Supreme Court Clarifies Who Is The “Maker” Of A Statement For Rule Private Rights Of Action Under 10b-5

One of the decisions securities fraud attorneys need to make before even bringing the claim is who to name as defendants in the lawsuit. Typically this is the party who made the material misstatement, but what does that really mean? In the case of many Wall Street firms the identity of the real maker of the statement can become cloudy, with wholly own subsidiaries and corporations formed by other corporations all interacting with each other. This is the exact issue that the Supreme Court has recently addressed, defining who the “maker” of a statement is. Although the Supreme Court provided clarity in the opinion about who was a “maker,” this clarity created legal loopholes which allow corporations to avoid liability under private rights of action of Section 10b-5 for those entities with creative ways of creating additional corporations that observe corporate formalities.
In the United States Supreme Court case of Janus Capital Group, Inc. v. First Derivatives Traders, decided by the Court on June 13, 2011 the Plaintiff, First Derivative Traders, brought a private 10b-5 securities claim as a class representatives against Janus Capital Group (“JCG”). The allegation was that JCG and its wholly owned subsidiary, Janus Capital Management (“JCM”) made false statements in mutual fund prospectuses filed by Janus Investment Fund (“JIF”) — for which JCM was the investment advisor and administrator — and that those statements affected the price of JCG’s stock. Although JCG created JIF, JIF is a separate legal entity that is owned entirely by mutual fund investors.

To he held liable under a 10b-5 claim for false statements the party must, “make any untrue statement of material fact.” The issue was whether or not the investment advice and counsel given by JCM to JIF, which it incorporated into its prospectus, constituted “making” a misrepresentation for the elements of a 10b-5 claim.

The district court dismissed the claims, finding the defendants were not the makers, and then the Fourth Circuit reversed. Then, the Supreme Court stepped into the fray granting certiorari to the case. There the plaintiffs continued to argue that JCG had made the statements, and in addition, also argued that JCG should be held liable as a control person under Section 20(a). The Supreme Court disagreed, holding that JIF was the only “maker” of the statement and therefore JCM and JCG could not be held liable under a private action under Rule 10b-5.

The Supreme Court clarified that JCM, even though it was the primary architect of JIF’s prospectus did not “make” the misrepresentations within the prospectus, but instead JIF was their maker. The Court found that under 10b-5 the “maker” of statements, “is the person or entity that has ultimate authority over the statement, including its content and whether and how to communicate it.” In its reasoning the Court made the analogy to a speechwriter and a speaker saying, “Even when a speechwriter drafts a speech, the content is entirely within the control of the person who delivers it.”

The Court also made clear the stark division between bringing a private action under 10b-5 and the SEC bringing claims under the rule. Relying on its decision in Central Bank of Denver N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), the Court stated that the private right of action under rule 10b-5 does not extend to aiders and abettors of securities fraud, those avenues of redress being reserved to the SEC. Since, the Court concluded that the JCM did not “make” the misrepresentation under 10b-5 the Plaintiffs claim failed.

This ruling seemingly creates a massive loophole in the scope of private claims actionable under 10b-5, in essence shielding parties that originate misrepresentations simply because they were not the party to effectuate their dissemination. The dissent to the Court’s opinion voiced by Justice Breyer picked up on this inequitable result. Justice Breyer argued that the Court’s definition of “make” was far too limited and in fact had no basis not only in securities law but in the wider English language usage of the word. For him, to construe “make” as the Court did was to artificially create a statutory loophole that limited the effectiveness of private claims under 10b-5 without support of legislative intent to do so. When taking in the policy concerns focused on the availability of equitable remedies for securities fraud and the maintenance of a fair market place, Justice Breyer’s position is both more sensible and defensible. Unfortunately though, it is not the law of the land.

Wrongful Death Of An Adult

At Starr Austen & Miller we help family members who have experienced the wrongful death of an adult loved one, as well as a child. (Click here for more information about child wrongful death claims, since they are handled differently under a different statute.)

When a family member dies it can be a very emotional and gut wrenching experience. Unfortunately, when that death was caused by another person, in addition to having to deal with the grief and loss the surviving family members may also be left with complicated legal issues.

A wrongful death lawsuit may be necessary if a loved one dies as a result of a truck or automobile accident, work related injuries, medical negligence, or injury from a defective product, for example.

Even when a death is accidental in nature, if there is negligence involved, it may allow surviving family members to get compensation for their loss.  The Indiana Wrongful Death Statute, and accompanying case law have confirmed what kinds of damages are, and are not allowed, and it depends on many factors surrounding both the decedent and the surviving family members.

