EDITION 11

WeeklyOcTObEr 5, 2012

How American Airlines Can Get Back on Track

Avoiding Food Label Litigation

What’s Next in the Boardroom: Greg Little on Criminal & Civil Litigation and Investigations

SEC Rulemaking on Conflict Minerals & the JOBS Act

LEVICK in the News

Amgen:

A Supreme Court CASe With immenSe BuSineSS impACt

richard S. Levick, Esq.Originally Published on Forbes.com

A Supreme Court CASe With immenSe BuSineSS impACt

Amgen: Here are the facts. The Connecticut Retirement

Plans & Trust Funds brought an action against

Amgen involving misrepresentations that the

pharmaceutical giant purportedly made to

the FDA regarding the safety of two products.

(Those products stimulate production of red

blood cells and reduce the need for blood

transfusions.) Connecticut Retirement Plans &

Trust Funds specifically alleged that the com-

pany then misrepresented those FDA meetings

to shareholders. The plaintiff moved to cer-

tify a class of persons who purchased Amgen

stock between April 22, 2004 and May 10, 2007,

when two of the FDA meetings occurred.

Amgen opposed certification, arguing that the

misrepresentations had no impact on share

price. At the district court level, the company

asserted that the truth fully entered the market

anyway via FDA announcements as well as

analyst reports disclosing all material infor-

mation regarding the safety of the drugs in

question. In other words, the alleged misrep-

resentations therefore could not have affected

the stock price. As one commentator wryly

observed, “not all lies are important: You can

fudge your weight if [HUD] is considering you

for a janitor’s position, but not if NASA is fit-

ting you for a space suit.”

And on Wednesday, for what it’s worth, Amgen

shares reached an all-time high.

The key principle that Amgen relied on was that

the plaintiff must prove at the class certification

stage that the misrepresentations were materi-

al. But Amgen lost in district court, certification

was granted, and the Ninth Circuit agreed.

Common perceptions might deem materiality

a matter for juries to decide. In fact, however,

“the Supreme Court has said in Wal-Mart that

a plaintiff seeking class certification must ‘af-

firmatively demonstrate’ his or her compliance

with the requisites for class certification under

Rule 23” of the Federal Rules of Civil Proce-

dure, as Paul Ferrillo advises. “Simply put, the

It’s one of those historic Supreme Court cases that, while it may inspire a great deal less public interest than Obamacare or Citizens United, will nonetheless have a long-reaching impact on American business. Importantly, it should also inspire new vigilance among business leaders even if, in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, the nine judges deliver a totally pro-defense ruling.

Weekly

case law says that the plaintiff has to prove

that the misstatement was material,” adds Fer-

rillo, a counsel at Weil, Gotshal & Manges LLP.

Likewise at issue is Amgen’s right to rebut such

proof if and when it must ultimately be present-

ed. A Solomonic outcome is not inconceivable

should the plaintiffs be required at day’s end to

prove materiality but, once they’ve done so, the

defense cannot then challenge that proof. Or

the opposite is also possible: a SCOTUS ruling

that plaintiffs do not have to prove materiality

but defendants can, as Robert Carangelo puts it,

“rebut the presumption that a company’s disclo-

sure was material to investors.

“Such an approach is already taken in the

Third Circuit,” adds Carangelo, a partner at

Weil, Gotshal who, with Ferrillo and associ-

ates David J. Schwartz and Matthew Altemeier,

have authored the seventh edition of The 10b-5

Guide, a primer on recent securities fraud case

law written for both businesspeople and legal

practitioners. “In fact, there’s a significant split

in the circuit courts that might have been the

driver for the Supreme Court to agree to hear

the case.”

In addition to the separate approach taken by

the Third Circuit, “the Second Circuit, directly

contrary to the Ninth Circuit, requires a plain-

tiff to prove materiality at the time of class

certification in order to gain the benefit of ‘the

fraud on the market presumption,’ and [it]

allows a defendant to rebut such proof with

contrary evidence.” (The fraud on the market

theory, enunciated by the Supreme Court in

the landmark Basic Inc. v. Levinson, requires

that a defendant’s material misrepresentation

regarding a security traded in an open market

was relied on by investors who then suffered a

loss as a result.)

“ ...not all lies are important: You can fudge your weight if [HUD] is considering you for a janitor’s position, but not if NASA is fitting you for a space suit.”

For business, the worst-case scenario is,

obviously, that SCOTUS will affirm plaintiff’s

position entirely, an all-the-more daunting

outcome considering how few avenues there

currently exist to challenge class certifications

in an environment where a company’s expo-

sure in a single case can total billions. Such a

decision by the Supreme Court will deprive

businesses of a significant legal recourse, open-

ing the floodgates for an ever greater number

of class actions.

