SFMS S ECURITIES LAW BULLETIN · Transactions - Morrison Strikes Again 7 In Re Toyota Motor Corporation Securities Litigation 7 SEC Expands Exchange-Traded Fund Investigation 8 Recommended

Sarbanes-Oxley Whistleblower Protections Limited

By Divided Panel Of First Circuit Court Of Appeals

SFMS SECURITIES LAW

BULLETIN

Spring 2012

Inside this issue:

California • Connecticut • Florida

New Jersey • New York • Pennsylvania

Wisconsin

A quarterly publication for institutional investors

By James E. Miller, Esquire

New Mexico Court Rules That First Amendment

Protection Does Not Always Apply To Credit Ratings

Agencies

By Karen M. Leser-Grenon, Esquire

In a lawsuit brought by investors against certain credit ratings agencies, Judge James Browning of the United States District Court for the District of New Mexico ruled in favor of investors, finding that credit ratings are not always protected opinion under the First Amendment. Genesee County Employees’ Retirement System, et al. v. Thornburg Mortgage Securities Trust 2006-3, et al., Case No. 09-00300, Nov. 12, 2011. The investors were represented by lead

plaintiffs, the Maryland-National Capital Park & Planning Commission Employees’ Retirement System and the Midwest Operating Engineers Pension Trust Fund in Illinois. Lead plaintiffs claimed that the agencies issued investment-grade ratings which were false and misleading with respect to Thornburg securities, and that the agencies were paid substantial sums of money for doing so. Specifically,

(Continued on page 11)

Shepherd, Finkelman, Miller & Shah, LLP

In Lawson v. FMR LLC, 670 F.3d 61 (1st Cir. 2012), a divided panel of the U.S. Court of Appeals for the First Circuit held on February 3, 2012 that employees of private companies that contract with public companies cannot take advantage of the

whistleblower protections of the Sarbanes‑Oxley Act (“SOX”).

SOX includes protection for whistleblowers who provide evidence of violations of either federal securities law, U.S. Securities and Exchange Commission (“SEC”) rules and regulations, or any “federal law relating to fraud against shareholders.” Relying on SOX, plaintiffs, Lawson and Zang, each separately sued their corporate employers for

unlawful retaliation.

Plaintiffs, Lawson and Zang, worked for “private companies that provide advising or management services by contract to the Fidelity family of mutual funds.” The Fidelity mutual funds are public companies that are required to file reports under the Securities Exchange Act of 1934. The mutual funds, which have no employees of


Sarbanes-Oxley Whistleblower Protections Limited By

Divided Panel Of First Circuit Court Of Appeals

1

New Mexico Court Rules That First Amendment

Protection Does Not Always Apply To Credit Ratings

Agencies

1

The Commodity Futures Trading Commission Issues New

Rules Amending The Registration And Compliance

Obligations Of Commodity Pool Operators And Trading

Advisors

2

The Ban On Insider Trading In Government 2

Consumer Financial Protection Bureau Update 3

Reversal of Class Certification Decision in

Haddock v. Nationwide Life Ins. Co.

4

The Federal Government And 49 States Settle Lawsuit

Against Banks Over Questionable Mortgage Foreclosure

Practices

4

Halliburton’s Fourth Attempt To Prevent Class Certification 5

The SEC Regulatory Accountability Act May Weaken

Investor Protection

6

Diamond Foods Shareholder Litigation 6

The Securities Act Of 1933 And Foreign Securities

Transactions - Morrison Strikes Again

7

In Re Toyota Motor Corporation Securities Litigation 7

SEC Expands Exchange-Traded Fund Investigation 8

Recommended Readings 11

SFMS News 12

Shepherd, Finkelman, Miller & Shah, LLP 2

Spring 2012 | SFMS Securities Law Bulletin

The Commodity Futures Trading Commission Issues New Rules Amending

The Registration And Compliance Obligations Of Commodity Pool

Operators And Trading Advisors

By Kolin C. Tang, Esquire

On February 9, 2012, the Commodity Futures Trade Commission (“CFTC”) issued its final rule amending and adding registration and compliance obligations for commodity pool operators (“CPO”) and commodity trading advisors (“CTA”)1. In particular, the CFTC removed registration exemptions for accredited investors and qualified eligible persons, removed the auditor certification exemption for CPOs that offered participation only to qualified eligible persons, reinstated a trading threshold and marketing restriction for registered investment companies and required CPOs and CTAs to annually reaffirm their claimed exemptions or exclusions and add risk disclosure statements for swaps. The CFTC also created new information reporting requirements for the purpose of data collection. The rule passed 4-1, with all Democratic appointees and a Republican appointee in

favor and the other Republican appointee dissenting.

