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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