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May 14, 2020 |
Webcast: Potential Implications of the COVID-19 Pandemic for Securities and Derivative Litigation

The COVID-19 pandemic has unfolded rapidly, causing unprecedented changes in daily life, disruption to businesses and the economy, as well as dramatic market volatility. Even as companies adjust to the new business environment, they also must remain vigilant to avoid potential exposure to securities class action and derivative action liability. In this webinar, Gibson Dunn and Cornerstone Research will discuss the potential implications of the COVID-19 pandemic for securities and derivative litigation, including the following topics:

  • The economic and other similarities and differences between this “black swan” event and other events that caused substantial market volatility, such as the 2008 financial crisis
  • Issues for companies to consider in preparing risk disclosures and discussing forward looking projections
  • Best practices for Board of Directors oversight
  • Financial reporting considerations
  • Economic analyses that are particularly relevant for COVID-19 related securities actions
View Slides (PDF)

PANELISTS: Lori Benson is a Senior Vice President and heads Cornerstone Research’s New York office. Over the course of her more than twenty years with the firm, she has prepared strategy and expert testimony in all aspects of complex commercial litigation, including trials, arbitrations, settlements, and regulatory inquiries. Ms. Benson has consulted on a wide range of cases including securities class actions, market manipulation, valuation, asset management and fixed income securities disputes. Yan Cao is a Vice President at Cornerstone Research’s New York office. Dr. Cao specializes in issues related to financial economics and financial reporting across a range of complex litigation and regulatory proceedings. Her experience covers securities, market manipulation, M&A, risk management, and bankruptcy matters. Dr. Cao has fifteen years of experience consulting on securities class actions that cover a wide variety of industries, with a focus on financial institutions. She has also worked on regulatory investigation and enforcement matters led by the SEC, the CFTC, the DOJ, the NY Fed, and state AGs. Dr. Cao is a Chartered Financial Analyst (CFA) and a Certified Public Accountant. Jennifer L. Conn is a partner in the New York office of Gibson, Dunn & Crutcher. She is a member of Gibson Dunn’s Litigation, Securities Litigation, Securities Enforcement, Appellate, and Privacy, Cybersecurity and Consumer Protection Practice Groups. Ms. Conn has extensive experience in a wide range of complex commercial litigation matters, including those involving securities, financial services, accounting, business restructuring and reorganization, antitrust, contracts, and information technology. In addition, Ms. Conn is an Adjunct Professor of Law at Columbia Law School, lecturing on securities litigation. Elaine Harwood is a Vice President at Cornerstone Research’s Los Angeles office and heads the firm’s accounting practice. She consults to clients and works with experts on securities litigation, complex enforcement matters brought by the SEC and PCAOB, and corporate investigations. She is an expert on financial accounting, financial reporting, and auditing. Dr. Harwood has served for more than twenty years as a consultant and expert on a wide range of liability and damages issues. She is a Certified Public Accountant (CPA) and is Certified in Financial Forensics (CFF) by the AICPA. Who’s Who Legal recognizes Dr. Harwood as a leading forensic accountant in the legal investigations space. Avi Weitzman is a litigation partner in the New York office of Gibson, Dunn & Crutcher. He is a member of the White Collar Defense and Investigations, Crisis Management, Securities Enforcement and Litigation, and Media, Entertainment and Technology Practice Groups. Mr. Weitzman is a nationally recognized trial and appellate attorney, with experience handling complex commercial disputes in diverse areas of law, white-collar and regulatory enforcement defense, internal investigations, and securities litigations. Prior to joining Gibson Dunn, Mr. Weitzman served for seven years as an Assistant United States Attorney in the Southern District of New York, primarily in the Securities and Commodities Fraud Task Force and Organized Crime Unit.
MCLE 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 Victoria Chan (Attorney Training Manager) at vchan@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.

April 24, 2020 |
Gibson Dunn Earns 84 Top-Tier Rankings in Chambers USA 2020

In its 2020 edition, Chambers USA: America’s Leading Lawyers for Business awarded Gibson Dunn 84 first-tier rankings, of which 31 were firm practice group rankings and 53 were individual lawyer rankings. Overall, the firm earned 302 rankings – 84 firm practice group rankings and 218 individual lawyer rankings. Gibson Dunn earned top-tier rankings in the following practice group categories: National – Antitrust National – Antitrust: Cartel National – Appellate Law National – Corporate Crime & Investigations National – FCPA National – Outsourcing National – Product Liability: Consumer Class Actions National – Real Estate National – Retail: Corporate & Transactional National – Securities: Regulation CA – Antitrust CA – IT & Outsourcing CA – Litigation: Appellate CA – Litigation: General Commercial CA – Litigation: Securities CA – Litigation: White-Collar Crime & Government Investigations CA – Real Estate: Zoning/Land Use CA (Los Angeles & Surrounds) – Employee Benefits & Executive Compensation CA – Real Estate: Northern California CA – Real Estate: Southern California CO – Litigation: White-Collar Crime & Government Investigations CO – Natural Resources & Energy DC – Corporate/M&A & Private Equity DC – Labor & Employment DC – Litigation: General Commercial DC – Litigation: White-Collar Crime & Government Investigations NY – Litigation: General Commercial: The Elite NY – Real Estate: Mainly Corporate & Finance NY – Technology & Outsourcing TX – Antitrust This year, 156 Gibson Dunn attorneys were identified as leading lawyers in their respective practice areas, with some ranked in more than one category. The following lawyers achieved top-tier rankings:  D. Jarrett Arp, Michael Bopp, Theodore Boutrous, Jessica Brown, Jeffrey Chapman, Linda Curtis, Michael P. Darden, Patrick Dennis, Mark Director, Thomas Dupree, Scott Edelman, Miguel Estrada, Stephen Fackler, Sean Feller, Eric Feuerstein, Amy Forbes, Stephen Glover, Richard Grime, Peter Hanlon, Hillary Holmes, Daniel Kolkey, Brian Lane, Jonathan Layne, Ray Ludwiszewski, Karen Manos, Randy Mastro, Cromwell Montgomery, Stephen Nordahl, Theodore Olson, Richard Parker, William Peters, Tomer Pinkusiewicz, Jesse Sharf, Orin Snyder, George Stamas, Beau Stark, Charles Stevens, Daniel Swanson, Steven Talley, Helgi Walker, Robert Walters, F. Joseph Warin, Debra Wong Yang, and Meryl Young.

March 20, 2020 |
Delaware Supreme Court Unanimously Upholds Federal-Forum Provisions

Click for PDF In Salzberg, et al. v. Sciabacucchi (“Blue Apron II”),[1] a unanimous Delaware Supreme Court, with Justice Valihura writing, confirmed the facial validity of federal-forum provisions (“FFPs”)—provisions Delaware corporations adopt in their certificates of incorporation requiring actions arising under the Securities Act of 1933 (the “1933 Act”) to be filed exclusively in federal court. The Court’s decision emphasizes the “broadly enabling” scope of both the Delaware General Corporation Law (“DGCL”) as a whole, and of Section 102(b)(1),[2] which governs the contents of a corporation’s certificate of incorporation, in particular. Rejecting facial challenges to FFPs adopted by Delaware corporations in connection with several recent IPOs, the Court held that Section 102(b)(1) authorizes corporations to adopt provisions regulating matters within an “outer band” of “intra-corporate affairs” extending beyond the “universe of internal affairs” of a Delaware corporation. In this regard, Blue Apron II may offer Delaware corporations, their boards and advisors a valuable new tool for managing complex, multidistrict litigation related to their corporate governance. Blue Apron I and the Established Scope of “Internal Corporate Claims” Blue Apron II reversed, on de novo review, the December 2018 decision of the Delaware Court of Chancery in Sciabacucchi v. Salzberg, et al. (“Blue Apron I”).[3] In Blue Apron I, a stockholder in each of Blue Apron, Inc., Roku Inc., and Stitch Fix, Inc. sought a declaratory judgment that FFPs adopted in each corporation’s certificate of incorporation in connection with their 2017 IPOs were facially invalid as a matter of Delaware law. As detailed by Vice Chancellor Laster, the basic principles underlying the holding in Blue Apron I were developed in Boilermakers,[4] ATP Tour,[5] and DGCL § 115,[6] each of which addressed bylaws for disputes involving Delaware corporations. Relying upon these authorities, the Blue Apron I court held that, despite the broad scope of DGCL § 102(b)(1), the FFPs could not validly restrict a stockholder plaintiff’s choice of forum for actions arising under the 1933 Act because such claims were “external” to the corporations at issue based upon their similarity to “a tort or contract claim brought by a third-party plaintiff who was not a stockholder at the time the claim arose.” The Court of Chancery also concluded that Section 115 implicitly narrowed Section 102(b)(1) to restrict the authority of Delaware corporations to regulating only “internal corporate claims.” Additionally, the trial court also noted, but did not reach, an argument that FFPs are invalid as a matter of public policy, because they “take Delaware out of its traditional lane of corporate governance and into the federal lane of securities regulation” and could even be preempted by federal law providing forum alternatives. The New Frontier: Intra-Corporate Affairs and the “Outer Band” of Section 102(b)(1) In Blue Apron II, the Delaware Supreme Court reversed the Court of Chancery, holding that FFPs are facially valid because such provisions “could easily fall within either of the[] broad categories [of Section 102(b)(1)],” and “do not violate the laws or policies of this State” or “federal law or policy.” In doing so, the Supreme Court rejected the Court of Chancery’s conclusions that Section 115 implicitly narrowed Section 102(b)(1) and that, under Boilermakers and ATP Tour, “everything other than an ‘internal affairs’ claim was ‘external’ and, therefore, not the proper subject of a bylaw.” Instead of such a “binary world,” the Supreme Court held that claims involving “intra-corporate affairs” under Section 102(b)(1), such as the federal antitrust claims underlying the fee-shifting bylaws in ATP Tour and certain 1933 Act claims considered hypothetically by the Court in Blue Apron II, sit on a “continuum” of corporate affairs. At one end of the spectrum is “the more traditional realm of ‘internal affairs,’” including “matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders.” At the other end are “purely ‘external’ claims,” such as tort claims and commercial contract claims.  According to the Supreme Court, the scope of matters that certificates of incorporation may properly regulate under Section 102(b)(1) falls between those poles, as it set forth in Figure 1, below. The “outer band” of Section 102(b)(1), the Court explained, extends to all “[i]ntra-corporate affairs,” which is a “universe of matters” that “is greater than the universe of internal affairs matters.” This includes FFPs “regulating the fora for Section 11 claims involving at least existing stockholders [because such claims] are neither ‘external’ nor ‘internal affairs’ claims.” Figure 1: Textual Analysis of Corporate Affairs Notwithstanding the Supreme Court’s holding that federal-forum provisions are facially valid, the Court acknowledged that the extent to which such provisions will be respected and enforced going forward by Delaware courts, and, even more critically, by other state and federal courts, will depend in large part on the unique facts and circumstances of each case. Key Takeaways Blue Apron II provides valuable guidance to Delaware litigators and board advisors on best practices for adopting FFPs and other provisions governing the procedural aspects of intra-corporate litigation pursuant to Section 102(b)(1) of the DGCL:

  • In the wake of this development, Delaware corporations that have not done so already may amend their charters to require claims under the 1933 Act to be filed in federal court.[7] After Cyan was decided in 2018, the filing of 1933 Act claims in state courts increased significantly.[8] Given that such claims cannot be removed to federal court under Cyan, corporations have increasingly been mired in unnecessarily costly, and sometimes duplicative, state and federal court litigation throughout the country.
  • The Supreme Court in Blue Apron II quells “concern that if [FFPs were] upheld, the ‘next move’ might be forum provisions that require arbitration of internal corporate claims,” explicitly reasoning that “[s]uch provisions, at least from [Delaware] state law perspective, would violate Section 115 . . . .” But it is not yet clear whether practitioners will continue to push to include arbitration as an exclusive means to resolve certain intra-corporate disputes lying within the “outer bound” of Section 102(b)(1).
  • Although Delaware law prohibits Delaware corporations from adopting mandatory arbitration provisions in their certificates of incorporation or bylaws, it remains to be seen whether other states will follow suit. States competing for Delaware’s franchise might attempt to attract corporations by authorizing such arbitration provisions to minimize the burden and cost of litigation.
  • FFPs clearly benefit stockholders by minimizing wasteful multi-jurisdictional litigation over many disputes involving the corporations they own. Nonetheless, corporate directors and officers should anticipate that some stockholders may be wary of the provisions, including broader FFPs adopted or approved under Blue Apron II. This decision should serve as a reminder that corporations may be well advised to engage with key stockholders to discuss the benefits these provisions provide before their adoption.
____________________       [1]     Salzberg, et al. v. Sciabacucchi, No. 346, 2019 (Del. Mar. 18, 2020) [hereinafter “Blue Apron II”)].       [2]    8 Del. C. § 102(b)(1) (“[T]he certificate of incorporation may also contain . . . [a]ny provision for the management of the business and for the conduct of the affairs of the corporation , and any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders . . . .”).       [3]   Sciabacucchi v. Salzberg, et al., 2018 WL 6719718 (Del. Ch. Dec. 19, 2018) [hereinafter “Blue Apron I”].       [4]   Boilermakers Local 154 Retirement Fund v. Chevron, 73 A.3d 934, 942, 952 (Del. Ch. 2013).       [5]    ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014).       [6]   8 Del. C. § 115 (“‘Internal corporate claims’ means claims, including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery.”).       [7]   Blue Apron II does not address the applicability of an FFP to claims arising under the Securities Exchange Act of 1934 (the “1934 Act”), which unlike the 1933 Act vests exclusive jurisdiction with federal courts and does not include a bar to removing claims improperly filed in state court.  Compare 15 U.S.C. 78aa(a) (1934 Act), with 15 U.S.C. 77v (1933 Act).       [8]   Stanford L. Sch. Sec. Class Action Clearinghouse & Cornerstone Research, Sec. Class Action Filings 2019 Year in Review 4 (2020).
The following Gibson Dunn lawyers assisted in the preparation of this client update: James Hallowell, Jason J. Mendro, Brian M. Lutz, Mark H. Mixon, Jr., Sam Berman and Andrew Kuntz. 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, any of the following practice group leaders and members, or the authors: James L. Hallowell - New York (+1 212-351-3804, jhallowell@gibsondunn.com) Jason J. Mendro - Washington, D.C. (+1 202-887-3726, jmendro@gibsondunn.com) Brian M. Lutz - San Francisco/New York (+1 415-393-8379/+1 212-351-3881, blutz@gibsondunn.com) Mark H. Mixon, Jr. - New York (+1 212-351-2394, mmixon@gibsondunn.com) Securities Litigation Group: 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) Jefferson Bell - New York (+1 212-351-2395, jbell@gibsondunn.com) Paul J. Collins - Palo Alto (+1 650-849-5309, pcollins@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) Mark A. Kirsch - New York (+1 212-351-2662, mkirsch@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) Securities Enforcement Group: Richard W. Grime - Washington, D.C. (+1 202-955-8219, rgrime@gibsondunn.com) Barry R. Goldsmith - New York (+1 212-351-2440, bgoldsmith@gibsondunn.com) Mark K. Schonfeld - New York (+1 212-351-2433, mschonfeld@gibsondunn.com) Securities Regulation and Corporate Governance Group: Elizabeth Ising - Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) James J. Moloney - Orange County, CA (+ 949-451-4343, jmoloney@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 11, 2020 |
Webcast: Shareholder Litigation Developments and Trends

Shareholder lawsuits are not only complicated to litigate, but due to the high financial stakes, these actions can be among the most threatening to a company and its directors and officers. It has been twenty-five years since Congress enacted the Private Securities Litigation Reform Act of 1995, and since that time, private actions under the federal securities laws have continued to be filed at a steady pace. Over the last decade, the U.S. Supreme Court and the State Supreme Courts have issued multiple decisions impacting the way shareholder actions are litigated and decided. This one-hour briefing highlights recent developments and trends in this constantly evolving and complex area of the law. Faculty discuss:

  • Shareholder actions filing and settlement trends
  • Discussion of scheme liability claims following the U.S. Supreme Court’s ruling in Lorenzo v. SEC (2019)
  • Update on trends in 1933 Act litigation in state courts in the wake of the Supreme Court’s ruling in Cyan v. Beaver County Employees Retirement Fund (2018), including various state courts’ rulings on such threshold questions as:
    • application of the PSLRA’s automatic stay of discovery pending resolution of a motion to dismiss
    • motions to stay state court actions in favor of parallel federal proceedings concerning the same issuer
    • the pleading standards applicable to 1933 Act claims in state courts
View Slides (PDF)

PANELISTS: Jennifer L. Conn is a partner in the New York office of Gibson, Dunn & Crutcher. Ms. Conn is a co-editor of PLI’s Securities Litigation: A Practitioner’s Guide, Second Edition. She has extensive experience in a wide range of complex commercial litigation matters, including those involving securities, financial services, accounting malpractice, antitrust, contracts, insurance and information technology. She is also a member of Gibson Dunn’s General Commercial Litigation, Securities Litigation, Appellate, and Privacy, Cybersecurity and Consumer Protection Practice Groups. Alexander K. Mircheff is a partner in the Los Angeles office of Gibson, Dunn & Crutcher. Mr. Mircheff is a co-author of PLI’s Securities Litigation: A Practitioner’s Guide, Second Edition. His practice emphasizes securities and appellate litigation, and he has substantial experience representing issuers, officers, directors, and underwriters in class action and shareholder derivative matters. Mr. Mircheff has handled matters across a variety of industries, including biotech, financial services, accounting, real estate, entertainment, engineering, manufacturing, and consumer products. He is also a member of Gibson Dunn’s Securities Litigation, Appellate, Class Actions, Labor and Employment and Litigation Practice Groups. Robert F. Serio is a partner in the New York office of Gibson, Dunn & Crutcher and a Co-Chair of Gibson Dunn’s Securities Litigation Practice Group. Mr. Serio is also a co-editor of PLI’s Securities Litigation: A Practitioner’s Guide, Second Edition. His practice involves complex commercial and business litigation, with an emphasis on securities class actions, shareholder derivative litigation, SEC enforcement matters and corporate investigations. He is also a member of the Appellate, Class Actions, FCPA, and White Collar Defense and Investigations Practice Groups.
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 Victoria Chan (Attorney Training Manager) at vchan@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.

February 26, 2020 |
Supreme Court Holds That Unread ERISA Plan Disclosures Do Not Give Participants Actual Knowledge Of The Information Disclosed

Click for PDF Decided February 26, 2020 Intel Corp. Investment Policy Committee v. Sulyma, No. 18-1116 Today, the Supreme Court unanimously held that a fiduciary’s disclosure of plan information alone does not trigger ERISA’s three-year limitations period in fiduciary breach cases. “Actual knowledge” sufficient to trigger this limitations period requires participants be “aware of” the disclosed information.

Background: Section 413(2) of the Employee Retirement Income Security Act of 1974 (ERISA) requires that claims for breach of fiduciary duty be brought no later than “three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation.” 29 U.S.C. § 1113(2). Absent “actual knowledge,” breach of fiduciary duty claims under ERISA must be brought within six years of the breach or violation. In 2015, Christopher Sulyma, a former Intel employee, sued multiple retirement plans, claiming that his retirement plans improperly overinvested in alternative investments. More than three years, but less than six years, before that suit was filed, Sulyma received disclosures that explained the investments Sulyma claimed were imprudent. The Ninth Circuit held that the disclosures did not trigger the three-year bar because Sulyma testified he had not read the disclosures and Intel had not established Sulyma had subjective awareness of what was disclosed. The United States filed an amicus brief in support of Sulyma defending that position and participated in oral argument.

Issue: Whether the ERISA three-year limitations period in Section 413(2), which runs from “the earliest date on which the plaintiff had actual knowledge of the breach or violation,” bars suit when all relevant information was disclosed to the plaintiff more than three years before the plaintiff filed the complaint, but the plaintiff chose not to read, or could not recall having read, the information.

Court’s Holding: No. A plan participant has “actual knowledge of the breach” only if the participant was “aware of” the relevant plan information. Disclosure of plan information alone does not trigger the three-year limitations period in Section 413(2).

“[T]o have ‘actual knowledge’ of a piece of information, one must in fact be aware of it.”

Justice Alito, writing for the unanimous Court Gibson Dunn submitted an amicus brief on behalf of the National Association of Manufacturers, the Chamber of Commerce of the United States, the Securities Industry and Financial Markets Association, the American Benefits Counsel, the ERISA Industry Committee, and the American Retirement Association in support of petitioner: Intel Corp. Investment Policy Committee What It Means:
  • Applying the ordinary meaning of “actual knowledge,” the Court reasoned that a plaintiff cannot have “actual knowledge” of materials he has not read, “however close at hand the fact might be.” The Court acknowledged that the plain meaning of “actual knowledge” would substantially diminish protections for ERISA fiduciaries, but held that this policy consideration was best left to Congress.
  • As a result of the Court’s opinion, retirement plans and employers may now be subject to more lawsuits and greater litigation costs because participants need only allege that they did not read plan documents to expand the ERISA statute of limitations from three to six years.
  • The Court emphasized that today’s opinion does not preclude a showing of “actual knowledge” through inference from circumstantial evidence, nor does it preclude defendants from contending that evidence of “willful blindness” supports a finding of “actual knowledge.” Litigating these issues will require individualized factual inquiries that may pose an obstacle to class certification.
  • The Court left open what a plaintiff must “actually know” about a defendant’s conduct to trigger the three-year limitations period.
  • This “actual knowledge” standard may be helpful to corporations and other defendants in securities and fraud cases. Relying on this holding, defendants may argue that a plaintiff must establish awareness of relevant information to prove scienter.

