The US Court of Appeals for the Second Circuit has affirmed the District Court’s decision granting summary judgment to the defendants in the securities litigation against Omnicom Group, Inc. In re Omnicom Group, Inc. Securities Litigation, --- F.3d ---, 2010 WL 774311 (2d Cir.). Plaintiffs brought claims under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. In dismissing the case the Second Circuit found that the plaintiff could not prove causation.
The plaintiffs claimed that revelations regarding Omnicom’s accounting practices led to the drop in Omnicom’s stock price. Omnicom allegedly misrepresented the value of its shares of stock in Seneca, a company Omnicom formed with a private equity firm to take advantage of perceived opportunities in the e-services consulting and professional services markets. Plaintiffs also claimed that the accounting for the Seneca transaction was fraudulent. At the time of the Seneca transaction, several publications discussed how the true purpose of the Seneca transaction was an attempt by Omnicom to move underperforming assets off its books. A year later, the price of Omnicom’s stock dropped when an article critical of Omnicom was published and one of its directors resigned.
A successful Section 10(b) claim requires a plaintiff to prove (1) a material misrepresentation or omission, (2) scienter, (3) a connection with the purchase or sale of a security, (4) reliance, (5) economic loss, and (6) loss causation. Defendants argued, and the Court agreed, that the plaintiffs could not demonstrate loss causation. The “loss causation” requirement can be satisfied by proving (1) that a particular plaintiff relied upon the misrepresentation, (2) that the misrepresentation is a cause-in-fact of the loss suffered, or (3) that the cause-in-fact of the investor’s losses falls within the class of events that Section 10(b) and the securities laws were designed to prevent. All three concepts were at issue in this case.
Plaintiffs asserted a fraud on the market theory in the complaint. The claim failed to satisfy the reliance theory of loss causation because the misrepresentations plaintiffs complained of – improprieties with the Seneca transaction – were widely reported over a year before the stock price declined. Therefore, the Court found that the Seneca issues were already reflected in the market price of Omnicom’s stock as long as a year before the price drop that lead to the suit. Thus, plaintiff could not prove the market had been relying on any misrepresentations about Seneca when the stock price fell over a year after the initial reports.
Next plaintiffs tried to advance under a cause-in-fact theory. Plaintiffs argued that the drop in Omnicom’s stock price was the result of a later corrective disclosure of the Seneca misrepresentations. The alleged later corrective disclosure was the article that was published a year after the initial coverage of true purpose of the Seneca transaction. The cause-in-fact argument failed because the Court found that the alleged corrective disclosure was simply a negative characterization of previously known information. Since the information was previously known, it re-publication cannot constitute a corrective disclosure and it cannot be the cause-in-fact of the drop in price of Omnicom’s stock.
Plaintiffs’ final argument was that Omnicom concealed the improper accounting of the Seneca transactions and this was the proximate cause of plaintiffs’ losses. To succeed on their proximate cause argument, plaintiffs had to prove that the loss was foreseeable and caused by the materialization of the risk concealed by the fraudulent misrepresentations. Plaintiffs’ argument relied heavily on the resignation of a member of Omnicom’s board of directors. This resignation occurred around the time of the alleged corrective disclosure – a year after the key facts were widely reported. Plaintiffs claimed that the resignation was the result of the director’s disproval of the Seneca transaction, which in turn caused the drip in the market price of Omnicom’s stock. The argument failed because the connection between the resignation of a board member and the stock’s drop in price was too tenuous to be a proximate cause. The Court determined that the resignation had caused only concerns that other unreported problems may exist.
Since plaintiff could not succeed under any of the three loss causation theories, summary judgment in favor of Omnicom was proper.
Jason B. Desiderio, Esq.
In People ex rel. Spitzer v. Pharmacia Corp., ---N.Y.S.2d---, 2010 WL 424010 (Sup. Ct. Albany County 2010), the New York State Attorney General brought suit against a prescription drug manufacturer seeking a ruling that the defendant violated New York General Business Law ("GBL") § 349, which prohibits deceptive consumer oriented business practices, as well as Executive Law § 63(12), which proscribes repeated acts of fraud.
