When the short-seller Muddy Waters exposed (alleged) fraud at
Sino-Forest last summer, Canadian plaintiffs' firms rubbed their hands in glee. Canada has become something of a plaintiffs'
paradise for securities litigation, especially in contrast to
the United States. Canadian lawyers fired up class actions on
behalf of investors who lost billions when Sino-Forest crashed,
while U.S. firms sat around and dreamed of what might have been
in the days before Morrison v. National Australia Bank.
But you know the old bromide: Adversity is the mother of
invention. And no one is more inventive than U.S. plaintiffs'
lawyers. Witness a new complaint filed Friday in Manhattan
federal court (courtesy of Courthouse News) by Cohen Milstein
Sellers & Toll. Cohen Milstein represents a putative class of
Sino-Forest debt and equity investors suing the company, its
bond offering underwriters Credit Suisse and Bank of America,
and its auditor, Ernst & Young. But rather than assert claims
under federal securities laws, Cohen Milstein is suing for New
York state and common-law fraud, unjust enrichment, and breach
of fiduciary duty -- which may not be susceptible to Morrison
defenses. (I told you last week about a test of Morrison's
impact on state-law claims that's now before the U.S. Court of
Appeals for the Second Circuit.)
Cohen Milstein partner Steven Toll told me this isn't the
first time the firm has brought state and common-law claims for
investors in order to get around Morrison's bar on the
extraterritorial application of federal laws; the firm has
followed the same path in a couple Madoff feeder-fund suits. He
also pointed out that to withstand Morrison, the Sino-Forest
suit is carefully crafted to assert claims only on behalf of
U.S. bondholders and shareholders who purchased Sino-Forest
shares on the U.S. OTC; it's not for anyone who bought shares on
the Toronto stock exchange. Toll said that "a not unreasonable"
percentage of Sino-Forest shares traded on the OTC. (He
contrasted Sino-Forest with Olympus, which had a tiny float in American Depository Receipts.)
There are, of course, other reasons for securities
class-action firms to assert state and common-law claims. They
can avoid the procedural strictures of the Private Securities
Litigation Reform Act and the heightened pleading standards for
securities fraud. Moreover, Cohen Milstein couldn't assert
federal securities-law claims against the Sino-Forest bond
underwriters since the bonds weren't registered with the
Securities and Exchange Commission, Toll said.
He's nevertheless confident the bond claims have an adequate
connection to New York through private placement documents that
refer to New York in discussion venue and forums. "We don't know
yet what the fact will show," Toll said. "But there's a lot of
stuff about the U.S. and New York."
Cohen Milstein has been one of the firms pioneering the use of Dutch "collective actions" on behalf of foreign investors
with securities claims. It's going to be interesting to see
which tack proves more effective: going hyperlocal with
state-law claims, or going abroad.
(Reporting by Alison Frankel)
Follow Alison on Twitter: @AlisonFrankel
Follow us on Twitter: @ReutersLegal