Why Investors Need Private Litigation to Protect Their Investments

Investors often question why they need to become involved in private securities litigation. "Isn't the SEC protecting us?" is a common statement. We then point out that the SEC is an underfunded and understaffed (by at least 400 employees), and has other barriers which prevent it from carrying out its mandate, according to a March 10, 2011 report by the Boston Consulting Group.

Now a report released on May 13, 2011 by the Project on Government Oversight questions the SEC's ability to remain independent in light of the a "revolving door" through which SEC staffers leave the agency for jobs at law and accounting firms that advise the public companies they once regulated, according to a Washington Post review of the report .

"The financial meltdown of 2008 brought renewed focus to the integrity and aggressiveness of federal government oversight of the financial system," the report's executive summary states. "One of the most important agencies overseeing financial markets and investor protection is the [SEC]."

The report is based on the groups analyses of hundreds of SEC documents obtained under the Freedom of Information Act—mainly statements that former employees file post-government employment statements if they plan to represent a client before the Commission within two years of leaving the SEC.. According to the report:

• Between 2006 and 2010, 219 former SEC employees filed 789 post-employment statements indicating their intent to represent an outside client before the Commission, with half (403) coming from the Division of Enforcement.
• Some former SEC employees filed statements within days of leaving the Commission, with one employee filing within 2 days of leaving
• There are 131 entities providing legal, accounting, consulting, and other services that were identified as new employers in the statements. Some entities recruited numerous SEC employees during the five-year period.
• POGO identified instances in which former SEC employees may have been required to file statements during the five-year period but did not
• The SEC Office of Inspector General has identified cases in which the revolving door appeared to be a factor in staving off SEC enforcement actions and other types of SEC oversight, including cases involving Bear Stearns and the Stanford Ponzi scheme
• One recent empirical study uncovered several significant and systematic biases in the SEC's enforcement patterns and found indirect evidence to support the contention that "post-agency employment at higher salaries may operate as a quid pro quo in return for favorable regulatory treatment"
• Some statements indicate that the former employee did participate in or have responsibility for a related matter while they worked at the SEC, but that they discussed the matter with an ethics officer who advised them they could contact Commission staff on that issue on behalf of their new client

The Project on says that its findings lend credence to the concerns of SEC critics wary of the commission's ability to remain independent and notes that the troubling traffic moves two ways. "The revolving door also operates in the opposite direction, where individuals come from entities regulated by the SEC to work for the Commission," states the POGO report. "The general concern is that a conflict of interest could bias SEC oversight and undermine public confidence in the SEC's work, as acknowledged by the current SEC Chairman."

But as lawyers who must sympathize with those underpaid SEC staffers, we do feel it is our civic duty to list your "new employers" found in the report. According to the following table, taken from the report, these firms are standing by to offer you a job:

Table 4: Top 11 New Employers Ranked by Number of Mentions in Post-Employment Statements, 2006 – 2010
Firm	Statements Listing Firm as New Employer
DLA Piper[	40
Deloitte & Touche LLP	34
Paul, Weiss, Rifkind, Wharton & Garrison LLP	32
O'Melveny & Myers LLP	30
Merrill Lynch	28
Wilmer Cutler Pickering Hale and Dorr LLP	28
Ernst & Young	27
Davis Polk & Wardwell LLP	21
Reed Smith, LLP	19
Sidley Austin LLP	19
Stradley Ronon Stevens & Young LLP	19

Reed Kathrein Speaking at Opal Public Pensions Conference

Reed Kathrein, HAGENS BERMAN SOBOL & SHAPRIO, will speak on Legal Issues Facing Public Pensions session at Opal's upcoming Public Funds Summit conference from 12:15 p.m. untill 1:15 p.m. on Thursday, January 13, 2011 The Pheonician in Scottsdale Arizona. The moderator will be Michael VanOverbeke, General Counsel, ANN ARBOR (MI) CITY EMPLOYEES' RETIREMENT SYSTEM. Other panelists include Jonathan Barry Forman, Trustee, OKLAHOMA PUBLIC EMPLOYEES PENSION FUND. Mr. Kathrein will focus his presentation on Pending and Recent Court Decisions and Their Potential Impact on Public Pension Plans in the area of Securities Fraud. Topics include current filing trends, pending Supreme Court decisions and the impact of Morrison on cross-border litigation.

