EDITION 11
WeeklyOcTObEr 5, 2012
How American Airlines Can Get Back on Track
Avoiding Food Label Litigation
What’s Next in the Boardroom: Greg Little on Criminal & Civil Litigation and Investigations
SEC Rulemaking on Conflict Minerals & the JOBS Act
LEVICK in the News
Amgen:
A Supreme Court CASe With immenSe BuSineSS impACt
richard S. Levick, Esq.Originally Published on Forbes.com
A Supreme Court CASe With immenSe BuSineSS impACt
Amgen: Here are the facts. The Connecticut Retirement
Plans & Trust Funds brought an action against
Amgen involving misrepresentations that the
pharmaceutical giant purportedly made to
the FDA regarding the safety of two products.
(Those products stimulate production of red
blood cells and reduce the need for blood
transfusions.) Connecticut Retirement Plans &
Trust Funds specifically alleged that the com-
pany then misrepresented those FDA meetings
to shareholders. The plaintiff moved to cer-
tify a class of persons who purchased Amgen
stock between April 22, 2004 and May 10, 2007,
when two of the FDA meetings occurred.
Amgen opposed certification, arguing that the
misrepresentations had no impact on share
price. At the district court level, the company
asserted that the truth fully entered the market
anyway via FDA announcements as well as
analyst reports disclosing all material infor-
mation regarding the safety of the drugs in
question. In other words, the alleged misrep-
resentations therefore could not have affected
the stock price. As one commentator wryly
observed, “not all lies are important: You can
fudge your weight if [HUD] is considering you
for a janitor’s position, but not if NASA is fit-
ting you for a space suit.”
And on Wednesday, for what it’s worth, Amgen
shares reached an all-time high.
The key principle that Amgen relied on was that
the plaintiff must prove at the class certification
stage that the misrepresentations were materi-
al. But Amgen lost in district court, certification
was granted, and the Ninth Circuit agreed.
Common perceptions might deem materiality
a matter for juries to decide. In fact, however,
“the Supreme Court has said in Wal-Mart that
a plaintiff seeking class certification must ‘af-
firmatively demonstrate’ his or her compliance
with the requisites for class certification under
Rule 23” of the Federal Rules of Civil Proce-
dure, as Paul Ferrillo advises. “Simply put, the
It’s one of those historic Supreme Court cases that, while it may inspire a great deal less public interest than Obamacare or Citizens United, will nonetheless have a long-reaching impact on American business. Importantly, it should also inspire new vigilance among business leaders even if, in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, the nine judges deliver a totally pro-defense ruling.
Weekly
case law says that the plaintiff has to prove
that the misstatement was material,” adds Fer-
rillo, a counsel at Weil, Gotshal & Manges LLP.
Likewise at issue is Amgen’s right to rebut such
proof if and when it must ultimately be present-
ed. A Solomonic outcome is not inconceivable
should the plaintiffs be required at day’s end to
prove materiality but, once they’ve done so, the
defense cannot then challenge that proof. Or
the opposite is also possible: a SCOTUS ruling
that plaintiffs do not have to prove materiality
but defendants can, as Robert Carangelo puts it,
“rebut the presumption that a company’s disclo-
sure was material to investors.
“Such an approach is already taken in the
Third Circuit,” adds Carangelo, a partner at
Weil, Gotshal who, with Ferrillo and associ-
ates David J. Schwartz and Matthew Altemeier,
have authored the seventh edition of The 10b-5
Guide, a primer on recent securities fraud case
law written for both businesspeople and legal
practitioners. “In fact, there’s a significant split
in the circuit courts that might have been the
driver for the Supreme Court to agree to hear
the case.”
In addition to the separate approach taken by
the Third Circuit, “the Second Circuit, directly
contrary to the Ninth Circuit, requires a plain-
tiff to prove materiality at the time of class
certification in order to gain the benefit of ‘the
fraud on the market presumption,’ and [it]
allows a defendant to rebut such proof with
contrary evidence.” (The fraud on the market
theory, enunciated by the Supreme Court in
the landmark Basic Inc. v. Levinson, requires
that a defendant’s material misrepresentation
regarding a security traded in an open market
was relied on by investors who then suffered a
loss as a result.)