These regulatory changes to the commodities trading market is only a part of the CTFC’s larger ongoing reform process to strengthen regulatory oversight as mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Huge derivatives exposures in the commodities markets had contributed to the “too big to fail” phenomena that paralyzed the financial markets during the 2008 panic. Thus, Dodd-Frank has, among other things, enlarged the CFTC’s antifraud authority, redefined the CFTC’s swap regime and added limitations on proprietary trading relating to funds and

entities within the CFTC’s purview.


The Ban On Insider Trading In Government

By Rose F. Luzon, Esquire and Karen M. Leser-Grenon, Esquire

In February 2012, the U.S. Senate passed a bill that bans insider trading by members of Congress. Internally, the

legislation is known as the STOCK Act (“Stop Trading on Congressional

Knowledge”). The STOCK Act forbids members of Congress from

trading on stocks on the basis of confidential information that they

receive in their employment position. The bill also requires

lawmakers and members of the executive branch of government to

disclose their stock transactions. President Obama had backed the

bill and raised the legislation in his State of the Union address in

January 2012. The bill passed by a 96 to 3 vote, with Republican

Senators Richard Burr (N.C.) and Tom Coburn (Okla.), and Democratic

Senator Jeff Bingaman (N.M.), voting against it. Burr believed that

the bill was not necessary, as insider trading laws apply equally to

everyone, whether or not you are a member of Congress. Coburn did

not favor the bill because it made it look like members of Congress

were engaging in insider trading. But others thought the bill would

assist in restoring ethics to government. Democratic Senator Kirsten


1 A commodity pool is an investment structure where investors pool their funds to trade in futures contracts, akin to a mutual fund for equity trading. But while mutual funds are open to public subscription and regulated by the Securities and Exchange Commis-sion, commodity pools are limited to private solicitation and regulated by the CFTC.



Consumer Financial Protection Bureau Update

By Natalie Finkelman Bennett, Esquire

The Dodd-Frank Wall Street Reform and Consumer Protection

Act created the Consumer Financial Protection Bureau (“CFPB” or

“Bureau”) to watch out for consumers’ interests in the financial

marketplace and, in so doing, to oversee a number of financial

products and services. The creation of the CFPB marked the first

time in decades that Congress had formed a new federal agency.

Because the Bureau became operational in 2011, there was a focus

last year on building the Bureau. However, the Bureau managed to

undertake numerous efforts, including the issuance of interim final

rules on the Alternative Mortgage Transaction Parity Act, the

TILA—RESPA single integrated disclosure project, issuance of a

notice and request for comment regarding the definition of “larger participants in certain markets,” and publication of

interim final rules restating (and renumbering) the regulations inherited from other agencies. In addition, CFPB was

very active in initiating its “Know Before You Owe” campaign with respect to mortgage loans, credit cards and student

loans.

On January 4, 2012, Richard Cordray began serving as the Bureau’s first Director. Director Cordray previously held

the role of enforcement chief for the CFPB, and he is known for vigorously pursuing enforcement actions against banks,

insurers, and brokers. In the past few months, the Bureau has been very active in pursuing its mission.

On January 20, 2012, the Bureau entered into a Memorandum of Understanding with the Federal Trade Commission

(“FTC”) “to prevent duplication of efforts, provide consistency and ensure a vibrant marketplace for consumer financial

products and services.”

On January 25, 2012, the CFPB announced that it would join efforts with the state Attorneys General and the Depart-

ment of Defense to track companies and individuals who repeatedly target the military community and to crack down

on financial scams directed at military service members, veterans and their families. This joint endeavor has been named

the Repeat Offenders Military Database.

On February 17, 2012, the CFPB proposed a rule that would bring the nation’s debt collection and consumer reporting

industries under the Bureau’s supervision. The Bureau is also looking into possible abuses with respect to checking

account overdraft fees charged to consumers. In addition, the CFPB announced on March 14 that it has begun sharing

consumer complaints with the FTC’s Consumer Sentinel database.

