Securities Litigation

All too often, derivative actions are filed on the heels of securities fraud class actions.  These cases, which are purportedly brought on behalf of the company against its directors, pose a particular concern for board members.

Experience

Gibson Dunn has decades of experience representing companies and their directors and officers in defending, and taking control of, shareholder derivative actions.

Recent representations include: 

• Representing one of the world’s leading retailers and its current and former directors and officers in civil litigation filed across the United States by the company’s shareholders relating to alleged corruption in Mexico.  Shareholder derivative lawsuits were filed in the Delaware Chancery Court and the Western District of Arkansas, two cases were filed in Arkansas state court, and a shareholder securities class action was filed in the Middle District of Tennessee (subsequently transferred to the Western District of Arkansas).   Accepting Gibson Dunn’s arguments, the Western District of Arkansas stayed the six consolidated actions before it in light of the substantially similar shareholder derivative actions pending in the Delaware Chancery Court.  This ruling followed a similar one from an Arkansas state court that granted Gibson Dunn’s motion to stay a similar shareholder derivative action in that court.  The Western District of Arkansas subsequently adopted Gibson Dunn’s arguments in connection with a shareholder derivative action brought in Arkansas state court but removed to federal court, denying plaintiff’s remand motion and granting our clients’ motion to stay pending the related Delaware litigation.  These combined rulings permit our clients to litigate the shareholder derivative claims exclusively in the Delaware courts.  Parallel government investigations are being pursued by the SEC and the Department of Justice.
• Secured the voluntary dismissal in the Central District of California of a shareholder derivative suit against Conversant, Inc. (formerly known as ValueClick, Inc.), its directors and officers.  The suit was prompted by the company’s announcement of a major write-down of a note receivable taken in connection with the sale of its lead generation business unit as well as a significant drop in revenues and income from its media segment business.  The complaint largely copied similar allegations in a securities class action filed against the company that also was voluntarily dismissed.  Shortly after Gibson Dunn moved to dismiss the derivative action for failure to allege demand futility as required by Delaware law plaintiff’s counsel voluntarily dismissed.
• Obtained dismissals in the Southern District of New York of two shareholder derivative actions and an ERISA action on behalf of JPMorgan’s independent directors, in connection with the company’s $6 billion “London Whale” trading losses.  Plaintiffs in the principal derivative action alleged that making a litigation demand on the JP Morgan Board would have been futile; in a “demand made” action, the plaintiff claimed that the JPMorgan Board had wrongly refused to bring an action against those responsible for the company’s CIO division losses.  The court rejected plaintiffs’ arguments, as it did also in the action alleging that the JPMorgan directors breached their fiduciary duties under ERISA by continuing to offer participants in the company’s 401(k) plan an opportunity to invest in JPMorgan stock, and by providing them with inaccurate investment information.  Gibson Dunn worked closely with counsel for JPMorgan in the defense of these lawsuits.
• Secured an unprecedented arbitration victory for Corvex Management and Related Fund Management arising from their campaign to remove the Board of Trustees of CommonWealth REIT due to the Trustees’ gross mismanagement of the company.  After a two- week hearing on the merits, a panel of arbitrators sided with Gibson Dunn and invalidated a series of by-laws unilaterally enacted by CommonWealth’s Trustees to entrench themselves in office and prevent a shareholder vote on removal.  To remedy the Trustees’ actions, the arbitration panel adopted a streamlined procedure for CommonWealth shareholders to have a vote on the Trustees’ removal.  Corvex and Related then secured consents from holders of more than 80% of CommonWealth’s shares, forcing the removal of all seven members of CommonWealth’s board.
• Won dual victories on behalf of Leidos Holdings, Inc. (formerly SAIC, Inc.), in cases arising from SAIC’s $500 million settlement and deferred prosecution agreement with the U.S. Department of Justice related to SAIC’s involvement with CityTime, the New York City payroll system.  In the wake of that resolution shareholders filed derivative suits and securities class actions in federal and state courts around the United States.  We secured dismissal and subsequent Second Circuit affirmance of all derivative claims against the directors.  In the Southern District of New York we then obtained dismissal of all remaining claims in the securities class actions, pertaining to allegations that Leidos failed to make proper FAS 5 disclosures.  These dual rulings dismissed all remaining shareholder litigation against Leidos, and clarified the standards for pleading director liability under Delaware law, and for FAS 5 liability in 10(b) practice.