Telenav IPO Fraud and MF Global - What Do the Class Actions and Our Investigation Have In Common

Our firm recently announced an investigation into potential fraud claims against TeleNav Inc. (Nasdaq: TNAV) relating to its May 13 initial public offering. We have now received information that leads us to believe that a strong case exists, worthy of consideration by investors. At the same time, the Second Circuit just issued a decision in  Iowa Pub. Employees' Ret. Sys. v. MF Global, Ltd., that favorably clarifies the applicable law. 

TeleNav provides cell phone carriers with navigation applications for their cell phones. Sprint Nextel Corp. provided TeleNav with more than 55 percent of its revenues. TeleNav's major competitors include Google, Garman and other companies providing their own navigation services. 

Just three months after the IPO, TeleNav revealed it was renegotiating a key contract with Sprint that would likely lead to substantially lower revenues. TeleNav's stock immediately plummeted nearly 40 percent.

 The usual barebones lawsuits were filed by several other law firms alleging TeleNav knew its shares would nosedive before going public in May. However, these lawsuits are the subject of criticism. For example, one blogger argued here that TeleNav disclosed it was renegotiating its contract with Sprint as early as October 2009 in a registration statement with the U.S. Securities and Exchange Commission: 

"Our current agreement with Sprint expires on December 31, 2011; however, our right to be Sprint’s exclusive provider of Sprint Navigation expires on December 31, 2010. Commencing on December 31, 2010, Sprint may terminate its agreement with us at any time by giving us 30 business days prior written notice. Our failure to renew or renegotiate this agreement on favorable terms or at all, a termination of our agreement by Sprint or our failure to otherwise maintain our relationship with Sprint would substantially reduce our revenue and significantly harm our business, operating results and financial condition."  

Other risk disclosures in the registration statement warn that the Sprint contract could be impacted by competitors offering equivalent or free competitive service: 

“Competitors could begin offering (location-based services) that have at least equivalent functionality to ours for free. For example, Google offers free voice guided, turn by turn navigation as part of its Google Maps product for mobile devices based on the Android 1.6 and higher operating system platform, and Nokia announced its latest version of Ovi Maps on its smartphones, which also provides turn by turn navigation functions. Competition from these free offerings may reduce our revenue and harm our business. If our wireless carrier partners can offer these (location-based services) to their subscribers for free, they may elect to cease their relationships with us, alter or reduce the manner or extent to which they market or offer our services, or require us to substantially reduce our subscription fees or pursue other business strategies that may not prove successful. 

The blogger goes on to write: 

“It is a common practice for specialized US law firms to seek class action status on such topics (GPS manufacturer SiRF faced the same type of complaint few years ago), but here their case seems particularly weak. It is however a pain in the neck for TeleNav.” 

Mighty strong risk disclosures, right? Wrong! This is where MF Global and our investigation come in to play. 

Suppose the facts show that prior to the IPO, TeleNav was so concerned about the upcoming contract negotiations with Sprint and the competition, that it wanted to go public before Sprint pulled the plug on their relationship.  If TeleNav knew nothing more than the risk disclosures above, it is doubtful that they could be held liable for not disclosing their fears and belief so long as they said nothing about their fears and belief. 

Suppose, however, that TeleNav knew before the IPO that Sprint was complaining about the resources it devotes to TeleNav's product – called "Sprint Navigation" – and told TeleNav management that it was in favor of Google's free navigation services instead of TeleNav's on Sprint's Android devices. Further, suppose Sprint told TeleNav it would not pre-load TeleNav’s product on Sprint's Android devices, but that TeleNav could sell their own services through Sprint Zone, forcing TeleNav to start its own branding efforts. 

Now we have a case! Just this week a federal appellate court clarified when risk disclosures are material misrepresentations or omissions. In Iowa Pub. Employees' Ret. Sys. v. MF Global, Ltd., the Second Circuit Court of Appeals stated: 

Investors are interested in issuer statements only insofar as those statements bear on the future. While it is true that predictions about the future can represent interpretations of present facts (and vice versa), there is a discernible difference between a forecast and a fact, and courts are competent to distinguish between the two.  

