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August 13, 2018 |
Wayne Barsky and James Zelenay Named Top Litigators in Los Angeles

Century City partner Wayne Barsky and Los Angeles partner James Zelenay were named to Los Angeles Business Journal’s list of Top Litigators in Los Angeles. The list highlights “50 of the very best litigators in the business” who “go to the proverbial mat to fight for their clients.”  The list was published on August 13, 2018.

August 6, 2018 |
SEC Proposes Streamlined Financial Disclosures for Certain Guaranteed Debt Securities and Affiliates Whose Securities Are Pledged to Secure a Series of Debt Securities

Click for PDF On July 24, 2018, the Securities and Exchange Commission (the “Commission”) proposed amendments to Rules 3-10 and 3-16 of Regulation S-X (available here) (the “Proposal”) in an effort to “simplify and streamline” the financial disclosures required in offerings of certain guaranteed debt and debt-like securities (collectively referred to as “debt securities”), as well as offerings of securities collateralized by securities of an affiliate of the registrant, registered under the Securities Act of 1933, as amended (the “Securities Act”). These proposed changes would, if implemented, facilitate greater speed to market for such public offerings, significantly reducing the Securities Act disclosure burdens for such registrants, as well as reducing the registrant’s disclosure obligations in its subsequent annual and interim reports required under Securities Exchange Act of 1934, as amended (the “Exchange Act”). Background Current Alternative Disclosure Regime for Certain Guaranteed Debt Securities.  For purposes of the Securities Act and the Exchange Act, guarantees of securities are deemed separate securities from the underlying security that is guaranteed.  As a result, absent a regulatory exception or exemption, a prospectus prepared for a public offering of guaranteed debt securities registered under the Securities Act is required to include the full separate financial statements of (and disclosure regarding) each guarantor (in addition to those of the issuer of the guaranteed debt security) in the form and for the periods required for registrants under Regulation S-X, and each such guarantor (like the issuer of the guaranteed debt security) is also required to be registered under the Exchange Act and thereafter file annual and interim reports under that Act just as any other registrant.  Recognizing the substantial burdens of such disclosures that would otherwise be imposed in connection with registered public offerings of certain guaranteed debt securities involving parent companies and their wholly-owned subsidiaries, much of which would be duplicative, the SEC has embraced exceptions (as currently set out in Regulation S-X Rule 3-10 (“S-X 3-10”)) to instead permit the parent company in a qualifying offering of such guaranteed debt securities to file only its consolidated financial statements, together with certain condensed consolidating financial information (“Consolidating Financial Information”) intended to allow investors to distinguish between the obligor and non-obligor components of the consolidated group of companies represented in the parent’s consolidated financial statements.  S-X 3-10 also requires the registrant to include specified textual disclosure, where applicable,  about the limited nature of the assets and operations of the issuer, guarantor(s) or non-guaranteeing subsidiaries, as the case may be, and describing any material limitations on the ability of the parent or any guarantor to obtain funds (whether by dividend, loan or otherwise) from its subsidiaries and any other relevant limitations on any subsidiary’s use of its fund (together with the Consolidating Financial Information, the “Alternative Disclosure”).  The Alternative Disclosure is required to be included in a note to the parent’s consolidated audited financial statements and must cover the same periods for which the parent is required to include its consolidated financial statements.  The parent company is required to include the Alternative Disclosure in its annual and quarterly Exchange Act reports filed after the guaranteed debt securities are issued and to continue to do so as long as the securities remain outstanding, even for periods in which the issuer(s) and guarantors have no Exchange Act reporting obligation with respect to such securities.  In addition, for certain significant recently-acquired subsidiary guarantors, S-X 3-10 currently requires that the registration statement for the offering include the separate audited financial statements for such subsidiaries’ most recent fiscal year and unaudited financial statements for any interim period for which the parent is required to include its interim financial statements. Pursuant to Rule 12h-5, each guarantor or issuer subsidiary in any such qualifying transaction is exempt from the separate ongoing Exchange Act reporting obligations otherwise applicable to a registrant. Notwithstanding the advantages offered by the exception provided by S-X 3-10, the conditions to the current regulation, including that the subsidiaries be 100% owned by the parent and that all guarantees be full and unconditional, the often time-consuming process of producing and auditing the Consolidating Financial Information, as well as the requirement that the parent continue to include the Alternative Disclosure for as long as any of the guaranteed debt securities remain outstanding, have limited the range of subsidiaries that are used as guarantors, delayed offerings and/or led to reliance on Rule 144A for life offer structures for some guaranteed debt offerings to avoid registration. Current Disclosure Requirements for Securities Collateralized by Affiliate Securities.  Current Regulation S-X Rule 3-16 (“S-X 3-16”) requires a registrant to provide separate audited annual financial statements, as well as unaudited interim financial statements, for each affiliate whose securities constitute a “substantial portion”[1] of the collateral pledged for such registrant’s registered securities as though such affiliate were itself a registrant, and thereafter file annual and interim reports under the Exchange Act for such affiliate.  The production of the financial statements required by S-X 3-16 is often time consuming and costly to the issuer and the requirement is triggered entirely by the outcome of the substantial portion test, without regard to the comparative importance of the relevant affiliate to the registrant’s business and operations as a whole or the materiality of such financial statements to an investment decision.  To avoid the burden of preparing separate full financial statements for each affiliate whose securities are pledged as collateral, issuers often reduce collateral packages or structure collateralized securities as unregistered offerings.  Additionally, debt agreements are sometimes structured to specifically release collateral if and when such collateral may trigger the S-X 3-16 financial statement requirements. Proposed Amendments In the SEC’s effort to streamline the disclosure requirements in connection with certain guaranteed debt securities offered and sold in public offerings registered under the Securities Act, as well as simplify the current number of myriad offer structures entitled to disclosure relief, the amendments proposed to S-X 3-10 would: replace the current detailed list of offer structures permitted relief under S-X 3-10 with a more simple requirement that the debt securities be either: issued by the parent or co-issued by the parent, jointly and severally, with one or more of its consolidated subsidiaries; or issued by a consolidated subsidiary of the parent (or co-issued with one or more other consolidated subsidiaries of the parent) and fully and unconditionally guaranteed by the parent; replace the condition currently included in S-X 3-10 that a subsidiary issuer or guarantor be 100% owned by the parent company, requiring instead that the subsidiary merely be consolidated in the parent company’s consolidated financial statements in accordance with U.S. GAAP or, in the case of foreign private issuer, IFRS (as promulgated by the IASB).  As a result, in addition to 100% owned subsidiaries, controlled subsidiaries and joint ventures which are consolidated in the parent’s financial consolidated financial statements could be added as issuers or guarantors in such offerings and take advantage of the reduced disclosure permitted under the Proposal, provided the other conditions of the revised regulation are met; modify the requirement that all guarantees be full and unconditional, requiring only that the parent guarantee (in the case of a subsidiary issuer) be full and unconditional.  The proposal would thereby allow greater flexibility with the extent and nature of guarantees to be given by subsidiary guarantors, provided the terms and limitations of such guarantees are adequately disclosed; eliminate the Consolidating Financial Information currently required to be included in the registration statement and the parent’s Exchange Act annual and (where applicable) quarterly reports under S-X 3-10, and, in lieu thereof, add a new Rule 13-01 of Regulation S-X requiring such parent companies to include (i) certain summary financial information (the “Summary Financial Information”) for the parent and guarantors (the “Obligor Group”) on a combined basis (after eliminating intercompany transactions among members of this Obligor Group), and (ii) certain non-financial disclosures, including expanded qualitative disclosures about the guarantees and factors which could limit recovery thereunder, and any other quantitative or qualitative information that would be material to making an investment decision about the guaranteed debt securities (the Summary Financial Information and such non-financial disclosures, the “Proposed Alternative Disclosure”); require that the Summary Financial Information conform to the current provisions of Regulation S-X Rule 1-02(bb) and include summarized information as to the assets, liabilities and results of operations of the Obligor Group only; reduce the periods for which the Summary Financial Information must be provided, requiring such information for only the most recent fiscal year and any interim period for which consolidated financial statements of the parent are otherwise required to be included; permit the parent flexibility as to the location of the Summary Financial Information and other Proposed Alternative Disclosures, including in the notes to it consolidated financial statements, in the “management’s discussion and analysis of financial condition and results of operations” or immediately following “risk factors” (if any”) or the pricing information in the Securities Act registration statement and related prospectus and in Exchange Act reports on Forms 10-K, 20-F and 10-Q required to be filed during the fiscal year in which the first bona fide sale of the guaranteed debt securities is completed.  By permitting such flexibility, the parent issuers may realize greater speed to market for such offering as the Summary Financial Information would not be required to be audited if located outside the notes to its consolidated financial statements; by allowing a parent company the option to exclude the Summary Financial Information from the notes to its audited financial statements, such parent may realize greater speed to market for such offerings as the Summary Financial Information would not be required to be audited as part of the offer process; such Summary Financial Information would, however, be required to be included in a footnote to the parent’s annual and (where applicable) quarterly reports (and thus audited), beginning with its annual report filed on Form 10-K or 20-F for the fiscal year during which the first bona fide sale of the guaranteed debt securities is completed.  Thus, for example, for guaranteed debt securities issued in the second quarter of fiscal 2018, the Summary Financial Information would first be required to be included in the notes to the parent’s financial statements filed in its annual report filed on Form 10-K for its fiscal year 2019; eliminate the current requirement that, for so long as the guaranteed debt securities remain outstanding, a parent company continue to include the Consolidating Financial Information within its annual and interim reports (including for periods in which the Obligor Group is not then  subject to the reporting requirements of the Exchange Act).  Under the Proposal, the Summary Financial Information and other Proposed Alternative Disclosures would not be required to be included in the parent’s annual and quarterly reports for such periods in which the Obligor Group is not then subject to the reporting requirements of the Exchange Act.  Nonetheless, some parent companies with an Obligor Group that issues guaranteed debt securities on a regular basis may elect to continue to prepare and include the Revised Alternative Disclosure in its Exchange Act reports to ensure a more rapid access to the market for future transactions; and eliminate, with respect to recently-acquired subsidiary guarantors or issuers, the current requirement under S-X 3-10 that the parent include in the registration statement for the offering separate audited financial statements for the most recent fiscal year of the recently-acquired subsidiary (as well as separate unaudited interim financial statements for any relevant interim periods).  Note, however, that other provisions of Regulation S-X regarding the impact of recent material acquisitions and the potential requirement thereunder to include separate financial statements of the acquired entity (and, in some cases, pro forma consolidated financial information regarding the acquisition) remain unchanged by the Proposal. The proposed amendments to S-X 3-16 would: replace the existing requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with a requirement to include the Summary Financial Information and any additional non-financial information material to investment decisions about the affiliate(s) (if more than one affiliate, such information could be provided on a combined basis) and the collateral arrangement(s).  The elimination of the requirement to include the affiliate’s separate audited financial statements would significantly decrease the cost and burden of an offering secured by the securities of an affiliate of the registrant; permit the proposed financial and non-financial affiliate disclosures to be located in filings in the same manner (and for reports for the same corresponding periods) as described above for the disclosures related to guarantors and guaranteed securities, which would bring the level and type of disclosure for collateralized securities in line with other forms of credit enhancement; and replace the requirement to provide disclosure only when the pledged securities meet or exceed a numerical threshold relative to the securities registered or being registered with a requirement to provide the applicable disclosures in all cases, unless they are immaterial to holders of the collateralized security, which would replace the arbitrary numerical cutoff with a consideration of materiality to investors. Set forth below, we summarizing the current requirements, and proposed changes to such requirements, for the use of abbreviated disclosure for subsidiary issuer/guarantors of certain guaranteed debt securities and for issuers of securities collateralized by securities of affiliates. Guaranteed Debt Securities:  Summary of Current Requirements for Abbreviated Disclosure and Proposed Revisions Current Provisions of S-X 3-10: Proposed Provisions: Offer Structures Permitted Disclosure Relief Finance subsidiary issuer of debt securities guaranteed by  parent; Operating subsidiary issuer of debt securities guaranteed by parent; Subsidiary issuer of debt securities guaranteed by  parent and one or more other subsidiaries; Single subsidiary guarantor of debt securities issued by parent; or Multiple subsidiary guarantors of debt securities issued by parent Debt securities: Issued by parent or co-issued by parent, jointly and severally, with one or more of its consolidated subsidiaries; or Issued by a consolidated subsidiary of parent (or co-issued with one or more other consolidated subsidiaries) and fully and unconditionally guaranteed by parent Conditions to Relief Each subsidiary issuer or guarantor must be 100% owned by parent; and All guarantees must be full and unconditional Subsidiary issuer/guarantors must be consolidated in the parent’s consolidated financial statements Only the parent guarantee, if any, must be full and unconditional Alternative Disclosure Condensed Consolidating Financial  Information, and certain textual disclosure Summary Financial Information for Obligor Group on a combined basis (after eliminating transactions between Obligors) and certain textual disclosure Periods for which Disclosure Required in Registration Statement For each year and any interim periods for which parent is required to include financial statements The most recent fiscal year and any interim period for which the parent is required to include financial statements Locations of Disclosure The Alternative Disclosure must be included in the notes to the parent’s audited consolidated financial statements (and in its unaudited interim financial statements where such financial statements are required to be included) In the Registration Statement and in Exchange Act reports filed during the fiscal year in which the debt securities are first bona fide offered to the public, the parent has the choice of including them in the notes to its consolidated financial statements or elsewhere, including within “management’s discussion and analysis of financial condition and results of operations” or immediately following “risk factors” For the parent’s annual report for the fiscal year in which the debt securities were first offered to the public, and all Exchange Act reports required to be filed thereafter, the Proposed Alternative Disclosures must be included in the notes to the parent’s consolidated financial statements How Long is Exchange Act Disclosure Required For so long as any of the debt securities remain outstanding Only for periods in which the Obligors are required to file Exchange Act reports in respect of the debt securities Additional Requirements For Recently Acquired Subsidiary Guarantor/Issuers Parent must include separate audited financial statements of the recently acquired subsidiary issuer/guarantor for the most recent fiscal and any interim period for which the parent is required to include financial statements No separate financial statements of a recently acquired subsidiary issuer/guarantor is required for relief under the Proposal Summary of Current Disclosure Requirements for Securities Collateralized by Securities of Affiliates and the Proposed Revisions Current Provisions of S-X 3-16: Proposed Provisions: Offer Structure Triggering Disclosure Requirement Securities issued by a registrant and collateralized with the securities of its affiliates where such collateral constitutes a “substantial portion” of the collateral for any class of securities Securities issued by a registrant and collateralized with the securities of its affiliates, unless such collateral is immaterial to making an investment decision about the registrant’s securities Additional Disclosure Required If the pledged securities of an affiliate constitute a “substantial portion” of the collateral for the secured class of securities, separate audited annual financial statements, as well as unaudited interim financial statements, for such affiliate as though such affiliate were itself a registrant Summary Financial Information with respect to any affiliate whose securities are pledged to secure a class of securities, and any additional non-financial information material to investment decisions about the affiliate(s) and the collateral arrangement Basis of Presentation Separate financial statements for each affiliate whose securities constitute a “substantial portion” of the collateral Summary Financial Information of affiliates consolidated in the registrant’s financial statements can be presented on combined basis If information is applicable to a subset of affiliates (but not all) separate Summary Financial Information required for such affiliates Periods for which Disclosure Required in Registration Statement For each year and any interim period as if affiliate were a registrant The most recent fiscal year and any interim period for which the registrant is required to include consolidated financial statements Locations of Disclosure Separate financial statements required to be included in the registration statement in the registrant’s annual report on Form 10-K or 20-F Disclosure not required in quarterly reports of the registrant In the Registration Statement and in Exchange Act reports filed during the fiscal year in which the first bona fide sale is completed, the registrant has the choice of including them in the notes to its consolidated financial statements or elsewhere, including within “management’s discussion and analysis of financial condition and results of operations” or immediately following “risk factors” For the registrant’s annual report for the fiscal year in which the first sale was completed, and all Exchange Act reports required to be filed thereafter, the required information must be included in the notes to the registrant’s consolidated financial statements   The SEC is seeking public comments on its proposal for a period of 60 days from July 24, 2018. Comments can be submitted on the internet at http://www.sec.gov/rules/other.shtml; via email to  rule-comments@sec.gov (File Number S7-19-18 should be included on the subject line); or via mail to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.    [1]   E.g., if the aggregate principal amount, par value or book value of the pledged securities as carried by the issuer of the collateralized securities, or market value, equals 20% or more of the aggregate principal amount of the secured class of securities offered. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work in the firm’s Capital Markets or Securities Regulation and Corporate Governance practice groups, or the authors: J. Alan Bannister – New York (+1 212-351-2310, abannister@gibsondunn.com) Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com) Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) Alina E. Iarve – New York (+1 212-351-2406, aiarve@gibsondunn.com) Michael J. Scanlon – Washington, D.C. (+1 202-887-3668, mscanlon@gibsondunn.com) Peter W. Wardle – Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

August 2, 2018 |
EPA & NHTSA Issue SAFE Vehicles Rule, Proposing Changes to Vehicle GHG Limits and Revocation of California Waiver

Click for PDF On August 2, 2018, the U.S. Environmental Protection Agency (EPA) and the National Highway Traffic Safety Administration (NHTSA) issued a notice of proposed rulemaking (NPRM), the Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule for Model Years 2021–2026 Passenger Cars and Light Trucks (SAFE Vehicles Rule), relating to the national automobile fuel economy and greenhouse gas (GHG) emissions standards set by EPA for cars and light-duty trucks.[1] The proposed SAFE Vehicles Rule is the expected next step in the Trump Administration’s efforts to reevaluate fuel economy and emissions standards set by the Obama Administration.  In 2012, the Obama Administration set GHG and fuel economy standards for passenger cars and light-duty trucks for model years 2017 to 2025, but EPA and NHTSA committed in that rulemaking to “a comprehensive midterm evaluation and agency decision-making process for the MYs 2022–2025 standards.”[2]  This “midterm evaluation” was to be completed by April 1, 2018.[3] On December 6, 2016, the Obama EPA published a “proposed determination,” finding that the standards set in the October 2012 rule should remain in place,[4] and on January 12, 2017, the agency issued a final determination to that effect.[5]  In March 2017, the Trump EPA announced its intention to reconsider that final determination.[6]  And in April 2018, the agency formally withdrew the Obama Administration’s January 2017 final determination and announced that it would initiate a notice and comment rulemaking to evaluate the appropriate standards for MYs 2022–2025.[7] The SAFE Vehicles Rule is the first step in the rulemaking process to evaluate the appropriate future GHG emissions and fuel economy standards for light-duty vehicles.  The proposed rulemaking includes several important developments of interest for the automotive industry: The proposed rulemaking includes several alternative regulatory proposals for fuel economy and tailpipe carbon dioxide (CO2) standards that would be applicable to vehicles sold in MYs 2021 to 2026. The alternative preferred by EPA and NHTSA would freeze fuel economy and CO2 standards at MY 2020 levels for MYs 2021 through 2026. The agencies are inviting comments on seven other options presented in the NPRM.  These options include maintaining the regulatory plan promulgated under the Obama Administration, or implementing increasingly stringent fuel economy and CO2 requirements at varying rates between MYs 2020 and 2026. EPA and NHTSA are also seeking comment on the compliance flexibilities associated with the fuel economy and CO2 programs, including whether to require some level of public disclosure for credit trading, or whether to eliminate credit trading in the CAFE program altogether. EPA is proposing to change CO2 targets after MY 2021 to remove the adjustments related to refrigerant and the offsets for nitrous oxide and methane emissions.  In practice, this would increase the applicable threshold for CO2 requirements for MYs 2020 and 2021. The NPRM also proposes to create a single 50-state standard for GHG emissions.  This would be accomplished by withdrawing California’s waiver of preemption under the Clean Air Act for the GHG and Zero Emissions Vehicle (ZEV) requirements of California’s Advanced Clean Cars program. California does not have authority to regulate fuel economy directly, as the Energy Policy and Conservation Act of 1975 (EPCA), as amended by the Energy Independence and Security Act of 2007 (EISA), preempts state standards relating to fuel economy.[8] The SAFE Vehicles Rule will be published in the Federal Register in the coming weeks, and will be open for public comment for a period of 60 days after publication.  In addition, EPA and NHTSA will hold three public hearings on the rule in Washington, DC, Detroit, MI, and Los Angeles, CA.  The dates for these hearings will be announced in a forthcoming notice in the Federal Register. If the agencies’ preferred proposals are adopted and the rule becomes final, it is virtually certain that the revised standards and the withdrawal of California’s waiver authority will be challenged in court by California and other states, and by the environmental community.    [1]   The official version of the SAFE Vehicles Rule will be published in the Federal Register in the coming weeks.  Until it is published, the proposed rule is available at https://www.epa.gov/sites/production/files/2018-08/documents/safe-my-2021-2026-cafe-ld-ghg-nhtsa-epa-nprm-2018-08-02.pdf.    [2]   2017 and Later Model Year Light-Duty Vehicle Greenhouse Gas Emissions and Corporate Average Fuel Economy Standards, 77 Fed. Reg. 62,624, 62,628 (Oct. 15, 2012).    [3]   Id. at 62,784.    [4]   Proposed Determination on the Appropriateness of the Model Year 2022–2025 Light-Duty Vehicle Greenhouse Gas Emissions Standards Under the Midterm Evaluation, 81 Fed. Reg. 87,927 (Dec. 6, 2016).    [5]   Final Determination on the Appropriateness of the Model Year 2022-2025 Light-Duty Vehicle Greenhouse Gas Emissions Standards Under the Midterm Evaluation (Jan. 12, 2017), available at https://nepis.epa.gov/Exe/ZyPDF.cgi?Dockey=P100QQ91.pdf.    [6]   Notice of Intention to Reconsider the Final Determination of the Mid-Term Evaluation of Greenhouse Gas Emissions Standards for Model Year 2022–2025 Light Duty Vehicles, 82 Fed. Reg. 14,671 (Mar. 22, 2017).    [7]   Mid-Term Evaluation of Greenhouse Gas Emissions Standards for Model Year 2022–2025 Light-Duty Vehicles, 83 Fed. Reg. 16,077 (Apr. 13, 2018).  Gibson Dunn is currently representing the Association of Global Automakers as movant-intervenors before the Court of Appeals for the District of Columbia Circuit in California v. EPA, No. 18-1114, California’s challenge to the withdrawal of the January 2017 final determination.    [8]   From 2006 to 2008, Gibson Dunn represented the Association of Global Automakers in litigation regarding the EPCA preemption of GHG motor vehicle emissions standards adopted by several states. The following Gibson Dunn lawyers assisted in the preparation of this client alert: Ray Ludwiszewski, Stacie Fletcher, Rachel Levick Corley and Veronica Till Goodson. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues.  For additional information about this regulatory change and other regulations, or related litigation, please contact the Gibson Dunn lawyer with whom you usually work or the following leaders and members of the firm’s Environmental Litigation and Mass Tort practice group in Washington, D.C.: Avi S. Garbow – Co-Chair (+1 202-955-8558, agarbow@gibsondunn.com) Daniel W. Nelson – Co-Chair (+1 202-887-3687, dnelson@gibsondunn.com) Peter E. Seley – Co-Chair (+1 202-887-3689, pseley@gibsondunn.com) Raymond B. Ludwiszewski (+1 202-955-8665, rludwiszewski@gibsondunn.com) Stacie B. Fletcher (+1 202-887-3627, sfletcher@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 31, 2018 |
Webcast: Strategies Regarding Corporate Veil Piercing and Alter Ego Doctrine

Please join a panel of seasoned Gibson Dunn attorneys for a presentation on how a company can best protect itself against “veil-piercing” claims and “alter ego” liability.  We provide an overview of what it means to “pierce the corporate veil” and the circumstances that have prompted courts to ignore the corporate separateness of entities and impose “alter ego” liability. We also focus on strategies to minimize the risk of facing claims for veil piercing and alter ego liability and maximize your chances for success in connection with any such claims. View Slides [PDF] PANELISTS: Robert A. Klyman is a partner in Gibson Dunn’s Los Angeles office. He is Co-Chair of the Firm’s Business Restructuring and Reorganization practice group. Mr. Klyman represents debtors, acquirers, lenders, ad hoc groups of bondholders and boards of directors in all phases of restructurings and workouts. His experience includes advising debtors in connection with traditional, prepackaged and “pre-negotiated” bankruptcies; representing lenders and bondholders in complex workouts; counseling strategic and financial players who acquire debt or provide financing as a path to take control of companies in bankruptcy; structuring and implementing numerous asset sales through Section 363 of the Bankruptcy Code; and litigating complex bankruptcy and commercial matters arising in chapter 11 cases, both at trial and on appeal. John M. Pollack is a partner in Gibson Dunn’s New York office. He is a member of the Firm’s Mergers and Acquisitions, Private Equity, Aerospace and Related Technologies and National Security practice groups. Mr. Pollack focuses his practice on public and private mergers, acquisitions, divestitures and tender offers, and his clients include private investment funds, publicly-traded companies and privately-held companies. Mr. Pollack has extensive experience working on complex M&A transactions in a wide range of industries, with a particular focus on the aerospace, defense and government contracts industries. Lori Zyskowski is a partner in Gibson Dunn’s New York office. She is Co-Chair of the Firm’s Securities Regulation and Corporate Governance practice group. Ms. Zyskowski advises public companies and their boards of directors on corporate governance matters, securities disclosure and compliance issues, executive compensation practices, and shareholder engagement and activism matters. Ms. Zyskowski advises clients, including public companies and their boards of directors, on corporate governance and securities disclosure matters, with a focus on Securities and Exchange Commission reporting requirements, proxy statements, annual shareholders meetings, director independence issues, and executive compensation disclosure best practices. Ms. Zyskowski also advises on board succession planning and board evaluations and has considerable experience advising nonprofit organizations on governance matters. Sabina Jacobs Margot is an associate in Gibson Dunn’s Los Angeles office. She is a member of the Firm’s Business Restructuring and Reorganization and Global Finance practice groups. Ms. Jacobs Margot practices in all aspects of corporate reorganization and handles a wide range of bankruptcy and restructuring matters, representing debtors, lenders, equity holders, and strategic buyers in chapter 11 cases, sales and acquisitions, bankruptcy litigation, and financing transactions. Ms. Jacobs Margot also represents borrowers, sponsors, and lending institutions in connection with acquisition financings, secured and unsecured credit facilities, asset-based loans, and debt restructurings. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

August 1, 2018 |
Who’s Who Legal Recognizes Nine Gibson Dunn Partners

Nine Gibson Dunn partners were recognized by Who’s Who Legal in their respective fields. In Who’s Who Legal Corporate Tax 2018, three partners were recognized: Sandy Bhogal (London), Hatef Behnia (Los Angeles) and Eric Sloan (New York). In the 2018 Who’s Who Legal Project Finance guide, two partners were recognized: Michael Darden (Houston) and Tomer Pinkusiewicz (New York). In the Who’s Who Legal Labour, Employment & Benefits 2018 guide, two partners were recognized: William Kilberg (Washington, D.C.) and Eugene Scalia (Washington, D.C.). Two partners were recognized by Who’s Who Legal Patents 2018: Josh Krevitt (New York) and William Rooklidge (Orange County). These guides were published in July and August of 2018.

