Category Archives: Class Action

H.R. 1927: The Bill that Further Destroys Accountability for Big Business

Let’s be honest. Class action lawsuits get a bad rap, plain and simple. Over the years and increasingly more so in the recent past, journalists and bloggers have written pieces against these types of cases–cases that afford large numbers of people who have been defrauded, injured or harmed to be represented in civil lawsuits against large companies they would not otherwise be able to bring.

Paul Bland, Jr., Executive Director at Public Justice, in one of his latest articles, states that H.R. 1927, introduced last week in the House Judiciary Committee by Rep. Bob Goodlatte of Virginia, “would make it essentially impossible for Americans to join together in bringing class action lawsuits for nearly any illegal act a corporation might undertake.”

Many times, class members affected by the acts of large corporations are so numerous and their claims so individually small, it is almost impossible for them each to sue in separate court filings. It is hard to imagine what would happen to our already crowded civil court system if each and every class member sued individually. It would flood the courts and create total judicial chaos.

One empirical study, published in 2004 by two law school professors, found that over the course of a decade, the average price of settling a class action lawsuit as well as covering the fees paid to litigators had remained steady, contrary to the position advanced that defending against such lawsuits was taking its toll on Big Business.

Another study, released last October by the Center for Justice & Democracy at New York Law School, lists a variety of class action lawsuits that have been settled over the past decade. From the famous $1.26 billion settlement by Toyota for covering up known defects in cars that made them accelerate out of control to Allstate Insurance Company violating the civil rights of almost five million African-American and Hispanic customers for unfairly charging them higher insurance rates than their White counterparts, the study analyzes the illegal business practices settling defendants agreed to change in the future. This is the true power of the class action lawsuit: the ability to provide financial incentives to huge corporations to follow basic ethical guidelines all the rest of us are expected to follow. Americans should feel safer knowing there is some sort of system in place that polices these corporations. To be sure, there is no corporate police force and no prison we can send a company to for harming or even killing people, violating their civil rights, or for committing petty larceny on a grand scale. As the authors of this study state, “Without the class action tool, corporations and businesses can ignore the law far more easily and operate with impunity.”

While most people may not hear about these class action victories in the mainstream media, they are happening; and they are one of the only ways these companies’ ethical compasses are kept in order. Class action lawsuits have become one of the only tools we have for holding large corporations accountable for their business practices. Without them, as Bland claims, corporate America “runs wild.”

So why then is Congress contemplating the elimination of a civil remedy that benefits so many people?

UPDATE: Foreign Currency Exchange Class Action Lawsuit Gains Ground

World-thumb-178x178-34092Last Monday, a group of investors filed a consolidated complaint in a class action that accuses 12 big banks of manipulating the foreign currency exchange market.

As we reported previously, plaintiffs are suing Bank of America, Barclays, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley, RBS, and UBS for violating federal antitrust law. (Korein Tillery is representing Haverhill Retirement System and Oklahoma Firefighters Pension and Retirement System in the litigation.)

The $5.3 trillion-a-day FX market is the largest-and least regulated-financial market in the world. A global investigation was launched last year into manipulation of the FX market on the heels of another international rate-rigging scandal involving the London interbank offered rate (LIBOR) benchmark. In particular, the FX investigation has focused on the manipulation of the WM/Reuters fixing rates, which are the key benchmark rates used to value currencies in the FX market.

In the FX class action filed in U.S. District Court for in the Southern District of New York, traders at the defendant banks are accused of colluding with one another to rig the WM/Reuters benchmark rates in their banks’ favors. One strategy employed by traders, called “banging the close,” involves pushing trades through immediately before and during the 60-second window when the benchmark is set. Another maneuver used is called “front running,” wherein a trader receives a customer order that could potentially move the market, and executes his proprietary trades ahead of his customer’s trade in order to benefit from the subsequent movement in the market. And in yet another scheme known as “painting the screen,” traders place phony orders with one another to create the illusion of trading activity in a given direction in order to move rates prior to the fixing window.

These tactics are illegal in some jurisdictions and unethical everywhere, since they place the banks’ interests ahead of their clients’. The traders also violated the Sherman Act when they conspired as a group to execute these strategies in order to manipulate the market.

Many of the details in the class action about the traders’ activities come directly from some of the same banks that were implicated in the LIBOR scandal, including Barclays, RBS, and UBS, which have been cooperating with federal authorities. (UBS settled its LIBOR claims for $1.5 billion with U.S., U.K., and Swiss authorities, while JPMorgan and Citigroup paid LIBOR-related fines of $107 million and $95 million, respectively, to the European Commission.) There is speculation that the banks’ cooperation in the FX investigation may reflect the lessons learned from the LIBOR investigation, especially regarding immunity given to the first banks who step forward with information.

