March 23, 2007

Big Decision in Enron Securities Class-Action Litigation

On Monday, the US Court of Appeals for the Fifth Circuit issued a decision in the Enron securities class-action litigation that generally affirms that bankers, accountants, and others who work with publicly traded securities are not subject to securities-fraud claims that arise due to fraud committed by the issuer. There is some useful analysis of the decision in “The 10b-5 Daily.”

And here is some analysis of the decision from Gibson Dunn: In a decision having important implications both for the scope of liability under the securities laws and for class certification in general, on March 19, the Fifth Circuit ruled that a securities fraud action against certain financial institutions that participated in transactions with Enron Corporation could not proceed as a class action. The decision, Regents of the University of California v. Credit Suisse First Boston (USA), Inc., No. 06-20856, 2007 WL 816518 (5th Cir. March 19, 2007), adds to a growing body of federal caselaw that places limits on efforts by plaintiffs’ lawyers to plead securities fraud claims against secondary actors such as investment banks and other professional advisors, who did not themselves make any misrepresentations or omissions. The Fifth Circuit joins the Eighth Circuit in narrowly construing the scope of liability under such theories, and helps solidify a circuit split with the Ninth Circuit, which recently adopted a more liberal standard.

The Fifth Circuit’s decision denying class certification also represents another recent example of how federal courts are beginning to impose more rigorous standards for certification of investor classes in securities cases, and are permitting defendants to present more sophisticated “merits-based” arguments opposing class certification in appropriate cases. In December 2006, the Second Circuit reached a similar conclusion in the high-profile In re IPO Public Offerings Securities Litigation case, and denied class certification in that case as well.

More ABA Spring Meeting Notes

In our “Conference Notes” Practice Area, we have posted notes from the ABA Spring Meeting relating to accounting and the law.

IRS Provides Guidance for Reporting Tax Shelter Penalties to SEC for Non-10-K Filers

On Monday, the IRS issued Revenue Procedure 2007-25 (pg. 761) to provide guidance to companies that don’t file Form 10-Ks (egs. for those that file 10-KSBs, 11-Ks, 20-Fs, etc.) about how to disclose tax shelter penalties to the SEC. These rules were originally established in the American Jobs Creation Act of 2004 when Congress added Section 6707A to the Internal Revenue Code. In 2005, the IRS provided its initial guidance for Form 10-K taxpayers in Revenue Procedure 2005-51.