Loss Causation, Economic Loss Rules and Offset Defenses:

Dismissal Motion Practice After

Acticon A.G. v. China N.E. Petroleum Holdings Ltd.

In Acticon A.G. v. China North East Petroleum Holdings Limited, (“Acticon”)1 the Second Circuit clarified several issues regarding the pleading of loss causation and application of the second investment rule defense in Rule 10b-5 class suits. The precise issue, as framed by the Second Circuit, was “whether the fact that a stock’s share price recovered soon after the fraud became known defeats an inference of economic loss.”2 It ruled that price recovery does not defeat an inference of economic loss:

[A] share of stock that has regained its value after a period of decline is not functionally equivalent to an inflated share that has never lost value. . . . [I]t is improper to offset gains that the plaintiff recovers after the fraud becomes known against losses caused by the revelation of the fraud if the stock recovers for completely unrelated reasons. Such a holding would place the plaintiff in a worse position [sic][than] he would have been absent the fraud.

The Second Circuit concluded an offset rule, such as the one it rejected, would deprive an investor of the benefits of a “second investment decision” to refrain from selling a security, notwithstanding a corrective disclosure of fraud, and the opportunity to make a determination as to whether to continue holding that investment, based on its non-fraudulent, remaining merits:

In the absence of fraud, the plaintiff would have purchased the security at an uninflated price and would have also benefitted from the unrelated gain in stock price. If we credit an unrelated gain against the plaintiff’s recovery for the inflated purchase price, he has not been brought to the same position as a plaintiff who was not defrauded because he does not have the opportunity to profit (or suffer losses) from “a second investment decision unrelated to his initial decision to purchase the stock. Read full article. 

Market-Based Prediction Models as an Aid to Litigation Strategy and Settlement Negotiations

In his recent book, “Litigation is War,” Frederick L. Whitmer suggests effective advocacy in litigation mirrors many tactics common in strategic military preparation. On a battlefield or in a courtroom, quantifying the likelihood of uncertainties that may hinder or facilitate a particular line of attack will provide an advantage to the party holding such information. Consider this scenario: you are a plaintiff bringing suit against a corporation for ten million dollars, your trial starts in two weeks, the corporation has offered to settle for one million dollars, but you believe that you deserve more; do you accept? There is no easy answer, but there is a question that any lawyer or client in that situation should reflect upon: How can I acquire the most accurate, cost-effective data about the viability and value of a particular case or cause of action? This article suggests a market designed to translate investments in various outcomes into predictions about the likelihood of various outcomes of a given situation.

This article will identify some of the major unmet needs of litigants today. It will explain how prediction markets, a new method of collecting research used for predicting outcomes in a wide variety of areas, can be crafted to assist clients in their litigation strategy and settlement negotiations. Finally, it will provide a sample market based on the uncertainties of an actual case. Read full article.

Behind the Financial Crisis: A Fraud Investigator Talks

Tom Borgers was tasked by a Congressional commission to investigate the causes of the financial crisis and found repeated examples of mortgage fraud. So why have no high-ranking bank executives been prosecuted?

“It’s been three years since the financial crisis crippled the American economy,” Steve Kroft begins his 60 Minutes piece this week. “[Yet] there has not been a single prosecution of a high ranking Wall Street executive or major financial firm.”

60 Minutes producer James Jacoby wanted to find out why, and one of the first people he spoke with was Tom Borgers, a man who literally helped write the book on the financial meltdown.

Borgers was a senior fraud investigator for the Financial Crisis Inquiry Commission (FCIC), a bipartisan panel set up by the Obama administration to examine the causes of the crisis. In the end, the FCIC issued a 500-page report on its findings, required reading for James and associate producer Maria Gavrilovic.

One of Borgers’ chief responsibilities at the FCIC was finding, vetting, and interviewing whistle-blowers, and he was therefore helpful in leading the 60 Minutes team to sources including Eileen Foster and Richard Bowen, the whistle-blowers who are the centerpiece of the 60 Minutes piece, “Prosecuting Wall Street.”

When Steve Kroft and Borgers sat down together, it was a great interview: honest, direct, and full of useful information. “I think he felt a real duty to make sure that a lot of their findings were followed up upon,” James told Overtime. “Most people who leave those commissions don’t really ever talk about it.” Which is why we are thrilled to feature Borgers this week on Overtime.

A seasoned fraud investigator, Tom Borgers worked for the government in the wake of the Savings & Loans scandal, preparing and directing criminal referrals, and responsible for the recovery of multi-million dollar claims. During that time, Borgers saw hundreds of bank executives prosecuted and sent to prison, a stark contrast with what’s happened in our current economic crisis.

Borgers tells Kroft that the FCIC found evidence of trillions of dollars of fraud and gross negligence, and that in the area of mortgage fraud, he found crimes committed by “mortgage originators, underwriters, banks . . . across the board.” Yet still, no prosecutions . . . so far.

Despite that, Tom Borgers’ personal contributions have been recognized. In 2010, he was awarded the Examiner of the Year Award by the Association of Certified Fraud Examiners, DC. It noted his “selfless and tireless service to the United States people” through his work at the FCIC. That same year, he was also honored with a Special Act of Service Award by the FCIC. In February of 2011, he became a managing director of a financial consulting firm in New York City.

The Financial Crisis Inquiry Report

The Financial Crisis Inquiry Commission was created to “examine the causes of the current financial and economic crisis in the United States.” In this report, the Commission presents to the President, the Congress, and the American people the results of its examination and its conclusions as to the causes of the crisis. Read full report.

More than two years after the worst of the financial crisis, our economy, as well as communities and families across the country, continues to experience the aftershocks. Millions of Americans have lost their jobs and their homes, and the economy is still struggling to rebound. This report is intended to provide a historical accounting of what brought our financial system and economy to a precipice and to help policy makers and the public better understand how this calamity came to be.

The Commission was established as part of the Fraud Enforcement and Recovery Act (Public Law 111-21) passed by Congress and signed by the President in May 2009. This independent, 10-member panel was composed of private citizens with experience in areas such as housing, economics, finance, market regulation, banking, and consumer protection. Six members of the Commission were appointed by the Democratic leadership of Congress and four members by the Republican leadership.

The Commission’s statutory instructions set out 22 specific topics for inquiry and called for the examination of the collapse of major financial institutions that failed or would have failed if not for exceptional assistance from the government. This report fulfills these mandates. In addition, the Commission was instructed to refer to the attorney general of the United States and any appropriate state attorney general any person that the Commission found may have violated the laws of the United States in relation to the crisis. Where the Commission found such potential violations, it referred those matters to the appropriate authorities. The Commission used the authority it was given to issue subpoenas to compel testimony and the production of documents, but in the vast majority of instances, companies and individuals voluntarily cooperated with this inquiry. Read full report.


Financial Transparency and Disclosure: China Progress on Corporate Governance

Recent negative publicity regarding fraud in Chinese public companies that entered the U.S. markets via reverse mergers has tended to paint all Chinese companies with the same toxic brush. Such capital markets’ cynicism regarding Chinese listed companies is overblown and counterproductive. A recent study has shown that the performance of Chinese companies, when compared to their peers in the U.S. reverse merger market, was actually superior to their Western company counterparts. Notwithstanding, much can be done to improve important aspects of corporate transparency and disclosure in China. The authors examine corporate governance issues particularly endemic to China and offer observations to ameliorate perceived market dysfunction while building a bridge towards greater global capital market efficiency. Read full article.