Corporate Governance

Using Loss Causation to Repeal Rule 10b-5: In re: Williams Securities Litigation (The Facts)(Part 2)

By J. Robert Brown

We are discussing the loss causation analysis in In re Williams Securities Litigation.

This case invovles a spin off by The Williams Companies, Inc. ('WMB') of its Communications Subsidiary (Subsidiary).  WMB described the spin off as 'the best way to ensure that both our energy and communications businesses have the efficient and effective access to the capital necessary to pursue the substantial growth that each enjoys.'  On the date of the announced spin-off, the Subisidiary traded at $28.50.  Less than two years later, the Subsidiary filed for bankruptcy.  

At the time of the spin off, management made positive statements about the viability of the subsidiary.  The CEO of WMB indicated that the Subsidiary had "the financial resources in place to enable it to deliver on the promise of a very bright future.'  Despite these rosy statements, however, internal remarks were far more negative.  As the opinion noted: 

• Officers were warning that [Subsidiary] was 'still approximately $800 million under-funded through the end of 2001,' and that [Subsidary] did not have 'any choice at this point other than going on a rigid, essential need only capital diet while [it] restore[d] capital capacity through operating performance and selling non core assets.'

In other words, according to the allegations, WMB was telling the market that the Subsidiary had adequate capital while simultaneously indicating internally that it did not. The district court (and the court of appeals) had little trouble concluding that plainitffs had successfully alleged materially false statements made with scienter.  The court, however, found insufficient evidence of loss causation.  In other words, the court concluded that there was inadequate evidence to show that materially false statements about a company's capitalization "caused" the stock decline in a company that filed bankruptcy two years later.

That there wasn't some decline in valuation related to the false statements (and the market's ultimate uncovering of the truth) seems beyond peradventure.  Nonetheless, the 10th Circuit panel relied on the Supreme Court's analysis in Dura to conclude that plaintiffs had not adequately pled causation.  We will address Dura in the next post.

We have some primary materials posted on the DU Corporate Governance web site.  Oddly, the briefs are not available but are under seal.

Full post as published by The Race to the Bottom on March 20, 2009 (boomark / email).