The Court's opinion is available here.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders:

Appellate and Constitutional Law Practice

Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Miguel A. Estrada +1 202.955.8257 mestrada@gibsondunn.com

Related Practice: Securities Litigation

Robert F. Serio +1 212.351.3917 rserio@gibsondunn.com Daniel J. Thomasch +1 212.351.3800 dthomasch@gibsondunn.com Brian M. Lutz +1 415.393.8379 blutz@gibsondunn.com
© 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 18, 2020 |
2019 Year-End Securities Litigation Update

Click for PDF The number of securities cases filed in federal court continued at a furious pace for the third year in a row. This year-end update highlights what you most need to know in securities litigation trends and developments for the last half of 2019:

  • Oral argument in Liu v. SEC, No. 18-1501, is scheduled for March 3, 2020, when the Supreme Court will consider the power of the SEC—and potentially, by extension, other federal agencies—to order “equitable disgorgement” in light of the Supreme Court’s prior ruling in Kokesh v. SEC, 137 S. Ct. 1635 (2017).
  • Anticipation for the Supreme Court’s decision in Jander—a case expected to examine the intersection of federal securities laws and ERISA—fizzled recently when the Supreme Court vacated and remanded for the Second Circuit to consider issues not resolved by its prior decision.
  • Developments in the Delaware Court of Chancery include continued scrutiny of relationships between directors for purposes of independence analyses, consideration of when a stockholder letter constitutes a formal demand to take corrective actions, and determining whether a buyer is excused from closing on an acquisition when the target discovers that FDA approval of its only product is at risk because of its own officer’s fraud.
  • Although no defendant has been found liable as a “disseminator” since the Supreme Court’s 2019 decision in Lorenzo, trial courts and the Tenth Circuit have begun to grapple with the case’s important implications.
  • We continue to observe Omnicare’s falsity of opinions standard developing into a formidable pleading barrier to securities fraud claims, with both the Eleventh and Fifth Circuits recently upholding dismissals at the pleadings stage.
  • Although the federal circuit courts of appeals did not provide any new guidance on “price impact” theories under Halliburton II during the second half of 2019, we expect the Second Circuit will soon reach a decision in Goldman Sachs II, which has been under consideration since June.
  • Finally, New York recently amended the statute of limitations for Martin Act claims, extending it from three years to six years.

I.  Filing and Settlement Trends

Data from a newly released NERA Economic Consulting (“NERA”) study shows that 2019 was a year largely unchanged from 2018. To start, the number of new federal class action cases filed in 2019 was equal to 2018, which buttressed a trend of increased filings that began in 2017. There has also been a continuation of the shift in the types of cases filed. The number of Rule 10b-5, Section 11 and Section 12 cases increased slightly in 2019, with 31 more filings than in 2018, while the number of merger objection cases fell. The median settlement values of federal securities cases for 2019—excluding merger-objection cases and cases settling for more than $1 billion or $0 to the class—was roughly equivalent to those in 2018 (at $13 million, up from $12 million in 2018). However, average settlement values were down by more than 50% (at $30 million, down from $71 million in 2018). This discrepancy is due in large part to the settlement of one case in 2018 exceeding $1 billion. Excluding such an outlier, we see only a slight increase in average settlement values compared to the prior two years. The industry sectors most frequently sued in 2019 continue to be the “Health Technology and Services” and “Electronic Technology and Technology Services” sectors, although 2019 saw the continuation of a downward trend in cases filed against healthcare companies following a spike in 2016.

A.  Filing Trends

Figure 1 below reflects filing rates for 2019 (all charts courtesy of NERA). Four hundred and thirty-three cases were filed this past year, exactly matching the number of cases filed in 2018 and similar to the number of filings in 2017. However, this figure does not include the many class action suits filed in state courts or the rising number of state court derivative suits, including those filed in the Delaware Court of Chancery. Figure 1: Figure 1

B.  Mix of Cases Filed in 2019

1.  Filings by Industry Sector

As seen in Figure 2 below, the split of non-merger objection class actions filed in 2019 across industry sectors is fairly consistent with the distribution observed in 2018, with few indications of significant shifts or increases in particular sectors. As in 2018, the “Health Technology and Services” and the “Electronic Technology and Technology Services” sectors accounted for over 40% of filings, although there was a slight drop in “Health Technology and Services”-related filings (at 21%, down from 25% in 2018). The other two sectors reflecting the largest changes from 2018 are “Process Industries” (at 4%, up from 1% in 2018) and “Consumer and Distribution Services” (at 6%, down from 9% in 2018). Figure 2: Figure 2

2.  Merger Cases

As shown in Figure 3 below, there were 170 merger objection cases filed in federal court in 2019. Although this is a 15% decrease from the number of such cases filed in 2018, the 170 filings continue the overall trend of a substantial increase in merger objection suits being filed in federal court after 2016, when the Delaware Court of Chancery put an effective end to the practice of disclosure-only settlements in In re Trulia Inc. Stockholder Litigation, 29 A.3d 884 (Del. Ch. 2016). Figure 3: Figure 3

C.  Settlement Trends

As Figure 4 shows below, the average settlement value in 2019 declined by more than 50% from $71 million in 2018 to $30 million, but still remained higher than the average of $26 million in 2017. This decrease in the average settlement value can primarily be attributed to the inclusion of a settlement in 2018 that exceeded $1 billion, thereby skewing the average for that year. If our analysis is limited to cases with settlements under $1 billion, there actually is a slight increase in the average settlement value in 2019 compared to the prior years. Figure 4: Figure 4 As Figure 5 shows, the median settlement value in 2019 was $13 million, which is similar to the median in 2018 ($12 million) and almost double the median value in 2017 ($7 million). Figure 5: Figure 5 As shown in Figure 6, the Median NERA-Defined Investor Losses and Median Ratio of Actual Settlement to Investor Losses by Settlement Year remained steady in 2019 at $472 million, following a return in 2018 to a number similar to those recorded during the period 2014 through 2016. Figure 6: Figure 6 Finally, Figure 7 shows that 2018 saw increases in the percentage of settlements in the $10 to $19.9 million range, $50 to 99.9 million range, and $100+ million range. The perecentage of settlements in the $20 to $49.9 million range returned to virtually the same level that at which it was located in 2017, after experiencing a significant bump in 2018. Figure 7: Figure 7

II.  What to Watch for in the Supreme Court

A.  Disgorgement in SEC Enforcement Actions

On November 1, 2019, the Supreme Court granted certiorari in Charles C. Liu and Xin Wang A/K/A Lisa Wang v. SEC, No. 18-1501, to review a Ninth Circuit decision affirming summary judgment for the Securities and Exchange Commission (“SEC”) on a claim of securities fraud under Section 17(a)(2) of the Securities Act and ordering disgorgement of the entire amount that the petitioners had raised from investors. Liu and Wang formed and controlled corporate entities presumably to build and operate a proton therapy cancer treatment center in Montebello, California. Liu financed the prospective cancer center with $27 million of international investments raised through the EB–5 Immigrant Investor Program—which allows foreigners to obtain permanent residency in the U.S. by investing at least $500,000 in a “Targeted Employment Area,” thereby creating at least 10 full-time jobs for U.S. workers. Instead of pursuing proton therapy, Liu funneled over $20 million of investor money to himself, his wife Wang, and marketing companies associated with them. In fact, the bulk of the millions of dollars transferred occurred shortly after the SEC subpoenaed Liu as part of its initial investigation in February 2016. No permit was ever issued for the construction of the treatment center. The SEC sought summary judgment on three securities fraud causes of action against the defendants but the district court addressed only the Section 17(a)(2) claim, given that it was a sufficient basis for the remedies sought by the SEC. See SEC v. Liu, 262 F. Supp. 3d 957, 970 (C.D. Cal. 2017). The SEC asked the court to, inter alia, order disgorgement of the total amount raised from the investors ($27 million) less the amount left over and available to be returned ($200,000). On the basis of its broad equitable power to order disgorgement of ill-gotten gains, and further discretion to indicate the amount to be disgorged, the court granted the relief sought by the SEC. See id. at 975. On appeal to the Ninth Circuit, defendants argued that the district court’s disgorgement order was erroneous. SEC v. Liu, 754 F. App’x 505, 509 (9th Cir. 2018). Relying on Kokesh v. SEC, 137 S. Ct. 1635 (2017), defendants asserted that the district court lacked the power to order the disgorgement. Liu, 754 F. App’x at 509. In Kokesh, the Supreme Court held that disgorgement operates as a penalty, and any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued. See Kokesh, 137 S. Ct. at 1645. Reviewing for abuse of discretion, the Ninth Circuit concluded that Kokesh expressly did not address the issue of whether a court had the equitable power to order disgorgement, thereby distinguishing it from Ninth Circuit precedent on this matter. See Liu, 754 F. App’x at 509. In their petition for a writ of certiorari, Liu and Wang specifically questioned the equitable power to award disgorgement in the wake of Kokesh. They argued that circuit courts need guidance after Kokesh, and also challenged the use of what was characterized as “equitable disgorgement” by other agencies, including the FTC and the EPA. The Kokesh Court—in providing a historical summary of the SEC’s enforcement powers—seemed to express disapproval of the SEC’s continued use of disgorgement in enforcement proceedings. See 137 S. Ct. at 1640 (“The Act left the Commission with a full panoply of enforcement tools: It may promulgate rules, investigate violations of those rules and the securities laws generally, and seek monetary penalties and injunctive relief for those violations. In the years since the Act, however, the Commission has continued its practice of seeking disgorgement in enforcement proceedings.”). Oral argument is scheduled for March 3, 2020. Based on the merits brief, it seems possible that the Court could issue a ruling further curtailing the SEC’s reliance on the disgorgement remedy in civil enforcement actions.

B.  Intersection Between Securities Laws and ERISA

On June 3, 2019, the Supreme Court granted certiorari in Retirement Plans Committee of IBM v. Jander, No. 18-1165. Fiduciaries of the IBM retirement plan had sought review of the Second Circuit’s decision, which reversed the district court’s dismissal of retirement plan participants’ putative class complaint alleging that the Committee members breached their duties of prudence and loyalty under ERISA by continuing to invest in IBM stock while in possession of inside information about the company’s supposedly fraudulent practices. IBM offers its employees an ERISA-qualified employee stock ownership plan (“ESOP”), which invests primarily in IBM common stock. See Jander v. Ret. Plans Comm. of IBM, 910 F.3d 620, 622 (2d Cir. 2018). Employees sued, arguing that plan fiduciaries (who were company insiders) breached their duty of prudence under ERISA by continuing to invest the plan in IBM stock despite allegedly knowing its market price was artificially inflated due to the company’s concealment of troubles in IBM’s microelectronics business. See id. at 622–23. Employees claimed that fiduciaries should either have disclosed the issues with the business’s valuation or frozen further investment in IBM stock. See id. at 623. The district court dismissed the employees’ complaint for failure to state a claim because they failed to meet the pleading standard set forth in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 428 (2014), which requires ERISA plaintiffs to “plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.” After employees amended their complaint to allege that disclosure of the fraud was inevitable and the harm of such disclosure would generally increase over time, as well as adding another possible alternative action fiduciaries could have taken, the district court again dismissed under Dudenhoeffer, because fiduciaries could reasonably conclude that all three alternatives would cause more harm than good.  See Jander v. Ret. Plans Comm. of IBM, 272 F. Supp. 3d 444, 451–54 (S.D.N.Y. 2017). The Second Circuit reversed, holding that “when a ‘drop in the value of the stock already held by the fund’ is inevitable, . . . it is far more plausible that a prudent fiduciary would prefer to limit the effects of the stock’s artificial inflation on the ESOP’s beneficiaries through prompt disclosure.” Jander, 910 F.3d at 630 (citation omitted) (quoting Dudenhoeffer, 573 U.S. at 430). The Second Circuit found that the employees therefore met the Dudenhoeffer standard by alleging, in part, research suggesting that the employees’ losses would have been smaller if negative information were disclosed promptly. Id. at 629–30. Plan fiduciaries petitioned for a writ of certiorari. After certiorari was granted, the fiduciaries (and the Solicitor General, on behalf of the SEC and the Department of Labor) focused on other arguments in their merits briefing. See Ret. Plans Comm. of IBM v. Jander, 2020 WL 201024, at *1 (U.S. Jan. 14, 2020) (per curiam). The fiduciaries argued for a bright-line rule that ERISA could never impose a duty on them to act on inside information. Id. The Government argued that requiring fiduciaries to disclose inside information under ERISA that is not otherwise required to be disclosed by the securities laws would conflict with the complex disclosure requirements imposed by those laws. Rather than resolve the questions presented on the pleading standard in breach of fiduciary duty cases involving employee-benefit plans, on January 14, 2020 the Supreme Court vacated and remanded back to the Second Circuit for consideration of the issues raised in the merits briefing that were not resolved by the previous decision. Id. at *2. In remanding, the Court referenced its statement in Dudenhoeffer that the SEC’s views “might ‘well be relevant’ to discerning the content of ERISA’s duty of prudence in this context.” Id. (quoting Dudenhoeffer, 573 U.S. at 429). Justice Kagan authored a concurring opinion, joined by Justice Ginsburg, noting that the Second Circuit could refuse to hear these new arguments if they were not properly preserved. Id. (Kagan, J., concurring). And if the Second Circuit did choose to address them, Justice Kagan opined that they would be hard to square with Dudenhoeffer, as that case “makes clear that an ESOP fiduciary at times has . . . a duty” to act on insider information given that it “sets out exactly what a plaintiff must allege to state a claim that the fiduciary breached his duty of prudence by ‘failing to act on inside information.’” Id. (quoting Dudenhoeffer, 573 U.S. at 423). Justice Kagan disagreed with the Government’s argument that ERISA only imposes such a duty when already imposed by the securities laws, explaining that Dudenhoeffer only holds that there is no duty to disclose when it would “violat[e],” or “conflict[]” with the “requirements” or “objectives” of those laws. Id. (quoting Dudenhoeffer, 573 U.S. at 428–29). Justice Kagan therefore left open the possibility that disclosure might be required under ERISA “even if the securities laws do not require it,” positing that in such a “conflict-free zone” the question would be whether a “prudent fiduciary would think the action more likely to help than to harm the fund.” Id. (citing Dudenhoeffer, 573 U.S. at 428). Justice Gorsuch also authored a concurring opinion, disagreeing with Justice Kagan’s “broad[]” reading of Dudenhoeffer, and noting that the “pure question of law” raised in the case should be “addressed immediately.” Id. at *3 (Gorsuch, J., concurring). Under Justice Gorsuch’s view, Dudenhoeffer does not impose liability on plan fiduciaries for “alternative actions they could have taken only in a nonfiduciary capacity.” Id. As Jander involves important questions regarding the fiduciary duties of pension plan managers who invest in company stock, including the intersection between the securities laws and ERISA, readers can expect that this will not be the Supreme Court’s last word on the issue.

III.  Delaware Developments

A.  The Delaware Court of Chancery Continues to Scrutinize Relationships Between Directors

Over the last several years, Delaware courts have reviewed independence among directors with seemingly increased scrutiny.  See, e.g., Marchand v. Barnhill, 212 A.3d 805 (Del. 2019) (director’s 28-year relationship with CEO’s family rebutted presumption of independence); Sandys v. Pincus, 152 A.3d 124 (Del. 2016) (director’s 50-year friendship with controller rebutted presumption of independence); Del. Cty. Emps. Ret. Fund v. Sanchez, 124 A.3d 1017 (Del. 2015) (director and controller’s co-ownership of airplane rebutted presumption of independence).  The Court of Chancery continued that apparent trend in In re BGC Partners, Inc., where it closely scrutinized the relationships between the members of BGC’s board of directors and the company’s controller. 2019 WL 4745121, at *1 (Del. Ch. Sept. 30, 2019). In BGC, stockholders of BGC purported to bring a derivative action against its controlling stockholder—who also served as its Chairman and CEO—and other directors based on the theory that the controller caused BGC to acquire and overpay for another company in which the controller owned a controlling stake. Id. at *1–2. As the controller’s interest in the transaction was conceded, the court’s analysis of whether the plaintiffs adequately pleaded demand futility and rebutted the business judgment rule turned on whether a majority of BGC’s directors were interested in the proposed transaction or lacked independence with respect to the controller. Id. at *9. Based on a deep dive into three particular directors’ professional and personal connections to the controller, id. at *10–14, the court held that it could infer that a majority of directors lacked independence, id. at *9. For the first director, the court noted that he had a 20-year professional and personal relationship with the controller, including attending galas with each other’s families and the controller’s setting up a private tour of a museum for the director’s family. Id. at *11–12. For the second and third directors, the court focused on their service on the boards of other companies affiliated with the controller and how their income from this service was likely to be material relative to their other sources of income. Id. at *12–14. The Court also referenced both of these directors’ ties to a college to which the controller had made substantial donations. Id. Although one director was no longer affiliated with that college, the court explained that past benefits could be enough to create a sense of obligation to the controller. Id. at *12.

B.  Court of Chancery Interprets Demand Letter

Whether a stockholder’s letter to the board is a “demand” affects the standard of review applicable to any litigation arising from that letter. If the letter is indeed a demand, then, under Delaware law, the stockholder has “tacitly concede[d]” that the board was able to exercise its business judgment in considering it. Spiegel v. Buntrock, 571 A.2d 767, 777 (Del. 1990). In Solak v. Welch, 2019 WL 5588877 (Del. Ch. Oct. 30, 2019), the Delaware Court of Chancery held that a stockholder’s letter was a “demand” even though it did not expressly demand litigation. The stockholder plaintiff in Solak sent a letter to the company’s board of directors “to suggest that the [board] take corrective action to address excessive director compensation as well as compensation practices and policies pertaining to directors.” Solak, 2019 WL 5588877, at *2. The letter asserted that the company’s compensation policy “lacks any meaningful limitations” and “warn[ed]” that “[t]he company is more susceptible than ever to shareholder challenges unless it revises or amends its director compensation practices and policies.” Id. The letter “suggest[ed]” that the board “take immediate remedial measures” and stated that the plaintiff “would consider ‘all available stockholder remedies’” if the board failed to respond within 30 days. Id. But the letter also included a footnote saying that “nothing contained herein shall be construed as a pre-suit litigation demand under Delaware Chancery Rule 23.1,” and that “[w]e do not seek or expect the board to initiate any legal action against its members.” Id. The board sent a response letter explaining that it viewed the stockholder letter as a demand, and declined to take any of the remedial actions suggested in the stockholder letter. Id. at *3. So the stockholder sued, purporting to assert derivative claims. Id. At issue was whether the letter counted as a “demand” on the board. Id. at *4. The court explained that a pre-suit communication need not expressly demand litigation to be deemed a demand. Id. at *5–6. Rather, the letter need only “clearly articulat[e] the remedial action to be taken by the board” or “clearly demand[] corporate action.” Id. at *5. The letter’s “strong overtures of litigation” and suggested remedial measures met this test, notwithstanding its footnote purportedly disclaiming that it was a demand. Id. at *6–7. And because the letter was a demand, the strict demand-refused standard applied, which the plaintiff could not overcome. Id. at *8–9.

C.  Despite Akorn, an MAE Is Still a Rare Event Requiring a Buyer to Carry a Heavy Burden

As we discussed in our 2018 Year-End Securities Litigation Update, in 2018, the Delaware Supreme Court affirmed the Court of Chancery’s conclusion that a buyer had proven it properly terminated a merger agreement because the target had suffered a “material adverse effect” (or “MAE”)—a first for both courts. See Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347 (Del. Ch. Oct. 1, 2018), aff’d, 198 A.3d 724 (Del. 2018). As the Court of Chancery explained, the test for an MAE is “whether there has been an adverse change in the target’s business that is consequential to the company’s long-term earnings power over a reasonable period, which one would expect to be measured in years rather than months.” Id. at *53. In Channel Medsystems, the first case since Akorn to consider whether an MAE had occurred, the Court of Chancery confirmed that triggering an MAE clause remains a high bar. Channel Medsystems, Inc. v. Boston Scientific Corp., 2019 WL 6896462 (Del. Ch. Dec. 18, 2019). In that case, Boston Scientific sought to be relieved from its agreement to acquire Channel after Channel learned and disclosed that fraud committed by its Vice President of Quality put at risk FDA approval of its only device even though “the FDA [had] accepted Channel’s remediation plan” and “made the FDA’s approval a distinct possibility.” Id. at *1. Indeed, one month before trial in Channel Medsystems, and “consistent with the timeframe for receiving FDA approval the parties expected when they entered into the [merger agreement],” the FDA approved the device. Id. The Court of Chancery concluded that “Boston Scientific failed to prove based on both qualitative and quantitative factors that it was entitled to terminate [the parties’ agreement].” Id. at *36. First, the court considered whether Boston Scientific held, at the time it purported to terminate the deal, “a reasonable expectation” that Channel “would reasonably be expected” to suffer a qualitatively significant adverse effect as of the closing date. Id. at *25, *29. But the court found virtually no contemporaneous evidence suggesting that Boston Scientific held such an expectation. Id. at *33. To the contrary, Boston Scientific had failed to take any reasonable steps to make an informed decision regarding the likely impact of the fraud on Channel and instead had relied solely on a report provided by Channel, which actually concluded the fraud had no impact on the device. Id. at *29–30. Second, the court rejected Boston Scientific’s attempt to demonstrate the quantitative impact of the fraud on Channel’s value to Boston Scientific as of the date that the merger agreement was signed. Id. at *34. The court did so in large part because Boston Scientific based its expert’s analysis on assumptions that were not objectively reasonable. Id. In particular, Boston Scientific’s expert assumed that Channel’s only product would have to be held off the market for two to four years for remediation and retesting. Id. The court found that this assumption was not objectively reasonable, however, because “Boston Scientific’s own track record and the testimony of its own witnesses belie[d] the contention that it was necessary to remediate an retest [the device] before placing it on the market given the FDA’s approval of the device.” Id. at *28–29, 35.

