The Private Securities Litigation Reform Act of 1995 got its start as a subclause in the Contract with America.  Congress overrode a veto by President Bill Clinton to pass it.

Has it panned out?  The WSJ cast light on the question today.

The item focused on how much some class action law firms give to the campaigns of candidates for state and local political offices.  The article suggested a link between the contributions and the firms' ability to land securities class action work:

Public pension funds increasingly are the lead plaintiffs in shareholder suits, partly because a federal law encourages judges to pick big institutional investors for this role.

As a result, plaintiffs' law firms focus their marketing efforts on wooing public pension funds and the state and local officials who influence them. Some firms enlist the help of lobbyists and attend pension-fund conferences.

The "federal law that encourages judges to pick big institutional investors" for the lead plaintiff role?  The PSLRA, of course.

Section 78u-4(a)(3)(B)(iii)(I)(bb) created a "presumption" in favor of appointing the investor or investor group that "has the largest financial interest in the relief sought by the class".  That often means funds that invest billions for employees of state and local governments.

Blawgletter doubts that the sponsors of the Contract with America intended the PSLRA to benefit public office holders and seekers who favor vigorous enforcement of federal securities laws.

Blawgletter's favorite source of business news — The Wall Street Journal – today presents a longish item on antitrust enforcement — "U.S. Trustbusters Try to Reclaim Decades of Lost Ground". 

The piece notes three recent cases in which the Supreme Court has lately rejected antitrust claims (Trinko, Twombly, and Leegin).

It also points to halting efforts by the Obama administration to reverse the trend.

We say halting because, as WSJ observes, the Federal Trade Commission and the Antitrust Division of the Department of Justice have so far waved through each merger they've reviewed for anticompetitive effects.  Yes, they've put more conditions on the okays than the Bush enforcement agencies would have.  But neither the FTC nor the AD has sued to block a deal since Obama took office a year ago.

What about Congress?  The Democrats aim to reverse Twombly (which created a "plausibility" requirement for pleading and applied it to a section 1 conspiracy claim) and Leegin (which killed a century-old per se claim for resale price maintenance).  Whether they succeed remains up in the air.

Backdating an employee''s option to buy stock at a certain price tends to guarantee that the optionee will make money.  It also defeats the usual purpose of granting the option — to give the worker an extra incentive to help the company do better financially.

Apple backdated 6,500 options over a five year period (1997-2002).  It later decided to reclassify the options as compensation to the option beneficiaries.  And so it restated its income as $105 million less than it reported at the time.

A class of Apple shareholders sued Steve Jobs and others for issuing false proxy statements and securities fraud.  The class later amended the complaint to assert only the proxy claims.  The district court dismissed on the ground that the complaint failed to allege the class suffered "economic" loss.  It also refused to let the shareholders revive their securities fraud claim under section 10(b) of the Securities Exchange Act of 1934.

The Ninth Circuit upheld the dismissal but reversed the denial of leave to re-raise the claim for securities fraud.  Although the complaint alleged false statements in connection with Apple's solicitation of proxies from shareholders, it didn't specify any loss to the shareholders, contrary to what section 14(a) of the Securities Exchange Act of 1933 requires.  Yes, the options may have diluted the shareholders' ownership  of Apple stock, but that doesn't necessarily entail economic loss, the court held.  New York City Employees' Retirement System v. Jobs, No. 08-16488 (9th Cir. Jan. 28, 2010).

The district court erred, though, in concluding that the plaintiffs "waived" their right to assert a section 10(b) claim by amending their complaint to omit it.  Lacking any other reason to deny leave to add the claim back, the district court abused its discretion, the court said.

The head of the DOJ's Antitrust Division, Christine Varney, has done a lot to change the Division's orientation on enforcement of Sherman Act section 2, which makes monopolization and attempts to monopolize unlawful.  A big step involved withdrawing the section 2 "report" that the AD issued under Ms. Varney's predecessor.  She has also joined with the other federal agency that can bring section 2 cases, the Federal Trade Commission, in sponsoring "workshops" to look at revitalizing the DOJ's and FTC's "Horizontal Merger Guidelines".

Yesterday, Ms. Varney came out with an overview of the issues she's identified in connection with the workshops.  Her synopsis looks to Blawgletter's eye to lend further support to predictions that the AD on Ms. Varney's watch will take a much more assertive stance in questioning mergers and acquisitions of and by actual and potential competitors.  The conditions the Division has placed on recent deals (e.g., Tickemaster/Live Nation and Dean Foods) also fit with that reading.

But does any of it matter?  The Antitrust Division and the FTC may threaten to bring, and actually bring, more actions to stop M&A activity or to undo combinations after the fact; but will edits to the HMG change the law?  Don't the agencies still have to persuade the U.S. courts of appeals and Supreme Court to adopt their views?

We expect that few lawyers on the plaintiff side of antitrust cases will draw great comfort from revitalization of the merger guidelines, however much we appreciate it.  Real change will come when appellate courts cite and adopt the new HMG. 

Blawgletter laments that most cases involving the worst instances of fraud suffer from a sad but inexorable fact:  the victims' money has vanished. 

Just ask the people who trusted their savings to Bernie Madoff, for instance.

Judges (and, occasionally, juries) struggle with competing urges in such cases.  On the one hand, they want to find a way to right the wrong.  But they also worry about "imposing . . . endless, unpredictable liability" on actors that aided the fraud without meaning to.  Chaney v. Dreyfus Service Corp., No. 08-60555, slip op. at 12 (5th Cir. Jan. 25, 2010) (applying New York law).