Other items on the Bureau’s agenda for 2012 include: 1) the issuance of a final “ability to repay” mortgage rule

(including protection from liability for “qualified mortgages”); 2) issuance of proposed rules to implement changes to

laws governing the mortgage industry (including origination and servicing practices, loan originator compensation, high-

cost loan restrictions and escrow account maintenance); and 3) issuance of proposed rules to expand the Bureau’s ca-

pacity to handle consumer complaints with respect to all products and services within its authority. In fact, the Bureau

reports that since it began fielding consumer complaints related to credit card accounts and mortgages, it received over

13,000 complaints through December 31, 2011 and had facilitated company responses to over 88 percent of the sub-

mitted complaints.

In the enforcement arena, the Bureau has created a joint task force to target scams aimed at consumers seeking mort-

gage modifications through the Home Affordable Modification Program and has also set up a whistleblower hotline for

the public to submit tips regarding potential violations of federal consumer protection laws. Look for more news from

this very active agency throughout 2012.



The Federal Government And 49 States Settle Lawsuit Against Banks Over

Questionable Mortgage Foreclosure Practices


On February 8, 2012, after a 14-month investigation and more than four years after the collapse of the American housing market, five of the nation’s largest banks—Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial—agreed to a $26 billion settlement with the federal government and 49 states to resolve allegations over the banks’ questionable processes during that period. The allegations included lack of oversight over personnel and third-party vendors when servicing mortgages, deceptive practices when modifying loans, failure to comply with loan origination requirements and disregard of legal obligations during foreclosures. (Oklahoma only agreed to settle the wrongful foreclosure allegations.) The settlement funds were split into three portions: a $5 billion payment directly to the federal government and the 49 states, of which $1.5 billion will be provided to foreclosed borrowers, and a $20 billion fund for other consumer relief. The settlement also established a compliance monitoring system and explicitly exempted claims for criminal

liability and mortgage securitization from the general release.

There are concerns over whether the settlement will effectively relieve affected homeowners and whether the banks have been adequately punished for their central role in the recent recession. But such questions will always remain at the forefront of any compromise, and economic recovery should be preferable to just deserts. After all, the settlement reduces the significant collective negative equity of the American housing market and allows the banks to remove some of the uncertainty from the potential legal liability that constrains the banks’ abilities to provide new loans—changes needed to reinvigorate the economy. Moreover, state and federal authorities retain the ability to pursue claims against the banks for mortgage-backed securities, which were the root cause of the housing crisis. Still, the hope is that the reforms enacted and the reminder that constant vigilance is required to protect consumers will not be

forgotten as the economy recovers.

Reversal Of Class Certification Decision

In Haddock v. Nationwide Life Ins. Co.


On February 6, 2012, the United States Court of Appeals for the Second Circuit (“Appellate Court”) reversed an order from the U.S. District Court for the District Court of Connecticut (“District Court”) that granted class certification in Haddock v. Nationwide Life Ins. Co. The Appellate Court vacated the order from the District Court and remanded the case

for further proceedings.

In the underlying case, plaintiffs allege that Nationwide breached its fiduciary duties by retaining revenue sharing payments from mutual funds that were offered as investment options to retirement plans. Plaintiffs allege that Nationwide’s actions violated the Employee Retirement Income Security Act of 1974 (“ERISA”). On November 6, 2009, the District Court issued an order granting class certification under Federal Rule of Civil Procedure 23(b)(2). The class included trustees of qualified employee benefit plans covered under ERISA that had contracts with Nationwide. The class consisted of over 24,000 qualifying plans. Nationwide appealed the District Court’s decision pursuant to Federal Rule of Civil Procedure 23

(f).

On appeal, Nationwide argued that pursuant to Rule 23(b), in light of the Supreme Court’s decision in Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011), plaintiffs’ claims were not suitable for adjudication as a class action. The Appellate Court agreed with respect to Rule 23(b)(2), stating that claims for individualized monetary damages preclude class certification under Rule 23(b)(2). However, in the underlying case, plaintiffs sought class certification with respect to both Rules 23(b)(2) and 23(b)(3). The District Court has not reached the decision of whether class certification is appropriate under Rule 23(b)(3), as it had certified the class under Rule 23(b)(2). Accordingly, the Appellate Court did not review class

certification with respect to Rule 23(b)(3).



Following a unanimous decision by the United States Supreme Court, which held that plaintiff did not have to prove loss causation prior to class certification under Federal Rule of Civil Procedure 23, the U.S. District Court for the Northern District of Texas granted plaintiff’s motion to certify the class on January 27, 2012. In an attempt at yet another bite of the apple, Halliburton (“Halliburton” or “Company” or “Defendant”) now seeks permission to appeal this decision to the U.S. Court of Appeals for the Fifth Circuit (“Appellate Court” or “Fifth Circuit”) in a petition filed in February 2012. Lead Plaintiff, Erica P.

