Co-Chair s Corner by Amy Longo

Transcription

1 Winter 2007 Vol. 17 No. 1 In This Issue Let the Holder Beware: How the Supreme Court Found in Merrill Lynch v. Dabit That SLUSA Preempts Your State Law Class Action Claim by Ellen B. Unger (Page 5) Does Attorney Choice of Forum in Class Action Litigation Really Make a Difference? by Shannon R. Wheatman & Thomas E. Willging (Page 11) Young Lawyer Focus: Five Things to Remember When Drafting or Responding To a Security Fraud Class Action Complaint by Brian J Hurst & Jeffrey D. Gardner (Page 14) Co-Chair s Corner by Amy Longo Coming Soon to a Federal Court Near You: How the New Electronic Discovery Rules Will Affect Class Action Practice As we head into the Winter of 2006, the Class Actions and Derivative Suits Committee is busier than ever. This Fall, we hosted the Tenth Annual Institute on Class Actions in San Diego and New York City. A major focus of this year s Institute was the Class Action Fairness Act of 2005, and its implications for class actions. Our Committee hosted two terrific programs at the ABA s Annual Conference in Hawaii in August At the first, entitled Legislative History Untethered To Statutory Text: Lessons From The Class-Action Fairness Act, Thomas Hefferon and Committee Webmaster, Frederick Levin, presented on the various uses that the Courts of Appeals have made of Legislative History to interpret the Class Action Fairness Act. At the second, entitled It s a Small World After All: The Increasing Influence of Foreign And Multinational Class Actions, panelists Stuart Clark, Lynda Grant, Laural Harbour and Bill Lee, spoke on the growth of class action litigation outside the United States and of domestic class action litigation involving facts occurring elsewhere. We look forward to bringing you several exciting programs at the Section s Annual Conference in San Antonio next Spring; stay tuned for details. Class Actions & Derivative Suits is published quarterly by the Class Actions & Derivative Suits Committee, Section of Litigation, American Bar Association, 321 N. Clark St., Chicago, IL The views contained within do not necessarily reflect the views of the American Bar Association, the Section of Litigation, or the Committee. Issue: Vol. 17, No. 1, Winter 2007.

2 This issue features two articles relating to securities class actions. In Committee Chairs the first, Subcommittee Chair Ellen B. Gregg A. Farley Sidley Austin Brown & Wood LLP 555 West Fifth Street, 40th Floor Los Angeles, CA (213) Amy Longo O'Melveny & Myers LLP 400 South Hope Street Los Angeles, CA (213) Editors Roger K. Smith Morgan Lewis & Bockius LLP 300 South grand Avenue, 22nd Floor Los Angeles, CA (213) ; James C. Rutten Munger, Tolles & Olsen LLP 355 South Grand Avenue, 35 th Floor Los Angeles, CA Jocelyn D. Larkin The Impact Fund 125 University Avenue Berkeley, CA (510) , ext. 306 (510) (fax) Unger writes on the U.S. Supreme Court s ruling in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, U.S., 126 S. Ct. 1503, 164 L. Ed 2d 179 (2006), which held that the Securities Litigation Uniform Standards Act of 1998 ( SLUSA ) preempts state law class action claims by holders, rather than purchasers or sellers, of securities. In the second article, Brian J. Hurst and Subcommittee Chair Jeffrey D. Gardner write on key things to remember in drafting or responding to a securities fraud complaint, particularly in light of the U.S. Supreme Court s decision in Dura Pharmaceuticals, Inc. v. Brudo, 544 U.S. 336 (2005), which established a heightened standard for pleading loss causation in securities fraud class actions. The major development on the horizon for class action and other litigators is the amendment of the federal rules of civil procedure to address electronic discovery, effective December 1, The amendments fall into five categories: (1) initial discussions of electronically stored information ( ESI ); (2) extent of production; (3) scope and form of production; (4) inadvertent production of privileged information or trial-preparation materials; and (5) sanctions. The changes to Rules 16(b) and 26(f) will require parties to discuss issues relating to ESI at their initial discovery conference and will permit the court to incorporate those issues into its pretrial scheduling order. Form 35, containing the parties proposed discovery plan, will be amended to reflect the parties discussion of ESI-related matters. Rule 16(b) will now provide that the court may include in its pretrial scheduling order (5) provisions for disclosure or discovery of [ESI]; [and] (6) any agreements the parties reach for asserting claims of privilege or of protection as trial preparation material after production. Rule 16(b). According to the Committee Note, the purpose of this change is to alert the court to the possible need to address the handling of discovery of [ESI] early in the litigation if such discovery is expected to occur. Several changes to Rule 26(f) will require parties to discuss the preservation and production of ESI at their initial discovery conference. First, in addition to developing a proposed discovery plan, parties will now be required to discuss any issues relating to preserving discoverable information. (Rule 26(f)). Second, parties will be required to include in their discovery plan their views and proposals regarding, (3) any issues relating to disclosure or discovery of [ESI], including the form or forms in which it should be produced; [and] (4) any issues relating to claims of privilege or of protection as trial preparation material, including -- if the parties agree on a procedure to assert such claims after production -- whether to ask the court to include their agreement in an order. These rules could have a major effect on class action and derivative practice in several respects. First, it will greatly increase the extent of information about discovery that is exchanged early in the case. Since merits discovery follows classrelated discovery in many class actions, it is often the case that beyond the initial disclosures required under Rule 26, most of this information is not exchanged until much later. Now, the new amendments will call for the discussion of the preservation and production of ESI up front. Furthermore, since the rules require earlier exchange of information about parties ESI, they will require the need to coordinate and delineate the roles of class representatives, liaison or lead counsel, and other counsel of record for class members. Where there can be long periods of dormancy for class representatives in an action, 2007 American Bar Association, Section of Litigation 2 Class Actions & Derivative Suits, Winter 2007, Vol. 17, No. 1

3 steps to ensure their understanding of and adherence to preservation guidelines will be a must. Another issue that will likely arise is the relationship between the scope of preservation and the proposed class period, claims and members. Since parties frequently disagree about the nature of the proposed class, courts will probably be visited by parties who, having exchanged information about preservation, have drastically differing views about its proper scope. One of the most significant changes is to Rule 26(b)(2)(B), limitations on discovery. In contrast to the existing structure for producing information or seeking to limit such production, the amendment creates a new two tiered system for discovery of ESI: A party need not provide discovery of [ESI] from sources that the party identifies as not reasonably accessible because of undue burden or cost. On motion to compel discovery or for a protective order, the party from whom discovery is sought must show that the information is not reasonably accessible because of undue burden or cost. If that showing is made, the court may nonetheless order discovery from such sources if the requesting party shows good cause, considering the limitations of Rule 26(b)(2)(C). The court may specify conditions for the discovery. Rule 26(b)(2)(B). Under the new rule, parties must produce ESI to the extent it is relevant, nonprivileged and reasonably accessible. For ESI from sources that are not reasonably accessible, parties must identify by category or type the sources containing potentially responsive information that are being neither searched nor produced. See Committee Note, Rule 26(b)(2)(B). Parties must meet and confer before seeking discovery from inaccessible sources. Under Rule 26(b)(2)(B), the responding party bears the initial burden of showing that sources of ESI are not reasonably accessible. Once that showing is made, The major development on the horizon for class action and other litigators is the amendment of the federal rules of civil procedure to address electronic discovery, effective December 1, the requesting party then has the burden to show that its need for the information outweighs the burden and costs. Discovery as to the asserted burden or cost, either in the form of inspection or of depositions, may be appropriate, as may sampling those sources. See Committee Note, Rule 26(b)(2)(B). Since much of class action-related discovery tends to be lopsided, in that the quantity of information produced by the defendants often far exceeds that produced by the class representatives, this change will likely have a greater effect on class plaintiffs ability to discover certain kinds of ESI from class action defendants. Furthermore, given that the damages estimates in class actions often vary dramatically, it will be interesting to see how Rule 26(b)(2)(B) s cost-benefit analysis plays out, particularly where discovery from sources identified as not reasonably accessible is sought before significant work on damages has transpired. Finally, because the Rule contemplates discovery about the reasonable accessibility of ESI or lack thereof, courts procedures for managing the pace and sequence of discovery in class actions will have to be adjusted to reflect this new stage of discovery. Proposed changes to Rules 33(d), 34(a) (b), and 45(a), (c)-(d) address the production of ESI in response to interrogatories and the forms of production of ESI by parties and nonparties. Rule 33(d) is amended to add, to the description of types of business records from which the answers to interrogatories may be derived, the phrase including [ESI]. Rule 33(d). Changes to Rule 34(a) and (b) address the scope and forms of production of ESI. Rule 34(a) is amended to state that: (1) parties can request to test or sample, in addition to seeking to inspect or copy, designated documents; (2) besides designated documents, a requesting party will be able to inspect, copy, test or sample [ESI] (including writings, drawings, graphs, charts, photographs, sound recordings, images, phone records, and other data or data compilations stored in any medium. Rule 34(a) American Bar Association, Section of Litigation 3 Class Actions & Derivative Suits, Winter 2007, Vol. 17, No.1