A forward-looking statement (accompanied by cautionary language) expresses the issuer's inherently contingent prediction of risk or future cash flow; a non-forward-looking statement provides an ascertainable or verifiable basis for the investor to make his own prediction. 

The line can be hard to draw, and we do not now undertake to draw one. However, a statement specifying the risk of default is distinct from a statement of present or historical financial instability, even though they both bear upon the same risk. And a statement of confidence in a firm's operations may be forward-looking and thus insulated by the bespeaks-caution doctrine -even while statements or omissions as to the operations in place (and present intentions as to future operations) are not. 

Thus, the Court found that characterizations of MF Global's risk-management system-that the system was “robust,” for example - invited the inference that the system would reduce the firm's risk. It went on to find that bespeaks caution did not apply insofar as those characterizations communicate present or historical fact as to the measures taken. Cautionary words about future risk cannot insulate from liability the failure to disclose that the risk has transpired. 

So too with TeleNav, the key question will be whether the "bespeaks caution" doctrine applies to TeleNav's description of its contract with Sprint, the expiration of that contract and the threat of the competitors. Our investigation causes us to believe that the risk of renegotiation of the Sprint contract was not just a possibility, but a current reality in which TeleNav's management knew they were in trouble. It was not a future risk, but one that had already transpired by the time of the IPO. 

I have lectured to corporate executives over the last 20 some years about this classic type of IPO fraud. It's often the one chance in a lifetime to cash in on millions by selling stock to the public. The temptation to hide or ignore bad news is great and accompanied by the mantra, “just get it done.” Risk disclosures are often written with this in mind, and the lawyers who draft them do a great disservice to their clients and the investors when the risks have already begun to manifest. 

Hagens Berman continues to investigate this matter, and to represent investors who purchased TeleNav stock before July 30, 2010. You may read more on the Hagens Berman website here, or read the press release here. To be eligible to be a lead plaintiff you must move by November 2, 2010. Contact Reed Kathrein at 510-725-3030 for a consultation or email Hagens Berman at tnav@hbsslaw.com.

The Supreme Court Leaves Domestic Investors Unprotected from Secutiries Fraud

United States investors who  buy or sell securities outside the US, cannot sue in the US or use US law, to recover against foreign fraudsters! Nor can foreign investors trading abroad who are victims of fraud perpetrated in the US by US corporate fraudsters! This dilemma is the new result of the United States Supreme Court's opinion in Morrison v. National Australia Bank. As a result, US investors will now be sent overseas, to forums which are not as investor friendly, to seek recovery.

 

 

Over the past 40 years, Courts have followed the "conduct" and "effects" test to exercise jurisdiction over securities fraud if a major portion of the fraud occurred in the US or if foreign conduct produced immediate and substantial effects in the United States. Justice Scalia, writing for the court, held that their was no affirmative indication that the Exchange Act was intended to apply extraterritorially. Its focus in not on where the deception originated, but on purchases or sales of securities in the US.

Justice Breyer concurred in part only so far as the complaint failed to allege that the purchases were "in connection with" either the purchase or sale of a security listed on a national securities exchange" or "any security not so registered" that was purchased or sold in the US. While there is nothing in the Securities Exchange Act that limits the second category to purchases or sales within the US, Breyer would apply the presumption against extraterritoriality.

Justices Stevens, joined by Ginsburg, also concurred, but only in the judgment, saying that they would adhere to the conduct -and-effects test approach followed over the last 40 years, and rejected the presumption against territoriallity. Rather, the real question should be "how much, and what kinds of, domestic contacts are sufficient to trigger application of Section 10b-5." Taking great issue with the majority, Steven wrote:

Repudiating the Second Circuit’s approach in its entirety, the Court establishes a novel rule that will foreclose private parties from bringing §10(b) actions  whenever the relevant securities were purchased or sold abroad and are not listed on a domestic exchange. The real motor of the Court’s opinion, it seems, is not the presumption against extraterritoriality but rather the Court’s belief that transactions on domestic exchanges are "the focus of the Exchange Act" and "the objects of [its] solicitude." ... In reality, however, it is the "public interest" and"the interests of investors" that are the objects of thestatute’s solicitude.