John Fund, opposes Halliburton’s petition.

The original case was brought on behalf of purchasers of Halliburton stock from June 3, 1999 through December 7, 2001 and alleges violations of the Securities and Exchange Act of 1934, 15 U.S.C. § 78a, et seq. Specifically, the case alleges that Halliburton and certain of its officers misled investors about Halliburton’s financial condition, the benefits of its acquisition of Dresser, Inc., the Company’s exposure to asbestos liability, and its future business and prospects. The District Court denied class certification and the Appellate Court affirmed the denial of class certification on the sole basis that plaintiff had not established loss causation. Then, in June 2011, the U.S. Supreme Court reversed the Fifth Circuit’s ruling and held that a plaintiff does not need to prove loss causation to

invoke the fraud-on-the-market presumption.

Halliburton now argues that the Supreme Court reserved the question of “whether Halliburton had permissibly rebutted the presumption of class-wide reliance at the class-certification stage by showing that

the alleged misrepresentations did not distort the market price.” Lead Plaintiff argues that the Supreme Court only held that plaintiffs do not have to establish loss causation and only arguments that Halliburton preserved could be considered on remand by the Appellate Court. Because Halliburton did not argue this at the District Court level, Lead Plaintiff argues that it is waived and cannot be considered by the Appellate Court. Defendant further argues in its petition that the District Court abused its discretion in denying Defendant’s request to supplement the record. Again, Lead Plaintiff argues that Defendant should have supplemented the record back in 2008

when the class certification motion was originally argued. Halliburton also argues that the January 2012 decision granting class certification is a threat to Halliburton, in that the decision causes “intense settlement pressure.” Lead Plaintiff argues that there is no support provided for Halliburton’s contention and also notes that Chief Justice Robert of the Supreme Court

rejected this same argument. Finally, Halliburton argues that the District Court incorrectly concluded that plaintiff “did not point to any stock price increases resulting from positive misrepresentations.” Lead Plaintiff argues that the Court should reject this argument because it did not claim that the misrepresentations caused the stock prices to rise. Instead, Lead Plaintiff claims that the misrepresentations kept the stock price from falling. Then, the stock price fell on the date of the

corrective disclosure.

Halliburton’s Fourth Attempt To Prevent Class Certification




The SEC Regulatory Accountability Act May Weaken Investor Protection

By Nathan Zipperian, Esquire

In February 2012, the House Financial Services Committee approved legislation, the SEC Regulatory Accountability Act H.R. 2308 (“the Act”), which ostensibly directs the Securities and Exchange Commission (“the SEC”) to conduct a rigorous cost-benefit analysis of its current and proposed regulations to ensure that the benefits of the

regulations outweigh the costs.

If the Act becomes law, it would require the SEC to conduct a cost-benefit analysis to ensure that the benefits of any rule-making outweigh the costs, and that both new and existing regulations are accessible, consistent, written in plain language, and easy to understand, consistent with President Obama’s executive order directing government agencies to take similar steps. As an independent agency, the SEC is not currently required to follow the executive order. The Act requires, inter alia, the SEC to clearly identify the nature of the problem that a proposed regulation is designed to address, as well as assess the significance of that problem, before issuing a new rule. The legislation also directs the SEC to review its regulations and orders periodically to determine their

efficacy and whether to modify or repeal them.

Critics of the Act fear that it would act to imperil the implementation of many important rules by adding burdensome new procedural requirement that would ultimately impede, rather than strengthen, the SEC’s ability to protect investors.

Diamond Foods Shareholder Litigation


SFMS, along with co-counsel, is representing the United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund (“UFCW Tri-State”) which, in December 2011, filed a shareholder derivative complaint on behalf of nominal defendant Diamond Foods, Inc. (“Diamond” or the “Company”) against various members (past and present) of the Company’s Board of Directors and various officers. The complaint is filed in San Francisco Superior Court and alleges breach of fiduciary duty, abuse of control, gross mismanagement and unjust enrichment. In February 2012, the complaint was consolidated with other similar actions and amended to include Diamond’s auditor, Deloitte & Touche LLP, on theories of negligence and breach of contract. Diamond processes, markets and distributes snack products, as well as engages in its historical walnut business. In the past few years, Diamond began to acquire

other snack brands, including, among others, Pop Secret and Kettle Brand chips. In April 2011, Diamond entered into an agreement with Procter & Gamble to purchase Pringles potato chips. The complaint alleges significant accounting problems in the way that Diamond allocated its walnut sales to walnut growers on its financial statements. Specifically, the complaint alleges that Diamond issued “momentum” or pre-harvest payments to walnut growers for the expected 2011 crop. The complaint also alleges that, in violation of Generally Accepted Accounting Principles, the Company allocated payments due to growers for the prior year into the next fiscal year for purposes of creating the appearance of much healthier financial statements. Diamond’s Audit Committee (“Audit Committee” or “Committee”) began an internal investigation of the accounting problems; then, in




