. 8, 2016) and Zagami v. Cellceutrix Corporation, et al., No. 15 Civ. 7194, slip op. (S.D.N.Y. Jun. 8, 2016).  

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On May 24, 2016, the United States Court of Appeals for the Sixth Circuit affirmed the District Court’s dismissal of securities fraud claims asserted against a corporation and the corporation’s CEO and CFO.  Doshi v. Gen. Cable Corp., No. 15 Civ. 5621, 2016 BL 164374 (6th Cir. May 24, 2016).  Although a corporate executive’s knowledge typically will be imputed to a corporation, the Court held that an executive’s state of mind, i.e., intent, will not be imputed unless that executive himself or herself makes a public misstatement.    This decision confirms the Sixth Circuit’s decision in In re Omnicare, Inc. Sec. Litig., 769 F.3d 455 (6th Cir. 2014) and makes clear that courts must review “all the allegations holistically” to determine whether a corporation’s scienter has been adequately pleaded.  Plaintiffs had alleged that defendants violated sections 10(b) and 20(a) of the Securities Exchange Act (the “Securities Act”) by recklessly issuing and/or approving materially false public financial statements.   

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On May 23, 2016,  the United States Court of Appeals for the Second Circuit overturned a jury verdict finding that defendants had violated the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), and invalidated more than $1.2 billion in civil penalties.  The Court ruled that the Government had failed to establish that defendants, including Bank of America N.A. and Countrywide Home Loans, Inc. (“Countrywide”), had committed fraud because there was no evidence of the requisite intent to defraud at the time the contracts leading to the loan sales at issue were executed. U.S. ex rel. O’Donnell v. Countrywide Home Loans, Inc., — F.3d —, 2016 WL 2956743 (2d Cir. 2016).  The Second Circuit noted that, absent contemporaneous intent to defraud at the time a contract is entered into, the Government’s case amounted to nothing more than intentional breach of contract, which is not a predicate for a FIRREA offense.
 
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On May 20, 2016,  the United States Court of Appeals for the Second Circuit affirmed the dismissal on summary judgment claims against a Hong Kong-based auditor brought under Section 10(b) of the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) and Section 11 the Securities Act of 1933 (the “Securities Act”), holding that plaintiffs had not demonstrated that the auditor had either recklessly issued “clean” audit opinions or did not believe the opinions were true when issued.   In re Puda Coal Securities Litigation, Inc., — F.3d —, 2016 WL 2942415 (2d Cir. 2016).  In so holding, the Court clarified that “audit reports are statements of opinion subject to the Omnicare standard for Section 11 claims,” and held absent evidence of subjective disbelief or actionable omissions of information regarding the basis for the opinion, there could be no claim under Section 11.

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On May 10, 2016, Best Buy shareholder plaintiffs filed a motion for rehearing in the United States Court of Appeals for the Eighth Circuit, seeking en banc review of the first circuit court ruling to apply the United States Supreme Court’s seminal decision in Halliburton II, and hold that a defendant had rebutted the fraud-on-the-market presumption of reliance by showing lack of price impact.  IBEW Local 98 Pension Fund et al. v. Best Buy Co. Inc. et al., case number 14-3178, in the U.S. Court of Appeals for the Eighth Circuit.  Plaintiffs seek rehearing of the Court’s 2-1 decision in April, which relied on Halliburton II in overturning the class certification order of the United States District Court for the District of Minnesota, after finding that the District Court had ignored evidence presented by defendants demonstrating that the alleged misstatements did not impact the share price.  In seeking rehearing, Plaintiffs are attempting to align the Eighth Circuit with the United States Court of Appeals for the Seventh and Eleventh Circuits, which have held that for purposes of invoking the fraud-on-the-market presumption, a plaintiff may point to evidence that a false statement maintained an inflated price until the price dropped as a result of a corrective disclosure.

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On April 22, 2016, Judge Kimba Wood of the United States District Court for the Southern District of New York denied defendants’ motion to dismiss plaintiffs’ claim brought under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), holding that the Private Securities Litigation Reform Act (“PSLRA”) safe-harbor for forward-looking statements does not apply to statements that incorporate misleading representations of present fact.  In re Salix Pharmaceuticals, Ltd., No. 14 Civ. 8925, 2016 WL 1629341 (S.D.N.Y. Apr. 22, 2016).  Plaintiffs had alleged misrepresentations regarding the inventory levels of defendant’s primary products, intentionally increasing levels beyond customer demand, in order to make the company appear more financially robust than it was.

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