IV.  Lower Courts Grappling with Implications of Lorenzo

As we discussed in our 2019 Mid-Year Securities Litigation Update, on March 27, 2019, the Supreme Court held in Lorenzo v. SEC, 139 S. Ct. 1094 (2019), that those who disseminate false or misleading information to the investing public with the intent to defraud can be found liable under Section 17(a)(1) of the Securities Act and under Exchange Act Rules 10b-5(a) and 10b-5(c), even if the disseminator did not “make” the statements and was thus not subject to enforcement under Rule 10b-5(b). Importantly, in Lorenzo, the Court stated that “[t]hose who disseminate false statements with intent to defraud are primarily liable under Rules 10b-5(a) and (c),” as well as Section 10(b) of the Exchange Act and Section 17(a)(1) of the Securities Act, “even if they are secondarily liable under Rule 10b-5(b).” Lorenzo, 139 S. Ct. at 1104. This holding raises the possibility that secondary actors could face liability under Exchange Act Rules 10b-5(a) and 10b-5(c) simply for disseminating the alleged misstatement of another if a plaintiff can show that they knew the statements contained false or misleading information. Although this issue has yet to come up in other cases, over the last year, three lower federal courts have grappled with how to apply Lorenzo in other ways. First, in April 2019, the Southern District of New York relied on Lorenzo to find that the SEC had adequately pleaded scheme liability under Rule 10b-5(a) and (c) even though it had alleged no deceptive act other than misstatements or omissions. SEC v. SeeThruEquity, LLC, 2019 WL 1998027 (S.D.N.Y. Apr. 26, 2019). The defendants, a stock research company and its co-founders, were accused of failing to disclose that they were paid by a company that they were recommending in their research reports. Id. at *1–3. They argued the SEC could not plead “scheme liability” under Rule 10b-5 because they had been accused of no deceptive acts beyond the misstatements themselves. Id. at *5. The court rejected this argument, stating that “[t]he complaint alleges that the defendants’ entire business model, beyond any misstatements or omissions, is deceptive.” Id. Then, in August 2019, the Tenth Circuit expanded Lorenzo further, holding that scheme liability could be found based on a failure to correct a misstatement. See Malouf v. SEC, 933 F.3d 1248 (10th Cir. 2019). In Malouf, the defendant had occupied two key positions at separate firms—one was a branch of the broker-dealer firm Raymond James Financial Services (“Raymond James”) and the other, UASNM, Inc. (“UASNM”), provided clients with investment advice. Id. at 1253–54. After Raymond James became concerned about the defendant’s dual role at the two firms, the defendant sold his Raymond James branch, which was to be paid for in installments based on the branch’s “collection of securities-related fees.” Id. at 1254. To collect on the sale, the defendant routed bond trades for his UASNM clients through the Raymond James branch so that the branch’s buyer could pay the defendant back with money accrued through commissions. Id. The defendant did not disclose this arrangement to anyone at UASNM, which publicly touted that it provided its clients with “impartial advice untainted by any conflicts of interest.” Id. Meanwhile, the defendant also helped decide what UASNM would include in its public disclosures, but “took no steps to remedy UASNM’s misstatements or to disclose his own conflict of interest.” Id. at 1254–55. Ultimately, after an outside consultant caught wind of the conflict, it was disclosed. Id. at 1255. During an enforcement action, the administrative law judge found that the defendant had violated, among other things, Section 17(a)(1) of the Securities Act and Exchange Act Rules 10b-5(a) and 10b-5(c). Id. On appeal, the Tenth Circuit affirmed. Id. at 1253. In connection with Section 17(a)(1) of the Securities Act and Exchange Act Rules 10b-5(a) and 10b-5(c), the court stated “we conclude that [the defendant’s] failure to correct UASNM’s misstatements could trigger liability” because, under Lorenzo, “a person could incur liability under these provisions when the conduct involves another person’s false or misleading statement.” Id. at 1259–60 (citing 139 S. Ct. at 1101–03). In other words, the panel accepted that the defendant was liable because, although he did not disseminate UASNM’s alleged misstatements, he failed to correct the relevant disclosures that he knew were false. Finally, in December 2019, in EnSource Investments LLC v. Willis, 2019 WL 6700403 (S.D. Cal. Dec. 6, 2019), a court found that Lorenzo did not apply to entities involved in an allegedly fraudulent scheme because those entities had not “disseminated any false statements.” Id. at *13. In EnSource, two entities were “under the umbrella” of another company and its founder, both of whom were defendants in the case. Id. at *1. The founder and parent company were found to have made misstatements “on behalf” of the entities. Id. at *13. Rather than holding that these entities had a duty under Lorenzo to correct the misstatements made on their behalf, the EnSource court simply found that because the entities did not disseminate the misstatements, Lorenzo did not apply. Id. at *13. It remains to be seen whether cases such as SeeThruEquity or Malouf will be confined to their facts or whether courts will adopt or expand on these holdings to increase the reach of scheme liability. We will, of course, provide an update on the direction that courts take Lorenzo and scheme liability in our 2020 Mid-Year Securities Litigation Update.

V.  Falsity of Opinions – Omnicare Update

As we discussed in our prior securities litigation updates, lower courts continue to explore application of the standard set forth in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 575 U.S. 175 (2015), for determining falsity of an opinion. In its Omnicare decision, the Supreme Court addressed the scope of liability for false opinion statements under Section 11 of the Securities Act and 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 186. According to that standard, an opinion statement can give rise to liability only when the speaker does not “actually hold[] the stated belief,” or when the opinion statement contains “embedded statements of fact” that are untrue. Id. at 184–85. In the “omission” section of the opinion, the Court held that a factual omission “about the issuer’s inquiry into or knowledge concerning a statement of opinion” gives rise to liability when the omitted facts “conflict with what a reasonable investor would take from the statement itself.” Id. at 1329. Omnicare’s falsity of opinions standard continues to serve as a significant pleading barrier to securities fraud claims. In Carvelli v. Ocwen Financial Corp., the Eleventh Circuit Court of Appeals held that the plaintiff failed to show the defendant’s “statements of opinion are mutually exclusive of—or even inconsistent with—[the company]’s alleged knowledge,” and therefore the complaint failed to meet the pleading standard set forth in Omnicare. 934 F.3d 1307, 1323 (11th Cir. 2019). The court noted that merely an inference that the company “could or should have known” that its belief about the company’s economic vitality conflicted with the company’s “persistent” technology problems is insufficient to show the company did not believe its statements of opinion. Id. (emphasis original). In its first decision applying the standard for opinion liability post-Omnicare, the Fifth Circuit Court of Appeals affirmed the dismissal of a case concerning an oil company’s stated belief that it was in “substantial compliance” with regulatory obligations. Police & Fire Ret. Sys. of City of Detroit v. Plains All Am. Pipeline, L.P., 777 F. App’x 726 (5th Cir. 2019) (“Plains II”). As discussed in our 2018 Mid-Year Securities Litigation Update, the Southern District of Texas dismissed allegations that statements concerning compliance were misleading on the basis that a regulatory agency had identified issues that concerned only a different and small part of the company’s varied operations. In re Plains All Am. Pipeline, L.P. Sec. Litig., 307 F. Supp. 3d 583, 621–22 (S.D. Tex. 2018). The Fifth Circuit concurred that the company’s “belief statements” regarding its compliance “were broadly applicable and therefore were not rendered false or misleading” by issues that affected “a small percentage” of the company’s pipelines. Plains II, 777 F. App’x at 731. In the latter half of 2019, several courts reached differing conclusions on whether companies could be held liable for opinions about the results of scientific research. In Lehman v. Ohr Pharmaceuticals, plaintiffs alleged that a company’s optimistic announcements about second-phase drug trials were misleading where the company omitted that the results were only meaningful because the control group fared significantly worse than in historical trials. 2019 WL 4572765 (S.D.N.Y. Sept. 20, 2019). The Southern District of New York disagreed, relying on the Second Circuit’s opinion in Tongue v. Sanofi, in which the court found that a pharmaceutical company’s statements were not misleading even though they did not “include a fact that would have potentially undermined Defendants’ optimistic projections.” Id. at *3 (citing Tongue v. Sanofi, 816 F.3d 199, 212 (2d Cir. 2016)). Judge Preska also cautioned against courts issuing decisions that would compel caution rather than optimism about the results of such an experiment: “[T]he law does not abide attempts at using the judiciary to stifle the risk-taking that undergirds scientific advancement and human progress. The answer to bad science is more science, not this Court’s acting as the Southern District for the Inquisition.” Id. at *5. By contrast, in Micholle v. Ophthotech Corp., the court considered whether an opinion that a change in testing methodology had no “meaningful” impact on who was eligible to participate in a certain drug trial was actionable in light of plaintiff’s allegations that there was at least a 17% difference. 2019 WL 4464802, at *12 (S.D.N.Y. Sept. 17, 2019). The court denied dismissal because “[m]ateriality is a fact-specific inquiry” and an “investor may well have considered the degree of similarity between the parameters of a new clinical trial and those of a recently completed—and purportedly very successful—clinical trial important.” Id. at *13. There were a handful of reported decisions that focused on whether a complaint sufficiently pled the omission of contrary facts that rendered positive opinions regarding the company’s business misleading. For example, in Hawaii Structural Ironworkers Pension Trust Fund v. AMC Entertainment Holdings, Inc., plaintiffs plausibly alleged that opinions about the “smooth” process of integrating a recent acquisition implied “that there were no significant or systemic obstacles to [the] integration.” 2019 WL 4601644, at *12 (S.D.N.Y. Sept. 23, 2019). Similarly, in Vignola v. FAT Brands, Inc., a Central District of California court denied the defendants’ motion to dismiss statements concerning the experience and track record of the company’s senior leadership team. 2019 WL 6888051, at *10 (C.D. Cal. Dec. 17, 2019). The court considered that while investors do understand that opinions generally are formed by weighing competing facts, here, the company allegedly omitted the key fact “that the same leadership team had previously steered the subsidiaries of its same flagship brand into bankruptcy.” Id. at *10 (emphasis original).

VI.  Halliburton II Market Efficiency and “Price Impact” Cases

We are continuing to monitor significant decisions interpreting Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014) (“Halliburton II”). The federal circuit courts of appeals did not provide any new guidance in the second half of 2019, but certain questions have been recurring in trial courts recently. Recall that in Halliburton II, the Supreme Court preserved the “fraud-on-the-market” presumption, permitting plaintiffs to maintain the common proof of reliance that is required for class certification in a Rule 10b-5 case, but also permitting defendants to rebut the presumption at the class certification stage with evidence that the alleged misrepresentation did not impact the issuer’s stock price. The key questions we have been following in the wake of Halliburton II are the following: (1) 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, 573 U.S. at 283, with the Supreme Court’s previous decisions in Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011) (“Halliburton I”), and Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, 568 U.S. 455 (2013), holding that plaintiffs need not prove loss causation or materiality until the merits stage?; (2) What standard of proof must defendants meet to rebut the presumption with evidence of no price impact?; and (3) What evidence is required to successfully rebut the presumption? As previously discussed in our 2018 Year-End Securities Litigation Update, the Second Circuit addressed the first two questions in Waggoner v. Barclays PLC, 875 F.3d 79 (2d Cir. 2017) (“Barclays”) and Arkansas Teachers Retirement System v. Goldman Sachs, 879 F.3d 474 (2d Cir. 2018) (“Goldman Sachs”). Those decisions remain the most substantive interpretations of Halliburton II. Barclays held that after a plaintiff establishes the presumption of reliance applies, the defendant bears the burden of persuasion to rebut the presumption by a preponderance of the evidence. Barclays, 875 F.3d at 100–03. Though this appeared to put 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, IBEW Local 98 Pension Fund v. Best Buy Co., 818 F.3d 775, 782 (8th Cir. 2016), the inconsistency was not enough to persuade the Supreme Court to take up the issue, Barclays PLC v. Waggoner, 138 S. Ct. 1702 (Mem.) (2018) (denying writ of certiorari). In Goldman Sachs, the Second Circuit vacated the trial court’s ruling certifying a class and remanded the action, directing that price impact evidence must be analyzed prior to certification, even if price impact “touches” on the issue of materiality.  Goldman Sachs, 879 F.3d at 486. Recent district court decisions in the latter half of 2019 have embraced this approach when reconciling Halliburton II with Halliburton I and Amgen. See, e.g., In re Chicago Bridge & Iron Co. N.V. Sec. Litig., 2019 WL 5287980, at *21–23 (S.D.N.Y. Oct. 18, 2019) (concluding price impact analysis appropriate prior to class certification even if it may “touch on materiality”); Di Donato v. Insys Therapeutics, Inc., 2019 WL 4573443, at *6 (D. Ariz. Sept. 20, 2019) (explaining that a plaintiff need not prove materiality at the class certification stage). The Southern District of New York again certified the Goldman Sachs class, In re Goldman Sachs Grp. Sec. Litig., 2018 WL 3854757, at *1–2 (S.D.N.Y. Aug. 14, 2018), holding that while the price had not moved in response to previous statements on the same subject as the alleged corrective disclosures, those disclosures were sufficiently different to credit plaintiff’s expert’s “link between the news of [defendant]’s conflicts and the subsequent stock price declines,” and that defendants’ expert testimony was insufficient to “sever” that link. Id. at *4–6. The Second Circuit agreed to review the decision recertifying the class, see Order, Ark. Teachers Ret. Sys. v. Goldman Sachs, Case No. 18-3667 (2d Cir. Jan. 31, 2019) (“Goldman Sachs II”), and the case was fully briefed, argued and taken under consideration in June. A decision could be reached in the case any day now. In 2019, the Third Circuit also weighed in, providing some guidance on the type of evidence defendants must present to rebut the presumption of reliance at the class certification stage. That court affirmed the district court’s grant of plaintiff’s motion for certification, finding that the district court did not abuse its discretion in considering conflicting expert testimony. Vizirgianakis v. Aeterna Zentaris, Inc., 775 F. App’x 51, 53–54 (3d Cir. 2019). Most significantly, the Third Circuit rejected defendants’ argument that plaintiff’s expert’s event study, which was offered for the purpose of proving market efficiency (i.e., that the stock price moved in reaction to news about the company), was actually evidence that the statements at issue had no price impact. Id. at 53. Specifically, Defendants argued that because plaintiff’s expert had not proven a stock price movement in response to one of the alleged corrective disclosures at the statistically significant 95% confidence level, the relevant statement had no price impact. Id. at 53. The Court observed that plaintiff’s expert’s report was not written for the purpose of proving or disproving price impact and plaintiff’s inconclusive evidence regarding a stock price movement is not evidence of a lack of price impact. Id. at *53. Similar attempts to use plaintiffs’ market efficiency studies as evidence of a lack of price impact have been rejected by a number of district courts as well. See, e.g., In re Signet Jewelers Ltd. Sec. Litig., 2019 WL 3001084, at *13–15 (S.D.N.Y. July 10, 2019) (“Defendants’ failure to . . . supplement [their expert’s] report with an event study showing the absence of price impact is, on its own, a basis for rejecting Defendants’ arguments.”); Di Donato, 2019 WL 4573443, at *13 (“The lack of statistically significant proof that a statement affected the stock price is not a statistically significant proof of the opposite[.]”) (emphasis original); accord Chicago Bridge, 2019 WL 5287980, at *12–14 (noting that even statistically insignificant findings of causes of price impacts should be considered, albeit possibly granted less weight than statistically significant findings). These cases suggest defendants should consider performing their own event studies if defendants intend to argue a lack of price impact rather than simply criticizing event studies offered by plaintiffs. Defendants should also account for the precise facts and circumstances of each case before settling on a strategy for challenging price impact in whole or in part. We will continue to monitor developments in Goldman Sachs II and related cases.

VII.  Statute of Limitations for Martin Act Claims Extended to Six Years

On August 26, 2019, New York Governor Andrew Cuomo signed into law a bill extending the statute of limitations for all claims brought pursuant to the Martin Act, New York’s blue sky law, to six years. This reverses a 2018 decision from New York’s highest court, which held that many Martin Act claims must be brought within three years. See generally Schneiderman v. Credit Suisse Sec. (USA) LLC, 31 N.Y.3d 622 (2018). According to the bill’s sponsor memo, a “six-year timeline was essential to some of the most meaningful cases that have reined in Wall Street excesses, halted fraudulent practices, and returned millions of dollars to defrauded consumers and investors,” and the law’s drafters expect this new six-year period to give New York’s Attorney General time to make “extensive investigations” into “novel areas of business practices.” See NY State Senate Bill S6536, The New York State Senate, https://www.nysenate.gov/legislation/bills/2019/s6536. As readers will know, the Martin Act permits New York “to investigate and enjoin fraudulent practices in the marketing of stocks, bonds and other securities within or from New York State.” Credit Suisse, 31 N.Y.3d at 629. The Martin Act defines “fraudulent practices” “expansive[ly],” and “prohibitions against fraud, misrepresentation and material omission are found throughout the statutory scheme.” Id.; N.Y. Gen. Bus. L. §§ 352–353. Moreover, unlike common law fraud, Martin Act liability does not require any showing of “scienter or justifiable reliance on the part of investors.” Credit Suisse, 31 N.Y.3d at 632. A violation of the Martin Act can lead to both civil and criminal liability. N.Y. Gen. Bus. L. §§ 353, 358. In 2018, in Credit Suisse, the New York Court of Appeals held that different theories of Martin Act liability would be subject to different limitations periods. When a case was premised on a legal theory akin to “fraud recognized in the common law,” the applicable statute of limitations would be six years, but for liability premised on the more “expansive” notions of a “fraudulent practice” solely created by statute, the applicable limitations period would be three years. See Credit Suisse, 31 N.Y.3d at 633–34 (dismissing stale claims). Credit Suisse now has been expressly superseded. It is too early to predict the practical impact of this development. However, it is reasonable to assume that New York enforcement officials will quickly take advantage of the longer limitations period. In a joint statement with New York Attorney General Letitia James, Governor Cuomo trumpeted the new law as “enhancing one of the state’s most powerful tools to prosecute financial fraud so we can hold more bad actors accountable, protect investors and achieve a fairer New York for all.” New Law Strengthens AG James’ Authority To Take On Corporate Misconduct, New York State Attorney General (Aug. 26, 2019), https://ag.ny.gov/press-release/2019/new-law-strengthens-ag-james-authority-take-corporate-misconduct. Attorney General James stated that “[a]s the federal government continues to abdicate its role of protecting investors and consumers, this law is particularly important. New York remains committed to finding and prosecuting the bad actors that rob victims and destabilize markets.” Governor Cuomo Signs Legislation Increasing New York’s Capacity to Prosecute Financial Fraud, Official Website of the State of New York (Aug. 26, 2019), https://www.governor.ny.gov/news/governor-cuomo-signs-legislation-increasing-new-yorks-capacity-prosecute-financial-fraud.
The following Gibson Dunn lawyers assisted in the preparation of this client update:  Mark Perry, Monica Loseman, Brian Lutz, Jefferson Bell, Shireen Barday, Nancy Hart, Lissa Percopo, Mark Mixon, Zoey Goldnick, Jason Hilborn, Hannah Kirshner, Emily Riff, Andrew Bernstein, Tim Deal, Luke Dougherty, Marc Aaron Takagaki, Patrick Taqui, Michael Klurfeld, Alisha Siqueira, Collin Vierra, and Chase Weidner. 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) Jefferson Bell - New York (+1 212-351-2395, jbell@gibsondunn.com) Jennifer L. Conn - New York (+1 212-351-4086, jconn@gibsondunn.com) Thad A. Davis - San Francisco (+1 415-393-8251, tadavis@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) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 22, 2020 |
Mark Kirsch Named to City & State 50 Over Fifty

City & State Magazine named New York partner Mark Kirsch among its 2020 50 Over Fifty Awards honorees. The list was published in January 2020. Mark Kirsch focuses on complex securities, white collar, commercial and antitrust litigation. He is routinely named one of the leading litigators in the United States.

January 14, 2020 |
2019 Year-End Securities Enforcement Update

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I.   Introduction: Themes and Notable Developments

A.   Behind and Beyond the Enforcement Numbers

This year, the SEC’s review of the performance of the Enforcement Division has de-emphasized the statistics and focused more on qualitative measures of its performance. As Chairman Clayton noted in his December testimony to the Senate Banking Committee, “purely quantitative measures alone cannot adequately measure the effectiveness of Enforcement’s work, which can be evaluated better by assessing the nature, quality and effects of each of the Commission’s enforcement actions with an eye toward how they further the agency’s mission.”[1] With that said, this fiscal year saw a spike in the number of enforcement actions – the number of standalone enforcement actions increased to 526 from 490 the prior year, and the amount of financial remedies obtained also increased to $4.3 billion from $3.9 billion the prior year. However, an unstated reason to avoid focus on statistical metrics could be that looking behind the numbers reveals that the increase is attributable to a one-time Mutual Fund Share Class Disclosure Initiative, a group of cases in which investment advisers were encouraged to self-report issues associated with the selection of fee-paying mutual fund share classes when a lower or no-cost share class of the same fund was available.  Consequently, the apparent increase is more likely an anomaly than a trend.[2] As in prior years under this administration, the SEC’s Enforcement Division this year continued to focus on cases impacting retail investors and on cyber-related cases, including initial coin offerings and other digital assets.  Given this current administration continues for at least another year, one should not expect dramatic changes in the focus of the Enforcement Division next year. After several years of a freeze on hiring, during which staffing numbers declined due to attrition, this year’s budget did provide the Enforcement Division with additional hiring authority. However, although headcount for Enforcement (as well as the Commission generally) increased slightly from the prior year, staffing is still well below its peak in 2016. One positive trend note to look for in the coming year is an increased focus on reducing the duration of investigations.  The Enforcement Division’s Annual Report notes that on average investigations that result in enforcement actions take an average of two years, and that the more complex accounting and disclosure cases take an average of three years.   This does not include investigations that do not result in any enforcement action, which can remain open even longer, leaving those subject to investigations in an indefinite state of uncertainty.  While it is encouraging that the Enforcement Division is taking steps to shorten the duration of investigations, it will remain to be seen whether the Commission is able to achieve any meaningful success in this regard.

