SECURITIES LAW

Court Invokes Recent U.S. Supreme Court Holding in Stoneridge and Dismisses Allegations of Federal Securities Law Violations Against Law Firm

In re DVI Inc. Securities Litigation, Slip Copy, 2008 WL 1900384 (E.D. Pa. April 29, 2008), involves a class action against various defendants alleging violations of federal securities laws related to the demise and bankruptcy of DVI Inc. Among other things, plaintiffs asserted that Clifford Chance, as DVI’s corporate counsel, substantially assisted in all elements of a fraudulent scheme to artificially inflate the price of DVI securities and to defraud investors and regulators. Lead Plaintiffs asserted a cause of action under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. A typical Section 10(b) private action requires a plaintiff to prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.

In seeking class certification, the Lead Plaintiffs sought to avoid establishing reliance for each individual member by invoking one of two presumptions established by the Supreme Court. The first, the “fraud on the market” theory, operates to create a rebuttable presumption of reliance as to “an investor who buys or sells securities at the price set by the market [since that investor] does so in reliance on that market.” The second, articulated in Affiliated Ute Citizens of Utah v. United States, provides that in cases “involving primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery. All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of this decision.” 406 U.S. 128, 153 (1972).

The Court held that class certification was inappropriate with respect to Defendant, Clifford Chance, because neither the fraud on the market presumption nor the Affiliated Ute presumption could be used by Lead Plaintiffs to establish reliance under Section 10(b). The Court relied on the recent Supreme Court decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 128 S.Ct. 761 (2008). In Stoneridge, the Supreme Court considered “when, if ever, an injured investor may rely upon § 10(b) to recover from a party that neither makes a public misstatement nor violates a duty to disclose but does participate in a scheme to violate § 10(b).” Id. at 767. Specifically, the Court considered whether two suppliers of a cable operator that entered into various sham transactions with the cable operator to artificially increase the cable operator's publically reported revenues could be held liable for violating section 10(b). The suppliers were not alleged to have directly made any misstatements to the public, but instead were alleged to have knowingly participated in a scheme with the purpose of creating a false appearance about the cable operator's revenues. The Court ultimately concluded that the suppliers could not be held liable because the suppliers' “deceptive acts, which were not disclosed to the investing public, [were] too remote to satisfy the requirement of reliance.”Id. at 770. Reliance, the Court stated, was an “essential element of the § 10(b) private cause of action.” Id. at 769.

The Court in Stoneridge also specifically addressed the applicability of the fraud on the market presumption and the Affiliated Ute presumption to the suppliers and found that neither presumption was applicable. With respect to the fraud on the market presumption, the Court noted that the presumption is applicable “when the statements at issue become public” and “[t]he public information is reflect in the market price of the security.”Id. at 769. Because the deceptive acts of the suppliers were not communicated to the public, “[n]o member of the investing public had knowledge, either actual or presumed, of the [supplier's] deceptive acts during the relevant times.” Id. With respect to the Affiliated Ute presumption, the Court noted that this presumption applies when “there is an omission of a material fact by one with a duty to disclose” information to investors and concluded that there was no such duty to disclose. Id.

Similarly, this court found that neither presumption applied to the claims against Defendant, Clifford Chance. The court based its holding on the fact that lead Plaintiffs did not allege that Clifford Chance made any direct public misstatements that affected the market for DVI securities. Rather, Lead Plaintiffs argued that Clifford Chance should be held liable under section 10(b) because it participated in a scheme to defraud investor in DVI. In making this argument, Lead Plaintiffs recognized that Stonebridge limits “scheme liability” under section 10(b); however, they argued that Clifford Chance's unique role in initiating and masterminding certain aspects of the overall scheme was sufficiently related to the injury suffered by DVI's investors as to satisfy the reliance element. The Court did not accept this argument and instead found that lead Plaintiffs did not overcome the fact that investors in DVI did not rely upon the allegedly deceptive conduct of Clifford Chance. The court provided, “[t]hough Lead Plaintiffs allege that Clifford Chance knew of the scheme, and at times took a more active part in assisting DVI in the scheme, the fact remains that none of this alleged conduct was publically disclosed such that it affected the market for DVI's securities.”

II. CIVIL LITIGATION

Court Finds Abuse of Discretion Where Trial Judge Required Defendant To Present Medical Expert Testimony Prior To Plaintiffs

In Kim v. Gordon, 2008 WL 1901335 (N.J. Super. May 1, 2008), an unpublished decision, the Superior Court reversed a $55,000 verdict for plaintiff and remanded back to state court for a new trial citing abuse of discretion by the trial judge in requiring defendant to present medical expert testimony prior to plaintiffs.

This case involved a personal injury matter where due to scheduling problems related to unavailability of plaintiff’s experts and vacation plans of plaintiff’s counsel, the trial judge required defendant to present his medical witnesses' testimony to the jury before plaintiff's doctors testified and before plaintiff completed his testimony. The jury returned a verdict of $55,000 for plaintiff. Defendant claims that requiring him to proceed with his case first denied him a fair trial.

During the trial of the underlying matter, defense counsel objected to having to take his witnesses out of order and moved for a mistrial. The motion was denied. Defense counsel also offered the court a reasonable scheduling alternative to having the defense witnesses testify first. Relying on plaintiff counsel’s scheduled vacation and the potential loss of jurors, the court denied this request. This court found that was a mistaken exercise of discretion.

According to New Jersey Rule of Evidence 611 (a), trial judges are entitled to exercise reasonable control over the order of presentation of witnesses. However, the court found the order of witnesses in this case eviscerated New Jersey Rule of Evidence 703 that permits an expert to support his or her opinion with facts and data known to the expert “at or before the hearing.” The court provided,

At the time the defense doctors testified, plaintiff had not completed his testimony and the defense doctors had not received [plaintiff’s expert’s] report. Nor had plaintiff's doctors testified. Thus, in forming their opinions as to causation and permanency, the defense doctors were deprived of their ability under N.J.R.E. 703 to rely on portions of plaintiff's testimony, as well as the testimony of plaintiff's experts. These circumstances undermined defendant's right to a fair trial.

The court recognized that taking witnesses out of order “is commonplace” and acknowledged that trial attorneys are entitled to take vacation. However, the court noted that “if the [trial] court wanted to accommodate plaintiff's counsel's vacation schedule, the appropriate resolution would have been to declare a mistrial, not to force the defense to present its case first.”

The court also found that it is speculative whether the jury’s verdict reflected confusion, but that “[i]t should not be the burden of a defendant [in a case such as this] to show that the jury was confused.”