On July 15, 2016, the U.S. Court of Appeals for the Second Circuit affirmed the post-verdict decertification of a previously certified class action against Wells Fargo subsidiaries. Mazzei v. Money Store, No. 15-2054 (2nd Cir. July 15, 2016).  The Court held that district courts have the power to decertify a class after a jury verdict and before the entry of final judgment. 

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On July 14, 2016, the U.S. Court of Appeals for the Second Circuit upheld a decision dismissing claims against Bear Stearns Companies L.L.C. (“Bear Stearns”) for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and common law fraud under New York law.  SRM Global Master Fund Ltd. P’ship v. Bear Stearns Cos. L.L.C., 14-507-cv, 2016 WL 3769735 (2d Cir. Jul. 14, 2016).  The Court held that the class action tolling rule set forth in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), does not apply to 28 U.S.C. § 1658(b)(2), the five-year statute of repose that limits the time in which plaintiffs may bring various securities related claims, including under Section 10(b) of the Exchange Act. 

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On July 6, 2016, Judge William H. Pauley III of the United States District Court for the Southern District of New York dismissed with prejudice a federal securities class action filed against Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (“Volaris”), a low-cost airline, and certain other participants in its September 2013 initial public offering (“IPO”).  See Dekalb Cnty. Emps.’ Ret. Sys. v. Controladora Vuela Compania de Aviacion, S.A.B. de C.V., No. 15 Civ. 1337 (S.D.N.Y. July 6, 2016).  In dismissing plaintiffs’ claims under Sections 11 and 15 of the Securities Act of 1933 (the “Securities Act”), the Court found that the alleged misstatements were not material because they affected less than 5% of Volaris’s overall revenue and also because the drop in stock price could not be attributed solely to the alleged misstatement but rather a “host of negative market-moving facts.”  Judge Pauley’s decision serves as a reminder that the materiality standard remains a “meaningful pleading obstacle” in Securities Act claims.

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The tolling rule established by the Supreme Court in American Pipe & Construction Co. v. Utah generally provides that the commencement of a class action in federal court suspends the applicable statute of limitations for all members of the proposed class.

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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 July 1, 2016, Judge William Pauley III of the United States District Court for the Southern District of New York granted in part and denied in part a motion to dismiss a putative class action concerning Virtus Investment Partners, the parent of an investment advisory company that managed and provided advice to mutual funds.  See Youngers v. Virtus Inv. Partners Inc., No. 15-cv-8262 (S.D.N.Y. July 1, 2016).  Plaintiffs purported to assert claims under Section 10(b) of the Securities Exchange Act of 1934 and Sections 11 and 12(a)(2) of the
Securities Act of 1933, on behalf of investors who purchased shares in certain Virtus mutual funds between May 8, 2010 and December 22, 2014.  Plaintiffs’ allegations concerned statements in the funds’ registration statement that the above-market performance of the funds using a particular investment strategy (the “AlphaSector” strategy) was calculated based on live trading since 2001.  Plaintiffs alleged that the pre-2008 returns were actually generated using only back-testing, as the algorithm was not developed until 2008.  

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On June 21, 2016, Chief Judge Colleen McMahon of the United States District Court for the Southern District of New York dismissed with prejudice a consolidated securities fraud class action filed against Alibaba Group Holding Ltd. (“Alibaba” or the “Company”) and several of its officers and directors.  See Christine Asia Co., Ltd. v. Alibaba Gr. Holding Ltd., No. 15 MDL 2631 (S.D.N.Y. June 21, 2016).  The court ruled that Alibaba’s failure to disclose a meeting with a Chinese regulator and certain administrative guidance from that regulator was not material because the disclosure of such information would not have significantly altered the “total mix” of information available to investors.

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On June 20, 2016, Judge Lorna Schofield of the United States District Court for the Southern District of New York dismissed a securities class action against Seadrill Limited (“Seadrill”), a Bermudan company that owns and operates sea-based oil rigs, and related parties.  See In re Seadrill Ltd. Sec. Litig., No. 14 Civ. 9642 (S.D.N.Y. June 20, 2016).  The Court granted the motion to dismiss because the alleged misrepresentations were either too vague to be actionable or were inactionable statements of opinion or optimism that were not inconsistent with the privately expressed concerns of company executives.