July 31, 2018 |
EPA Amendments to the Coal Ash Rule

Click on PDF On July 30, 2018, the Environmental Protection Agency (“EPA”) published a final rule amending the national minimum criteria for existing and new landfills and surface impoundments that contain coal combustion residuals (“CCR”), also known as coal ash.[1]  This rule, which directly affects over four hundred coal-fired electricity generating plants nationwide, is the first in a series of anticipated amendments altering regulations promulgated under the Obama Administration to address the disposal of coal ash in landfills and surface impoundments.  This first phase of regulatory changes has three key elements: It adopts two alternative performance standards that either participating state directors or the EPA may apply to owners and operators of CCR units; It revises groundwater protection standards (“GWPS”) for four regulated constituents which do not have an established maximum contaminant level under the Safe Drinking Water Act; and It extends certain deadlines by which facilities must cease the placement of waste in CCR units that are closing. I.   Background and Context Coal ash is produced from the burning of coal in coal-fired power plants.  According to the American Coal Ash Association, approximately 110 million tons of coal ash are generated every year, making it one of the most-generated forms of industrial waste in the United States.  While over one-third of all coal ash produced in the United States is recycled into construction materials, such as concrete or wallboard, a significant amount must be disposed of each year.  Coal ash contains contaminants like mercury, cadmium, and arsenic, which can pose environmental and health risks if not properly managed or disposed of. On April 17, 2015, the Obama Administration promulgated regulations setting federal standards for the disposal of coal ash pursuant to its authority under the Resource Conservation and Recovery Act, notably regulating such waste as a solid waste pursuant to Subtitle D, rather than as a hazardous waste pursuant to Subtitle C.[2]  The regulations addressed the risks associated with disposal, including leaking of contaminants into ground water, blowing into the air as dust, and catastrophic failure of coal ash surface impoundments.  EPA set certain minimum criteria consisting of location restrictions, design and operating criteria, groundwater monitoring and corrective action requirements, closure and post-closure care requirements, and record keeping, notification, and internet posting requirements. It also required unlined CCR surface impoundments contaminating groundwater above certain protection standards to stop receiving wastes and either retrofit or close, except in certain circumstances. Congress subsequently passed the Water Infrastructure for Improvements to the Nation (“WIIN”) Act, signed into law on December 16, 2016, which authorized EPA-approved state permitting programs to regulate coal ash disposal.[3]  Under the WIIN Act’s Section 2301, states may develop and operate their own permitting programs that adhere to, or are at least as protective as, the EPA’s standards.  On June 18, 2018, Oklahoma became the first (and so far only) state to have its permit program approved for the management of coal ash.  The EPA regulates coal ash disposal in states that choose not to implement permitting programs or that have inadequate programs that fail to meet federal standards. II.   Amendments to the 2015 Regulations On September 13, 2017, the EPA granted petitions from certain industry groups requesting reconsideration of certain provisions of the 2015 regulations in light of the WIIN Act and other factors.  EPA announced that it anticipates completing reconsideration of all provisions in two phases:  a first phase, which includes these amendments, to be finalized no later than June 2019, and a second phase to be proposed by September 30, 2018 and finalized by December 2019. The recently signed Amendments constituting phase one, part one, make three major changes to the prior regulations governing coal ash management and disposal.  First, EPA adopted two alternative performance standards that either participating state directors in states with approved CCR permit programs, or EPA where it is the permitting authority, may apply to owners and operators of CCR units:  (1) the suspension of groundwater monitoring requirements if there is evidence that there is no potential for migration of hazardous constituents to the uppermost aquifer during the active life of the unit and post-closure care; and (2) the issuance of technical certifications in lieu of the current requirement to have professional engineers issue certifications. Second, the Amendments revise the GWPSs for the four constituents[4] which do not have established maximum contaminant levels under the Safe Drinking Water Act, in place of the background levels under 40 CFR § 257.95(h)(2).  This revision adopts national criteria as health-based standards available to facilities to use to compare against monitored groundwater concentrations and to develop cleanup goals. Finally, the Amendments extend the deadline for when CCR units closing for cause must initiate closure under two circumstances:  (1) where the facility has detected a statistically significant increase from an unlined surface impoundment above a GWPS; and (2) where the unit is unable to comply with the aquifer location restriction.  With respect to unlined surface impoundments, the Amendments extend the 90-day period in which the owner or operator is to perform the required analysis and demonstrations by 18 months, until October 31, 2020.  With respect to aquifer location restrictions, the revision extends the timeframes during which facilities may continue to use the units by the same period, until October 31, 2020.  The EPA states that this extension allows facilities time to adjust their operations and better coordinate engineering, financial, and permitting activities. Generally speaking, these changes reduce the compliance obligations for facilities managing coal ash surface impoundments and provide increased flexibility in the management of coal ash.  They also grant the industry more time for compliance with the 2015 regulations, addressing concerns about feasibility of compliance within the original deadlines. These regulations are subject to challenge, even as EPA considers additional rulemakings to address other aspects of the 2015 coal ash rule.  In addition, EPA is currently scheduled to propose revisions to the Clean Water Act’s Effluent Limitation Guidelines applicable to steam electric power generators in December 2018, potentially posing added challenges relating to overlapping compliance schedules relevant to the management and disposal of coal ash.  In light of the ongoing complexities of the regulatory landscape, owners or operators of coal ash disposal facilities should evaluate how these proposed changes will impact their operations, costs, and investments.    [1]   See Hazardous and Solid Waste Management System:  Disposal of Coal Combustion Residuals from Electric Utilities; Amendments to the National Minimum Criteria (Phase One, Part One); Final Rule (83 Fed. Reg. 36435, July 30, 2018) (hereinafter, the “Amendments”).    [2]   40 C.F.R. § 257 pt. D.    [3]   Water Infrastructure for Improvements to the Nation Act, Pub. L. No. 114-322, 130 Stat. 1628 (2016).    [4]   These four constituents are cobalt, lithium, molybdenum, and lead. The following Gibson Dunn lawyers assisted in the preparation of this client alert: Avi Garbow and Courtney Aasen. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues.  For additional information about this regulatory change and other regulations affecting the management and disposal of coal ash, or related litigation, please contact the Gibson Dunn lawyer with whom you usually work or the following leaders of the firm’s Environmental Litigation and Mass Tort practice group: Avi S. Garbow (+1 202-955-8558, agarbow@gibsondunn.com) Daniel W. Nelson (+1 202-887-3687, dnelson@gibsondunn.com) Peter E. Seley (+1 202-887-3689, pseley@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 30, 2018 |
2018 Mid-Year Securities Enforcement Update

