ERISA litigation about investment management presents a tension between the administrators’ fiduciary obligations, on the one hand, and discouraging needless litigation, on the other. After the Supreme Court’s most recent guidance about an ERISA fiduciary’s “duty of prudence” in Amgen Inc. v. Harris, 136 S. Ct. 758 (2016), the Fifth Circuit found that the plaintiffs in Whitley v. BP. PLC failed to meet their pleading burden: “The amended complaint states that BP’s stock was overvalued prior to the Deepwater Horizon explosion due to “numerous undisclosed safety breaches” known only to insiders. In other words, the stockholders theorize that BP stock was overpriced because BP had a greater risk exposure to potential accidents than was known to the market. Based on this fact alone, it does not seem reasonable to say that a prudent fiduciary at that time could not have concluded that (1) disclosure of such information to the public or (2) freezing trades of BP stock—both of which would likely lower the stock price—would do more harm than good. In fact, it seems that a prudent fiduciary could very easily conclude that such actions would do more harm than good.” No. 15-20282 (Sept. 26, 2016).
In Local 731 Pension Trust Fund v. Diodes, Inc., the Fifth Circuit affirmed the dismissal of securities claims related to the alleged nondisclosure of labor problems at a Shanghai manufacturing plant, finding a failure to adequately allege scienter. Most basically, the Court observed — “It is important to note the curious nature of the Fund’s claims. To recap the relevant facts: during the class period, Diodes repeatedly warned investors of a labor shortage that would affect its output in the first two quarters of 2011; Diodes accurately warned the precise impact this labor shortage would have on its financial results, not once, but twice. Yet the Fund contends that more disclosure was required.” The Court went on to reject arguments about the unique knowledge of the relevant executives, the company’s decision to make an early product shipment (noting this would have made the labor problem worse and more apparent), and circumstances of an insider’s stock sales. No. 14-41141 (Jan. 13, 2016).
In the wake of the Deepwater Horizon accident, plaintiffs sought to bring two class actions against BP alleging violations of federal securities law — one regarding BP’s representations about its pre-spill safety procedures, and one about BP’s post-accident statements as to the flow rate of oil after the spill occurred. The district court certified the post-spill class, concluding that the plaintiffs had established a model of damages consistent with their liability case and capable of measurement across the class, and refused to certify the pre-spill class, finding that it had not satisfied the “common damages” burden established by the Supreme Court in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013). The Fifth Circuit affirmed. As to the post-spill class, the Court reviewed BP’s criticisms of the plaintiffs’ damages expert, and found that they were not so potent as to invalidate his theory at the class certification stage. As to the pre-spill class, however, the Court agreed that the expert failed to exclude class members who would have bought the stock even with full knowledge of the alleged risks, making his analysis infirm for certification purposes. Ludlow v. BP, PLC, No. 14-20420 (revised Sept.15, 2015).
The Texas Securities Act has a five-year statute of repose. The issue in FDIC v. RBS Securities was whether that statute was preempted by a 3-year “extender” provision in FIRREA, which “works by hooking any claims that are alive at the time of the FDIC’s appointment as receiver and pulling them forward to a new, federal, minimum limitations period — six years for contract claims, three years for tort claims.” No. 14-51055 (Aug. 10, 2015).
The Fifth Circuit concluded that the Texas statute of repose was preempted, and reversed a judgment on the pleadings in a securities fraud suit arising out of the failure of Guaranty Bank, holding: “The text, structure, and purpose of the FDIC Extender Statute all evince a Congressional intent to grant the FDIC a three-year grace period after its appointment as receiver to investigate potential claims. Therefore, the statute displaces any limitations period that would interfere with that reprieve — whether characterized as a statute of limitations or as a statute of repose.” The Court distinguished the analysis of a CERCLA limitations provision in CTS Corp. v. Waldburger, 134 S. Ct. 2175 (2014), finding that “many of the considerations that the [Supreme] Court found disfavored preemption in CTS suggest preemption when applied to the FDIC Extender Statute.”
