Below is a brief summary of precedential Court of Appeals decisions issued in the past 30 days in the field of private securities litigation:

• Loss Causation. Ray v. Citigroup Global Markets, Inc., No. 05-4362, --- F.3d ---, 2007 WL 1080426 (7th Cir. Apr. 17, 2007). The suit was brought by retail investors against an investment advisor and his employer for allegedly touting a stock that ultimately collapsed. The plaintiffs claimed, among other things, that the defendants made claims that the company had signed significant contracts knowing about unreported problems with the company’s current contracts, and had presented the stock as a safe investment for which there was little risk. When the truth became known, according to plaintiffs, the stock price dropped from $80 per share to $1 per share. At the same time, however, the stock price of the company’s competitors had also declined (in orders of magnitude ranging from 94% to 98%). The District Court granted summary judgment to the defendants for failure to demonstrate a triable issue of fact on loss causation. The Seventh Circuit affirmed. Held: (1) plaintiffs failed to contradict the defendants’ expert evidence that the company lost its value because of market forces, thus precluding reliance on the Caremark ‛materialization of risk“ approach to proving loss causation; (2) plaintiffs failed to put forth sufficient evidence to establish loss causation based on a Dura-style fraud-on-the-market theory because the record contradicted the assertion that the company’s stock ‛declined just when the alleged misrepresentations were revealed“; and (3) statements by the defendants that the stock ‛was a certain money winner“ do not amount to the ‛very explicit language“ necessary to satisfy the Bastian dictum that loss causation can be shown where an investment is presented as risk free and the plaintiffs’ loss was caused by materialization of that risk.

• SLUSA. Ring v. AXA Finantial, Inc., No. 05-0516-cv, --- F.3d ---, 2007 WL 1087261 (2d Cir. Apr. 6, 2007). The Second Circuit held that a Children’s Term Rider that is not itself a ‛covered security“ under SLUSA, does not become a ‛covered security“ simply because it attached to a variable life insurance policy that does meet the definition of a ‛covered security.“ Held: SLUSA does not apply, district court order vacated, remand with instructions to remand to state court.

• Investment Contracts. Securities and Exchange Commission v. Merchant Capital, LLC, No. 06-10353, --- F.3d ---, 2007 WL 983082 (11th Cir. Apr. 4, 2007). Held: Registered Limited Liability Partnership interests are investment contracts covered by the federal securities laws; sale of interests without filing a registration statement violated registration requirements; misstatements and omissions alleged actionable.

• Touhy-related Appeals/Private Subpoenas To SEC. Watts v. Securities and Exchange Commission, No. 06-1307, --- F.3d ---, 2007 WL 935898 (D.C. Cir. Mar. 30, 2007). The D.C. Circuit held that it lacked jurisdiction to review the SEC’s refusal to produce witness in response to Rule 45 on privilege grounds on a direct appeal from that decision. Rather than dismiss the direct appeal outright, the Court transferred the matter to the district court overseeing the underlying action pursuant to 28 U.S.C. § 1631.

• Fiduciary Duty of Class Counsel/PSLRA. Koehler v. Brody, Nos. 06-2357, 06-2746, 2007 WL 895864 (8th Cir. Mar. 27, 2007). Lead plaintiffs and class representatives of the NationsBank stockholders in the BankAmerica securities litigation were dissatisfied with the settlement of the litigation and objected on grounds including purported breaches of fiduciary duty and misrepresentations by lead counsel, co-lead counsel and other firms alleged to have represented the NationsBank stockholders. After the settlement was approved and affirmed on appeal in the Eighth Circuit, the plaintiffs brought a separate action against class counsel in the Southern District of New York asserting claims based on the lead plaintiff provisions of the Private Securities Litigation Reform Act and breach of fiduciary duty. The case was transferred to the District Judge in the Eastern District of Missouri who oversaw the underlying litigation and approved the settlement, and it was dismissed. On appeal, the Eighth Circuit held, among other things, that: (1) there is no private right of action under the PSLRA for a claim brought by an appointed lead plaintiff against lead counsel for alleged fiduciary breaches and misrepresentations; and (2) a lead plaintiff who objects to a settlement that is ultimately approved by the District Court based on alleged misdeeds of lead counsel cannot attack the quality of the representation or settlement amount in a collateral action for breach of fiduciary duty. In reaching the latter conclusion, the Eighth Circuit relied upon the D.C. Circuit’s decision in Thomas v. Powell, 247 F.3d 260 (D.C. Cir. 2001) and the 6th Circuit’s decision in Laskey v. UAW, 638 F.2d 954 (6th Cir. 1981).

Doug Pepe