“ ...not all lies are important: You can fudge your weight if [HUD] is considering you for a janitor’s position, but not if NASA is fitting you for a space suit.”
For business, the worst-case scenario is,
obviously, that SCOTUS will affirm plaintiff’s
position entirely, an all-the-more daunting
outcome considering how few avenues there
currently exist to challenge class certifications
in an environment where a company’s expo-
sure in a single case can total billions. Such a
decision by the Supreme Court will deprive
businesses of a significant legal recourse, open-
ing the floodgates for an ever greater number
of class actions.
The rest is predictable: to avoid the untenable
expense of defending these multiple class ac-
tions, corporations will settle earlier and for
higher amounts. The plaintiffs will have im-
mense new leverage and, in turn, another bur-
den will be imposed on an already-beleaguered
economy as large companies do whatever they
must do to shoulder the additional cost.
The best case is equally obvious: the Supreme
Court reverses entirely and finds that a plaintiff
must prove materiality to gain the further bene-
fit of the fraud on the market presumption. The
leverage then switches back to the defendant.
However, if the worst-case scenario is awfully
bad under any circumstances, I’m not so sure
that this best case doesn’t carry its own longer-
term risks for business as well. Here the issue
involves more than legal procedure. It speaks
broadly to investor confidence and public trust
in what a company says to its stakeholders, and
to how fully transparent those communications
are—beyond what the law requires.
The very existence of this decisive case be-
speaks need for such enhanced vigilance and
a corporate will to openly and fully impart bad
news. The danger for companies of a totally
pro-Amgen outcome is that they might become
just a wee bit more confident that, if push
comes to shove, they’re shielded by procedural
rules or otherwise effective legal strategies.
All lies may not be equally “important” and
some may indeed be totally immaterial. But it’s
a bad habit to get into.
Richard S. Levick, Esq., President and CEO of LEVICK,
represents countries and companies in the highest-stakes
global communications matters—from the Wall Street
crisis and the Gulf oil spill to Guantanamo Bay and the
Catholic Church.
L
Weekly
LEVICK Executive Vice President Gene Grabowski discusses the problems currently confronting
American Airlines and outlines what the carrier can do to regain passenger confidence.
hoW AmeriCAn AirlineS CAn get BACk on trACkgene grABoWSki
Martin Hahn, a Partner in the law firm of Hogan Lovells US LLP, continues our examination of
class action lawsuits filed against food and beverage companies alleged to have misled consumers
with questionable labeling.
Avoiding Food lABel litigAtion mArtin hAhn
What’s Next iN the Boardroom: GreG LittLe oN CrimiNaL & CiviL LitiGatioN aNd iNvestiGatioNsRichard S. Levick, Esq.Originally Published on LEVICK Daily
Weekly
duct leading to investor losses. By pursuing
negligence-based claims, the SEC will increase
the number of potential targets to include
those who had no intent to deceive investors
but simply did not act in a reasonable man-
ner. If a business decision results in significant
shareholder loss, there may be a tendency to
view all actions and disclosures surrounding
that decision as unreasonable. The bottom line
is the SEC will potentially be bringing more
claims with a significantly reduced burden of
proof. This new focus will reinforce the need
for robust compliance programs.
how can boards of directors best serve a company in the midst of a civil or criminal investigation?
Gregory Little: In most investigations, there
are three distinct phases that require three
distinct approaches. In the beginning stages of
the investigation, every effort should be made to
demonstrate to investigators that the company
intends to be part of the solution —not part of
the problem. Whether it is the SEC, the DOJ, or a
state attorney general, regulators and prosecu-
tors are very quick to make a determination as
to whether your company is truly committed to
solving a perceived problem or perpetuating it.
