The Supreme Court issued only one significant decision about securities litigation in 2008, ruling that shareholders cannot sue third parties that helped a company commit fraud. But securities lawyers expect a much more portentous 2009.

First, courts will continue to apply the 2008 decision—Stoneridge Investment Partners v. Scientific-Atlanta—to other class-action securities lawsuits winding through the courts now. Stoneridge could affect a rash of current and future litigation related to the sub-prime mortgage debacle, since so many players were involved in offering now-worthless loans and securities, and flocks of them have since gone bankrupt.

Then there are the host of other legal spats related to the financial crisis, that have encountered various levels of success as plaintiffs have tried to demonstrate scienter, the knowing intent of fraud that would allow a case to proceed.

Jennifer Rearden, a partner at the law firm Gibson, Dunn & Crutcher, points to several important early decisions related to the sub-prime crisis. Investors suing two companies, NovaStar Financial and Impac Mortgage Holdings, had their cases dismissed with prejudice because the plaintiffs weren’t specific enough in detailing the companies’ alleged deceptions or inadequate controls.


“You don’t often see dismissals with prejudice,” Rearden says. “They are fairly few and far between.”

On the other hand, a federal district judge in California allowed a case to proceed against Accredited Home Lenders. In that case, the plaintiffs allege that the sub-prime lender, a subsidiary real estate trust, and numerous company officials publicly said they were following strict loan underwriting standards when they were actually loosening standards to get more business. The plaintiffs also say Accredited Home manipulated earnings by inadequately reserving for mortgage defaults and potential losses.

Rearden notes that unlike in Impac and NovaStar, the Accredited Home plaintiffs provided extensive detail for their claims and provided temporal links between the defendants’ knowledge of the violations and their public statements that they were in compliance with company underwriting standards.

Rearden also cites several cases in 2008 related to pleading loss causation that could have future ramifications. For example, a case brought against homebuilder Toll Brothers in Pennsylvania was allowed to proceed because the plaintiffs pointed to four public statements over a three-month period that, according to the plaintiffs, “gradually revealed” the truth about a lack of demand for Toll’s homes.

The court sided with the plaintiffs and deemed each of the four revelations and subsequent drop in stock price to be actionable. Earlier decisions rejected the notion of gradual disclosure or gradual loss in share price, Rearden says, in favor of a stricter rule requiring any such loss to follow closely on the heels of a corrective disclosure. “In this case we saw a loosening of the loss causation standard.”

Another significant decision about loss causation involved a lawsuit against Gilead Sciences, a biopharmaceutical company. The 9th Circuit Court of Appeals reversed a dismissal from the district court and reinstated the plaintiff’s case, despite only a “limited temporal gap” between the announcement of poor results and a drop in stock price. “It’s clear to everyone that Gilead, though not a sub-prime case, will apply to such cases in the 9th Circuit,” Rearden says. That circuit oversees California, the epicenter of the sub-prime crisis, and the Gilead decision has already been applied against disgraced lenders such as Countrywide Financial.

Other Decisions

The always-important 2nd Circuit Court of Appeals in New York issued two significant decisions in class certification last year. In Salomon Analyst Metromedia and Teamsters v. Bombardier Capital, the court refused to certify a putative class of investors, reasoning that the “fraud on the market” presumption did not apply in either case. (To certify a class action in federal court, the putative class must satisfy the predominance requirement of Rule 23(b)(3) in the Federal Rules of Civil Procedure.)

In the Salomon case, the plaintiffs asserted that they relied on misleading analyst reports when they lost money on Metromedia Fiber Network, a dot-com stock. The Appeals Court overturned a grant of class certification because the district court erred in not permitting defendants to try to rebut the presumption prior to certification.

Experts say the Bombardier case could have broader ramifications. The Canadian company packaged mobile home loans and sold “certificates” in the packages to investors; the plaintiffs accused Bombardier of reckless underwriting practices, causing a rise in mobile home loan delinquency rates that went under-reported. The plaintiffs claimed the certificate prices finally collapsed partly because they were downgraded by ratings agencies in 2002 and 2003.

The appeals court, however, ruled that the plaintiffs failed to show by a preponderance of the evidence that the certificates traded in an efficient market. That could weigh on sub-prime mortgage lawsuits, since plaintiffs in those cases are often suing over actions similar to Bombardier’s and many of the cases have survived the motion-to-dismiss stage.

The Second Circuit also shed more light on another important issue for class-action securities lawsuits: whether foreign investors who purchased shares of a foreign company on a foreign stock exchange can still sue the company in U.S. courts.

The answer appears to be no. The appeals court ruled on such “F-cubed” lawsuits for the first time ever in October, in Morrison v. National Australia Bank, and dismissed a lawsuit by unhappy Australian investors. The plaintiffs claimed U.S. jurisdiction because a small U.S. subsidiary had faulty accounting results that were incorporated in the parent’s statements, causing National Australia to report false financials.

“You don’t often see dismissals with prejudice … They are fairly few and far between.”

— Jennifer Rearden,


Gibson, Dunn & Crutcher

Joel Haims, a partner with the law firm Morrison & Foerster, says the ruling is significant because it leaves open the possibility that jurisdiction could exist under different circumstances. Given the large number of foreign issuers listed in the United States, the number of potential F-cubed lawsuits is large.

A related decision about F-cubed lawsuits came from a federal district judge in New York, who in August held that at least some F-cubed investors were barred from participating in a U.S. securities class-action lawsuit against Alstom SA, a French company whose securities were traded on the Paris, New York, and London stock exchanges. The judge ruled that plaintiffs who purchased Alstom securities on a foreign exchange could pursue their securities fraud claims against Alstom in U.S. court only to the extent that those claims related to a fraud that occurred on U.S. soil at U.S. subsidiary, Alstom Transportation.

The plaintiffs had alleged that Alstom and the U.S. subsidiary made false statements regarding the financial performance of the French parent’s operations and, separately, the operations of the American subsidiary; and that these false statements were incorporated in the financial statements issued by Alstom, according to Darren Check, partner at the law firm Barroway Topaz Kessler Meltzer & Check.

Check says the Alstom decision will affect similar claims being brought by European institutional investors who owned shares of UBS, the global financial giant.

And what about decisions to come in 2009? Legal experts say numerous cases based on recent market blowups could result in significant rulings. They point to the growing number of disputes related to sub-prime mortgages, mortgage-backed securities, collateralized debt obligations, and auction rate securities. Many were filed in late 2007 and early 2008.

“This should be a telling year,” Rearden says. “A year from now, we will certainly have additional decisions to interpret and apply after the pleading stage.”