This Week In Securities Litigation: Last Year’s Issues That Will Impact This Year
This is the first week of a new year. A new beginning for all. At the same time, key securities litigation issues linger from last year and will have a significant impact as this year moves forward. These include the prosecution standards which will be used in the on-going options backdating scandal, the renewed global war on insider trading, the increasing number of FCPA investigations and cases, the impact of corporate cooperation standards on officers and directors, and the scope of liability in private civil damages actions which is currently being considered by the Supreme Court.
While the SEC has worked through about half of its reported inventory of option backdating cases, many issuers, directors, corporate officers and advisors remain under scrutiny. The key question, of course, is the prosecution standards which will be applied in evaluating those under investigation. Those charged to date have typically been directly involved in the claimed securities law violations. The cases have usually been based on intentional conduct. The Reyes case, where former Brocade chairman Gregory Reyes was convicted on multiple counts, is a good example. If this and similar cases are the model for future enforcement efforts (as discussed here), only a relative handful of cases should be expected later this year, with few facing prosecution. If, on the other hand, SEC v. Maxim Integrated Products and its negligence standard (discussed here) is the model for future prosecution, many more should be concerned. The Maxim standard could significantly broaden the prosecutorial net. Backdating cases brought early this year should give an indication of what standards the SEC and DOJ will use.
Insider trading is another key area of emphasis from last year which will carry forward into this year. Last year, the SEC and DOJ brought a number of ambitious and high profile insider trading cases including those involving the TXU acquisition, the News Corp/Dow Jones deal and the Guttenberg case, which many believe is the most significant insider trading case in years. These and a number of other important insider trading cases discussed in our occasional series which began here, are in litigation and will move forward this year. Many of these cases were brought very quickly, often within days of the event which spurred the alleged insider trading. While insider trading cases are notoriously difficult to prove, these may be even more difficult since the agency did not have time before filing to conduct its usual painstaking investigation. The ability of the SEC to prevail in these cases may have a significant impact on its renewed war on insider trading.
A related issue is the repeated warnings of the Enforcement staff about Rule 10b5-1 plans. While the plans were created to give corporate executives a safe harbor from insider trading charges when selling their stock, statements by the Director of the Division of Enforcement last year (discussed here) have had an unsettling effect. In those statements, Ms. Thomsen cautioned that executive trading under the plans is being scrutinized. That scrutiny could result in enforcement actions later this year.
Foreign Corrupt Practices Act
Another area of renewed emphasis is the FCPA. While this has long been an important enforcement area, last year there was a significant increase in the number of FCPA investigations and actions discussed here. This trend will undoubtedly carry forward into this year, suggesting that all issuers should carefully review their compliance programs.
Corporate cooperation standards in SEC and DOJ investigations were also critical issue in 2008. The Business Roundtable, the ABA and others claimed the standards were creating a “culture of waiver,” stripping issuers of fundamental rights in the name of cooperation. The court in U.S. v. Stein (discussed here) held portions of the DOJ standards unconstitutional. Congress has sought to address these issues in the Attorney Client Protection Act of 2007, which passed the House and is due for consideration by the Senate later this year (discussed here).
While cooperation standards are typically of concern to issuers, directors and corporate executives should, as the year proceeds, carefully monitor developments in this area. Many believe that the recently revised DOJ standards are little different that their predecessor. The SEC has refused to modify its position (discussed here). Yet, in view of these standards, directors and officers caught up in an SEC or DOJ investigation could find themselves without indemnification rights and thus without counsel or with little or no access to corporate materials critical to their representation in an internal investigation or government inquiry. It is questionable at best whether the pending legislation will remedy these difficulties.
Tellabs and Stoneridge and the scope of liability
Finally, another key issue to watch from last year is the scope of liability in private securities damage actions. Last year the number of securities class actions increased. The amount paid in settlements increased (discussed here). Last year, the Supreme Court decided a key case in this area, defining a critical pleading standard for bringing these cases. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499 (2007) (discussed here).
This year the Supreme Court will hand down a decision in Stoneridge Investment Partners v. Scientific-America, Inc., defining the scope of liability under antifraud Section 10(b), the key provision on which most securities class actions are based (the development of this case is discussed in an occasional series which began here). The ruling in this case could significantly impact not only who can be held liable but how issuers do business (discussed here). For these reasons, many consider this case to be the most important to come before the high court in years (see discussion here). Regardless of the precise ruling made by the Court, there should be little doubt that the Stoneridge decision, along developments in the option backdating area, insider trading, the FCPA and cooperation standards will have a significant impact on issuers and their directors and executives in 2008.