Two years after the U.S. Supreme Court decided Morrison v. National Australia Bank Ltd., 130 S.Ct. 2869 (2010), the reverberations of this landmark decision continue to be felt. Indeed, in a recent decision by the U.S. District Court for the Southern District of New York, In re Vivendi Universal, S.A. Securities Litigation, No. 02 Civ. 5571 (RJH), et al., 2012 WL 280252 (S.D.N.Y. Jan. 27, 2012), the District Court not only reaffirmed the application of Morrison to the Securities Exchange Act of 1934 (the “Exchange Act”), it broadened Morrison’s reach to also include claims brought under the Securities Act of 1933

(the “Securities Act”).

With Morrison, the U.S. Supreme Court weighed in on the issue of whether the Exchange Act applies extraterritorially; that is, to the purchase or sale of securities made on a foreign exchange or in a foreign country. The U.S. Supreme Court declared in Morrison that it does not: “Section 10(b) [of the Exchange Act] reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the

purchase or sale of any other security in the United States.”

In re Vivendi has now gone one step further than Morrison. Following the lead of two Southern District of New York decisions from last year, In re Royal Bank of Scotland Group PLC Securities Litigation, 765 F.Supp.2d 327 (S.D.N.Y. 2011)

and SEC v. Goldman Sachs & Co., 790 F.Supp.2d 147 (S.D.N.Y. 2011), the District Court held that the Securities Act – not just the Exchange Act – lacks extraterritorial application. In In re Vivendi, the plaintiffs were individual shareholders who purchased Vivendi shares on the EuroNext, S.A. (also known as the “Paris Bourse”). They alleged that defendants made materially false and misleading statements about Vivendi’s financial health, which then caused the share prices to be overvalued and artificially inflated. On this basis, the shareholder plaintiffs asserted claims for violations of Sections 10(b) and 20(a) of the Exchange Act, as well as violations of Sections 11, 12(a)(2), and 15 of the Securities Act. Relying on Morrison, the District Court dismissed all of these claims and, in so doing, concluded that while Morrison indeed involved an Exchange Act claim only, nonetheless, the decision’s “underlying logic counsels extending its holding to cover the Securities Act.” Thus, by virtue of purchasing their shares on the Paris Bourse, the shareholder plaintiffs were barred from bringing any claims against defendants both under the Exchange Act

and the Securities Act.

Undoubtedly, we have not heard the last of the Morrison decision, and as its implications continue to unfold, Shepherd, Finkelman, Miller & Shah, LLP will continue to

monitor and advise you of new developments.

THE SECURITIES ACT OF 1933 AND FOREIGN SECURITIES TRANSACTIONS –

MORRISON STRIKES AGAIN

By Rose F. Luzon, Esquire

By James C. Shah, Esquire

IN RE TOYOTA MOTOR CORPORATION SECURITIES LITIGATION

This securities litigation arises from allegations that the price of Defendants’ stock was artificially inflated as a direct result of Defendants’ material representations, omissions, and concealment regarding the unintended acceleration condition in Toyota vehicles. Defendants filed a Motion for Partial Judgment on the Pleadings (“Motion”), arguing that Plaintiffs had not adequately alleged loss causation for several of the statements made by Toyota’s corporate spokesperson, Bill Kwong. The statements at issue, which appeared in several newspaper articles, generally pertained to representations by Defendants that the unattended

acceleration issue was caused by driver error and media-induced publicity, including the following:

· “[w]e don’t feel it’s an issue with the vehicle;”

· “a misapplication of the pedals by the driver” could account for complaints;

· there are “no flaws in the trucks and that many reports [of unintended acceleration] were ‘inspired by public-

ity;’”

· “it is clear that the majority of complaints are related to minor drivability issues and are not indicative of a

safety-related defect;” and

· “tests by the automaker and the NHTSA revealed no problems that would explain the complaints.”