B.   Insider Trading Developments

On December 30, 2019, the Second Circuit issued a significant opinion in United States v. Blaszczak that heightens the risk of investigation and prosecution in certain types of insider trading cases.[3] In Blaszczak, a Center for Medicare & Medicaid Services (“CMS”) employee, a “political intelligence” hedge fund consultant, and two hedge fund employees were charged in an insider trading scheme whereby confidential “predecisional” CMS information regarding planned changes to medical reimbursement rates was allegedly disclosed via the consultant to the hedge fund employees, who then directed their hedge fund to short stocks of healthcare companies that would be hurt by the reimbursement rate changes. After trial, a jury verdict found the defendants not guilty of insider trading under Title 15 (the Securities Exchange Act provision prohibiting securities fraud), which required that the defendants knew that the tipper received a personal benefit, but found the defendants guilty under Title 18 (a criminal securities fraud provision added in the 2002 Sarbanes-Oxley Act to the wire fraud statute), which did not require a personal benefit to the tipper. On appeal, the Second Circuit considered two primary issues: (1) whether the requirement in insider trading cases brought under Title 15 that the tipper receive a personal benefit and the tippee have knowledge of that personal benefit applied to the Title 18 criminal securities fraud provision; and (2) whether confidential predecisional government information constituted government “property,” a necessary element for the convictions. Reasoning that the Securities Exchange Act and Sarbanes-Oxley securities fraud provisions were rooted in different purposes, the Second Circuit refused to extend the Title 15 personal benefit requirement to the Title 18 securities fraud and wire fraud provisions. In addition, the Second Circuit, in a 2-1 decision, held that confidential government information may constitute government “property,” analogizing it to “confidential business information” that the Supreme Court had previously held to be property. The Second Circuit therefore affirmed the convictions. Blaszczak heightens the risk of DOJ investigation and prosecution in the subset of insider trading cases where there is limited-to-no-evidence of personal benefit to the tipper or the downstream tippee’s knowledge of the personal benefit. The decision makes it more likely that prosecutors will routinely bring Title 18 securities fraud and wire fraud charges in conjunction with Title 15 charges, especially given the continually evolving case law regarding what constitutes a “personal benefit.” Blaszczak also heightens the risk of both SEC and DOJ investigations in cases involving trading while in possession of a wide range of confidential executive agency information, whether obtained directly from a government employee or, as was the case in Blaszczak, from a consultant with access to government employees. For further information on the Blaszczak decision and its implications, please see our separate Client Alert, “United States v. Blaszczak: Second Circuit Ruling Heightens Risks of Insider Trading Investigations and Prosecutions.”

C.   Legislative Developments

On December 9, 2019, the US House of Representatives overwhelmingly passed the Insider Trading Prohibition Act (the “Act”), 410 to 13, which, if enacted, would codify a ban on insider trading. See H.R. 2534 116th Cong. § 16A. The Act amends the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.), the securities fraud provisions of which courts have previously interpreted to prohibit insider trading. The Act, which is currently pending in the Senate, largely adopts existing insider trading caselaw and theories of liability. In its current form, the Act does not amend the criminal securities fraud provision 18 U.S.C. § 1348, which, similar to the Securities Exchange Act, courts have interpreted to prohibit insider trading. Section (a) of the Act would prohibit trading securities while aware of “material, nonpublic information relating to [a security], or any nonpublic information… that has, or would reasonably be expected to have, a material effect on the market price of [the security]” if the person “knows, or recklessly disregards, that such information has been obtained wrongfully” or that the transaction “would constitute a wrongful use of such information.” Id. § 16A(a). Section (b) would prohibit anyone who would be prohibited from trading under section (a) from “communicat[ing] material, nonpublic information relating to such security…to any other person if” (1) the other person trades “any security. . . to which such communication relates” or “communicates the information to another person who makes or causes such a purchase, sale, or entry,” and (2) “the purchase, sale, or entry . . . is reasonably foreseeable.” Id. § 16A(b). The Act applies to information that is “obtained wrongfully” or where use would be “wrongful.” It clarifies that “trading while aware of material, nonpublic information . . . or communicating material nonpublic information. . . is wrongful only if the information has been obtained by, or its use would constitute. . . (A) theft, bribery, misrepresentation, or espionage (through electronic or other means); (B) a violation of any Federal law protecting computer data or the intellectual property or privacy of computer users; (C) conversion, misappropriation, or other unauthorized and deceptive taking of such information; or (D) a breach of any fiduciary duty, a breach of a confidentiality agreement, a breach of contract, a breach of any code of conduct or ethics policy, or a breach of any other personal or other relationship of trust and confidence for a direct or indirect personal benefit (including pecuniary gain, reputational benefit, or a gift of confidential information to a trading relative or friend).” Id. § 16A(c)(1). In addition, the Act has a “knowledge requirement” mandating that the person “was aware, consciously avoided being aware, or recklessly disregarded that such information was wrongfully obtained, improperly used, or wrongfully communicated,” although the person is not required to know “whether any personal benefit was paid or promised.” Id. § 16A(c)(2). This is not the first time Congress has considered a statutory definition of insider trading. Advocates of such legislation argue that a statutory definition will bring clarity to an area of the law developed through decades of judicial interpretation of a general anti-fraud statute. However, since the House bill, like similar prior attempts a legislation, generally seeks to embody existing legal theories, critics argue that such attempts do little to simplify a complex and nuanced set of issues and actually risks adding vagueness and uncertainty. Moreover, despite significant support for the bill in the House, there appears to be little enthusiasm in the Senate for pursuing such legislation, particularly in the final months before the next election.

D.   Litigation Developments

Looming over the Enforcement Division in the coming year will a case before the Supreme Court which presents the question of whether the SEC is authorized to pursue one of its mainstay remedies -- disgorgement of so-called ill-gottten gains -- in enforcement actions in federal district court. There is no statute which expressly authorizes the SEC to obtain disgorgement in these federal enforcement actions, unlike in administrative proceedings where there is specific authority for the SEC to seek disgorgement. Rather, the securities laws enumerate certain statutorily defined penalties that the SEC may recover in appropriate circumstances. Nevertheless, historically, federal courts have ordered disgorgement as an equitable remedy.  In its 2017 decision in Kokesh, the Supreme Court held that the remedy of disgorgement constituted a penalty and therefore was subject to the 5-year statute of limitations on penalties.  The Enforcement Division estimates that as of the end of the 2019 fiscal year, the 5-year statute of limitations put beyond the SEC’s reach $1.1 billion in alleged ill-gotten gains. In a footnote to the Kokesh decision, the Court noted that the case did not present, and the Court would not decide, whether the SEC is authorized to obtain disgorgement. In November, the Supreme Court granted certiorari in Liu v. SEC, in which a defendant in an enforcement action was ordered to pay disgorgement as part of a final judgment entered by the district court. Before appealing to the Ninth Circuit, the Supreme Court decided Kokesh. The appellant argued to the Ninth Circuit that, in light of the decision in Kokesh that disgorgement is a penalty, and there is no statutory authorization for the SEC to seek disgorgement as a penalty, the SEC lacks authority to seek disgorgement. The Ninth Circuit affirmed the District Court’s disgorgement order based on pre-Kokesh precedent and the fact that Kokesh had expressly declined to address the question. The issue is now squarely before the Supreme Court. If the Supreme Court disallows disgorgement, the SEC’s enforcement program will be significantly weakened, that is, unless Congress steps in with a legislative solution to authorize the disgorgement remedy expressly.

E.   Commissioners and Senior Staffing Update

During the latter half of 2019, there were a number of leadership changes, several of which reflect the advancement of lawyers with many years of experience in the Division of Enforcement to positions of senior leadership. On July 8, Allison Lee was sworn in as the fifth Commissioner, bringing the Commission back to its full complement of five Commissioners. As we noted in our Mid-Year Alert, Commissioner Lee replaces prior Democratic Commissioner Kara Stein. Commissioner Lee previously served at the Commission for over a decade, including as counsel to Commissioner Stein, as well as a Senior Counsel in the Complex Financial Instruments Unit of the Division of Enforcement. A change in the other Democratic Commissioner, Robert Jackson, also appears to be on the horizon. For several months there have been reports that Commissioner Jackson would be stepping down soon to return to teaching at NYU Law School. (Although Commissioner Jackson’s term formally ended in June 2019, Commissioners may continue for another 18 months.) According to media reports shortly before the end of the year, Senator Chuck Schumer proposed to the White House that Caroline Crenshaw, an attorney currently working for Commissioner Jackson, be nominated as his replacement. Crenshaw has been employed at the SEC since 2013, and, like Commissioner Lee, previously worked under Democratic commissioner Kara Stein. Crenshaw is also a judge advocate in the U.S. Army Judge Advocate General’s Corps.[4] Other changes in the senior staffing of the Commission include:
  • In September, Monique Winkler was appointed Associate Regional Director in the SEC’s San Francisco Office. As Associate Regional Director, Ms. Winkler oversees the Enforcement program for the San Francisco Office. Ms. Winkler has worked at the SEC since 2008, including working in the Enforcement Division’s Public Finance Abuse Unit.
  • In October, Katharine Zoladz was appointed Associate Regional Director in the SEC’s Los Angeles Office. As Associate Regional Director, Ms. Zoladz, co-heads the Enforcement program for the Office, along with Associate Regional Director Alka Patel. Ms. Zoladz has worked at the SEC since 2010, including working in the Asset Management Unit.
  • In November, Chief Administrative Law Judge Brenda Murray retired after 50 years of federal service, including 25 years as Chief Administrative Law Judge.
  • In December, Kristina Littman was appointed Chief of the Enforcement Division’s Cyber Unit. Ms. Littman has worked at the SEC since 2010, including working in the Enforcement Division’s Market Abuse Unit and Trial Unit, and most recently, as counsel to Chairman Clayton.

F.   Whistleblower Awards and Cases

The SEC’s whistleblower program continues to provide significant financial awards to whistleblowers.   As of the end of 2019, the SEC has awarded a total of approximately $390 million to 71 individual whistleblowers.  This is a reminder of the powerful financial incentive the program provides to would-be whistleblowers.  In fiscal year 2019, the SEC received over 5,200 whistleblower tips. The size of whistleblower payments, in addition to the volume of tips coming through the whistleblower office, emphasize the importance of a company’s response to internal complaints from employees who could become whistleblowers. Maintaining a record of investigating internal complaints can put a company in a position to respond to SEC inquiries if and when the government comes calling. In the second half of 2019, the SEC granted several whistleblower awards that were significant, though not on the scale of the largest awards that have been awarded since the program began. As always, the Commission discloses little substantive information on the basis for the award. In July, the SEC announced a $500,000 award to an overseas whistleblower whose reporting helped the Commission bring a successful enforcement action.[5] In August, the SEC awarded over $1.8 million to a whistleblower whose cooperation included giving sworn testimony and reviewing documents, among other assistance in an investigation of conduct committed overseas.[6] And in November, the SEC awarded collectively $260,000 to three whistleblowers—themselves harmed investors—who jointly provided a tip that led to an enforcement action alleging a scheme targeting retail investors.[7] The Commission also brought another action for violation of the anti-retaliation provision of the whistleblower law. In November, the SEC amended its complaint in a pending enforcement action against an online auction portal and its CEO to add allegations that the defendants unlawfully sought to prohibit investors from reporting misconduct to the SEC and other governmental agencies.[8] In its original complaint against the company and its CEO, the SEC had alleged that the defendants engaged in a fraudulent securities offering based on false statements to investors and had misappropriated over $6 million of investor proceeds. According to the amended complaint, the defendants attempted to resolve investor allegations of wrongdoing by conditioning the return of investor money on the investors signing agreements prohibiting them from reporting potential securities law violations to law enforcement, including the SEC. The complaint is pending in the U.S. District Court for the Southern District of New York.

G.   Emerging Interest in Use of Big Data by Investment Managers

For years now we have been counseling clients on managing the regulatory and compliance risks arising from the use of alternative data or big data in portfolio management. The procurement and use of such data raises a number of potential compliance issues – both under the securities laws as well as data privacy laws – not unlike the risks presented by the use of other third party data sources such as expert networks. Years before regulators and prosecutors began bringing insider trading cases based on the use of expert networks, the SEC’s Compliance Examination program had begun asking investment advisers about their use of expert networks and the policies and procedures advisers employed to promote compliance with the securities laws. This year we have observed the SEC’s Examination staff adding to certain of their request lists requests for information about the adviser’s use of alternative data and related compliance policies and procedures. The Examination staff can use such information to learn about the various forms of alternative data managers are using, understand the range of compliance and diligence practices being employed, potentially formulate guidance in the form of a risk alert, or, in certain cases, refer matters to Enforcement for further investigation. The Examination staff’s heightened scrutiny also mirrors interest from other regulators, legislators and the media in this fast-evolving and potentially risky area. In sum, the focus of the Examination staff on fund managers’ use of alternative data emphasizes the importance of having in place policies and procedures for the on-boarding of big data providers, training of investment professionals in the risks, and ongoing monitoring of such providers on a periodic basis.

H.   Cryptocurrency

In the latter half of 2019, the SEC continued its cyber focus, bringing multiple enforcement actions in the cryptocurrency space, in large part centered on initial coin offerings (“ICOs”). Commissioner Peirce has been critical of the Commission’s approach to crypto-related issues, and has advocated for clarifying regulation rather than a “parade of enforcement actions” as a means to provide guidance to the market. In a speech in November 2019, Commissioner Peirce argued that, “the lack of a workable regulatory framework has hindered innovation and growth.” In particular, Commissioner Peirce advocated a “non-exclusive safe harbor period within which a token network could blossom without the full weight of the securities laws crushing it before it becomes functional.” It remains to be seen whether these views will influence that regulatory approach to offerings of crypto-currencies and other digital assets.[9] In the meantime, the parade marches on, as the discussion of recent cases below reflects. In September, the SEC settled an action against a blockchain technology company for allegedly conducting an unregistered ICO.[10] According to the SEC, the company failed to register the ICO—which had raised several billion dollars’ worth of digital assets between June 2017 and June 2018—as a securities offering and did not otherwise seek an exemption from registration requirements, in violation of the registration provisions of the federal securities laws. Without admitting or denying the SEC’s findings, the company agreed to pay a $24 million civil penalty and to a cease-and-desist order. A few weeks later, the SEC announced an emergency action against a mobile messaging company and its subsidiary in connection with an alleged unregistered ICO.[11] The SEC filed a complaint against the two companies in the Southern District of New York alleging that they failed to register their securities—digital tokens called “Grams”—and therefore also failed to provide investors with information about their investments. The SEC sought and obtained a temporary restraining order in order to stop the then-ongoing ICO. The litigation remains pending; the parties are currently engaged in discovery and additional briefing is due in January. The Court has ordered that the companies refrain from the offering, selling, or distribution of Grams until conclusion of the preliminary injunction hearing, which has been scheduled for mid-February 2020. In December, the SEC filed another action in the Southern District of New York, charging the founder of a digital-asset issuer and the issuer itself with defrauding investors in connection with an ICO.[12] The complaint alleges that the founder conducted a fraudulent unregistered securities offering, making misrepresentations to investors and failing to create a functional platform for online shopping profiles as promised would be done with funds raised in the ICO. The founder also allegedly misappropriated funds from the ICO for his own personal use, according to the SEC. The founder and company have not yet answered the SEC’s complaint. Also in December, the SEC brought settled charges against a blockchain technology company for failing to register an ICO that began after the Commission’s 2017 DAO Report was issued.[13] The company allegedly sold unregistered digital tokens to investors in the U.S. and through foreign resellers without placing restrictions on resale to U.S. investors. In settling the charges without admitting or denying the findings, the company agreed to a $250,000 penalty, a cease-and-desist order, and to return funds used to purchase tokens to investors who submit a claim.

II.   Public Company Cases

A.   Accounting Fraud and Internal Controls

The SEC brought several accounting fraud cases involving filed complaints against public companies and executives in the second half of 2019. Notably, several of the Commission’s actions against individuals were not settled, thus adding to the Enforcement Division’s litigation docket for the coming year. In July, the SEC filed a complaint in federal court in Chicago alleging that the former CEO and two former sales executives of an engine manufacturing company had committed accounting fraud by overstating the company’s revenues by nearly $25 million.[14] According to the SEC, the executives fraudulently recorded revenue on sales that were not yet complete, that the customer had not agreed to accept, and for which the company falsely inflated the price. The executives allegedly worked to conceal the fraud by misleading and withholding key information from the company’s accountants and outside auditor. The complaint sought permanent injunctions and penalties, as well as disgorgement and prejudgment interest from one of the sales executives and an officer-and-director bar and clawback of incentive-related compensation from the CEO. In September, the SEC filed a complaint in federal court in Indianapolis charging two former executives of a trucking company with accounting fraud, books and records violations, and reporting violations.[15] The complaint alleged that the former president and COO and former CFO participated in a scheme to buy and sell trucks at prices much higher than their fair market value, leading to the company overstating its income and earnings per share. According to the complaint, the executives tried to conceal the alleged overvaluing by lying to the company’s auditor about whether the prices were determined independently and their roles in the transactions. The SEC is seeking injunctions, monetary penalties, and officer-and-director bars. The company settled related accounting fraud charges in April 2019. The SEC in November charged a biotech company and three former executives with antifraud, reporting, books and records, and internal control violations for allegedly misstating revenue and attempting to cover it up.[16] The complaint alleged that the company’s former CEO and COO entered into undisclosed side arrangements with distributors that allowed the distributors to return product and conditioned payment obligations on end-user sales, leading to the company prematurely recognizing sales revenue and overstating revenue growth. According to the SEC, the two former executives, along with the CFO, covered up this arrangement for years, including by misleading outside auditors and lawyers. The company agreed to settle for a $1.5 million penalty, without admitting or denying wrongdoing; the litigation against the executives remains pending. In early December, the SEC charged a brand-management company and three of its former executives with accounting fraud.[17] According to the complaint, the former CEO and COO created fictitious revenue that caused the company to meet or beat analysts’ estimates for two quarters and allowed the executives to profit substantially on stock sales. In related charges, the SEC alleged that the company recognized false revenue and manipulated its earnings; concealed distressed finances of licensees; and failed to recognize more than $239 million in impairment charges for three brands. And it alleged that the company and its former CFO caused the company to overstate its net income by hundreds of millions of dollars by failing to recognize certain losses, disclose transactions to temporarily improve licensees’ finances, and test for impairment. Without admitting or denying the allegations, the company agreed to pay a $5.5 million penalty, while the former COO agreed to a permanent officer-and-director bar as well as disgorgement and prejudgment interest of more than $147,000 and a penalty to be determined later, and the former CFO agreed to disgorgement and prejudgment interest of almost $50,000 and a penalty of $150,000. The litigation against the former CEO remains ongoing.

B.   Misleading Disclosures

In addition to the accounting-related cases discussed above, the SEC also pursued cases based on misleading disclosures made by public companies in the latter half of the year. Misleading Metrics In August, the SEC announced settled charges against a publicly-traded real estate investment trust and simultaneously filed a complaint against four former executives, alleging that over a two-year period they fraudulently adjusted a certain non-GAAP metric in an effort to hit the company’s growth targets.[18] The complaint alleged that the executives misled investors and analysts by manipulating the company’s same property net operating income (SP NOI) metric in various ways, including by only selectively recognizing income, incorporating income the company had said was excluded, and making the company’s growth appear stronger by lowering the prior year’s SP NOI. The company paid a $7 million penalty to settle the charges without admitting or denying liability. Two of the executives also agreed to partial judgments with monetary relief to be determined in the future. In September, the SEC announced settled fraud charges against an information and media analytics firm and its former CEO for allegedly overstating revenue and misstating certain performance metrics after entering into a series of non-monetary transactions.[19] According to the SEC’s orders, the company—at the direction of the CEO—was negotiating for and exchanging sets of data without cash consideration and then recognizing inflated revenue on those non-monetary transactions based on the fair value of the data, which itself was increased. As part of the alleged scheme, the SEC contended that both the company and CEO misled investors by making false statements about the company’s customer base and product, and that the CEO lied to accountants in an effort to exceed revenue targets for seven consecutive quarters. Without admitting or denying the SEC’s findings, the company and CEO agreed to settle for a combined penalty of $5.7 million, with the CEO also reimbursing the company $2.1 million in incentive-based compensation and profits from stock sales. Executive Perks In September, the SEC settled actions against an automobile manufacturer, its former CEO, and its former director relating to charges that the company made false financial disclosures when it omitted disclosure of approximately $140 million in executive benefits.[20] The SEC alleged that the company’s CEO, with substantial assistance from the charged director and others in the company, worked to conceal more than $90 million in executive compensation from disclosure. The individuals also allegedly made efforts to increase the CEO’s retirement account by approximately $50 million each year. Without admitting or denying the charges, the company agreed to a $15 million civil penalty and, along with the individuals charged, agreed to cease and desist from future violations of the anti-fraud provisions of federal securities laws. In addition, the company’s CEO agreed a $1 million civil penalty and a 10-year officer and director bar while the director settled charges for a $100,000 penalty, a five-year officer and director bar, and a five-year suspension from practicing or appearing before the Commission as an attorney. Other Disclosures and Omissions In July, the SEC settled charges with a social media platform relating to allegations that the company made misleading disclosures regarding the risk of misuse data.[21] Specifically, the SEC alleged that for approximately two years, the company framed its data misuse disclosure as a hypothetical, staying that “data may be improperly accessed, used or disclosed,” when the company allegedly knew that a third-party had misused its users’ data. Without admitting or denying the allegations, the company agreed to pay $100 million to settle the action. In September, the SEC announced it had settled charges with a Silicon Valley-based issuer for allegedly failing to disclose a revenue management scheme in violation of the antifraud and reporting provisions of the federal securities laws.[22] The SEC alleged the issuer misled investors when it engaged in a scheme to “pull-in” sales to the current quarter in order to meet publicly-issued revenue guidance. The practice allegedly concealed from investors a decline in consumer demand, a loss of market share, and reduced future sales. Without admitting or denying the charges, the issuer agreed to pay a $5.5 million. Also in September, the SEC announced settled charges against a pharmaceutical company for allegedly failing to disclose or accrue for losses relating to a Department of Justice (“DOJ”) investigation into the company’s classification of its largest revenue and profit generating product.[23] The DOJ investigation began in 2014 and lasted nearly two years. The SEC’s complaint alleged that before October 2016 when it announced a $465 million settlement with the DOJ, the company did not adequately disclose to investors the potential losses caused by the investigation. Without admitting or denying the SEC’s allegations, the company agreed to a $30 million penalty. On the same day, the SEC settled charges against a Michigan-based automaker and its parent company for allegedly misleading investors about the number of new vehicles sold to U.S. consumers each month.[24] The SEC alleged that between 2012 and 2016, the automaker falsely reported uninterrupted monthly year-over-year sales growth in company press releases. The SEC alleged that the company’s growth streak had been broken in September 2013 and the company inflated vehicle sales by reporting fake sales and by reporting older sales as current ones. Without admitting or denying the charges, the two companies agreed to jointly and severally pay a $40 million civil penalty.