4 The amendments to Rule 34(b) concern the form of production of ESI. First, Rule 34(b) will now provide that a discovery request may specify the form or forms in which [ESI] is to be produced. (Proposed Rule 34(b)). Second, it will further provide that a responding party shall state any objection to the requested form or forms for producing [ESI]. Id.. Third, where objection is made to the requested form or forms for producing [ESI] -- or if no form was specified in the request -- the responding party must state the form or forms it intends to use. Id. Finally, unless the parties agree otherwise or the court so orders, if a request does not specify the form or forms for producing [ESI], a responding party must produce the information in a form or forms in which it is ordinarily maintained or in a form or forms that are reasonably usable ; however, a party need not produce the same [ESI] in more than one form. Id. One of the most significant changes is to Rule 26(b)(2)(B), limitations on discovery. In contrast to the existing structure for producing information or seeking to limit such production, the amendment creates a new two tiered system for discovery of ESI Class actions often involve the coordination of many related actions and/or parts thereof -- whether a combination of types of class actions such as securities and ERISA, or a series of classes with many sub-classes. In general, class actions therefore require far greater management and case administration than other types of cases. Since the changes to Rules 33 and 34 establish entire new areas for parties to meet and confer about, such as the forms of production, any testing or sampling requests, and the adequacy of ESI provided in response to interrogatories, many of the untested issues will likely come to fruition in the class action arena. For example, where discovery is coordinated among actions, whose preference for a certain form of production will prevail? And how will testing and sampling parameters be determined where various sub-classes seek to focus on different factual angles in discovery? Because of the nature and volume of ESI, concerns about inadvertent production of privileged materials are heightened. The amendment to Rule 26(b)(5), and accompanying changes to Rules 16(b)(6), 26(f)(4), 45(d)(2) and Form 35, introduce to the federal rules a mechanism for requesting the return of inadvertently produced privileged information, and permit agreements among the parties concerning claims of privilege. Though this issue arises most visibly in the context of ESI, these provisions apply to the production of privileged information regardless of its form. The amendment to Rule 26(b)(5)(B) creates a procedure for asserting a claim of privilege or work-product over previously-produced information. It does not, however, address whether the privilege or protection that is asserted after production was waived by the production. Committee Note, Rule 26(b)(5)(B). In addition to providing a mechanism for belated privilege assertions, the amendments will allow parties to form agreements about how privilege assertions will operate. The amendment to Rule 16(b)(6) will provide that the court s pretrial scheduling order may include... (6) any agreements the parties reach for asserting claims of privilege or of protection as trial-preparation material after production... The corresponding amendment to Rule 26(f)(4) directs parties to discuss, at their initial discovery conference, any issues relating to claims of privilege or of protection as trialpreparation material, including -- if the parties agree on a procedure to assert such claims after production -- whether to ask the court to include their agreement in an order... Rule 26(f)(4). New Rule 37(f) introduces what some have termed a safe harbor against sanctions for the loss or destruction of ESI. It provides that, Absent exceptional circumstances, a court may not impose sanctions under these rules on a party for failing to provide [ESI] lost as a result of the routine, goodfaith operation of an electronic information system. (Rule 37(f)). The rationale for the change stems from a distinctive feature of computer operations, the routine alteration and deletion of information that attends ordinary use. Committee 2007 American Bar Association, Section of Litigation 4 Class Actions & Derivative Suits, Winter 2007, Vol. 17, No.1

5 Note, Rule 37(f)). While the Rule does not articulate the meaning of the phrase routine operation of a party s computer system, such operation includes the ways in which such systems are generally designed, programmed, and implemented to meet the party s technical and business needs (Committee Note, Rule 37(f)), such as document retention and destruction programs that automatically delete and/or recycle data on a regularly-set schedule. Like the changes to Rules 16 and 26, this change necessarily prompts the question: What is the reasonable universe of information to which a duty to preserve extends in an as-yet uncertified class action? Since courts orders on class certification can take various forms over the course of a litigation, including through potential interlocutory appeals, courts may face parties conflicting views of what information should be preserved, and therefore whether a safe harbor based on good faith applies in different settings. There will be many open issues under the new federal rules, and class action litigators are likely to be at the forefront of a lot of them. As your Committee Chairs, we look forward to bringing you the latest thinking on the electronic discovery rules as they evolve, through our many Committee publications, CLEs and other forums. And we look forward to defining the shape of the new federal e-discovery landscape with you in the class action arena. Let the Holder Beware: How the Supreme Court Found in Merrill Lynch v. Dabit That SLUSA Preempts Your State Law Class Action Claim by Ellen B. Unger* The magnitude of the federal interest in protecting the integrity and efficient operation of the market for nationally traded securities cannot be overstated. With those words, issued March 21, 2006, the United States Supreme Court delivered a shot across the bow of litigants filing securities-related claims in state court: the preemptive powers of the Securities Litigation Uniform Standards Act of 1998 ( SLUSA ) are alive and well and broader than you (or your counsel) may think. The case, Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit ( Dabit ), --- U.S. ---, 126 S. Ct. 1503, 164 L. Ed. 2d 179 (2006), resolved a sharp difference of opinion between the Seventh and Second Circuit United States Courts of Appeals. Compare Kircher v. Putnam Funds Trust, 403 F.3d 478 (7th Cir. 2005) with Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 395 F.3d 25 (2d Cir. 2005). In April 2005, the Seventh Circuit found SLUSA broad enough to preempt state law class action claims defining plaintiffs as holders, rather than purchasers or sellers, of shares. Only three months before, the Second Circuit found SLUSA not broad enough to preempt holder state law class action claims. Resolving that split, the Supreme Court landed squarely in the Seventh Circuit s corner. Using Dabit as a guide, this article explains (1) what the purchaser-seller requirement is all about, (2) how that requirement affects SLUSA preemption of state law securities class actions, and (3) the Supreme Court s own explanation of (1) and (2) American Bar Association, Section of Litigation 5 Class Actions & Derivative Suits, Winter 2007, Vol. 17, No.1