The Commodity Futures Trading Commission Issues New Rules Amending The Regis-

tration And Compliance Obligations Of Commodity Pool Operators And Trading

Advisors

But despite the more than 18 months after the Congress enacted Dodd-Frank, the regulatory effort to forestall a repeat of the 2008 financial crisis looks far from over. Critics from both sides of the regulatory divide have commented on the emerging complexity and confusion caused by the new regulations and system of overlapping agency authority. Still, the recent MF Global meltdown, which was caused by the derivatives broker’s overexposure to risk and led to the subsequent discovery of missing client funds, demonstrates that regulatory oversight of the commodities markets may still face some gaps. Whether Dodd-Frank’s prescriptions will close the gap or only add to compliance costs when fully enacted remain

to be seen.

Regardless, these new rules will provide additional protection for investors to enforce their rights when investing in futures contracts. Section 22 of the Commodities and Exchange Act (7 USC § 25) (“CEA”) gives investors a private right of action for violations of the CEA, so there may be additional theories of recovery for a defrauded investor if the new

registration requirements are not followed.

(Continued from page 2)

SEC Expands Exchange-Traded Fund Investigation

According to a Reuters report on February 21, 2012, ex-change-traded funds (“ETFs”) are receiving more attention from the Securities and Exchange Commission (“SEC”) after the delay of a big trade of an unnamed but popular ETF. ETFs, which are intended to provide investors access to highly liquid pools of securities, have been around since the mid-1990s. They also allow investors to take magnified short positions on indexes or industry sectors, which are known as “leveraged” ETFs. There is currently about $1 trillion invested in all ETFs, of which leveraged and inverse (or “short” and “ultrashort”) ETFs make up 5%, according to one estimate. ETFs also account for almost 30% of the equities traded daily in the Ameri-can markets, according to a Credit

Suisse report.

ETFs are securities, so they are also subject to the same regulations that cover a standard equity share. Still, despite the fact that ETFs have been around for almost two decades, the SEC has largely left ETFs alone until fairly recently. This changed after the May 6, 2010 “Flash Crash,” when the Dow Jones Industrial Average ex-perienced a 1,000-point swing in less than half an hour. The SEC and the Commodity Futures Trading Commission issued a joint report later that September, explaining that the vola-tility was caused by a large fundamental trader’s sell program. The sell program created a massive sell-off ripple effect after

high-speed traders using algorithms reacted to that trade, which, in turn, caused other high-speed algorithms to react to those reactions, and so on. In September 2011, the Wall Street Journal reported that the SEC began investigating whether ETFs added to market volatility after the market’s wide swings that August as part of its larger investigation into

high-speed trading. Specifically, the SEC inquired into whether the extent of high-speed leverage ETF trading could amplify market swings as traders sought to unload their holdings during a particularly volatile day. But while in-dustry insiders acknowledge that possi-bility, they largely dismiss the connec-tion because of the relatively minimal

trading volume of leverage ETFs.

The recent trading shortfall has now caused the SEC to widen its investiga-tion to determine whether high-speed trading was a contributor to that failure and to explore the links between the ETF prices and the value of securities that make up the ETF. Though the

impact of failed trade settlements is currently unknown, the potential to manipulate the market using leveraged and in-verse ETFs is becoming more and more apparent--nimble short-sellers may be able to use the leveraged and inverse ETFs to either quickly drive up or drive down equity or fu-tures prices in response to an expected large or institutional investor trade.




their own, were not named in the lawsuits. Perhaps importantly, neither Lawson nor Zang were employed by companies that normally would be deemed unrelated to Fidelity. Plaintiff, Zang, was employed by Fidelity Management & Research Co. (later renamed FMR Co., Inc.), a subsidiary of Fidelity Management & Research Co. Meanwhile, plaintiff, Lawson, was employed by Fidelity Brokerage Services, LLC, a private subsidiary of FMR Corp., which was succeeded by FMR, LLC. FMR Co., Inc. and FMR, LLC, which also were known as the Fidelity Management companies, entered into contracts with certain of the Fidelity mutual funds to serve as investment advisers or sub‑advisers. As investment advisers to the funds, the Fidelity Management companies were subject to the provisions of the Investment Advisers Act of

1940, 15 U.S.C. § 80b–1, et seq.

The defendants moved to dismiss the cases, arguing that SOX’s whistleblower provision, 18 U.S.C. § 1514A, did not cover Lawson and Zang. The defendants specifically argued that SOX only protects employees of public companies and not the employees of private companies that contract (or subcontract) with public companies. The plaintiffs countered that “Congress meant to cover all

whistleblowers” in SOX.

