\n<\/p>\n
This quarter\u2019s issue includes summaries and associated court opinions of selected cases decided in August and September 2021.<\/p>\n
Delaware Supreme Court Enforces Sophisticated Investors\u2019 Waiver of Appraisal Rights<\/strong><\/p>\n Manti Holdings, LLC v. Authentix Acquisition Co., Inc.<\/a><\/em>, No. 354, 2020 (Del. Sept. 13, 2021)<\/p>\n The Delaware Supreme Court affirmed the Court of Chancery\u2019s decision to enforce a waiver of appraisal rights included in a stockholders agreement that was executed by \u201csophisticated parties\u201d and accounted for all shares of the corporation.<\/p>\n In connection with a 2008 transaction, Authentix Acquisition Company, Inc. entered into a stockholders agreement with all holders of the company\u2019s shares (the Stockholders Agreement). The Stockholders Agreement provided that the common stockholders would \u201crefrain from the exercise of appraisal rights with respect to [a board and controller approved] transaction\u201d (the Refrain Obligation). In 2017, a third party acquired Authentix. Under the merger agreement, the petitioners\u2019 stock was canceled and converted into a right to receive merger consideration which, for common stock, was little to no compensation. The petitioners sent timely appraisal demands to Authentix. Authentix reminded the stockholders of the Refrain Obligation and requested withdrawal of the demands. The petitioners refused and filed an appraisal petition in the Court of Chancery. The court granted summary judgment for defendant Authentix and, in a case of first impression, held that Authentix stockholders waived their appraisal rights by consenting to the Stockholders Agreement and that such appraisal waiver was valid under Delaware law.<\/p>\n The Delaware Supreme Court affirmed the lower court\u2019s decision. First, the Supreme Court held that, by signing the Stockholders Agreement, petitioners agreed to a clear waiver of their appraisal rights. In doing so, the court rejected each of the petitioners\u2019 contractual arguments, including the argument that the termination provision in the Stockholders Agreement eliminated all contractual obligations upon a sale of Authentix. This provision, petitioners argued, freed them of any post-termination duty to refrain from seeking appraisal. The court concluded this was a \u201ccommercially unreasonable\u201d interpretation of the termination provision because stockholders can only exercise appraisal rights after a transaction closes. The court also refused to credit petitioners\u2019 attempt to distinguish between an agreement to \u201crefrain\u201d from exercising appraisal rights and an agreement to \u201cwaive\u201d those rights.<\/p>\n Second, the court found the Refrain Obligation enforceable as a matter of Delaware law and public policy. While the court noted that \u201cthere are certain fundamental features of a corporation that are essential to that entity\u2019s identity and cannot be waived,\u201d it also reiterated that the Delaware General Corporation Law (DGCL) is a \u201cbroad and enabling statute\u201d that allows for freedom of contract. The court found that certain provisions of the DGCL contain express prohibitions against waivers, highlighting the DGCL\u2019s prohibition on charter provisions shifting attorneys\u2019 fees for internal corporation claims or eliminating monetary liability for a director\u2019s breach of the duty of loyalty. While even certain of those provisions are not absolute, the majority found that Section 262 did not contain similar language prohibiting a waiver. Thus, while stating that \u201cthere are other contexts where an ex ante<\/em> waiver of appraisal rights would be unenforceable for public policy reasons,\u201d the court \u201cheld that sophisticated and informed stockholders could preemptively relinquish their appraisal rights for valuable consideration,\u201d and that such a waiver did not contravene Delaware public policy.<\/p>\n Second Circuit Vacates and Remands Class Certification Following the Supreme Court\u2019s Guidance on Generic Misstatements and Their Impact on a Stock\u2019s Price<\/strong><\/p>\n Ark. Tchr. Ret. Sys. v. Goldman Sachs Grp., Inc.<\/a><\/em>, No. 18-3667 (2d Cir. Aug. 26, 2021)<\/p>\n A Second Circuit panel vacated class certification for a group of Goldman Sachs investors in light of the Supreme Court\u2019s recent directive in Goldman Sachs Grp., Inc. v. Ark. Tchr. Ret. Sys.<\/em>, 141 S. Ct. 1951, 1958 (2021) for lower courts to consider whether a company\u2019s alleged misstatements are too generic to be relied upon by an entire class of investors when deciding on class certification. This case was initially brought by a putative class of investors against Goldman Sachs and several of its executives for violations of Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder. Investors alleged that Goldman had made certain misstatements about its conflicts of interest policies and business practices \u2014 including \u201c[w]e have extensive procedures and controls that are designed to identify and address conflicts of interest\u201d and \u201c[w]e are dedicated to complying fully with the letter and spirit of the laws\u201d \u2014 that were later revealed to be false by reports of government investigations into Goldman\u2019s conflicted role in certain transactions, causing the company\u2019s stock price to drop. Investors argued that the positive statements had fraudulently inflated Goldman\u2019s stock price. In response, Goldman submitted expert testimony that claimed, among other things, that the price drops were due to news of enforcement activities rather than Goldman\u2019s alleged conflicts.<\/p>\n The district court first certified a class in 2015, which the Second Circuit vacated and remanded in 2018 upon finding that it was unclear whether the district court had applied the preponderance-of-the-evidence standard in determining whether Goldman had rebutted the presumption that investors rely on all of a company\u2019s public misrepresentations when trading stock in an efficient market. On remand, the district court again certified the class because it found that Goldman had failed to establish by a preponderance of the evidence that its alleged misrepresentations had no price impact. This time, the Second Circuit affirmed. It disagreed with Goldman\u2019s argument that \u201cgeneral statements, like those challenged here, are incapable of impacting a company\u2019s stock price as a matter of law,\u201d and instead held that the proposal to exclude general statements as a matter of law too closely resembled the materiality inquiry, which was inappropriate at the class certification stage.