***

Imagine, for example, an American investor who buys shares in a company listed only on an overseas exchange. That company has a major American subsidiary with executives based in New York City; and it was in New York City that the executives masterminded and implemented a massive deception which artificially inflated the stock price—and which will, upon its disclosure, cause the price to plummet. Or, imagine that those same executives go knocking on doors in Manhattan and convince an unsophisticated retiree, on the basis of material misrepresentations, to invest her life savings in the company’s doomed securities. Both of these investors would, under the Court’s new test, be barred from seeking relief under §10(b).

The oddity of that result should give pause. For in walling off such individuals from §10(b), the Court narrows the provision’s reach to a degree that would surprise and alarm generations of American investors—and, I amconvinced, the Congress that passed the Exchange Act.Indeed, the Court’s rule turns §10(b) jurisprudence (and the presumption against extraterritoriality) on its head,by withdrawing the statute’s application from cases inwhich there is both substantial wrongful conduct that occurred in the United States and a substantial injurious effect on United States markets and citizens.

Nevertheless, Justice Stevens follows the Court of Appeals decision in concluding that this case, in particular, does not have extensive links to or ramnifications in the US, but rather "has Australia written all over it."

Most important, however, is Justice Stevens concluding paragraph which transcends this case and expresses his heartfelt opinion against the Court's campaign against our securities laws:

The Court instead elects to upend a significant area of securities law based on a plausible, but hardly decisive, construction of the statutory text. In so doing, it pays short shrift to the United States’ interest in remedying frauds that transpire on American soil or harm American citizens, as well as to the accumulated wisdom and experience of the lower courts. I happen to agree with the result the Court reaches in this case. But “I respectfully dissent,” once again, “from the Court’s continuing campaign to render the private cause of action under §10(b)toothless.” Stoneridge, 552 U. S., at 175 (STEVENS, J., dissenting).

We could not agree more.

So now what? As a firm we must now look abroad to protect our clients. While we have done so in the past, it will now become a primary function. Unfortunately, those laws are not as developed as well as those in the US, and access to the Courts is much more difficult.

Senators Lose Will to Allow Pursuit of Aiders and Abettors

As reported by Reuters here the House approved amendments to the Financial Reform Bill  H.R. 4173. The amendment would reinstate the grounds for private civil actions for aiding and abetting in securities fraud -- i.e., overturning the U.S. Supreme Court decision in Stoneridge Investment Partners v. Scientific Atlanta in which the Roberts Court let third parties who assist the frauds go free. The logic went something like this:

1. Defendants actually and knowingly  assisted in sham transactions that misrepresented the financial results of a public company.
2. Defendants had no duty to the investors of another company, nor did they make any public statements about the transactions.
3. Hence, investors did not rely on their conduct when making their investment decisions!!!!

And therefore, unless Congress says otherwise, the Defendants can now move on and help the next fraudster with impunity.

But, as Reuters also reported, Senator Chris Dodd, who helped lead the charge in 2004 and 2005 to make it more difficult to sue his campaign donators from the accounting and banking industry, has once again stood in the path of accountability. Dodd was instrumental in the passage of the Private Securities Litigation Reform Act that made it impossible to sue anyone who commits securities fraud unless you can get the facts usually soley in the possession of the fraudsters themselves. Now again, the Senate negotiators for the Financial Reform Bill rejected the amendments to reinstate liability in favor of a "STUDY." Reuters quotes Dodd as saying "The idea of having a healthy private practice litigation in this area is critical in my view, but I do believe there are legitimate concerns about this point." So let's have a study.

This is probably the last chance to get such liability reinstated and Dodd well knows that a STUDY is the kiss of death. He is not really standing up for the little guy in protecting his friends. The lawyers, accountants, bankers, who act as gatekeepers cannot be allowed to assist fraud and line their pockets. The main culprit often has too few resources to pay the damages, is bankrupt, or otherwise judgment proof. Even the SEC cannot recover damages from those who aid and abet. In large part that is why we have the financial/banking mess we have now.