Click for PDF I.  Significant Developments A.  Introduction For a brief moment in time, after several years with as many as 3 of the 5 commissioner seats vacant, the SEC was operating at full force, with the January 2018 swearing in of newest commissioners Hester Peirce and Robert Jackson.  This situation was short-lived, as Commissioner Piwowar, a Republican appointee with a deregulatory bent who had pulled back on certain enforcement powers, stepped down at the beginning of July.  While the president has named a potential replacement, the Senate has not yet held confirmation hearings; with Democratic Commissioner Kara Stein also set to leave the agency sometime later this year, the Senate may defer consideration until both the Republican and Democratic nominees have been named.  The vacancy could cause the Commission, which has already split on several key rulemakings, to defer some more controversial regulatory initiatives and even some enforcement actions which pose thornier policy questions. Meanwhile, the most noteworthy Enforcement-related event came with the Supreme Court’s Lucia decision, in which the Court held that the agency’s administrative law judges have been unconstitutionally appointed, resolving a technical but significant legal issue which has dogged the SEC’s administrative proceedings for several years.  As discussed further below, the decision throws a wrench in the works for the Enforcement Division, which until the past couple years had been litigating a growing number of enforcement actions in its administrative forum rather than in federal court. In terms of enforcement priorities, the SEC has continued to pursue a relatively small number of significant public company cases; despite a push in recent years to increase its focus on accounting fraud, few new actions were filed in the first half of 2018.  In contrast, the Division filed a surprisingly large number of cases against investment advisers and investment companies, including advisers to individual retail clients, private fund managers, and mutual fund managers. And the SEC’s concentration on all things “cyber” continued to make headlines in the initial months of 2018.  The SEC rolled out guidance on appropriate cybersecurity disclosures, and filed its first (and to date only) case against a public company for allegedly failing to report a data breach to investors on a timely basis.  Additionally, the SEC continues to institute enforcement actions in the cryptocurrency space, though is focus remains primarily on outright frauds, leaving ongoing uncertainty as to the regulatory status of certain digital assets. B.  Significant Legal Developments On June 21, 2018, the Supreme Court ruled in Lucia v. SEC that the SEC’s administrative law judges (ALJs) were inferior officers of the United States for purposes of the Constitution’s Appointments Clause, and that the SEC had failed to properly appoint its ALJs in a manner consistent with the Clause.[1]  (Mr. Lucia was represented by Gibson Dunn before the Supreme Court.)  After several years in which the SEC had increasingly filed contested proceedings administratively rather than in federal district court, the agency reversed course in the face of mounting court challenges to the constitutionality of its ALJs (who had been appointed by a government personnel office rather than by the commissioners themselves).  Even with the reduced number of pending, litigated administrative proceedings, the SEC still faces the prospect of retrying dozens of cases which had been tried before improperly-appointed ALJs.  As this report went to press, the SEC had yet to determine how it would handle these pending cases, or how or when it would go about appointing ALJs to hear litigated administrative proceedings going forward. Even with Lucia resolving the primary legal question which had been floating about in recent years, other questions about the legality of ALJs may continue to complicate administrative proceedings, and thus for the time being the SEC has determined to pursue most litigated cases in court.  (Though the SEC continues to bring settled administrative proceedings, as such settled orders are issued by the Commission itself rather than by an ALJ.) Another Supreme Court decision that curtailed SEC enforcement actions, SEC v. Kokesh, continues to impact the enforcement program.  As detailed previously, in June 2017 the Supreme Court overturned a lower court ruling that required the defendant to disgorge $34.9 million for conduct dating back to 1995.  The Supreme Court found that disgorgement was a form of penalty and was therefore subject to a five-year statute of limitations.[2]  In March 2018, on remand, the Tenth Circuit determined that the statute of limitations still did not bar the SEC’s action since the “clock” restarted with each act of misappropriation.[3]  Moreover, notwithstanding Kokesh, the issue of whether SEC actions seeking injunctive relief or other non-monetary sanctions (such as industry bars) are governed by the five-year statute remains hotly contested.  In a May 2018 speech, Co-Enforcement Director Steven Peiken noted that the SEC continues to maintain that injunctive relief is not subject to the five-year statute of limitations under Kokesh, and admonished parties that the staff would not forgo pursuing actions based on such arguments.[4]  However, the issue is far from settled, and just this month a district court came to a different conclusion.[5] In June, the Supreme Court granted a petition of certiorari filed by Francis V. Lorenzo, an investment banker who copied and pasted his boss’s allegedly fraudulent email into a message to his clients and who the D.C. Circuit found liable for fraud as a result[6].  Mr. Lorenzo has argued that, based on the Supreme Court’s 2011 decision in Janus Capital Group Inc. v. First Derivative Traders, he should not be considered the “maker” of the allegedly fraudulent statements.  Mr. Lorenzo’s petition asserts that the D.C. Circuit decision allows the SEC to avoid the requirements of Janus by characterizing fraud claim as “fraudulent scheme” claims.  A circuit split exists as to whether a misstatement alone can form the basis of a fraudulent scheme claim. C.  Whistleblower Developments The first half of 2018 saw the SEC’s largest whistleblower bounties to date, as well as some related rulemaking proposals which could potentially cap such awards.  As of April, the SEC reported that it had paid more than $266 million to 55 whistleblowers since 2012.[7] In March, the SEC announced its highest-ever whistleblower awards, paying a combined $50 million to two individuals and an additional $33 million to a third.[8]  While the SEC may not disclose the identities of whistleblowers, their counsel subsequently publicly disclosed that the awards were paid in connection with a $415 million SEC settlement with a major financial institution alleged to have misused customer cash.[9]  In its Order granting the awards, the Commission declined to grant awards to additional putative whistleblowers and, in doing so, clarified the standard for finding that a tip “led to” the success of a particular action.[10]  For a tip to “significantly contribute[] to the success of an . . . action” and entitle the whistleblower to an award, the “information must have been ‘meaningful,'” i.e., must “‘make a substantial and important contribution’ to the success of the . . . action.”  The Commission declined to adopt a more flexible standard. In a separate action the following month, the SEC awarded $2.2 million to a former company insider.[11]  The SEC noted that the $2.2 million award was paid under the 120-day “safe harbor” rule, which provides that, when a whistleblower reports to another federal agency and then submits the same information to the SEC within 120 days, the SEC will treat the information as having been submitted on the day it was submitted to the other agency.  A week later, the SEC announced a $2.1 million award to a former company insider whose tips had led to “multiple” successful enforcement actions.[12] In addition to developments relating to award payments, the first half of 2018 also included a Supreme Court decision affecting the rights of whistleblowers pursuant to anti-retaliation protections.  In Digital Realty Trust, the Court overturned the Ninth Circuit’s decision (described in our 2017 Year-End Update) and found that Dodd-Frank’s anti-retaliation measures protect only whistleblowers who report their concerns to the SEC and not those who only report internally.[13] Finally, in a late June open meeting, the Commission voted to propose various amendments to its whistleblower program.[14]  In response to the record-breaking award noted above, the proposed rules would give the SEC discretion to limit the size of awards in cases resulting in monetary sanctions greater than $100 million (which, given a permissible award size of 10-30% of money collected by the SEC, would effectively create a $30 million award cap).  Other proposed amendments include: allowing awards based on deferred prosecution agreements and non-prosecution agreements entered into in criminal cases; permitting awards made when the Commission reaches a settlement outside the context of a judicial or administrative proceeding; allowing the SEC to bar individuals from later seeking awards after they submit false or frivolous claims; and, in response to Digital Realty, requiring a whistleblower to submit information in writing to receive retaliation protection. D.  Cybersecurity and Cryptocurrency In 2017, the SEC touted cybersecurity as a major enforcement priority and created a dedicated “Cyber Unit” to investigate and prosecute cyber-related threats.  The SEC’s cyber-focus continued in the first half of 2018 with its February release of interpretive guidance on public companies’ disclosure obligations regarding cybersecurity risks and incidents.[15]  The Guidance, which reaffirms and expands upon the SEC Division of Corporation Finance’s existing guidance on the topic from 2011, encourages companies to adopt “comprehensive policies and procedures related to cybersecurity,” and to consider how their insider trading policies address trading related to cybersecurity incidents.  While not creating any bright-line rules, it discusses that the “materiality of cybersecurity risks and incidents depends upon their nature, extent, and potential magnitude,” as well as “the range of harm that such incidents could cause,” including “harm to a company’s reputation, financial performance, and customer and vendor relationships, as well as the possibility of litigation or regulatory investigations or actions.”  The SEC further noted that the existence of an ongoing internal or external investigation into an incident “would not on its own provide a basis for avoiding disclosures” of an otherwise material incident.  As discussed further below, the Guidance was followed two months later by the SEC’s announcement of its first enforcement action against a company arising out of a data breach. Regarding the continuing proliferation of digital (or “crypto”) currencies, the staff of the SEC’s Divisions of Enforcement and Trading and Markets issued a statement in March reinforcing that digital platforms that trade securities and operate as an “exchange,” as defined by the federal securities laws, must register as a national securities exchange or operate under an exemption from registration.[16]  The statement also outlines a list of questions that potential investors should consider before deciding to trade on such platforms.  The statement came on the heels of a litigated enforcement action charging a bitcoin-denominated platform, BitFunder, and its founder with operating an unregistered securities exchange, defrauding users by misappropriating their bitcoins and failing to disclose a cyberattack, and making false and misleading statements in connection with an unregistered offering of securities.[17]  In a parallel criminal case, the U.S. Attorney’s Office charged BitFunder’s founder with perjury and obstruction of the SEC’s investigation. The SEC also brought a handful of initial coin offering (ICO) enforcement actions in the first half of 2018.  In January, the SEC obtained a court order halting an ICO it characterized as “an outright scam,” which had raised $600 million in just two months by claiming to be the world’s first “decentralized bank” and falsely representing that it had purchased an FDIC-insured bank.[18]  In April, the SEC charged two co-founders of a financial services start-up with orchestrating a fraudulent ICO by falsely claiming to offer a debit card backed by major credit card companies that would allow users to convert cryptocurrencies into U.S. dollars.[19]  The U.S. Attorney’s Office for the Southern District of New York brought parallel criminal actions against the co-founders, and the SEC later charged a third co-founder with fraud after discovery of text-messages revealing fraudulent intent.[20]  Then, in May, the SEC obtained a court order halting an ICO by a self-proclaimed “blockchain evangelist” who had fabricated customer testimonials and misrepresented having business relationships with the Federal Reserve and dozens of companies.[21] Additionally, in April, the SEC obtained a court order freezing over $27 million in proceeds raised by Longfin Corp. after the company and its CEO allegedly violated Section 5 by issuing unregistered shares to three other individuals so they could sell them to the public right after the company’s stock had risen dramatically due to announcement of acquisition of a cryptocurrency platform.[22] II.  Issuer and Auditor Cases A.  Accounting Fraud and Other Misleading Disclosures In March, the SEC settled charges of accounting fraud against a California-based energy storage and power delivery product manufacturer and three of its former officers.[23]  The SEC alleged that the company prematurely recognized revenue to better meet analyst expectations, that a former sales executive inflated revenues by executing secret deals with customers and concealing them from finance and accounting personnel, and that the former CEO and former controller failed to adequately respond to red flags that should have alerted them to the misconduct.  Without admitting or denying the allegations, the company agreed to pay penalties of $2.8 million; the former CEO and controller agreed to pay a combined total of approximately $100,000 in disgorgement, interest and penalties; and the former sales executive agreed to be barred from serving as an officer or director of a public company for five years and pay a $50,000 penalty. In April, the SEC settled charges of accounting fraud against a Japanese electronics company.[24]  The SEC alleged that the company’s U.S. subsidiary prematurely recognized more than $82 million in revenue by backdating an agreement with an airline and providing misleading information to an auditor.  The matter involved FCPA allegations as well. Also in April, the SEC instituted settled proceedings against a California internet services and content provider.[25]  The SEC alleged that the company failed to timely disclose a major data breach in which hackers stole personal data relating to hundreds of millions of user accounts.  In addition, the SEC alleged that the company did not share its knowledge of the breach with its auditors or outside counsel, and failed to maintain adequate controls and procedures to assess its cyber-disclosure obligations.  Without admitting the allegations, the company agreed to pay a $35 million penalty to settle the charges. In May, the SEC filed a complaint against three former executives of a Houston-based health services company.[26]  The complaint alleged that the executives falsified financial information—including financial statements for three fictitious subsidiaries acquired by the company—to induce a private firm to acquire a majority of the company’s equity.  In a parallel action, DOJ brought criminal charges against the defendants. In June, the SEC filed a complaint against a California-based telecommunications equipment manufacturer and three of its executives.[27]  According to the SEC’s complaint, the executives inflated company revenues by prematurely recognizing revenue on sales and entering into undisclosed side agreements that relieved customers of payment obligations.  The SEC also alleged that the defendants inflated the prices of products to hit revenue targets with the agreement that the company would later repay the difference as marketing development fees.  Without admitting or denying the charges, the defendants agreed to pay penalties totaling $75,000.  In addition, two of the individual defendants consented to five-year officer and director bars; the other individual defendant consented to a bar from appearing or practicing before the SEC as an accountant for five years. B.  Auditor Cases In February, in a case the SEC said underscores its determination to pursue violations “regardless of the location of the violators,” a foreign auditor and his U.S.-based accounting firm, settled charges alleging they providing substantial assistance in a fraudulent shell company scheme by issuing misleading audit reports for numerous companies.[28]  The SEC suspended the auditor and his firm from appearing or practicing before the Commission. In March, the SEC announced settled charges against several foreign firms of the large international accounting networks based on allegations that the firms improperly relied on component auditors that were not registered with the PCAOB, even though the component auditors performed substantial work that should have triggered registration.[29] The SEC alleged violations of PCAOB standards that require sufficient analysis and inquiry when relying on another auditor.  Without admitting or denying the allegations, the four foreign firms agreed to pay roughly $400,000 combined in disgorgement and penalties. Additionally, an auditing firm, two of its partners and a registered financial advisory firm settled charges in May relating to violations of the Custody Rule.[30]  According to the SEC, the auditors failed to meet the independence requirements of the Custody Rule by both preparing and auditing financial statements of several funds and because they had a direct business relationship with the financial advisory firm through a fee-referral relationship.  The SEC also charged the respondents for failing to comply with the requirement of regular PCAOB inspections and cited multiple professional conduct violations, including for failing to design and implement appropriate oversight mechanisms, insufficient quality control and violation of professional due care, among others.  Without admitting or denying the allegations, the defendants were barred from appearing before the Commission and agreed to pay roughly $52,000 combined in disgorgement and penalties. The SEC is also ensuring that firms are not associating with barred auditors. In April, an accounting firm and its sole officer and founder settled charges with the SEC for allegedly violating the Sarbanes Oxley Act of 2012, which prohibits auditors barred by the PCAOB from association with a registered public accounting firm from associating with corporate issuers in an accountancy or financial management capacity.[31]  Without admitting or denying the findings, the company and its founding officer agreed to cease and desist from the association and agreed to pay a $22,500 civil penalty. C.  Private Company Cases While the number of cases against public companies remains low, the SEC has continued to step up its enforcement efforts against private companies. In March, the SEC instituted settled proceedings against a California-based financial technology company.[32]  The SEC alleged that the respondent offered unregistered stock options to its employees without providing the employees with timely financial statements and risk disclosures.  Without admitting the allegations, the company agreed to pay a $160,000 penalty to settle the charges. Also in March, the SEC filed a complaint against a California-based health care technology company, its former CEO, and a former president at the company.[33]  The complaint alleged that the defendants made numerous false statements in investor presentations, product demonstrations and media articles about their flagship product—including misrepresentations regarding expected revenue and the U.S. Department of Defense’s adoption of the product—which deceived investors into believing the product was revolutionary.  Without admitting the allegations, the company and former CEO agreed to settle the charges.  Under the settlement terms, the former CEO agreed to pay a $0.5 million penalty, be barred from serving as an officer or director of a public company for ten years, return 18.9 million shares of the company, and relinquish her voting control by converting her Class B Common shares to Class A Common shares.  The SEC will continue to litigate its claims against the former president in federal court. And in April, the SEC filed a fraud complaint against four parties:  a biotechnology startup formerly based in Massachusetts, its CEO, an employee, and the CEO’s close friend.[34]  According to the SEC, the CEO and the employee made false claims to investors about the company’s finances and the company’s progress in seeking FDA approval for one of its products.  The complaint also alleged that the defendants engaged in a fraudulent scheme to acquire and merge the company with a publicly traded company, manipulated the shares of the new entity, and diverted a portion of the sale proceeds.  The SEC is litigating the case in federal court and seeks to freeze the company’s and CEO’s assets, as well as prohibit the defendants from soliciting money from investors.  In addition, the SEC seeks a permanent injunction, the return of the ill-gotten gains with penalties, and industry and penny stock bars.  The DOJ brought parallel criminal charges against the individual defendants. III.  Investment Advisers and Funds A.  Fees and Expenses In June, a private equity firm settled allegations that it had charged accelerated monitoring fees on portfolio company exits without adequate disclosure.[35]  According to the SEC, the undisclosed receipt of accelerated fees from portfolio companies resulted in negligent violations of various provisions of the Advisers Act.  To settle the matter, the Respondents agreed to pay $4.8 million in disgorgement and prejudgment interest and $1.5 million in penalties. Shortly thereafter, the SEC filed a settled action against a New York-based venture capital fund adviser for allegedly failing to offset consulting fees against management fees in accordance with organizational documents for the funds it advised.[36]  The SEC alleged that the adviser received $1.2 million in consulting fees from portfolio companies in which the funds had invested, and that those fees were not properly offset against advisory or management fees paid by investors, resulting in an overpayment of over $750,000.  The adviser reimbursed its clients, plus interest, and agreed to pay a $200,000 penalty.  Significantly, the SEC’s press release cites to the adviser’s remediation and cooperation, indicating that this was taken into account in determining the appropriate resolution. B.  Conflicts of Interest In March, the SEC instituted settled proceedings against two investment adviser subsidiaries for undisclosed conflicts of interest with regard to the practice of recalling securities on loan.[37]  The SEC alleged that the advisers were affiliated with insurance companies, but also served as investment advisers to insurance-dedicated mutual funds.  The advisers would lend securities held by the mutual funds, and then recall those securities prior to their dividend record dates.  This meant that the insurance company affiliates, as record shareholders of such shares, would receive a tax benefit on the basis of the dividends received.  However, according to the SEC, this recall system resulted in the mutual funds (and their investors) losing income, while the insurance company affiliates reaped a tax benefit.  Without admitting or denying the allegations, the advisers agreed to pay approximately $3.6 million to settle the charges. In April, the SEC instituted proceedings against a New York-based investment adviser in connection with the receipt of revenue sharing compensation from a service provider without disclosing conflicts of interest to its private equity clients.[38]  According to the SEC, the investment adviser entered into an agreement with a company that provided services to portfolio companies.  Pursuant to that agreement, when portfolio companies made purchases, the service provider would receive revenue, and, in turn, the investment adviser would receive a portion of that revenue.  Without admitting or denying the allegations of Advisers Act violations, the investment adviser agreed to pay nearly $800,000 in disgorgement, prejudgment interest, and civil penalties. In early June, the SEC instituted settled proceedings against a New York-based investment adviser in connection with alleged failures to disclose conflicts of interest to clients and prospective clients relating to compensation paid to the firm’s individual advisers and an overseas affiliate.[39]  According to the SEC, this undisclosed compensation, which came from overseas third-party product and service providers recommended by the adviser, incentivized the adviser to recommend certain products and services and a pension transfer.  The SEC also found that the adviser made misleading statements regarding investment options and tax treatment of investments.  In settling the action without admitting or denying the allegations, the investment adviser agreed to pay an $8 million civil penalty and to engage an independent compliance consultant.  In a parallel action, the Commission filed a complaint in federal court in Manhattan against the adviser’s former CEO and a former manager. On the same day, the SEC filed another settled administrative proceeding relating to undisclosed conflicts of interest with a Delaware-based investment adviser.[40]  The settlement order alleges that the adviser negotiated side letters with outside asset managers resulting in arrangements under which the asset managers would make payments to the adviser based on the amount of client assets placed or maintained in funds advised by those asset managers.  This was not disclosed to clients, and contravened the adviser’s agreements with two specific advisory clients.  The SEC also alleged that the adviser failed to implement policies and procedures to prevent conflicts of interest and failed to maintain accurate records relating to the payments from the outside asset managers.  Without admitting or denying the Commission’s findings, the adviser agreed to pay a $500,000 penalty. C.  Fraud and Other Misconduct In January, the SEC filed settled charges against a California-based investment adviser and its CEO and President for failing to adequately disclose the risks associated with investing in their advisory business.[41]  According to the SEC, the firm decided to borrow cash from investors—including its own retail investor clients whose portfolio accounts were managed by the CEO—in the form of promissory notes, in order to fund its business expenses, which exceeded the amount of money received from advisory fees.  In their efforts to market the promissory notes, the CEO and President failed to disclose the true financial state of the firm or the significant risk of default.  In settling the action, the investment adviser agreed to various undertakings, including an in-depth review and enhancement of compliance policies and procedures, and the provision of detailed information regarding noteholders to the staff.  In addition, the firm paid a $50,000 penalty and each principal paid a $25,000 penalty. Also in January, the SEC filed charges in the District of Massachusetts against two Boston-based investment advisers, alleging they engaged in various schemes to defraud their clients, including stealing client funds, failing to disclose conflicts of interest, and secretly using client funds to secure financing for their own investments.[42]  The SEC also alleged that one of the individuals violated his fiduciary duties to clients by obtaining a loan from a client on unfavorable terms to that client and charging advisory fees over 50% higher than the promised rate.  According to the complaint, the pair in one instance misappropriated nearly $450,000 from an elderly client, using the funds to make investments in their own names and to pay personal expenses for one of the individual advisers.  The U.S. Attorney’s Office for the District of Massachusetts also filed criminal charges against the same advisers in a parallel action.  While the SEC action remains pending, the individuals have both pleaded guilty to criminal charges.[43] The SEC also initiated a number of enforcement actions for alleged cherry-picking by investment advisers.  In February, the SEC instituted a litigated action against a California-based investment adviser, its president and sole owner, and its former Chief Compliance Officer for allocating profitable trades to the investment adviser’s account at the expense of its clients.[44]  The SEC’s complaint also alleges that the adviser and president misrepresented trading and allocation practices in Forms ADV filed with the Commission.  The former CCO agreed to settle the charges against him—without admitting or denying allegations that he ignored red flags relating to the firm’s allocation practices—and pay a fine of $15,000; the litigation against the investment adviser and president remains ongoing.  And in March the SEC instituted settled proceedings against a Texas-based investment adviser and its sole principal for disproportionately allocating unprofitable trades to client accounts and profitable trades to their own accounts.[45]  The investment adviser agreed to pay a total of over $700,000 in disgorgement, prejudgment interest, and civil penalties, and the principal agreed to a permanent bar from the securities industry. In April, the SEC filed a settled administrative proceedings against an Illinois-based investment adviser and its president in connection with allegedly misleading advertisements about investment performance.[46]  According to the SEC, the adviser did not disclose that performance results included in advertisements—in the form of written communications and weekly radio broadcasts and video webcasts by its president—were often based on back-tested historical results generated by the adviser’s models, rather than actual results.  The adviser also allegedly failed to adopt written policies and procedures designed to prevent violations of the Advisers Act.  In reaching the agreed-upon resolution, the SEC took into account remediation efforts undertaken by the adviser during the course of the SEC’s investigation, including hiring a new CCO and engaging an outside compliance consultant who conducted an in-depth review of the compliance program and made recommendations which were then implemented by the adviser.  The investment adviser agreed to pay a $125,000 penalty, and the adviser’s president agreed to pay a $75,000 penalty. In May, the SEC charged a California-based individual investment adviser with lying to clients about investment performance and strategy, inflating asset values and unrealized profits in order to overpay himself in management fees and bonuses, and failing to have the private funds audited.[47]  The adviser settled the charges without admitting or denying the allegations, agreeing pay penalties and disgorgement in amounts to be determined by the court. Later that month, the SEC filed settled charges against a Delaware-based investment adviser and its managing member for allegedly making misrepresentations and omissions about the assets and performance of a hedge fund they managed.[48]  According to the SEC, the adviser misrepresented the performance and value of assets in the hedge fund after losing nearly all of its investments after the fund’s trading strategy led to substantial losses.  In addition to making false representations to the fund’s two investors, the adviser withdrew excessive advisory fees based on the inflated asset values.  Without admitting or denying the charges, the adviser and managing member agreed to a cease-and-desist order under which the individual also agreed to a broker-dealer and investment company bar, as well as a $160,000 penalty. In another pair of cases filed in May, the SEC charged a hedge fund and a private fund manager in separate cases involving inflated valuations.  In one case, the SEC alleged that the fund manager’s Chief Financial Officer failed to supervise portfolio managers who engaged in asset mismarking.[49]  The asset mismarking scheme resulted in the hedge fund reaping approximately $3.15 million in excess fees.  The SEC had previously charged the portfolio managers in connection with their misconduct in 2016.  The CFO agreed to pay a $100,000 penalty and to be suspended from the securities industry for twelve months, while the firm agreed to pay over $9 million in disgorgement and penalties.  In the other case, the SEC filed a litigated action in the U.S. District Court for the Southern District of New York against a New York-based investment adviser, the company’s CEO and chief investment officer, a former partner and portfolio manager at the company, and a former trader, in connection with allegations that the defendants inflated the value of private funds they advised.[50]  According to the complaint, the defendants fraudulently inflated the value of the company’s holdings in mortgage-backed securities in order to attract and retain investors, as well as to hide poor fund performance.  This litigation is ongoing. Finally, in late June the SEC announced a settlement with an investment adviser that allegedly failed to protect against advisory representatives misappropriating or misusing client funds.[51]  Without sufficient safeguards in place, one advisory representative was able to misappropriate or misuse $7 million from advisory clients’ accounts.  Without admitting or denying the SEC’s findings, the adviser agreed to pay a $3.6 million penalty, in addition to a cease-and-desist order and a censure.  The representative who allegedly misused the $7 million from client accounts faces criminal charges by the U.S. Attorney’s Office for the Southern District of New York. D.  Investment Company Share Price Selection The first half of 2018 saw the launch of the SEC’s Share Class Selection Disclosure Initiative (SCSD Initiative), as well as several cases involving share class selections.  Under the SCSD Initiative, announced in February, the SEC’s Division of Enforcement agreed not to recommend financial penalties against mutual fund managers which self-report violations of the federal securities laws relating to mutual fund share class selection and promptly return money to victimized investors.[52]  Where investment advisers fail to disclose conflicts of interest and do not self-report, the Division of Enforcement will recommend stronger sanctions in future actions. In late February, a Minnesota-based broker-dealer and investment adviser settled charges in connection with the recommendation and sale of higher-fee mutual fund shares when less expensive share classes were available.[53]  In turn, those recommendations resulted in greater revenue for the company and decreased customers’ returns.  The company, without admitting or denying the allegations, consented to a penalty of $230,000. In April, three investment advisers agreed to settle charges in connection with their failure to disclose conflicts of interest and violations of their fiduciary duties by recommending higher-fee mutual fund share classes despite the availability of less expensive share classes.[54]  Collectively, the companies agreed to pay nearly $15 million in disgorgement, prejudgment interest, and penalties.  The SEC used the announcement of the cases to reiterate its ongoing SCSDC Initiative. E.  Other Compliance Issues In January, the SEC announced settled charges against an Arizona-based investment adviser and its sole principal in connection with a number of Advisers Act violations, including misrepresentations in filed Forms ADV, misrepresentations and failure to produce documents to the Commission examination staff, and other compliance-related deficiencies.[55]  According to the SEC, the adviser’s Forms ADV for years misrepresented its principal’s interest in private funds in which its advisory clients invested.  While the clients were aware of the principal’s involvement with the funds, the adviser falsely stated in filings that the principal had no outside financial industry activities and no interests in client transactions.  Additionally, the SEC alleged that the adviser misstated its assets under management, failed to adopt written policies and procedures relating to advisory fees, and failed to conduct annual reviews of its policies and procedures.  Without admitting or denying the SEC’s allegations, the investment adviser agreed to pay a $100,000 penalty, and the principal agreed to a $50,000 penalty and to a prohibition from acting in a compliance capacity. In April, the SEC filed settled charges against a Connecticut-based investment adviser and its sole owner for improper registration with the Commission and violations of the Commission’s custody and recordkeeping rules.[56]  According to the settled order, the adviser misrepresented the amount of its assets under management in order to satisfy the minimum requirements for SEC registration.  The adviser also allegedly—while having custody over client assets—failed to provide quarterly statements to clients or to arrange for annual surprise verifications of assets by an independent accountant, as required by the Custody Rule, and also failed to make and keep certain books and records required by SEC rules.  Without admitting or denying the allegations, the adviser and its owner agreed to the entry of a cease-and-desist order, and the owner agreed to pay a $20,000 civil penalty and to a 12-month securities industry suspension. A few weeks later, a fund administrator settled cease-and-desist proceedings in connection with the company’s alleged noncompliance in maintaining an affiliated cash fund.[57]  According to the SEC, from mid-2008 to the end of 2012, the firm’s pricing methodology for its affiliated unregistered money market fund was flawed.  The SEC alleged that the deficiencies in the pricing methodology caused the affiliated cash fund to violate Investment Company Act.  To settle the charges, the trust agreed to pay a civil monetary penalty of $225,000. And in June, the SEC announced settlements with 13 private fund advisers in connection with their failures to file Form PF.