Investors and issuers alike should take note of the Supreme Court's opinion in Morrison v. National Australian Bank as it could have major implications for their ability to sue or be sued for securities fraud in the future. 

In a ground breaking decision decided yesterday the High Court in Morrison rejected years of federal jurisprudence on the extraterritorial application of US securities fraud legislation. In a scathing opinion by Justice Scalia, the Court criticized the Second Circuit's vaunted "conduct" and "effects" test for establishing subject matter jurisdiction over foreign investors trading foreign securities on foreign exchanges (the so called "foreign cubed" case). The Court found that the authority to hear a securities fraud case involving foreign investors and securities is a question of "merit" and not a question of subject matter jurisdiction. In other words, rather than diving into the particulars of the defendant's conduct or the nationality of the parties, the Court found that the question is whether Section 10(b) gives rise to a private cause of action for securities that are traded outside of the territory of the United States.

In opposition to the Second Circuit's test involving foreign securities traded on foreign exchanges, the Court promulgated the "transactional test" for determining the extraterritorial reach of US securities fraud laws. The Court held that "[T]hose purchase-and-sale transactions are the objects of the statue's solicitude...And it is in our view only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which Section 10(b) applies."

Continuing their series of "trends" studies for non-US securities class actions, NERA Economic Consulting has released a study of securities litigation trends in the Australia market.

Covering the period from 1993 - 2009, the study has several notable findings, chief among them:

• New case filings have accelerated in recent years.
• The vast majority of Australian actions settle.
• Cases are concentrated in the financial industry

According to the authors (and borne out by our own SCAS data), securities class action filings in Australia set a new record in 2009, breaking the previous record set in 2008.  Moreover, the total number of new cases filed in 2007-2009  represents half of all securities class action cased ever filed in Australia.

As with US cases, a majority of Australian cases alleged either misleading or deceptive conduct, or failure by companies to promptly disclose information material to the value of their securities.

Also, more than half of all securities class actions were brought against companies in the "financial industry," though the report has a broad definition of that term, including both real estate and insurance companies for example.

The study also found that a super-majority of securities class action cases in Australia settle. Of the 12 class actions resolved by the end of 2009, 8, or 75%, were settled.  Apparently, this trend has become even more pronounced in recent years – every case filed after 2003 that has been resolved was settled.

The full report can be downloaded here.

Today NERA Economic Consulting released the 2009 update to their study, Trends in Canadian Securities Class Actions.

According to the report, securities class action filings in Canada in 2009 continued to stay above historical average filings. The report notes that eight securities class actions were filed in 2009, compared with ten filings in 2008. As with recent reports discussing trends in US securities class action case filings, the "drop" from one year to the next is not the whole story, as 2009 is the second most active year ever for Canadian securities class action case filings.

Six new cases were filed in 2009 involving allegations of misrepresentations and/or omissions by issuers, including claims brought under the new continuous disclosure provisions. This is a new high both in absolute terms and in percentage terms (75%).

The report also notes a steep drop in the overall value of settlements achieved in 2009, with six cases settling 2009 for approximately $51 million versus eight cases totaling $890 million in settlements in 2008. According to the report, the average settlement for 2009 was $8.5 million and the median settlement was $9 million.

Of interest - the majority of cases filed in 2009 were brought in relation to securities issued by companies in the minerals and financial sectors. The report notes that this is both reflective of the composition of the Canadian economy and consistent with filing trends in prior years.

The trend of "belatedly filed" cases that has been discussed with respect to US cases also appears to have permeated north of the border, with 2 of the 8 cases (25% for you non-math majors) filed in 2009 having been filed nearly two years after the end of the proposed class period.

The full report can be downloaded here.

An online article from Responsible Investor is causing waves for suggesting that a number of UK pension funds and other institutional investors excluded from a US class action against RBS might file a class action in the High Court in London.

Interesting as the article may be, there is a subtle, but important distinction between this potential UK action and a true class action.

The article notes that "a group of 25-30 institutional investors could 'co-ordinate' their legal actions," and also notes "that in contrast to the US class action system, each plaintiff in the UK would maintain autonomy and control over their individual legal case."