The State alleged that Pharmacia intentionally reported false and inflated prices for its products and that their reports did not reflect the actual cost paid by its pharmacy customers. According to the State, this practice caused the State and certain Medicare consumers to pay higher prices for Pharmacia's drugs because government health plans in New York rely upon the "average wholesale price" of prescription medications when providing reimbursement to pharmacies.
Following discovery, Pharmacia moved for summary judgment arguing that the State's claims were barred by the statute of limitations. Specifically, Pharmacia alleged that the State's claim accrued no later than the 1980s when State officials were well aware that published "average wholesale price" lists did not reflect pharmacies' actual acquisition costs. Because this action was not commenced until 2003, Pharmacia argued that it was time barred.
The court determined that the appropriate statute of limitations was three years as provided in CPLR § 214(2), given that the State's claim sought to establish liability arising solely from statute. The court held that if Pharmacia's price reports are violative of GBL § 349 and/or Executive Law § 63(12), each price report constituted the a separate wrong. Accordingly, the State is permitted to pursue damages in connection with price reports published by Pharmacia for the three-year period preceding the commencement of the action. Because the court determined that the action was not barred by the statute of limitations, but instead, limited to such three year period, Pharmacia's motion for summary judgment was denied.
In a case like this, where the conduct is continuous, the focus for purposes of the statute of limitations is on the date of the accrual of each separate violation, rather than merely the date of the first violation.
Sean C. McPhee, Esq.
In Key Equipment Finance v. South Shore Imaging, Inc. ___ N.Y.S.2d ___, 2010 WL 190205 (2d Dept. 2010), the New York State Appellate Division, Second Department explained that under a guaranty provision, officers can be held personally liable for the contractual obligations of a corporation. In this case, Key Equipment Finance leased a copier to South Shore Imaging, Inc. After South Shore failed to pay the lease, Key Equipment Finance sought to enforce a guaranty provision of the lease agreement. The provision provided that the guarantors unconditionally and irrevocably guarantee the payment and performance of all obligations of South Shore. The guarantors further agreed that all liability was joint and several. The original guaranty contained the corporate titles of the defendants, but the final guaranty portion of the lease did not state the corporate titles. The Fourth Department reversed a summary judgment order dismissing the complaint and determined that the plaintiff’s made a prima facie case.
The court explained that generally officers or agents are not personally liable on corporate contracts as long as the officers do not purport to bind themselves individually. However, when a guaranty constitutes a deliberately stated, unambiguous, and separate expression personally obligating an individual, that individual may be held liable under a contract.
The individual defendants contested that they did not intend to be held personally liable on the contract. However, the court indicated that the change between the first and second guaranty are contrary to this assertion. The first guaranty was unacceptable to the plaintiffs because it included the defendants’ corporate capacities. So, the document was re executed, demonstrating that the defendants understood that they were personally liable.
This case is a good example of how a court looks at a guaranty agreement signed by corporate officers. While it is generally the corporation, not the individual officers who are liable under a corporate contract, a guaranty would be worthless if it was not enforced against the individual officers who sign such an agreement. In this case, it would mean that if South Shore defaulted, South Shore would be liable under the contract. Such a result would, as the court states, be completely illogical.
However, the Second Department did not universally declare that corporate officers are always individually liable. Citing Florence Corp. v. Penguin Constr. Corp., 227 A.D.2d 442, 443, 642 N.Y.S.2d 697), the court explained “if a plaintiff attempts to trap an unwary corporate officer into making an unintended assertion of personal liability by inserting an obscure clause in the midst of a lengthy and complex contract,” an officer is not personally liable. While that did not happen in this case, it is important to remember the exception to the general rule holding individual corporate officers liable under a guaranty.
Matthew J. Kibler, Esq.