[58]  Advisers who manage $150 million or more of assets are obligated to file annual reports on Form PF that indicate the amount of assets under management and other metrics about the private funds that they advise.  In turn, the SEC uses the data contained in Form PF in connection with quarterly reports, to monitor industry trends, and to evaluate systemic risks posed by private funds.  Each of the 13 advisers failed to timely file Form PF over a number of years.  Without admitting or denying the allegations, each of the 13 advisers agreed to pay a $75,000 civil penalty. IV.  Brokers and Financial Institutions A.  Supervisory Controls and Internal Systems Deficiencies The SEC brought several cases during the first half of 2018 relating to failures of supervisory controls and internal systems.  In March, the SEC filed a litigated administrative proceeding against a Los Angeles-based financial services firm for failing to supervise one of its employees who was involved in a long-running pump-and-dump scheme and who allegedly received undisclosed benefits for investing her customers in microcap stocks that were the subject of the scheme.[59]  The employee agreed to settle fraud charges stemming from the scheme.  The SEC alleged that the firm ignored multiple signs of the employee’s fraud, including a customer email outlining her involvement in the scheme and multiple FINRA arbitrations and inquiries regarding her penny stock trading activity.  The firm even conducted two investigations, deemed “flawed and insufficient” by the SEC, but failed to take action against the employee.  The SEC previously charged the orchestrator of the pump-and-dump scheme, as well as 15 other individuals and several entities. Also in March, the SEC announced settled charges against a New York-based broker-dealer for its failure to perform required gatekeeping functions in selling almost three million unregistered shares of stock on behalf of a China-based issuer and its affiliates.[60]  The SEC alleged that the firm ignored red flags indicating that the sales could be part of an unlawful unregistered distribution. At the end of June, the SEC charged a New York-based broker-dealer and two of its managers for failing to supervise three brokers, all three of whom were previously charged with fraud in September 2017.[61]  According to the SEC, the firm lacked reasonable supervisory policies and procedures, as well as systems to implement them, and if those systems had been in place, the firm likely would have prevented and detected the brokers’ wrongdoing.  In separate orders, the SEC found that two supervisors ignored red flags indicating excessive trading and failed to supervise brokers with a view toward preventing and detecting their securities-laws violations. B.  AML Cases During the first half of 2018, the SEC brought a number of cases in the anti-money laundering (“AML”) arena.  In March, the SEC brought settled charges against a New York-based brokerage firm for failure to file Suspicious Activity Reports (or “SARs”) reporting numerous suspicious transactions.[62]  The brokerage firm admitted to the charges, and agreed to retain a compliance expert and pay a $750,000 penalty.  The SEC also brought charges against the brokerage firm’s CEO for causing the violation, and its AML compliance officer for aiding and abetting the violation.  Without admitting or denying the charges, the CEO and AML compliance officer respectively agreed to pay penalties of $40,000 and $25,000. In May, the SEC instituted settled charges against two broker-dealers and an AML officer for failing to file SARs relating to the suspicious sales of billions of shares in penny stock.[63]  Without admitting or denying the SEC’s findings, the broker-dealers agreed to penalties; the AML officer agreed to a penalty and an industry and penny stock bar for a minimum of three years. C.  Regulatory Violations In January, the SEC instituted a settled administrative proceeding against an international financial institution for repeated violations of Rule 204 of Regulation SHO, which requires timely delivery of shares to cover short sales.[64]  The SEC’s order alleged that the firm improperly claimed credit on purchases and double counted purchases, resulting in numerous, prolonged fail to deliver positions for short sales.  Without admitting or denying the allegations, the firm agreed to pay a penalty of $1.25 million and entered into an undertaking to fully cooperate with the SEC in all proceedings relating to or arising from the matters in the order. In March, the SEC announced settled charges against a Los-Angeles broker dealer for violating the Customer Protection Rule, which requires that broker-dealers safeguard the cash and securities of customers, by illegally placing more than $25 million of customers’ securities at risk to fund its own operations.[65]  Specifically, the broker-dealer on multiple occasions moved customers’ securities to its own margin account without obtaining the customers’ consent.  The SEC’s Press Release noted that it had recently brought several cases charging violations of the Customer Protection Rule.  Without admitting or denying the allegations, the broker dealer agreed to pay a penalty of $80,000. Also in March, the SEC filed a settled action against a New York-based broker dealer and its CEO and founder for violating the net capital rule, which requires a broker-dealer to maintain sufficient liquid assets to meet all obligations to customers and counterparties and have adequate additional resources to wind down its business in an orderly manner if the firm fails financially.[66]  The SEC found that for ten months, the firm repeatedly failed to maintain sufficient net capital, failed to accrue certain liabilities on its books and records, and misclassified certain assets when performing its net capital calculations.  According to the SEC, the firm’s CEO was involved in discussions about the firm’s unaccrued legal liabilities and was aware of the misclassified assets, but he nevertheless prepared the firm’s erroneous net capital calculations.  As part of the settlement, he agreed to not serve as a financial and operations principal (FINOP) for three years and to pass the required licensing examination prior to resuming duties as a FINOP; the firm agreed to pay a $25,000 penalty. And in a novel enforcement action also arising in March, the SEC filed a settled action against the New York Stock Exchange and two affiliated exchanges in connection with multiple episodes, including several disruptive market events, such as erroneously implementing a market-wide regulatory halt, negligently misrepresenting stock prices as “automated” despite extensive system issues ahead of a total shutdown of two of the exchanges, and applying price collars during unusual market volatility on August 24, 2015, without a rule in effect to permit them.[67]  The SEC also, for the first time, alleged a violation of Regulation SCI, which was adopted by the Commission to strengthen the technology infrastructure and integrity of the U.S. securities markets.  The SEC charged two NYSE exchanges with violating Regulation SCI’s business continuity and disaster recovery requirement.  Without admitting or denying the allegations, the exchanges agreed to pay a $14 million penalty to settle the charges. D.  Other Broker-Dealer Enforcement Actions In June, the SEC settled with a Missouri-based broker-dealer, alleging that the firm generated large fees by improperly soliciting retail customers to actively trade financial products called market-linked investments, or MLIs, which are intended to be held to maturity.[68]  The SEC alleged that the trading strategy, whereby the MLIs were sold before maturity and the proceeds were invested in new MLIs, generated commissions for the firm, which reduced the customers’ investment returns.  The order also found that certain representatives of the firm did not reasonably investigate or understand the significant costs of the MLI exchanges.  The SEC also alleged that the firm’s supervisors routinely approved the MLI transactions despite internal policies prohibiting short-term trading or “flipping” of the products. Later in June, the SEC announced that it had settled with a New York-based broker-dealer for the firm’s violations of its record-keeping provisions by failing to remediate an improper commission-sharing scheme in which a former supervisor received off-book payments from traders he managed.[69]  The SEC also filed a litigated complaint in federal court against the former supervisor and former senior trader for their roles in the scheme.  As alleged by the SEC, the former supervisor and another trader used personal checks to pay a portion of their commissions to the firm’s former global co-head of equities and to another trader.  The practice violated the firm’s policies and procedures and resulted in conflicts of interest that were hidden from the firm’s compliance department, customers, and regulators. E.  Mortgage Backed Securities Cases The SEC appeared to be clearing out its docket of enforcement actions dating back to the mortgage crisis. In February, the SEC announced a settlement against a large financial institution and the former head of its commercial mortgage-backed securities (“CMBS”) trading desk, alleging that traders and salespeople at the firm made false and misleading statements while negotiating secondary market CMBS sales.[70]  According to the SEC’s order, customers of the financial institution overpaid for CMBS because they were misled about the prices at which the firm had originally purchased them, resulting in increased profits for the firm to the detriment of its customers.  The order also alleged that the firm did not have in place adequate compliance and surveillance procedures which were reasonably designed to prevent and detect the misconduct, and also found supervisory failures by the former head trader for failing to take appropriate corrective action.  The firm and trader, without admitting or denying the allegations, agreed to respective penalties of $750,000 and $165,000.  The firm also agreed to repay $3.7 million to customers, which included $1.48 million ordered as disgorgement, and the trader agreed to serve a one-year suspension from the securities industry. Similarly, in mid-June, a large New York-based wealth management firm paid $15 million to settle SEC charges that its traders and salespersons misled customers into overpaying for residential mortgage backed securities (RMBS) by deceiving them about the price that the firm paid to acquire the securities.[71]  The SEC also alleged that the firm’s RMBS traders and salespersons illegally profited from excessive, undisclosed commissions, which in some instances were more than twice the amount that customers should have paid.  According to the SEC, the firm failed to have compliance and surveillance procedures in place that were reasonably designed to prevent and detect the misconduct. V.  Insider Trading A.  Classical Insider Trading And Misappropriation Cases In January, a former corporate insider and a former professional in the brokerage industry agreed to settle allegations that they traded on the stock of a construction company prior to the public announcement of the company’s acquisition.[72]  The insider purportedly tipped his friend, who was then a registered broker-dealer, about the impending transaction in return for assistance in obtaining a new job with his friend’s employer following the merger.  According to the SEC, the broker-dealer traded on that information for a profit exceeding $48,000.  Without admitting or denying the SEC’s findings, both individuals consented to pay monetary penalties, and the trader agreed to disgorge his ill-gotten gains. The following month, the SEC sued a pharmaceutical company employee who allegedly traded in the stock of an acquisition target despite an explicit warning not to do so.[73]  According to the SEC, the defendant bought stock in the other company a mere 14 minutes after receiving an e-mail regarding the acquisition.  Without admitting or denying the SEC’s allegations, the employee agreed to disgorgement of $2,287 and a $6,681 penalty. In February, the SEC charged the former CEO and a former officer of a medical products company with trading on information regarding a merger involving one of their company’s largest customers.[74]  Without admitting or denying the allegations, the two executives agreed to disgorge a total of about $180,000 in trading proceeds and to pay matching penalties. In March, the SEC charged a former communications specialist at a supply chain services company with garnering more than $38,000 in illicit profits after purchasing shares in his company prior to the public announcement of its acquisition.[75]  Without admitting or denying the allegations, the defendant subsequently agreed to $38,242 in disgorgement and the payment of a penalty to be determined following a subsequent motion by the SEC.[76] That same month, the SEC filed suit against the former chief information officer of a company who sold shares of his employer prior to public revelations that that company had suffered a data breach.[77]  In addition, the U.S. Attorney’s Office for the Northern District of Georgia brought  parallel criminal charges.  Both cases are still pending.  Subsequently, at the end of June, the SEC charged another employee at that same company with trading on nonpublic information that he obtained while creating a website for customers affected by the data breach.[78]  The defendant agreed to a settlement requiring him to return ill-gotten gains of more than $75,000 plus interest, and a criminal case filed by the U.S. Attorney’s Office for the Northern District of Georgia remains ongoing. In April, the SEC charged a New York man with tipping his brother and father about the impending acquisition of a medical-supply company based on information that he learned from his friend, the CEO of the company being acquired.[79]  The SEC alleged that the father and brother garnered profits of about $145,000 based on their unlawful trading, and—without admitting or denying the SEC’s allegations—the tipper agreed to pay a $290,000 penalty.  The SEC’s investigation remains ongoing. Also in April, the SEC and the U.S. Attorney’s Office for the District of Massachusetts filed parallel civil and criminal charges against a man accused of trading on a company’s stock based on information gleaned from an unidentified insider.[80]  The man purportedly purchased shares using his retirement savings in advance of eight quarterly earnings announcements over a two-year period, reaping over $900,000 in illicit profits.  The SEC’s complaint also names the man’s wife as a relief defendant, and the matter remains ongoing. Finally, in May, the SEC charged two men with reaping small profits by trading on non-public information in advance of a merger of two snack food companies based on information gained from a close personal friend at one of the merging companies.[81]  Both defendants agreed to settle the lawsuit by disgorging ill-gotten gains and paying penalties. B.  Misappropriation by Investment Professionals and Other Advisors At the end of May, the SEC charged a vice president at an investment bank with repeatedly using confidential knowledge to trade in advance of deals on which his employer advised.[82]  The defendant allegedly used client information to trade in the securities of 12 different companies via a brokerage account held in the name of a friend living in South Korea, evading his employer’s rules that he pre-clear any trades and use an approved brokerage firm.  The trader purportedly garnered approximately $140,000 in illicit profits, and the U.S. Attorney’s Office for the Southern District of New York filed a parallel criminal case.  Both matters are still being litigated. In June, the SEC sued a Canadian accountant for trading on information misappropriated from his client, a member of an oil and gas company’s board of directors.[83]  Based on this relationship, the defendant gained knowledge of an impending merger involving the company.  Without admitting or denying the SEC’s allegations, he agreed to be barred from acting as an officer or director of a public company, and to pay disgorgement and civil penalties of $220,500 each.  The defendant also consented to an SEC order suspending him from appearing or practicing before the Commission as an accountant. Finally, that same month, the SEC charged a credit ratings agency employee and the two friends he tipped about a client’s nonpublic intention to acquire another company.[84]  According to the SEC, the tipper learned the confidential information when the client reached out to the agency to assess the impact of the merger on the company’s credit rating.  Based on the information they received, the friends allegedly netted profits of $192,000 and $107,000, respectively.  In addition, the U.S. Attorney’s Office for the Southern District of New York filed a parallel criminal case against all three individuals.. C.  Other Trading Cases And Developments In February, the Third Circuit Court of Appeals issued a decision in United States v. Metro reversing the district court’s sentencing calculation following the appellant’s conviction on insider trading charges.[85]  The appellant, Steven Metro, was a managing clerk at a New York City law firm, and over the course of five years, he disclosed material nonpublic information to a close friend, Frank Tamayo, concerning 13 different corporate transactions.  Tamayo then transmitted that information to a third-party broker, who placed trades on behalf of Tamayo, himself, and other clients, yielding illicit profits of approximately $5.5 million.  Metro pleaded guilty to one count of conspiracy and one count of securities fraud, and the district court attributed the entire $5.5 million sum to Metro in calculating the length of his sentence.  Metro objected, arguing that he was unaware of the broker’s existence until after he stopped tipping Tamayo. On appeal, the Third Circuit vacated Metro’s sentence after determining that the district court made insufficient factual findings to substantiate imputation of all illicit profits to Metro, holding: “When the scope of a defendant’s involvement in a conspiracy is contested, a district court cannot rely solely on a defendant’s guilty plea to the conspiracy charge, without additional fact-finding, to support attributing co-conspirators’ gains to a defendant.”  The court emphasized that “when attributing to an insider-trading defendant gains realized by other individuals . . . a sentencing court should first identify the scope of conduct for which the defendant can fairly be held accountable . . . .”  Such an inquiry “may lead the court to attribute to a defendant gains realized by downstream trading emanating from the defendant’s tips, but, depending on the facts established at sentencing, it may not,” and the court therefore found that the government erred in propounding a “strict liability” standard. Finally, the first half of this year also saw limited activity by the SEC to freeze assets used to effectuate alleged insider trades.  In January, the SEC obtained an emergency court order freezing the assets of unknown defendants in Swiss bank accounts.[86]  According to the SEC, those unknown defendants were in possession of material nonpublic information regarding the impending acquisition of a biopharmaceutical company, and some of the positions taken in those accounts represented almost 100 percent of the market for those particular options.  The illicit trades allegedly yielded about $5 million in profits.. VI.  Municipal Securities and Public Pensions Cases In the first half of 2018, the SEC’s Public Finance Abuse Unit continued the slower pace of enforcement that began in 2017, pursuing two separate cases against municipal advisors. In January, the SEC charged an Atlanta, Georgia-based municipal advisor and its principal with defrauding the city of Rolling Fork, Mississippi.[87]  The SEC alleged that the municipal advisor had fraudulently overcharged Rolling Fork for municipal advisory services in connection with an October 2015 municipal bond offering and had failed to disclose certain related-party payments.  The related-party payments consisted of an undisclosed $2500 payment made to the advisor by an employee of a municipal underwriter shortly before the advisor recommended that the city hire the underwriter’s firm.  The parties subsequently agreed to settle the case.[88]  Without admitting or denying the allegations against them, the advisor and principal consented to the entry of judgments permanently enjoining them from violating Sections 15B(a)(5) and 15B(c)(1) of the Securities Exchange Act of 1934 and MSRB Rule G-17.  The judgment also requires the defendants to pay a total of about $111,000 in disgorgement, interest, and penalties. In addition, the SEC settled its case against the municipal underwriter.  Without admitting the SEC’s findings, the underwriter agreed to a six-month suspension and to pay a $20,000 penalty. And in May, the SEC brought settled administrative proceedings against another municipal advisor and its owner.[89]  The SEC alleged that, by misrepresenting their municipal advisory experience and failing to disclose conflicts of interest, the advisor and owner had defrauded a South Texas school district and breached their fiduciary duties to that district.  Without admitting to the allegations, the advisor and owner agreed to pay a combined total of approximately $562,000 in disgorgement, interest, and penalties.. [1] Lucia v. SEC, 585 U.S. __ (2018).  For more on Lucia, see Gibson Dunn Client Alert, SEC Rules That SEC ALJs Were Unconstitutionally Appointed (June 21, 2018), available at www.gibsondunn.com/supreme-court-rules-that-sec-aljs-were-unconstitutionally-appointed. [2] See Gibson Dunn Client Alert, U.S. Supreme Court Limits SEC Power to Seek Disgorgement Based on Stale Conduct (June 5, 2017), available at www.gibsondunn.com/united-states-supreme-court-limits-sec-power-to-seek-disgorgement-based-on-stale-conduct. [3] SEC v Kokesh, No. 15-2087 (10th Cir. Mar. 5, 2018); see also Jonathan Stempel, SEC Can Recoup Ill-gotten Gains from New Mexico Businessman: U.S. Appeals Court, Reuters (Mar. 5, 2018), available at www.reuters.com/article/us-sec-kokesh/sec-can-recoup-ill-gotten-gains-from-new-mexico-businessman-u-s-appeals-court-idUSKBN1GH2YK. [4] Adam Dobrik, Unhelpful to Threaten SEC with Trial, Says Enforcement Director, Global Investigations Review (May 10, 2018), available at globalinvestigationsreview.com/article/jac/1169315/unhelpful-to-threaten-sec-with-trial-says-enforcement-director. [5] See SEC v. Cohen, No. 1:17-CV-00430 (E.D.N.Y. July 12, 2018) (holding claims for injunctive relief time-barred). [6] Dunstan Prial, High Court Agrees To Review Banker’s Copy-Paste Fraud, Law360 (Jun. 18, 2018), available at https://www.law360.com/securities/articles/1054568. [7] SEC Press Release, SEC Awards Whistleblower More Than $2.1 Million (Apr. 12, 2018), available at www.sec.gov/news/press-release/2018-64. [8] SEC Press Release, SEC Announces Its Largest-Ever Whistleblower Awards (Mar. 19, 2018), available at https://www.sec.gov/news/press-release/2018-44. [9] Ed Beeson, SEC Whistleblowers Net $83M In Largest Ever Bounties, Law360 (Mar. 19, 2018), available at www.law360.com/articles/1023646/sec-whistleblowers-net-83m-in-largest-ever-bounties. [10] In re Claims for Award in connection with [redacted], Admin. Proc. File No. 2018-6 (Mar. 19, 2018), available at https://www.sec.gov/rules/other/2018/34-82897.pdf. [11] SEC Press Release, SEC Awards More Than $2.2 Million to Whistleblower Who First Reported Information to Another Federal Agency Before SEC (Apr. 5, 2018), available at www.sec.gov/news/press-release/2018-58. [12] SEC Press Release, SEC Awards Whistleblower More Than $2.1 Million (Apr. 12, 2018), available at www.sec.gov/news/press-release/2018-64. [13] Digital Realty Trust, Inc. v. Somers, 583 U.S. __ (2018); see Dunstan Prial, Supreme Court Narrows Definition Of Whistleblower, Law360 (Feb. 21, 2018), available at www.law360.com/securities/articles/1003954. [14] Jennifer Williams Alvarez, SEC Proposes Changes to Whistle-Blower Program, Agenda: A Financial Times Services (Jun. 28, 2018), available at [insert]. [15] SEC Public Statement, Statement on Cybersecurity Interpretive Guidance (Feb. 21, 2018), available at www.sec.gov/news/public-statement/statement-clayton-2018-02-21. [16] SEC Public Statement, Statement on Potentially Unlawful Online Platforms for Trading Digital Assets (March 7, 2018), available at https://www.sec.gov/news/public-statement/enforcement-tm-statement-potentially-unlawful-online-platforms-trading. [17] SEC Press Release, SEC Charges Former Bitcoin-Denominated Exchange and Operator with Fraud (Feb. 21, 2018), available at https://www.sec.gov/news/press-release/2018-23. [18] SEC Press Release, SEC Halts Alleged Initial Coin Offering Scam (Jan. 30, 2018), available at www.sec.gov/news/press-release/2018-8. [19] SEC Press Release, SEC Halts Fraudulent Scheme Involving Unregistered ICO (April 2, 2018), available at www.sec.gov/news/press-release/2018-53. [20] SEC Press Release, SEC Charges Additional Defendant in Fraudulent ICO Scheme (April 20, 2018), available at www.sec.gov/news/press-release/2018-70. [21] SEC Press Release, SEC Obtains Emergency Order Halting Fraudulent Coin Offering Scheme (May 29, 2018), available at www.sec.gov/news/press-release/2018-94. [22] SEC Press Release, SEC Obtains Emergency Freeze of $27 Million in Stock Sales of Purported Cryptocurrency Company Longfin (April 6, 2018), available at www.sec.gov/news/press-release/2018-61. [23] SEC Press Release, SEC Charges Energy Storage Company, Former Executive in Fraudulent Scheme to Inflate Financial Results (Mar. 27, 2018), available at www.sec.gov/news/press-release/2018-48. [24] SEC Press Release, Panasonic Charged with FCPA and Accounting Fraud Violations (Apr. 30, 2018), available at www.sec.gov/news/press-release/2018-73. [25] SEC Press Release, Altaba, Formerly Known as Yahoo!, Charged With Failing to Disclose Massive Cybersecurity Breach; Agrees To Pay $35 Million (Apr. 24, 2018), available at www.sec.gov/news/press-release/2018-71. [26] SEC Press Release, SEC Charges Three Former Healthcare Executives With Fraud (May 16, 2018), available at www.sec.gov/news/press-release/2018-90. [27] SEC Litig. Rel. No. 24181, SEC Charges California Company and Three Executives with Accounting Fraud (July 2, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24181.htm. [28] SEC Press Release, SEC Obtains Bars and Suspensions Against Individuals and Accounting Firm in Shell Factory Scheme (Feb. 16, 2018), available at www.sec.gov/news/press-release/2018-21. [29] SEC Press Release, Foreign Affiliates of KPMG, Deloitte, BDO Charged in Improper Audits (Mar. 13, 2018), available at www.sec.gov/news/press-release/2018-39. [30] In the Matter of Winter, Kloman, Moter & Repp, S.C., Curtis W. Disrud, CPA, and Paul R. Sehmer, CPA, Admin. Proc. File No. 3-18466 (May 04, 2018), available at www.sec.gov/litigation/admin/2018/34-83168.pdf. [31] AP File No. 3-18442, SEC Charges New Jersey-Based Company and Founder for Impermissible Association with Barred Auditor (Apr. 19, 2018), available at www.sec.gov/enforce/34-83067-s. [32] SEC Admin. Proc. File No. 3-18398, Fintech Company Charged For Stock Option Offering Deficiencies, Failed To Provide Required Financial Information To Employee Shareholders (Mar. 12, 2018), available at www.sec.gov/litigation/admin/2017/34-82233-s.pdf. [33] SEC Press Release, Theranos, CEO Holmes, and Former President Balwani Charged With Massive Fraud (Mar. 14, 2018), available at www.sec.gov/news/press-release/2018-41. [34] SEC Litig. Rel. No. 24121, SEC Charges Biotech Start-up, CEO With Fraud (Apr. 24, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24121.htm. [35] In the Matter of THL Managers V, LLC, and THL Managers, VI, LLC, Admin. Proc. File No. 3-18565 (June 29, 2018), available at www.sec.gov/litigation/admin/2018/ia-4952.pdf. [36] SEC Admin. Proc. File No. 3-18564, SEC Charges New York-Based Venture Capital Fund Adviser for Failing to Offset Consulting Fees (June 29, 2018), available at www.sec.gov/enforce/ia-4951-s. [37] SEC Press Release, (Mar. 8, 2018), available at www.sec.gov/news/press-release/2018-35. [38] SEC Admin. Proc. File No. 3-18449, SEC Charges a New York-Based Investment Adviser for Breach of Fiduciary Duty (Apr. 24, 2018), available at www.sec.gov/enforce/ia-4896-s. [39] SEC Press Release, SEC Charges Investment Adviser and Two Former Managers for Misleading Retail Clients (June 4, 2018), available at www.sec.gov/news/press-release/2018-101. [40] In re Lyxor Asset Management, Inc., Admin Proc. File No. 3-18526 (June 4, 2018), available at www.sec.gov/litigation/admin/2018/ia-4932.pdf. [41] SEC Admin. Proc. File No. 3-18349, Investment Adviser and Its Principals Settle SEC Charges that They Failed to Disclose Risks of Investing in Their Advisory Business (Jan. 23, 2018), available at  www.sec.gov/enforce/33-10454-s. [42] SEC Litig. Rel. No. 24037, SEC Charges Two Boston-Based Investment Advisers with Fraud (Jan. 31, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24037.htm. [43] Nate Raymond, Ex-Morgan Stanley adviser sentenced to U.S. prison for fraud, Reuters (June 28, 2018), available at www.reuters.com/article/morgan-stanley-fraud/ex-morgan-stanley-adviser-sentenced-to-u-s-prison-for-fraud-idUSL1N1TU28Q. [44] SEC Litig. Rel. No. 24054, SEC Charges Orange County Investment Adviser and Senior Officers in Fraudulent “Cherry-Picking” Scheme (Feb. 21, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24054.htm. [45] SEC Press Release, Investment Adviser Settles Charges for Cheating Clients in Fraudulent Cherry-Picking Scheme (Mar. 8, 2018), available at www.sec.gov/news/press-release/2018-36. [46] In re Arlington Capital Management, Inc. and Joseph L. LoPresti, Admin. Proc. File No. 3-18437 (Apr. 16, 2018), available at www.sec.gov/litigation/admin/2018/ia-4885.pdf. [47] SEC Litig. Rel. No. 24142, SEC Charges California Investment Adviser in Multi-Million Dollar Fraud (May 15, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24142.htm. [48] In re Aberon Capital Management, LLC and Joseph Krigsfeld, Admin. Proc. File No. 3-18503 (May 24, 2018), available at www.sec.gov/litigation/admin/2018/ia-4914.pdf. [49] SEC Press Release, Hedge Fund Firm Charged for Asset Mismarking and Insider Trading (May 8, 2018), available at www.sec.gov/news/press-release/2018-81. [50] SEC Press Release, SEC Charges Hedge Fund Adviser With Deceiving Investors by Inflating Fund Performance (May 9, 2018), available at www.sec.gov/news/press-release/2018-83. [51] SEC Press Release, SEC Charges Morgan Stanley in Connection With Failure to Detect or Prevent Misappropriation of Client Funds (June 29, 2018), available at www.sec.gov/news/press-release/2018-124. [52] SEC Press Release, SEC Launches Share Class Selection Disclosure Initiative to Encourage Self-Reporting and the Prompt Return of Funds to Investors (Feb. 12, 2018), available at www.sec.gov/news/press-release/2018-15. [53] SEC Press Release, SEC Charges Ameriprise With Overcharging Retirement Account Customers for Mutual Fund Shares (Feb. 28, 2018), available at www.sec.gov/news/press-release/2018-26. [54] SEC Press Release, SEC Orders Three Investment Advisers to Pay $12 Million to Harmed Clients (Apr. 6, 2018), available at www.sec.gov/news/press-release/2018-62. [55] SEC Admin. Proc. File No. 3-18328, Formerly Registered Investment Adviser Settles SEC Charges Related to Filing False Forms ADV and Other Investment Advisers Act Violations (Jan. 3, 2018), available at www.sec.gov/litigation/admin/2018/ia-4836-s.pdf. [56] SEC Admin. Proc. File No. 3-18423, SEC Charges Investment Adviser for Improperly Registering with the Commission and Violating Several Rules (Apr. 5, 2018), available at www.sec.gov/enforce/ia-4875-s. [57] In re SEI Investments Global Funds Services, Admin. Proc. File No. 3-18457 (Apr. 26, 2018), available at www.sec.gov/litigation/admin/2018/ic-33087.pdf. [58] SEC Press Release, SEC Charges 13 Private Fund Advisers for Repeated Filing Failures (June 1, 2018), available at www.sec.gov/news/press-release/2018-100. [59] SEC Press Release, SEC Charges Recidivist Broker-Dealer in Employee’s Long-Running Pump-and-Dump Fraud (Mar. 27, 2018), available at www.sec.gov/news/press-release/2018-49. [60] SEC Press Release, Merrill Lynch Charged With Gatekeeping Failures in the Unregistered Sales of Securities (Mar. 8, 2018), available at www.sec.gov/news/press-release/2018-32. [61] SEC Press Release, SEC Charges New York-Based Firm and Supervisors for Failing to Supervise Brokers Who Defrauded Customers (June 29, 2018), available at www.sec.gov/news/press-release/2018-123. [62] SEC Press Release, Broker-Dealer Admits It Failed to File SARs (Mar. 28, 2018), available at www.sec.gov/news/press-release/2018-50. [63] SEC Charges Brokerage Firms and AML Officer with Anti-Money Laundering Violations (May 16, 2018), available at www.sec.gov/news/press-release/2018-87. [64] Administrative Proceeding File No. 3-18341, Industrial and Commercial Bank of China Financial Services LLC Agrees to Settle SEC Charges Relating to Numerous Regulation SHO Violations That Resulted in Prolonged Fails to Deliver (Jan. 18, 2018), available at www.sec.gov/litigation/admin/2018/34-82533-s.pdf. [65] SEC Press Release, Broker Charged with Repeatedly Putting Customer Assets at Risk (Mar. 19, 2018), available at www.sec.gov/news/press-release/2018-45. [66] Admin. Proc. File No. 3-18409, SEC Charges Broker-Dealer, CEO With Net Capital Rule Violations (Mar. 27, 2018), available at www.sec.gov/enforce/34-82951-s. [67] SEC Press Release, NYSE to Pay $14 Million Penalty for Multiple Violations (Mar. 6, 2018), available at www.sec.gov/news/press-release/2018-31. [68] SEC Press Release, Wells Fargo Advisors Settles SEC Chargers for Improper Sales of Complex Financial Products (June 25, 2018), available at www.sec.gov/news/press-release/2018-112. [69] Lit. Rel. No. 24179, SEC Charges Cantor Fitzgerald and Brokers in Commission-Splitting Scheme (June 29, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24179.htm. [70] SEC Press Release, Deutsche Bank to Repay Misled Customers (Feb. 12, 2018), available at www.sec.gov/news/press-release/2018-13. [71] SEC Press Release, SEC Charges Merrill Lynch for Failure to Supervise RMBS Traders (June 12, 2018), available at www.sec.gov/news/press-release/2018-105. [72] Admin. Proc. File No. 3-18335, Former Corporate Insider and Brokerage Industry Employee Settle Insider Trading Charges with SEC (Jan. 11, 2018), available at www.sec.gov/litigation/admin/2018/34-82485-s.pdf. [73] Lit. Rel. No. 24056,  SEC: Insider Bought Minutes After Warnings Not to Trade (Feb. 28., 2018), available at www.sec.gov/litigation/litreleases/2018/lr24056.htm. [74] Lit Rel. No. 24044, SEC Charges Former Medical Products Executives with Insider Trading (Feb. 12, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24044.htm. [75] Lit Rel. No. 24065, SEC Charges Corporate Communications Specialist with Insider Trading Ahead of Acquisition Announcement (Mar. 8, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24065.htm. [76] Lit Rel. No. 24163, Court Enters Consent Judgment against Robert M. Morano (June 11, 2018), available at https://www.sec.gov/litigation/litreleases/2018/lr24163.htm. [77] Press Release, Former Equifax Executive Charged With Insider Trading (Mar. 14, 2018), available at www.sec.gov/news/press-release/2018-40. [78] Press Release, Former Equifax Manager Charged With Insider Trading (June 28, 2018), available at www.sec.gov/news/press-release/2018-115. [79] Lit Rel. No. 24104, SEC Charges New York Man with Insider Trading (Apr. 5, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24104.htm. [80] Lit Rel. No. 24097, SEC Charges Massachusetts Man in Multi-Year Trading Scheme (Apr. 5, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24097.htm. [81] Lit Rel. No. 24134, SEC Charges Two Pennsylvania Residents with Insider Trading (May 4, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24134.htm. [82] Press Release, SEC Charges Investment Banker in Insider Trading Scheme (May 31, 2018), available at www.sec.gov/news/press-release/2018-97. [83] Lit Rel. No. 24165, SEC Charges Canadian Accountant with Insider Trading (June 12, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24164.htm. [84] Lit Rel. No. 24178, SEC Charges Credit Ratings Analyst and Two Friends with Insider Trading (June 29, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24178.htm. [85] 882 F.3d 431 (3d Cir. 2018); see also Tom Gorman, “SEC Disgorgement: A Path For Reform?,” SEC Actions Blog (Feb. 20, 2018), available at http://www.lexissecuritiesmosaic.com/net/Blogwatch/Blogwatch.aspx?ID=32139&identityprofileid=PJ576X25804. [86] Lit Rel. No. 24035, SEC Freezes Assets Behind Alleged Insider Trading (Jan. 26, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24035.htm. [87] SEC Press Release, SEC Charges Municipal Adviser and its Principal with Defrauding Mississippi City (January 5, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24025.htm. [88] SEC Press Release, SEC Obtains Judgments Against Municipal Adviser and Its Principal for Defrauding Mississippi City (July 2, 2018), available at www.sec.gov/litigation/litreleases/2018/lr24182.htm. [89] SEC Press Release, SEC Levies Fraud Charges Against Texas-Based Municipal Advisor, Owner for Lying to School District (May 9, 2018), available at www.sec.gov/news/press-release/2018-82. The following Gibson Dunn lawyers assisted in the preparation of this client update:  Marc Fagel, Mary Kay Dunning, Amruta Godbole, Amy Mayer, Jaclyn Neely, Joshua Rosario, Alon Sachar, Tina Samanta, Lindsey Young and Alex Zbrozek. Gibson Dunn is one of the nation’s leading law firms in representing companies and individuals who face enforcement investigations by the Securities and Exchange Commission, the Department of Justice, the Commodities Futures Trading Commission, the New York and other state attorneys general and regulators, the Public Company Accounting Oversight Board (PCAOB), the Financial Industry Regulatory Authority (FINRA), the New York Stock Exchange, and federal and state banking regulators. Our Securities Enforcement Group offers broad and deep experience.  Our partners include the former Directors of the SEC’s New York and San Francisco Regional Offices, the former head of FINRA’s Department of Enforcement, the former United States Attorneys for the Central and Eastern Districts of California, and former Assistant United States Attorneys from federal prosecutors’ offices in New York, Los Angeles, San Francisco and Washington, D.C., including the Securities and Commodities Fraud Task Force. 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July 26, 2018 |
2018 Mid-Year Securities Litigation Update