• Won dismissal from the Northern District of Texas of a creditor derivative lawsuit seeking over $725 million from Energy Future Competitive Holdings, Inc. (EFCH) and its directors.  The decision acknowledged a significant difference between Texas and Delaware law on an issue of recurring importance to corporations and their directors.  The plaintiffs were subsidiaries of Aurelius Capital Management, a hedge fund that had purchased bonds backed by an EFCH guarantee.  Alleging that EFCH had failed to charge an adequate interest rate on loans to EFCH’s parent company, Aurelius filed suit challenging the loans’ terms, arguing that its status as an EFCH creditor gave it standing to sue derivatively because EFCH was insolvent at the time suit was filed.  The court, dismissing for lack of standing, adopted Gibson Dunn’s argument in its entirety:  While the Texas Trust Fund Doctrine allows creditors to sue corporations and their directors for breach of fiduciary duty if the corporation both is insolvent and has ceased doing business, it was undisputed that EFCH had not ceased doing business.  Acknowledging that Delaware follows a different rule and allows creditors to bring derivative suits whenever a corporation is insolvent, even if still operational, the court concluded that the Delaware rule was inconsistent with the pronouncements of Texas intermediate appellate courts on the issue.
• Secured dismissal with prejudice of all claims against the directors of Hewlett-Packard in a shareholder derivative suit arising out of the termination of former CEO Mark Hurd, and related claims of breach of fiduciary duty lodged against HP’s board of directors.  Plaintiff made demand on HP to bring claims against the directors for, among other things, violating their duty of oversight, making false statements in HP’s annual proxy statements, and approving an improper severance deal for Mr. Hurd when he was forced to step down as CEO following a personal scandal.  In response, HP conducted an internal investigation and concluded that the directors had not engaged in any wrongful conduct.  Plaintiff sued, claiming that his demand was wrongfully refused, and that HP’s independent committee, in-house and outside counsel had engaged in a “whitewash” investigation designed to exonerate the board and management.  The court dismissed the plaintiff’s original as well as amended complaints and denied further leave to amend.
• Successfully defended the independent directors of Diamond Foods in shareholder derivative litigation in the state and federal courts in California and Delaware.  The cases arose out of Diamond’s announcement of a major accounting restatement in 2012, and the commencement of an SEC investigation into the restatement issues.  Gibson Dunn represented the audit committee in the company’s internal investigation leading to the announcement of the restatement.  Defendants successfully moved to dismiss both the federal and state court derivative actions, after which the derivative cases settled with no payment from our clients.
• Obtained a victory on behalf of the directors of Allergan, Inc. in the Supreme Court of Delaware in a derivative lawsuit brought by shareholders who had filed substantively identical actions against the directors in both California and Delaware.  The Delaware court ultimately agreed with Gibson Dunn that the previous dismissal of the federal California action precluded further proceedings in Delaware, holding that under constitutional principles of full faith and credit, the preclusion law of California, not of Delaware, must be applied; and that under established California preclusion law, the dismissal of one shareholder derivative complaint precludes complaints by other shareholders on the same allegations and theories.
• Successfully settled a shareholder derivative action brought against Gibson Dunn clients, the former independent directors of Wachovia Corp, alleging inter alia that Wachovia issued billions of dollars of “toxic” mortgage loans during the housing bubble and that the board of directors breached its fiduciary duties and failed in its oversight obligations.  Because Wachovia was acquired by Wells Fargo in 2009, plaintiffs asserted “double derivative” claims and alleged that Wells Fargo’s board also breached its fiduciary duties.  The settlement, which followed Gibson Dunn’s motion to dismiss and has been approved by the court, includes certain corporate governance reforms to be adopted by Wells Fargo, but no monetary payment from our clients.  The Northern District of California action is the last of several shareholder lawsuits in which Gibson Dunn acted as national monitoring counsel for the former directors of Wachovia, including class and derivative actions in New York, North Carolina, and Alabama, and a parallel SEC investigation.  The SEC action concluded with no action taken against any of our clients.