The traders implicated in the FX investigation represent a close-knit group wholive primarily in the same exclusive neighborhood outside of London and frequently socialize with one another, and have in many cases worked together in prior positions. The traders manipulated the benchmark rates by exchanging confidential customer order information and trading positions amongst themselves via instant messages, emails, and chat rooms. These chat rooms were given names like, “The Cartel,” “The Mafia,” and “The Bandits’ Club,” by the traders who participated in them. After this litigation was filed, many defendants banned the use of such chat rooms.

The banks, which have declined comment, have a strong incentive to cooperate with government investigators. In the U.S., a company can obtain immunity from convictions and fines if it’s the first to report antitrust violations. Companies that self-report antitrust violations later than others must do so in a “timely fashion” or face stricter penalties. And since the defendants have already produced evidence to government investigators confirming that their traders “inappropriately share[d] market-sensitive information with rivals,” and that “it was common for a group of senior currency traders to discuss with their competitors the types and volume of trades they planned to place,” it’s not much of a stretch to suspect that settlement talks with government authorities are underway at some of the big banks.

Justices Consider Overturning Landmark Securities Ruling

fraudonthemarketLast week, the Supreme Court heard oral arguments in Halliburton Co. v. Erica P. John Fund, Inc. In the class action suit, Halliburton shareholders allege that the company falsified its financial records and misled investors about its exposure to asbestos claims, among other charges. And once the facts came to light, investors allege, the value of their stock plunged.

At issue is the “fraud-on-the-market” presumption, which presumes that in an efficient market, share prices reflect information or misinformation that is available to the public. The presumption has allowed plaintiffs to maintain securities fraud suits without having to prove that each individual investor was personally misled by false statements.

The fraud-on-the-market presumption was accepted by the Court in a 1988 case, Basic Inc. v. Levinson, and U.S. Courts have relied on it for the past 25 years to certify securities class actions. In Basic, the Court explained that in efficient markets, material public information is reflected in the market price of a security and investors naturally rely on that price to make investment decisions. In other words, investors would not pay a price for a stock they knew to be artificially inflated. This presumption, the Basic court held, was “consistent with, and … supports congressional policy.”

But Halliburton is now asserting that the underlying economic theory behind the fraud-on-the- market presumption is wrong, and is asking the Supreme Court to overturn Basic. Should this happen, it would mark the end of securities class actions as we know them.

There’s a lot at stake here. If Basic were overturned, investors would be subjected to a nearly impossible burden of proof in order to file a securities lawsuit, and it would also be almost impossible for shareholders to bind together as a class. Instead each individual investor would need to prove that if she had know the truth, she would not have purchased the stock.

Consider the number of cases and the amount of investor money that could be lost if Basic is overturned. Last year, according to a recent report by economic consulting group NERA, 234 securities class actions were filed in federal court–a 10% increase over 2012. And in the past five years alone, the aggregate losses to investors in federal filings for alleged securities violations totaled $1.065 trillion.

Korein Tillery securities attorney Aaron Zigler noted “Without the Basic presumption, those who commit securities fraud will be nearly immune from the consequences. The laws regulating Wall Street will be meaningless when each individual investor must prove what information led them to buy.”

While a decision won’t be rendered until July, the plaintiffs’ bar is uneasy about how the justices will rule, especially given how friendly the Court has been to business.

A study published last April in the Minnesota Law Review examining how business fares in the Supreme Court found that out of the 36 justices who have presided over the Court since 1945, the two justices most likely to vote in favor of business interests are Chief Justice Roberts and Justice Alito.

The Court’s pro-business leanings are on full display in recent rulings on two major class actions. In 2011, the Court reaffirmed a lower court’s decision to deny class certification to a group of female employees who wanted to sue Walmart for pay discrimination. In Walmart v. Dukes, the High Court ruled that the putative class failed to show that evidence of wrongdoing was common to the group.

And last May, the Court threw out an antitrust class action against Comcast, the nation’s largest cable provider, on a similar argument, adding that the proposed two million-member class failed to demonstrate that damages could be measured on a class-wide, rather than an individual, basis.

But there may be a glimmer of hope for Halliburton. According to a story in Am Law’s Litigation Daily, the justices focused on a brief suggesting that plaintiffs be required to conduct an “event study” at the class certification stage to show that the company’s misstatements had a significant impact on its stock price.

While event studies aren’t an ideal solution–plaintiffs’ lawyer David Boies said in Court that they can be costly and complicated–it’s a better option than overturning Basic. If the justices permit an event study, although it will be more expensive and more complicated to prove, plaintiffs will be able to maintain a presumption that they relied on the misinformation and have the opportunity to show the case is suitable for class certification.

Follow this space for updates on Halliburton Co. v. Erica P. John Fund, Inc. and other class action related cases before the Supreme Court.

-Mary Ellen Egan

Email: megan@koreintillery.com