The United States District Court for the District of Massachusetts rejected the defendants’ theory and held that SOX protects “employees of private agents, contractors, and subcontractors to public companies.” The First Circuit reversed the district court, finding that the “protected employee” within § 1514A(a) “refers only to employees of the public companies.” Focusing on the text of the statute, the Court noted that SOX’s whistleblower provision specifically references “employees of publically traded companies.” The First Circuit also held that where Congress “wished to enact broader whistleblower protection elsewhere, it explicitly did so” and the “choice by Congress to provide limited coverage in § 1514A(a) was not inadvertent.” The First Circuit contrasted § 1514A(a) with other broader whistleblower statutes that clearly

protected “employees of contractors to the entities

regulated by those statutes.”

Both the SEC and the U.S. Department of Labor (“DOL”) supported the plaintiffs’ broader interpretation of the statute. The First Circuit, however, gave no deference to the views of the federal agencies. In so holding, the First Circuit noted that “Congress chose not to give authority to the SEC or the DOL to interpret the term “employee” in § 1514A(a)....” The First Circuit also explained that it was “bound by what Congress has written” and if “Congress intended the term “employee” in § 1514A(a) to have a

broader meaning ..., it can amend the statute.”

The Honorable O. Rogeriee Thompson did not join the majority in this opinion. In a dissenting opinion, Judge Thompson argued that the statute “plainly protects whistleblower employees of contractors of public companies.” Judge Thompson reasoned that the ruling improperly bars “a significant class of potential securities‑fraud whistleblowers from any legal protection.” In so arguing, Judge Thompson stated that the majority is wrong to “impose an unwarranted restriction on the intentionally broad language” of the statute and ignore

the views of the SEC and DOL.

After the First Circuit’s ruling, the plaintiffs, Lawson and Zang, filed petitions seeking rehearing and rehearing en banc. On its face, the decision appears somewhat perverse, especially since the Fidelity mutual

funds do not have employees of their own and, to serve the purposes of SOX, it would seem appropriate to extend the protection to subsidiary/contractor companies, especially where, as here, the public companies engaged in alleged wrongdoing have been structured in a manner so that they do not have any employees of their own and, thus, could be deemed immunized from the whistleblower protections of SOX. SFMS will monitor this important decision under SOX and whether the First Circuit chooses to hear the case en banc. Ultimately, it may be necessary for the Supreme Court to resolve this important and obviously close issue.


Sarbanes-Oxley Whistleblower Protections Limited By Divided Panel

Of First Circuit Court Of Appeals



Diamond Foods Shareholder Litigation

E. Gillibrand indicated that the bill is “to make sure that members of Congress play by the exact same rules as everyone

else.”

In March 2012, Senate leaders gave up their version of legislation regarding insider trading by members of Congress and

other governmental officials. The Senate agreed to accept the House of Representatives’ version, which was considerably

scaled down from the Senate’s version. Harry Reid, the Senate Majority Leader, indicated that he did not have the proper

amount of votes to establish a House-Senate conference to attempt a compromise. Pursuant to the House’s version,

financial transactions by members of Congress and certain government workers would have to be filed online within a

certain amount of time. With the public’s low approval rate for members of Congress, the STOCK Act (whatever version)

is likely to help improve Congress’ ethical image.


The Ban On Insider Trading In Government

November of 2011, less than three weeks after the Committee began its investigation, one of the Committee members, director Joseph Silveira, committed suicide. In January of 2012, the Wall Street Journal reported that federal prosecutors in the U.S. Attorney’s Office in San Francisco were working together with the U.S. Securities and Exchange Commission to investigate the treatment of payments by Diamond to walnut growers. The Audit Committee released the results of its investigation in February 2012, and concluded that certain payments in the amount of $20 million and $60 million “were not accounted for in the correct periods.” On February 15, 2012, Proctor and Gamble announced that it would

no longer proceed with its intended acquisition of Diamond.

Also, currently pending is a federal securities case against Diamond and certain of its officers and directors, as a result of

the Company’s false and misleading statements to investors.