Securities litigation is sometimes preceded by, or occurs parallel with, an internal investigation under the supervision of a special committee of the board of directors.  Our lawyers are frequently called on to advise such special committees in conducting internal investigations into alleged insider trading, improper revenue recognition, breaches of fiduciary duty, and violations of U.S. federal and state statutes including the Foreign Corrupt Practices Act.  In recent years, we have conducted independent investigations for the audit committees of numerous Fortune 500 companies.

Gibson Dunn’s securities litigators know that early and aggressive crisis management can enhance a corporation’s credibility with law enforcement officials, regulators and the investment community and head off or limit corporate exposure.

Gibson Dunn’s Securities Litigation Group has extensive experience defending the litigation that inevitably follows the announcement of public company mergers.  We work closely with our corporate lawyers and anticipate potential issues before a deal is announced, minimizing the costs and risks associated with the fast-paced discovery and preliminary injunction battles that often accompany such deals.  We have successfully handled these types of proceedings all over the United States, through both aggressive litigation on the merits and, where appropriate, favorable settlement.

Our M&A practice, including takeover defense, is one of the most extensive and well-respected.  According to Corporate Control Alert, Gibson Dunn ranks among the top five firms in helping takeover targets defend themselves.  We have worked on many of the major hostile offers in the United States and abroad.

Our securities litigators also represent companies, directors and their financial advisers in connection with shareholder litigation arising out of proposed mergers.

Experience

Our track record is hardly surprising, as Gibson Dunn lawyers created many of the legal ideas and strategies that others in the legal industry now employ.

Recent representations include:

• Obtained complete victory for Hewlett-Packard following a three-week JAMS San Francisco arbitration on all claims asserted by the former CEO of a company that had been acquired by HP.  He claimed entitlement to upwards of $150 million in damages as a result of a decision by the acquired company’s board of directors to terminate him for cause and unilaterally cancel millions of his backdated, in-the-money stock options.  Gibson Dunn successfully argued that both the termination and option cancellation were permissible under Delaware Law, and that the board’s decisions were both appropriate under the circumstances and entitled to deference.
• Successfully represented hedge fund Eminence Capital in litigation that forced the hand of Jos. A. Bank to negotiate a merger with rival The Men’s Wearhouse, on terms that were highly favorable to both companies’ stockholders, including Eminence, which held significant stakes in both clothing retailers. Eminence commenced the lawsuit in the Delaware Chancery Court alleging that the Jos. A. Bank directors breached their fiduciary duties by refusing to pursue, and erecting improper obstacles to, a negotiated deal with The Men’s Wearhouse.  Following that move The Men’s Wearhouse filed a substantially similar case.  In response to the litigation pressure Jos. A. Bank ultimately dropped its refusal to negotiate. This case was another example of the continued growth in M&A litigation, now brought to challenge virtually all public company mergers and going private transactions.
• Secured affirmance from the California Court of Appeal of summary judgment for Lawrence Ng, co-founder of oversee.net, a multimillion-dollar Internet marketing business that oversees and monitors over 600,000 domain names.  Plaintiff co-founder sued in connection with Mr. Ng’s decision to sell his shares to a private equity firm, alleging breach of fiduciary duty as a company director for failing to consider an allegedly superior offer for all outstanding company shares.  The trial court granted summary judgment based on Gibson Dunn’s argument that plaintiff was precluded from bringing the lawsuit because of a previous action he had brought against Mr. Ng in Delaware but then dismissed with prejudice so that he could participate in the sale to the private equity firm.
• Secured partial acquittal and a declaration of mistrial in the District Court for the District of Columbia for a former executive of China North East Petroleum (CNEP) in the first-ever criminal securities fraud trial stemming from investigation of Chinese reverse mergers by the U.S. Department of Justice and Securities and Exchange Commission.  The client was indicted in connection with an alleged fraud stemming from two securities offerings raising more than $30 million in capital; CNEP had traded on the New York Stock Exchange.  The seven criminal counts included one of conspiracy to commit securities fraud, four of securities fraud and two of false statements.  Following a six-week criminal jury trial Gibson Dunn secured an acquittal on two of the four securities fraud counts and the jury deadlocked on the remaining five counts, prompting the court to declare a mistrial as to them.
• Secured summary judgment from the Delaware Court of Chancery and affirmance by the Delaware Supreme Court for client Dr. Ernst Volgenau in a shareholder suit arising from the sale of government contractor SRA International, Inc. (SRA), founded by Dr. Volgenau, to Providence Equity Partners.  The decision importantly clarified the rights of controlling shareholders under Delaware law.  Providence acquired SRA for a substantial premium over SRA’s unaffected share price.  As part of the deal Dr. Volgenau rolled over a portion of his controlling equity stake into the new company and became chairman of the SRA Board of Directors.  Despite the premium to shareholders, plaintiff Southeastern Pennsylvania Transportation Authority (SEPTA) sued SRA, Providence and Dr. Volgenau, claiming a breach of fiduciary duties and alleging that Dr. Volgenau controlled the transaction and received an impermissible premium at the expense of the minority shareholders.  In granting the defendants summary judgment, the Court of Chancery had concluded that the transaction should be reviewed under the deferential business judgment rule because adequate procedural protections ensured that the minority shareholders’ rights were protected in the negotiation process.
• Obtained from the Delaware Supreme Court a rare expedited ruling from the bench reversing an injunction of the Delaware Chancery Court against an $8.3 billion stock repurchase transaction involving client Vivendi S.A. and software publisher Activision Blizzard, Inc.  Gibson Dunn represented Vivendi in the transaction in which Vivendi agreed to sell most of its majority ownership stake in Activision back to the company and a consortium of investors.  After the transaction’s public announcement shareholder derivative suits were filed in California and Delaware challenging the sale.  Thereafter one of the shareholder plaintiffs sued in the Delaware Court of Chancery seeking to prevent the transaction from closing.  The day before the scheduled closing the Chancery Court issued a preliminary injunction barring it.  Gibson Dunn and several other firms representing Activision and its directors requested an expedited appeal to the Delaware Supreme Court, which agreed to hear it on an accelerated schedule.  The Supreme Court’s ruling reversing the injunction remanded the case, allowing the transaction to proceed.
• Obtained reversal from the California Court of Appeal, First Appellate District, of a judgment of the California Superior Court invalidating the election of Gibson Dunn clients to the boards of directors for The McGraw Group of specialty insurance companies under the California Corporations Code.  Plaintiff, a one-third shareholder in The McGraw Group, sought to invalidate the election based on financial transactions between the Gibson Dunn clients’ affiliates and the majority shareholders who elected them.  The trial court agreed and declared the election and related actions invalid.  On appeal Gibson Dunn argued for reversal because the majority shareholders were indispensable parties who were not joined in the action, resulting in impairment of their ability to protect their interests, and exposure of Gibson Dunn’s clients to inconsistent obligations in subsequent litigation.  The Court of Appeal agreed and reversed, holding that it was error not to require plaintiff to join the other shareholders as parties to the action.
• Successfully represented the Chandler Trusts in a case in the Southern District of New York alleging fraudulent transfer claims aggregating more than $8 billion against Tribune Company shareholders by former Tribune creditors.  The lawsuit challenged payments to the shareholders in connection with a leveraged buyout of the company in 2007.  The Tribune Company ultimately filed for bankruptcy protection approximately one year after the closing of the LBO in 2008.  The Chandler Trusts were among the largest Tribune shareholders.  The court dismissed all fraudulent transfer claims on the legal ground, developed by Gibson Dunn, that individual creditors lacked standing to pursue avoidance of the same transfers that a representative of the Tribune estate had previously sought and was continuing to seek avoidance of under an alternative theory of liability.
• Successfully opposed an effort to enjoin the stockholder vote to approve Fushi Copperweld’s “going private” merger.  After Fushi, a Nevada corporation based in China, received a proposal to take the company private, various plaintiffs filed lawsuits alleging the directors had breached their fiduciary duty to stockholders.  Gibson Dunn was retained by the Special Committee and assisted the corporate team by negotiating terms for the benefit of unaffiliated stockholders.  The Special Committee approved the proposed merger and recommended it to Fushi’s board and stockholders.  Following argument, the U.S. District Court for the District of Nevada denied plaintiff’s motion, finding that plaintiff s had not satisfied any of the requirements for preliminary injunctive relief.  The court agreed with Gibson Dunn that the business judgment rule applies to protect the Special Committee’s actions.
• Successfully opposed an effort to enjoin a stockholder vote on Ameristar Casinos, Inc.’s proposed merger with Pinnacle Entertainment, Inc.  Ameristar’s Board of Directors had analyzed and rejected the idea of remaining independent and restructuring the company as a real estate investment trust (REIT).   Plaintiffs alleged the Board breached its fiduciary duty to stockholders and sought a preliminary injunction on the vote, arguing that Ameristar’s definitive proxy statement filed with the SEC omitted certain material information provided by financial advisors regarding the “upside” of a REIT transaction.  The court denied the motion, agreeing with Gibson Dunn that plaintiffs had not established a likelihood of success on the merits of their disclosure claim.