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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 June 9, 2016, the New York Court of Appeals held that New York law does not exempt from discovery attorney-client privileged communications shared by parties that have a common legal interest, unless the communications relate to either pending or anticipated litigation.  Ambac, et al. v. Countrywide Home Loans, Inc., et al., 2016 WL 3188989 (N.Y. Jan. 9, 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 20, 2016, Judge Dean Pregerson of the United States District Court for the Central District of California dismissed with prejudice a putative securities class action against Toshiba Corporation.  Stoyas v. Toshiba Corporation, No. CV 15-04194 DDP, 2016 BL 163950 (C.D. Cal May 20, 2016).  Plaintiffs alleged that Toshiba violated Section 10(b) of the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) and Japan’s Financial Instruments & Exchange Act by making accounting misstatements that led to the restatement of six years of financial results and the elimination of approximately one-third of the company’s profits from 2008 to 2014.  The Court rejected these arguments, holding that the American Depository Receipts (“ADRs”) were not subject to Section 10(b) claims, and that comity and a lack of connection to the United States compelled dismissing the Japanese law claims.

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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 16, 2016, the United States Supreme Court unanimously affirmed the United States Court of Appeals for the Third Circuit, holding that Section 27 of the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) confers exclusive federal jurisdiction over the suits that “arise under” the Exchange Act pursuant to the general federal question statute, 28 U.S.C. § 1331.  Merrill Lynch Pierce Fenner & Smith Inc. v. Manning, 14-1132 (May 16, 2016).  Thus, the Court held that Section 27’s jurisdictional test matches the one formulated by the Court for Section 1331.  Plaintiffs had commenced the suit in New Jersey state court, asserting state-law claims based on allegations that several financial institutions had impermissibly engaged in “naked short sales,” which had devalued stock of Escala Group, Inc., a company in which Manning and the other plaintiffs held stock.

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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 May 10, 2016, Facebook filed a letter in the United States District Court for the Southern District of New York action in connection with class action litigation concerning its $16 billion IPO. In re Facebook Inc., IPO Securities and Derivative Litigation, Case No. 1:12-md-02389 (S.D.N.Y.).  Facebook, defending against claims under Sections 11, 12, and 15 of the U.S. Securities Act of 1933 (the “Securities Act”), contends that the absence of an effective plan for obtaining individualized discovery from unnamed class members may render the case “unmanageable” as a class action and, as a result, “the Court may wish to reconsider class certification at some point.”  Facebook further requested that, “at the very least, if the case proceeds as a class action,” the Court confirm that Facebook “will have the right to take individualized discovery from absent class members in a later phase of the case.”  The Court’s ultimate decision on these issues may impact parties in similar cases.

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On April 29, 2016, the United States Court of Appeals for the Second Circuit affirmed a dismissal by the United States District Court for the Southern District of New York, holding that the Oxley Act of 2002 (“SOX”) extended the statute of repose from three years to five years for claims brought under Sections 9(f) and 18(a) of the U.S. Securities Exchange Act of 1934 (the “Exchange Act”), it did not change the three-year statute of repose for Section 14(a) claims.  Bricklayers and Masons Local Union No. 5 Ohio Pension Fund v. Transocean Ltd. et. al., No. 14 Civ. 0894, 2016 WL 1055363 (2d Cir. April 29, 2016).  The Court reached this result despite a prior decision that applied the repose period under Sections 9(f) and 18(a) to Section 14(a), based on the principle that assumes that Congress accounts for existing law when it passes legislation.  

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On April 29, 2016, Chief Judge Patti Saris of the United States District Court for the District of Massachusetts granted plaintiff’s motion to remand to state court a putative class action brought under the U.S. Securities Act of 1933 (the “Securities Act”).  Fortunato v. Akebia Therapeutics, Inc., No. 15-13501-PBS, 2016 BL 137403 (D. Mass. Apr. 29, 2016).  This decision joins a number of courts that have remanded Securities Act class actions to state court after concluding that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) did not negate the removal bar contained in the Securities Act.  This decisional trend has led plaintiffs to increasingly file Securities Act class action lawsuits in state courts, which often are less likely to dismiss complaints and may not apply the procedural protections of the Private Securities Litigation Reform Act (“PSLRA”), such as the pre-motion to dismiss discovery stay.

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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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