6 Dabit s Claim: Purchasers + Sellers + Holders = A State Law Class Shadi Dabit is a former Merrill Lynch broker. Dabit alleged that Merrill Lynch disseminated misleading research and, in doing so, manipulated stock prices. Instead of filing an action based on federal securities laws, Dabit invoked federal diversity jurisdiction and advanced his claims under Oklahoma state law, filing a class action in the United States District Court for the Western District of Oklahoma on behalf of himself and all other former or current brokers who, while employed by Merrill Lynch, purchased (for themselves and for their clients) certain stocks between December 1, 1999, and December 31, The complaint claimed that Merrill Lynch breached the fiduciary duty and covenant of good faith and fair dealing it owed its brokers: the brokers relied on biased research analysis in deciding whether or not to sell their own holdings and advise clients in kind. Because of that misplaced reliance, Merrill Lynch s clients and brokers both continued to hold their stocks long beyond the point when, had the truth been known, they would have sold. The complaint further alleged that when the truth was actually revealed, the stocks prices plummeted. The District Court: Purchasers + Sellers + Holders A State Law Class Merrill Lynch moved to dismiss Dabit s complaint. It argued (1) that SLUSA preempted the action and (2) that the claims alleged were not cognizable under Oklahoma law. The District Court rejected the state law argument but agreed that SLUSA preempted at least some of Dabit s claims: while the holding claims might not be preempted the purchasing claims certainly were. The court dismissed the complaint with leave to amend. For the sake of saving his class action claim, Dabit then filed an amended complaint omitting all direct references to purchases. What began as a class of brokers who purchased the subject securities during the class period became a class of brokers who owned and continued to own those securities. Shortly after Dabit amended, the Judicial Panel on Multidistrict Litigation transferred Dabit and dozens of like cases to the United States District Court for the Southern District of New York for consolidated pretrial proceedings. Merrill filed a second motion to dismiss Dabit s complaint. This time dismissal was granted on the ground that the remaining holding claims fell squarely within SLUSA s ambit. In re Merrill Lynch & Co., Inc., No. 02MDL1484, 02CV4051, 02CV8472, 02CV4205, 02CV , WL , *1 (Apr. 10, 2003). The Second Circuit: Holders Only = A State Law Class But the Second Circuit vacated that judgment and remanded Dabit for further proceedings. 395 F.3d at 51. The basis: the claims asserted by holders did not allege fraud in connection with the purchase or sale of securities under SLUSA. Congress intended a narrow meaning, incorporating the standing limitation on private federal securities actions adopted in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S. Ct. 1917, 44 L.Ed.2d 539 (1975). See Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir. 1952) (limiting Rule 10b-5 private right of action to purchasers or sellers of securities). Thus, fraud is only in connection with the purchase or sale of securities, as used in SLUSA, if it is alleged by a purchaser or seller of securities. Claims by brokers who were fraudulently induced, not to sell or purchase, but to retain or delay selling their securities, fell outside SLUSA s preemptive scope. Under the Second Circuit s analysis, a class action of holders could be sustained under state law. That analysis though, inspired no consensus among the circuit courts of appeals. The Seventh Circuit s Kirchner summarized the lack of agreement. 403 F.3d at 483. An equation between SLUSA s coverage and the scope of private damages actions under Rule 10b-5 was supported by the Second Circuit, Eighth Circuit, and Eleventh Circuit. The Ninth Circuit found that SLUSA tracked the coverage of 10(b) and Rule 10b-5 when enforced by public plaintiffs (the SEC or a criminal prosecutor). The Third Circuit reserved decision on the issue. And the Securities and Exchange Commission filed an amicus brief in Dabit supporting the view that SLUSA tracks the full scope of 10(b) and Rule 10b-5, not just their enforcement in private actions. Id. The Seventh Circuit unflinchingly held that holder class actions 2007 American Bar Association, Section of Litigation 6 Class Actions & Derivative Suits, Winter 2007, Vol. 17, No.1

7 were preempted: [t]o say that SLUSA uses the same language as 10(b) and Rule 10b-5 is pretty much to resolve the point. Id. The Supreme Court agreed. The Supreme Court: Purchasers or Sellers or Holders A State Law Class In Dabit the Supreme Court offers the reader a sampler of justifications for curtailing securitiesrelated state law class actions: first, there is American history. Our federal securities laws were born [i]n response to the sudden and disastrous collapse in prices of listed stocks in 1929, and the Great Depression that followed. 126 S. Ct. at Second, there is statutory authority. The Securities Act of 1933 and the Securities Exchange Act of 1934 have anchored federal regulation of vital elements of our economy. Rule 10b-5, promulgated in 1942 pursuant to 10(b) of the 1934 Act, is an important part of The PSLRA had an unintended consequence: It prompted at least some members of the plaintiffs bar to avoid the federal forum altogether. Plaintiffs began bringing securities-related class actions under state law in state court. And so, out of the same policy considerations that propelled the PSLRA, the Securities Litigation Uniform Standards Act of 1998 ( SLUSA ) was born. that regulatory scheme. Rule 10b- 5 prohibits deception, misrepresentation, and fraud in connection with the purchase or sale of any security. Third, there is precedent. Fourth, public policy. Fifth, legislative history. Sixth, statutory construction. Seventh, limited effect. Invoking at least three of the above justifications, the Dabit Court begins its analysis by noting that the right of a private individual and by extension a class of individuals -- to file suit under 10b-5 has always been limited. Only the SEC has express statutory authority to enforce the Rule. See 15 U.S.C. 78u (2000 ed. and Supp. III). Private individuals injured by securities fraud gained the right to sue in 1946 when Judge Kirkpatrick of the United States District Court for the Eastern District of Pennsylvania, relying on the general purpose of the Rule, recognized an implied right of action. Kardon v. National Gypsum Co., 69 F. Supp. 512, 514 (E.D. Pa. 1946). That holding was adopted by the vast majority of district courts and circuit courts of appeals and endorsed by the Supreme Court in See Superintendent of Ins. of N.Y. v. Bankers Life & Casualty Co., 404 U.S. 6, 92 S. Ct. 165, 30 L. Ed.2d 128 (1971). A few years after Kardon (and decades before the Supreme Court endorsed Kardon) the Second Circuit articulated the reach of Kardon s implied private right of action under Rule 10b-5. In Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir. 1952), the Second Circuit held that the Rule could only be invoked by a purchaser or seller of securities. Widely adopted by other courts and absent a High Court holding on the issue, Birnbaum became the norm. Decades later the Supreme Court adopted Birnbaum, choosing to limit the private remedy based on policy considerations. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S. Ct. 1917, 44 L. Ed 2d 539 (1975). The main policy consideration was the widespread recognition that Rule 10b-5 litigation presented a danger of vexatiousness different in degree and in kind from that which accompanies litigation in general. Id. at 739. The very existence of a 10b- 5 lawsuit may frustrate or delay normal business activity. Id. at 740. Limiting the private cause of action to purchaser-seller would, in the Blue Chip Stamps Court s view, minimize these ill effects. According to the Dabit Court, these same policy considerations prompted Congress, in 1995, to adopt legislation targeted at perceived abuses of the class-action vehicle in litigation involving nationally traded securities. 126 S. Ct. at The Private Securities Litigation Reform Act of 1995 ( PSLRA ), (codified at 15 U.S.C. 77z-1 and 78u-4), identified a multitude of ways in which the class action device was being used to injure the entire U.S. economy, for example: nuisance filings, targeting of deep-pocket defendants, vexatious discovery requests, and manipulation by class action lawyers of the clients whom they purportedly represent. Id. Through heightened pleading standards, provision of a safe harbor, restrictions on lead plaintiffs, etc., the PSLRA 2007 American Bar Association, Section of Litigation 7 Class Actions & Derivative Suits, Winter 2007, Vol. 17, No.1