The proposed action, as spelled out in the article, is more aptly described as a "mass" or "group" action, and is not a true class action. Indeed, most US securities class actions are brought with the express disclaimer that the true identities of the majority of class members are unknown to counsel at the outset. These are generally known as "absent class members," and the identities of all members of the defined class may never be known. Only those class members that file a claim will become "known," whereas in the proposed action, there is no ambiguity about the identity of the group.

Also, in a class action, the named or lead plaintiffs certainly have some control over their individual claims, but every other absent class member has little control over the overall litigation strategy, and certainly not "autonomy and control over their individual legal case," unless they opt out of the class action.

The potential UK action would be brought by Coughlin Stoia Geller Rudman & Robbins and two UK based partners - Bates Wells & Braithwaite and UK barrister Christopher Brown. One feature of US class action litigation will be incorporated into the potential claim - according to the article, the law firms have said that they will represent "the UK pension funds on a no-win, no fee basis and insure the funds against any potential costs if the legal action is unsuccessful," taking 25% of any compensation paid to the funds if the case is successful.

Stay tuned for more developments...

While the Bloomberg story describing it may have been painfully short, the actual report released by Hong Kong's Law Reform Commission to propose allowing multiparty litigation, is shall we say, thorough.

If adopted, the 300+ page consultation paper released last week, would add Hong Kong to the growing list of non-US jurisdictions that allow class actions.

There are a number of differences that would set Hong Kong's proposed class action procedure apart from many of the recently enacted class action statutes in other countries.

Most notably, would be the hybrid approach to determining who will be included in the class. The report recommends that the new class action regime generally would operate under an "opt-out" approach, similar to that used in most US class actions. But, and this is a big one, "[w]here the proceedings involve parties from outside Hong Kong, an 'opt-in' procedure should be the default position (that is, persons will not be included in the class litigation unless they take active steps to 'opt in' to the litigation), with a discretion given to the court to adopt an 'opt-out' procedure if the particular circumstances of the case warrant it."

To the best of our knowledge, this two track model is unique among jurisdictions allowing class actions. It may be an attempt to avoid some of the "f-cubed" issues that we are seeing in US cases, as well as allow most cases to avoid having to undertake an in-depth, country-by-country analysis of comity and other international law issues.

Also of interest, the report suggests allowing contingency fees, third-party litigation funders, and public financing, hitting all three of the major regimes that we have already seen implemented to deal with the funding of class actions.

We would be remiss if we did not note for readers that the

[R]ecommendations in the consultation paper are intended to facilitate discussion and do not represent the sub-committee's final conclusions. The sub-committee would welcome views, comments and suggestions on any issues discussed in the consultation paper, and in particular on the questions set out in Chapter 10. The consultation period will last until 4 February 2010.

Comments should be sent to:

The Secretary
The Class Actions Sub-committee
The Law Reform Commission
20th Floor, Harcourt House
39 Gloucester Road
Wanchai
Hong Kong
Telephone: (852) 2528 0472
Fax: (852) 2865 2902
E-mail: hklrc@hkreform.gov.hk

And for those readers that are still scratching their heads over the title of this post, Hong Kong Phooey was a 16-episode Hanna-Barbera animated series that first aired on ABC in September 1974.

One of the areas that we track here at SLW headquarters is the small, but growing number of federal securities class actions that have gone to trial since the PSLRA was enacted.

Yesterday, that group got a new member, as jury selection started in the Vivendi shareholder litigation pending in the Southern District of New York.

The case, pending against Vivendi and Jean-Marie Messier, the former chairman and CEO, and Guillaume Hannezo, the former CFO, represents a collision of two areas that have received a lot of ink over the last few years - a rare securities class action trial and a so-called "F-cubed" case.

Cravath, Swaine & Moore, Weil, Gotshal & Manges, and King & Spalding represent the defendants while Abbey Spanier Rodd & Abrams are lead counsel for the plaintiffs.

Media coverage has been surprisingly light so far, with stories in the Litigation Daily and the New York Times domestically and The London Telegraph and The Times of London.