Click for PDF The continued explosion in the number of securities class action filings is once again the big headline in our half yearly update.  The now-sustained increase in both the number of filings and average and median settlement amounts—including a five-fold increase in average settlement amounts in the first half of 2018 to $124 million from $25 million in 2017—is causing significant alarm in the securities defense bar, prompting insurance carriers and others to seek regulatory reform and explore other alternatives to reverse these trends.  The trends and critical case law updates are explored in detail below. I.    Filing and Settlement Trends In the first half of 2018, new securities class actions filings are on pace to repeat the 2017 results of significantly exceeding annual filing rates in previous years.  According to a newly-released NERA Economic Consulting study (“NERA”),[1] 217 cases were filed in the first half of this year.  While this lags slightly behind the first half of 2017, which saw 246 new filings, the 2018 rate nonetheless substantially outpaces the average number of 235 cases filed annually over the five years from 2012-2016.  At the current pace, filings for 2018 are projected to reach 434 total cases—compared with 428 total cases filed in 2017.  So-called “merger objection” cases, which more than doubled each year from 2015 to 2017, remain a driving force although the rate of increase in the number of such cases filed has greatly slowed.  NERA projects that the number of merger objection cases filed in federal court in 2018 will be slightly greater than 2017, representing 218 projected filings of the 434 total projected federal filings for 2018 compared to 203 merger objection filings in 2017. While the total number of such federal filings is not projected to increase drastically over the number of filings in 2017, both average and median settlement amounts are up significantly in the first half of 2018. Notably, median settlement amounts as a percentage of alleged investor losses also increased significantly, and have broken a pattern that has persisted for decades.  In the last fifteen years, median settlement amounts have never exceeded 3% of total alleged investor losses.  In the first half of 2018, that percentage is 3.9%, up sharply from 2.6% in 2017. The industry sectors most frequently sued in 2018 continue to be healthcare (25% of all cases filed), tech (23%), and finance (16%).  Cases filed against healthcare companies in the first half of 2018 are showing the continuation of a downward trend from a spike in 2016.  Cases filed against tech and finance companies are both on pace for increases from 2017.  The tech sector’s share of filings is showing a near-doubling from 2017, with the first-half 2018 numbers indicating 23% of cases filed in this sector—up from 12% in 2017. A.    Filing Trends Figure 1 below reflects filing rates for the first half of 2018 (all charts courtesy of NERA).  Two hundred and seventeen cases have been filed so far this year, annualizing to 434 cases. This figure does not include the many class suits filed in state courts or the rising number of state court derivative suits, including many such suits filed in the Delaware Court of Chancery. B.    Mix of Cases Filed in First Half of 2018 1.    Filings by Industry Sector New filings for the first half of 2018 show a marked increase in cases targeting defendants in the tech industry, reversing a downward trend from 2016 and 2017.  Tech sector filings have spiked significantly, from 12% of the total in 2017 to 23% of the total for the first half of 2018.  Healthcare still owns the dubious honor as the top industry in the category of new filings, at 25% of total filings, but the industry is showing a continued downward trend from a high of 34% in 2016.  Among the top five industries by number of new cases filed so far in 2018, healthcare is the only sector on pace for fewer filings than in 2017.  Tech, finance, consumer and distribution services, and producer/manufacturing sectors each are on pace for increases from 2017.  Outside of the top-five industry sectors for new filings, all other measured industry sectors show a decline in their respective 2017 shares of new cases filed.  Of these sectors, the two reflecting the largest decline are consumer durables and non-durables (at 5%, down from 10% in 2017) and energy and non-energy minerals (at 2%, down from 7% in 2017). 2.    Merger Cases As shown in Figure 3, 109 “merger objection” cases have been filed in federal court in the first half of 2018 alone—continuing a high rate of such filings from 2017, which saw a drastic increase in the number of such cases over previous years.  If the 2018 pace continues, this year will see an increase both in the total number of these cases filed in federal court and in the percentage of federal filings that are merger objection filings. C.    Settlement Trends As Figure 4 shows below, after a significant decrease year-over-year from 2016 to 2017, average settlements jumped from $25 million in 2017 to an eye-popping $124 million in the first half of 2018.  As we have noted in previous updates, in any given year the statistics can mask a number of important factors that contribute to any particular settlement value.  Average and median settlement statistics also can be influenced by the timing of large settlements.  In 2017, there were no settlements at $1 billion or greater; while in the first half of 2018, $3.0 billion of a total $3.8 billion of aggregate settlement value is accounted for by settlements of $1 billion or more.    Removing settlements over $1 billion shows a much smaller increase in the average settlement—from $25 million in 2017 to $28 million in the first half of 2018.  However, as Figure 5 shows, the median settlement value, even when excluding settlements over $1 billion, still shows a significant increase from $6 million in 2017 to $16 million in the first half of 2018.  In the first half of 2018, the percentage of settlements above $100 million shows a continuation of a downward trend—from 15% in 2016 to 8% in 2017 to 6% in the first half of 2018.  The percentage of settlements below $10 million decreased substantially from 61% in 2017 to 39% in the first half of 2018, while over the same period settlements valued between $20 million and $49.9 million increased substantially from 14% to 32%. Mid-Year 2018 Securities Litigation Update: What to Watch for in the Supreme Court A.    Making Sense of “Gibberish”—Cyan and the Securities Litigation Uniform Standards Act As readers may recall, on November 28, 2017, the Supreme Court heard oral argument in Cyan, Inc. v. Beaver County Employees Retirement Fund, No. 15-1439.  The fundamental issue in Cyan was whether Congress intended to preclude state court jurisdiction over “covered class actions” under the Securities Act of 1933 (the “1933 Act”) when it enacted the Securities Litigation Uniform Standards Act (“SLUSA”) in 1998.  As amended by SLUSA, the 1933 Act provides for concurrent state and federal court jurisdiction “except as provided in section 77p of this title with respect to covered class actions.”  15 U.S.C. § 77v(a).  The Court also considered a secondary question raised by the U.S. government as amicus curiae:  whether SLUSA granted defendants the ability to remove a 1933 Act class action from state to federal court. As we reported in our 2017 Year-End Securities Litigation Update, at oral argument, several Justices referred to SLUSA’s jurisdictional limitation as “obtuse” at best and “gibberish” at worst and seemed frustrated by the statute’s confusing language.  See, e.g., Transcript of Oral Argument at 11, 47.  Those concerns were not reflected, however, in the Court’s decision:  In an opinion authored by Justice Kagan and joined by all other Justices, the Court concluded on March 20, 2018 that SLUSA did not preclude state court jurisdiction over 1933 Act suits.  Cyan, Inc. v. Beaver Cty. Employees Ret. Fund, 138 S. Ct. 1061, 1069 (2018). Parsing the statutory text, the Court explained that the “except clause” in § 77v(a) only precluded concurrent jurisdiction over class actions based on state law.  Id.  Consequently, “as a corollary of that prohibition,” SLUSA allowed state courts the ability to remove state law-based suits to federal courts for dismissal.  Id.  The Court also noted that the statute was silent with respect to class actions based on federal law, and interpreted this silence to suggest that Congress did not intend to deprive state courts of the ability to hear those cases.  Id. The Court declined to accept Cyan’s textual argument that the definition of “covered class actions,” located in § 77p(f)(2), which denotes individual lawsuits seeking damages on behalf of more than 50 people or in which at least one named party seeks “to recover damages on a representative basis,” as well as groups of lawsuits seeking damages on behalf of more than 50 people or which have been “joined, consolidated, or otherwise proceed as a single action,” exempted all sizable class actions from state court jurisdiction, explaining that a “definition does not provide an exception, but instead gives meaning to a term.”  Id. at 1070.  The Court elaborated that Cyan’s interpretation of the definition “fits poorly with the remainder of the statutory scheme” because it would prohibit state courts from hearing any 1933 Act class actions made up of more than 50 class members regardless of whether or not they were “covered class actions” under § 77p.  Id. at 1071. The Court similarly rejected Cyan’s legislative intent arguments, noting that SLUSA was initially created in order “[t]o prevent plaintiffs from circumventing” the requirements of the Private Securities Litigation Reform Act (“PSLRA”).  Id. at 1067.  The Court thus reasoned that “stripping state courts of jurisdiction over 1933 Act class suits” was simply not something Congress needed or intended to do in order to effect that goal.  Id. at 1072–73.  Cyan also argued that SLUSA’s legislative reports demonstrated Congress’s intent to keep securities class actions solely in federal court.  Id. at 1072.  In response, the Court explained that SLUSA already ensured that most securities class action cases would be brought in federal court by amending the Securities Act of 1934 to provide for exclusive jurisdiction in federal court.  Id. at 1073.  Ultimately, the Court summarized its decision by stating that “we have no sound basis for giving the except clause a broader reading than its language can bear.”  Id. at 1075. The Court similarly rejected the Solicitor General’s argument that § 77p(c) permits the removal of 1933 Act cases to federal court if they allege the types of misconduct listed in § 77p(b), including “false statements or deceptive devices in connection with a covered security’s purchase or sale.”  Id.  Instead, the Court held that in light of its determination that § 77p(b) only prohibited claims based on state law, the state law claims were removable, and therefore subject to dismissal in federal court.  Id.  However, federal law suits—like Cyan—which alleged 1933 Act violations are not “covered class actions,” and therefore, they “remain subject to the 1933 Act’s removal ban.”  Id. B.    China Agritech and the Limits of American Pipe Tolling As discussed in our 2017 Year-End Securities Litigation Update, on December 8, 2017, the Supreme Court granted certiorari in China Agritech, Inc. v. Resh, No. 17-432.  The principal issue raised by China Agritech was whether a statute of limitations is tolled for absent class members who bring successive class actions outside the applicable limitations period, rather than just individual claims. By way of background, as readers will know, the Supreme Court held in American Pipe and Construction Co. v. Utah, 414 U.S. 538 (1974), that the statute of limitations is tolled by “the commencement of the original class suit” “for all purported members of the class who make timely motions to intervene after the court has found the suit inappropriate for class action status.”  Id. at 553.  The Court then extended this holding in Crown, Cork & Seal Co. v. Parker, 462 U.S. 345 (1983), to include “class members . . . choos[ing] to file their own suits,” effectively allowing the statute of limitations to remain tolled for individual suits by any “members of the putative class until class certification is denied.”  Id. at 354.  Crown went on to hold that in the event class certification is denied, “class members may [then] choose to file their own suits or to intervene as plaintiffs in the pending action.”  Id.  In Smith v. Bayer, 564 U.S. 299, 314 n.10 (2011), the Court summarized the rule of American Pipe and Crown thusly:  “[A] putative member of an uncertified class may wait until after the court rules on the certification motion to file an individual claim or move to intervene in the suit.” At oral argument on March 26, 2018, China Agritech argued that American Pipe should not be expanded to toll the claims of “absent class members who have not shown diligence . . . by not filing their own claims when class certification was denied” and that the Court should “require that anyone who wants to file a class action come to court early and in no event later than the running of the statute of limitations.”  Transcript of Oral Argument at 3.  Several of the Justices questioned China Agritech’s push to force additional actions to file while other actions may still be pending.  Justice Sotomayor, for example, observed that “if my financial interest is moderately sized or small sized, there’s no inducement for me to do anything other than what American [Pipe] tells me to do, which is to wait until the class issues are resolved before stepping forward. . . . [Y]our regime is encouraging the very thing that American Pipe was trying to avoid, which is having a multiplicity of suits being filed and encouraging every class member to come forth and file their own suit.”  Id. at 8–9. On the other hand, Justice Gorsuch commented that extending American Pipe could lead plaintiffs to “stack [cases] forever, so that try, try again, [] the statute of limitations never really has any force in these cases[.]”  Id. at 39.  Chief Justice Roberts echoed this concern, noting that American Pipe’s holding applied only to plaintiffs who sought to bring individual claims past the statute of limitations period and that “if you allow [plaintiffs to bring class actions after the statute of limitations have run every time class certification is denied], you’ve got to allow the third and then the fourth and the fifth.  And there’s no end in sight.”  Id. at 46. Ultimately, these concerns about a never-ending succession of class actions prevailed, and on June 11, 2018, the Court issued an 8-1 opinion declining to extend American Pipe to successive class actions.  Specifically, the Court held that after the denial of class certification, a putative class member may not commence a new class action beyond the time allowed by the statute of limitations.  China Agritech, Inc. v. Resh, 138 S. Ct. 1800, 1804 (2018). The Court dismissed Resh’s concerns that such a holding would result in a “needless multiplicity” of protective class action filings, pointing to the Second and Fifth Circuits—both of which had long ago declined to extend American Pipe in this context—and neither of which has faced excessive filings as a result.  Id. at 1810.  The Court went on to explain that its decision would not harm prospective plaintiffs or require them to file a protective, duplicative class action simply to protect against possible statute of limitations issues because “[a]ny plaintiff whose individual claim is worth litigating on its own rests secure in the knowledge that she can avail herself of American Pipe tolling if certification is denied to a first putative class.”  Id. (emphasis added).  Furthermore, even if courts faced an influx of multiple pre-emptive class actions, district courts have sufficient tools, “including the ability to stay, consolidate, or transfer proceedings” to deal with such an increase in an efficient way.  Id. at 1811. Justice Sotomayor concurred in the decision, stating that although she agreed with the majority that plaintiffs in the instant case should not be permitted to bring successive class actions under the American Pipe tolling provision, she believes that this bar should apply only to class actions brought under the PSLRA.  Id. (Sotomayor, J., concurring). Gibson Dunn represented the U.S. Chamber of Commerce, Retail Litigation Center, and American Tort Reform Association as amici curie supporting China Agritech in this case. C.    Lorenzo: Can Misstatement Claims Be Repackaged as Fraudulent Scheme Claims Post-Janus? On June 18, 2018, the Supreme Court granted certiorari in Lorenzo v. Securities and Exchange Commission, No. 17-1077, which raises the question of whether a securities fraud claim premised on a misstatement that does not meet the elements set forth in the Court’s decision in Janus Capital Group, Inc. v. First Derivative Traders for a Rule 10b-5(b) claim can instead be pursued as a “fraudulent scheme” claim under Rule 10b-5(a) and 10b-5(c).  See Petition for Writ of Certiorari at i.  The decision could limit the scope of Rule 10b-5 and significantly affect how the SEC chooses to pursue fraud claims against defendants who are alleged to have made false statements to investors. We expect that, in Lorenzo, the Court will further explicate its holding in Janus that only the “maker” of a fraudulent statement could be held liable for that misstatement under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b).  564 U.S. 135, 142 (2011).  In Lorenzo, the SEC accused brokerage firm director Francis Lorenzo of violating Rule 10b-5 by providing false information about a debenture offering to two potential investors.  Lorenzo claimed that he did not intentionally convey any false information and that he had merely copied and pasted information from an email he received from his boss without checking to see if it was accurate.  In the Matter of Francis V. Lorenzo, File No. 3-15211, at 15–16 (Dec. 31, 2013). Nevertheless, an SEC Administrative Law Judge found that Lorenzo had violated all three parts of Rule 10b-5: (a) employing a “device, scheme or artifice to defraud;” (b) making a false statement or omitting information that misleads investors; and (c) engaging in conduct that “would operate as a fraud or deceit.”  Id. at 8–17.  This decision was affirmed by the Commission.  Id. at 17.  Lorenzo was barred from associating with other advisers, brokers, or dealers in the industry and from participating in penny stock offerings and ordered to pay a $15,000 penalty and to cease and desist from further violations.  Id. at 1. Lorenzo appealed to the D.C. Circuit, arguing that under Janus, he could not be liable for a violation of Rule 10b-5(b) because he had not intended to convey false information to the investors and had merely transmitted information he received from his firm.  The D.C. Circuit agreed, finding that Lorenzo was not “the ‘maker’ of the false statements” and therefore could not be liable for a 10b-5(b) violation.  Lorenzo v. Sec. & Exch. Comm’n, 872 F.3d 578, 580 (D.C. Cir. 2017).  Nevertheless, the D.C. Circuit upheld the SEC’s findings that Lorenzo violated Rule 10b-5(a) and (c) and remanded back to the SEC to redetermine the appropriate sanctions.  Id. at 595.  Judge Kavanaugh dissented, arguing that the majority’s decision “create[d] a circuit split by holding that mere misstatements, standing alone, may constitute the basis for so-called scheme liability under [Rules 10b-5(a) and (c)]—that is, willful participation in a scheme to defraud—even if the defendant did not make the misstatements.”  Id. at 600 (Kavanaugh, J., dissenting). Lorenzo filed a petition for a writ of certiorari to the Supreme Court on January 26, 2018.  The petition contended that the D.C. Circuit’s holding “allows the SEC and private plaintiffs to sidestep Janus’ carefully drawn out elements of a fraudulent statement claim merely by relabeling the claim—with nothing more—as a fraudulent scheme claim.”  Petition for Writ of Certiorari at 5.  Lorenzo identified a 3-2 circuit split on the issue, noting that Second, Eighth, and Ninth Circuits have all held that a fraudulent scheme claim cannot be premised on misstatements alone, id. at 17–20, while the Eleventh and D.C. Circuits opine that a person can be liable for violations of Rule 10b-5(a) and (c) even where they are not the “maker” of an untrue statement, id. at 20–21.  The Petition further argued that the D.C. Circuit’s opinion “erases the important distinction between primary and secondary violators of the securities laws and opens up large numbers of defendants who are secondary actors at best to claims for securities fraud—claims that would otherwise be barred in private litigation.”  Id.  The SEC filed its opposition brief on May 2, 2018, arguing that the Second, Eighth, Ninth, Eleventh, and D.C. Circuit’s “inconsistent” rulings on Rule 10b-5(a) and (c) violations are distinguishable because they “have involved different conduct by the defendants, and they arose out of suits brought by private plaintiffs, rather than (as in this case) an administrative enforcement action brought by the SEC.”  Respondent’s Opposition to Writ of Certiorari at 8.  Respondent further contended that “petitioner does not identify any conflict over the scope of liability under Section 17(a)(1),” which uses the same language as Rule 10b-5(a) and makes it unlawful “to employ any device, scheme, or artifice to defraud.”  Id. The Supreme Court granted certiorari on June 18, 2018.  We expect that the parties will submit their briefs to the Supreme Court in the Fall of 2018, with oral argument to follow in the coming months.  We will continue to monitor this matter and provide an update in our 2018 Year-End Securities Litigation Update. D.    Securities Enforcement Updates In our 2017 Year-End Securities Litigation Update, we noted that the Court granted certiorari in two major SEC enforcement actions:  Lucia v. SEC, No. 17-130 and Digital Realty Trust, Inc. v. Somers, No. 16-1276.  For further analysis of Lucia and Digital Realty, please see our 2018 Mid-Year Securities Enforcement Update. II.    Delaware Developments A.    Transactions Involving A Potentially Controlling Stockholder Four recent decisions involved transactions with a potentially controlling stockholder.  In one, the Court of Chancery extended the MFW standard of review-shifting framework to all transactions in which a controlling stockholder receives a “non-ratable” benefit.  In another, the court concluded a company’s visionary founder was a controlling stockholder in part due to longstanding public acknowledgement of his influence.  In a similar case, the Court of Chancery held demand was excused because a majority of a board was not independent of its visionary founder, but stopped short of deciding whether that founder was a controlling stockholder.  Last, the Court of Chancery declined to enjoin a controlling stockholder from interfering with a special committee’s plan to dilute its voting control from around 80% to 17%. 1.    Controlling stockholder transactions satisfying the requirements of MFW will be reviewed under the business judgment rule. In Kahn v. M & F Worldwide Corp., the Delaware Supreme Court held that the business judgment rule applies to a merger between a controlling stockholder and its subsidiary where the merger is conditioned on “both the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders.”  88 A.3d 635, 644 (Del. 2014).  Late last year, the Court of Chancery extended MFW to stock reclassifications.  IRA Tr. FBO Bobbie Ahmed v. Crane, 2017 WL 7053964, at *9 (Del. Ch. Dec. 11, 2017).  In Crane, NRG Yield, Inc. was dominated by a controlling stockholder, NRG Energy, Inc. (“NRG”), as part of a “yieldco” ownership structure.  When stock issuances threatened NRG’s control, the NRG-dominated board sought to eliminate or reduce the voting rights of the publicly-traded stock class through reclassification.  The independent Conflicts Committee negotiated an agreement with NRG whereby both NRG and minority stockholders were issued new classes of stock with 1/100 of a voting share each, substantially slowing down NRG’s vote dilution, and conditioned the deal on the approval of a majority of minority stockholders.  The measure passed, and a minority stockholder challenged the transaction.  As a matter of first impression, the Court of Chancery held that the reclassification’s compliance with MFW shifted the standard of review from entire fairness to the business judgment rule because “[t]he animating principle of the MFW framework is that . . . the controlled company replicates an arms-length bargaining process in negotiating and executing a transaction.”  Id. at *11.  Importantly, however, the Court of Chancery expressly extended its holding beyond reclassifications, reasoning that there is “no principled basis on which to conclude that the dual protections in the MFW framework should apply to squeeze-out mergers but not to other forms of controller transactions.”  Id. 2.    Elon Musk is Tesla’s controlling stockholder. In In re Tesla Motors Inc. Stockholder Litigation, the Court of Chancery denied defendants’ motion to dismiss and found, “in a close call,” that the complaint sufficiently alleged that Tesla’s CEO and Chairman Elon Musk is its controlling stockholder for purposes of its 2016 acquisition of SolarCity, a Musk-related entity.  2018 WL 1560293 (Del. Ch. Mar. 28, 2018).  According to the court, Musk’s ownership of 22% of Tesla’s outstanding stock and a combination of “other factors” made him a controlling stockholder for purposes of the SolarCity acquisition.  First, Musk pitched the proposed transaction to the board on three separate occasions, and the board did not consider any other solar power companies or form an independent committee to consider the proposal.  Second, a majority of the five directors who approved the acquisition “were interested in the Acquisition or not independent of Musk.”  Id. at *17.  Third, the court relied on Musk’s and the board’s public statements acknowledging Musk’s influence on Tesla, such as Musk’s role in shaping the company’s vision, hiring executives and engineers, and raising capital.  The court concluded that the combination of Musk’s control over the board, board level conflicts, and the public acknowledgment of Musk’s influence allowed a reasonable inference that Musk enjoyed “the equivalent of majority voting control” in the transaction.  Id. at *15. 3.    A majority of Oracle’s board of directors is not independent of Larry Ellison. In a similar vein, the Court of Chancery found that plaintiffs sufficiently alleged demand futility against the board of Oracle Corporation because the majority of the board was not independent of Larry Ellison, Oracle’s co-founder and Chairman, for purposes of the acquisition of NetSuite, Inc., another Ellison-founded company.  In re Oracle Corp. Derivative Litig., 2018 WL 1381331 (Del. Ch. Mar. 19, 2018).  Because a breach of loyalty claim belongs to the company, in the normal course a plaintiff must demand that the board take a particular action before bringing a lawsuit.  In lieu making a demand on the board, however, a plaintiff may plead that demand is excused because a majority of the directors were not independent or disinterested.  At the time of the challenged acquisition, Ellison owned roughly 28% of Oracle and about 45% of NetSuite.  After concluding that Ellison and the four manager directors were not independent due to Ellison’s outsized impact on the company’s day-to-day operations, the court went on to find that three other directors, including two of the three directors on the Special Committee that approved the NetSuite acquisition, had sufficient entanglements with Ellison to call into question their independence with respect to the acquisition of the Ellison-controlled NetSuite.  Specifically, those directors had substantial business ties with Ellison, and two of the three directly owed their director positions to Ellison because a majority of non-Ellison stockholders disapproved of their performance on the Compensation Committee.  Without deciding whether Ellison “qualif[ies] as a controller,” the court held that the “constellation of facts” were sufficient, “taken together, [to] create reasonable doubt” about the ability of the directors to “objectively consider a demand.”  Id. at *16, *18. 4.    Equity favors a controller’s right to protect its control preemptively. In CBS Corp. v. National Amusements, Inc., CBS and a special committee of five independent directors sought to enjoin CBS’s controlling stockholder from interfering with their plan to dilute its voting power from around 80% to 17%.  2018 WL 2263385, at *1 (Del. Ch. May 17, 2018).  Through her control of National Amusements, Inc. (“NAI”), Shari Redstone controls 79.6% of CBS’s voting power, even though NAI owns only 10.3% of CBS’s economic stake.  Id.  According to the plaintiffs, dilution was justified by Ms. Redstone’s efforts to combine CBS with Viacom, which she also controls, and various actions she took over two years that “present[ed] a significant threat of irreparable and irreversible harm to [CBS]” and “the interests of the stockholders who hold approximately 90% of [its] economic stake.”  Id. at *1, *4.  The Court of Chancery agreed that the plaintiffs allegations were “sufficient to state a colorable claim for breach of fiduciary duty against Ms. Redstone and NAI as CBS’s controlling stockholder,” id. at *4.  Nonetheless, the court declined to issue the unprecedented temporary restraining order because case law “expressly endorsed a controller’s right to make the first move preemptively to protect its control interest” and subjected exercise of that right to further judicial review.  Id. This dispute is ongoing, and an expedited trial is scheduled for the fall. B.    Bad Faith, Waste, And The Business Judgment Rule Delaware’s default standard of review, the business judgment rule presumes that a company’s directors make business decisions in good faith, on an informed basis, and in the honest belief that the decisions are in the best interest of the company.  In general, unless a plaintiff rebuts this presumption, its claims will not survive a motion to dismiss.  In the first half of 2018, plaintiffs survived a motion to dismiss in three notable cases. 1.    Directors who knowingly cause a corporation to violate the law act in bad faith. A plaintiff’s breach of loyalty claim survived a motion to dismiss where the complaint adequately alleged that “the directors knowingly permitted [the company] to continue with marketing campaigns containing false representations in violation of law.”  City of Hialeah Emps.’ Ret. Sys. v. Begley, 2018 WL 1912840, at *4 (Del. Ch. Apr. 20, 2018).  The defendants in Begley were directors of a company that operated DeVry University.  Id. at *1.  According to the complaint, the defendants authorized marketing campaigns that misrepresented DeVry graduates’ employment rates and income despite knowing the information was wrong and the campaigns violated federal law, resulting in the company paying over $100 million to settle various government lawsuits and investigations.  Id.  The Court of Chancery denied the defendants’ motion to dismiss, concluding that specific facts alleged in the complaint supported a reasonable inference that “the defendants chose to maintain DeVry’s marketing campaign and operate DeVry in violation of law because that was the route to maximizing DeVry’s profits.”  Id. at *3.  Operating a company in violation of law to maximize profits “expose[s] [directors] to liability for acting in bad faith, which is a breach of the duty of loyalty.”  Id. at *3. 2.    A board commits waste when it fails to consider terminating an incapacitated employee earning millions of dollars. In an “extreme factual scenario,” the Court of Chancery found that plaintiffs successfully pleaded demand futility and stated a claim for corporate waste with respect to payments made to CBS’s controlling stockholder, Sumner Redstone, during his twenty-month incapacitation beginning in 2014.  Feuer on behalf of CBS Corp. v. Redstone, 2018 WL 1870074 (Del. Ch. Apr. 19, 2018), judgment entered sub nom. Feuer v. Redstone, 2018 WL 2006677 (Del. Ch. 2018).  Despite having the inherent ability to terminate his employment agreement, CBS continued making payments to Redstone after he fell critically ill.  Id. at *12.  Because the board “made no effort to reckon with the financial consequences of Redstone’s severe incapacity,” id. at *14, however, and Redstone’s contributions during that time “were so negligible and inadequate in value that no person of ordinary, sound business judgment would deem them worth the millions of dollars in salary that the Company was paying him,” the court held that the board faced “a substantial threat of liability for non-exculpated claims for waste and/or bad faith,” id. at *13, and denied the defendants’ motion to dismiss. 3.    A transaction negotiated by an allegedly conflicted CEO is not protected by the business judgment rule. In In re Xerox Corp. Consolidated Shareholder Litigation, the New York Supreme Court recently enjoined a multi-billion dollar merger of Xerox Corp. and Fujifilm Holdings Corp. (“Fuji”), concluding the plaintiffs adequately rebutted the business judgment rule and showed a likelihood of success on the merits of their claims that the merger was not entirely fair.  2018 WL 2054280, at *8 (N.Y. Sup. Apr. 27, 2018).  The merger arose from a decades-long joint venture between Xerox and Fuji whose governing documents made it difficult for Xerox to do a deal with anyone else.  Id. at *2.  The transaction was structured so that Fuji would transfer its 75% stake in the joint venture without additional consideration to Xerox and be issued enough new Xerox shares to become its 50.1% stockholder; simultaneously, Xerox would borrow $2.5 billion to pay its non-Fuji stockholders a special dividend in the same amount.  Id. at *1.  The Supreme Court enjoined the deal, however, because Xerox’s CEO, who negotiated the deal, was “massively conflicted” and a majority of Xerox’s board lacked independence.  Id. at *7.  According to the court, the CEO was conflicted because after Carl Icahn, Xerox’s largest stockholder, stated his preference for an all-cash deal and convinced the board to fire the CEO, the CEO negotiated a non-cash deal in which he would remain as the CEO of the combined entity.  Id.  The court also concluded that Xerox’s board lacked independence from the CEO because he recommended by name a majority of Xerox’s directors to continue as directors after the merger.  Id. This decision is on appeal to the First Department. B.    Delaware Continues to Restrict Appraisal Awards In our 2017 Year-End Update, we reported on the significant shift in Delaware appraisal law in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017).  In Dell, the Delaware Supreme Court held that “[t]here is no requirement that a company prove that the sale process is the most reliable evidence of its going concern value in order for the resulting deal price to be granted any weight,” id. at 35, and reversed “the trial court’s decision to give no weight to any market-based measure of fair value.”  Id. at 19. The Court of Chancery began interpreting the high court’s directives in the first half of 2018.  In Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., for example, the Court of Chancery interpreted Dell as (i) endorsing a company’s unaffected market price and deal price as reliable indicators of value when, respectively, the market for the company’s stock is efficient or a third-party merger is negotiated at arm’s length; and (ii) cautioning against relying on discounted cash flow analyses when such reliable market indicators are available.  2018 WL 2315934, at *1 (Del. Ch. May 21, 2018) (awarding $17.13 per share—the unaffected market price and significantly below the $24.67 deal price—as the only reliable indicator of value).  And in In re AOL, Inc., the Court of Chancery found the deal was not “Dell-compliant” based both on provisions in the merger agreement and on the CEO’s public statements that the deal was “done.”  2018 WL 1037450, at *1 (Del. Ch. Feb. 23, 2018) (conducting its own discounted cash flow analysis where the deal price was unreliable, but awarding a price close to it).  These two cases suggest that while there may continue to be some uncertainty as to when and how the Delaware Court of Chancery will choose among market indicators of a company’s value, the Court will continue to enforce the Supreme Court’s directive to use market factors to determine the fair value of a company’s stock, which should continue to keep appraisal awards in check. III.    Loss Causation Developments The first half of 2018 saw several notable circuit court opinions addressing loss causation, including continued developments relating to Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014), discussed below in Section VI. Leading the way, on January 31, 2018, the Ninth Circuit issued a per curiam opinion resolving a perceived ambiguity in prior precedent regarding the correct test for loss causation under the Exchange Act.  See Mineworkers’ Pension Scheme v. First Solar Inc., 881 F.3d 750 (9th Cir. 2018).  The First Solar court held that “to prove loss causation, plaintiffs need only show a causal connection between the fraud and the loss . . . by tracing the loss back to the very facts about which the defendant lied.”  Id. at 753 (internal citations and quotation marks removed).  This test does not require loss causation to rest on a revelation of fraud to the marketplace.  Instead, “[a] plaintiff may also prove loss causation by showing that the stock price fell upon the revelation of an earnings miss, even if the market was unaware at the time that fraud had concealed the miss.”  Id. at 754.  In so holding, the Ninth Circuit rejected a more “restrictive view,” in which “[s]ecurities fraud plaintiffs can recover only if the market learns of the defendants’ fraudulent practices” before the claimed loss.  Id. at 752.  As long as the revelation that caused the decline in a company’s stock price is related to the facts allegedly concealed, a plaintiff has adequately plead loss causation for the purposes of stating a claim under the Exchange Act.  At least one district court has relied upon First Solar to deny a defendants’ motion for summary judgment on the issue of loss causation.  See Mauss v. NuVasive, Inc., No. 13CV2005 JM (JLB), 2018 WL 656036, at *5 (S.D. Cal. Feb. 1, 2018) (rejecting defendants’ argument that plaintiffs failed to show that the market learned of the actual fraud, because “the Ninth Circuit does not require that fraud be affirmatively revealed to the market to prove loss causation”). Over in the Fourth Circuit, a split panel issued a decision on February 22, 2018 holding that a plaintiff can plead loss causation based on “an amalgam” of two theories: corrective disclosure and the materialization of a concealed risk.  Singer v. Reali, 883 F.3d 425 (4th Cir. Feb. 22, 2018).  The complaint in Singer alleged that TranS1, Inc., a medical device company, and its officers made misrepresentations and omissions in public filings by failing to disclose that a large portion of TranS1’s revenues were generated by a purportedly fraudulent reimbursement scheme.  In vacating the lower court opinion dismissing the complaint, the majority concluded that two disclosures highlighted in the complaint—a Form 8-K reporting that TranS1 had received a subpoena from the Department of Health and Human Services and an analyst report revealing that the subpoena sought communications relating to certain reimbursements—sufficiently revealed information for investors to recognize that defendants had perpetrated a fraud on the market.  Id. at 447.  Moreover, the allegation that the disclosures resulted in a 40% stock price drop was sufficient to plead that the revelation of the purported fraud was at least “one substantial cause” of the drop.  Id.  The decision in Singer adds to the debate about the extent to which the disclosure of a government investigation, without a later disclosure of wrongdoing, is sufficient to establish loss causation.  See, e.g., Public Employees’ Retirement System of Mississippi v. Amedisys, Inc., 769 F.3d 313, 323-24 (5th Cir. 2014) (“commencement of government investigations . . . do not, standing alone, amount to a corrective disclosure,” but can support a finding of loss causation when coupled with other disclosures); Meyer v. Greene, 710 F.3d 1189, 1201 (11th Cir. 2013) (company disclosure of SEC investigations were not “corrective disclosures” for the purposes of loss causation); SEC investigation was insufficient to plead loss causation). 2018 Mid-Year Securities Litigation Update: Falsity of Opinions Under Omnicare As we have reported in our past several updates, courts continue to grapple with the reach of Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 135 S. Ct. 1318 (2015).  The Supreme Court’s Omnicare decision addressed the scope of liability for false opinion statements under Section 11 of the Securities Act.  The Court held that “a sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless whether an investor can ultimately prove the belief wrong.”  Id. at 1327.  An opinion statement can give rise to liability only when the speaker does not “actually hold[] the stated belief,” or when the opinion statements contains “embedded statements of fact” that are untrue.  Id. at 1326–27.  In addition, the Court held that a factual omission from a statement of opinion gives rise to liability only when the omitted facts “conflict with what a reasonable investor would take from the statement itself.”  Id. at 1329. In the first half of 2018, two courts issued notable opinions about how Omnicare applies to disclosure of financial information.  The United States District Court for the Central District of California denied a motion to dismiss when plaintiffs alleged that defendants issued false opinions about the company’s financial health by recognizing revenue in violation of Generally Accepted Accounting Principles.  In re Capstone Turbine Corp. Sec. Litig., No. CV 15-8914, 2018 WL 836274, at *7–8 (C.D. Cal. 2018).  The parties disputed whether the amount of revenue recognized in a particular period is an opinion or a statement of fact, and the court held that “revenue is an opinion with an embedded fact,” clarifying that “[t]he fact is the actual quantity of the sales and the opinion is that collectability on these sales is reasonably assured.”  Id. at *6.  The court further concluded that the falsity of the opinion portions of the statements regarding revenue recognition were sufficiently pled under Omnicare because the complaint alleged facts showing that defendants knew collectability was not reasonably assured.  Id. at *7.  In the United States District Court for the District of Massachusetts, plaintiffs brought a suit under Massachusetts security law, which closely mirrors federal securities law, alleging that an auditor’s statement of compliance with PCAOB standards was false.  Miller Inv. Trust v. Morgan Stanley & Co., No. 11-12126, 2018 WL 1567599 (D. Mass. Mar. 30, 2018) appeal docketed No. 18-1460 (1st Cir. May 17, 2018).  Acknowledging that courts have reached contradictory conclusions as to whether an auditor’s statements of compliance are statements of fact or statements of opinion, the court ultimately reasoned that “statements by auditors of their own compliance with [standards] are statements of fact” even though “one auditor may apply the standards differently from another.”  Id. at *11–12. Omnicare continued to act as a pleading barrier to securities fraud claims in the first half of this year, with courts paying close attention to the role of context in determining whether an opinion could be allegedly false.  For example, in Martin v. Quartermain, investors alleged that a mining company’s opinion statements expressing continued optimism in its mining operations were false when the company failed to disclose that one of its experts had expressed doubt.  No. 17-2135, 2018 WL 2024719 (2d Cir. May 1, 2018).  Investors alleged that the opinion was false on two theories:  first, that company did not actually believe its statement of continued optimism given that one of its experts had expressed concern with the mine’s projected viability; and, second, that the company’s failure to disclose this concern was an omission that made the opinion statement misleading to a reasonable investor.  Id. at 2.  As to the first theory, the court held that the plaintiffs failed to show that the company believed the concerned expert instead of the optimistic projection, so plaintiffs failed to show that the company did not hold the stated belief.  As for the second theory, the Second Circuit concluded that omitting the concerned expert’s views did not render the opinion misleading when viewed in context, even if the company knew “but fail[ed] to disclose some fact cutting the other way.”  Id. at *3 (citing Omnicare, 135 S. Ct. at 1329).  The court reasoned that the risk that a mine will not be successful is part of the “broader frame” of the industry that a reasonable investor would understand as part of the “weighing of competing facts.”  Id. (citing Omnicare, 135 S. Ct. 1329). Similarly, the United States District Court for the Southern District of New York rejected allegations that a company’s guardedly optimistic assessments about the implementation of a new software program were false because they did not include disclosure of implementation challenges the company was facing.  Oklahoma v. Firefighters Pension and Ret. Sys. v. Xerox Corp., 300 F. Supp. 3d 551, 575 (S.D.N.Y. 2018), appeal docketed No. 18-1165 (2d Cir. April 20, 2018).  The court reasoned that these “quintessential statements of opinion” were not false even though the defendant only disclosed in general terms the challenges it was facing because a reasonable investor “does not expect that every fact known to an issuer supports its opinion statement.”  Id. at 577 (citing Omnicare, 135 S. Ct. 1329).  Another court in the Southern District of New York permitted an omission claim to proceed, but this case may simply highlight how difficult it is to overcome Omnicare.  Plaintiffs alleged that Blackberry’s optimistic sales projections were contradicted by omitted data Blackberry had about its sales numbers.  Pearlstein v. Blackberry Ltd., No. 13-CV-7060, 2018 WL 1444401 (S.D.N.Y. Mar. 19, 2018).  In their second amended complaint, plaintiffs supplemented these allegations with evidence that came to light in a related criminal trial that revealed that Blackberry had adverse sales data when it issued its optimistic projections.  The court concluded that Blackberry’s failure to disclose adverse sales data could plausibly be misleading to a reasonable investor.  Id. at *3–4.  Most plaintiffs, of course, do not have the benefit of evidence unearthed in a related criminal proceedings to demonstrate that an opinion is false. Further highlighting the barriers imposed by Omnicare, two courts in the first half of this year also rejected claims alleging that pharmaceutical companies made false statements about their clinical trials.  One court held that plaintiff’s allegations that defendants issued a false opinion when they opined on a drug’s efficacy but failed to disclose an allegedly flawed clinical methodology did not support a Section 10(b) claim because plaintiff’s claims amounted to nothing more than an attack on the trial’s methodology.  Hoey v.  Insmed Inc., No. 16-4323, 2018 WL 902266, at *9, 14 (D.N.J. Feb. 15, 2018).  The court noted that the failure to reveal that the results of a study were inaccurately reported or that a study was manipulated to conceal data may support allegations that an omission made a statement of opinion misleading, but that disagreements over the proper methodology will not support such an allegation.  Likewise, a company’s failure to disclose the recurrence of a known side effect did not render opinions that the clinical trial was “predictable and manageable” and that the company was seeing “favorable clinical data” false or misleading since a reasonable investor would expect the recurrence of a known side effect.  In re Stemline Therapeutics, Inc. Sec. Litig., No. 17 CV 832, 2018 WL 1353284, at *5 (S.D.N.Y. Mar. 15, 2018) appeal docketed No. 18-1044 (2d Cir. Apr. 12, 2018). Courts in the first half of 2018 also provided guidance for companies making opinion statements about legal and compliance risks.  The United States District Court for the Southern District of Texas rejected allegations that a company’s opinion that it was in “substantial compliance” with regulations was false on the ground that a regulatory agency had sent informal communications and had issued two infraction notices about recordkeeping practices on a different and small part of the company’s large-scale and pipeline operations.  In re Plains All Am. Pipeline, L.P. Sec. Litig., No. H:15-02404 2018 WL 1586349, at * 38–39 (S.D. Tex. Mar. 30, 2018) appeal docketed No. 18-20286 (5th Cir. May 7, 2018).  The court reasoned that the opinion that the company was in “substantial compliance,” when combined with other hedges and qualifications, would inform a reasonable investor that the company was operating in substantial, but not perfect, compliance with relevant laws.  Id. at *39.  On the other hand, the United States District Court for the Northern District of Georgia permitted a claim to proceed where the defendant opined that it had been in material compliance with the laws and that pending lawsuits had no merit because plaintiffs’ complaint sufficiently alleged that defendant had been informed by legal counsel that its model was not in compliance with applicable laws.  In re Flowers Foods, Inc. Sec. Litig., No. 7:16-CV-222, 2018 WL 1558558, at *7–8 (M.D. Ga. Mar. 23, 2018). IV.    Halliburton II Market Efficiency and “Price Impact” Cases Courts across the country continue to grapple with implementing the Supreme Court’s landmark ruling in Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II“), and the first half of 2018 did not bring any new decisions from the federal circuit courts of appeal.  In Halliburton II, the Supreme Court preserved the “fraud-on-the-market” presumption—a presumption enabling plaintiffs to maintain the common proof of reliance that is essential to class certification in a Rule 10b-5 case—but made room for defendants to rebut that presumption at the class certification stage with evidence that the alleged misrepresentation had no impact on the price of the issuer’s stock.  Two key questions continue to recur: first, how should courts reconcile the Supreme Court’s explicit ruling in Halliburton II that direct and indirect evidence of price impact must be considered at the class certification stage, Halliburton II, 123 S. Ct. at 2417, with its previous decisions holding that plaintiffs need not prove loss causation or materiality until the merits stage, see Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011) (“Halliburton I“); Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 568 U.S. 455 (2013).  And second, what standard of proof must defendants meet to rebut the presumption with evidence of no price impact of Basic Inc. v. Levinson, 485 U.S. 224, 237 (1988)? As we reported in our 2017 Year-End Securities Litigation Update, the Second Circuit recently addressed both of these key questions in Waggoner v. Barclays PLC, 875 F.3d 79 (2d Cir. 2017) (“Barclays“) and Ark. Teachers Ret. Sys. v. Goldman Sachs, 879 F.3d 474 (2d Cir. 2018) (“Goldman Sachs“).  Those decisions remain the most substantive interpretations of Halliburton II.  Barclays addressed the standard of proof necessary to rebut the presumption of reliance and held that after a plaintiff establishes the presumption of reliance applies, defendant bears the burden of persuasion to rebut the presumption by a preponderance of the evidence.  As we have previously noted, this puts the Second Circuit at odds with the Eighth Circuit, which cited Rule 301 of the Federal Rules of Evidence when reversing a trial court’s certification order on price impact grounds, see IBEW Local 98 Pension Fund v. Best Buy Co., 818 F.3d 775, 782 (8th Cir. 2016), because Rule 301 assigns only the burden of production—i.e., producing some evidence—to the party seeking to rebut a presumption, but “does not shift the burden of persuasion, which remains on the party who had it originally.”   In Goldman Sachs, the Second Circuit directed that price impact evidence must be analyzed prior to certifying a class, even if price impact “touches” on the issue of materiality.  Goldman Sachs, 879 F.3d at 486.  In April, the Supreme Court declined to take up the Barclays case, Waggoner v. Barclays PLC, 875 F.3d 79 (2d Cir. 2017), cert. denied, 138 S. Ct. 1702 (2018), and Goldman Sachs remains pending before the Southern District of New York on remand, where an evidentiary hearing and oral argument on class certification was held on July 25, 2018. The Third Circuit is poised to be the next to substantively address the issue, as the court recently agreed to review Li v. Aeterna Zentaris Inc., 324 F.R.D. 331 (D.N.J. 2018) (“Aeterna“).  See Order, Vizirgianakis v. Aeterna Zentaris, Inc., No. 18-8021 (3d Cir. Mar. 30, 2018).  That ruling is likely to address the nature of the evidence a defendant must put forward to defeat plaintiff’s presumption of reliance.  Before the district court, defendants sought to rebut plaintiffs’ presumption of reliance by challenging plaintiffs’ expert’s event study for failing to demonstrate price impact to the industry’s standard level of confidence.  Aeterna, 324 F.R.D. at 344-45.  The argument failed to convince the court, which noted that (1) plaintiffs’ report had been prepared to show an efficient market, not to demonstrate price impact, (2) the report’s failure to find a movement with 95% confidence did not prove the “lack of price impact with scientific certainty,” and (3) defendants did not present any competent evidence of their own to demonstrate price impact.  Id. at 345 (citation omitted).  Defendants’ 23(f) petitions requesting review of class certification on price impact grounds are pending in several other circuit courts of appeal. We will continue to monitor developments in these and other cases. The following Gibson Dunn lawyers assisted in the preparation of this client update: Monica Loseman, Matt Kahn, Brian Lutz, Laura O’Boyle, Mark Perry, Lissa Percopo, Lauren Assaf, Jefferson Bell, Michael Eggenberger, Kim Lindsay Friedman, Leesa Haspel, Mark Mixon, Emily Riff, and Zachary Wood. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following members of the Securities Litigation Practice Group Steering Committee: Brian M. Lutz – Co-Chair, San Francisco/New York (+1 415-393-8379/+1 212-351-3881, blutz@gibsondunn.com) Robert F. Serio – Co-Chair, New York (+1 212-351-3917, rserio@gibsondunn.com) Meryl L. Young – Co-Chair, Orange County (+1 949-451-4229, myoung@gibsondunn.com) Thad A. Davis – San Francisco (+1 415-393-8251, tadavis@gibsondunn.com) Jennifer L. Conn – New York (+1 212-351-4086, jconn@gibsondunn.com) Ethan Dettmer – San Francisco (+1 415-393-8292, edettmer@gibsondunn.com) Barry R. Goldsmith – New York (+1 212-351-2440, bgoldsmith@gibsondunn.com) Mark A. Kirsch – New York (+1 212-351-2662, mkirsch@gibsondunn.com) Gabrielle Levin – New York (+1 212-351-3901, glevin@gibsondunn.com) Monica K. Loseman – Denver (+1 303-298-5784, mloseman@gibsondunn.com) Jason J. Mendro – Washington, D.C. (+1 202-887-3726, jmendro@gibsondunn.com) Alex Mircheff – Los Angeles (+1 213-229-7307, amircheff@gibsondunn.com) Robert C. Walters – Dallas (+1 214-698-3114, rwalters@gibsondunn.com) Aric H. Wu – New York (+1 212-351-3820, awu@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 25, 2018 |
Contractual Duties to Conduct a Business in Accordance With ‘Sound Business Practices’