8 would limit federal securities 10(b) and 10b-5 class actions. But, as the Dabit Court tells it, the story did not end happily ever after. The PSLRA had an unintended consequence: It prompted at least some members of the plaintiffs bar to avoid the federal forum altogether. Plaintiffs began bringing securities-related class actions under state law in state court. And so, out of the same policy considerations that propelled the PSLRA, the Securities Litigation Uniform Standards Act of 1998 ( SLUSA ) was born. Title I of SLUSA provides that: Class Action Limitations. No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging -- What is certain: to preempt state law class actions, it is enough that the fraud alleged coincide with a securities transaction -- whether by the plaintiff or by someone else. (A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or (B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security. 101(b), (codified at * U.S.C. 78bb(f)(1)(A)) (emphasis added). SLUSA s purpose to eliminate securitiesrelated state class actions -- was evident and its reach expansive. But how expansive? SLUSA imported its in connection with the purchase or sale of securities language from 10(b) and 10b-5. It was now up to the Dabit Court to determine if the private action limitations previously attributed to 10(b) and 10b-5 s in connection with the purchase or sale language applied to the state class action limitations of SLUSA. The Supreme Court cont d: Fraud That Coincides With A Securities Transaction A State Law Class Unsurprisingly, Dabit urged the Court to adopt the Second Circuit s analysis and read SLUSA s operative language narrowly to encompass (and preempt) only those actions that meet the Blue Chip Stamps purchaser-seller requirement. The Supreme Court disagreed. But rejecting the purchaser-seller requirement meant finding a way to leave behind the Blue Chip Stamps purchaser-seller requirement and Birnbaum, which the Blue Chip Stamps Court embraced. The Dabit Court found a way: unlike Birnbaum (limiting 10b- 5 to purchaser or seller of securities), the rule adopted in Blue Chip Stamps (limiting 10b-5 to purchase or seller of securities) did not stem from the text of Rule 10b-5 (specifically, the in connection with language) but was based on policy considerations. Dabit s invocation of the in connection with language raised issues of statutory construction, not policy consideration. The Blue Chip Stamps holding did not define the words in connection with the purchase or sale. But other Supreme Court holdings did. Under Court precedents that gave meaning to the 10(b) and 10b-5 in connection with phrase, it is enough that the fraud alleged coincide with a securities transaction -- whether by the plaintiff or by someone else. 126 S. Ct. at 1513 (citing United States v. O'Hagan, 521 U.S. 642, 656, 664, 117 S. Ct. 2199, 138 L. Ed.2d 724 (1997)). The requisite showing, in other words, is deception in connection with the purchase or sale of any security, not deception of an identifiable purchaser or seller. Id. (internal quotation marks omitted; citing 521 U.S. at 651). This broader interpretation of the statutory language mirrors the longstanding views of the SEC. SEC v. Zandford, 535 U.S. 813, 820, 822, 122 S. Ct. 1899, 153 L.Ed.2d 1 (2002). Congress imported the key phrase in connection with the purchase or sale into SLUSA s core provision and can hardly have been unaware of the broad construction adopted by both the Supreme Court and the SEC American Bar Association, Section of Litigation 8 Class Actions & Derivative Suits, Winter 2007, Vol. 17, No.1

9 And, the Dabit Court says, if further support is needed, look to public policy and legislative intent: adopting Dabit s reasoning would give rise to wasteful, duplicative litigation because [f]acts supporting an action by purchasers under Rule 10b- 5 (which must proceed in federal court if at all) typically support an action by holders as well, at least in those States that recognize holder claims. 126 S. Ct. at This raises the prospect of parallel state and federal class actions with different standards governing claims asserted on identical facts, precisely the occurrence SLUSA sought to prevent. See H.R. Rep. No , p. 10 (1998) (the solution to circumvention of the PSLRA is to make Federal court the exclusive venue for securities fraud class action litigation ). The Supreme Court: Why Dabit s Effect Is Limited For those who find Dabit a sweeping assertion of federal preemptive power, the Court offers assurances that it has not lost sight of the general presumption against Congressional preemption of state law causes of action. But the Court notes that presumption carries less force in Dabit because SLUSA does not actually preempt any state cause of action. 126 S. Ct. at It simply denies plaintiffs the right to use the class action device to vindicate certain claims. SLUSA does not deny any individual plaintiff, or indeed any group of fewer than 50 plaintiffs, the right to enforce any state-law cause of action that may exist. Id. The Dabit Court declines to say what state law causes of action may exist in a post-dabit world. Left unanswered: if individual or multiparty claims revert to the Blue Chip Stamps purchaserseller requirement or can now invoke the broader Dabit construction. What is certain: to preempt state law class actions, it is enough that the fraud alleged coincide with a securities transaction -- whether by the plaintiff or by someone else. The claim need be no more securities-related than that. Lest you still think Dabit expansive, the Court reminds the reader of several additional reasons why the ruling has limited effect. First, federal law rather than state law has long been the principal vehicle for asserting class-action securities fraud claims. See, e.g., H.R. Conf. Rep. No , p. 14 (1998) ( Prior to the passage of the Reform Act, there was essentially no significant securities class action litigation brought in State court ). 126 S. Ct. at Second, while statelaw holder claims were theoretically available both before and after Blue Chip Stamps, such claims by way of class action were virtually unheard of before SLUSA was enacted; Dabit and amici identified only one pre- SLUSA case Despite the Supreme Court s assertion of minimal effect, it may well be that after Dabit more courts are willing to see wolves where once they saw only sheep. involving a state law class action asserting holder claims. 126 S. Ct. at This is hardly a situation, then, in which a federal statute has eliminated a historically entrenched state-law remedy. Id. Id. The holder class action that respondent tried to plead, and that the Second Circuit envisioned, is distinguishable from a typical Rule 10b- 5 class action in only one respect: It is brought by holders instead of purchasers or sellers. For purposes of SLUSA pre-emption, that distinction is irrelevant; the identity of the plaintiffs does not determine whether the complaint alleges fraud in connection with the purchase or sale of securities. The misconduct of which respondent complains here -- fraudulent manipulation of stock prices -- unquestionably qualifies as fraud in connection with the purchase or sale of securities. The Limited Effect Having ruled on March 21 in the Second Circuit s Dabit, the Supreme Court then ruled on June 15 in the Seventh Circuit s Kircher, reiterating Dabit in a different context. Kircher v. Putnam Funds Trust, --- S.Ct. ----, No , 2006 WL (June 15, 2006). In Kircher mutual fund investors brought state-court putative class actions 2007 American Bar Association, Section of Litigation 9 Class Actions & Derivative Suits, Winter 2007, Vol. 17, No.1