And of course, we would be remiss if we didn't point out that the Vivendi case spawned another new breed of securities litigation - the "opt-in" individual action, as discussed in our prior post, here.

Our presentation detailing the prior 21 securities class action cases that have gone to trial since 1996, is available here.

Those cases fall into three categories:

1.Securities Class Action Trials Based on Post-Reform Act Conduct Resulting in a Verdict at Trial (seven)

2. Securities Class Action Trials Based on Post-PSLRA Conduct Resulting in a Settlement or Summary or Default Judgment During Trial (seven)

3. Securities Class Action Trials Based on Pre-PSLRA Conduct Resulting in a Verdict at Trial (seven)

Note that we have not yet added the Vivendi case to the presentation, but will do so when it fits into one of our three categories.

Stay tuned for trial updates as they come in.

As always, readers are encouraged to send in any updates, additions, or corrections.

On July 21, 2009, I will be participating in a webcast entitled "Securities Litigation Issues Facing Institutional Investors." The webcast will examine the fiduciary duties of institutional investors and discuss significant topics, including:

* Monitoring the portfolio: When and why you would want to be a lead plaintiff;

* Don't leave money on the table: Filing claim forms in settled cases to recover losses;

* Opting in: Navigating the waters of non-US securities litigation; and

* Opting out: When does it make sense to leave the safety of the class action and pursue an individual case.

I will be joined by Wayne Schneider, General Counsel of the New York State Teachers' Retirement System and Sal Graziano, a partner with Bernstein Litowitz Berger & Grossmann LLP. The webcast will be moderated by Bruce Carton, the editor of Securities Docket.

To register for this free webcast (7/21/09 11:00 am EDT), please use this link.

Nearly five years ago, this blog noted that defendants faced with a securities class action complaint often issued press releases stating that the complaint was "without merit" and that the company intended to "vigorously" defend itself.

The issue was "the apparently unanimous use of the word 'vigorous' for these 'denial' press release by defendants."

The prior author of this blog issued a challenge relating to the practice, and your current author repeated the challenge three years ago.

Well, just as securities class actions are on the rise north of the border (see NERA report, here), Canadian defendants are using the same language as their US counterparts.

Recently, Timminco Limited, a Canadian producer solar grade silicon for the solar photovoltaic energy industry, was hit with a securities class action over alleged misstatements regarding the company's growth and profit potential.

Well the response from Timminco is in and you guessed it - they intend to "vigorously defend these allegations."

On a side note, the law firm prosecuting the Timminco class action, Kim Orr, appears to have taken a page or two out of the playbooks of some US firms.

Perusing the bio of Victoria Paris, the Kim Orr barrister handling the Timminco action, we note that she has represented both plaintiffs and defendants in class actions, much like Boies, Schiller & Flexner or Susman Godfrey.

And of course, as noted by the Securities Docket, Kim Orr is working with an obscure US based class action firm, Milberg, on other potential Canadian class actions.

After a brief hiatus, our creative juices are flowing again, and have we got a story for you.

Recall the heady days of 1996. The PSLRA had just become law and a number of plaintiffs started choosing to file their cases in state, instead of federal court. One of the reasons often cited for this move - to avoid the PSLRA's discovery stay. With the passage of SLUSA in 1998, that issue largely faded away, only to be revived in more recent years when parallel derivative or ERISA suits were filed along with a more traditional securities class action. While the cases on allowing securities plaintiffs access to the ERISA or derivative discovery (or even staying discovery in those parallel cases) have had mixed results, there appears to be a new fight on the horizon.

According to a story in The Globe and Mail today, an Ontario Superior Court judge has just dropped a bombshell on the defendants in the securities class action pending there against IMAX Corporation and several directors and officers.

The case was filed under "Bill 198," the revised provincial class action legislation enacted late in 2005. In such cases, the investor plaintiff must obtain leave from the Court to proceed with their suit. The standard as to whether a plaintiff is granted such leave is relatively modest - a reasonable probability that the plaintiff would prevail at trial.

In order to rule on whether a plaintiff has met the standard, the court relies on affidavits filed by the plaintiff and each of the named defendants. These affidavits outline the positions of the parties and the material facts on which they intend to rely if the case goes forward. The parties are then allowed to engage in "cross-examination," a/k/a discovery.

