Gift to Plaintiff’s Bar

businessgiftSecurities fraud litigation attorneys no doubt welcomed a recent ruling by the Second Circuit Court of Appeals (covering New York and other northeastern states).

This decision enables plaintiffs to sue a public company for securities fraud if the company fails to disclose in its SEC filings trends and uncertainties that it could reasonably expect to have a material impact on revenues.

Public companies already disclose a long litany of potential risks, trends and uncertainties.  The disclosure is so voluminous that it practically diminishes its influence.  It’s overkill.

Under this recent ruling, securities fraud litigation attorneys can use “20/20 hindsight” to claim that a company should have disclosed trends and uncertainties that resulted in problems for the company.

Giving the plaintiffs grounds to sue starts the litigation process which often results in a settlement before trial.  Plaintiff’s counsel typically gets a large portion of the settlement payment.  This gives the plaintiff’s bar the incentive to be aggressive in pursuing cases.

The Second Circuit’s ruling conflicts with rulings in other Circuits.  Until this conflict is resolved by the US Supreme Court, the plaintiff’s bar will likely make the most of the opportunity.

For additional background on the ruling, please click here to read an article by Benesch, the law firm, on JDSupra, the online legal resource.

SEC Charges Company Exec’s with False Certification

In a rare case, the SEC has charged the CEO and CFO of Quality Services Group, a computer equipment company, with falsely certifying its financial statements.

The charge stems from an SEC review of the company procedures which revealed that company management misrepresented the state of its internal controls over financial reporting to its auditors, and not from a misstatement of financial results.

Excerpt from SEC Press Release

The Sarbanes-Oxley Act of 2002 requires a management’s report on internal controls over financial reporting to be included in a company’s annual report. The CEO and CFO must sign certifications confirming they’ve disclosed all significant deficiencies to the outside auditors, reviewed the annual report, and attest to its accuracy.

“Corporate executives have an obligation to take the Sarbanes-Oxley disclosure and certification requirements very seriously. Sherman and Cummings flouted these regulatory requirements and misled investors and external auditors in the process,” said Scott W. Friestad, associate director in the SEC’s Enforcement Division.

FierceCFO, the online newsletter noted

Indeed, many companies and executives are likely taking a careful look at internal controls, given the charges the Securities and Exchange Commission levied recently against Quality Services Group, a computer equipment company in Florida.

Click here to read the SEC press release.

Click here to read the FierceCFO article.

SEC Trends for Public Companies

This webinar will include practical tips to help your company avoid SEC trouble.

Latham & Watkins, the law firm, has produced valuable webinars which are well worth the time (which is not universal with webinars, in my opinion).


Please join Latham & Watkins for a complimentary webcast discussing SEC trends for public companies in the areas of accounting and financial fraud.

Click here to go to the webinar.


• The Re-Tooled SEC – A smarter SEC takes on big data analytics

• The New Era of Creative and Aggressive Enforcement – The “broken windows” approach to enforcement and the lower bar for SEC actions

• Hitting and Avoiding the SEC’s Radar Screen – Practical tips for avoiding compliance issues and enforcement action

John Sikora, Partner, Latham & Watkins LLP (Chicago), former SEC Assistant Director in Enforcement and the Asset Management Unit

Latham & Watkins LLP is a leading global law firm dedicated to working with clients to help them achieve their business goals and overcome legal challenges anywhere in the world. The firm has earned considerable market recognition based on a record of landmark matters and a unified culture of innovation and collaboration. From a global platform of offices covering the world’s major financial, business and regulatory centers, the firm’s lawyers help clients succeed. For more information, visit


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Securities Fraud Ruling Under Review By US Supreme Court

A case currently before the US Supreme Court sets the stage for a review of a key tenet of US securities fraud cases, the “fraud on the market” or “efficient market” theory.

If the US Supreme Court materially changes the way courts apply this key tenet or, overturns its use entirely, securities fraud plaintiff’s attorneys will lose a valuable tool to obtain class certification and, therefore, lose the leverage they currently enjoy against public companies.

