What Is “Contemporaneous Trading” under Section 20A?

A recent motion in In re Valeant Pharmaceuticals International, Inc., raises important questions regarding the scope of the “contemporaneous trading” requirement found in section 20A of the Securities Exchange Act of 1934. Section 20A provides a private right of action for investors who traded “contemporaneously” with someone trading on inside information. In the Valeant case, certain defendants filed a motion for immediate appeal under 28 U.S.C. § 1292(b), seeking an interlocutory appeal in order to answer the question of whether the availability of a cause of action under section 20A is limited to those plaintiffs who purchased securities on the same day as the defendant’s sale or whether recovery is also available to those who purchased the securities at a later date.

The plaintiffs, investors in Valeant Pharmaceuticals, brought a putative class action on behalf of all persons who acquired stock in Valeant between February 23, 2015, and October 20, 2015, alleging violations of section 10(b), section 20(a), and section 20A of the Securities Exchange Act, as well as a number of violations under the Securities Act of 1933. The plaintiffs’ 20A claim arises from alleged insider trading in connection with a Valeant insider’s sale of 4.2 million shares of Valeant’s stock on June 10, 2015. The plaintiffs allege that ValueAct Capital Management (VAC) and its chief executive officer, Jeffrey Ubben—who served on Valeant’s board for 10 months out of the 38-month-long class period—sold $925 million of Valeant stock while knowing that the company’s value would drop significantly only months later. Following the June 10, 2015, sale, lead plaintiff IBEW allegedly purchased 850 shares of Valeant stock. It was based on that purchase that IBEW brought its insider trading claims against the VAC defendants.

The VAC defendants moved to dismiss the section 20A claims, arguing, among other things, that the lead plaintiff had failed to allege that it traded “contemporaneously” with the VAC defendants because it had alleged a next-day—rather than same-day—purchase and therefore lacked standing under section 20A. The U.S. District Court for the District of New Jersey issued an order concluding that the availability of a cause of action under section 20A extends beyond traders who purchased stock on the same day of the company’s sale, and the court denied the VAC defendants’ motion. In making its ruling, the court acknowledged that the Third Circuit Court of Appeals had not yet ruled on the issue.

Under section 1292, a district court judge may certify an order for interlocutory appeal when “such order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation.” In their motion, the defendants argue that this issue is appropriate for interlocutory appeal because the absence of controlling law and the existence of conflicting precedent demonstrate that there is a “substantial ground for difference of opinion” over the “contemporaneous trading” requirement in section 20A and because it presents a controlling and dispositive question of law. In support of the first argument, the defendants point out that courts, both within and outside the Third Circuit, have arrived at materially inconsistent interpretations of the word “contemporaneously.”

Some courts have read it to encompass only trades made on the same day. See, e.g., Copland v. Grumet, 88 F. Supp. 2d 326, 388 (D.N.J.); In re AST Research Sec. Litig., 887 F. Supp. 231, 234 (C.D. Cal. 1995); In re Aldus, No. C92-885C, 1993 U.S. Dist. LEXIS 5008 (W.D. Wash. Mar. 1, 1993); In re Stratus Comput., Inc. Sec. Litig., No. Civ. A 89-2075-7, 1992 U.S. Dist. LEXIS 22481 (D. Mass. Mar. 27, 1992). Other courts have read the requirement to encompass trades made within several days. See, e.g., Shapiro v. Merrill Lynch, Pierce Fenner & Smith, Inc., 495 F.2d 228, 241 (2d Cir. 1974) (less than a week apart); In re Eng’g Animation Sec. Litig., 110 F. Supp. 2d 1183 (S.D. Iowa 2000) (three-day gap); In re Oxford Health Plans, Inc., Sec. Litig., 187 F.R.D. 133, 138 (S.D.N.Y. 1999) (five-day gap); In re Cypress Semiconductor Litig., 836 F. Supp. 711 (N.D. Cal. 1993) (same); O’Connor & Assocs. v. Dean Witter Reynolds, Inc., 559 F. Supp. 800, 803 (S.D.N.Y. 1983) (same). And, in at least one instance, a court has even read the requirement to encompass the entire period in which relevant and nonpublic information remained undisclosed. See In re Am. Bus. Computs. Corp. Sec. Litig., 1994 U.S. Dist. LEXIS 21467 (S.D.N.Y. Dec. 9, 1995).

Other arguments advanced by the defendants are illustrative of why the resolution of this issue by the Third Circuit may have a significant impact on securities class action litigation. Whether section 20A claims are available to only same-day traders or to a larger class of investors will directly and significantly affect the size of purported classes and even the question of whether preconditions for class certification are met in the first place. For example, in Valeant Pharmaceuticals, if the Third Circuit were to hear the appeal and hold that the word “contemporaneous” limits the availability of the claim to same-day traders, named plaintiff IBEW would lack standing to bring the claim; and if, for example, plaintiffs’ counsel were unable to identify a class representative that traded Valeant stock on June 10, 2015, willing to be substituted as lead plaintiff—or if such substitution were precluded by the statute of limitations—then the section 20A class action claim would fail in its entirety, and the defendants would be entitled to summary judgment as a matter of law. But even if a class asserting section 20A claims is ultimately certified, the reduction of the size that class could drastically reduce the scope (and costs) of discovery and potentially result in a more efficient resolution of the matter.

With section 20A claims being brought in federal courts around the country, the potential impact of the ultimate resolution of the “contemporaneous” issue cannot be overstated. The wide and divergent reading of the “contemporaneous” requirement by district courts across the Third Circuit, as well as in other courts around the country, suggests that this issue may ultimately need to be resolved by the Supreme Court. In the meantime, practitioners are advised to closely analyze and monitor precedent in their jurisdiction when litigating section 20A cases.