10 asserting state law claims against funds, investment advisors, and an insurance company, alleging injury due to the devaluation of their holdings. Defendants removed the actions under SLUSA, arguing that SLUSA precluded plaintiffs holder suits. The United States District Court for the Southern District of Illinois found for plaintiffs and remanded the actions. After ruling that the remand orders were appealable, 373 F.3d 847, the Seventh Circuit, 403 F.3d 478, reversed and remanded, finding that the holder actions were precluded by SLUSA. Granting cert, the Supreme Court held that (1) the district court s remand orders were not appealable, and (2) the decision as to whether an action is statutorily precluded by SLUSA is not within the exclusive jurisdiction of the federal courts. As the Supreme Court wrote, we have no reason to doubt that the state court will duly apply Dabit s holding that holder claims are embraced by [SLUSA] subsection b WL , at * 8. As of this writing, there is one published lower court opinion analyzing and applying Dabit s in connection with purchaser-seller ruling. In Felton v. Morgan Stanley Dean Witter & Co., plaintiffs brought a putative class action in a New York state court against defendant securities broker Morgan Stanley Dean Witter & Co. alleging a common law claim for breach of contract for failing to provide objective research and recommendations. Felton v. Morgan Stanley Dean Witter & Co., No. 04 Civ.7892, 2006 WL (S.D.N.Y. May 2, 2006). The Felton plaintiffs claimed they held onto securities, rather than selling them on the market, as a result of the reports and recommendations. Morgan Stanley removed the case to federal district court, asserting that the state law claim was preempted by SLUSA. Plaintiffs then moved to remand the action to the state court on the ground that SLUSA does not preempt it. Morgan Stanley moved to dismiss the action on the grounds that SLUSA applies to it and mandates its dismissal. Based upon Dabit, dismissal was granted. Dabit precluded plaintiffs claim by making it clear that there is no holder class exemption under the in connection with the purchase or sale prong of the SLUSA analysis WL , at * 5. What s more, the Felton court stated, artful pleading cannot rescue plaintiffs: I conclude without difficulty that Plaintiffs claim is a securities fraud wolf dressed up in a breach of contract sheep s clothing. Id. at * 6. Of course only time will tell how much Dabit limits litigants ability to use state law as the basis for class action securities-related claims. Despite the Supreme Court s assertion of minimal effect, it may well be that after Dabit more courts are willing to see wolves where once they saw only sheep. *Ms. Unger is a member of Lowenstein Sandler's Class Action and Derivative Litigation Practice Group, with offices in New Jersey and New York. We welcome submission of articles on topical issues or decisions involving class actions or derivative suits. If you have any ideas for a future newsletter or an article you wish to submit, please contact Roger Smith, Jim Rutten or Jocelyn Larkin at the or mail addresses shown on the second page of this newsletter. If you are aware of any pertinent decisions and, in particular, any unreported decisions, we would appreciate you bringing them to the attention of Roger, Jim, or Jocelyn or any of the contributing editors. To Our Readers: If you are not a member of the Committee on Class Actions and Derivative Suits, we encourage you to join. Please visit our website to learn more about the Committee and its activities at committee/classact/home.html. If you missed an issue of the Class Actions and Derivative Suits Newsletter, you can read it online at classact/home.html. The newsletter is available online to Section and Committee members in Adobe Acrobat format. Log in using your ABA ID# as your user name and your last name as your password American Bar Association, Section of Litigation 10 Class Actions & Derivative Suits, Winter 2007, Vol. 17, No.1

11 Does Attorney Choice of Forum in Class Action Litigation Really Make a Difference? by Shannon R. Wheatman & Thomas E. Willging* One would expect the drafters of the Class Action Fairness Act of 2005 ( CAFA ) to answer the question posed above with a reverberant Yes. That statute, after all, rests on two related assumptions: that plaintiff attorneys have good reason to believe state courts will provide better outcomes for the proposed class they seek to represent and that federal courts present a superior venue for resolving multistate class actions. The findings of a pre-cafa study we conducted on attorney choice of forum disputes the first assumption, which seems to have been based exclusively on anecdotal information, that state courts favor plaintiffs and federal courts favor defendants. To the extent that the better outcomes in federal courts envisioned by CAFA proponents were rulings favorable to class action defendants, our findings also call that vision into question. The bottom line is that our data show no meaningful difference between state and federal court rulings on class actions in a representative sample of recent cases. We collected and analyzed case-specific survey responses from 728 attorneys in 621 terminated class action cases that had been filed in federal court or removed to federal court. Of the responding attorneys, 312 (43%) represented plaintiffs and 416 (57%) represented defendants. The questionnaire asked attorneys about the reasons they either (1) filed in state or federal court or (2) removed the case to federal court, and about the judicial rulings and outcomes of the cases. We conducted this research on cases terminated between 1999 and 2002, well before the February 18, 2005, effective date of CAFA. Under the laws in effect at the time of the research, a plaintiff s attorney could generally choose between a state or federal forum and sometimes from among a number of state or federal forums. On the basis of assumptions and anecdotes and without the benefit of representative empirical data, CAFA changed federal jurisdiction and removal law. CAFA proponents presented extreme scenarios referring, for example, to a state court as an outlier among outliers that appear to have been taken as typical of class action litigation. 1 These tactics seemed to have impeded careful examination of the possible factors that might affect choice of forum, such as the original location of the claims, class members residence, the applicable law, and the convenience of the parties and lawyers factors that seem likely to become less relevant under CAFA. Factors Affecting Attorneys Choice Of Forum In our study we asked respondents about certain factors that may have affected their choice of forum. We analyzed their responses using powerful multiple regression methods that allowed us to identify the most salient factors linked to the attorneys decisions. Expectations of perceived favorable judicial treatment were a driving force in both plaintiff and defendant attorneys decisions on where to litigate. Those expectations, though, were not solely determined by the attorneys perceptions of judicial predispositions or biases. Plaintiff attorneys expectations of favorable judicial treatment were related to perceptions of favorable substantive law and discovery rules in the state forum they selected. Similarly, defense attorneys expectations were also related to perceptions of favorable substantive law and discovery rules as well as to favorable class action and expert evidence rules in the federal court they selected. Defense attorneys responses depicted an almost totally favorable legal environment for their clients in the federal courts a convergence of judicial receptivity, predispositions, and favorable substantive and procedural rules. Plaintiff attorneys preferences to choose state forums showed a strong statistical relationship with state (that is, local) factors, such as the source of legal claims and the factual origins of the claims in state law, and the number of class members residing in the forum state. The local residence of a 2007 American Bar Association, Section of Litigation 11 Class Actions & Derivative Suits, Winter 2007, Vol. 17, No.1