If a decedent has left behind surviving dependents, such as a spouse, dependent children or other dependent next of kin, then the following damages may be awarded, taking into consideration both the decedent’s age, health and life expectancy and how long the dependents were expected to remain so:

•  Loss of earning capacity, including probably future earnings, reduced by persona living expenses

•  Value of future support the dependents could have reasonably expected to receive

•  Loss of love, care and affection that dependents could reasonably have expected

If a decedent, on the other hand, did not have any dependents since he or she was unmarried, but did have either parents or non-dependent children who survived, then, as long as those parents and/or children had a genuine, substantial and ongoing relationship with the decedent, they could be awarded damages for loss of love and companionship.

In addition to the damages listed above, the personal representative of the decedent’s estate could also be entitled to damages in a wrongful death action for the following:

•  Value of hospital and other health care services provided to the decedent in connection with the injuries caused by the defendant

•  Value of necessary and reasonable funeral and burial expenses

•  Cost of administering decedent’s estate, including reasonable attorney’s fees and expenses

•  The costs of pursuing the wrongful death lawsuit, including reasonable attorney’s fees and expenses

You cannot receive punitive damages in a wrongful death action used to either punish the defendant or discourage similar conduct. In addition, you cannot receive damages to compensate you for your grief.

As mentioned previously, Indiana has specific statutory laws about wrongful death in this state, and they can be complicated, with issues experienced attorneys should handle for you. The attorneys at Starr Austen & Miller are experienced in this specialized area of the law and are here to assist you to get the maximum compensation allowed by law for your circumstances.

If you’ve lost a loved one due to someone else’s fault or negligence, we’re here to help.

Deceptive Accounting Practices Can Constitute Both Material Misrepresentations And Scienter For 10b-5 Claims

In securities fraud litigation it can be difficult to identify the material misrepresentation sometimes without careful scrutiny because typically companies try to be sly about it. This is what happened with Gateway, Inc. in a case recently, where the company tried to use deceptive accounting practices to misrepresent to investors the health of its quarterly sales. Turns out that these deceptive accounting practices constituted both the material misrepresentation, and because the deception made it look like Gateway was trying to hide something it also constituted the scienter element necessary for the case.

In the case styled Securities And Exchange Commission v. Todd, decided by the Ninth Circuit on June 23, 2011 the SEC brought a securities fraud claim against Gateway Inc. and several of its corporate officers under the Securities Exchange Act of 1934, section 10(b) and Rule 10b-5. The allegations in the complaint dealt with three unusual transactions during the year 2000 where Gateway had unusual large sales to other corporations and reported them in a deceptive way through its accounting practices to make it look like they had better normal quarterly sales than they really did.

The case actually went all the way to a jury trial, where the jury found the former Gateway financial executives liable on all claims by the SEC. Thereafter, the defendants brought motions for judgment as a matter of law, which the district court granted, basically nullifying the jury’s decision. The SEC then appealed to the Ninth Circuit, which after review of the evidence determined that at least some of the district court’s orders should be reversed and the jury’s verdict reinstated for the 10b-5 claims.

Specifically, the Court of Appeals reviewed the evidence supporting the viability of the SEC’s 10b-5 claim. Liability under 10b-5 requires evidence of (1) a material misrepresentation, (2) in connection with the purchase or sale of security, (3) with scienter, (4) by means of interstate commerce. In reviewing the jury verdict of the Plaintiffs’ 10b-5 claim the court acknowledged that the standard of review for such considerations was that “a jury’s verdict must be maintained if it is supported by substantial evidence.” In light of the facts, the majority of the court’s attention focused on whether or not the SEC had provided enough evidence to support the jury’s verdict on the misrepresentation and scienter elements of their claims. The court concluded that the deceptive accounting and reporting of these incidents by Gateway was enough evidence to support the jury’s verdict in regard to the misrepresentation and scienter elements of the 10b-5 claims.

The Gateway decision illiterates one of the basic protections afforded by securities

fraud litigation. While not involved in a blatant Ponzi scheme or similar activity the corporate officers of Gateway were riding the line of accurate account and report
practices in an effort to maximize the company’s profits and live up to the market
forecasters’ expectations of their quarterly revenue growth. Feeling the weight of a
more competitive and shrinking personal PC market in 2000 Gateway felt pressure to
preserve its perception of corporate health through suspect accounting. This type of
misrepresentation is no less harmful to investors and the case is a way of sending a message to companies not to engage in these deceptive accounting practices in the future.

Contractual Promises For The Future Which Are Breached Are Not Material Misrepresentations Under Securities Law

All securities fraud lawyers know it can be tough to make it past a 12(b)(6) motion in securities fraud cases, because of the intense scrutiny all complaint allegations get under the law and procedural rules. That’s why its important to first make sure you properly identify the material misrepresentations upon which your client relied, since this is the cornerstone of the case. Unfortunately, what we’re learning is that promises of future behavior that investors may rely upon, if they are part of contractual language, will not constitute the first critical element of securities fraud cases.