C.   Private Company Cases

Finally, the SEC brought the following financial reporting and disclosure cases against private companies in the second half of 2019: In September, the SEC announced it settled charges against a multinational direct-to-consumer sales company relating to allegedly false and misleading statements about the company’s business model in China.[25] The SEC alleged that between 2012 and 2018, the company’s quarterly and annual SEC filings inaccurately described the company’s payment structure in China as different from that used in other countries, when in fact the compensation paid in China was similar to that paid in other countries. This description, the SEC alleged, prevented investors from fully evaluating the risk to the company’s stock. Without admitting or denying the SEC’s charges, the company agreed to pay a $20 million penalty and to cease and desist from future violations of the antifraud and reporting provisions of the federal securities laws. In November, the SEC filed amended fraud charges against four former executives of a private healthcare advertising company relating to misleading disclosures about the company’s success.[26] The SEC’s amended complaint, filed in federal court in Chicago, alleges that the four former executives violated the antifraud provisions of the federal securities laws by misrepresenting the company’s successes by manipulating third-party studies on its product and by overstating the company’s revenue in its 2015 and 2016 financial statements by $14.3 million and $30 million, respectively. The SEC alleges that these misleading disclosures allowed the company to raise approximately $487 from a private offering. The SEC is seeking disgorgement, penalties, injunctive relief, and officer and director bars. The U.S. Attorney’s Office for the Northern District of Illinois and Fraud Section of the Department of Justice announced parallel criminal charges against the four former executives and against two former employees not named in the SEC action.

III.   Investment Advisers and Funds

In a November 2019 speech, Enforcement Co-Director Stephanie Avakian, outlined issues in the investment adviser area that are drawing investigative interest from the Enforcement Division.[27] Not surprisingly, the Enforcement Division views as a success its Share Class Selection Disclosure Initiative as it has resulted in 95 enforcement actions. (Commissioner Peirce has not been as complimentary and has questioned the merits of such aggregation of cases.[28]). Following on the conflict and disclosure themes of the Initiative, Director Avakian explained that the Commission is investigating other circumstances in which an investment adviser may be conflicted by financial incentives that may affect the adviser’s recommendations to clients. As examples, Director Avakian cited revenue sharing, cash sweep arrangements, and unit investment trusts (UITs) as circumstances that may present conflicts of interest and therefore are a growing focus of the Commission’s enforcement efforts. In each of these circumstances, the adviser’s financial interest could be impacted by investment choices for the client. In addition, Director Avakian discussed the Enforcement Division’s recently announced Teachers Initiative to examine the compensation and sales practices of third-party administrators of teacher retirement plans to identify potential conflicts of interest. In closing, Director Avakian emphasized that advisory firms should be proactive in identifying potential conflicts and ensuring adequate disclosure to clients. The enforcement actions discussed below from the latter half of 2019 reflect the Commission’s focus advisers’ identification, management and disclosure of conflicts of interest. In July, the SEC instituted a settled action against a Massachusetts-based investment adviser and its principal based on allegations that the company failed to disclose to clients conflicts of interest in connection with recommendations to invest in certain securities.[29] According to the SEC, the company concealed the substantial financial incentives offered to it by the company in which it invested client money, resulting in over $7 million in client investments over the course of approximately two years. The SEC further alleged that the investment adviser and its principal concealed this arrangement in its regulatory filings. Additionally, the principal misused investor funds for his personal benefit. Without admitting or denying the findings in the SEC’s order, the company and the principal agreed to pay over $1 million in disgorgement and prejudgment interest, as well as a $275,000 penalty, and the principal agreed to a permanent bar from the securities industry. In September, the SEC filed suit in federal district court in Illinois against an Illinois-based hedge fund adviser, as well as its top two executives, charging the defendants with violations of the antifraud provisions of the federal securities laws.[30] The SEC’s complaint alleges that the defendants manipulated valuation models, which artificially inflated the value of its investments, and in turn resulted in misstatements of historical performance and caused investors to overpay fees. Moreover, the SEC alleges that its exam staff discovered the valuation problems, but the defendants then endeavored to hide their actions from the company auditor and investors. The SEC seeks permanent injunctions and civil penalties. In November, the SEC filed suit in federal district court in New York against a New York-based investment adviser in connection with its alleged concealment of losses and its sale of $60 million in bogus loan assets.[31] The SEC’s complaint alleges that the investment adviser falsified its records to hide the fact that there was no repayment of defaulted loans and that any supposed new loans were fictitious. The SEC further alleges that the firm induced clients into buying these false new loan assets by providing clients with doctored documents, including a forged credit agreement. In connection with settlement, the SEC revoked the firm’s registration and the firm’s assets are preliminarily frozen. Any future monetary relief, including but not limited to disgorgement, will be determined at a later date. In December, the SEC filed suit in federal district court in Sacramento, California against a California-based investment adviser firm and its owner in connection with their alleged defrauding of hundreds of retirees by recommending certain investments without disclosing their conflicts of interest.[32] According to the SEC’s complaint, by concealing any conflicts of interest, the firm and its owner were able to reap millions of dollars in compensation and other benefits. Further, the firm owner had a radio show, in which he touted his expertise and simultaneously hid past charges brought against him by the SEC, with the effect of misleading prospective investors. The SEC’s complaint seeks injunctions, as well as disgorgement and civil penalties.

IV.   Brokers and Financial Institutions

A.   Rule Violations and Internal Systems Deficiencies

In the latter half of 2019, the SEC brought a number of cases against broker-dealers relating to inadequate SEC rule compliance and failures of internal systems. In August, the SEC brought settled charges against a New York City headquartered broker-dealer for deficient review of over-the-counter (“OTC”) securities in violation of Rule 15c2-11, which requires that a broker-dealer have a reasonable basis for believing that information made available by the issuer of the securities is accurate.[33] The SEC’s order alleged that the broker-dealer made markets in OTC securities while delegating responsibility for rule compliance to a compliance associate who had no formal training or trading experience, resulting in allegedly deficient reviews. Without admitting or denying the SEC’s findings, the broker-dealer agreed to a penalty of $250,000. In September, the SEC announced charges against two broker-dealers for providing the SEC with incomplete and deficient securities trading information known as “blue sheet data.”[34] The SEC’s order alleged that both broker-dealers provided blue sheet submissions which reflected millions of inaccurate or missing entries over a period of several years, largely due to undetected coding errors. The broker-dealers admitted the findings in the SEC’s orders and agreed to censures and penalties of $2.7 million and $1.95 million respectively to settle the charges. In December, the SEC brought settled charges with two trading firms for rule violations in connection with a tender offer.[35] Specifically, the SEC’s orders alleged that the trading firms violated the “short tender rule” in connection with a partial tender offer by tendering more shares than their net long positions in the security. The SEC’s orders alleged that, because the tender offer was oversubscribed, the trading firms’ actions resulted in the firms unfairly receiving shares in the offer at the expense of other tender offer participants. Without admitting or denying the findings, the trading firms agreed to pay disgorgement and penalties totaling approximately $300,000 and $200,000 respectively. Finally, as part of its ongoing initiative into American Depositary Receipt (“ADR”) practices (resulting in settlements exceeding $431 million), the SEC in December announced settled charges against a multi-national financial services firm relating to the handling of ADRs—U.S. securities that represent foreign shares of a foreign company and require corresponding foreign shares to be held in custody at a depositary bank.[36] The SEC’s order alleged that the firm borrowed ADRs from other brokers when it should have known that those brokers did not own the corresponding foreign shares required to support the ADRs. Without admitting or denying the findings, the firm agreed to pay nearly $4 million in disgorgement, interest, and penalties. The SEC’s order noted that the settlement represented the SEC’s fourteenth enforcement action relating to ADRs.

B.   Retail Investors

As part of its ongoing focus on protecting retail investors, in September 2019, the SEC brought settled charges against three subsidiaries of a national financial services firm for charging excessive fees and commissions on retail accounts.[37] The SEC’s order alleged that the firm (i) did not perform reviews of advisory accounts that had no trading activity for at least one year, resulting in unsuitable advisory fees being charged to these accounts; and (ii) misapplied pricing data to certain unit investment trusts (“UITs”) in advisory accounts, resulting in excess fees charged on UITs. The SEC’s order also alleged with respect to UITs that the firm made unsuitable recommendations to sell UITs prior to maturity (and to then purchase new UITs), resulting in excess commissions being charged to retail customers. Without admitting or denying the findings, the firm agreed to pay approximately $12 million in disgorgement to retail investors, and also agreed to a $3 million penalty. The SEC’s order noted that it took into account remedial efforts and cooperation undertaken by the firm.

V.   Insider Trading, Market Manipulation and Regulation FD

A.   Insider Trading

In the second half of 2019, the SEC brought a number of insider trading cases and won a trial on insider trading charges relating to a previously-filed complaint. In July, the SEC brought insider trading charges against a former accountant of a life sciences company and her close friend, seeking injunctive relief along with disgorgement and penalties.[38] The complaint alleges that the accountant leaked confidential revenue information to the friend in exchange for extravagant gifts, while the friend purchased securities using accounts held by several associates to conceal his identity. The scheme was discovered using advanced trading analytics software. The matter is being litigated, and parallel charges were filed by the U.S. Attorney’s Office for the Southern District of New York. In August, the SEC charged an investment banking analyst with insider trading, alleging that the analyst purchased securities after learning about a potential transaction his employer was advising on.[39] The complaint alleges that the analyst reaped nearly $100,000 in profits, and seeks disgorgement of the gains, plus penalties and injunctive relief. The matter is being litigated, and parallel charges were filed by the U.S. Attorney’s Office for the Southern District of New York. In August, an Atlanta federal court jury returned a verdict finding a New Jersey based securities broker liable for insider trading in advance of three transactions relating to charges that the SEC brought in 2016.[40] The broker was found guilty of violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934, as well as Rules 10b-5 and 14e-3. The jury held that the broker received information surrounding each transaction from an employee at an accounting firm, traded on the information, and passed it to a friend of his to do the same. The employee and the other trader were also charged, but previously settled their cases.[41] In December, the SEC announced a settlement with a former United States congressman, his son, and his friend.[42] The trio were charged with insider trading, and previously pleaded guilty to related criminal charges. The defendants agreed to disgorgement and injunctive relief, and the former congressman was permanently barred from acting as an officer or director of a public company. Also in December, the SEC charged a ring of five friends who are accused of repeatedly trading on confidential earnings information of a Silicon Valley cloud-computing company.[43] The group allegedly procured the information from one member’s IT administration position at the company, who used his credentials to access and pass along the information. The group used “carefully tailored cash withdrawals” to avoid detection, but were discovered using SEC data analysis tools. The matter is being litigated, and parallel charges have been filed by the U.S. Attorney for the Northern District of California. Notably in the criminal case, two of the individuals have been charged with violating 18 U.S.C. § 1348, a relatively recent securities fraud provision added by the Sarbanes-Oxley Act in 2002.[44] This charge may become more routine following the Second Circuit’s recent majority opinion in United States v. Blaszczak, which held that there is no “personal benefit” requirement in insider trading cases charged under this provision. This result is different from charges under the traditional Section 10(b) of the Exchange Act, where in Dirks v. SEC, the Supreme Court had held that tippers are only liable where they breach a fiduciary duty to the company’s shareholders, and they only breach such a duty where they “personally will benefit, directly or indirectly, from [their] disclosure. Absent some personal gain, there has been no breach of duty to stockholders.”

B.   Market Manipulation

In November, a New York federal court jury found a Ukrainian trading firm and two individuals liable for their roles in an unlawful trading scheme.[45] The SEC originally filed the complaint in March 2017. The evidence demonstrated that the defendants engaged in a “layering scheme” involving placing and canceling orders to artificially adjust a stock price. They also engaged in cross-market manipulation by buying and selling stocks to impact options prices. The jury found all three defendants liable on all counts.

C.   Regulation FD

In August, the SEC announced settled charges against a Florida-based pharmaceutical company relating to violations of Regulation FD based on its alleged sharing of material, nonpublic information with sell-side research analysts without also disclosing the same information to the public.[46] The SEC’s order alleged that on two separate occasions in 2017, the company selectively shared material information with analysts about the company’s interactions with the FDA, and that at the time of these disclosures, the company did not have policies or procedures regarding compliance with Regulation FD. The pharmaceutical company consented to the SEC’s order without admitting or denying the findings and was ordered to pay a penalty of $200,000 and cease and desist from future violations. ________________________ [1]              Testimony of Chairman Jay Clayton before the U.S. Senate Committee on Banking, Housing, and Urban Affairs (Dec. 10, 2019), available at https://www.banking.senate.gov/imo/media/doc/Clayton%20Testimony%2012-10-191.pdf. [2]              See D. Michaels, Focus on Sale of Higher-Fee Mutual Funds Fuels 30-Year High for SEC Enforcement Actions, Wall St. J. (Nov. 6, 2019), available at https://www.wsj.com/articles/focus-on-sale-of-higher-fee-mutual-funds-fuels-30-year-high-for-sec-enforcement-actions- 11573043400. [3]              2019 WL 7289753 (2d Cir. Dec. 30, 2019). [4]              Reuters, Exclusive: White House expected to nominate SEC lawyer for Democratic commissioner seat – sources (Dec. 20, 2019), available at https://www.reuters.com/article/us-usa-sec-nominations-exclusive/exclusive-white-house-expected-to-nominate-sec-lawyer-for-democratic-commissioner-seat-sources-idUSKBN1YO2CN. [5]              SEC Press Release, SEC Awards Half-Million Dollars to Overseas Whistleblower (July 23, 2019), available at https://www.sec.gov/news/press-release/2019-138. [6]              SEC Press Release, SEC Awards More Than $1.8 Million to Whistleblower (Aug. 29, 2019), available at https://www.sec.gov/news/press-release/2019-165. [7]              SEC Press Release, SEC Awards Over $260,000 to Whistleblowers for Their Help in Spotting Securities Fraud (Nov. 15, 2019), available at https://www.sec.gov/news/press-release/2019-238. [8]              SEC Press Release, SEC Charges Issuer and CEO with Violating Whistleblower Protection Laws to Silence Investor Complaints (Nov. 4, 2019), available at https://www.sec.gov/news/press-release/2019-227. [9]              Commissioner Hester M. Peirce, Broken Windows: Remarks Before the 51st Annual Institute on Securities Regulation (Nov. 4, 2019), available at https://www.sec.gov/news/speech/peirce-broken-windows-51st-annual-institute-securities-regulation. [10]             SEC Press Release, SEC Orders Blockchain Company to Pay $24 Million Penalty for Unregistered ICO (Sept. 30, 2019), available at https://www.sec.gov/news/press-release/2019-202. [11]             SEC Press Release, SEC Halts Alleged $1.7 Billion Unregistered Digital Token Offering (Oct. 11, 2019), available at https://www.sec.gov/news/press-release/2019-212. [12]             SEC Press Release, SEC Charges Founder, Digital-Asset Issuer With Fraudulent ICO (Dec. 11, 2019), available at https://www.sec.gov/news/press-release/2019-259. [13]             SEC Press Release, Issuer Settles Unregistered ICO Charges, Agrees to Return Funds and Register Tokens (Dec. 18, 2019), available at https://www.sec.gov/news/press-release/2019-267. [14]             SEC Press Release, SEC Charges Engine Manufacturing Company Executives with Accounting Fraud (July 19, 2019), available at www.sec.gov/news/press-release/2019-137. [15]             SEC Press Release, SEC Charges Trucking Executives with Accounting Fraud (Dec. 5, 2019), available at www.sec.gov/news/press-release/2019-253. [16]             SEC Press Release, SEC Charges Biotech Company and Executives with Accounting Fraud (Nov. 26, 2019), available at www.sec.gov/news/press-release/2019-243. [17]             SEC Press Release, SEC Charges Iconix Brand Group and Former Top Executives with Accounting Fraud (Dec. 5, 2019), available at www.sec.gov/news/press-release/2019-251. [18]             SEC Press Release, SEC Charges Brixmor Property Group Inc. and Former Senior Executives with Accounting Fraud (Aug. 1, 2019), available at www.sec.gov/news/press-release/2019-143. [19]             SEC Press Release, SEC Charges Comscore Inc. and Former CEO with Accounting and Disclosure Fraud (Sept. 24, 2019), available at www.sec.gov/news/press-release/2019-186. [20]             SEC Press Release, SEC Charges Nissan, Former CEO, and Former Director with Fraudulently Concealing from Investors More than $140 Million of Compensation and Retirement Benefits (Sept. 23, 2019), available at https://www.sec.gov/news/press-release/2019-183. [21]             SEC Press Release, Facebook to Pay $100 Million for Misleading Investors About the Risks It Faced From Misuse of User Data (July 24, 2019), available at https://www.sec.gov/news/press-release/2019-140. [22]             SEC Press Release, SEC Charges Silicon Valley-Based Issuer With Misleading Disclosure Violations (Sept. 16, 2019), available at https://www.sec.gov/news/press-release/2019-175. [23]             SEC Press Release, Mylan to Pay $30 Million for Disclosure and Accounting Failure Relating to EpiPen (Sept. 27, 2019), available at https://www.sec.gov/news/press-release/2019-194. [24]             SEC Press Release, Automaker to Pay $40 Million for Misleading Investors (Sept. 27, 2019), available at https://www.sec.gov/news/press-release/2019-196. [25]             SEC Press Release, Herbalife to Pay $20 Million for Misleading Investors (Sept. 27, 2019), available at https://www.sec.gov/news/press-release/2019-195. [26]             SEC Press Release, SEC Charges Former Top Executives of Healthcare Advertising Company With $487 Million Fraud (Nov. 25, 2019), available at https://www.sec.gov/news/press-release/2019-241. [27]             Speech, What You Don’t Know Can Hurt You (Nov. 5, 2019), available at https://www.sec.gov/news/speech/speech-avakian-2019-11-05. [28]             Speech, Reasonableness Pants (May 8, 2019), available at https://www.sec.gov/news/speech/speech-peirce-050819. [29]             SEC Press Release, SEC Charges Investment Adviser With Fraud (July 1, 2019), available at https://www.sec.gov/news/press-release/2019-115. [30]             SEC Press Release, SEC Charges Hedge Fund Adviser and Top Executives With Fraud (Sept. 30, 2019), available at https://www.sec.gov/news/press-release/2019-201. [31]             SEC Press Release, SEC Revokes Registration of Adviser Engaged in $60 Million Fraud (Nov. 26, 2019), available at https://www.sec.gov/news/press-release/2019-244. [32]             SEC Press Release, SEC Charges Recidivist Investment Adviser With Defrauding Retirees (Dec. 19, 2019), available at https://www.sec.gov/news/press-release/2019-274. [33]             SEC Press Release, SEC Charges Broker-Dealer with Violations of Gatekeeping Provisions Aimed at Protecting Investors (Aug. 14, 2019), available at https://www.sec.gov/news/press-release/2019-151. [34]             SEC Press Release, Two Broker-Dealers to Pay $4.65 Million in Penalties for Providing Deficient Blue Sheet Data (Sept. 16, 2019), available at https://www.sec.gov/news/press-release/2019-177. [35]             SEC Press Release, SEC Charges Broker-Dealers With Illicitly Profiting in Partial Tender Offer (Dec. 18, 2019), available at https://www.sec.gov/news/press-release/2019-268. [36]             SEC Press Release, Jefferies to Pay Nearly $4 Million for Improper Handling of ADRs (Dec. 9, 2019), available at https://www.sec.gov/news/press-release/2019-256. [37]             SEC Press Release, Raymond James Agrees to Pay $15 Million for Improperly Charging Retail Investors (Sept. 17, 2019), available at https://www.sec.gov/news/press-release/2019-151. [38]             SEC Press Release, SEC Charges Accountant and Friend in $6.2 Million Insider Trading Scheme (Jul. 10, 2019), available at https://www.sec.gov/news/press-release/2019-126. [39]             SEC Press Release, SEC Charges Investment Banking Analyst with Insider Trading (Aug. 12, 2019), available at https://www.sec.gov/news/press-release/2019-149. [40]             SEC Press Release, SEC Wins Jury Trial Against Broker Charged with Insider Trading (Aug. 14, 2019), available at https://www.sec.gov/news/press-release/2019-152. [41]             SEC Litig. Rel. No. 24554, SEC Obtains Final Judgment Against Former Accounting Firm Partner (Aug. 2, 2019), available at https://www.sec.gov/litigation/litreleases/2019/lr24554.htm. [42]             SEC Press Release, Former Congressman and Two Others Settle Insider Trading Charges (Dec. 9, 2019), available at https://www.sec.gov/news/press-release/2019-257. [43]             SEC Press Release, Silicon Valley IT Administrator and Friends Charged in Multimillion Dollar Insider Trading Ring (Dec. 17, 2019), available at https://www.sec.gov/news/press-release/2019-261. [44]           DOJ Press Release, Two South Bay Residents Indicted For Securities Fraud Relating To Palo Alto Networks, Inc. (Dec. 17, 2019), available at https://www.justice.gov/usao-ndca/pr/two-south-bay-residents-indicted-securities-fraud-relating-palo-alto-networks-inc. [45]             SEC Press Release, SEC Wins Jury Trial in Layering, Manipulative Trading Case (Nov. 12, 2019), available at https://www.sec.gov/news/press-release/2019-236. [46]             SEC Press Release, SEC Charges TherapeuticsMD With Regulation FD Violations (Aug. 20, 2019), available at https://www.sec.gov/news/press-release/2019-156.
The following Gibson Dunn lawyers assisted in the preparation of this client update:  Mark Schonfeld, Tina Samanta, Amy Mayer, Jaclyn Neely, Zoey Goldnick, Erin Galliher, Zachary Piaker, Brandon Davis. 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 Director of the SEC's New York Regional Office, 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. Securities enforcement investigations are often one aspect of a problem facing our clients. Our securities enforcement lawyers work closely with lawyers from our Securities Regulation and Corporate Governance Group to provide expertise regarding parallel corporate governance, securities regulation, and securities trading issues, our Securities Litigation Group, and our White Collar Defense Group. Gibson Dunn's 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: Securities Enforcement Practice Group Leaders: Richard W. Grime - Washington, D.C. (+1 202-955-8219, rgrime@gibsondunn.com) Barry R. Goldsmith - New York (+1 212-351-2440, bgoldsmith@gibsondunn.com) Mark K. Schonfeld - New York (+1 212-351-2433, mschonfeld@gibsondunn.com) Please also feel free to contact any of the following practice group members: New York Zainab N. Ahmad (+1 212-351-2609, zahmad@gibsondunn.com) Matthew L. Biben (+1 212-351-6300, mbiben@gibsondunn.com) Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Joel M. Cohen (+1 212-351-2664, jcohen@gibsondunn.com) Lee G. Dunst (+1 212-351-3824, ldunst@gibsondunn.com) Mary Beth Maloney (+1 212-351-2315, mmaloney@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Avi Weitzman (+1 212-351-2465, aweitzman@gibsondunn.com) Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com) Tina Samanta (+1 212-351-2469, tsamanta@gibsondunn.com) Washington, D.C. Stephanie L. Brooker (+1 202-887-3502, sbrooker@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Patrick F. Stokes (+1 202-955-8504, pstokes@gibsondunn.com) F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) San Francisco Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) Thad A. Davis (+1 415-393-8251, tadavis@gibsondunn.com) Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Michael Li-Ming Wong (+1 415-393-8234, mwong@gibsondunn.com) Palo Alto Michael D. Celio (+1 650-849-5326, mcelio@gibsondunn.com) Paul J. Collins (+1 650-849-5309, pcollins@gibsondunn.com) Benjamin B. Wagner (+1 650-849-5395, bwagner@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) Los Angeles Michael M. Farhang (+1 213-229-7005, mfarhang@gibsondunn.com) Douglas M. Fuchs (+1 213-229-7605, dfuchs@gibsondunn.com)