The plaintiffs in Owens v. Jastrow sued officers of Guaranty Bank for securities fraud, alleging that their SEC filings and public comments misstated the vulnerability of the bank’s mortgage-related holdings. No. 13-10928 (June 12, 2015). The Fifth Circuit affirmed dismissal in a detailed opinion, holding, procedurally, that:
- “A district court may best make sense of scienter allegations by first looking to the contribution of each individual allegation to a strong inference of scienter, especially in a complicated case such as this one. Of course, the court must follow this initial step with a holistic look at all the scienter allegations”; and
- “Group pleaded” allegations were properly disregarded, although the Court declined to adopt “a strict rule requiring outright dismissal for any group or puzzle pleading[.]”
And on the merits:
- Knowledge of undercapitalization showed motive and opportunity, but does not by itself establish scienter;
- “Defendants’ disclosure of the ‘red flags’ [cited by Plainitiffs] and candidness about the uncertainly underlying its models neutralize any scienter inference from ‘red flags'”; and
- “An inference of severe recklessness is more likely when a statement violates an objective rule than when GAAP permits a range of acceptable outcomes.”
Therefore: “Considered holistically, plaintiffs’ allegations of knowledge of Guaranty’s undercapitalization, a large misstatement, red flags, and ignorance of internal warnings, do not raise a strong inference of severe recklessness that is equally as likely as the competing inference that [Defendants] negligently relief on the AAA ratings and believed that Guaranty’s internal models were accurate.”
Plaintiffs sued for securities fraud about their investments in a business that auctioned antiques. Heck v. Triche, No. 14-30146 (Dec. 23, 2014). They won on many claims at trial and the Fifth Circuit affirmed, largely on procedural grounds:
1. Appeal Deadline Extended. As a threshold matter, the plaintiffs’ motion for attorneys fees tolled the deadline for the notice of appeal, because the district court entered an order under Fed. R. Civ. P. 83(e) that stayed the deadline until the disposition of the motion. The Court noted some tension between its analysis of this issue and that of the Second Circuit’s in Mendes Junior Int’l Co. v. Banco Do Brasil, S.A., 215 F.3d 306 (2000).
2. Invited Charge Error. The Court agreed that the district court’s verdict form erroneously conflated the elements of a federal 10b-5 claim with those of a Louisiana securities claim. It found, however, that the plaintiffs invited this error by advocating for this part of the charge (citing United States v. Gray, 626 F.2d 494, 501 n.2 (5th Cir. 1980) [“The invited error doctrine bars reversal even if the instruction constituted plain error.”])
3. Cross-Appeal Needed. The plaintiffs argued that the district court erred by imposing liability under state law, not 10b-5. The Court found this argument waived, because its acceptance would change the amount of the judgment as well as its basis, and the plaintiffs did not cross-appeal.
Plaintiffs alleged that Amedisys, a provider of home health services, concealed billing improprieties, causing a drop in its stock value when they were revealed. Public Employees’ Retirement System of Mississippi v. Amedisys, Inc., No. 13-30580 (Oct. 2, 2014). The Fifth Circuit reversed the district court’s dismissal on the pleadings, finding adequate allegations of loss causation. It based its holding on the alleged cumulative effect of the five pleaded disclosures of the allegedly concealed information: “This holding can best be understood by simply observing that the whole is greater than the sum of its parts.” In its discussion of the Supreme Court’s treatment of this pleading issue in Dura Phamaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), the Court pointed out that Dura relied on Conley v. Gibson for its summary of pleading requirements — perhaps inviting a reassessment of that holding in light of later developments under Twombly and Iqbal.
Plaintiffs sued for securities fraud, alleging misrepresentations about a company’s capabilities and plans about drilling for oil. Spitzberg v. Houston American Energy Corp.. No. 13-20519 (July 15, 2014). Emphasizing the plaintiffs’ arguments about “the industry definitions of . . . terms” and the timing of events giving rise to an inference of scienter, the Fifth Circuit reversed the dismissal of their claims under the PSLRA,. The Court also found adequate pleading of loss causation. (The significance of industry terminology echoes the reversal of a Rule 12 dismissal about the sale of a loan in Highland Capital Management LP v. Bank of America, although that claim ultimately lost at the summary judgment stage.)
