DALLAS COURT OF APPEALS REVERSES JUDGMENT AGAINST BROKER-DEALER—AN OFFER TO DO CUSTOMIZED SECURITIES TRADE “SUBJECT TO DOCUMENTATION” DOES NOT CREATE AN UNCONDITIONAL CONTRACT

The Dallas Court of Appeals has reversed a $21.5 million judgment awarded to Highland Capital Management, L.P. against RBC Capital Markets, LLC in the trial court, and rendered a take-nothing judgment.

The case stemmed from events in 2000, when RBC marketed a set of subordinated promissory notes offered for sale by the note holders. Highland Capital offered to buy some of the notes for roughly half their face value, subject to “docs and reps,” including a customized written trade confirmation and representations by both the note holders and the payor. The note holders later refused to sell, but Highland claimed RBC was contractually bound to deliver the notes, even though the conditions were not satisfied. Arguing its stated conditions were not material to the deal, Highland sued RBC for breach of contract, and the jury awarded Highland $21.5 million plus pre-judgment interest. RBC appealed.

The appeal turned on whether oral communications between RBC and Highland created an enforceable agreement. Under New York law, as in Texas, contract formation requires a meeting of the minds on the essential terms. Here, Highland’s bid was subject to numerous conditions, including a written trade confirmation and certain representations from the note holders. The Court held RBC did not, and could not, accept those conditions because they required agreement by the note holders. And because material terms remained to be negotiated, the Court found no contract was formed.

The Court rejected Highland’s position, supported by expert testimony, that according to industry custom a securities trade occurs whenever parties agree to price and principal and that “docs and reps” were just a formality. The Court stressed that industry custom cannot alone create an intent to be bound or vary the parties’ express agreement. Nor can an expert witness “usurp the court’s function by giving an opinion as to the legal effect of an industry custom” or by opining “on the ultimate legal issue in the case.” From its own examination of the record, the court found the parties had not reached an agreement, reversed the jury’s verdict, and rendered a take-nothing judgment.

Carrington Coleman and Enoch Kever, PLLC represented RBC. The full opinion is available here.

FIFTH CIRCUIT PROVIDES GUIDANCE ON CLASS CERTIFICATION

The Fifth Circuit Court of Appeals recently provided guidance on class certification related to securities fraud claims. On September 8, 2015, the Fifth Circuit released its opinion in Ludlow et al v. BP, P.L.C. et al, a case stemming from the 2010 Deepwater Horizon oil spill, where plaintiffs alleged BP made misstatements in violation of section 10(b) of the Securities and Exchange Act of 1934 and SEC Rule 10b-5. In that opinion, the Fifth Circuit affirmed the district court in certifying one class of plaintiffs and in refusing to certify another class of plaintiffs based on whether the methodology presented for determining class damages for each class was a “sound methodology” applicable “across the entire class” as required by the Supreme Court’s decision in Comcast Corp. v. Behrend.

The two proposed classes were those claiming damages based on pre-spill misrepresentations by BP (the “Pre-spill Class”) and those claiming damages based on post-spill misrepresentations by BP (the “Post-spill Class”). The Pre-spill Class claimed that BP’s alleged misstatements regarding the efficacy of its safety procedures created an impression that the risk of a catastrophic failure was lower than it actually was and deprived investors of the opportunity to decide whether to invest in light of the heightened risk. The Post-spill Class complained of BP’s misrepresentation as to the magnitude of the spill, even as internal BP estimates showed that the magnitude was much higher than was being publicly disclosed.

The district court refused to certify the Pre-spill Class, but certified the Post-spill Class. The Fifth Circuit affirmed based on its analysis of the class damage models in comparison to Comcast’s requirement that a damage model must be “susceptible of measurement across the entire class for purposes of Rule 23(b)(3).” The Fifth Circuit noted that the Pre-spill Class’s damages theory hinged on a determination that each plaintiff would not have bought BP stock at all were it not for the alleged misrepresentations. The Fifth Circuit explained that this would require an individualized inquiry as some investors would be less risk averse than others and might have still invested, even if in smaller amounts. In light of this, the Pre-spill Class’s damages theory could not provide an adequate measure of class-wide damages under Comcast. In contrast, the Fifth Circuit noted that Post-spill Class’s damages theory was sufficient under Comcast despite BP’s attack that the expert report on which plaintiffs relied said it was “possible” that BP’s stock price would have declined to a specified level if the true spill rate had been released earlier because Comcast requires a “sound” methodology and not certainty.

SEC GUIDANCE SUPPORTS PROTECTION FOR INTERNAL WHISTLEBLOWERS

On August 4, 2015, the SEC released a rule interpretation supporting its view that whistleblowers who report possible wrongdoing internally within their company and not to the SEC, qualify for anti-retaliation protection under the Dodd-Frank Act. The Dodd-Frank Act protects employers from discharging, demoting, suspending, threatening, harassing, or discriminating against a whistleblower who engages in certain protected activity. 15 U.S.C. § 78u-6(h)(1)(A). One of the enumerated protected activities is a catchall provision that protects individuals who make disclosures that are required or protected under certain laws, which covers reporting possible wrongdoing internally. Inconsistently, however, the Dodd-Frank Act defines “whistleblower” as any individual who provides information relating to a violation of the securities laws to the SEC. Id. § 78u-6(a)(6).

