January 04, 2013
The shareholder class action arises out of a massive, multi-year fraud, known as “India’s Enron,” in which senior management at Satyam, India’s fourth-largest outsourcing firm, inflated the company’s revenue, income, and cash balances by more than $1 billion. In their complaint, the class plaintiffs allege that the former independent directors recklessly failed to prevent or discover this securities fraud. In 2011, Satyam and its auditor, PricewaterhouseCoopers agreed to pay $125 million and $25.5 million, respectively, to settle all claims filed by the US shareholders. The 2011 settlements did not include claims against the former directors.
Weil moved to dismiss the claims against the directors for failure to state a claim and also moved to dismiss certain plaintiffs’ claims based on the U.S. Supreme Court decision in Morrison v. National Australian Bank, Ltd., defining the territorial reach of the U.S. securities laws.
In a 71-page opinion, the U.S. District Court Judge Barbara Jones dismissed all claims against the former independent directors, holding that plaintiffs failed to adequately plead fraud. Judge Jones stated that the assertions in the complaint “concern an intricate and well concealed fraud perpetrated by a very small group of insiders and only reinforce the inference” that the former board members “were themselves victims of the fraud.”
In addition, Judge Jones dismissed claims against the former independent directors pursuant to Morrison, which allows a claim under the U.S. securities laws only if that claim arises out of the purchase of securities either on a U.S. exchange or in another domestic transaction. Because Satyam's common stock was only traded in India, Judge Jones explained, plaintiffs could not bring claims based on the purchase of those securities. Likewise, Judge Jones held that plaintiffs could not bring U.S. securities claims based on the purchase of Satyam American Depository Shares (which are traded on the NYSE) under the Satyam stock option plan because those purchases were directly from Satyam; and based on the terms of the option plan, employees should be deemed to have purchased these shares in India. Judge Jones' decision appears to be the first instance in which Morrison has been applied in connection with purchases made pursuant to foreign-issued employee stock plans.
Securities Litigation partners Irwin Warren and Miranda Schiller led the Weil team, which included associates Margarita Platkov, Evert Christensen, and Stacey Harkey (all of New York). Mr. Warren discussed the decision in an interview on “The Firm,” a weekly program on Indian legal news on CNBC India (CNBCTV 18) (a written transcript of the interview is available here).
This news was also reported in the following outlets (may require registration/subscription):
- Reuters: Ex-directors of Satyam win ruling in U.S. class-action suit (January 3, 2013)
- Bloomberg: Ex-Satyam Directors Win Dismissal of U.S. Fraud Lawsuit (January 3, 2013)
- The Am Law Litigation Daily: Former Satyam Directors Dodge Class Action Over “India’s Enron” (January 3, 2013)
- Law360: Satyam Directors Skirt Securities Suit Alleging $1B Fraud (January 3, 2013)
- Bloomberg / Bloomberg Businessweek: Duane Morris, Troutman Sanders, Munger: Business of Law (January 4, 2013)
- The D&O Diary: Former Satyam Directors Win Dismissal of Securities Claims (January 4, 2013)
- Securities Docket: Former Satyam Directors Dodge Class Action over ‘India’s Enron’ (January 4, 2013)