The recent case of Reese v. BP Exploration (Alaska), Inc., decided on June 29, 2011, by the Ninth Circuit illustrates this point well, since many of the claims brought against the company failed because the court determined no material misrepresentation was properly alleged. The appeal originated with a securities fraud action involving British Petroleum Exploration of Alaska (BPXA). In fall 2006 BPXA was in charge of supervising its pipeline and oil production facilities in Prudhoe Bay Alaska. During that time two separate pipeline leaks resulted from the buildup of bacterial colonies in the pipeline due to sediment accumulation. In the resulting action under the Clear Water Act brought by the U.S. government BPXA admitted to being aware of the sediment buildup before the spills. The class of Plaintiffs represented by Claude A. Reese, were those individuals who purchased shares of BP in the time frame leading up to the spill, who collectively suffered billions of dollars of capital loss when the stock plummeted in the spill’s aftermath. The Plaintiffs alleged that BPXA had given them assurances that such spills, which had occurred before, were a thing of the past due to new safety protocols. Based on that assurance the Plaintiffs filed a securities fraud suit against BPXA.

The Plaintiffs claimed that BPXA made false and misleading statements about its

operations in Prudhoe Bay through the SEC filings of the BP Prudhoe Bay Royalty
Trust, a trust created to distribute royalty interest from oil production in Prudhoe Bay to
purchasers of Trust units traded on the New York Stock Exchange. When BPXA created
the trust, it executed an Overriding Royalty Agreement to govern the details of the
interest distribution. Pursuant to the Overriding Agreement, BPXA contracted to operate
its production in Prudhoe Bay according to a “prudent operating standard.” Then during
each quarter the Trust attached the Overriding Agreement, with its “prudent operating
standard” clause to its SEC filings.

The Plaintiffs claim that this act when taken with the admitted negligent operation of the Prudhoe Bay pipeline constituted a material misrepresentation and the grounds for a securities fraud action. The Court of Appeals rejected this claim by the Plaintiffs using the general “reasonable investor test,” which holds that a statement is misleading in the context of securities fraud if “it would give a reasonable investor the impression of a state of affairs that differs in a material way from the ones that actually exist.” For the Court of Appeals the Trust’s Overriding Agreement, with its prudent operating procedure clause, constituted only a contractual promise to perform services, not a material guarantee that such services would be performed in the future. They reasoned that a breach of a contractual promise of future action does not constitute a material misrepresentation that will support the allegation of fraud. Thusly, the Court of Appeals affirmed the District Court’s partial dismissal of the Plaintiff’s claim based on a failure to show a material misrepresentation.

The case provides a valuable lesson in the standards to which investors will be held when engaging in securities trading. Recent trends in securities law focus on the doctrine of “investor beware” and increasingly hold investors to a high standard of due diligence in their investment activity. Here the court held that investors should not assume that a contractual promise of a company to act in a certain manner is a guarantee of such action, relying on the contractual doctrine of efficient breach, which assumes that people will sometimes intentionally breach their contractual agreements for no other reason than financial gain. While the Court of Appeals left open the issue of whether or not the Plaintiffs could recover contractual remedies from BPXA, their ruling illustrates the proactive environment of investing that all Plaintiffs should be aware is required.

Class Action Versus Mass Action

Practical And Legal Differences Between Class And Mass Actions

Before filing a case on behalf of multiple people who have been injured, either physically or monetarily, an initial decision must be made of whether to bring each person’s claims individually, or as a group. If you believe bringing the claims as a group would be more beneficial for purposes of economy of scale, greater bargaining power collectively, and efficiency, the next issue that needs to be decided is whether to pursue the case as a class action or a mass action. These two types of procedural mechanisms for bringing a group of claims together are appropriate under different circumstances, and each have their own pros and cons.

Sometimes the decision of which type of action to pursue is easy, while other times there is some strategy and weighing of options involved, as well as legal considerations of whether the proposed class meets the criteria for certification. Here are some considerations to keep in mind when making this decision with your clients:

How Many Plaintiffs Can Be Practically Joined And Can They Represent Others Or Just Themselves?

One of the most obvious differences between a class and mass action are the number of plaintiffs named in the lawsuit. Class actions have only one or a few named plaintiffs, who act as representatives of the entire class, because, as Trial Rule 23 says, the class is so large joinder of all the members would be impracticable. That means technically there are only a few named parties to the lawsuit, and those class members not listed as class representatives have very limited input and responsibilities with regard to the lawsuit.

