Kessler Topaz – Is the U.S. Closing the Courtroom Doors to Shareholder Litigation?

Posted on 01/03/2014

This article is sponsored by Kessler Topaz Meltzer & Check, LLP.

Since the passage of the Private Securities Litigation Reform Act of 1995, in which the U.S. Congress provided incentives for institutional investors to lead securities class actions, institutional investors have had a remarkable impact on the shareholder litigation landscape. Large institutional investors have successfully used shareholder litigation to recover investment losses, deter corporations from wrongdoing, enforce corporate disclosure requirements, and incentivize companies to adopt corporate social responsibility policies. As of the end of 2012, 88 out of the top 100 settlements, stemming from securities fraud litigation, involved an institutional investor as a lead plaintiff. Recent and pending cases in the U.S. courts, however, have limited shareholders’ right to seek judicial redress for corporate fraud and the resulting investment losses. Between 2010 and 2013, the U.S. Supreme Court issued decisions that fundamentally altered shareholders’ rights to judicial review. These decisions have made it more difficult for public pension funds to recover for their members.

  • In the 2013 decision in Comcast v. Behrend, the U.S. Supreme Court issued a landmark opinion which strengthened the requirement that a class cannot be certified without in-depth analysis and a conclusion that issues and facts that are common to all class members predominate over individual issues and facts. Under Comcast, in order for a class to be certified, plaintiffs must now ensure that both causation and damages can be adjudicated on a class wide basis. Although Comcast was an anti-trust case, it has implications for all class actions.
  • In the 2010 Supreme Court decision in Janus Capital Group Inc. v. First Derivative Traders, the court held that plaintiffs must meet a higher burden of proof when pleading that an individual or entity is responsible for the fraudulent or misleading statements of others. For the purposes of the Securities Exchange Act of 1934 Rule 10b-5 claims (Rule 10b-5 makes it “unlawful for any person…[t]o make an untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made…not misleading”), only the maker of a statement can be liable and a maker is the person with ultimate authority over the statement and not necessarily one who merely prepares or publishes a statement on behalf of another. As a result of this ruling, plaintiffs must now prove that the person or entity who made a false or misleading statement had “ultimate authority,” that is control over both content and the manner of communication of a false or misleading statement.
  • In the 2010 Supreme Court decision in Morrison v. National Australian Bank, the Court closed the door to U.S. courtrooms to investors who purchase securities on non-U.S. exchanges.Investors must now evaluate a number of factors in determining whether to pursue litigation outside the United States.

In addition to the recent decisions, the Supreme Court is currently reviewing a case involving Halliburton Co., which calls the “fraud-on-the-market” theory into question and has the potential to upend twenty-five years of jurisprudence. The “fraud-on-the market” theory is a long accepted theory of liability in a securities fraud case in which a plaintiff need not prove their individual reliance on a defendant’s fraudulent statement and reliance is instead presumed because the statements (and ultimate corrections) impact the price of a given security. If the Supreme Court overturns the “fraud-on-the-market” theory, it will be much more difficult for aggrieved shareholders to recover investment losses through a class action.

It is not just decisions by the U.S. Supreme Court that threaten the ability of shareholders to seek justice. Publicly traded companies are now inserting forced arbitration clauses into corporate bylaws and investment-advisor contracts (which often also contain class action waivers) in order to bypass judicial oversight of the companies’ compliance with federal securities laws.

Given all the recent and pending changes to the shareholder litigation landscape, it’s important for institutional investors to be aware of both new legal developments and the actions that they can take to prevent a further erosion of shareholder rights.

Since 1987, Kessler Topaz has specialized in the prosecution of securities class actions and has grown into one of the most successful shareholder litigation firms in the field.Kessler Topaz is committed to not only serving as legal counsel to its clients, but also to being an educator on all issues related to shareholder activism and asset protection and recovery. To learn more about our Firm, our services, and the investor education opportunities we offer, please visit