High court decision, new federal stance could reduce viability
Class-action lawsuits, an important tool for public pension funds and other investors to address perceived wrongs, could become less viable options following a Supreme Court ruling and new positions from the departments of Labor and Justice.
One of the biggest game changers came June 26, when the Supreme Court ruled 5-4 against the $323.6 billion California Public Employees' Retirement System, Sacramento, in a case challenging the amount of time investors have to decide whether to opt out of securities class-action lawsuits and pursue their cases alone.
Instead of having a class complaint serve to "toll," or suspend, the statute of limitations for opting out to file individual claims, as CalPERS had argued, the Supreme Court opinion said the law "in clear terms" bars any action more than three years after the securities offering.
The CalPERS decision "did change things," said attorney David Wertheimer, a New York-based partner at Hogan Lovells LLP, who represents public company defendants in securities class actions. "It likely changed the mindset of institutional investors, who are now evaluating their claims."
The issue was pivotal enough to prompt an amicus brief from an international group of 75 pension funds and other institutional investors with a collective $4 trillion in assets, including the National Conference on Public Employee Retirement Systems, state and municipal U.S. pension funds, and large overseas investors such as the $468 billion APG Asset Management, $351 billion Aegon Asset Management and $210 billion PGGM Investments in the Netherlands.
Blair A. Nicholas, San Diego-based managing partner at Bernstein Litowitz Berger & Grossmann LLP, who filed the group's brief, said the tolling issue "is extremely important for efficiency and resource purposes."
Until 2013, investors relied on a 1974 Supreme Court decision in American Pipe & Construction Co. vs. Utah, which held that the commencement of a securities class action preserves the timeliness of individual claims while a court decides whether to grant class-action status.
That changed in 2013 when the 2nd U.S. Circuit Court of Appeals ruled in Police & Fire Retirement System vs. IndyMac MBS Inc. that the American Pipe decision applies only to the statute of limitations and not to the statute governing repose, which creates an absolute three-year deadline for filing an action.
In a dissenting opinion in the CalPERS case, Supreme Court Justice Ruth Bader Ginsburg cited the pension fund's argument that the 5-4 decision could "gum up the works of class litigation" by giving defendants an incentive to slow walk pre-certification proceedings until the clock runs out on potential opt-outs.
CalPERS spokeswoman Megan White said the ruling, while disappointing, "reiterates the importance of remaining vigilant" about future securities class-action cases and deciding whether to opt out.
Mr. Wertheimer cited one study from NERA Economic Consulting that showed the median time for class certification decisions to be made is 2.5 years after cases are filed, which leaves little time under the new three-year deadline.
"That statistic suggests that people are going to have to make tactical decisions much earlier. They will not have the luxury of deciding later," he said. NERA also found that a record 300 securities class actions were initiated in 2016, a 32% increase over 2015.
Hogan Lovells partner Christopher Pickens noted there are pending cases that will soon be coming up against the three-year statute of repose, "and you have to start making those decisions today. I expect those discussions are now being had at plaintiffs' firms."
Jeff Mahoney, general counsel for the Council of Institutional Investors in Washington, whose general members have a combined $3 trillion in assets, noted that while pension funds are often passive investors without a direct case, "they are going to have think about establishing new procedures with respect to their oversight of class-action litigation within three years of a securities offering to protect their right to opt out and pursue an individual case."
Going it alone "could be a good idea" if there is a potentially larger recovery, he said. "The bottom line is, it's going to take more effort."
The Supreme Court will address class actions in at least two more cases involving public pension funds when members start their new term this fall.
On the question of whether an issuer's duty to disclosure certain information allows for class-action lawsuits, Leidos Inc. is challenging a decision in favor of the $31 billion Indiana Public Retirement System, Indianapolis. At issue is the Securities and Exchange Commission's regulation S-K, which requires companies to disclose "any known trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the registrant's liquidity increasing or decreasing in any material way."
Leidos petitioned the Supreme Court to decide whether that duty to disclose allows shareholders to file lawsuits under Section 10(b), the antifraud provision of the Securities and Exchange Act.
"It is an interesting case with a lot of ramifications," said Mr. Wertheimer of Hogan Lovells. "There are a lot of issues that could be swept up by the court's recognition of a disclosure duty. (Such a decision) has the potential for public companies to be second-guessed by the plaintiffs' bar."
In Cyan Inc. vs. Beaver County (Pa.) Employees Retirement Fund, the Supreme Court will consider whether state courts can hear some investor lawsuits, revisiting a 1998 securities law that limits jurisdiction of state courts in certain securities violations.
After purchasing Cyan stock, the $277 million pension fund claimed that documentation in the initial public offering allegedly included altered and misleading statements.
A California appeals court ruled that state courts do have jurisdiction, and the U.S. solicitor general's amicus brief urged the Supreme Court to resolve an issue "that has generated confusion in lower courts."
The CalPERS vs. Anz Securities Inc. decision may increase the number of opt-outs in federal securities class-action cases, including some filed in state courts. And, in the case of foreign securities litigation, "state courts have become a potential venue for pension plans," said Mr. Mahoney of CII, in light of a 2010 Supreme Court decision in Morrison vs. National Australia Bank Ltd. that U.S. law against securities fraud does not apply to certain foreign-issued securities.
The federal government's position on class-action lawsuits is in a state of flux as well.
In a brief filed on July 3 in a 5th U.S. Circuit Court of Appeals challenge to the Labor Department's new fiduciary rule, the Justice Department on behalf of the DOL argued that the rule should be upheld except for the part allowing class actions against financial advisers. Government lawyers said they would not defend the provision that allows investors to file class-action suits against financial advisers who violate the rule's best-interest standard.
Not as significant
Kent Mason, a partner with Davis & Harman LLP who represents several major financial institutions, points out that the government decision to not defend the provision is not as significant as it might seem because the Financial Industry Regulatory Authority precludes broker-dealers from requiring clients to waive the right to pursue class actions. To avoid creating new class actions, Mr. Mason said, the Department of Labor would need to eliminate the fiduciary rule's best-interest contract requirement.
In June, the Justice Department also reversed its position on banning class actions in workplace arbitration agreements. In an amicus brief to the Supreme Court, acting Solicitor General Jeffrey Wall said the department "reconsidered the issue and has reached the opposite conclusion" from one taken by the department during the Obama administration.