WASHINGTON -- A federal appeals court has made it less difficult for investors in California to sue for securities fraud, attorneys said yesterday.
The ruling last Friday also effectively repudiates litigation reform legislation drafted by U.S. Rep. Christopher Cox, R-Calif., that attorneys said would hurt investors seeking redress from losses connected with the Orange County, Calif., financial debacle.
The full U.S. Court of Appeals for the Ninth Circuit ruled in In re Glen-Fed Inc. Securities Litigation that a three-judge panel of the court was wrong to throw out a securities fraud suit against a thrift institution. The panel interpreted too strictly a federal rule governing the kind of information such challenges should include to be accepted for review, the full court said.
Other federal courts, including the U.S. Court of Appeals for the Second Circuit, have held that the federal rule requires investors to provide facts that would give rise to a "strong inference" of intent to defraud.
But the Ninth Circuit said that while investors should state the particular circumstances of a fraud allegation, they do not have to meet the stricter "strong inference" test that would require detailed knowledge about defendants.
The San Francisco-based court, whose district covers Orange County, reinstated the class action suit by investors against officers and directors of GlenFed and spelled out how securities fraud complaints should be written under federal rules of civil procedure.
Like investor suits recently filed against Orange County officials and financial advisers, the GlenFed litigation focused on the way disclosures were made -- in this case, by the thrift's officers and directors. The GlenFed investors alleged misrepresentations and omissions aimed at concealing the thrift's deteriorating financial condition.
A U.S. district court dismissed the GlenFed litigation because it said the investors did not comply with a federal rule that requires a fraud complaint to be specific. The lower court found that the complaint, which ran more than 100 pages, was too general to meet the rule's requirement that allegations of fraud or mistake "shall be stated with particularity."
The lower court ruling, which was upheld by the three-judge panel of the appeals court, represented the first time a federal court in California adopted the harsher test set by the Second Circuit, said attorney Jeffrey Klafter of Bernstein Litowitz Berger & Grossman in New York. Klafter is representing a class of bondholders and other investors who are suing Orange County officials and financial advisers.
But the appeals court found that despite many flaws, the GlenFed investors' complaint met the rule by specifically stating why certain statements by thrift executives were alleged to be false. The court said the "strong inference" test was too strict because the rule also states that investors may "generally" allege "malice, intent, knowledge, and other condition of mind of a person."
Under Cox's bill, investors would have to allege specific knowledge about the state of mind of people they are suing as well as the facts supporting such knowledge, which Klafter said is "inappropriate" because investors normally do not have access to such information.
The Ninth Circuit ruling probably will not make much difference to investors suing in the Orange County situation because the investors also could meet the harsher test set by the Second Circuit, Klafter said.
But the ruling could help stoke the long-running legislative debate on litigation reform, analysts said. Cox's legislation is expected to be the centerpiece of a litigation reform measure that Republicans hope to push through the House as part of their 100-day agenda. The Republicans want to stop frivolous suits and curb other abuses that they say have hurt businesses, especially high-tech ventures.
A court ruling that helps investors file suits could further fuel efforts to reform the litigation system, an attorney said.
But opponents of litigation reform also will have political ammunition from Orange County's multibilliondollar losses and bankruptcy filing as purchasers of county bonds and other debt seek redress for their losses, analysts said.
The House Commerce Committee's subcommittee on telecommunications and finance plans to begin holding hearings on Jan. 19 on litigation reform.
The conflict among the circuit courts on how allegations are made in lawsuits may make the Ninth Circuit ruling ripe for appeal to the U.S. Supreme Court, attorneys said. An attorney for GlenFed could not be reached for comment on the thrift's plans.
However, the high court on Oct. 3 declined to review another Ninth Circuit ruling involving similar issues in In re Wells Fargo Securities Litigation. In that case, a three-judge panel of the Ninth Circuit interpreted the federal rule on specificity of filings differently from the panel in the GlenFed case.
Ninth Circuit Judge William A. Norris wrote a concurring opinion with last Friday's ruling that said the Second Circuit has interpreted the rule much more stictly to deter suits aimed at forcing defendants to disclose reams of information or to extract "undeserved settlements as the price of avoiding discovery costs."
Norris said that securities fraud complaints such as the GlenFed suit, which include excessive general information, have "spread like the plague." District judges should manage cases better to avoid excessive litigation and associated costs, Norris said.
Municipal Bond Index Update
The list of bonds priced for the Municipal Bond Index will be revised after the December 15 pricing.
Three new issues will be added to the index. They are:
Illinois Development Finance Authority,
pollution control revenue refunding bonds, Series 1994D
(Commonwealth Edison Co.) (AMBAC insured);
6&s dated 12/1/94, due 3/1/15; first coupon 3/1/95;
term amount: $91,000,000; callable 3/1/05 at 102, 3/1/07 at par;
ratings: Aaa/AAA; conversion factor: 0.9047; CUSIP: 451888CU3.
New York State Research & Development Authority,
facilities revenue bonds, Series 1994A (Consolidated Edison Co.);
7??s dated 12/1/94, due 12/1/29; first coupon 6/1/95;
term amount: $100,000,000; callable 12/1/04 at 102, 12/1/06 at par;
ratings: Aa3/A-plus; conversion factor: 0.9340; CUSIP: 64984EBC8.
Pennsylvania Intergovernmental Cooperation Authority,
special tax revenue bonds, Series 1994 (City of Philadelphia Funding
Program) (FGIC insured);
6&s dated 12/1/94, due 6/15/21; first coupon 6/15/95;
term amount: $54,000,000; callable 6/15/04 at 102, 6/15/05 at par;
ratings: Aaa/AAA; conversion factor: 0.9135; CUSIP: 708840DX8.
Three bonds will be removed from the index in accordance to the index criteria. The bonds, as numbered in today's report, are:
20. Chicago wastewater 6[theta]s due 1/1/24
24. Sacramento MUD 6s due 1/1/24
26. Ohio Air Quality Dev 6[theta]s due 1/1/29