12 class representative was also pivotal. The nature of the defendant s business seemed to be the only factor that was strongly associated with a plaintiff s choice of forum that did not have a local connection. These empirical findings seem to fly in the face of some of the assumptions and findings in CAFA, for example the assumption that [s]tate and local courts are... keeping cases of national importance out of Federal court Our findings indicate that state court cases were largely matters of state or local significance. Rulings and Outcomes We analyzed the rulings and outcomes in the cases in the study and found that attorney perceptions of judicial predispositions were not accurate. In fact, the percentage of class actions that were certified (20% in federal courts; 22% in state courts), dismissed on the merits (22% in federal and state courts), and had a class settlement approved (82% in federal courts; 88% in state courts) were almost identical in state and federal courts regardless of whether an attorney perceived a predisposition in that court or not. We found that in the majority of cases (57%) the court took no action on class certification. Courts certified 24% of the cases as class actions and denied certification in 19% of them. Of the certified cases, 58% were certified for settlement (up from 39% found in a 1996 Federal Judicial Center ( FJC ) study) 3 and 42% were certified for trial or litigation. While federal courts were more likely to deny class certification, state courts were more likely to take no action regarding class certification. Rulings on dispositive procedural motions were not significantly different in federal or state court. In the end, one is left to wonder about the source of the attorneys perceptions and the extent to which attorneys themselves may have been influenced to accept without question or empirical data a general set of preconceptions about state and federal courts and judges. Trends in Class Certification Rulings Data from the 1996 FJC study showed a certification rate of 37% in four federal district courts, considerably higher than the 20% rate we found here for federal class certification rulings. Those numbers indicate a substantial decrease in the rate of class certification in federal courts. While we don t have any data about prior class certification rates in the state courts, the fact that they are currently the equivalent of the federal rates is significant. Even if the state courts at one time certified a higher percentage of class actions, our data indicate that is no longer the case. Rates, of course, will vary from district to district and from state to state, but aggregate data from the two sets of courts reveal no meaningful differences. Monetary Recoveries and Settlements Despite the similarities in rulings, monetary recoveries differed in federal and state courts. Such recoveries almost always took the form of settlements fashioned by the parties. State and federal courts were almost equally likely to approve class settlements. In removed cases that had been remanded to state courts, the amount of class-wide monetary recoveries and settlements was substantially larger than monetary recoveries and settlements in cases retained in federal court. The median recovery was $850,000 in state court and $300,000 in federal court. Those differences, however, appeared to be a product of the larger size of class actions resolved in state courts (typically 5,000 class members, compared to 1,000 in federal courts). The median recovery per class member turned out to be higher in federal court ($517) than in cases remanded to state court ($350). In both state and federal courts, all certified class actions settled on a class-wide basis. The median recovery in the class-wide settlements was $800,000. Twenty-five percent of the recoveries and settlements exceeded $5.2 million (just above CAFA s $5 million jurisdictional threshold), and 25% were $50,000 or less. In contrast, most cases that were never certified were terminated by dismissal, summary judgment, voluntary dismissal, or settlement of class representatives claims. In the study, 29 of 315 cases (9%) with a recovery included some type of coupon; 3 of those cases (1%) involved nontransferable coupons. Attorney Fees The percentage of attorney fees did not vary much between state and federal courts, but the larger class awards (resulting from larger class membership in state cases) yielded higher attorney fee awards. Attorney fees typically were 27% of the class recovery in remanded cases and 29% of the 2007 American Bar Association, Section of Litigation 12 Class Actions & Derivative Suits, Winter 2007, Vol. 17, No.1

13 class recovery in cases retained in the federal courts, about the same percentage (27% - 30%) as in the 1996 FJC study of class actions. Twenty-five percent of the cases involved fees of 36% or more. While attorneys did not identify fee awards as a major factor affecting their choice of forum in a given class action, the results of our study indicate that the differences in the amounts of attorney fee awards in state and federal courts appear to be large enough to serve as an incentive to file class actions in state courts. Our data suggest, however, that the size of the class, not the type of forum, is the predominant factor in determining award sizes. A larger class in a federal court would be expected to generate as high a fee award as the same size class in a state court. Conclusion In the end, the data from this study document the conventional expectations of lawyers in choosing a forum. At the same time, the casebased findings reveal that those expectations did not prove to be accurate predictors of judicial rulings in a random sample of cases. State forums were not typically more favorable for plaintiffs, and federal forums were not typically more favorable for defendants. Plaintiff and defendant expectations proved to be true in about half of the cases, which suggest that those outcomes were highly likely to have occurred by chance. Attorney choice of forum may have been influenced by routine acceptance of a general set of preconceptions about the differences between state and federal courts. Now that CAFA is operating, plaintiff and defendant attorneys can be expected to continue to jockey for advantageous position among various federal and state forums. Finding a single forum in which to litigate national and local class actions may remain elusive even under CAFA. The Federal Judicial Center is engaged in further empirical research to determine the impact of CAFA on the federal district and appellate courts. Other researchers intend to explore CAFA s impact at the state level. Stay tuned. *Dr. Shannon R. Wheatman is Vice President/Notice Director of Hilsoft Notifications and was a research associate at The Federal Judicial Center (FJC) from 2000 to 2004, and Thomas E. Willging is a Senior Researcher at the FJC. The study that generated the data in this report was originally undertaken by the Federal Judicial Center ( FJC ) in response to a request by the Judicial Conference of the United States Advisory Committee on Civil Rules ( Advisory Committee ) and is in furtherance of the FJC s statutory mission to conduct and stimulate research for the improvement of judicial administration. Any views expressed in this article are those of the authors and not necessarily those of the Advisory Committee or the FJC. 1 See footnote 23 in Thomas E. Willging & Shannon R. Wheatman, Attorney Choice of Forum in Class Action Litigation: What Difference Does it Make? 81 NOTRE DAME L. REV. at 597 (Jan. 2006). 2 Class Action Fairness Act 2(a)(4)(A), (B), 28 U.S.C.A note (West Supp. 2005) (Findings and Purposes). 3 See Thomas E. Willging, Laural L. Hooper & Robert J. Niemic, Empirical Study of Class Actions in Four Federal District Courts 7, 26 (Federal Judicial Center 1996); see also Thomas E. Willging, Laural L. Hooper & Robert J. Niemic, An Empirical Analysis of Rule 23 to Address the Rulemaking Challenges, 71 N.Y.U. L. Rev. 74, 101(1996 To Our Readers: Need to find out the latest and most significant class action decisions from around the country? Then, check out the Recent Cases and Commentary section, at our website ( committees/classact/circuit.html) American Bar Association, Section of Litigation 13 Class Actions & Derivative Suits, Winter 2007, Vol. 17, No.1

14 YOUNG LAWYER FOCUS: TIPS FROM THE TRENCHES Five Things to Remember When Drafting or Responding to a Security Fraud Class Action Complaint by Brian J Hurst and Jeffrey D. Gardner* Novice and veteran litigators alike, faced with the opportunity to pursue or defend a federal securities fraud class action, must grasp how dramatically the landscape of class action securities litigation has changed in recent years. With the Private Securities Litigation Reform Act (PSLRA), the Securities Litigation Uniform Standards Act (SLUSA), and the landmark Supreme Court decision in Dura Pharmaceuticals, Inc. v. Brudo, 544 U.S. 336 (2005). Congress and the federal courts have significantly heightened the pleading requirements for a securities fraud class action complaint. This article highlights five concerns every securities litigator must take into account in drafting or responding to a class action securities fraud complaint. 1. Federal Rule of Civil Procedure 23 is Always the First Point of Reference. The starting point for all class action litigation, including those securities class actions brought pursuant to Section 10(b) of the Securities Exchange Act of 1934(15 U.S.C. 78j(b)) or Securities and Exchange Commission Rule 10b-5 (17 C.F.R b-5(b)) is Federal Rule of Civil Procedure 23 (Rule 23). Class actions are representative matters, and Rule 23 guarantees a level of protection for absent class members. A lawsuit may be certified as a class action only if the trial court is satisfied, after a rigorous analysis, that the prerequisites of Rule 23(a) have been met. General Telephone Co. of the Southwest v. Falcon, 457 U.S. 147, 155 (1982). Rule 23(a) requires a class action complaint to allege that: (1) the class is so numerous that joinder of all individual members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interest of the class. FED. R. CIV. P. 23(a). Additionally, Rule 23(b) must be satisfied by allegations that questions of fact or law common to the members of the class predominate over any questions affecting only individual members, and the class action adjudication vehicle is superior to other methods for the fair and efficient adjudication of the controversy. Thus, a class action will not be maintained if the complaint fails to allege that the four requirements of 23(a) have been satisfied, and at least one of the provisions of 23(b) is met. The Plaintiff bears the burden of proof with regard to satisfying Rule 23 and, thus, a defendant should scrutinize each of the required elements for vulnerability to a motion to dismiss. 2. The PSLRA Increased Substantive Pleading Requirements for Securities Fraud Class Actions. Congress enacted the PSLRA to remedy perceived abuses in private securities class action litigation. See Joint Explanatory Statement of the Committee of Conference, Conference Report on Securities Litigation Reform, H.R. Rep. No. 369, 104 th Congress, 1 st Sess. at 31, reprinted in 1995 U.S.C.C.A.N. 679, Before the enactment of the PSLRA, private class actions for securities fraud were widely considered to be subject to manipulation by lawyers and professional plaintiffs. The PSLRA was designed to protect businesses by transferring primary control of private securities litigation from lawyers to investors. In order to achieve this goal, and to shield businesses from lawyer-driven strike suits, Congress increased the substantive pleading standards for securities class action complaints. Section 78u-4(b) of the PSLRA applies to any private action arising under the PSLRA in which the plaintiff alleges that the defendant made an untrue statement of material fact or omitted to state a material fact necessary in order to make the 2007 American Bar Association, Section of Litigation 14 Class Actions & Derivative Suits, Winter 2007, Vol. 17, No.1