After the Deepwater Horizon disaster, BP’s share price declined and several employee benefits sustained major losses. An ERISA lawsuit on behalf of the beneficiaries was dismissed, noting that an ERISA fiduciary’s to maintain an investment in company stock receives a “presumption of prudence,” sometimes referred to as the Moench presumption. Whitley v. BP, P.L.C., No. 12-20670 (July 15, 2014, unpublished). In June 2014, the Supreme Court eliminated that presumption and held that ERISA fiduciaries managing a plan invested in company stock are subject to the same duty of prudence as any other ERISA fiduciary, “except that they need not diversify the fund’s assets.” Fifth Third Bancorp v. Dudenhoeffer, No. 12-751 (U.S. June 25, 2014). Accordingly, the Fifth Circuit vacated the district court’s dismissal and remanded the appeal for reconsideration in light of that opinion.
The SEC settled an enforcement action except as to the issue of potential disgorgement. SEC v. Halek, No. 12-11045 (August 5, 2013). Negotiations then broke down because the SEC did not accept the financial information provided by the defendants. The district court then entered an order to disgorge over $20 million. In affirming the district court, the Fifth Circuit: (1) found no abuse of discretion in reopening the case, noting that “[a]n administrative closure is more akin to a stay than a dismissal,” (2) reminded that “[d]istrict courts have ‘broad discretion in fashioning the equitable remedy of a disgorgement order,'” and (3) found no clear error in the court’s determinations about joint and several liablity, the reasonableness of the ordered amount as an approximation of the defendants’ unlawful gain, or its decision not to credit settlement payments against the ordered amount.
The plaintiff in Asadi v. G.E. Energy (USA), LLC was terminated after making an internal report of a potential securities law violation. No. 12-20522 (July 17, 2013). The Fifth Circuit affirmed the Rule 12 dismissal of his whistleblower claim based on Dodd-Frank: “Based on our examination of the plain language and structure of the whistleblower-protection provision, we conclude that the whistleblower protection provision unambiguously requires individuals to provide information relating to a violation of the securities laws to the SEC to qualify for protection . . . . (emphasis in original)” The Court acknowledged a more expansive SEC regulation on the point, but found it was not entitled to Chevron deference given the clarity of the statute.
A putative plaintiff class alleged violations of federal securities law by alleged misstatements about asbestos liabilities, the quality of certain receivables and the claimed benefits of a merger. Erica P. John Fund Inc. v. Halliburton, Inc., No. 12-10544 (April 30, 2013). Reviewing recent Supreme Court cases about relevant evidence at the certification stage, including one that reversed the Fifth Circuit about proof of loss causation, the Court held: “price impact fraud-on-the-market rebuttal evidence should not be considered at class certification. Proof of price impact is based upon common evidence, and later proof of no price impact will not result in the possibility of individual claims continuing.” (citing Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds, ___ U.S. ___ (Feb. 27, 2013)) The Court rejected a policy argument about the potential “in terrorem” effect of not considering such potentially dispositive evidence about the merits at the certification stage. The district court ruling about this evidence, and the resulting class certification, were affirmed.
An unpublished opinion reversed the vacating of a FINRA arbitration award in Morgan Keegan v. Garrett, No. 11-20736 (Oct. 23, 2012). The Court reversed a finding of fraudulent testimony “because the grounds for [the alleged] fraud were discoverable by due diligence before or during the . . . arbitration.” Id. at 8. The Court also deferred to the panel’s conclusions about the scope of the arbitration as consistent with the authority given by the FINRA rules. Id. at 10-12. Throughout, the opinion summarizes Circuit authority about the appropriate level of deference to the panel in a confirmation seting.
An unpublished opinion affirmed a ruling that an SEC suit about backdating was barred by limitations and the discovery rule did not apply. SEC v. Microtune, No. 11-10594 (Aug. 7, 2012). An interesting analysis of the opinion and its potential broader significance appears in the August 11, 2012 Texas LawBook.
In a detailed opinion that surveyed differing Circuit opinions on several topics, the Court found that “the purchase or sale of securities (or representations about the purchase or sale of securities) is only tangentially related to the fraudulent scheme alleged” in state class actions about the Allen Stanford scandal. Roland v. Green (March 19, 2012). Therefore, the Securities Litigation Uniform Standards Act (SLUSA) did not preclude those actions. The opinion will likely have a significant influence on future cases about the scope of SLUSA in the Fifth Circuit.