Gibson Dunn is a leader in defending companies and individuals facing investigations by the U.S. Department of Justice, the SEC, state Attorneys General, and other federal and state regulatory agencies.  We represent directors, officers, issuers, underwriters and auditors in enforcement matters.  Our lawyers also routinely represent clients before FINRA (formerly NASD), the New York Stock Exchange, and other regulatory and self-regulatory organizations. 

Experience

While many of our finest representations are cases that were never brought and thus that we cannot detail, a few may be shared as examples.

Recent representations include:

• In a high-profile, hard-fought struggle for exoneration (over 12 years), we secured a unanimous jury verdict in the Southern District of New York in favor of Nelson Obus and co-defendants in a long-running insider trading case. The Securities and Exchange Commission sued Mr. Obus, the general partner of Wynnefield Capital, Inc., his analyst Peter Black, and Black’s friend Brad Strickland in 2006, alleging that Black and Obus traded on inside information in connection with Wynnefield’s 2001 purchase of shares in SunSource, Inc. — two weeks before Allied Capital Corporation announced that it would acquire SunSource. The SEC charged Strickland with misappropriating information about the acquisition and tipping Black, who tipped Obus, who then traded. The agency sought an injunction against the three defendants, disgorgement of over $1.3 million in alleged ill-gotten gains, civil monetary penalties, and an order prohibiting each of them from acting as an officer or director of any issuer of securities. The jury verdict, coming after a two-week trial and one day of deliberations, ended years of litigation: The SEC first subpoenaed Mr. Obus, his codefendants and his hedge funds in 2002. The defendants moved for summary judgment on a novel theory in 2009, which the Southern District of New York granted in September 2010. The SEC appealed and the Second Circuit reversed, two years later, in the most significant reinterpretation of the misappropriation theory in 20 years. That opened the way for the trial and acquittal.
• Secured partial acquittal and a declaration of mistrial in the District Court for the District of Columbia for a former executive of China North East Petroleum (CNEP) in the first-ever criminal securities fraud trial stemming from investigation of Chinese reverse mergers by the U.S. Department of Justice and Securities and Exchange Commission.  The client was indicted in connection with an alleged fraud stemming from two securities offerings raising more than $30 million in capital; CNEP had traded on the New York Stock Exchange.  The seven criminal counts included one of conspiracy to commit securities fraud, four of securities fraud and two of false statements.  Following a six-week criminal jury trial Gibson Dunn secured an acquittal on two of the four securities fraud counts and the jury deadlocked on the remaining five counts, prompting the court to declare a mistrial as to them.
• Representing the former head of corporate cash on the fixed income desk at Thomas Weisel Partners LLP in an auction rate securities case, we secured dismissal of all fraud charges against him.  The Financial Industry Regulatory Authority (FINRA) had alleged that he engaged in fraud when he authorized the purchase of $15.7 million of auction rate securities for three corporate clients approximately two weeks before the unexpected and unprecedented freeze of the entire ARS market in February 2008.  After hearing testimony and reviewing hundreds of documents, The National Adjudicatory Council panel (the appellate review body of FINRA) agreed with a November 2011 decision by a three-member hearing panel and fully credited Gibson Dunn’s arguments that defendant believed the securities were safe and liquid investments, that the transactions were entirely consistent with years of practice at Thomas Weisel, and that there was no evidence of improper motive or intent.