15 statement made, in light of the circumstances in which they were made, not misleading thus encompassing Section 10(b) and Rule 10b-5 claims. 15 U.S.C. 78u-4(b). Specifically, Section 78u- 4(b)(1) works in conjunction with Federal Rule of Civil Procedure 9(b) and commands that the securities fraud complaint specify each statement alleged to have been misleading, the reason or reasons why the statement was misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint must state with particularity all of the facts on which that belief is formed. Moreover, Section 78u-4(b)(2) includes an element of intent, requiring the plaintiff to state with particularity facts giving rise to a strong inference that the defendant acted with scienter. The failure to satisfy the heightened pleading requirements of the PSLRA renders a complaint defective and subject to dismissal. Id. 3. The PSLRA also Expanded the Procedural Mechanisms of Securities Fraud Class Action Complaints. The PSLRA also imposes new procedural obstacles to maintaining a securities fraud claim as a class action. Specifically, Section 78u-4(a)(2)(A), requires that each securities fraud complaint filed as a class action be accompanied by a sworn certification by each representative of the putative class. 15 U.S.C. 78u-(a)(2)(A). The certification must include the representative s affirmation that (1) he reviewed the complaint and authorized its filing; (2) did not purchase the subject security at the direction of counsel in order to participate in the class action; and (3) is willing to serve as a representative party on behalf of the class including the provision of deposition and trial testimony. The certification also must identify all of the class representative s transactions in the subject security during the class period and all other class actions filed by the representative under the PSLRA during the preceding three-year period. Id. The PSLRA also requires that prior to the expiration of twenty days following the filing of the complaint, the plaintiff must publish in a business periodical of national circulation a notice that adequately advises prospective members of the purported class about the pendency of the action and associated deadlines and other considerations. 15 U.S.C. 78u-(a)(3)(A). Therefore, the PSLRA has heightened both the substantive and procedural pleading requirements with regard to securities fraud class action complaints. 4. Congress Enacted the SLUSA to Promote Objectives of PSLRA. Some securities fraud plaintiffs attempted to side-step the requirements of the PSLRA by filing class actions in state court. In 1998, Congress sought to close the state court loophole by enacting the SLUSA. See Securities Litigation Uniform Standards Act of 1998: Conference Report, H.R. Rep. No , 105 th Congress, 2 nd Sess. (Oct. 1998). From the many opinions interpreting the SLUSA emerged a judicial consensus that the SLUSA preempts state law securities fraud claims, making federal courts the exclusive forum for class actions involving the purchase or sale of nationally traded securities. See 15 U.S.C. 78bb; see also 15 U.S.C. 77p(b). The SLUSA permits defendants to remove to federal court for the purpose of seeking a ruling on whether the SLUSA preempts the pendent state law claims. Id. Thus, the SLUSA limits the ability of plaintiffs to circumvent the PSLRA with state court filings. 5. Dura Dramatically Impacted the Pleading Requirements for Securities Fraud Class Actions where Plaintiffs Rely on the Fraud on the Market Theory of Liability. The PSLRA requires that a private plaintiff in a securities fraud class action must plead and prove that the defendants fraud caused an economic loss. 15 U.S.C. 78u-4(b)(4). The Ninth Circuit Court of Appeals previously held that a plaintiff could satisfy the loss causation requirement merely by alleging and subsequently establishing that the price of the subject security purchased during the class period was artificially inflated by virtue of the defendants misrepresentation. In Dura, the Supreme Court unanimously rejected the Ninth Circuit view and established a stricter pleading standard for loss causation in securities fraud class actions. Dura, 544 U.S. at American Bar Association, Section of Litigation 15 Class Actions & Derivative Suits, Winter 2007, Vol. 17, No.1

16 In Dura, the Supreme Court held that allegation of an inflated purchase price does not, by itself, satisfy the pleading requirement of economic loss. Id. at This is because at the moment the purchase of the subject security takes place, the plaintiff has suffered no loss. Id. Rather, the inflated purchase price is offset by ownership of a share, or shares, that possess an equivalent value at that same instant. Id. The Supreme Court required that a plaintiff further plead and prove a causal link between the defendants alleged misrepresentation and a subsequent decline in the value of the share price (by, for instance, belated disclosure of facts wrongfully concealed during the class period). Id. Conclusion Recent federal legislation and judicial action have heightened the pleading requirements for federal securities fraud class actions. This article, while far from exhaustive, is intended to highlight for the uninitiated what should be five key concerns of any litigator drafting or seeking dismissal of a class action securities fraud complaint. * Mr. Hurst is a principal and Mr. Gardner is an associate in the Dallas office of Baker & McKenzie LLP, where they specialize in complex litigation matters, including class actions pages 6 x 9 Paper ISBN: Product Code: Regular Price: $64.95 LT Member Price: $54.95 NEW EDITION McElhaney is back and better than ever A new edition of the ABA s all-time best-selling book on trial practice. Expanded, updated and revised by the author, this new edition of Trial Notebook includes 30 years of James McElhaney s clear, lively and memorable prose from Litigation Journal. Nearly a third larger than the previous edition, the book now includes 90 chapters that cover everything from discovery through rebuttal and provides you with techniques, tactics and strategies for every stage of trial. James McElhaney knows his subject better than anyone, as a practitioner and as a professor. The result is information, grounded in actual courtroom experience, that you will understand, enjoy and use daily in court. Used again and again by thousands of trial lawyers, Trial Notebook is certain to make your trial work more effective. Bulk discounts available. AMERICAN BAR ASSOCIATION Phone: Fax: Young Lawyers: The ABA s Litigation Section has a site dedicated to young lawyers that includes articles, networking opportunities, web resources, and more! See http//: younglawyers/home.html 2007 American Bar Association, Section of Litigation 16 Class Actions & Derivative Suits, Winter 2007, Vol. 17, No.1