Chaney involved looting of several insurance companies.  The looter-in-chief, Martin Frankel, gained control of the insurers through minions, who then sold the carriers' good assets and pretended that they re-invested the proceeds in U.S. Treasury instruments.  As "Eric Stevens", Frankel also gulled a broker-dealer, Dreyfus Service Corp., into moving hundreds of millions of dollars in looting proceeds into his Swiss bank account.

Should Dreyfus pay the receivers who took over the insurance companies after they collapsed for their losses?  Yes and no, the Fifth Circuit held yesterday. 

New York law did require Dreyfus to watch for suspicious activity in accounts that named insurers as owners but not in accounts that stood in the name of another Frankel outfit.

Would Chaney tempt us as a case to take on a contingent fee basis?  Probably.  Although the opinion doesn't disclose how much money went through the insurer-specific accounts, it does say that Frankel and his helpers moved $480 million through Dreyfus to Switzerland over a five-year period.  We'd want to check the net worth of Dreyfus, of course.  But the case looks like one that would appeal to a jury, the members of which may marvel at the ease with which Dreyfus seems to have allowed Frankel to use it for half a decade in aid of a massive fraudulent scheme.

The Second Circuit today upheld dismissal of securities law complaints against Morgan Stanley for misleading disclosures about a couple of mutual funds.  In the course of saying why, the court noted:

Although plaintiffs use the term "Chinese Wall," we use the term "Information Barrier" and intend it to have the same meaning.

Lindsay v. Morgan Stanley (In re Morgan Stanley Info. Fund Securities Litig.), No. 09-0837-cv, slip op. at 10 n.4 (2d Cir. Jan. 25, 2010).

The panel didn't explain its preference.  Likely because it didn't need to?

The U.S. Supreme Court took aim today at "the troubling specter of turning RICO into a tax collection statute."  Hemi Group LLC v. City of New York, No. 08-969, slip op. at 13 n.2 (U.S. Jan. 25, 2010).  But the Court coudn't muster a majority on the reason why the specter had to die (give up the ghost?).

The case concerned whether New York City could sue under the Racketeer Influenced and Corrupt Organizations Act for loss of cigarette tax revenue.  The City alleged that out-of-state vendor Hemi Group caused New Yorkers not to pay a $1.50 per pack tax on "possession" of the smokes it sold to them.  How did Hemi do it?  By failing (on purpose) to report its interstate sales to Big Apple addressees – in violation of the Empire State's Jenkins Act.

A four-member group (consisting of Chief Justice Roberts plus Justices Alito, Scalia, and Thomas) felt that RICO's "by reason of" element required a more "direct" link between the fraud — non-reporting of sales under the Jenkins Act — and the harm — purchasers' non-payment of the City possession tax.  The four wanted a "far" closer connection.

Justice Ginsburg concurred in part and in the judgment on the far narrower ground that the City shouldn't use RICO "to end-run its lack of authority to collect tobacco taxes from Hemi Group or to reshame the 'quite limited remedies' Congress has provided for violations of the Jenkins Act . . . ."  Id.

The three dissenters (Justice Sotomayor sat this one out, having sat on the Second Circuit panel below) urged that old style notions of "proximate cause" — the Court's long-standing test for causation under RICO — supported the City's complaint.

Blawgletter wishes to point out that the Court continues to use common law tort ideas to narrow federal statutes — e.g., "antitrust duty" for the Sherman Act and, now, "directness" for proximate cause under RICO.  Which doesn't surprise us.  But we do note that the fixing of where injury-causing conduct becomes actionable involves less the calling of balls and strikes and more the divination of policy.

Feed Icon Blue The common law seems to have started shrinking. 

Blawgletter often handles business cases on a contingent fee basis.  We earn a percentage of the client's recovery.  No recovery, no fee.

But guess what?  The client may owe tax on the recovery.  Which could of course affect the client's net.  And the Internal Revenue Service may regard the entire recovery — including the contingent fee that goes to the lawyer — as taxable income to the client.  See Roco v. Commissioner, 121 T.C. 160, 165 (Tax Ct. 2003) (holding that payment to False Claims Act relator for exposing contractor's fraud on the federal government amounted to a "reward" and therefore counted as gross income).  Which would reduce the client's net further.

But we got decent news yesterday from the U.S. Tax Court, which ruled on whether another False Claims Act/qui tam relator, Albert D. Campbell, "must include the entire $8.75 million qui tam payment in gross income or is entitled to exclude the $3.5 million attorney's fee payment and thus include only the $5.25 million qui tam payment in gross income."  Campbell v. Commissioner, 134 T.C. No. 3 (Tax Ct. Jan. 21, 2010).  Yes, the court held.  No surprise there.

But the court went on to decide that Mr. Campbell "may deduct" the contingent fee "as a miscellaneous itemized deduction."  Because he testified he paid the fee and corroborated his testimony with the contingent fee agreement between him and his lawyers, the court concluded, Mr. Campbell "has substantiated the payment of the fees" and thus could deduct them.  Hooray.

The tax treatment of qui tam proceeds may not apply to other sorts of recoveries — such as ones that compensate for actual loss.  We suggest you get advice from a tax professional.

The Seventh Circuit today resolved an issue that only one sister court — the Eleventh Circuit — had decided.  Both agreed that the Class Action Fairness Act doesn't kill federal court jurisdiction over a putative class action once the "putative" label vanishes due to an anti-class action ruling under Rule 23 of the Federal Rules of Civil Procedure.  Cunningham Charter Corp. v. LearJet, Inc., No. 09-8042, slip op. at (following Vega v. T-Mobile USA, Inc., 564 F.3d 1256, 1268 n.12 (11th Cir. 2009)).

Blawgletter notes that Judge Posner makes a strong practical case for keeping CAFA cases federal in spite of denial of class treatment.  Something about ping pong.  Good stuff.