November 14, 2019 |
If It Looks Like a Duck: Chancery Court Knows a Demand When It Sees One

San Francisco partner Brian Lutz and Washington, D.C. associate Jason Hilborn are the authors of “If It Looks Like a Duck: Chancery Court Knows a Demand When It Sees One,” [PDF] published in the Delaware Business Court Insider on November 13, 2019.

November 12, 2019 |
Law360 Names Nine Gibson Dunn Partners as 2019 MVPs

Law360 named nine Gibson Dunn partners among its 2019 MVPs and noted that Gibson Dunn was one of two law firms with the most MVPs this year.  Law360 MVPs feature lawyers who have “distinguished themselves from their peers by securing hard-earned successes in high-stakes litigation, complex global matters and record-breaking deals.” The list was published on November 12, 2019. Gibson Dunn’s MVPs are:

  • Richard J. Birns, a Private Equity MVP [PDF] – Rich is a partner in the New York office and Co-Chair of the Sports Law Practice Group. He focuses his practice on U.S. and cross-border mergers, acquisitions, divestitures, joint ventures and financings for both corporations and leading private equity firms.  He also advises private investment funds on a variety of corporate issues, including securities law and shareholder activism matters.  He has extensive experience advising clients on significant transactional matters in media, sports and entertainment.
  • Michael P. Darden, an Energy MVP [PDF] – Mike is Partner-in-Charge of the Houston office and Chair of the Oil & Gas practice group. His practice focuses on International and U.S. oil and gas ventures (including LNG, deep-water and unconventional resource development projects), international and U.S. infrastructure projects, asset acquisitions and divestitures, and energy-based financings (including project financings, reserve-based loans and production payments).
  • Scott A. Edelman, a Trials MVP [PDF] – Scott is a partner in the Century City office and Co-Chair of the Media, Entertainment and Technology Practice Group. He has first-chaired numerous jury trials, bench trials and arbitrations, including class actions, taking well over 25 to final verdict or decision. He has a broad background in commercial litigation, including antitrust, class actions, employment, entertainment and intellectual property, real estate and product liability.
  • Theane Evangelis, a Class Action MVP [PDF] – Theane is a partner in the Los Angeles office, Co-Chair of the firm’s Class Actions Practice Group and Vice Chair of the California Appellate Practice Group. She has played a lead role in a wide range of appellate, constitutional, media and entertainment, and crisis management matters, as well as a variety of employment, consumer and other class actions.
  • Mark A. Kirsch, a Securities MVP [PDF] – Mark is Co-Partner-in-Charge of the New York office. His practice focuses on complex securities, white collar, commercial and antitrust litigation. He is routinely named one of the leading litigators in the United States.
  • Joshua S. Lipshutz, a Cybersecurity MVP [PDF] – Josh is a partner in the Washington, D.C. and San Francisco offices. His practice focuses primarily on constitutional, class action, data privacy, and securities-related matters.  He represents clients before the Supreme Court of the United States, the Ninth Circuit Court of Appeals, the California Supreme Court, the Delaware Supreme Court, the D.C. Court of Appeals, and many other state and federal courts.
  • Jane M. Love, a Life Sciences MVP [PDF] – Jane is a partner in the New York office. Her practice spans four areas: patent litigation, Patent Office trial proceedings including inter partes reviews (IPRs), strategic patent prosecution advice and patent diligence in transactions. She is experienced in a wide array of life sciences areas such as pharmaceuticals, biologics, biosimilars, antibodies, immunotherapies, genetics, vaccines, protein therapies, blood factors, medical devices, diagnostics, gene therapies, RNA therapies, bioinformatics and nanotechnology.
  • Matthew D. McGill, a Sports & Betting MVP [PDF] – Matthew is a partner in the Washington, D.C. office. He has participated in 21 cases before the Supreme Court of the United States, prevailing in 16.  Spanning a wide range of substantive areas, those representations have included several high-profile triumphs over foreign and domestic sovereigns. Outside the Supreme Court, his practice focuses on cases involving novel and complex questions of federal law, often in high-profile litigation against governmental entities.
  • Jason C. Schwartz, an Employment MVP [PDF] – Jason is a partner in the Washington, D.C. office and Co-Chair of the Labor & Employment Practice Group. His practice includes sensitive workplace investigations, high-profile trade secret and non-compete matters, wage-hour and discrimination class actions, Sarbanes-Oxley and other whistleblower protection claims, executive and other significant employment disputes, labor union controversies, and workplace safety litigation.

September 9, 2019 |
Law360 Names Seven Gibson Dunn Lawyers as 2019 Rising Stars

Seven Gibson Dunn lawyers were named among Law360’s Rising Stars for 2019 [PDF], featuring “attorneys under 40 whose legal accomplishments transcend their age.”  The following lawyers were recognized: Washington D.C. partner Chantale Fiebig in Transportation, San Francisco partner Allison Kidd in Real Estate, Washington D.C. associate Andrew Kilberg in Telecommunications, New York associate Sean McFarlane in Sports, New York partner Laura O’Boyle in Securities, Los Angeles partner Katherine Smith in Employment and Century City partner Daniela Stolman in Private Equity. Gibson Dunn was one of three firms with the second most Rising Stars. The list of Rising Stars was published on September 8, 2019.

August 19, 2019 |
12 Gibson Dunn Partners Named Lawyers of the Year

Best Lawyers® named 12 Gibson Dunn partners as the 2020 Lawyer of the Year in their respective practice areas and cities: Rachel Brass – San Francisco – Litigation – Antitrust Lawyer of the Year, Miguel Estrada – Washington, D.C. – Litigation – Intellectual Property Lawyer of the Year, Sean Feller – Los Angeles Employee Benefits (ERISA) Law Lawyer of the Year, Douglas Fuchs – Los Angeles Litigation – Regulatory Enforcement (SEC, Telecom, Energy) Lawyer of the Year, Ronald Mueller – Washington, D.C. Corporate Governance Law Lawyer of the Year, Douglas Rayburn – Dallas Securities Regulation Lawyer of the Year, Brian Robison – Dallas Antitrust Law Lawyer of the Year, Eugene Scalia – Washington, D.C. Employment Law – Management Lawyer of the Year, Jesse Shapiro – Los Angeles – Real Estate Law Lawyer of the Year, Daniel Swanson – Los Angeles Litigation – Antitrust Lawyer of the Year , F. Joseph Warin – Washington, D.C. Criminal Defense: White-Collar Lawyer of the Year, and Meryl Young – Orange Country Litigation – Securities Lawyer of the Year. The lawyers that were selected received particularly high ratings in Best Lawyers’ survey by earning a high level of respect among their peers for their abilities, professionalism and integrity. Only one lawyer in each legal community is selected as the Lawyer of the Year for each practice area.  The list was published in August 2019.

August 15, 2019 |
Five Partners Named Among Top Women in Litigation

Benchmark Litigation named Perlette Jura, Andrea Neuman, Elizabeth Papez, Deborah Stein and Meryl Young to its 2019 list of the Top 250 Women in Litigation, which recognizes America’s leading female trial lawyers.  The list was published on August 15, 2019. Perlette Jura co-chairs the firm’s Transnational Litigation Group and co-founded the firm’s Aerospace and Related Technologies Group.  She practices complex trial and appellate litigation and has played a key role in a number of the firm’s most high-profile transnational, environmental and technology-driven matters. She also has extensive experience working with the food and beverage, agricultural, aerospace, automotive, emerging technology and energy industries. Deborah Stein routinely represents clients in high-stakes matters, including cybersecurity and trade secrets litigation, securities and consumer class actions, and insurance coverage and business practices disputes.  She devotes a significant part of her practice to representing clients in cases involving the False Claims Act and whistleblower allegations of fraud. Andrea Neuman co-chairs Gibson Dunn’s Transnational Litigation Practice Group.  She is a high-stakes trial lawyer whose victories include billion dollar matters in both international and domestic forums.  Her international work spans Central, South and North America at both the trial and appellate levels.  Domestically, she represents clients in an array of industries nationwide, including oil and gas, food and agriculture, aerospace, technology, accounting, real estate and financial services. Meryl Young is Co-Chair of Gibson, Dunn & Crutcher’s Securities Litigation Practice Group.  She practices complex business and commercial litigation, with an emphasis on securities and merger and acquisition litigation and related government investigations.  She represents companies, directors and officers, and accounting firms in class actions, and professional liability actions in both state and federal courts.  She has also handled a wide variety of other types of business litigation, including cases involving contract disputes, unfair business practices, misappropriation of trade secrets and other business torts, trademark and patent infringement, antitrust, real estate, employment and insurance issues. Elizabeth Papez focuses on high-stakes class actions, complex commercial litigation, and related government investigations and appeals.  As a seasoned litigator and former U.S. Deputy Assistant Attorney General, she has substantial experience representing clients in the financial services, pharmaceutical, consumer, and product sectors.  She regularly handles federal class actions, multidistrict litigation and other complex commercial disputes under federal and state antitrust statutes, banking and securities laws, and false claims acts, as well as parallel regulatory investigations with the U.S. Department of Justice, the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Food and Drug Administration.

August 15, 2019 |
2019 Mid-Year Securities Litigation Update

Click for PDF The rate of new securities class action filings appears to be stabilizing, but that does not mean 2019 has been lacking in important developments in securities law. This mid-year update highlights what you most need to know in securities litigation trends and developments for the first half of 2019:

  • The Supreme Court decided Lorenzo, holding that, even though Lorenzo did not “make” statements at issue and is thus not subject to enforcement under subsection (b) of Rule 10b-5, the ordinary and dictionary definitions of the words in Rules 10b-5(a) and (c) are sufficiently broad to encompass his conduct, namely disseminating false or misleading information to prospective investors with the intent to defraud.
  • Because the Supreme Court dismissed the writ of certiorari in Emulex as improvidently granted, there remains a circuit split as to whether Section 14(e) of the Exchange Act supports an implied private right of action based on negligent misrepresentations or omissions made in connection with a tender offer.
  • We explain important developments in Delaware courts, including the Court of Chancery’s application of C & J Energy, as well as the Delaware Supreme Court’s (1) application and extension of its recent precedents in appraisal litigation to damages claims, (2) elaboration of its recent holding on MFW’s “up front” requirement, and (3) rare conclusion that a Caremark claim—“possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment”—survived a motion to dismiss.
  • Finally, we continue to monitor significant cases interpreting and applying the Supreme Court’s decisions in Omnicare and Halliburton II.

I.   Filing And Settlement Trends

New federal securities class action filings in the first six months of 2019 indicate that annual filings are on track to be similar to the number of new cases filed in each of the prior two years. According to a newly released NERA Economic Consulting study (“NERA”), 218 cases were filed in the first half of this year. While there was a relative surge in new cases in the first quarter of the year, this higher level of new cases did not persist in the second quarter. Filing activity in the first half of 2019 indicates a continuation of the shift in the types of cases observed in 2018—an increase in the number of Rule 10b-5, Section 11, or Section 12 cases, and a decrease in the number of merger objection cases. If the filing composition and levels observed in the first half of 2019 are indicative of the pattern for the rest of the year, we will see a 15% increase in Rule 10b-5, Section 11, and Section 12 cases compared to the approximate 1% growth in this category of filings in 2018. On the other hand, merger objection cases filed in 2019 are on pace to be more than 16% lower than similar cases filed in the prior year. While the median settlement values for the first half of 2019 are roughly equivalent to those in 2018 (at $12.0 million, down from $12.70 million in 2018), average settlement values are down over 50% from 2018 (at $33 million, down from $71 million in 2018).  That said, this discrepancy is due predominantly to one settlement in 2018 exceeding $1 billion.  Excluding such outliers, we actually see a slight increase in average settlement values compared to the prior two years. The industry sectors most frequently sued thus far in 2019 continue to be healthcare (22% of all cases filed), tech (20%), and finance (15%). Cases filed against healthcare companies in the first half of 2019 are showing the continuation of a downward trend from a spike in 2016, while cases filed against tech and finance companies are on pace with 2018.

A.   Filing Trends

Figure 1 below reflects filing rates for the first half of 2019 (all charts courtesy of NERA). So far this year, 218 cases have been filed in federal court, annualizing to 436 cases, which is on pace with the number of filings in 2017 and 2018, and significantly higher than the numbers seen in years prior to 2017. Note that 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.

Figure 1

B.   Mix Of Cases Filed In First Half Of 2019

1.   Filings By Industry Sector

As seen in Figure 2 below, the split of non-merger objection class actions filed in the first half of 2019 across industry sectors is fairly consistent with the distribution observed in 2018, with few indications of significant shifts or increases in particular sectors. As in 2018, the Health Technology and Services and the Electronic Technology and Technology Services sectors accounted for over 40% of filings. The two sectors reflecting the largest changes from 2018 thus far are Consumer Durables and Non-Durables (at 9%, up from 6% in 2018) and Consumer and Distribution Services (at 5%, down from 9% in 2018). See Figure 2, infra.

Figure 2

2.   Merger Cases

As shown in Figure 3, 83 “merger objection” cases have been filed in federal court in the first half of 2019 —below the pace of 109 cases at this point in 2018. If the 2019 trend continues, the 166 merger objection cases projected to be filed in 2019 will be about 16% fewer than the 198 merger objection cases filed in the prior year.

Figure 3

C.   Settlement Trends

As Figure 4 shows below, during the first half of 2019, the average settlement declined to $33 million, more than 50% lower than the average in 2018 but higher than the average in 2017. This phenomenon is primarily driven by one settlement in 2018 exceeding $1 billion, heavily skewing the average for that year.  If we limit our analysis to cases with settlements under $1 billion, there is actually a slight increase in the average settlement value in 2019 compared to the prior years.

Figure 4

Finally, as Figure 5 shows, the median settlement value for cases was $12 million, which is in line with the median in 2018 and almost double the median value in 2017.

Figure 5

II.   What To Watch For In The Supreme Court

A.   Lorenzo Affirms That Disseminators Of False Statements May Be Held Liable Under Rules 10b-5(a) And 10b-5(c) Even If Janus Shields Them From Liability Under Rule 10b-5(b)

We discussed the Supreme Court’s decision to grant review of Lorenzo v. Securities and Exchange Commission, No. 17-1077, in our 2018 Mid-Year Securities Litigation Update, and our 2018 Year-End Securities Litigation Update. Readers will recall that the question presented in Lorenzo was whether a securities fraud claim premised on a false statement that was not “made” by the defendant can be actionable as a “fraudulent scheme” under Section 17(a)(1) of the Securities Act and Exchange Act Rules 10b-5(a) and 10b-5(c), even though it would not support a claim under Rule 10b-5(b) pursuant to the Court’s ruling in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011). On March 27, 2019, the Supreme Court affirmed the D.C. Circuit in a 6–2 opinion by Justice Breyer (Justice Kavanaugh took no part in the decision because he participated in the panel decision while a judge on the court of appeals).  The Court held that the ordinary and dictionary definitions of the words in Rules 10b-5(a) and 10b-5(c) are sufficiently broad to encompass Lorenzo’s conduct, namely disseminating false or misleading information to prospective investors with the intent to defraud, even if the disseminator did not “make” the statements and is thus not subject to enforcement under subsection (b) of the Rule.  Lorenzo v. SEC, 587 U.S. ___ (2019), slip op. at 5–7. Underlying the Court’s opinion is the principle that the securities laws and regulations work together as a whole. The Court rejected Lorenzo’s argument that Rule 10b-5 should be read to mean that each provision of the Rule governs different, mutually exclusive spheres of conduct. Under Lorenzo’s reading, he could be liable for false statements only if his conduct violated provisions that specifically refer to such statements, such as Rule 10b-5(b), and could therefore not be liable under other provisions of the Rule, which do not specifically mention misstatements. The Court noted, however, that it has “long recognized considerable overlap among the subsections of the Rule” and related statutory provisions.  Id. at 7–8.  The opinion further noted that Lorenzo’s conduct “would seem a paradigmatic example of securities fraud,” making it difficult for the majority to reconcile Lorenzo’s argument with the basic purpose and congressional intent behind the securities laws.  Id. at 9. The majority also adopted the SEC’s argument that Janus concerned only Rule 10b-5(b), and thus does not operate to shield those who disseminate false or misleading information from scheme liability, even if they do not “make” the statement.  In response to Lorenzo’s contention that imposing primary liability here would weaken the distinction between primary and secondary liability, the Court drew what it characterized as a clear line:  “Those who disseminate false statements with intent to defraud may be held primarily liable under Rules 10b-5(a) and (c),” as well as Section 10(b) of the Exchange Act and Section 17(a)(1) of the Securities Act, “even if they are secondarily liable under Rule 10b-5(b).”  Id. at 10–11.  Finally, the Court identified a flaw in Lorenzo’s suggestion that he should only be held secondarily liable.  Under that theory, someone who disseminated false statements (even if knowingly engaged in fraud) could not be held to have aided and abetted a “maker” of a false statement if the maker did not violate Rule 10b-5(b). That is because the aiding and abetting statute requires that there be a violator to whom the secondary violator provides “substantial assistance.” Id. at 12. And if, under Lorenzo’s theory, the disseminator did not primarily violate other subsections (perhaps because the disseminator lacked the necessary intent), the fraud might go unpunished altogether.  Id. at 12–13. We noted in our 2018 Year-End Securities Litigation Update that Justice Gorsuch appeared accepting of Lorenzo’s positions during the oral argument, and he did join Justice Thomas (the author of Janus) in dissent. The dissent contended that the majority “eviscerate[d]” the distinction drawn in Janus between primary and secondary liability by holding that a person who did not “make” a fraudulent misstatement “can nevertheless be primarily liable for it.” Id. at 1 (Thomas, J., dissenting).  The dissent faulted the Court for holding, in essence, that the more general provisions of other securities laws each “completely subsumes” the provisions that specifically govern false statements, such as Rule 10b-5(b). Id. at 3.  Instead, the dissenters argued that these specific provisions must be operative in false-statement cases, and that the more general provisions should be applied only to cases that do not fall within the purview of these more specific provisions.