The rest is predictable: to avoid the untenable

expense of defending these multiple class ac-

tions, corporations will settle earlier and for

higher amounts. The plaintiffs will have im-

mense new leverage and, in turn, another bur-

den will be imposed on an already-beleaguered

economy as large companies do whatever they

must do to shoulder the additional cost.

The best case is equally obvious: the Supreme

Court reverses entirely and finds that a plaintiff

must prove materiality to gain the further bene-

fit of the fraud on the market presumption. The

leverage then switches back to the defendant.

However, if the worst-case scenario is awfully

bad under any circumstances, I’m not so sure

that this best case doesn’t carry its own longer-

term risks for business as well. Here the issue

involves more than legal procedure. It speaks

broadly to investor confidence and public trust

in what a company says to its stakeholders, and

to how fully transparent those communications

are—beyond what the law requires.

The very existence of this decisive case be-

speaks need for such enhanced vigilance and

a corporate will to openly and fully impart bad

news. The danger for companies of a totally

pro-Amgen outcome is that they might become

just a wee bit more confident that, if push

comes to shove, they’re shielded by procedural

rules or otherwise effective legal strategies.

All lies may not be equally “important” and

some may indeed be totally immaterial. But it’s

a bad habit to get into.

Richard S. Levick, Esq., President and CEO of LEVICK,

represents countries and companies in the highest-stakes

global communications matters—from the Wall Street

crisis and the Gulf oil spill to Guantanamo Bay and the

Catholic Church.

L

Weekly

LEVICK Executive Vice President Gene Grabowski discusses the problems currently confronting

American Airlines and outlines what the carrier can do to regain passenger confidence.

hoW AmeriCAn AirlineS CAn get BACk on trACkgene grABoWSki

Martin Hahn, a Partner in the law firm of Hogan Lovells US LLP, continues our examination of

class action lawsuits filed against food and beverage companies alleged to have misled consumers

with questionable labeling.

Avoiding Food lABel litigAtion mArtin hAhn

What’s Next iN the Boardroom: GreG LittLe oN CrimiNaL & CiviL LitiGatioN aNd iNvestiGatioNsRichard S. Levick, Esq.Originally Published on LEVICK Daily

Weekly

duct leading to investor losses. By pursuing

negligence-based claims, the SEC will increase

the number of potential targets to include

those who had no intent to deceive investors

but simply did not act in a reasonable man-

ner. If a business decision results in significant

shareholder loss, there may be a tendency to

view all actions and disclosures surrounding

that decision as unreasonable. The bottom line

is the SEC will potentially be bringing more

claims with a significantly reduced burden of

proof. This new focus will reinforce the need

for robust compliance programs.

how can boards of directors best serve a company in the midst of a civil or criminal investigation?

Gregory Little: In most investigations, there

are three distinct phases that require three

distinct approaches. In the beginning stages of

the investigation, every effort should be made to

demonstrate to investigators that the company

intends to be part of the solution —not part of

the problem. Whether it is the SEC, the DOJ, or a

state attorney general, regulators and prosecu-

tors are very quick to make a determination as

to whether your company is truly committed to

solving a perceived problem or perpetuating it.

If the investigation proceeds to the second

stage where the regulators and/or prosecutors

believe a problem exists, the company should

make an objective assessment as to whether

that is the case and, if so, demonstrate why

that problem is an aberration in an otherwise

strong compliance program. If the board con-

cludes that the regulators and/or prosecutors

are wrong about whether the problem exists,

the company should work closely with them to

explain why the conclusion is erroneous.

Finally, if the regulators/prosecutors are ap-

parently committed to moving forward with

an enforcement action, the company must be

prepared to show it is committed to winning in

court. Even if the company ultimately decides

to resolve the dispute, the willingness and abil-

ity to pose a vigorous defense will enhance the

negotiating posture of the company.

This post is excerpted from Richard Levick’s recent NACD

Directorship feature “What’s Next? The Top Issues of 2013

and Beyond.” To read the full article and learn more about

the most significant issues impacting boardrooms today,

click here.

L

Best CommUNiCatioNs PraCtiCes: 1. New whistleblower rules have changed the game. Boards must ensure that all employees know every channel by which they can

report compliance issues internally, before they turn to the government.

2. Companies are naturally reticent to aggressively communicate on compliance. But the more they do, the more they condition the

marketplace, investors, and regulators to give them the benefit of the doubt should trouble arise.