If the investigation proceeds to the second
stage where the regulators and/or prosecutors
believe a problem exists, the company should
make an objective assessment as to whether
that is the case and, if so, demonstrate why
that problem is an aberration in an otherwise
strong compliance program. If the board con-
cludes that the regulators and/or prosecutors
are wrong about whether the problem exists,
the company should work closely with them to
explain why the conclusion is erroneous.
Finally, if the regulators/prosecutors are ap-
parently committed to moving forward with
an enforcement action, the company must be
prepared to show it is committed to winning in
court. Even if the company ultimately decides
to resolve the dispute, the willingness and abil-
ity to pose a vigorous defense will enhance the
negotiating posture of the company.
This post is excerpted from Richard Levick’s recent NACD
Directorship feature “What’s Next? The Top Issues of 2013
and Beyond.” To read the full article and learn more about
the most significant issues impacting boardrooms today,
click here.
L
Best CommUNiCatioNs PraCtiCes: 1. New whistleblower rules have changed the game. Boards must ensure that all employees know every channel by which they can
report compliance issues internally, before they turn to the government.
2. Companies are naturally reticent to aggressively communicate on compliance. But the more they do, the more they condition the
marketplace, investors, and regulators to give them the benefit of the doubt should trouble arise.
3. When it becomes clear that an investigation will result in charges, boards must ensure that companies articulate their willingness to
aggressively defend against dubious allegations. At the very least, they strengthen their position at the bargaining table by doing so.
Over the next several weeks, LEVICK Daily
will share selected interviews from our
recent NACD Directorship article entitled
“What’s Next? The Top Issues of 2013 and
Beyond.” Today, we feature a discussion of
civil and criminal litigation and investiga-
tions with Gregory Little, a Partner in the
New York office of White & Case.
Mr. Little is a trial lawyer who counsels
clients on successfully avoiding, resolving,
and winning litigation. He has broad commer-
cial litigation experience, with an emphasis on
SEC enforcement actions, securities litigation,
and product liability. In addition to leading
high-stakes corporate litigation strategy and
serving as national coordinating counsel for
Fortune 10 companies, Mr. Little has been lead
trial counsel in over 45 trials in state and fed-
eral courts nationwide.
At the conclusion of the interview, you can
find LEVICK’s own communications best
practices appended.
how is dodd-Frank implementation most dramatically affecting director liability issues?
Gregory Little: There are many provisions in
Dodd-Frank that impact director liability. The
provision that has the most potential impact
is the SEC whistleblower bounty program.
This program authorizes the SEC to pay mon-
etary awards to whistleblowers who provide
information that relates to violation of the
federal securities laws and results in sanctions
exceeding $1 million. The monetary awards
are significant and can range from ten to
30 percent of the total amount of sanctions
recovered. The whistleblower bounty program
has been described by the SEC as a “game
changer.” That description could prove to be
an understatement. At its peak, the SEC has
announced it was receiving 7-9 tips per day.
That number likely will increase dramatically
once payments have actually been made and
publicized.
What trends stand out most to you in the area of seC enforcement?
Gregory Little: There are several trends that
stand out in the area of SEC enforcement that
could directly impact directors. In the past
several years, the SEC has been involved in a
number of high-profile insider trading cases.
Many of the allegations involved evidence
of directors of public companies providing
material nonpublic information to friends and
business associates. Insider trading cases, of
course, have been around for years. However,
recent cases have demonstrated that the SEC is
working more closely with the Department of
Justice and taking full advantage of the DOJ’s
ability to bring criminal actions and seek en-
hanced investigatory powers like wiretaps and
informants.
At the other end of the spectrum, the SEC has
also announced a willingness to pursue civil
cases in which defendants are accused of neg-
ligence only. Traditionally, the SEC pursued
individuals engaged in intentional miscon-
Weekly
This week’s edition of NACD BoardVision focuses on SEC rulemaking. Join Steve Kalan, associate
publisher of NACD Directorship, and Brian Breheny, partner at Skadden Arps, as they discuss the
conflict minerals rule, the JOBS Act, and resource extraction and disclosure.
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The FCS presents “Powershifts: Washington & Wall Street”—a breakfast discussion on pre-election
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