Those absent class members normally don’t have to answer discovery, go to depositions or court hearings, and don’t have to prove their claims individually (at least not their liability claims). Instead, although there are some chances along the way for them to opt out or contest any settlement, for example,  even class counsel only has to communicate with class members during certain limited times during the lawsuit. The other side of the coin of this representation, however, is that if the class is certified the results of the lawsuit are res judicata for all class members -- whether named or not. That is why to get certified as a class the court must determine that the class is adequately represented by both the class representatives and the attorneys for the class.

On the other hand, mass actions typically have many allegedly injured parties too, but instead of choosing one or two people to represent everyone, each person is individually listed as a plaintiff in the lawsuit. Since the Class Action Fairness Act (CAFA) was signed into law in 2005, whenever such a mass action lists over 100 plaintiffs though, it is typically deemed to be a class action removable to federal court by defendants. 28 U.S.C. 1332(d)(11). Further, when many lawsuits, even across districts, deal with the same issues they are often brought together with federal multi district litigation, governed by the procedural rules found at 28 U.S.C. 1407 and 2112.

Unlike with class actions, each plaintiff in a mass action has responsibilities for doing all the activities that any regular plaintiff must do, like discovery, etc. Further, although there are some procedural mechanisms that can be put in place to try to prove some elements of the case across the board for all claimants, at the end of the day each person’s case ultimately is decided individually.

How Similar Are The Plaintiffs Claims In Regard To Both Commonality And Typicality?

The other major difference between a class action and mass action is whether the claims are similar enough, either factually and/or legally, to be able to prosecute them as a whole. Class actions can only be brought if they meet all the requirements of Federal Rule of Civil Procedure 23 (or a similar state rule, such as Indiana Rule of Trial Procedure 23), whereas mass actions are a default when all such requirements cannot be met. 

There are many procedural rules set in place for determining when a class action is appropriate, but ultimately the idea behind each of them is to make sure that the person who is the class representative can adequately represent the interests of his or her fellow class members. This was touched upon above, but it also is important for the other two major requirements for a class to be certified -- commonality and typicality. The idea is that a class representative could not adequately represent another absent person if they do not pose questions of law and fact common to the class, and if the named parties claims or defenses are not typical of the class.

Mass Torts Sometimes Are Not The Right Fit For Class Actions

A common example of claims that are sometimes not appropriate as class actions are mass torts, where multiple people are injured such as in a large accident. Mass torts can include such things as injuries from pharmaceutical drugs, large scale accidents and even products liability claims. In fact, the comment to FRCP 23(b)(3) explicitly cautions against the use of the class action device in mass tort cases. The reasons for this include that these cases involve personal injuries and sometimes even death, meaning that each claim is not easily described as “typical,” because there is a need for individual evidence of exposure, injury and damages for each plaintiff, not just class representatives.

Here in Indiana we are unfortunately too familiar right now with such a large accident, the stage collapse at the Sugarland concert at the Indiana State Fair. In that case the victims have brought a mass action, not a class action, against various defendants alleging fault for the accident. It would not have been appropriate to try to bring a class action because there was no commonality regarding the injuries, and therefore each plaintiff’s case ultimately must be decided on its own.  On the other hand, the State Fair stage collapse case is perfect for a mass action as the liability claims (what caused the stage to collapse and who is responsible) will require the same proof for all the injured parties.

There are both factual and legal differences between individual claims in mass actions. These differences make it impossible to fulfill the elements of typicality and adequacy which are required for Rule 23(a). Further, these same differences make it difficult to demonstrate that the putative class has the requisite “cohesiveness” which is required in Rule 23(b)(2) and makes it difficult to demonstrate that the putative class as common issues which “predominate” which is required for Rule 23(b) claims.

Another reason not mentioned in procedural rules themselves, but which often is an important factor in why class actions do not practically work for mass torts is that when someone suffers a personal injury they and the courts have major concerns about autonomy, and being properly represented as a class member. Each plaintiff has significant interest in individually controlling the prosecution of separate actions, and a substantial stake in making individual decisions on whether and when to settle. This came into stark focus when, for example, in the nationwide asbestos settlement classes proposed in Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997) and Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999) the individual absent class members had concerns so great about the proposed class action settlements that they pursued their objections all the way to the United States Supreme Court on multiple occasions.

While there are many legal and practical differences between class actions and mass actions, they often have the same general goal in mind -- get relief for the injured parties as quickly, efficiently, and in as cost-effective manner as possible. Certain factual situations lend themselves better than others to one procedural mechanism or the other, so the first step is to examine the facts of the case and decide which has a better chance of achieving the goals of your clients before going forward.

If you believe that you have a class or mass action case, please contact Mario Massillamany at Starr Austen & Miller at 574-722-6676.