3. When it becomes clear that an investigation will result in charges, boards must ensure that companies articulate their willingness to

aggressively defend against dubious allegations. At the very least, they strengthen their position at the bargaining table by doing so.

Over the next several weeks, LEVICK Daily

will share selected interviews from our

recent NACD Directorship article entitled

“What’s Next? The Top Issues of 2013 and

Beyond.” Today, we feature a discussion of

civil and criminal litigation and investiga-

tions with Gregory Little, a Partner in the

New York office of White & Case.

Mr. Little is a trial lawyer who counsels

clients on successfully avoiding, resolving,

and winning litigation. He has broad commer-

cial litigation experience, with an emphasis on

SEC enforcement actions, securities litigation,

and product liability. In addition to leading

high-stakes corporate litigation strategy and

serving as national coordinating counsel for

Fortune 10 companies, Mr. Little has been lead

trial counsel in over 45 trials in state and fed-

eral courts nationwide.

At the conclusion of the interview, you can

find LEVICK’s own communications best

practices appended.

how is dodd-Frank implementation most dramatically affecting director liability issues?

Gregory Little: There are many provisions in

Dodd-Frank that impact director liability. The

provision that has the most potential impact

is the SEC whistleblower bounty program.

This program authorizes the SEC to pay mon-

etary awards to whistleblowers who provide

information that relates to violation of the

federal securities laws and results in sanctions

exceeding $1 million. The monetary awards

are significant and can range from ten to

30 percent of the total amount of sanctions

recovered. The whistleblower bounty program

has been described by the SEC as a “game

changer.” That description could prove to be

an understatement. At its peak, the SEC has

announced it was receiving 7-9 tips per day.

That number likely will increase dramatically

once payments have actually been made and

publicized.

What trends stand out most to you in the area of seC enforcement?

Gregory Little: There are several trends that

stand out in the area of SEC enforcement that

could directly impact directors. In the past

several years, the SEC has been involved in a

number of high-profile insider trading cases.

Many of the allegations involved evidence

of directors of public companies providing

material nonpublic information to friends and

business associates. Insider trading cases, of

course, have been around for years. However,

recent cases have demonstrated that the SEC is

working more closely with the Department of

Justice and taking full advantage of the DOJ’s

ability to bring criminal actions and seek en-

hanced investigatory powers like wiretaps and

informants.

At the other end of the spectrum, the SEC has

also announced a willingness to pursue civil

cases in which defendants are accused of neg-

ligence only. Traditionally, the SEC pursued

individuals engaged in intentional miscon-

Weekly

This week’s edition of NACD BoardVision focuses on SEC rulemaking. Join Steve Kalan, associate

publisher of NACD Directorship, and Brian Breheny, partner at Skadden Arps, as they discuss the

conflict minerals rule, the JOBS Act, and resource extraction and disclosure.

CriSiS

litigAtionFinAnCiAl CommuniCAtionS

CorporAte & reputAtionpuBliC AFFAirS

Sign up todAy

SeC rulemAking on ConFliCt minerAlS & the JoBS ACt

nACd BoArdviSion

Washington & Wall street

The FCS presents “Powershifts: Washington & Wall Street”—a breakfast discussion on pre-election

perspectives—what will change and what won’t.

Powershifts:

Tuesday, OcTOber 16Th8:00am–9:30am

aT The WashingTOn POsT1150 15Th STreeT NW

SPONSORED BY:

FEatuRiNg SENiOR ExEcutivES FROm:Citi, GE Capital, LEVICK, T. Rowe Price, The Washington Post

FOR mORE iNFORmatiON aND tO PuRchaSE tickEtS gO tO www.FcSiNtERactivE.cOm

the urgenCyoF noW.

ArtiCleS

video

Computerworld | Friday, October 5, 2012Steve JOBS iS miSSed, But Apple’S StrONger NOW thAN A yeAr AgO, ANAlyStS SAy

The Arizona Republic | thursday, October 4, 2012gOOdykOONtz: pArtiSAN pOlitiCS driveS COverAge

Chicago Tribune | tuesday, October 2, 2012lABOr StriFe At AmeriCAN AirliNeS hAS pASSeNgerS WAry OF delAyS

The Los Angeles Times | Friday, October 1, 2012delAyS At AmeriCAN AirliNeS tAke A tOll ON the COmpANy, FlierS

in the neWS

The AgeApple CeO ApOlOgiSeS FOr mApS App

The Wall Street Journal digitS live: pr CriSiS leSSONS FrOm Apple’S mAp ApOlOgy