In what appears to be a case of first impression, Madam Justice Katherine van Rensburg ruled on how broad that examination will be.

She held that the test is whether the information sought in cross-examination has a "semblance of relevance" to the allegations. This is the same threshold used in formal discovery in Canadian cases, but that discovery generally comes substantially later in the litigation. And just as in the US courts, the discovery burden is a lower threshold than the burden for introducing evidence at trial.

But, going a step further, Madam Justice van Rensburg also held that anyone being cross-examined would be required to answer questions that are potentially relevant even if it "might also reveal some other potential issues or wrongdoing not currently contemplated by the statutory claim."

This raises a new battleground for cases, such as IMAX, with a cross-border component to them. Recall that in addition to the securities class action pending in Ontario, IMAX is the subject of a securities class action in the Southern District of New York, where a motion to dismiss the latest complaint is currently pending.

Siskinds LLP and Sutts, Strosberg LLP are counsel for the plaintiffs in the Ontario IMAX litigation, and McCarthy Tétrault LLP is counsel for IMAX.

A prior ruling by Madam Justice van Rensburg on a motion to compel in this matter is available here.

Coupled with the international "arms race" we have blogged about before, this raises the specter of cases being filed cooperatively in Canadian and US courts, with discovery in the Canadian action possibly being allowed to be used in the US action.

Very special thanks to Rob Patton at NERA for sending the IMAX story to us.

While the recently announced $303 million settlement of the General Motors securities class action has already garnered a fair amount of attention in the blogosphere (See The 10b5 Daily and The D&O Diary), it is hard to pass up taking our own bite at the apple.

As noted by Kevin LaCroix at The D&O Diary, the lead plaintiffs in the GM case were two international institutional investors, both affiliates of DekaBank.

A reader asked whether that made GM the largest settlement where a non-US institutional investor was the lead plaintiff.

The short answer is no, but the long answer is far more interesting.

According to the most recent Top 100 Securities Class Action Settlements Report (a publication that we put out for clients each quarter), the largest securities class action settlements where a non-US institutional investor was the lead plaintiff would be the two Nortel Networks cases, where the Ontario Public Service Employees' Union Pension Plan Trust Fund and Ontario Teachers' Pension Plan Board were among the lead plaintiffs.

But most commentators (this one included) generally look at non-North American parties when we are looking to examine the role of non-US investors in US securities class actions.

The next largest settlement where a non-US institutional investor was the lead plaintiff is the Delphi case, which, with total settlements of just over $322 million is slightly larger than the total settlement in the GM securities class action.

In the Delphi case, Raiffeisen Kapitalanlage-Gesellschaft (Austria's largest asset manager) and Stichting Pensioenfonds ABP (a pension fund for Dutch government and educational sector employees) were among the co-lead plaintiffs.

The initial reader question raised more questions for us over at SLW World Headquarters - namely who gets to scream "We're #1" with regard to some of the other securities class action settlements over the years.

So without further ado, here is a quick rundown of some of the largest securities class action settlements:

Taft-Hartley fund as Lead Plaintiff - Tyco International, Ltd.

The Plumbers & Pipefitters National Pension Fund, United Association Office Employees Pension Plan, United Association of Local Union Officers & Employees Pension and United Association General Officers Pension Plan were among the lead plaintiffs.

Private Institutional Investor as Lead Plaintiff - Toss Up

Voyageur Asset Management was one of the lead plaintiffs in the Tyco litigation, but at the class certification stage, they were not appointed as a class representative by Judge Barbadoro.

The next largest settlement with a private institutional investor as a lead plaintiff was the Royal Ahold litigation, where Generic Trading of Philadelphia, LLC, was co-lead plaintiff.

Both of these cases (and a host more) should be sufficient ammunition should my quixotic quest ever need to be revived.

And of course, the largest securities class action settlement where there were no institutional investors serving as lead plaintiffs was the Bank of America litigation stemming from the NationsBank / BankAmerica merger in 1998.

And for those that wanted something a little more lighthearted, this article recounts the history of the foam #1 finger.