B.   Pending Certiorari Petitions

Regular readers of these updates will recall that we wrote about the Supreme Court’s pending decision in Emulex Corp. v. Varjabedian, No. 18-459, in the 2018 Year-End Securities Litigation Update. In April, the Supreme Court heard oral argument and then dismissed the writ of certiorari as improvidently granted. Emulex Corp. v. Varjabedian, 587 U.S. ___ (2019), slip op. at 1. As is common in such dismissals, the Justices offered no explanation of why they dismissed the case. Therefore, there remains a circuit split as to whether Section 14(e) of the Exchange Act supports an implied private right of action based on negligent misrepresentations or omissions made in connection with a tender offer. There is also at least one notable securities case in which a petition for certiorari is pending. Putnam Investments, LLC v. Brotherston, No. 18-926, an ERISA case, presents the question whether the plaintiff or defendant must prove that an alleged fiduciary breach related to investment option selection caused a loss to participants or the plan. The case also raises the issue of whether the First Circuit correctly held that showing that particular investment options did not perform as well as a set of index funds, selected by the plaintiffs with the benefit of hindsight, suffices as a matter of law to establish “losses to the plan.” The Supreme Court has entered an order requesting the Solicitor General file a brief expressing the views of the United States. The government has not yet filed its brief in this case. We will continue to monitor the petition and provide an update if the Supreme Court grants certiorari.

III.   Delaware Developments

A.   Delaware Supreme Court Affirms Deal Price Is Best Evidence Of Fair Value In Appraisal, And Of Damages In Entire Fairness

Regular readers of these updates will recall that, since our 2017 Year-End Securities Litigation Update, we have been reporting on the significant shift in Delaware appraisal law resulting from the Delaware Supreme Court’s landmark decision in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017), where it directed the Court of Chancery to use market factors to determine the fair value of a company’s stock. In our 2018 Mid-Year Securities Litigation Update, we wrote about the Delaware Court of Chancery’s decision in Verition Partners Master Fund v. Aruba Networks, Inc., where the trial court interpreted Dell as endorsing a company’s unaffected market price and deal price as reliable indicators of fair value under certain circumstances. 2018 WL 2315943, at *1 (Del. Ch. May 21, 2018). In April, however, the Delaware Supreme Court reversed the trial court, clarifying that, although the “unaffected market price” of a seller’s stock “in an efficient market is an important indicator of its economic value that should be given weight” under appropriate circumstances, Dell “did not imply that the market price of a stock was necessarily the best estimate of the stock’s so-called fundamental value at any particular time.” Verition Partners Master Fund v. Aruba Networks, Inc., 210 A.3d 128, 2019 WL 1614026, at *6 (Del. Apr. 16, 2019). Eschewing remand, the Supreme Court instead ordered the trial court to enter judgment awarding deal price less synergies as the company’s “fair value.” Id. at *8–9. Then, in May, the Delaware Supreme Court extended the same market-based deference from the appraisal context to damages claims in its affirmance of In re PLX Technology Inc. Stockholders Litigation, 2018 WL 5018535 (Del. Ch. Oct. 16, 2018), aff’d, 2019 WL 2144476, at *1 (Del. May 16, 2019) (TABLE). Late last year, the Delaware Court of Chancery determined in a post-trial opinion that an activist hedge fund aided and abetted a breach of fiduciary duties by directors in connection with their sale of the target company. 2018 WL 5018535, at *1. This was a pyrrhic victory, however, as the Court of Chancery concluded that the plaintiffs failed to prove their allegation that, had the company remained a stand-alone entity, its value would have exceeded the deal price by more than 50%. Id. at *2. Instead, the Court of Chancery found that “[a] far more persuasive source of valuation evidence is the deal price that resulted from the Company’s sale process.” Id. at *54; see also id. & n.605 (citing Dell, 177 A.3d at 30). In affirming the Court of Chancery’s decision on appeal, the Delaware Supreme Court rejected the plaintiffs’ argument that “the Court of Chancery erred . . . by importing principles from . . . appraisal jurisprudence to give deference to the deal price.” In re PLX Tech. Inc. Stockholders Litig., 2019 WL 2144476, at *1 (Del. May 16, 2019) (TABLE).

B.   Joint Valuation Exercise Constitutes Substantive Economic Negotiations Under Flood, Fails MFW’s “Up Front” Requirement

In our 2018 Year-End Securities Litigation Update, we reported on the Delaware Supreme Court’s decision in Flood v. Synutra International, Inc., where it held that the element of Kahn v. M & F Worldwide Corp. (“MFW”), 88 A.3d 635, 644 (Del. 2014) that requires a transaction to be conditioned “ab initio” or “up front” on the approval of both a special committee and a majority of the minority stockholders, in turn “require[s] the controller to self-disable before the start of substantive economic negotiations, and to have both the controller and Special Committee bargain under the pressures exerted on both of them by these protections.” Flood v. Synutra Int’l, Inc., 195 A.3d 754, 763 (Del. 2018). In Olenik v. Lodzinski, 208 A.3d 704 (Del. 2019), the Delaware Supreme Court added color to its holding in Flood that “up front” means “before the start of substantive economic negotiations,” Flood, 195 A.3d at 763. In the decision underlying Olenik, the Court of Chancery found that, although the parties to the merger had “worked on the transaction for months” before implementing MFW’s “up front” conditions, those “preliminary discussions” were “entirely exploratory in nature” and “never rose to the level of bargaining.” Olenik, 208 A.3d at 706, 716–17. Disagreeing with and reversing the Court of Chancery, the Delaware Supreme Court held that “preliminary discussions transitioned to substantive economic negotiations when the parties engaged in a joint exercise to value” the merging entities. Id. at 717. In particular, the Delaware Supreme Court found it reasonable to infer that two presentations valuing the target “set the field of play for the economic negotiations to come by fixing the range in which offers and counteroffers might be made.” Id. Thus, the parties could not invoke MFW’s protections because they did not condition the transaction on approval of both a special committee and a majority of the minority stockholders until after these “substantive economic negotiations.” Id.

C.   Under C & J Energy, Curative Shopping Process “Cannot Be Granted” To Remedy Deal Subject To Entire Fairness

Recently, the Court of Chancery declined to “blue-pencil” a merger agreement resulting from a flawed process based on the Delaware Supreme Court’s decision in C & J Energy Services v. City of Miami General Employees’ & Sanitation Employees’ Retirement Trust, 107 A.3d 1049 (Del. 2014). See FrontFour Capital Grp. LLC v. Traube, 2019 WL 1313408, at *33 (Del. Ch. Mar. 22, 2019). Recall that, in C & J Energy, the Delaware Supreme Court cautioned the Court of Chancery against depriving “adequately informed” stockholders of the “chance to vote on whether to accept the benefits and risks that come with [a flawed] transaction, or to reject the deal,” 107 A.3d at 1070, where (1) “no rival bidder has emerged to complain that it was not given a fair opportunity to bid,” id. at 1073, and (2) a preliminary injunction would “strip an innocent third party [buyer] of its contractual rights while simultaneously binding that party to consummate the transaction,” id. at 1054. In FrontFour, the plaintiff proved that the deal at issue was not entirely fair because conflicted insiders tainted the sale process; the special committee failed to inform itself adequately; standstill agreements prevented third parties from coming forward; and other deal protections prevented an effective post-signing market check, among other things. 2019 WL 1313408, at *32. Nevertheless, the Court of Chancery declined to grant “the most equitable relief” available—“a curative shopping process, devoid of [management] influence, free of any deal protections, plus full disclosures.” Id. at *33. The Court of Chancery reasoned that it had “no discretion” to do so under C & J Energy because the injunction sought would “strip an innocent third party of its contractual rights” under the merger agreement. Id.

D.   Delaware Supreme Court Holds Caremark Claim Adequately Pleaded

As we reported in our 2017 Year-End Securities Litigation Update, a Caremark claim generally seeks to hold directors personally accountable for damages to a company arising from their failure to properly monitor or oversee the company’s major business activities and compliance programs. On June 19, 2019, the Delaware Supreme Court reversed the Court of Chancery’s dismissal of a derivative suit against key executives and the board of directors of Blue Bell USA, carrying implications for both determinations of director independence and fiduciary duties under Caremark. See Marchand v. Barnhill, 2019 WL 2509617 (Del. June 19, 2019). In its demand futility analysis, the Court held that a combination of a “longstanding business affiliation” and “deep . . . personal ties” cast reasonable doubt on a director’s ability to act impartially. Id. at *2. Notably, the reversal turned on the length and depth of one director’s relationship with the CEO of Blue Bell and his family. Although being “social acquaintances who occasionally have dinner or go to common events” does not per se preclude one’s independence, the current CEO’s father and predecessor had hired, mentored, and quickly promoted the director in question to senior management. Id. at *11. The director maintained a close relationship with the CEO’s family that spanned more than three decades and the family even spearheaded a campaign to name a college building after the director. Id. at *10. This combination of facts persuaded the Court that this director was not independent for demand futility purposes. Id. at *10–11. The Court also held that a board’s failure to implement oversight systems related to a “compliance issue intrinsically critical to the business operation” gives rise to a duty of loyalty claim under Caremark. Id. at *13. The Court concluded that because food safety compliance was critical to the operation of a “single-product food company,” id at *4, neither the Company’s nominal compliance with some applicable regulations, nor management’s discussion of general compliance matters with the board were sufficient to satisfy the board’s oversight responsibilities, id. at *13–14.

IV.   Loss Causation Developments

The first half of 2019 saw several notable developments regarding 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. Separately, on June 24, 2019, the Supreme Court rejected a petition for a writ of certiorari filed in First Solar, Inc. v. Mineworkers’ Pension Scheme, which we discussed in the 2018 Mid-Year Securities Litigation Update. First Solar involved a perceived ambiguity in prior precedent regarding the correct test for loss causation under the Securities Exchange Act of 1934 (the “Exchange Act”). Readers will recall that the Ninth Circuit held in First Solar that loss causation can be established even when the corrective disclosure did not reveal the alleged fraud on which the securities fraud claim is based. Mineworkers’ Pension Scheme v. First Solar, Inc., 881 F.3d 750, 754 (9th Cir. 2018), cert. denied, No. 18-164, 2019 WL 2570667 (U.S. June 24, 2019). First Solar filed its petition for writ of certiorari in August 2018, arguing that loss causation can be proven only if the market learns of, and reacts to, the underlying fraud. In May 2019, the Solicitor General filed an amicus brief recommending that certiorari be denied, arguing that the Ninth Circuit correctly rejected a “revelation-of-the-fraud” requirement for loss causation, pursuant to which a stock-price drop comes immediately after the revelation of a defendant’s fraud. Following the Ninth Circuit’s decision in First Solar, some courts have found that a plaintiff adequately pleaded loss causation for the purposes of stating a claim under the Exchange Act when the revelation that caused the decline in a company’s stock price could be tracked back to the facts allegedly concealed, thus establishing proximate cause at the pleadings phase. See, e.g., In re Silver Wheaton Corp. Sec. Litig., 2019 WL 1512269, at *14 (C.D. Cal. Mar. 25, 2019) (denying motion to dismiss); Maverick Fund, L.D.C. v. First Solar, Inc., 2018 WL 6181241, at *8–10 (D. Ariz. Nov. 27, 2018) (denying motion to dismiss and finding that plaintiffs had adequately pleaded facts that, if proven, would establish that disclosures related to misstatements were “casually related” to fraudulent scheme). We will continue to monitor these and other developments regarding loss causation.

V.   Falsity Of Opinions – Omnicare Update

In the first half of 2019, courts continued to define the boundaries of Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015), the case in which the Supreme Court addressed the scope of liability for false opinion statements under Section 11 of the Securities Act. In Omnicare, 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. Under that standard, opinion statements give rise to liability under only three circumstances: (1) when the speaker does not “actually hold[] the stated belief;” (2) when the statement contains false “embedded statements of fact;” and (3) when the omitted facts “conflict with what a reasonable investor would take from the statement itself.” Id. at 1326–27, 1329. Consistent with past years, Omnicare remains a high bar to pleading the falsity of opinion statements. See, e.g, Plaisance v. Schiller, 2019 WL 1205628, at *11 (S.D. Tex. Mar. 14, 2019) (dismissing complaint that was “[m]issing . . . allegations of fact capable of proving that [the company] did not subjectively believe its audit opinions when they were issued”); Teamsters Local 210 Affiliated Pension Tr. Fund v. Neustar, Inc., 2019 WL 693276, at *5 (E.D. Va. Feb. 19, 2019) (finding that plaintiffs did not “allege facts that create a strong inference that at the time they [made the alleged misstatement], the Defendants could not have reasonably held the opinion” proffered). For example, in Neustar, plaintiffs alleged that defendants’ opinion that a certain transition “would occur by September 30, 2018” was false or misleading. 2019 WL 693276, at *5. Even though defendants were in possession of a “Transition Report, which warned that the transition might not occur” by that date, the court found that “[t]hese statements were far from definitive pronouncements that the transition date would occur later than September 2018.” Id. In addition, courts have continued to flesh out the contours of when a plaintiff has alleged that a company is in possession of sufficient information cutting against its statements to render it liable for an omission. In In re Ocular Therapeutix, Inc. Securities Litigation, the court found that a CEO’s statement that the company “think[s]” it had remedied deficiencies leading to the FDA’s denial of its New Drug Application was inactionable, even where the FDA later rejected the resubmitted application. 2019 WL 1950399, at *8 (D. Mass. Apr. 30, 2019). Not only did the CEO’s language “signal[] to investors that his statement was an opinion and not a guarantee,” but he also cautioned that it was up to the FDA to determine whether or not those deficiencies were corrected. Id. In Securities & Exchange Commission v. Rio Tinto plc, the SEC alleged that Rio Tinto violated securities laws by overstating the valuation of its newly acquired coal business when there had been certain adverse developments concerning the ability to transport coal and the quality of coal in the ground. 2019 WL 1244933, at *9 (S.D.N.Y. Mar. 18, 2019). The court dismissed the claim based on early valuation statements because those statements were opinions that “‘fairly align[ed] with’” information known at the time: namely, the main transportation option had not been entirely rejected, and the SEC did not “allege that Rio Tinto had come to fully appreciate the difficulties” concerning other transportation options and coal reserves by the time of those statements. Id. The SEC has moved to amend its complaint. Gibson Dunn represents Rio Tinto in this and other litigation. This year, courts also weighed in on the question of whether Omnicare applies to claims other than those brought under Section 11. Specifically, a Northern District of California court found that “[t]he Ninth Circuit has only extended Omnicare to Section 10(b) and Rule 10b-5 claims, not to Section 14 claims,” and therefore “decline[d] to extend Omnicare past the Ninth Circuit’s guidance.” Golub v. Gigamon Inc., 372 F. Supp. 3d 1033, 1049 (N.D. Cal. 2019) (citing City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc., 856 F.3d 605, 616 (9th Cir. 2017)). Gibson Dunn represents several defendants in that matter. In contrast, the Fourth Circuit applied Omnicare to dismiss a Section 14 claim without any discussion about Omnicare’s limitations, determining that a forward-looking statement was still actionable as an omission. Paradise Wire & Cable Defined Benefit Pension Plan v. Weil, 918 F.3d 312, 322–23 (4th Cir. 2019). Rather, the court emphasized the importance of context when evaluating opinion statements, noting that “words matter” and, as in Paradise Wire, can “render the claim for relief implausible.” Id. at 323. “When the words of a proxy statement, like the ones in this case, . . . contain tailored and specific warnings about the very omissions that are the subject of the allegations, those words render the claim for relief implausible.” Id. Additionally, a District of Delaware court recently declined to apply Omnicare to Section 10(b) claims: “Because the Third Circuit has twice declined to decide that Omnicare applies to Exchange Act claims, the Court is reluctant to decide that issue of first impression in connection with a motion to dismiss.” Lord Abbett Affiliated Fund, Inc. v. Navient Corp., 363 F. Supp. 3d 476, 496 (D. Del. 2019) (citing Jaroslawicz v. M & T Bank Corp., 912 F.3d 96 (3d Cir. 2018); In re Amarin Corp. PLC Sec. Litig., 689 F. App’x 124, 132 n.12 (3d Cir. 2017)). The Southern District of New York also considered whether Omnicare required broad disclosure of attorney-client privileged communications that might bear on whether omitted information rendered an opinion misleading. Pearlstein v. BlackBerry Ltd., 2019 WL 1259382, at *16 (S.D.N.Y. Mar. 19, 2019). In Pearlstein, plaintiffs argued that under Omnicare, a company’s “decision to include a legal opinion in [a] press release waived all attorney-client communications” related to the issuance of that release. Id. at *15. The court noted that Omnicare did not mandate a wholesale waiver, but “[a]t best . . . suggest[ed] that communications specific to a particular subject allegedly omitted or misrepresented within a securities filing may be subject to disclosure and, if the communications happen to be privileged, those communications may be subject to a finding of waiver.” Id. at *16. Accordingly, the company could not insulate itself with the privilege—documents containing relevant factual information were discoverable. However, privilege was not waived over the “side issue” of the company’s legal exposure, including as to documents on the strength and likelihood of any legal claims and “communications conducted solely for purposes of document preservation in connection with anticipated legal claims.” Id.

VI.   Courts Continue To Define “Price Impact” Analysis At The Class Certification Stage

We are continuing to monitor significant decisions interpreting Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014) (“Halliburton II”), but the one federal circuit court of appeal decision issued in the first half of 2019 did little to resolve outstanding questions regarding what it will mean for securities litigants. Recall that in Halliburton II, the Supreme Court preserved the “fraud-on-the-market” presumption, permitting plaintiffs to maintain the common proof of reliance that is required for class certification in a Rule 10b-5 case, but also permitting defendants to rebut the presumption at the class certification stage with evidence that the alleged misrepresentation did not impact the issuer’s stock price. There are three key questions we have been following in the wake of Halliburton II. 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, 573 U.S. at 283, with the Supreme Court’s 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, 815 (2011); Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 568 U.S. 455 (2013). Second, what standard of proof must defendants meet to rebut the presumption with evidence of no price impact? Third, what evidence is required to successfully rebut the presumption? As noted in our 2018 Year-End Securities Litigation Update, the Second Circuit addressed the first two questions in Waggoner v. Barclays PLC, 875 F.3d 79 (2d Cir. 2017) (“Barclays”) and Arkansas Teachers Retirement System v. Goldman Sachs Group, Inc., 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, the defendant bears the burden of persuasion to rebut the presumption by a preponderance of the evidence. 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.” Fed. R. Evid. 301. Nonetheless, that inconsistency was not enough to persuade the Supreme Court to review the Second Circuit’s decision.  Barclays PLC v. Waggoner, 138 S. Ct. 1702 (Mem.) (2018) (denying writ of certiorari). In Goldman Sachs, the Second Circuit vacated the trial court’s ruling certifying a class and remanded the action, directing that price impact evidence must be analyzed prior to certification, even if price impact “touches” on the issue of materiality.  Goldman Sachs, 879 F.3d at 486. On remand, the district court again certified the class. In re Goldman Sachs Grp. Sec. Litig., 2018 WL 3854757, at *1–2 (S.D.N.Y. Aug. 14, 2018). Plaintiffs argued on remand that because the company’s stock price declined following the announcement of three regulatory actions related to the company’s conflicts of interest, previous misstatements about its conflicts had inflated the company’s stock price.  See id. at *2. Defendants’ experts testified that correction of the alleged misstatements could not have caused the stock price drops, both because thirty-six similar announcements had not impacted the company’s stock price and because alternative news (i.e., news of regulatory investigations), in fact, caused the price drop. Id. at *3. The court found the plaintiffs’ expert’s “link between the news of [the company]’s conflicts and the subsequent stock price declines . . . sufficient,” and defendants’ expert testimony insufficient to “sever” that link. Id. at *4–6. In January, however, the Second Circuit agreed to review Goldman Sachs for a second time.  See Order, Ark. Teachers Ret. Sys. v. Goldman Sachs, Case No. 18-3667 (2d Cir. Jan. 31, 2019) (“Goldman Sachs II”). In Goldman Sachs II, the Second Circuit is poised to address what evidence is sufficient to rebut the presumption and how the analysis is affected by plaintiffs’ assertion that the alleged misstatements’ price impact is evidenced not by a price increase when the alleged misstatement is made, but by a price drop when the alleged misstatements are corrected, known as “price maintenance theory.” Defendants-appellants challenged the district court’s finding in two primary ways. First, they argued that the district court impermissibly extended price maintenance theory. See Brief for Defendants-Appellants, Goldman Sachs II, at 28–52 (2d Cir. Feb. 15, 2019). They reasoned that a price maintenance theory is unsupportable where the alleged corrective disclosures revealed no concrete financial or operational information that had been hidden from the market for the purpose of maintaining the stock price, see id. at 28–40, and where the challenged statements are too general to have induced reliance (and thus impacted the stock’s price), see id. at 40–50. Second, defendants-appellants argued that the district court misapplied the preponderance of the evidence standard by considering plaintiffs-appellees’ allegations as evidence and misconstruing defendants-appellants’ evidence of no price impact. See id. at 53–67. Plaintiffs-appellees responded that defendants-appellants’ price-maintenance arguments are not supported by law and that such arguments regarding the general nature of the statements are, in essence, a materiality challenge in disguise and thus not appropriate at the class certification stage. Brief for Plaintiffs-Appellees, Goldman Sachs II, at 20–30 (2d Cir. Feb. Apr. 19, 2019). Plaintiffs-appellees further argued that the district court did not abuse its discretion in weighing the evidence. Id. at 36–61. Defendants-appellants submitted their reply brief in May, Reply Brief for Defendants-Appellants, Goldman Sachs II (2d Cir. May 3, 2019), and the Second Circuit heard the case in June. Seven amicus briefs were filed in this case, including by the United States Chamber of Commerce and a number of securities law experts supporting defendants-appellants, and by the National Conference on Public Employee Retirement Systems supporting plaintiffs-appellees. Our 2018 Year-End Securities Litigation Update also noted that the Third Circuit was poised to address price impact analysis in Li v. Aeterna Zentaris, Inc. in the coming months. Briefing there invited the Third Circuit to clarify the type of evidence defendants must present, including the burden of proof they must meet, to rebut the presumption of reliance at the class certification stage and whether statistical evidence regarding price impact must meet a 95% confidence threshold. The district court had rejected defendants’ argument that plaintiff’s event study rebutted the presumption, and criticized defendants for not offering their own event study. See Li v. Aeterna Zentaris, Inc., 324 F.R.D. 331, 345 (D.N.J. 2018). With limited analysis, the Third Circuit affirmed, finding that the district court did not abuse its discretion in its consideration of conflicting expert testimony. Vizirgianakis v. Aeterna Zentaris, Inc., 2019 WL 2305491, at *2–3 (3d Cir. May 30, 2019). We will continue to monitor developments in Goldman Sachs II and other cases.
The following Gibson Dunn lawyers assisted in the preparation of this client update:  Jefferson Bell, Monica Loseman, Brian Lutz, Mark Perry, Shireen Barday, Lissa Percopo, Lindsey Young, Mark Mixon, Emily Riff, Jason Hilborn, Andrew Bernstein, Alisha Siqueira, Kaylie Springer, and Collin James Vierra. 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) Jefferson Bell - New York (+1 212-351-2395, jbell@gibsondunn.com) Jennifer L. Conn - New York (+1 212-351-4086, jconn@gibsondunn.com) Thad A. Davis - San Francisco (+1 415-393-8251, tadavis@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) © 2019 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 15, 2019 |
Gibson Dunn Lawyers Recognized in the Best Lawyers in America® 2020

The Best Lawyers in America® 2020 has recognized 158 Gibson Dunn attorneys in 54 practice areas. Additionally, 48 lawyers were recognized in Best Lawyers International in Belgium, Brazil, France, Germany, Singapore, United Arab Emirates and United Kingdom.