New York partner Gabriel Herrmann and associate Lee R. Crain are the authors of “Contractual Duties to Conduct a Business in Accordance With ‘Sound Business Practices'” [PDF] published in the Delaware Business Court Insider on July 25, 2018.

July 18, 2018 |
Second Quarter 2018 Update on Class Actions

Click for PDF This update provides an overview and summary of significant class action developments during the second quarter of 2018 (April through June), as well as a brief look ahead to some of the key class action issues anticipated later this year. Part I discusses the U.S. Supreme Court’s decisions in two key cases, Epic Systems Corp. v. Lewis, and China Agritech, Inc. v. Resh. Part II looks forward to the Supreme Court’s October 2018 Term and previews a new class action case on the Court’s docket, Nutraceutical Corp. v. Lambert. Part III discusses two recent circuit-level cases involving class action settlements. I.     The U.S. Supreme Court Affirms Validity of Arbitration Clauses in Employment Agreements, and Limits American Pipe Tolling to Individual Suits The Supreme Court issued two important opinions in the past quarter of significant relevance to class action defendants. First, in the consolidated cases of Epic Systems Corp. v. Lewis, Ernst & Young LLP v. Morris, and National Labor Relations Board v. Murphy Oil USA, Inc., 138 S. Ct. 1612 (2018), the Supreme Court held that arbitration agreements in which an employee waives his right to bring a claim against an employer on a class or collective basis are enforceable under the Federal Arbitration Act (“FAA”) and do not violate the National Labor Relations Act (“NLRA”).  The Court’s ruling resolved a longstanding circuit split on this issue. In a 5-4 decision written by Justice Gorsuch, the Court held that “Congress has instructed in the Arbitration Act that arbitration agreements providing for individualized proceedings must be enforced, and neither the Arbitration Act’s saving clause nor the NLRA suggests otherwise.”  138 S. Ct. at 1616, 1624–27.  The Court rejected the employees’ argument that the FAA’s savings clause—which allows courts to refuse to enforce arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract”—precludes enforcement of their arbitration agreements.  Because the employees’ argument was not applicable to “any” contract, and instead singled out “individualized arbitration proceedings” as invalid, the Court explained that the savings clause was not implicated, and there was no “generally applicable contract defense[]” to overcome the FAA’s presumption of enforceability.  Id. at 1622–23. The Court also rejected the argument that enforcing an arbitration agreement’s class action waiver would violate employees’ right to engage in collective action under the NLRA.  It disagreed with the suggestion that the later-passed NLRA had impliedly repealed portions of the FAA, emphasizing that “repeals by implication are ‘disfavored,’” and “Congress ‘does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions.’”  Id. at 1624, 1626–27.  Section 7 of the NLRA, moreover, “focuses on the right to organize unions and bargain collectively,” “does not express approval or disapproval of arbitration,” and “does not even hint at a wish to displace the Arbitration Act—let alone accomplish that much clearly and manifestly.”  Id. at 1624. Finally, the Court declined to apply Chevron deference to the NLRB’s contrary conclusions, noting that Congress had not given the NLRB any authority to interpret the FAA, a statute that the agency does not administer.  The Court also observed that although Chevron deference is premised on the notion that “‘policy choices’ should be left to the Executive Branch,” “here the Executive seems to be of two minds, for [the Court] received competing briefs from the [NLRB] and the United States (through the Solicitor General),” the latter of which had supported the employers.  Id. at 1630. Justice Ginsburg, joined by Justices Breyer, Sotomayor, and Kagan, dissented.  They expressed concern that “underenforcement of federal and state” employment statutes will result from the majority’s decision, because employees will be deterred by the relative expense and “slim relief obtainable” in individual suits.  Id. at 1637, 1646–48 (Ginsburg, J., dissenting).  In response, the majority observed that “the dissent retreats to policy arguments,” and underscored that “[t]he respective merits of class actions and private arbitration as means of enforcing the law are questions constitutionally entrusted not to the courts to decide but to the policymakers in the political branches where those questions remain hotly contested.”  Id. at 1632. Epic Systems confirms that courts will continue to enforce agreements between employers and employees to arbitrate their disputes on an individual—rather than class or collective—basis, and continues the Supreme Court’s trend of enforcing the FAA’s strong policy favoring arbitration. In the second important class action case of the Term, China Agritech, Inc. v. Resh, 138 S. Ct. 1800, the Court declined to extend the rule of equitable tolling announced in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), to the filing of successive class actions. Under American Pipe, the timely filing of a class action tolls the applicable statute of limitations for “all persons encompassed by the class complaint” to intervene in the action or to file individual suits after the denial of class certification.  China Agritech, 138 S. Ct. at 1804–05.  The Ninth Circuit had extended that ruling to the successive filing of class actions, but the Supreme Court reversed, explaining that the concerns underlying American Pipe simply do not apply in the class action context.  The rule announced in American Pipe serves to promote “the efficiency and economy of litigation” embodied in Rule 23, on the theory that plaintiffs “reasonably rel[y] on the class representative . . . to protect their interests in their individual claims,” and without equitable tolling, potential class members “would be induced to file protective motions to intervene” (id. at 1806), or “a needless multiplicity of [separate] actions” to protect their interests in the event certification is denied (id. at 1810). Extending American Pipe tolling to successive class actions, however, “would allow the statute of limitations to be extended time and again” and allow plaintiffs “limitless bites at the apple.”  Id. at 1808–09.  The Court noted that in those circuits that had already declined to extend American Pipe to successive class actions, there had not been “a disproportionate number of duplicative, protective class action filings.”  Id. at 1810.  The Court also reasoned that “efficiency favors early assertion of competing class representative claims” (id. at 1807), and early filing “may aid a district court in determining, early on, whether class treatment is warranted” (id. at 1811). All of the justices joined the Court’s opinion in China Agritech except for Justice Sotomayor, who wrote an opinion concurring in the judgment but expressing the view that the Court’s holding should be limited to cases governed by the Private Securities Litigation Reform Act.  Id. at 1811–15 (Sotomayor, J., concurring in the judgment). China Agritech emphasizes the importance of timely filing putative class actions and reaffirms the class action defendant’s reasonable expectation that class claims will not continue to emerge after the statute of limitations period has expired. II.     The U.S. Supreme Court Is Poised to Weigh In on the Timing of Rule 23(f) Petitions, Arbitration Issues, and the Validity of Cy Pres-Only Settlements The Supreme Court’s October 2018 Term promises to be another active one in the class action space, particularly on a number of bread-and-butter issues relating to class action procedure, settlement, and arbitration. On June 25, 2018, the Supreme Court granted certiorari in Nutraceutical Corp. v. Lambert (No. 17‑1094) to resolve whether equitable exceptions apply to non-jurisdictional claims-processing rules, and specifically, to decide if and when an appellate court may equitably toll the time to file a petition for permission to appeal the grant or denial of class certification under Federal Rule of Civil Procedure 23(f).  Ordinarily, a Rule 23(f) petition must be filed within 14 days following the grant or denial of class certification or decertification, but the Ninth Circuit held that, under the particular circumstances of the case, the filing of a motion for reconsideration 20 days after the decertification order equitably tolled the 14-day deadline.  The Ninth Circuit acknowledged, however, that its ruling conflicted with the other circuit courts that have considered the issue.  (We covered the Ninth Circuit’s decision in Lambert in our third quarter 2017 update.) As noted in our first quarter 2018 update, the Supreme Court is also expected to resolve a series of other issues of interest to class action practitioners in the coming Term.  In New Prime Inc. v. Oliveira (No. 17‑340), the Court will decide whether (a) a dispute regarding the applicability of the FAA must be resolved by an arbitrator under a valid delegation clause, and (b) an exemption for contracts of employment for transportation workers in Section 1 of the FAA applies to independent contractors.  Briefing is currently underway.  (Gibson Dunn represents the petitioner, New Prime, Inc.)  In Lamps Plus, Inc. v. Varela (No. 17‑988), the Court will decide whether the FAA forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in such agreements.  And in Frank v. Gaos (No. 17-961), the Court will consider the validity of cy pres-only settlements that provide no direct compensation to class members.  Opening briefs were filed in both cases on July 9, 2018. III.     The Seventh and Eighth Circuits Issue Notable Class Action Settlement Decisions The federal courts of appeals continue to closely scrutinize class action settlements, and this past quarter saw the issuance of two significant decisions (which both coincidentally involved Target Corp.). In Pearson v. Target Corp., No. 17‑2275,  — F.3d —, 2018 WL 3117848 (7th Cir. June 26, 2018), the Seventh Circuit examined a common tactic employed by professional objectors—filing baseless appeals from a settlement approval as a form of “blackmail,” hoping that the parties will pay them to dismiss the appeals so that the settlement can become effective. In 2014, the parties in Pearson had agreed to a classwide settlement in response to allegations that the defendants had “violated consumer protection laws by making false claims about the efficacy of [a dietary] supplement.”  Id. at *1.  Ted Frank, a frequent objector to class action settlements, objected to the awards to class counsel in the district court, and appealed the settlement approval order to the Seventh Circuit.  The Seventh Circuit agreed with Frank’s objections and reversed the district court, holding that “the settlement provided outsized benefits to class counsel.”  Id. On remand, the parties reached a new settlement, which the district court approved.  It then dismissed the case “‘without prejudice’ so as to allow the Court to supervise the implementation and administration of the Settlement.”  Id.  Three different class members then objected and filed appeals.  Id. at *2.  All three subsequently dismissed their appeals, and the district court entered a new order dismissing the case with prejudice.  Id.  Frank then moved to intervene and disgorge any side settlements made with the other three objectors.  His concern was “‘objector blackmail’” in which an “absent class member objects to a settlement with no intention of improving the settlement for the class,” “appeals, and pockets a side payment in exchange for voluntarily dismissing the appeal.”  Id. at *1.  The district court refused to hear the motion, reasoning that the dismissal with prejudice had divested the court of jurisdiction.  Frank then moved under Federal Rule of Civil Procedure 60(b) to vacate the dismissal with prejudice and restore the court’s jurisdiction over the settlement.  Id. at *2.  The district court denied that motion as well, which led to Frank’s second appeal and the subject of this decision.  Id. The Seventh Circuit again ruled in Frank’s favor.  Writing for a three-judge panel, Judge Wood explained that Frank could bring a Rule 60(b) motion because he had objected the settlement and thus qualified as a “party.”  Id.  On the merits, the court held that the district court should have granted the Rule 60(b) motion because (1) the objectors voluntarily dismissed their appeals before briefing raised concerns that they had done so at the expense of the class; (2) the class was comprised of ordinary consumers rather than sophisticated financial institutions (and thus needed greater protection from the court); (3) Frank sought only to effectuate the limited ancillary jurisdiction contemplated by the settlement itself, so the interest in finality was less compelling that it would be had Frank sought to unwind the settlement and re-litigate merits issues; and (4) Rule 60(b)(6) exists as an “‘equitable’” “safety valve” for precisely these types of situations.  Id. at *3-4. This decision continues the trend among the federal courts of appeals to carefully scrutinize class settlements, particularly when they involve “ordinary consumers.”  And, as the Seventh Circuit recognized, it also highlights the importance of “an amendment of Rule 23”—Rule 23(e)(5)(B)—which is “designed to prevent this problem from recurring.”  Id. at *5.  That proposed rule would require district court approval, after a hearing, of any “‘payment or other consideration’ provided for ‘forgoing or withdrawing an objection’ or ‘forgoing, dismissing, or abandoning an appeal.’”  Id.  If Congress allows this new rule to go into effect, observers will be keen to see whether it “solve[s] the problem” of “objector blackmail,” or whether objectors will find new, creative ways to “leverage[]” the process “for a purely personal gain.”  Id. at *1, *5. The second case, In re Target Corporation Customer Data Security Breach Litigation, 892 F.3d 968 (8th Cir. 2018), also involved the re-examination of a class action settlement, at the urging of an objector, after the Eighth Circuit had rejected an earlier settlement. With the earlier settlement, the Eighth Circuit concluded the district court had “failed to conduct the appropriate pre-certification analysis.”  Id. at 972.  On the second go-around, however, the Eighth Circuit affirmed the judgment of the district court, reasoning that the court had not “fundamentally misunderstood the structure of the settlement agreement” (id. at 973), nor was separate legal counsel required to protect the interests of the subclass of plaintiffs who had yet to suffer any material loss from the data breach that formed the basis for the suit (id. at 976).  On the latter point, the Eighth Circuit maintained that the interests of those class members with “documented losses” and those without losses were “more congruent than disparate” because it was “hypothetically possible that a member” of either subclass could “suffer some future injury.”  Id. at 975-76. The Eighth Circuit also affirmed the district court’s approval of the settlement.  Even though it noted the district court’s analysis of the $6.75 million fee award may have been “perfunctory,” it held the court’s reasoning was sufficient and that the lodestar multiplier applied was “well within amounts [the court had] deemed reasonable in the past.”  Id. at 977.  The court also held that the district court was within its discretion to approve the settlement despite the objectors’ concerns about what arguably constituted a “clear-sailing” provision requiring defendants not to oppose the attorney’s fees request, and a “kicker” provision that permitted unused settlement funds to be returned to defendants rather than distributed to the class.  Id. at 979. The following Gibson Dunn lawyers prepared this client update: Christopher Chorba, Theane Evangelis, Kahn A. Scolnick, Bradley J. Hamburger, Brandon J. Stoker, Jeremy S. Smith, Lauren M. Blas, Michael Eggenberger, and Gatsby Miller. Gibson Dunn attorneys are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Class Actions or Appellate and Constitutional Law practice groups, or any of the following lawyers: Theodore J. Boutrous, Jr. – Co-Chair, Litigation Practice Group – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com) Christopher Chorba – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com) Theane Evangelis – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com) Kahn A. Scolnick – Los Angeles (+1 213-229-7656, kscolnick@gibsondunn.com) Bradley J. Hamburger – Los Angeles (+1 213-229-7658, bhamburger@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 10, 2018 |
Benchmark Litigation Recognizes Gibson Dunn Partners

Benchmark Litigation named four Gibson Dunn partners to its list of the Top 250 Women in Litigation: Los Angeles partner Perlette Jura, New York partners Caitlin Halligan and Andrea Neuman and Orange County partner Meryl Young. This list is dedicated to honoring the accomplishments of America’s leading female trial lawyers and features female litigators from all 50 states, plus the District of Columbia.  The list was published on July 10, 2018. ​Benchmark Litigation also named six partners to its annual Under 40 Hotlist: Los Angeles partner Heather Richardson, New York partner Gabrielle Levin, Orange County partner Blaine Evanson and Washington, D.C. partners Daniel Chung, Michael Diamant and Amir Tayrani. This list honors the achievements of the nation’s most accomplished legal partners aged 40 or younger and was published on July 5, 2018.

July 12, 2018 |
Shareholder Proposal Developments During the 2018 Proxy Season

Click for PDF This client alert provides an overview of shareholder proposals submitted to public companies during the 2018 proxy season, including statistics and notable decisions from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on no-action requests. Top Shareholder Proposal Takeaways From the 2018 Proxy Season As discussed in further detail below, based on the results of the 2018 proxy season, there are several key takeaways to consider for the coming year: Shareholder proposals continue to be used by certain shareholders and to demand significant time and attention.  Although the overall number of shareholder proposals submitted decreased 5% to 788, the average support for proposals voted on increased by almost 4 percentage points to 32.7%, suggesting increased traction among institutional investors.  In addition, the percentage of proposals that were withdrawn increased by 6 percentage points to 15%, and the number of proponents submitting proposals increased by 20%.  However, there are also some interesting ongoing developments with respect to the potential reform of the shareholder proposal rules (including the possibility of increased resubmission thresholds). It is generally becoming more challenging to exclude proposals, but the Staff has applied a more nuanced analysis in certain areas.  Success rates on no-action requests decreased by 12 percentage points to 64%, the lowest level since 2015.  This is one reason (among several) why companies may want to consider potential engagement and negotiation opportunities with proponents as a key strategic option for dealing with certain proposals and proponents.  However, it does not have to be one or the other—20% of no-action requests submitted during the 2018 proxy season were withdrawn (up from 14% in 2017), suggesting that the dialogue with proponents can (and should) continue after filing a no-action request.  In addition, companies are continuing to experience high levels of success across several exclusion grounds, including substantial implementation arguments and micromanagement-focused ordinary business arguments.  Initial attempts at applying the Staff’s board analysis guidance from last November generally were unsuccessful, but they laid a foundation that may help develop successful arguments going forward.  The Staff’s announcement that it will consider, in some cases, a board’s analysis in ordinary business and economic relevance exclusion requests provided companies with a new opportunity to exclude proposals on these bases.  Among other things, under the new guidance, the Staff will consider a board’s analysis that a policy issue is not sufficiently significant to the company’s business operations and therefore the proposal is appropriately excludable as ordinary business.  In practice, none of the ordinary business no‑action requests that included a board analysis were successful in persuading the Staff that the proposal was not significant to the company (although one request based on economic relevance was successful).  Nevertheless, the additional guidance the Staff provided through its no-action request decisions should help provide a roadmap for successful requests next year, and, therefore, we believe that companies should not give up on trying to apply this guidance.  It will be important for companies to make a determination early on as to whether they will seek to include the board’s analysis in a particular no-action request so that they have the necessary time to create a robust process to allow the board to produce a thoughtful and well-reasoned analysis. Social and environmental proposals continue to be significant focus areas for proponents, representing 43% of all proposals submitted.  Climate change, the largest category of these proposals, continued to do well with average support of 32.8% and a few proposals garnering majority support.  We expect these proposals will continue to be popular going into next year.  Board diversity is another proposal topic with continuing momentum, with many companies strengthening their board diversity commitments and policies to negotiate the withdrawal of these proposals.  In addition, large asset managers are increasingly articulating their support for greater board diversity. Don’t forget to monitor your EDGAR page for shareholder-submitted PX14A6G filings.  Over the past two years, there has been a significant increase in the number of exempt solicitation filings, with filings for 2018 up 43% versus 2016.  With John Chevedden recently starting to submit these filings, we expect this trend to continue into next year.  At the same time, these filings are prone to abuse because they have, to date, escaped regulatory scrutiny. Click here to READ MORE. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers in the firm’s Securities Regulation and Corporate Governance practice group: Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Gillian McPhee – Washington, D.C. (+1 202-955-8201, gmcphee@gibsondunn.com) Maia Gez – New York (+1 212-351-2612, mgez@gibsondunn.com) Aaron Briggs – San Francisco (415-393-8297, abriggs@gibsondunn.com) Julia Lapitskaya – New York (+1 212-351-2354, jlapitskaya@gibsondunn.com) Michael Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 12, 2018 |
The Politics of Brexit for those Outside the UK