I addressed the history and issues at stake in prior posts:

It appears from questions posed by several Justices that some are considering a modification of the ruling, not the elimination of the ruling preferred by corporations and their counsels.

In a now famous 1988 court case, the US Supreme Court ruled that fraudulent information was reflected in the stock price under the efficient market theory.  Therefore, all parties who bought and sold stock were impacted whether they read and relied on the fraudulent information.  This has made obtaining class action certification relatively easy.

Several law professors filed a “friend of the court” brief which proposed what has been characterized as a “midpoint” modification.  In this modification, plaintiffs would be required to show that fraudulent information had a significant effect on the stock price.

One of the professors commented that the proposed modification would make it more difficult to obtain class certification but would not prevent it.

If this modification makes it more difficult for securities fraud plaintiff’s attorneys to qualify for class action status, I believe it will have a dramatic effect.  It will eliminate key leverage enjoyed by the plaintiff’s attorneys.  Statistics show that once a securities fraud class has been certified, companies commonly settle.

We will share developments in this case as it progresses.

Click here to read a Reuters article on the US Supreme Court proceedings.

Click here to read an article on JD Supra, the online legal magazine by Sutherland, a law firm on the proceedings. Plus another article by Akin Gump, the law firm.

Last but not least, click here to read an article on SECActions about this case.

US Supreme Court To Address Key Fraud Ruling

The first hurdle has been met.  The US Supreme Court will address the issue of the use of the efficient market theory as the basis for determining securities class action cases.

I describe the issue in my post,Key Securities Fraud Ruling Challenged.

Click here to read a helpful Forbes article for background.

Hit the Download button to read an article by Latham & Watkins, the law firm, discussing the ramifications of the case and potential outcomes.

Post by Dennis McCarthy

Key Securities Fraud Ruling Challenged

By Dennis McCarthy – (213) 222-8260 – –

US Public companies should take note. A key US Supreme Court ruling which backstops most securities fraud litigation is being challenged.  If the Supreme Court reverses this ruling, the plaintiff’s securities litigation bar loses an important tool.

Since 1986, securities fraud cases have relied on a key ruling that stock prices reflect all publicly available information.  This is known as the efficient market hypothesis.

Applying the efficient market hypothesis enabled the US Supreme Court in Basic v. Levinson to conclude that any shareholder buying or selling stock while fraudulent information was publicly available suffered from that fraudulent information.  A shareholder didn’t have to read and rely on the specific fraudulent information, it was already reflected in the stock price.

Now, compare that position with a tougher standard which some believe is the correct standard.

What if, in order to sue for securities fraud, a shareholder had to show that he actually read and relied on the fraudulent information.  Given that relatively few shareholders, buying or selling, actually read company’s publicly available information, that would set a much higher standard.

That standard would make today’s class action securities fraud lawsuits less likely.  It would remove key leverage used by the plaintiff’s bar.

 To give you an idea of the magnitude of what’s at stake here, Cornerstone Research, a financial and economic consulting firm, determined that there were over 3000 securities litigation cases brought over the last 15 years.  During this period, companies and their insurers paid over $73 billion in settlements and judgments.  The plaintiff’s bar collected $17 billion in fees.

So the stakes are high and many of us noticed when a company involved in a long-running securities litigation, petitioned the US Supreme Court to overturn the decision in the “Basic” case and apply the tougher standard.   

We’ll be watching whether the Supreme Court takes up the issue and, if it does, whether this key ruling applying the efficient market hypothesis will be overturned.

I’ve attached an excellent article on this topic by Steven M. Davidoff writing in The New York Times “Dealbook”.

Please contact me to help your company to complete any capital market project.

Click here to go to the New York Times “Dealbook” article.

Click the download button to read an article by Latham & Watkins, the law firm, on the case and implications of potential outcomes.

Update – US Supreme Court takes up question of the use of the efficient market theory which is the basis of the “Basic v Levinson” case – read Forbes background.

Postscript: In my research, I came across a blog “The D&O Diary” with several articles providing background on trends in securities litigation following the demise of the law firm Milberg Weiss and a review of the book “Circle of Greed” about the fall of Bill Lerach.