Scott Graham is a senior writer covering appellate law for The Recorder, an American Lawyer affiliate.
The chief judge of the U.S. Court of Appeals for the Ninth Circuit handed plaintiffs securities lawyers a partial victory Wednesday, while one of his protégés handed them a flat-out loss.
Chief Judge Alex Kozinski wrote for a unanimous panel that plaintiffs can bring portions of a state law class action aimed at variable universal life insurance policies, notwithstanding the Securities Litigation Uniform Standards Act of 1998.
But his former law clerk, Judge Paul Watford, ruled in a separate case that when suing over alleged misrepresentations in registration statements, plaintiffs must trace their shares in the securities back to the relevant offering. That will generally sound a death knell when a company has held secondary offerings, Watford candidly acknowledged. “Experience and common sense tell us that when a company has offered shares under more than one registration statement, aftermarket purchasers usually will not be able to trace their shares back to a particular offering,” he wrote.
The insurance case, Freeman Investments v. Pacific Mutual Life Insurance involves a product that is part insurance policy and part investment vehicle. A variable universal life insurance policy guarantees a minimum level of insurance while also letting policyholders realize gains or losses on the investments of their premiums. Plaintiffs led by Kansas City’s Stueve Siegel Hanson alleged that Pacific Life was deducting more than “the cost of insurance” as fees, contrary to assurances in the policy language. They sued for breach of contract, bad faith and unfair competition.
Pacific Life, represented by Reed Smith, argued that the claims were blocked by SLUSA, the 1998 law limiting securities class actions brought under state law.
Kozinski held that the contract claims don’t violate SLUSA because they don’t necessarily include claims of misrepresentation or omission. “To succeed on this claim, plaintiffs need not show that Pacific misrepresented the cost of insurance or omitted critical details. They need only persuade the court that theirs is the better reading of the contract term,” Kozinski wrote. “Just as plaintiffs cannot avoid SLUSA through crafty pleading, defendants may not recast contract claims as fraud claims by arguing that they ‘really’ involve deception or misrepresentation.”
At the same time, because the fees were deducted from the investment portion of the policy, any illegal deduction would necessarily coincide with the purchase or sale of a security, meaning the unfair competition claims would be blocked by SLUSA. “Every time Pacific collected the allegedly inflated cost of insurance charge, it sold securities to generate the funds,” Kozinski wrote. “Because the insurer’s alleged fraud ‘coincided’ with the sale of securities, it doesn’t matter that the policyholders didn’t themselves redeem the securities.”
Judges Stephen Trott and Sidney Thomas concurred.
Watford, who was confirmed to the court just seven months ago, seems to be asserting himself quickly, having now issued two majority opinions, a dissent and a dissent from denial of en banc review.
In Wednesday’s case, In re Century Aluminum, the San Diego plaintiffs firm Wolf Haldenstein Adler Freeman & Herz alleged under §11 of the Securities Act that their clients bought shares pursuant to a materially false and misleading prospectus issued in connection with a 2009 secondary offering. Within days, they allege, the stock price plunged when underwriters of the offering flooded the market with stock.
When all of a company’s shares have been issued under a single offering, tracing their origin generally poses no obstacle, Watford wrote. “But when a company has issued shares under more than one registration statement, the plaintiff must prove that her shares were issued under the allegedly false or misleading registration statement, rather than some other registration statement,” he noted.
Tracing the chain of title back to the secondary offering is “easier said than done” for a company like Century Aluminum, Watford wrote, because millions of shares are traded through brokers who don’t track whether they’re getting new or old shares.
The plaintiffs tried to meet this obligation by alleging that they “purchased Century Aluminum common stock directly traceable to the company’s secondary offering.”
“Some district courts have held that this allegation suffices, and before Bell Atlantic v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), it probably did,” Watford wrote.
But under those Supreme Court decisions that tightened pleading standards, more “factual content” is necessary — at least when a company has issued multiple offerings of stock.
The plaintiffs argued that they purchased their stock in the days immediately after the secondary offering, indicating it probably came from those shares. But, Watford wrote, quoting Twombly, “the ‘obvious alternative explanation’ is that they could instead have come from the pool of previously issued shares.”
Judges Consuelo Callahan and U.S. District Judge James Singleton, sitting by designation, concurred.
Robert Varian of Orrick, Herrington & Sutcliffe argued the case for defendant Credit Suisse Securities (USA) and Morgan Stanley. Pillsbury Winthrop Shaw Pittman represented Century Aluminum.