August 13, 2019 |
Benchmark Litigation Names Three Partners to 40 & Under Hotlist

Benchmark Litigation named Los Angeles partner Heather Richardson, New York partner Gabrielle Levin and Orange County partner Blaine Evanson to its annual 40 & Under Hotlist, which recognizes the achievements of the nation’s most accomplished legal partners aged 40 or younger.  The list was published on August 4, 2019. Heather Richardson focuses on health care, insurance, and class action matters.  She has represented health plans and plan sponsors in a variety of lawsuits, arbitrations, and government inquiries on a wide range of issues including reimbursement policy, coverage determinations, quality of care, pharmacy benefits, and provider contracting. Gabrielle Levin represents clients in employment, securities, and general litigation matters.  She also has experience in the defense of employers in Sarbanes-Oxley and other whistleblower protection litigation, discrimination and retaliation claims, executive compensation disputes, restrictive covenant and trade secret litigation, and wage and hour class actions. Blaine Evanson practices complex commercial litigation both in the trial court and on appeal. At the trial court level, he has experience in complex motion practice and providing strategic advice to trial counsel preparing for appeal.  At the appellate level, he has represented clients in a wide variety of matters in the U.S. Supreme Court and federal and state appellate courts around the country.

July 29, 2019 |
Delaware Supreme Court Revisits Oversight Liability

Click for PDF In a recent decision applying the famous Caremark doctrine, the Delaware Supreme Court confirmed several important legal principles that we expect will play a central role in the future of derivative litigation and that serve as important reminders for boards of directors in performing their oversight responsibilities.  In particular, the Delaware Supreme Court held that a claim for breach of the duty of loyalty is stated where the allegations plead that “a board has undertaken no efforts to make sure it is informed of a compliance issue intrinsically critical to the company’s business operation.”[1] Although the case addressed extreme facts that will have no application to most mature corporations, the plaintiffs’ bar can be expected to attempt to weaponize the decision.  With all the benefits that hindsight provides, derivative plaintiffs will more frequently contend that a board lacked procedures to monitor “central compliance risks” that were “essential and mission critical.”[2]  The Supreme Court’s decision reinforces that directors need to implement controls that enable them to monitor the most serious sources of risk, and may even caution in favor of a special discussion each year around critical risks.

The Decision

Marchand involved problems at Blue Bell Creameries USA, Inc., “a monoline company that makes a single product—ice cream.”[3] After several years of food-safety issues known by management, the company suffered a listeria outbreak. This outbreak led to a product recall, a complete operational shutdown, the layoff of one-third of employees, and three deaths.[4] The operational shutdown, in turn, caused the company to accept a dilutive investment to meet its liquidity needs.[5] After obtaining books and records, a stockholder sued derivatively alleging breach of fiduciary duties under Caremark.[6] That theory requires sufficiently pleading that “the directors utterly failed to implement any reporting or information system or controls” or “having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of the risks or problems requiring their attention.”[7] The plaintiff, though, chose not to make a demand on the board before suing on behalf of the company, so he was subject to the burden of pleading that making a demand would have been futile. In an effort to do so, he tried to allege that a majority of the board was not independent because it could not act impartially in considering a demand and that the directors also faced liability under Caremark. The Delaware Court of Chancery rejected both arguments, holding that the plaintiff came up one director short on his independence theory and that the plaintiff failed to plead liability under Caremark.[8] The Delaware Supreme Court reversed both holdings.[9] On independence, Chief Justice Strine continued his instruction from Delaware County Employees Retirement Fund v. Sanchez, 124 A.3d 1017 (Del. 2015) and Sandys v. Pincus, 152 A.3d 124 (Del. 2016) that Delaware law “cannot ignore the social nature of humans or that they are motivated by things other than money, such as love, friendship, and collegiality.”[10] “[D]eep and long-standing friendships are meaningful to human beings,” the Chief Justice reasoned, and “any realistic consideration of the question of independence must give weight to these important relationships and their natural effect on the ability of parties to act impartially towards each other.”[11] The director at issue, although recently retired from his role as CFO at the company, owed his “successful career” of 28 years at the company to the family of the CEO whom the director would be asked to sue.[12] And that family “spearheaded” an effort to donate to a local college that resulted in the college naming a new facility after the director.[13] These facts “support[ed] a pleading-stage inference” that the director could not act independently.[14] This was so despite the director’s previously voting against the CEO on whether to split the company’s CEO and Chairman position. Although the Court of Chancery reasoned that this militated against holding that the director was not independent, the Delaware Supreme Court held it was irrelevant to the demand futility analysis.[15] Voting to sue someone, the Supreme Court explained, is “materially different” than voting on corporate-governance issues.[16] The Supreme Court thus held that the number of directors incapable of acting impartially was sufficient to excuse demand. On Caremark liability, the Court focused on the first prong of the Caremark test: whether the board had made any effort to implement a reporting system. It explained that a director “must make a good faith effort” to oversee the company’s operations. “Fail[ing] to make that effort constitutes a breach of the duty of loyalty”[17] and can expose a director to liability. To meet this standard, the board must “try”[18] “to put in place a reasonable system of monitoring and reporting about the corporation’s central compliance risks.”[19] For Blue Bell, food safety was “essential and mission critical”[20] and “the obviously most central consumer safety and legal compliance issue facing the company.”[21] Despite its importance, the complaint contained sufficient facts to infer that no system of board-level compliance monitoring and reporting over food safety existed at the company. For example:
  • “no board committee that addressed food safety existed”;
  • “no regular process or protocols that required management to keep the board apprised of food safety compliance practices, risks, or reports existed”;
  • “no schedule for the board to consider on a regular basis, such as quarterly or biannually, any key food safety risks existed”;
  • “during a key period leading up to the deaths of three customers, management received reports that contained what could be considered red, or at least yellow, flags, and the board minutes of the relevant period revealed no evidence that these were disclosed to the board”;
  • “the board was given certain favorable information about food safety by management, but was not given important reports that presented a much different picture”; and
  • “the board meetings [we]re devoid of any suggestion that there was any regular discussion of food safety issues.”[22]
These shortcomings convinced the Delaware Supreme Court that the plaintiff had pleaded sufficient allegations that Blue Bell’s “board ha[d] undertaken no efforts to make sure it [wa]s informed of a compliance issue intrinsically critical to the company’s business operation.” Id. at 33. So the Court could infer that the board “ha[d] not made the good faith effort that Caremark requires.”[23] That management “regularly reported” to the board on “operational issues” was insufficient to demonstrate that the board had made a good faith effort to put in place a reasonable system of monitoring and reporting about Blue Bell’s central compliance risks.[24] So, too, was “the fact that Blue Bell nominally complied with FDA regulations.”[25] Neither of these facts showed that “the board implemented a system to monitor food safety at the board level.”[26] In light of these facts, the Supreme Court held that the plaintiff met his “onerous pleading burden” and was entitled to discovery to prove out his Caremark claim.[27]

Key Takeaways

  • Independence: Close Personal Ties Increase Litigation Risk
    • Directors should be aware that the greater the level of close personal or business relationships amongst themselves, management, and even each other’s families, the greater risk they face of being held incapable of exercising their business judgment in a demand futility analysis, even in circumstances where they have plainly demonstrated independent or dissenting judgment on corporate-governance matters.
  • Caremark
    • Increased Litigation Risk over Compliance Efforts
      • Derivative Litigation. Although Caremark claims will remain “the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,”[28] we expect an increase in attempted derivative litigation over a purported lack of board-level monitoring systems for specific risks as plaintiffs try to shoehorn as many standard business and non-business risks as possible into Marchand’s “essential and mission critical” risk category. Whereas to date many Caremark claims have focused on the second prong of the standard—alleging that a board consciously failed to monitor or oversee the operation of its reporting system or controls and by ignoring red flags disabled themselves from being informed of risks or problems requiring their attention—Marchand likely will focus plaintiffs on the first prong: whether in particular areas a board failed to implement any reporting or information system or controls.
        • The plaintiffs’ bar is bound to focus on the full array of corporate risks, including many that are not correctly characterized as “central compliance risks” for most companies. These areas could range from risks disclosed in the company’s SEC filings to cultural issues, like harassment or bullying, and more broader environmental, social, and governance (“ESG”) issues.
      • Books and Records Litigation. Similarly, we expect a rise in Section 220 books and records demands seeking to investigate a board’s specific oversight of central compliance risks.
  • Assessing Central Compliance Risks
    • Marchand does not change the core principle that a company’s board of directors is responsible for seeing that the company has systems in place to provide the board with information that is sufficient to allow directors to perform their oversight responsibilities. This includes information about major risks facing the company.
    • The Delaware Supreme Court emphasized in Marchand that these systems can be “context- and industry-specific approaches tailored to . . . companies’ business and resources.”[29] Accordingly, boards have wide latitude in designing systems that work for them. In light of this, boards should be comfortable that they understand the “central compliance risks” facing their companies. They should satisfy themselves that they are receiving, on an appropriate schedule, reports from management and elsewhere on these central risks and what management is doing to manage those risks.
    • In recent years, many boards have devoted significant time to thinking about how best to allocate responsibility for risk oversight at the board level. Boards should be comfortable that there is adequate coverage, among the full board and its committees, of the major compliance and other risks facing the corporation, and that the full board is receiving appropriate reports from responsible committees, as well as from management. They also should periodically evaluate the most effective methods for monitoring “essential and mission critical” risk to their companies, even where these risks do not relate directly to operational issues, and whether the current committee structure, charters, and meeting schedules are appropriate. These efforts, reports, and discussions should be documented.
    • Boards should establish systems so that management provides them with an adequate picture of compliance risks. In Marchand, although management received many reports about food-safety issues, “this information never made its way to the board.”[30]
    • Boards should remain mindful of the second prong in Caremark by overseeing the company’s response when they are informed of risks or problems requiring their attention. When reporting systems or other developments demonstrate that risks are becoming manifest, directors should assess whether a need exists to implement a heightened system of monitoring, such as setting additional meetings and requiring additional reports from management about the steps the company is taking to address the risk. Boards should hesitate to leave the response entirely to management.
  • Documenting the Board’s Work
    • Minutes of board meetings, and board materials, should not just reflect the “good news.” Instead, they should demonstrate that the board received appropriate information about issues and challenges facing the company, and that the board spent time discussing those issues and challenges. The goal should be to create a balanced record demonstrating diligent oversight by the board, while recognizing that those minutes could be produced in litigation.
________________________    [1]   Marchand v. Barnhill, No. 533, 2018, slip op. at 33 (Del. June 18, 2019).    [2]   Id. at 36.    [3]   Id. at 5.    [4]   Id. at 1.    [5]   Id.    [6]   Id. at 19.    [7]   Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).    [8]   Marchand, No. 533, 2018, slip op. at 20-23.    [9]   Id. at 3. [10]   Id. at 25. [11]   Id. at 28. [12]   Id. at 26. [13]   Id. [14]   Id. at 29. [15]   Id. at 27. [16]   Id. [17]   Id. at 37. [18]   Id. at 30. [19]   Id. at 36 (emphasis added). [20]   Id. [21]   Id. at 37. [22]   Id. at 32-33. [23]   Id. [24]   Id. at 35-36. [25]   Id. at 34. [26]   Id. [27]   Id. at 37. [28]   Stone v. Ritter, 911 A.2d 362, 372 (Del. 2006). [29]   Marchand, No. 533, 2018, slip op. at 30. [30]   Id. at 12.
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, any member of the firm's Securities Litigation or Securities Regulation and Corporate Governance practice groups, or the authors in Washington, D.C.: Securities Litigation Group: Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Jason J. Mendro (+1 202-887-3726, jmendro@gibsondunn.com) Jason H. Hilborn (+1 202-955-8276, jhilborn@gibsondunn.com) Securities Regulation and Corporate Governance Group: Elizabeth Ising (+1 202-955-8287, eising@gibsondunn.com) Ronald O. Mueller (+1 202-955-8671, rmueller@gibsondunn.com) Gillian McPhee (+1 202-955-8201, gmcphee@gibsondunn.com) Please also feel free to contact any of the following leaders of the Securities Litigation group:

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)

© 2019 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 12, 2019 |
Meryl Young Named Among Most Influential in Orange County

Orange County partner Meryl Young was recognized by the Orange County Business Journal’s in the OC500, a list of the most influential people in Orange County The guide notes her as a ”top female litigator” and one of  “California’s top 30” litigators.  The OC500 was published on July 12, 2019. Meryl Young is Co-Chair of the firm’s Securities Litigation Practice Group.  Her practice focuses on complex business and commercial litigation, with an emphasis on securities and merger and acquisition litigation and related government investigations.  She represents companies, directors and officers, and accounting firms in class actions, shareholder derivative suits and professional liability actions in both state and federal courts.  She has also handled a wide variety of other types of business litigation, including cases involving contract disputes, unfair business practices, misappropriation of trade secrets and other business torts, trademark and patent infringement, antitrust, real estate, employment and insurance issues.

July 11, 2019 |
Gibson Dunn Ranked in 2019 U.S. Legal 500

Gibson Dunn earned 54 practice area rankings, including 18 top-tier rankings in the 2019 edition of The Legal 500 – United States, and 32 partners were named Leading Lawyers in their respective practices with an additional 15 partners recognized as Next Generation Lawyers and two attorneys recognized as Rising Stars. The firm achieved first-tier rankings in the following categories: Antitrust – Cartel; Antitrust – Civil litigation/class actions: defense; Dispute resolution – Appellate – Courts of Appeals; Dispute resolution – Appellate: Supreme Courts (federal and state); Dispute resolution – Corporate investigations and white-collar criminal defense – advice to corporates; Dispute resolution – Corporate investigations and white-collar criminal defense – advice to individuals; Dispute resolution – General commercial disputes; Dispute resolution – International litigation; Dispute resolution – Securities litigation: defense; Industry focus – Energy transactions: oil and gas; Industry focus – Environment: litigation; Industry focus – Transport: rail and road – litigation; Industry focus – Transport: rail and road – regulation; Labor and employment – Labor and employment disputes (including collective actions): defense; Media, technology and telecoms – Media and entertainment: litigation; Media, technology and telecoms – Outsourcing; Real estate – Land use/zoning; and Real estate. The partners named as Leading Lawyers are Scott Hammond (Antitrust: Cartel), Richard Parker (Antitrust: Cartel, Antitrust – Civil ligation/Class Actions - Defense),  Daniel Swanson (Antitrust: Civil Litigation/Class Actions -  Defense), Allyson Ho, Miguel Estrada and Theodore Olson (Dispute Resolution: Appellate), Reed Brodsky and F. Joseph Warin (Corporate Investigations and White-Collar Criminal Defense), Randy Mastro (Corporate Investigations and White-Collar Criminal Defense, General Commercial Disputes, International Litigation and Leading Trial Lawyer), Deborah Stein (General Commercial Disputes), Perlette Jura (International Litigation), Orin Snyder (Leading Trial Lawyers), Brian Lutz(M&A Litigation Defense), Mark Kirsch (Securities Litigation – Defense),  Karen Manos (Government Contracts), Nicholas Politan (Energy – Renewable/Alternative), Peter Hanlon (Energy Transactions – Conventional Power), Michael Darden (Energy Transactions – Oil and Gas), Patrick Dennis (Environmental Litigation), Andrew Tulumello (Sport), Thomas Dupree Jr. (Transport: Rail and Road – Litigation and Transport: Rail and Road - Regulation), Catherine Conway, Eugene Scalia and Jason Schwartz (Labor and Employment Disputes), Scott Edelman (Media and Entertainment – Litigation), Ruth Fisher (Media and Entertainment - Transactional), Daniel Mummery, Stephen Nordahl and William Peters (Outsourcing), Eric Feuerstein and Jesse Sharf (Real Estate), Amy Forbes and Mary Murphy (Real Estate Land Use/Zoning). The partners named Next Generation Lawyers are Cynthia Richman (Antitrust: Cartel, Civil litigation/class actions and Merger Control), Adam Di Vincenzo (Merger Control), Matthew McGill (Dispute Resolution: Appellate), Anne Champion (International Litigation), Alexander Mircheff (M&A Litigation Defense), Robyn Zolman (Capital Markets Debt Offerings), Justin Stolte (Energy Transactions – Oil & Gas), Stacie Fletcher (Environmental Litigation), Gabrielle Levin and Katherine Smith (Labor and Employment Disputes), Benyamin Ross (Media and Entertainment - Transactional), Daniel Angel (Outsourcing and Technology Transactions), Douglas Champion (Real estate – Land use/zoning) and Noam Haberman and Kahlil Yearwood (Real Estate). The attorneys recognized as Rising Stars are David Schnitzer (Rail and Road: Litigation) and Molly Senger (Labor and Employment Disputes).

March 27, 2019 |
Supreme Court Holds That Securities Fraud Liability Extends Beyond “Maker” Of False Statements

Click for PDF Decided March 27, 2019 Lorenzo v. SEC, No. 17-1077

Today, the Supreme Court held 6-2 that an individual who knowingly disseminates false statements, even if the individual did not “make” the statements under SEC Rule 10b-5(b), can be held liable under other subdivisions of Rule 10b-5 and related securities laws.

Background: Francis Lorenzo sent emails to prospective investors containing false statements about the sale of securities.  He sent the emails at the direction of his boss, who wrote their content.  Under Janus Capital v. First Derivative Traders, 564 U.S. 135 (2011), Lorenzo could not be held liable for making false statements under Rule 10b-5(b) because he was not the “maker” of the statements—his boss retained “ultimate authority” over their content.  Id. at 142.  The SEC nonetheless charged Lorenzo with violating other parts of Rule 10b-5 and related statutes.  For example, the SEC alleged that Lorenzo had “employ[ed] any device, scheme, or artifice to defraud” under Rule 10b-5(a), and also had “engage[d] in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person” under Rule 10b-5(c).  The D.C. Circuit rejected Lorenzo’s contention that, because he was not the “maker” of the misstatements, he could not be held liable under Rule 10b-5(a) and (c) and related statutes. Issue:  Whether someone who is not a “maker” of a misstatement under Rule 10b-5(b) can nevertheless be held liable for dissemination of misstatements under other subsections of Rule 10b-5 and related securities laws. Court’s Holding:  Yes.  The prohibitions of fraudulent schemes and fraudulent practices in Rule 10b-5(a) and (c), as well as related prohibitions in securities laws, are broad enough to encompass the knowing dissemination of false or misleading statements directly to investors with the intent to defraud, even if the person who disseminates them did not “make” them under Rule 10b-5(b).

“[W]e conclude that . . . dissemination of false or misleading statements with intent to defraud can fall within the scope of subsections (a) and (c) of Rule 10b-5 . . . even if the disseminator did not ‘make’ the statements and consequently falls outside subsection (b) of the Rule.”

Justice Breyer, writing for the majority What It Means:
  • The Court read the language of Rule 10b-5 broadly, relying on dictionary definitions to hold that an individual need not “make” false statements in order to be liable for “employ[ing]” a scheme to defraud under Rule 10b-5(a) or for “engag[ing]” in an act that operates as a fraud under Rule 10b-5(c) based on the individual’s knowing dissemination of false statements with intent to deceive.
  • The Court declined to read the subdivisions of Rule 10b-5 as mutually exclusive, reasoning that their prohibitions involve “considerable overlap” to ensure coverage for multiple forms of fraud.
  • The Court suggested some limits to its broad reading of Rule 10b-5, observing that “liability would typically be inappropriate” for individuals “tangentially involved” in disseminating false statements, such as “a mailroom clerk.”
  • The Court reaffirmed its precedent holding that private suits are not permitted against secondary violators of Section 10(b), 15 U.S.C. § 78j(b).  For example, private plaintiffs cannot sue defendants for undisclosed actions that investors could not have relied upon.  Therefore, the Court’s ruling should be limited to claims involving the dissemination of false information directly to investors.
  • The Court did not address what intent (scienter) is required to establish violations of Rule 10b-5 and related securities laws, as Lorenzo did not challenge the D.C. Circuit’s holding that he had the requisite scienter.  The Court also reaffirmed that the SEC, “unlike private parties, need not show reliance in its enforcement actions.”
  • The decision may result in the SEC and private plaintiffs increasingly relying on provisions other than Rule 10b-5(b) when alleging violations of the securities laws.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders:

Appellate and Constitutional Law Practice

Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com

Related Practice: Securities Litigation

Brian M. Lutz +1 415.393.8379 Robert F. Serio +1 212.351.3917 Meryl L. Young +1 949.451.4229