17 CONTRIBUTING EDITORS CADS NEWSLETTER NAME FIRM NAME Edward K. O Brien ((1 st Cir.) O Brien Law Firm, P.C. e-obrien@star.net John D. Mullen (2 nd Cir.) Holland & Knight, LLP jmullen@hklaw.com Michael C. Dell Angelo (3 rd Cir.) Berger & Montague, P.C. mdellangelo@bm.net B. Rush Smith (4 th Cir.) Nelson Mullins Riley & Scarborough LLP BRS@nmrs.com Ann R. Koppel (5 th Cir.) Adams & Reese Koppelar@arlaw.com Matthew Cooper (6 th Cir.) GE Financial Assurance matt.cooper@gecapital.com Adam J. Levitt (7 th Cir.) Wolf Haldenstein Adler Freeman & Herz, LLP levitt@whafh.com James K. Langdon, II (8 th Cir.) Dorsey & Whitney, LLP langdon.jim@dorseylaw.com Mark H. Hamer (9 th Cir.) Gray Cary Ware & Freidenrich LLP mhamer@graycary.com Joseph Whyte (10 th Cir.) Heyl, Royster, Voelker & Allen jwhyte@hrva.com M. Jerome Elmore (11 th Cir.) Bondurant, Mixson & Elmorek, LLP elmore@bondurant-mixson.com Edward K. Bilich (D.C. Cir.) Jones, Day, Reavis & Pogue Edward_K._Bilich@jonesday.com Robert H. Klonoff (Federal Cir.) Jones, Day, Reavis & Pogue Robert_H._Klonoff@jonesday.com CLASS ACTIONS &DERIVATIVE SUITS COMMITTEE SUBCOMMITTEE CHAIRS COMMITTEE CO-CHAIRS Gregg A. Farley Sidley Austin LLP gfarley@sidley.com Amy Jane Longo O Melveny & Myers LLP alongo@omm.com ANTITRUST LAW SUBCOMMITTEE Ethan M. Posner Covington & Burling eposner@cov.com Andrew McGuinness Dykema Gossett PLLC amcguinness@dykema William M. Katz, Jr. Thompson & Knight, LLP william.katz@tklaw.com Daniel R. Karon Goldman Scarlato & Karon, PC karon@gsk-law.com CONSUMER LAW SUBCOMMITTEE Michael D. Donovan Donovan Searles dmlaw@erols.com Daniel P. Shapiro Goldberg Kohn Bell Black Rosenbloom & Moritz dps@goldbergkohn.com Ira Rheingold National Association of Consumer Advocate ira@naca.net DERIVATIVE SUITS SUBCOMMITTEE Pamela Palmer Latham & Walker pamela.palmer@lw.com Stephen C. Norman Potter Anderson & Corroon, LLP snorman@potteranderson.com EMPLOYMENT LAW SUBCOMMITTEE Fred W. Alvarez Wilson Sonsini Goodrich & Rosati falvarez@wsgr.com Alan G. Crone Crone & Mason, PLC acrone@cronemason.com MASS TORTS SUBCOMMITTEE Stuart M. Feinblatt Sills Cummis Epstein & Gross, PC sfeinblatt@sillscummis.com G. Calvin Hayes Holland & Knight, LLP calvin.hayes@hklaw.com Debra Pole Sidley Austin Brown & Wood LLP dpole@sidley.com NEWSLETTER SUBCOMMITTEE Jocelyn D. Larkin The Impact Fund jdl@impactfund.org Roger K. Smith Morgan, Lewis & Bockius LLP roger.smith@morganlewis.com James C. Rutten Munger, Tolles & Olson LLP james.rutten@mto.com PROGRAMS Roger B. Greenberg Schwartz Junell Campbell & Oathout rgreenberg@schwartz-junell.com M. Jerome Elmore Bondurant Mixson & Elmore elmore@bmelaw.com Greg Cook Balch & Bingham LLP gcook@balch.com Donald R. Frederico McDermott Will & Emery dfrederico@mwe.com RULE 23 SUBCOMMITTEE Janet C. Evans Robins, Kaplan, Miller & Ciresi JCEvans@rkmc.com Robert S. Gans Bernstein Litowitz Berger & Grossman robert@blbglaw.com James P. Muehlberger Shook Hardy & Bacon, LLP jmuehlberger@shb.com Matt Heffner Sussman, Heffner & Hurst LLP mattheffner@ameritech.net SECURITIES LAW SUBCOMMITTEE Jill Abrams Abbey Gardy, LLP jabrams@abbeygardy.com James M. Finberg Lieff Cabraser Heimann & Bernstein jfinberg@lchb.com Lynda J. Grant Goodkind Labaton Rudoff & Sucharow lgrant@glrslaw.com Ellen Unger Lowenstein Sandler eunger@lowenstein.com Meanith Huon Johnson & Bell huonm@jbltd.com STATE LAW SUBCOMMITTEE Fabrice N. Vincent Lieff Cabraser Heimann & Bernstein fvincent@lchb.com Dennis Egan Butzel Long Egan@butzel.com INTERNATIONAL CLASS ACTIONS SUBCOMMITTEE Deborah Glendinning Osler, Hoskin & Harcourt dglendinning@osler.com David I. Hamer McCarthy & Tetrault dhamer@mccarthy.ca NATIONAL INSTITUTE PLANNING Scott Nelson Public Citizen Litigation Group snelson@citizen.org WEB MASTER Frederick S. Levin Mayer, Brown, Rowe & Maw LLP Flevin@mayerbrown.com Lee A. Weiss Milberg Weiss Bershad & Schulman LLP lweiss@milbergweiss.com Jeff Gardner Baker & McKenzie Jeffrey.d.gardner@bakernet.com 2007 American Bar Association, Section of Litigation Class Actions & Derivative Suits, Winter 2007, Vol. 17, No.1

18 Business and Commercial Litigation in Federal Courts EDITED BY ROBERT L. HAIG Covering the most common commercial litigation subjects, the new edition of Business and Commercial Litigation in Federal Courts takes readers through a step-by-step analysis of the entire litigation process.with 16 new chapters and more than 500 pages of forms and jury charges on CD-ROM, the set is an indispensable resource for the commercial litigator. SPECIAL SAVINGS FOR LITIGATION MEMBERS The eight-volume set is now available at a 40% discount to Section of Litigation members. Take David Berg to Court with You Acclaimed trial lawyer David Berg has spent more than 30 years refining his litigation techniques. Learn his winning methods in The Trial Lawyer: What It Takes To Win, now available on DVD. I THINK OF DAVID AS A PEOPLE S LAWYER IN THE CLARENCE DARROW TRADITION. HE HAS AN ABILITY TO PERSUADE JURORS THAT IS THE EQUAL OF ANY PRACTITIONER IKNOW. THE TRIAL LAWYER SHOWS HOW IT CAN BE DONE. MORRIS DEES In this 6-hour program, Berg shares his strategies for telling your client s story during every phase of trial. Whether you are new to the practice of law or are seeking fresh ways to persuade at trial, turn to The Trial Lawyer. The DVD package includes the softcover edition of the book. Learn more at

19 Litigation Series TeleConferences THE CONVENIENT WAY TO STAY CURRENT ON TRENDS IN LITIGATION PRACTICE Successful litigators understand the importance of lifelong learning. But with research, client meetings, and the everyday work of litigation practice, it can be difficult to find time for professional development. With Litigation Series Teleconferences, discussing the latest issues with nationally known faculty is as easy as picking up the phone. Join leading lawyers and judges on the second Tuesday of the month for a lively and balanced discussion of hot issues and litigation fundamentals. As a member of the Section, you qualify for special pricing on each program. Recent teleconference topics Witness preparation and Rule 615 Inadvertent document production management Successful oral argument Sarbanes-Oxley update Class certification Get connected today at

20 THE BENEFITS OF MEMBERSHIP Seeing Both Sides with the Section of Litigation Section E-newsletters and Discussion Groups Choose your news and information with the Section s free newsletter subscriptions. Sign up for as many as you like, and end your subscriptions at any time. View the available e-newsletters and discussion groups at