The SEC’s rule interpretation establishes that, in its view, for purposes of qualifying for anti-retaliation protection, an individual’s status as a whistleblower does not depend on whether the individual reported the information to the SEC. The SEC based its decision on the fact that the broad reporting catchall provision is within the employment retaliation section and that its interpretation supports the SEC’s overall goals in implementing the whistleblower program by encouraging individuals to report possible wrongdoing.

The SEC’s interpretation is directly at odds with the Fifth Circuit’s decision in Asadi v. G.E. Energy (USA), L.L.C., in which the court held that the plain language of the statute creates a cause of action only for whistleblowers who report information to the SEC. 720 F.3d 620, 623 (5th Cir. 2013). As the Fifth Circuit noted, extending anti-retaliation protection to internal whistleblowers renders the Sarbanes-Oxley anti-retaliation provisions moot because individuals will always choose to raise claims under Dodd-Frank because of its greater monetary damages, longer statute of limitations, and ease of bringing whistleblower protection claims. However, the SEC’s rule interpretation is not likely to be the end of the debate. A case similar to Asadi is pending in the Second Circuit, Berman v. Neo@Ogilvy LLC, and it may only be a matter of time before the Supreme Court weighs in on the issue.

2015 SECURITIES CLASS ACTIONS BROUGHT IN THE FIFTH CIRCUIT HOLD STEADY; FILINGS AGAINST INDUSTRIAL AND TECHNOLOGY FIRMS INCREASE

Bryan Erman and Thomas Conner

Cornerstone Research recently released its “Securities Class Action Filings: 2015 Midyear Assessment,” which tracks the number and type of securities class action lawsuits filed nationwide each semiannual period. In the first half of 2015, plaintiffs filed 85 new federal securities class actions, which is an 8% decrease from the 92 new federal securities class actions filed in the second half of 2014 and below the historical average of 94 new class actions filed each semiannual period between 1997 and 2014. Of those 85 new class actions in 2015, five were filed in district courts located within the Fifth Circuit. This is the same number as were filed in the first half of 2014 and is also in line with the 6% historical trend, between 1997 and 2014, of the percentage of nationwide securities class actions that are filed in the Fifth Circuit.

Unlike the Fifth Circuit’s steady numbers, the Ninth Circuit saw 38 new securities class actions filed within its district courts, which is 18 more than were filed in the second half of 2014. This increase is likely the result of increased filings against technology firms. In the first half of 2015, technology firms saw seven more class actions filed against them than in the second half of 2014. Filings against industrial firms also increased substantially, while filings against energy firms were reduced by 50%. Also of note, federal securities class actions brought against foreign-headquartered companies accounted for 24% of all filings in the first half of 2015. That is the second-highest percentage of class actions brought against foreign-headquartered companies since 1997.

It appears that the Supreme Court’s two Halliburton rulings, both of which overturned more restrictive standards in the Fifth Circuit, have yet to impact the relatively low number of securities class actions filed in the Fifth Circuit. Read the full Cornerstone Research report.

FEDERAL DISTRICT COURT CERTIFIES SECURITIES CLASS ACTION UNDER THE SUPREME COURT’S HALLIBURTON CASES

Bryan Erman and Parker Graham

After thirteen years and two trips to the Supreme Court, Halliburton investors won class certification to pursue certain securities-fraud claims in a Dallas district court, signaling the first significant application of the Supreme Court’s companion cases in this circuit. Halliburton, according to the plaintiffs, had initially misrepresented its potential liability in asbestos litigation and its expected revenue from various contracts, which caused the company’s stock to drop when it later made corrective disclosures.

The case’s complex history hinged on several procedural issues: Judge Barbara Lynn initially denied class certification because the plaintiffs had not proved loss causation (a link between misrepresentations and loss). The Supreme Court reversed, holding plaintiffs are not required to show loss causation at the class-certification stage. On remand, Judge Lynn certified the class and declined to consider Halliburton’s argument that it could negate a necessary element (the presumption of reliance) by showing any misrepresentations had not impacted its stock price. The Supreme Court reversed again, holding defendants are entitled to introduce price impact evidence at the class-certification stage.

Judge Lynn’s most-recent opinion, therefore, considered Halliburton’s price impact evidence for the first time. By parsing through dueling experts, the court found no reliable evidence that Halliburton’s corrective disclosures about construction contracts, its swelling asbestos liability exposure, and two adverse jury verdicts—information that had already been reported by the media or partially disclosed by Halliburton—had any impact on its stock price. But the court did find a convincing price impact based on Halliburton’s disclosure of one particular $30 million asbestos verdict and the 40% stock price plunge that day. Judge Lynn therefore certified the class with respect to that disclosure alone. More broadly, the court’s 53-page opinion provides the most thorough roadmap yet for class certification issues under the Supreme Court’s Halliburton rulings.