The Lead Plaintiff, Maryland State Retirement and Pension System, opposed the Motion, arguing that, in previously deny-ing Defendants’ Motion to Dismiss, the Court had already determined that the loss causation element was satisfied and, in any event, the Complaint adequately alleged facts demonstrating loss causation. Specifically, Plaintiff argued that under Dura Pharms., Inc. v. Broudo, 544 U.S. 336 (2005), the Complaint was only required to provide Defendants with notice of its loss causation theory -- that is, “some indication of the loss and the causal connection.” In an effort to satisfy this requirement, Plaintiff pointed to, among other things, specific allegations in the Complaint that Defendants made a series of partially corrective disclosures between September 14, 2009 and February 3, 2010, during which time the price of Toyota stock fell following the disclosure of information revealing the true nature, scope and severity of Toyota’s unin-tended acceleration problems. Plaintiff also argued that, because loss causation was a fact-intensive question, it was par-ticularly inappropriate for resolution on the pleadings alone and, as such, there were no Ninth Circuit cases granting

judgment on the pleadings on the issue of loss causation.

On February 21, 2012, the Honorable Dale S. Fischer, after considering the submissions of all parties, denied Defendants’ Motion, agreeing with Plaintiff that the Court had previously considered and rejected the arguments in issuing a decision denying the Motion to Dismiss. Noting the similar standards applicable to the two Motions, the Court stated that “[j]udicial economy would be undermined by allowing parties an unlimited right to revised issues raised in Rule 12(b)(6)

motions via Rule 12(c) motions.” The litigation is currently proceeding and discovery is ongoing.


IN RE TOYOTA MOTOR CORPORATION SECURITIES LITIGATION



investors claimed that these agencies issued inflated ratings on more than $5 billion of securities issued over the course of two years. Traditionally, credit ratings agencies such as McGraw-Hill Companies’ Standard & Poor’s and Moody’s Corporation (“Moody’s”), have often defended against investors’ suits by arguing that the Constitution protects them from claims that they issued inflated ratings. The New Mexico District Court disagreed and ruled that, because the ratings were shared with only a small group of investors (not the public at large), such broad First Amendment protection did not apply. The Judge did, however, dismiss certain of the investors’ claims against Moody’s and Fimalac SA’s Fitch Ratings, stating that investors did not adequately allege that the two agencies did not believe their ratings, or knowingly concealed their inaccuracy.


Recommended Readings

• A Single Roll of the Dice: Obama’s Diplomacy with Iran, by Trita Parsi -- a detailed analysis of the current administration’s foreign policy relations with Iran, which is a must read for those concerned about

the relations of these two world powers.

• City of Fortune, by Roger Crowley -- a fascinating account of the rise of the Venetian Republic based upon a combination of naval

dominance and mercantile acumen.

• Conversations with Wall Street, by Peter Ressler and Monica Mitchell (2012) - the insider story of the financial crisis of 2008 and advice

on how to prevent the next one.

• Flagrant Misconduct, by Dale Carpenter -- the story behind the United States Supreme Court’s 2003 decision in Lawrence v. Texas holding anti-sodomy laws unconstitutional. A very interesting read regarding the events that lead up to a major Supreme Court decision that may be of especial interest in light of the current

debate regarding President Obama’s Affordable Care Act.

• Hawksmoor, by Peter Ackroyd (1985) -- For those who have had the pleasure of dining at the Spitalfields restaurant bearing the same name, a fascinating novel regarding 18th and 20th Century London as Nicholas Hawksmoor, C.I.D., investigates a series of murders whose only connection is 18th‑century churches constructed by Nicholas Dyer, including a church in Spitalfields.

• India Becoming: A Portrait of Life in Modern India, by Akash Kapur (2012) -- an insightful and, at times, disturbing analysis of a country with an economy that has doubled in size in eight years, where there is an ongoing public policy debate about the need to address widespread corruption, create better welfare systems and solve

persistent issues of income inequality.

• Republic Lost, by Lawrence Lessig -- a critical commentary on the donor/lobbyist/representative system that dominates Congress and which arguably results in systemic corruption that prevents true legislative

accomplishments in the long-term interests of the United States.

New Mexico Court Rules That First Amendment Protection Does Not Always

Apply To Credit Ratings Agencies



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SFMS Securities Litigation Bulletin Editors: James E. Miller, Esquire • Kolin C. Tang, Esquire • Karen M. Leser-Grenon, Esquire

Chiharu Sekino, Institutional Relations Administrator

Please direct all inquiries regarding this publication to James E. Miller at 866-540-5505 or [email protected]

SFMS Securities Litigation Bulletin © 2012 Shepherd, Finkelman, Miller & Shah, LLP

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SFMS S ECURITIES LAW BULLETIN · Transactions - Morrison Strikes Again 7 In Re Toyota Motor Corporation Securities Litigation 7 SEC Expands Exchange-Traded Fund Investigation 8 Recommended