Click for PDF Following the widely reported Cabinet meeting at Chequers, the Prime Minister’s country residence, on Friday 6 June 2018, the UK Government has now published its “White Paper” setting out its negotiating position with the EU.  A copy of the White Paper can be found here. The long-delayed White Paper centres around a free trade area for goods, based on a common rulebook.  The ancillary customs arrangement plan, in which the UK would collects tariffs on behalf of the EU, would then “enable the UK to control its own tariffs for trade with the rest of the world”.  However, the Government’s previous “mutual recognition plan” for financial services has been abandoned; instead the White Paper proposes a looser partnership under the framework of the EU’s existing equivalence regime. The responses to the White Paper encapsulate the difficulties of this process.  Eurosceptics remain unhappy that the Government’s position is far too close to a “Soft Brexit” and have threatened to rebel against the proposed customs scheme; Remainers are upset that services (which represent 79% of the UK’s GDP) are excluded. The full detail of the 98-page White Paper is less important at this stage than the negotiating dynamics.  Assuming both the UK and the EU want a deal, which is likely to be the case, M&A practitioners will be familiar with the concept that the stronger party, here the EU, will want to push the weaker party, the UK, as close to the edge as possible without tipping them over.  In that sense the UK has, perhaps inadvertently, somewhat strengthened its negotiating position – albeit in a fragile way. The rules of the UK political game In the UK the principle of separation of powers is strong as far as the independence of the judiciary is concerned.  In January 2017 the UK Supreme Court decided that the Prime Minister could not trigger the Brexit process without the authority of an express Act of Parliament. However, unlike the United States and other presidential systems, there is virtually no separation of powers between legislature and executive.  Government ministers are always also members of Parliament (both upper and lower houses).  The government of the day is dependent on maintaining the confidence of the House of Commons – and will normally be drawn from the political party with the largest number of seats in the House of Commons.  The Prime Minister will be the person who is the leader of that party. The governing Conservative Party today holds the largest number of seats in the House of Commons, but does not have an overall majority.  The Conservative Government is reliant on a “confidence and supply” agreement with the Northern Ireland Democratic Unionist Party (“DUP”) to give it a working majority. Maintaining an open land border between Northern Ireland and the Republic of Ireland is crucial to maintaining the Good Friday Agreement – which underpins the Irish peace process.  Maintaining an open border between Northern Ireland and the rest of the UK is of fundamental importance to the unionist parties in Northern Ireland – not least the DUP.  Thus, the management of the flow of goods and people across the Irish land border, and between Northern Ireland and the UK, have become critical issues in the Brexit debate and negotiations.  The White Paper’s proposed free trade area for goods would avoid friction at the border. Parliament will have a vote on the final Brexit deal, but if the Government loses that vote then it will almost certainly fall and a General Election will follow – more on this below. In addition, if the Prime Minister does not continue to have the support of her party, she would cease to be leader and be replaced.  Providing the Conservative Party continued to maintain its effective majority in the House of Commons, there would not necessarily be a general election on a change in prime minister (as happened when Margaret Thatcher was replaced by John Major in 1990) The position of the UK Government The UK Cabinet had four prominent campaigners for Brexit: David Davis (Secretary for Exiting the EU), Boris Johnson (Foreign Secretary), Michael Gove (Environment and Agriculture Secretary) and Liam Fox (Secretary for International Trade).  David Davis and Boris Johnson have both resigned in protest after the Chequers meeting but, so far, Michael Gove and Liam Fox have stayed in the Cabinet.  To that extent, at least for the moment, the Brexit camp has been split and although the Leave activists are unhappy, they are now weaker and more divided for the reasons described below. The Prime Minister can face a personal vote of confidence if 48 Conservative MPs demand such a vote.  However, she can only be removed if at least 159 of the 316 Conservative MPs then vote against her.  It is currently unlikely that this will happen (although the balance may well change once Brexit has happened – and in the lead up to a general election).  Although more than 48 Conservative MPs would in principle be willing to call a vote of confidence, it is believed that they would not win the subsequent vote to remove her.  If by chance that did happen, then Conservative MPs would select two of their members, who would be put to a vote of Conservative activists.  It is likely that at least one of them would be a strong Leaver, and would win the activists’ vote. The position in Parliament The current view on the maths is as follows: The Conservatives and DUP have 326 MPs out of a total of 650.  It is thought that somewhere between 60 and 80 Conservative MPs might vote against a “Soft Brexit” as currently proposed – and one has to assume it will become softer as negotiations with the EU continue.  The opposition Labour party is equally split.  The Labour leadership of Jeremy Corbyn and John McDonnell are likely to vote against any Brexit deal in order to bring the Government down, irrespective of whether that would lead to the UK crashing out of the EU with no deal.  However it is thought that sufficient opposition MPs would side with the Government in order to vote a “Soft Brexit” through the House of Commons. Once the final position is resolved, whether a “Soft Brexit” or no deal, it is likely that there will be a leadership challenge against Mrs May from within the Conservative Party. The position of the EU So far the EU have been relatively restrained in their public comments, on the basis that they have been waiting to see the detail of the White Paper. The EU has stated on many occasions that the UK cannot “pick and choose” between those parts of the EU Single Market that it likes, and those it does not.  For this reason, the proposals in the White Paper (which do not embrace all of the requirements of the Single Market), are unlikely to be welcomed by the EU.  It is highly likely that the EU will push back on the UK position to some degree, but it is a dangerous game for all sides to risk a “no deal” outcome.  Absent agreement on an extension the UK will leave the EU at 11 pm on 29 March 2019, but any deal will need to be agreed by late autumn 2018 so national parliaments in the EU and UK have time to vote on it. Finally Whatever happens with the EU the further political risk is the possibility that the Conservatives will be punished in any future General Election – allowing the left wing Jeremy Corbyn into power. It is very hard to quantify this risk.  In a recent poll Jeremy Corbyn edged slightly ahead of Theresa May as a preferred Prime Minister, although “Don’t Knows” had a clear majority. This client alert was prepared by London partners Charlie Geffen and Nicholas Aleksander and of counsel Anne MacPherson. We have a working group in London (led by Nicholas Aleksander, Patrick Doris, Charlie Geffen, Ali Nikpay and Selina Sagayam) addressing Brexit related issues.  Please feel free to contact any member of the working group or any of the other lawyers mentioned below. Ali Nikpay – Antitrust ANikpay@gibsondunn.com Tel: 020 7071 4273 Charlie Geffen – Corporate CGeffen@gibsondunn.com Tel: 020 7071 4225 Nicholas Aleksander – Tax NAleksander@gibsondunn.com Tel: 020 7071 4232 Philip Rocher – Litigation PRocher@gibsondunn.com Tel: 020 7071 4202 Jeffrey M. Trinklein – Tax JTrinklein@gibsondunn.com Tel: 020 7071 4224 Patrick Doris – Litigation; Data Protection PDoris@gibsondunn.com Tel:  020 7071 4276 Alan Samson – Real Estate ASamson@gibsondunn.com Tel:  020 7071 4222 Penny Madden QC – Arbitration PMadden@gibsondunn.com Tel:  020 7071 4226 Selina Sagayam – Corporate SSagayam@gibsondunn.com Tel:  020 7071 4263 Thomas M. Budd – Finance TBudd@gibsondunn.com Tel:  020 7071 4234 James A. Cox – Employment; Data Protection JCox@gibsondunn.com Tel: 020 7071 4250 Gregory A. Campbell – Restructuring GCampbell@gibsondunn.com Tel:  020 7071 4236 © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 12, 2018 |
California Consumer Privacy Act of 2018

Click for PDF On June 28, 2018, Governor Jerry Brown signed the California Consumer Privacy Act of 2018 (“CCPA”), which has been described as a landmark privacy bill that aims to give California consumers increased transparency and control over how companies use and share their personal information.  The law will be enacted as several new sections of the California Civil Code (sections 1798.100 to 1798.198).  While lawmakers and others are already discussing amending the law prior to its January 1, 2020 effective date, as passed the law would require businesses collecting information about California consumers to: disclose what personal information is collected about a consumer and the purposes for which that personal information is used; delete a consumer’s personal information if requested to do so, unless it is necessary for the business to maintain that information for certain purposes; disclose what personal information is sold or shared for a business purpose, and to whom; stop selling a consumer’s information if requested to do so (the “right to opt out”), unless the consumer is under 16 years of age, in which case the business is required to obtain affirmative authorization to sell the consumer’s data (the “right to opt in”); and not discriminate against a consumer for exercising any of the aforementioned rights, including by denying goods or services, charging different prices, or providing a different level or quality of goods or services, subject to certain exceptions. The CCPA also empowers the California Attorney General to adopt regulations to further the statute’s purposes, and to solicit “broad public participation” before the law goes into effect.[1]  In addition, the law permits businesses to seek the opinion of the Attorney General for guidance on how to comply with its provisions. The CCPA does not appear to create any private rights of action, with one notable exception:  the CCPA expands California’s data security laws by providing, in certain cases, a private right of action to consumers “whose nonencrypted or nonredacted personal information” is subject to a breach “as a result of the business’ violation of the duty to implement and maintain reasonable security procedures,” which permits consumers to seek statutory damages of $100 to $750 per incident.[2]  The other rights embodied in the CCPA may be enforced only by the Attorney General—who may seek civil penalties up to $7,500 per violation. In the eighteen months ahead, businesses that collect personal information about California consumers will need to carefully assess their data privacy and disclosure practices and procedures to ensure they are in compliance when the law goes into effect on January 1, 2020.  Businesses may also want to consider whether to submit information to the Attorney General regarding the development of implementing regulations prior to the effective date. I.     Background and Context The CCPA was passed quickly in order to block a similar privacy initiative from appearing on election ballots in November.  The ballot initiative had obtained enough signatures to be presented to voters, but its backers agreed to abandon it if lawmakers passed a comparable bill.  The ballot initiative, if enacted, could not easily be amended by the legislature,[3] so legislators quickly drafted and unanimously passed AB 375 before the June 28 deadline to withdraw items from the ballot.  While not as strict as the EU’s new General Data Protection Regulation (GDPR), the CCPA is more stringent than most existing privacy laws in the United States. II.     Who Must Comply With The CCPA? The CCPA applies to any “business,” including any for-profit entity that collects consumers’ personal information, which does business in California, and which satisfies one or more of the following thresholds: has annual gross revenues in excess of twenty-five million dollars ($25,000,000); possesses the personal information of 50,000 or more consumers, households, or devices; or earns more than half of its annual revenue from selling consumers’ personal information.[4] The CCPA also applies to any entity that controls or is controlled by such a business and shares common branding with the business.[5] The definition of “Personal Information” under the CCPA is extremely broad and includes things not considered “Personal Information” under other U.S. privacy laws, like location data, purchasing or consuming histories, browsing history, and inferences drawn from any of the consumer information.[6]  As a result of the breadth of these definitions, the CCPA likely will apply to hundreds of thousands of companies, both inside and outside of California. III.     CCPA’s Key Rights And Provisions The stated goal of the CCPA is to ensure the following rights of Californians: (1) to know what personal information is being collected about them; (2) to know whether their personal information is sold or disclosed and to whom; (3) to say no to the sale of personal information; (4) to access their personal information; and (5) to equal service and price, even if they exercise their privacy rights.[7]  The CCPA purports to enforce these rights by imposing several obligations on covered businesses, as discussed in more detail below.            A.     Transparency In The Collection Of Personal Information The CCPA requires disclosure of information about how a business collects and uses personal information, and also gives consumers the right to request certain additional information about what data is collected about them.[8]  Specifically, a consumer has the right to request that a business disclose: the categories of personal information it has collected about that consumer; the categories of sources from which the personal information is collected; the business or commercial purpose for collecting or selling personal information; the categories of third parties with whom the business shares personal information; and the specific pieces of personal information it has collected about that consumer.[9] While categories (1)-(4) are fairly general, category (5) requires very detailed information about a consumer, and businesses will need to develop a mechanism for providing this type of information. Under the CCPA, businesses also must affirmatively disclose certain information “at or before the point of collection,” and cannot collect additional categories of personal information or use personal information collected for additional purposes without providing the consumer with notice.[10]  Specifically, businesses must disclose in their online privacy policies and in any California-specific description of a consumer’s rights a list of the categories of personal information they have collected about consumers in the preceding 12 months by reference to the enumerated categories (1)-(5), above.[11] Businesses must provide consumers with at least two methods for submitting requests for information, including, at a minimum, a toll-free telephone number, and if the business maintains an Internet Web site, a Web site address.[12]            B.     Deletion Of Personal Information The CCPA also gives consumers a right to request that businesses delete personal information about them.  Upon receipt of a “verifiable request” from a consumer, a business must delete the consumer’s personal information and direct any service providers to do the same.  There are exceptions to this deletion rule when “it is necessary for the business or service provider to maintain the consumer’s personal information” for one of nine enumerated reasons: Complete the transaction for which the personal information was collected, provide a good or service requested by the consumer, or reasonably anticipated within the context of a business’s ongoing business relationship with the consumer, or otherwise perform a contract between the business and the consumer. Detect security incidents, protect against malicious, deceptive, fraudulent, or illegal activity; or prosecute those responsible for that activity. Debug to identify and repair errors that impair existing intended functionality. Exercise free speech, ensure the right of another consumer to exercise his or her right of free speech, or exercise another right provided for by law. Comply with the California Electronic Communications Privacy Act pursuant to Chapter 3.6 (commencing with Section 1546) of Title 12 of Part 2 of the Penal Code. Engage in public or peer-reviewed scientific, historical, or statistical research in the public interest that adheres to all other applicable ethics and privacy laws, when the businesses’ deletion of the information is likely to render impossible or seriously impair the achievement of such research, if the consumer has provided informed consent. To enable solely internal uses that are reasonably aligned with the expectations of the consumer based on the consumer’s relationship with the business. Comply with a legal obligation. Otherwise use the consumer’s personal information, internally, in a lawful manner that is compatible with the context in which the consumer provided the information.[13] Because these exceptions are so broad, especially given the catch-all provision in category (9), it is unclear whether the CCPA’s right to deletion will substantially alter a business’s obligations as a practical matter.            C.     Disclosure Of Personal Information Sold Or Shared For A Business Purpose The CCPA also requires businesses to disclose what personal information is sold or disclosed for a business purpose, and to whom.[14]  The disclosure of certain information is only required upon receipt of a “verifiable consumer request.”[15]  Specifically, a consumer has the right to request that a business disclose: The categories of personal information that the business collected about the consumer; The categories of personal information that the business sold about the consumer and the categories of third parties to whom the personal information was sold, by category or categories of personal information for each third party to whom the personal information was sold; and The categories of personal information that the business disclosed about the consumer for a business purpose.[16] A business must also affirmatively disclose (including in its online privacy policy and in any California-specific description of consumer’s rights): The category or categories of consumers’ personal information it has sold, or if the business has not sold consumers’ personal information, it shall disclose that fact; and The category or categories of consumers’ personal information it has disclosed for a business purpose, or if the business has not disclosed the consumers’ personal information for a business purpose, it shall disclose that fact.[17] This information must be disclosed in two separate lists, each listing the categories of personal information it has sold about consumers in the preceding 12 months that fall into categories (1) and (2), above.[18]            D.     Right To Opt-Out Of Sale Of Personal Information The CCPA also requires businesses to stop selling a consumer’s personal information if requested to do so by the consumer (“opt-out”).  In addition, consumers under the age of 16 must affirmatively opt-in to allow selling of personal information, and parental consent is required for consumers under the age of 13.[19]  Businesses must provide notice to consumers that their information may be sold and that consumers have the right to opt out of the sale.  In order to comply with the notice requirement, businesses must include a link titled “Do Not Sell My Personal Information” on their homepage and in their privacy policy.[20]            E.     Prohibition Against Discrimination For Exercising Rights The CCPA prohibits a business from discriminating against a consumer for exercising any of their rights in the CCPA, including by denying goods or services, charging different prices, or providing a different level or quality of goods or services.  There are exceptions, however, if the difference in price or level or quality of goods or services “is reasonably related to the value provided to the consumer by the consumer’s data.”  For example, while the language of the statute is not entirely clear, a business may be allowed to charge those users who do not allow the sale of their data while providing the service for free to users who do allow the sale of their data—as long as the amount charged is reasonably related to the value to the business of that consumer’s data.  A business may also offer financial incentives for the collection of personal information, as long as the incentives are not “unjust, unreasonable, coercive, or usurious” and the business notifies the consumer of the incentives and the consumer gives prior opt-in consent.            F.     Data Breach Provisions The CCPA provides a private right of action to consumers “whose nonencrypted or nonredacted personal information” is subject to a breach “as a result of the business’ violation of the duty to implement and maintain reasonable security procedures.”[21]  Under the CCPA, a consumer may seek statutory damages of $100 to $750 per incident or actual damages, whichever is greater.[22]  Notably, the meaning of “personal information” under this provision is the same as it is in California’s existing data breach law, rather than the broad definition used in the remainder of the CCPA.[23]  Consumers bringing a private action under this section must first provide written notice to the business of the alleged violations (and allow the business an opportunity to cure the violations), and must notify the Attorney General and give the Attorney General an opportunity to prosecute.[24]  Notice is not required for an “action solely for actual pecuniary damages suffered as a result of the alleged violations.”[25] IV.     Potential Liability Section 1798.150, regarding liability for data breaches, is the only provision in the CCPA expressly allowing a private right of action.  The damages available for such a civil suit are limited to the greater of (1) between $100 and $750 per consumer per incident, or (2) actual damages.  Individual consumers’ claims also can potentially be aggregated in a class action. The other rights embodied in the CCPA may be enforced only by the Attorney General—who may seek civil penalties not to exceed $2,500 for each violation, unless the violation was intentional, in which case the Attorney General can seek up to $7,500 per violation.[26] [1]   To be codified at Cal. Civ. Code § 1798.185(a) [2]      Cal. Civ. Code § 1798.150. [3]      By its own terms, the ballot initiative could be amended upon a statute passed by 70% of each house of the Legislature if the amendment furthered the purposes of the act, or by a majority for certain provisions to impose additional privacy restrictions.  See The Consumer Right to Privacy Act of 2018 No. 17-0039, Section 5. Otherwise, approved ballot initiatives in California can only be amended with voter approval. California Constitution, Article II, Section 10. [4]   Cal. Civ. Code § 1798.140(c)(1). [5]   Cal. Civ. Code § 1798.140(c)(2). [6]   Cal. Civ. Code § 1798.140(o). The definition of “personal information” does not include publicly available information, and the CCPA also does not generally restrict a business’s ability to collect or use deidentified aggregate consumer information. Cal. Civ. Code § 1798.145(a)(5). [7]   Assemb. Bill 375, 2017-2018 Reg. Sess., Ch. 55, Sec. 2 (Cal. 2018) [8]   Cal. Civ. Code § 1798.100 and 1798.110. [9]   Cal. Civ. Code § 1798.110(a). [10]     Cal. Civ. Code §§ 1798.100(b); 1798.110(c). [11]     Cal. Civ. Code §§ 1798.110(c); 1798.130(a)(5)(B). [12]   Cal. Civ. Code § 1798.130(a)(1). [13]   Cal. Civ. Code § 1798.105(d). [14]   Cal. Civ. Code § 1798.115. [15]   Cal. Civ. Code § 1798.115(a)-(b). [16]   Cal. Civ. Code § 1798.115(a). [17]   Cal. Civ. Code § 1798.115(c). [18]   Cal. Civ. Code § 1798.130(a)(5)(C). [19]   Cal. Civ. Code § 1798.120(d). [20]   Cal. Civ. Code § 1798.135. [21]   Cal. Civ. Code § 1798.150. [22]   Cal. Civ. Code § 1798.150. [23]   Cal. Civ. Code § 1798.81.5(d)(1)(A) [24]   Cal. Civ. Code § 1798.150(b). [25]   Cal. Civ. Code § 1798.150 (b)(1). [26]   Cal. Civ. Code § 1798.155. The following Gibson Dunn lawyers assisted in the preparation of this client alert: Joshua A. Jessen, Benjamin B. Wagner, Christina Chandler Kogan, Abbey A. Barrera, and Alison Watkins. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work or the following leaders and members of the firm’s Privacy, Cybersecurity and Consumer Protection practice group: United States Alexander H. Southwell – Co-Chair, New York (+1 212-351-3981, asouthwell@gibsondunn.com) M. Sean Royall – Dallas (+1 214-698-3256, sroyall@gibsondunn.com) Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com) Christopher Chorba – Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com) Richard H. Cunningham – Denver (+1 303-298-5752, rhcunningham@gibsondunn.com) Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com) Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com) Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com) H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com) Shaalu Mehra – Palo Alto (+1 650-849-5282, smehra@gibsondunn.com) Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com) Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com) Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com) Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com) Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com) Europe Ahmed Baladi – Co-Chair, Paris (+33 (0)1 56 43 13 00, abaladi@gibsondunn.com) James A. Cox – London (+44 (0)207071 4250, jacox@gibsondunn.com) Patrick Doris – London (+44 (0)20 7071 4276, pdoris@gibsondunn.com) Bernard Grinspan – Paris (+33 (0)1 56 43 13 00, bgrinspan@gibsondunn.com) Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Jean-Philippe Robé – Paris (+33 (0)1 56 43 13 00, jrobe@gibsondunn.com) Michael Walther – Munich (+49 89 189 33-180, mwalther@gibsondunn.com) Nicolas Autet – Paris (+33 (0)1 56 43 13 00, nautet@gibsondunn.com) Kai Gesing – Munich (+49 89 189 33-180, kgesing@gibsondunn.com) Sarah Wazen – London (+44 (0)20 7071 4203, swazen@gibsondunn.com) Alejandro Guerrero Perez – Brussels (+32 2 554 7218, aguerreroperez@gibsondunn.com) Asia Kelly Austin – Hong Kong (+852 2214 3788, kaustin@gibsondunn.com) Jai S. Pathak – Singapore (+65 6507 3683, jpathak@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 10, 2018 |
President Trump Nominates Judge Brett Kavanaugh To Supreme Court

Click for PDF On July 9, 2018, President Trump nominated Judge Brett Kavanaugh of the United States Court of Appeals for the District of Columbia Circuit to fill seat on the Supreme Court of the United States being vacated by Justice Anthony Kennedy. To assess Judge Kavanaugh’s potential impact on the Supreme Court, should the Senate confirm his nomination, we have started reviewing his written opinions and other legal writings.  This Memorandum briefly summarizes Judge Kavanaugh’s noteworthy opinions in several key areas of law, including (1) administrative law, (2) antitrust, (3) arbitration, (4) immigration, (5) labor and employment, (6) religious liberty, and (7) tax. Based on Judge Kavanaugh’s prior opinions, President Trump appears to have fulfilled his campaign promise to “appoint judges very much in the mold of Justice Scalia.”  Like Justice Scalia, Judge Kavanaugh often decides cases by focusing on the text of the relevant statute or constitutional provision, without resorting to legislative history.  Judge Kavanaugh also frequently resolves constitutional cases by examining the document’s original meaning in light of history and tradition. Judge Kavanaugh, who is 53 years old, is admired on both sides of the political aisle.  He is credited with a keen legal mind and praised for writing opinions that are clear and concise.  Judge Kavanaugh earned his law degree in 1990 from Yale Law School.  Following law school, he clerked for Judge Walter King Stapleton on the Third Circuit and Judge Alex Kozinski on the Ninth Circuit.  He then completed a one-year position with the United States Solicitor General’s Office (later called a Bristow Fellowship) before clerking for Justice Kennedy.  Judge Kavanaugh joined the Office of the Independent Counsel under Kenneth Starr and later went into private practice.  In the George W. Bush administration, Judge Kavanaugh served as Assistant to the President and Staff Secretary to the President.  President George W. Bush nominated him to the D.C. Circuit in 2006.  The Senate confirmed his nomination to that seat by a vote of 57-36. Gibson Dunn will continue to review his jurisprudence and monitor the confirmation proceedings, and provide periodic updates. Administrative Law In two significant decisions addressing the process for appointment of executive branch officials, and the President’s power to remove them, Judge Kavanaugh authored opinions that construed the Constitution’s separation of powers in the context of the modern administrative state. PHH Corp. v. Consumer Fin. Prot. Bureau, 881 F.3d 75 (D.C. Cir. 2018) (en banc).  Judge Kavanaugh dissented from the en banc opinion holding that the statute providing that the Consumer Financial Protection Bureau’s director could be removed by the President only for cause was constitutional.  According to Judge Kavanaugh, vesting authority in a single director removable only for cause violates historical precedent, threatens individual liberty, and diminishes the President’s Article II authority over the Executive Branch. Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 537 F.3d 667 (D.C. Cir. 2008), aff’d in part, rev’d in part and remanded, 561 U.S. 477 (2010).  Judge Kavanaugh dissented from a panel opinion holding that the Public Company Accounting Oversight Board did not violate the Appointments Clause or separation of powers principles.  He reasoned that the PCAOB violated separation of powers because PCAOB members were only removable for cause by another independent agency, the Securities and Exchange Commission, and not by the President or his alter ego, such as the head of an executive agency.  The Supreme Court later reversed the panel decision and largely endorsed Judge Kavanaugh’s reasoning. * * * An important question in administrative law is the continued vitality of Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984), under which courts examine agency interpretations of statutes in two steps, such that if the statute itself unambiguously forecloses the agency’s interpretation, it is invalid, but if the statute is ambiguous, the agency’s interpretation is upheld if merely reasonable.  Chevron deference, Judge Kavanaugh has explained, is the rule that “in cases of textual ambiguity, [courts] defer to an executive agency’s reasonable interpretation of a statute.”  Fixing Statutory Interpretation, 129 Harv. L. Rev. 2118, 2135 (2016) (reviewing Second Circuit Judge Katzmann’s book on statutory interpretation). One potential limitation on the reach of Chevron deference is the “major rules” doctrine, and Judge Kavanaugh’s dissent from denial of rehearing en banc as to the D.C. Circuit’s upholding of the FCC’s 2015 net neutrality rule indicates that he takes that limitation seriously.  See U.S. Telecom Ass’n v. FCC, 855 F.3d 381, 417-35 (D.C. Cir. 2017).  The major rules doctrine requires Congress to speak clearly when it authorizes an agency rule that is of “vast ‘economic and political significance,’” and Judge Kavanaugh has explained that it “helps preserve the separation of powers and operates as a vital check on expansive and aggressive assertions of executive authority.”  And, in his view, “while the Chevron doctrine allows an agency to rely on statutory ambiguity to issue ordinary rules, the major rules doctrine prevents an agency from relying on statutory ambiguity to issue major rules,” although he acknowledged that “determining whether a rule constitutes a major rule sometimes has a bit of a ‘know it when you see it’ quality.”  Id. at 419, 423. That said, Judge Kavanaugh’s day job for 12 years has required application of Chevron as it currently exists, and in doing so, he has often written for the D.C. Circuit in reining in exercises of authority by agencies—perhaps most prominently, the EPA.  For example, in Mexichem Fluor, Inc. v. EPA, 866 F.3d 451 (D. C. Cir. 2017), writing for the divided panel, he concluded that a Clean Air Act provision which requires manufacturers to replace ozone-depleting substances with safe substitutes does not grant EPA authority to require replacement of hydroflourocarbons, a set of compounds which are not ozone-depleting substances.  Focusing on the plain statutory text at the first of the two steps under Chevron, he concluded that “EPA’s current reading stretches the word ‘replace’ beyond its ordinary meaning.”  He nevertheless pointed to other sources of statutory authority for regulating HFCs. In two prominent cases, the Supreme Court relied on and agreed with Judge Kavanaugh’s opinions, which had differed from his colleagues’ upholding of EPA actions: Coalition for Responsible Regulation, Inc. v. EPA, 684 F.3d 102 (D.C. Cir. 2012) (per curiam), reh’g en banc denied, No. 09–1322, 2012 WL 6621785 (Dec. 20, 2012), rev’d in part by Utility Air Regulatory Group v. EPA, 134 S. Ct. 2427 (2014).  The D.C. Circuit upheld challenged EPA greenhouse-gas actions, and Judge Kavanaugh urged rehearing en banc, disagreeing with EPA’s construction of the term “air pollutant.”  The Supreme Court, in a 5-4 opinion by Justice Scalia, rejected EPA’s construction, quoting an admonition from Judge Kavanaugh’s opinion:  “Agencies are not free to ‘adopt . . . unreasonable interpretations of statutory provisions and then edit other statutory provisions to mitigate the unreasonableness.’” White Stallion Energy Center, LLC v. EPA, 748 F.3d 1222 (D.C. Cir. 2014), rev’d by Michigan v. EPA, 135 S. Ct. 2699 (2015).  After Judge Kavanaugh dissented in part from the D.C. Circuit panel’s upholding of an EPA power-plant emission rule, the Supreme Court reversed in a 5-4 opinion by Justice Scalia.  The Court quoted Judge Kavanaugh’s opinion for the principle that, where Congress instructed EPA to add power plants to the program only if EPA found regulation “appropriate and necessary,” the term “appropriate” was “broad and all-encompassing” enough to include consideration of cost.  “Read naturally in the present context,” the Court explained, “the phrase ‘appropriate and necessary’ requires at least some attention to cost.” In another case, however, the Supreme Court overturned Judge Kavanaugh’s conclusion and instead deferred to the EPA’s views under Chevron: EME Homer City Generation, L.P. v. EPA, 696 F.3d 7 (D.C. Cir. 2012), rev’d and remanded by EPA v. EME Homer City Generation, L.P., 134 S. Ct. 1584 (2014), on remand, 795 F.3d 118 (D.C. Cir. 2015).  Judge Kavanaugh’s opinion for a divided panel entirely set aside the Transport Rule, also known as the Cross–State Air Pollution Rule, under the Clean Air Act, but the Supreme Court, in a 6-2 opinion by Justice Ginsburg (Justice Alito was recused), disagreed.  The Supreme Court concluded that the Rule was not invalid “on its face,” but allowed certain “particularized, as-applied challenge[s]” to proceed.  On remand, Judge Kavanaugh’s opinion for a unanimous opinion remanded actions as to some states to the EPA for reconsideration (without vacating them). To be sure, Judge Kavanaugh has written unanimous and divided panel opinions upholding EPA rules against private challengers.  See, e.g., Am. Trucking Ass’s, Inc. v. EPA, 600 F.3d 624 (D.C. Cir. 2010) (upholding, over a dissent, EPA approval of California’s rule regulating emissions from transportation refrigeration units in trucks); Energy Future Coalition v. EPA, 793 F.3d 141 (D.C. Cir. 2015) (upholding unanimously EPA regulation requiring test biofuels be commercially available against biofuel producer challenge). And Judge Kavanaugh’s rejection of EPA’s efforts to interpret the statutes it administers have not only favored regulated entities:  In NRDC v. EPA, 749 F.3d 1055 (D. C. Cir. 2014), writing for a unanimous panel, he held that EPA exceeded its authority when it created an affirmative defense for private civil suits in which plaintiffs seek penalties for violations of emission standards by sources of pollution. Antitrust FTC v. Whole Foods Market, Inc., 548 F.3d 1028 (D.C. Cir. 2008).  The FTC moved to preliminarily enjoin Whole Foods’s merger with Wild Oats.  The district court denied the injunction, and the panel majority reversed.  Judge Kavanaugh dissented, writing that he would have affirmed the denial of the injunction, and that the FTC’s position opposing the merger “calls to mind the bad old days when mergers were viewed with suspicion regardless of the economic benefits.”  He accused the majority of reviving the Supreme Court’s “moribund Brown Shoe practical indicia test” and of applying “an overly lax preliminary injunction standard for merger cases.” Arbitration Verizon New England v. NLRB, 826 F.3d 480 (D.C. Cir. 2016).  In the collective bargaining agreement between Verizon New England and its employees’ union, the employees waived their right to picket.  Later, during a labor dispute, employees displayed pro-union signs on Verizon’s property.  Verizon demanded that the employees take down the signs, and the union challenged Verizon’s action before an arbitration panel, which interpreted the collective bargaining agreement’s waiver of the right to picket as including waiver of the right to display of pro-union signs.  The union sought relief from the NLRB, which is allowed to review arbitral decisions but must apply a highly deferential standard to the arbitrator.  The agency overturned the arbitration decision, and Verizon appealed to the D.C. Circuit.  Judge Kavanaugh, writing for the Court, held that the NLRB had not deferred sufficiently to the arbitration decision.  His opinion stressed the importance of deference to arbitrators, noting that the NLRB was required to defer unless “the arbitration decision was ‘clearly repugnant’ to the National Labor Relations Act.”  Here, Judge Kavanaugh wrote, it did not matter whether the agency read the collectively bargaining agreement differently than the arbitrator; instead, what mattered was that the arbitrator’s reading was not “egregiously wrong” because the term “picketing” may, under certain circumstances, include the mere display of signs. Immigration Garza v. Hargan, 874 F.3d 735 (D.C. Cir. 2017) (en banc).  In this litigation over whether a teenager who was in the United States unlawfully could be released from government custody to obtain an abortion, the en banc D.C. Circuit vacated the panel opinion granting the government additional time to find an immigration sponsor and thus delaying the abortion.  In dissent from the en banc order, Judge Kavanaugh wrote that the majority wrongly concluded “that the Government must allow unlawful immigrant minors to have an immediate abortion on demand.”  He stated that the en banc order ignored the government’s “permissible interest in favoring fetal life, protecting the best interests of a minor, and refraining from facilitating abortion.” Fogo de Chao (Holdings) Inc. v. U.S. Dep’t of Homeland Sec., 769 F.3d 1127 (D.C. Cir. 2014). The panel majority held that the agency failed to sufficiently explain its newly adopted conclusion that cultural knowledge was categorically irrelevant to the “specialized knowledge” required to obtain an L-1B work visa. Judge Kavanaugh dissented, agreeing with the agency that a chef’s cultural background does not constitute “specialized knowledge,” and that American chefs could learn the relevant Brazilian cooking techniques within a reasonable time.   He concluded: “In our constitutional system, Congress and the President determine the circumstances under which foreign citizens may enter the country.  The judicial task is far narrower: to apply the immigration statutes as written.” Labor and Employment Venetian Casino Resort LLC v. NLRB, 793 F.3d 85 (D.C. Cir. 2015).  The Venetian, a luxury hotel and casino complex operating from the Las Vegas Strip, asked police to issue criminal citations to union-demonstrators who were blocking an entrance to the casino.  The demonstrators filed a petition with the NLRB, claiming that the Venetian committed an unfair trade practice by interfering with the demonstration. Writing for a unanimous panel, Judge Kavanaugh determined that the Noerr-Pennington doctrine—which provides that “employer conduct that would otherwise be illegal may be ‘protected by the First Amendment when it is part of a direct petition to government’”—shielded the Venetian from liability.  The court explained that “the act of summoning the police to enforce state trespass law is a direct petition to government,” and therefore constitutionally protected conduct. Ayissi-Etoh v. Fannie Mae, 712 F.3d 572 (D.C. 2013).  Judge Kavanaugh, writing in concurrence, emphasized that a single workplace use of an offensive racial epithet could be severe enough to establish a hostile work environment for purposes of federal anti-discrimination laws.  He noted that although “[i]t may be difficult to fully catalogue the various verbal insults and epithets that by themselves could create a hostile environment,” no other “act can more quickly alter the conditions of employment and create an abusive working environment that the use” of the n-word “by a supervisor in the presence of his subordinates.” Religious Liberty Priests for Life v. U.S. Dep’t of Health & Human Services, 808 F.3d 1 (D.C. Cir. 2015).  This constitutional challenge to the scheme for opting out of contraceptive coverage under the Affordable Care Act (“ACA”) was brought by several pro-life, religiously-affiliated employers.  They contended that the statutory and regulatory scheme (which allowed religious nonprofits to opt out from including contraceptive coverage in their health insurance plans only by completing forms that prompted others to cover contraceptives to employees) violated the Religious Freedom Restoration Act (“RFRA”), among other laws.  RFRA prohibits the federal government from substantially burdening any person’s exercise of religion, unless there is both a compelling government interest and no less restrictive mean of achieve that interest.  A three-judge panel of the D.C. Circuit (which did not include Judge Kavanaugh) held that the contraception scheme did not violate RFRA because it did not impose a substantial burden on religious exercise.  The en banc D.C. Circuit denied review over a dissent by Judge Kavanaugh.  In his dissent, Judge Kavanaugh argued that:  (1) the contraception scheme substantially burdened the plaintiffs’ exercise of religion because “submitting the form actually contravenes plaintiffs’ sincere religious beliefs” and refusing to submit the form would trigger a monetary penalty; (2) the federal government “has a compelling interest in facilitating access to contraception for the employees of these religious organizations”; and (3) the government could have facilitated access to contraception without requiring religious organizations to submit any forms.  Judge Kavanaugh concluded that the contraceptive scheme violated RFRA, but along the way he identified the “less restrictive” way the government could have lawfully ensured contraceptive coverage. In addition, Judge Kavanaugh has been involved with several other challenges to the Affordable Care Act: Sissel v. U.S. Dep’t of Health & Human Services, 799 F.3d 1035 (D.C. Cir. 2015).  Judge Kavanaugh dissented from the denial of a petition for rehearing en banc, and would have granted the petition to fix the rationale of the panel opinion while reaching the same outcome.  In Sissel, the plaintiffs argued that the Affordable Care Act was unconstitutional because it is a revenue-raising bill that, per the Origination Clause, must originate in the House of Representatives rather than the Senate.  The panel opinion, relying on Supreme Court precedent, determined that the Origination Clause was not implicated because the revenue-raising function of the ACA was not the primary purpose of the Act.  Judge Kavanaugh would have granted the petition to hold that the ACA was a revenue-raising bill because it raised an “enormous” amount of revenue that is not earmarked for a program created by the Act.  However, he would have found that the Act originated in the House of Representatives and therefore satisfied the Origination Clause. Seven-Sky v. Holder, 661 F.3d 1 (D.C. Cir. 2011), abrogated by National Federation of Independent Businesses v. Sebelius, 567 U.S. 519 (2012).  Judge Kavanaugh dissented from a panel decision upholding the Affordable Care Act’s individual mandate, and would have found that the Anti-Injunction Act deprived the panel of jurisdiction to decide the issue.  He regarded the individual mandate, which is enforced and collected by the Internal Revenue Service, as a tax, and therefore the Anti-Injunction Act, “which carefully limits jurisdiction of federal courts over tax-related matters,” prevents a federal court from passing on its constitutionality until a challenger pays the tax or faces an enforcement action by the IRS.  Judge Kavanaugh’s dissent previewed Chief Justice Robert’s later opinion upholding the individual mandate as a permissible tax. Tax Cannon v. District of Columbia, 783 F.3d 327 (D.C. Cir. 2015).  The District of Columbia requires retired police officers who work in the D.C. Protective Services Division to offset their salary by the amount of their police pension.  Judge Kavanaugh, writing for a unanimous panel, determined that the offset did not constitute a tax.  “It does not raise revenue.  Rather, it operates on the opposite side of D.C.’s financial ledger.  It reduces D.C.’s total expenditures on salaries.”  Judge Kavanaugh characterized the salary reduction statute as “nothing more than a way for D.C. to prevent so-called double-dipping and thereby reduce its expenditures on employee salaries.” Gibson Dunn Supreme Court Practice: Gibson Dunn has a longstanding, high-profile presence before the Supreme Court of the United States.  No law firm has a stronger record of success in representing clients before the Supreme Court. Gibson Dunn lawyers have argued more than 150 cases before the Supreme Court. Twelve of our current attorneys have argued before the Supreme Court Our Supreme Court victories have been some of the biggest in history, including Bush v. Gore, Citizens United v. Federal Election Commission, Hollingsworth v. Perry, Wal-Mart Stores, Inc. v. Dukes, Alice Corp. v. CLS Bank International, N.L.R.B. v. Noel Canning, Daimler AG v. Bauman, and many more. While the grant rate for certiorari petitions is below 1%, Gibson Dunn’s certiorari petitions have captured the Court’s attention: Gibson Dunn has persuaded the Court to grant 23 certiorari petitions since 2006. We are also unmatched in advocacy before the federal and state courts of appeals. Gibson Dunn attorneys argue one appeal approximately every three business days. Each year, we brief and argue federal appeals in every regional circuit, the D.C. Circuit, and the Federal Circuit. We also argue dozens of state court appeals annually.  Numerous currently serving state solicitors general began their careers at Gibson Dunn. Appellate and Constitutional Law Group Co-Chairs: Mark A. Perry – Washington, D.C. (+1 202.887.3667, mperry@gibsondunn.com) Caitlin J. Halligan – New York (+1 212.351.4000, challigan@gibsondunn.com) Nicole A. Saharsky – Washington, D.C. (+1 202.887.3669,nsaharsky@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 9, 2018 |
Who’s Who Legal Recognizes 24 Gibson Dunn Attorneys

24 Gibson Dunn attorneys were recognized by Who’s Who Legal in their respective fields. In Who’s Who Legal Competition 2018, 20 attorneys were recognized for their work. The list includes Brussels attorneys Peter Alexiadis, Attila Borsos, Jens-Olrik Murach, Elsa Sependa and David Wood; Dallas partners Sean Royall and Robert Walters; Hong Kong partner Sébastien J Evrard; London partner Ali Nikpay; Los Angeles partner Daniel Swanson; New York partner Eric Stock; San Francisco partners Rachel Brass, Trey Nicoud and Gary Spratling; and Washington, D.C. partners Jarrett Arp, Adam Di Vincenzo, Scott Hammond, Joseph Kattan, Richard Parker and Cynthia Richman. In the 2018 Who’s Who Legal M&A and Governance guide, four partners were recognized: Century City partner Jonathan Layne, New York partner Dennis Friedman and Washington, D.C. partners Howard Adler and John Olson. The guides were published on July 9, 2018 and June 8, 2018.

June 22, 2018 |
Allyson Ho Receives Outstanding Appellate Lawyer Award from Texas Bar Foundation

The Texas Bar Foundation presented Dallas partner Allyson Ho with its 2018 Gregory S. Coleman Outstanding Appellate Lawyer Award. The award is given to a lawyer who exhibits “an outstanding appellate practice while maintaining a strong commitment to providing legal services for the underserved,” a “dedication to mentoring young attorneys” and “a strong moral compass to guide both professional and personal pursuits.”  Honorees were recognized at the annual dinner in June 2018.

July 2, 2018 |
Who’s Who Legal Recognizes Five Gibson Dunn Partners in Energy

Five Gibson Dunn partners were recognized in Who’s Who Legal’s Energy 2018 guide:  Houston partners Michael Darden and Hillary Holmes, London partner Anna Howell, Singapore partner Brad Roach, and Washington, D.C. partner William Scherman. Additionally, Brad Roach was recognized as a Thought Leader in energy. The guide recognizes lawyers based on their “experience advising on some of the world’s most significant and cutting-edge legal matters.” The list was published July 2, 2018.

July 6, 2018 |
Update on California Immigrant Worker Protection Act (AB 450)

Click for PDF On July 5, 2018, Judge John A. Mendez of the Eastern District of California issued an important ruling involving California employers’ legal obligations during federal immigration enforcement actions at the workplace.  In the lawsuit at issue, the federal government seeks to invalidate a series of recent California “sanctuary” statutes, including AB 450, which imposes various restrictions and requirements on California employers, including that employers are not permitted to voluntarily consent to a federal agent’s request to access the worksite and employee records without a warrant.  In his 60-page order yesterday, Judge Mendez granted in part and denied in part the federal government’s motion for preliminary injunction and forbade California and its officials from enforcing several portions of AB 450 during the pendency of the litigation. While private California employers will not be subject to many of AB 450’s requirements for the time being, the fight over AB 450 is likely to proceed, including at the appellate level.  In the meantime, employers should make sure that they are knowledgeable about their obligations (and potential future obligations) under federal immigration law and AB 450 and seek counsel regarding how best to prepare for and ensure compliance with those obligations. Background California Governor Jerry Brown signed the Immigrant Worker Protection Act (also known as “Assembly Bill 450” or AB 450) into law on October 5, 2017.  AB 450 became effective on January 1, 2018, and applies to both public and private employers.  The statute prohibits employers from consenting to immigration enforcement agents’ access to the workplace or to employee records (unless permitted by judicial warrant) and also requires that employers provide prompt notice to employees of any impending inspection.  Violations of these requirements may result in penalties of between $2,000 and $5,000 for the first offense, and up to $10,000 for subsequent offenses.  The law does not provide for a private right of action; rather it is enforced exclusively through civil action by California’s Labor Commissioner or Attorney General, who recovers the penalties. AB 450 Requirements, The Specifics AB 450 sets forth several obligations (each of which is limited by the phrase, “except as otherwise required by federal law”) on employers that can be grouped into three main categories detailed below.  The California Labor Commissioner and Attorney General also provided joint guidance that sheds additional light on the application of AB 450 available here:  https://www.dir.ca.gov/dlse/AB_450_QA.pdf. Deny Access To Premises/Employee Records.  Under the new law, employers are prohibited from “provid[ing] voluntary consent to an immigration enforcement agent’s [attempt] to enter any nonpublic areas of a place of labor.”  Employers may only permit access when the agent provides a judicial warrant.[1]  A judicial warrant must be issued by a court and signed by a judge.[2]Similarly, employers may not “provide voluntary consent to an immigration enforcement agent to access, review, or obtain the employer’s employee records.”  Again, the employer may permit access when the agent provides a judicial warrant or subpoena or when the employer is providing access to I-9 Employment Eligibility Verification forms or other documents for which a Notice of Inspection (“NOI”) has been provided to the employer.[3]The state-provided guidance makes clear that “whether or not voluntary consent was given by the employer is a factual, case-by-case determination that will be made based on the totality of the circumstances in each specific situation,” but, at minimum, the new law “does not require physically blocking or physically interfering with an immigration enforcement agent in order to show that voluntary consent was not provided.” Provide Employees Notice.  AB 450 requires employers to provide each current employee notice of any upcoming inspections of I-9 records or other employment records within 72 hours of receiving an NOI.[4]  Notice must be posted in the language the employer normally communicates with its employees and contain (at minimum): (i) the name of the immigration agency conducting the inspection; (ii) the date the employer received the NOI; (iii) the nature of the inspection; and (iv) a copy of the NOI.After an inspection has been completed, employers must provide any affected employees (employees identified by the agency as potentially lacking work authorization or having deficiencies in their authorization documents) with notice of that information.[5]  Specifically, the affected employee (and his/her authorized representative) must receive a copy of the agency’s notice providing the results of the inspection and written notice of the employer’s and employee’s obligations resulting from the inspection within 72 hours of its receipt.  Employers must provide this notice by hand at work, if possible, or otherwise via both mail and email. Limit Reverification Of Current Employees.  Finally, the law penalizes employers for the reverification of the employment eligibility of a current employee “at a time or in a manner not required by [federal law.]”[6] Federal Government Response Within weeks of AB 450 becoming law, ICE’s Acting Director Thomas Homan responded by announcing that the agency planned to increase significantly the number of worksite-related investigations it initiated nationwide during 2018.  Homan later called AB 450 and Senate Bill 54, a related statute enacted at the same time as AB 450 that seeks to limits permissible cooperation between California agencies and federal immigration authorities, “terrible.”  And he stated that Californians “better hold on tight.” On March 6, 2018, the U.S. Department of Justice filed legal action against the state of California, Governor Jerry Brown, and Attorney General of California Xavier Becerra in federal court, requesting that the Court invalidate AB 450 and other so-called sanctuary laws on the ground, in part, that they are preempted by federal immigration law and are therefore unconstitutional.[7] The federal government also moved for a preliminary injunction forbidding enforcement of AB  450 during the pendency of the lawsuit.[8]  In short, the federal government contends that the laws intentionally obstruct federal law and impermissibly interfere with federal immigration authorities’ ability to carry out their lawful duties and, thereby violate the Supremacy Clause of the United States Constitution. The lawsuit generated significant interest, including no fewer than sixteen amici curiae briefs in support of both sides and multiple (unsuccessful) motions to intervene.  The California defendants’ motion to dismiss the case, filed on May 4, 2018, is pending before the Court. The district court heard argument on the federal government’s preliminary injunction motion on June 20, 2018, in Sacramento, California.  Yesterday, the Court found in the federal government’s favor (in part), enjoining California and its officials from enforcing all provisions of AB 450 except for the provisions relating to employee notice.[9] The Court noted that the lawsuit involves several “unique and novel constitutional issues,” including “whether state sovereignty includes the power to forbid state agents and private citizens from voluntarily complying with a federal program.”  In a detailed legal analysis, noting that it “expresse[d] no views on the soundness of the policies or statutes involved,” the Court found: That the federal government is likely to prevail in its arguments against the provisions of AB 450 that impose penalties on private employers who “voluntarily consent to federal immigration enforcement’s entry into nonpublic areas of their place of business or access to their employment records” because they “impermissibly discriminate[] against those who choose to deal with the Federal Government;” That the federal government is likely to prevail in its arguments against AB 450’s prohibition on reverification of employee eligibility, albeit “with the caveat that a more complete evidentiary record could impact the Court’s analysis at a later stage of th[e] litigation;” and That the federal government is not likely to prevail in its arguments against AB 450’s notice requirements adopted in Cal. Labor Code section 90.2.  The Court explained that “notice provides employees with an opportunity to cure any deficiency in their paperwork or employment eligibility” and does not impermissibly impede the federal government’s interests. As a result, the Court enjoined California from enforcing all provisions of AB 450 as applied to private employers except those regarding employee notice.  Private employers therefore only need to ensure compliance with those notice requirements for the time being.  As the Court itself noted, however, its ruling was only as to the likelihood of success at this early stage of the litigation and is subject to further review and a final determination on the merits after additional evidence is presented, as well as to further potential review by the Ninth Circuit Court of Appeals. Practical Considerations & Best Practices While yesterday’s ruling enjoins enforcement of most of the obligations imposed by AB 450, the ruling is only temporary and employers should seek counsel from immigration and/or employment counsel and should determine in advance how they will comply with these obligations, should AB 450 go into full effect.  Among other measures, employers should consider: Preparing facility managers and other employees most likely to encounter an immigration enforcement agent seeking access to the worksite or records on the proper procedures for handling an inspection, including how to determine whether the agent has a valid judicial warrant (as opposed, for example, to an administrative subpoena) and to consult immediately with counsel; Implementing procedures for handling notice to employees on an expedited basis, including a template to ensure all necessary information is provided (the state Labor Commissioner has provided a form template available here: https://www.dir.ca.gov/DLSE/LC_90.2_EE_Notice.pdf); and Ensuring any reverification of employment eligibility complies with federal legal obligations and conducting training on the verification and reverification process.    [1]   Cal. Gov. Code § 7285.1(a), (e).    [2]   Guidance No. 11, available at https://www.dir.ca.gov/dlse/AB_450_QA.pdf.    [3]   Cal. Gov. Code § 7285.2(a)(1), (a)(2).    [4]   Cal. Labor Code § 90.2(a).    [5]   Cal. Labor Code § 90.2(b).    [6]   Cal. Labor Code § 1019.2(a).    [7]   U.S. v. State of California, Case No. 1:18-cv-00490-JAM-KJN, Dkt. No. 1 (E.D. Cal. Mar. 6, 2018), available at https://www.justice.gov/opa/press-release/file/1041431/download.    [8]   Id. at Dkt. No. 2, available at https://www.justice.gov/opa/press-release/file/1041436/download.    [9]   Id. at Dkt. No. 193 (E.D.Cal. July 5, 2018). The following Gibson Dunn lawyers assisted in preparing this client update: Jesse Cripps and Ryan Stewart. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding the issues discussed above. Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following in the firm’s Labor and Employment practice group: Catherine A. Conway – Co-Chair, Los Angeles (+1 213-229-7822, cconway@gibsondunn.com) Jason C. Schwartz – Co-Chair, Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com) Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com) Jesse A. Cripps – Los Angeles (+1 213-229-7792, jcripps@gibsondunn.com) Michele L. Maryott – Orange County (+1 949-451-3945, mmaryott@gibsondunn.com) Katherine V.A. Smith – Los Angeles (+1 213-229-7107, ksmith@gibsondunn.com)

June 27, 2018 |
Webcast: Developments in Virtual Currency Law and Regulation

The past year has seen an explosion in virtual currency offerings, as well as significant legal and regulatory developments as U.S. regulators have tried to keep pace with the industry. It is therefore timely for an analysis of these developments under a multi-disciplinary approach. Our team of experienced virtual currency practitioners analyze relevant issues from the perspective of U.S. securities regulation and enforcement, U.S. commodities regulation and enforcement, U.S. banking and licensed financial services law, and the U.S. anti-money laundering statutes and regulations. View Slides (PDF) PANELISTS: J. Alan Bannister is a partner in Gibson Dunn’s New York office and a member of the Firm’s Capital Markets, Global Finance and Securities Regulation and Corporate Governance Practice Groups. Mr. Bannister concentrates his practice on securities and other corporate transactions, acting for underwriters and issuers (including foreign private issuers), as well as strategic or other investors, in high yield, equity (including ADRs and GDRs), and other securities offerings, including U.S. public offerings, Rule 144A offerings, other private placements and Regulation S offerings, as well as re-capitalizations, NYSE and NASDAQ listings, shareholder rights offerings, spin-offs, PIPEs, exchange offers, other general corporate transactions and other advice regarding compliance with U.S. securities laws, as well as general corporate advice. Mr. Bannister also advises issuers and underwriters on dual listings in the U.S. and on various exchanges across Europe, Latin America and Asia. He has closely followed developments on Initial Coin Offerings (ICOs). Michael D. Bopp is a partner in Gibson Dunn’s Washington, D.C. office and Chair of the firm’s Public Policy group and its Financial Services Crisis Team, a multi-disciplinary group formed to address client concerns stemming from the credit and capital markets crisis.  Mr. Bopp engages in high-level, strategic policy and related regulatory work on a variety of issues but focuses on financial regulatory issues. He works with Congress and the Executive Branch on regulatory reform legislation and helping to shape new regulatory requirements promulgated as a result of the Dodd-Frank Act.  Mr. Bopp also has counseled numerous companies in complying with Dodd-Frank Act requirements.  From 2006-2008, Mr. Bopp served as Associate Director of the Office of Management and Budget in the White House, and was responsible for overseeing budgets and coordinating regulatory, legislative, and other policy for approximately $150 billion worth of spending for various government agencies, including the Departments of Treasury, Homeland Security, Transportation, Justice, Housing and Urban Development, and Commerce, the General Services Administration, the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission.  As a result of his work on financial regulatory and policy issues, Mr. Bopp has been named one of the 100 most influential people in finance by Treasury and Risk magazine. M. Kendall Day is a partner in Gibson Dunn’s Washington, D.C. office and a member of the White Collar Defense and Investigations and the Financial Institutions Practice Groups. His practice focuses on internal investigations, regulatory enforcement defense, white-collar criminal defense, and compliance counseling for financial institutions, multi-national companies, and individuals. Prior to joining Gibson Dunn, Mr. Day spent 15 years as a white-collar prosecutor, serving most recently as an Acting Deputy Assistant Attorney General of the U.S. Department of Justice’s Criminal Division. In that role, Mr. Day supervised more than 200 Criminal Division prosecutors and professionals tasked with investigating and prosecuting many of the country’s most significant and high-profile cases involving corporate and financial misconduct. He also had supervisory authority over every Bank Secrecy Act and money-laundering charge, deferred prosecution agreement and non-prosecution agreement involving every type of financial institution. Arthur S. Long is a partner in Gibson Dunn’s New York office, Co-Chair of Gibson Dunn’s Financial Institutions Practice Group and a member of the Securities Regulation Practice Group. Mr. Long focuses his practice on financial institutions regulation, advising on the regulatory aspects of M&A transactions; bank regulatory compliance issues; Dodd-Frank issues, including the regulation of systemically significant financial institutions (SIFIs) and related heightened capital and liquidity requirements; resolution planning; and Volcker Rule issues with respect to bank proprietary trading and private equity and hedge fund operations. Mr. Long has concentrated on the issues raised under U.S. state and federal banking law and state money transmission law by virtual currencies. Carl E. Kennedy is Of Counsel in Gibson Dunn’s New York office and a member of the firm’s Financial Institutions, Energy, Regulation and Litigation, and Public Policy Practice Groups. Mr. Kennedy applies his prior financial services and government experience to assisting clients with myriad regulatory, legislative, compliance, investigative and litigation issues relating to the commodities and derivatives markets. Mr. Kennedy served as Special Counsel and Policy Advisor to Commissioner Scott O’Malia at the U.S. Commodity Futures Trading Commission (CFTC) where he advised the commissioner on a full range of legal, regulatory and policy matters before the CFTC. While also at the CFTC, Mr. Kennedy was Legal Counsel in the Office of the General Counsel where he played a key role in the commission’s adoption of several rulemakings and guidance implementing the Dodd-Frank Act. Jeffrey L. Steiner is Counsel in Gibson Dunn’s Washington, D.C. office and is a member of the firm’s Financial Institutions, Energy, Regulation and Litigation, Investment Funds and Public Policy Practice Groups. Mr. Steiner co-leads the firm’s Derivatives team, as well as the firm’s Digital Currencies and Blockchain Technology team. Prior to joining Gibson Dunn, Mr. Steiner was special counsel in the Division of Market Oversight at the Commodity Futures Trading Commission (CFTC) where he drafted rules that became the current regulatory framework for over-the-counter derivatives. He advises commercial end-users, financial institutions, dealers, hedge funds, private equity funds, clearinghouses, industry groups and trade associations on regulatory, legislative and transactional matters related to OTC and listed derivatives, commodities and securities, including those relating to the Dodd-Frank Act, the rules of the CFTC, the Securities and Exchange Commission (SEC), the National Futures Association and the prudential banking regulators. Mr. Steiner also advises a range of clients on issues related to digital currencies and distributed ledger technology, including analyzing regulatory and enforcement matters relating to their implementation and use. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement.  This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast.  Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.