<\/p>\n The Supreme Court vacated the Second Circuit\u2019s decision since it determined that it was unclear whether the appellate court had properly considered the generic nature of Goldman\u2019s alleged misrepresentations in reviewing the district court\u2019s price impact determination. It instructed on remand that the Second Circuit take into account all record evidence relevant to price impact. The Second Circuit therefore vacated class certification and remanded the matter to the district court because it determined that the lower court had not considered the generic nature of Goldman\u2019s alleged misrepresentations during its price impact analysis, and that these fact-intensive issues were better evaluated by the district court in the first instance.<\/p>\n SDNY Grants Class Certification to Investors of Pharmaceutical Company<\/strong><\/p>\n In re Allergan PLC Sec. Litig.<\/a><\/em>, <\/em>No. 18-civ-12089 (S.D.N.Y. Sept. 8, 2021)<\/p>\n Judge C.J. McMahon certified a class of investors in a pharmaceutical and medical products company in a suit alleging that the company and certain of its officers violated Sections 10(b) and 20(a) of the Securities Exchange Act, and Rule 10b-5 thereunder by failing to disclose information in publicly filed documents about a potential link between the company\u2019s breast implants and a rare form of cancer. Specifically, the plaintiffs alleged that the defendants made several statements downplaying the risk that the breast implants would be recalled on the basis of that link. The plaintiffs further alleged that a recall of the company\u2019s breast implants ordered by France\u2019s National Agency for the Safety of Medicines & Health Products (ANSM) functioned as a corrective disclosure, causing the company\u2019s stock price to drop.<\/p>\n Opposing the plaintiffs\u2019 motion for class certification, the defendants disputed only the predominance element of Rule 23(b), which requires that \u201cquestions of law or fact common to class members predominate over any questions affecting only individual members.\u201d In principal, the defendants contended that individualized questions relating to potential plaintiffs\u2019 reliance on the company\u2019s alleged misrepresentations and to measuring the economic loss associated with those statements would predominate over common issues. The defendants argued that the market did not rely on their alleged misstatements because there was no relationship between any of those statements and the company\u2019s share price. The court rejected this argument because the complaint alleged that the misstatements helped maintain an artificially inflated stock price.<\/p>\n The court similarly rejected the defendants\u2019 argument that because there were 15 days on which incidence reports about the possible link between the cancer and the implants were published and there were subsequently \u201cno statistically significant price fluctuations\u201d of the company\u2019s stock, the market was indifferent to reports of the link between the company\u2019s breast implants and cancer. Observing that \u201cnone of the fifteen\u201d incident reports \u201cfocused on the likelihood of a recall,\u201d the court held that the \u201cpresence or absence of a statistically significant price decline following any of the\u201d dates other than the ANSM announcement, when there was indisputably a price decline, \u201cis thus meaningless to the certification analysis.\u201d The court also rejected the defendants\u2019 argument that the plaintiff\u2019s economic loss model was incapable of isolating the loss attributable to challenged statements downplaying the risk of recall, finding that at the class certification stage, the plaintiff need not \u201cdisaggregate any legitimate confounding factors to prove economic loss.\u201d The court thus concluded that \u201ccommon questions of law and fact predominate over individualized ones in this case.\u201d<\/p>\n SDNY Allows Claims of Anticompetitive Conduct in Cryptocurrency Market To Proceed While Dismissing Civil RICO Claims<\/strong><\/p>\n In re Tether and Bitfinex Crypto Asset Litig.<\/a><\/em>, <\/em>No. 19 Civ. 9236 (KPF) (S.D.N.Y. Sept. 28, 2021)<\/p>\n Judge Katherine Polk Failla granted in part and dismissed in part a motion to dismiss a complaint brought by a proposed class of cryptocurrency buyers that allegedly purchased Bitcoin, Ether and other cryptocurrencies at artificially inflated prices before they dropped in 2018. The plaintiffs alleged that the defendants \u2014 various cryptocurrency companies and exchanges and certain of their executives and officers \u2014 were liable under Sections 1, 2 and 3 of the Sherman Act, as well as under Section 1962 of the Racketeer Influenced and Corrupt Organizations Act (RICO) because they engaged in a scheme to manipulate cryptocurrency markets by strategic purchasing to create a false \u201cbubble\u201d and control cryptocurrency pricing.<\/p>\n The court dismissed the claim brought under Section 2 of the Sherman Act and the claim brought under Section 1962 of RICO. Under Section 2, a plaintiff must allege a conspiracy to monopolize by showing (i) a combination or conspiracy; (ii) an overt act in furtherance of the conspiracy; and (iii) a specific intent to monopolize. The court determined that the complaint merely alleged a shared monopoly theory (i.e.<\/em>, that defendants lacked a specific intent to monopolize because they did not aim to confer monopoly power upon a single entity), which \u201ccannot support a Section 2 claim.\u201d Similarly, under the civil provisions of RICO under Section 1962, a plaintiff must allege that it suffered injuries \u201cin his business or property by reason of a violation of [S]ection 1962\u201d and must prove that the violation caused the injury in order to establish standing. The court found that the plaintiffs were harmed by the \u201cdecisions of independent market participants to purchase cryptocommodities (thereby artificially inflating prices)\u201d and not by the defendants directly. The court determined that the connection between the defendants\u2019 alleged activities \u2014 the establishment of price floors and increased market demand \u2014 and the purported injury was \u201cintricate, uncertain, and contingent on numerous independent decisions made by other market participants.\u201d The court thus found that the \u201ccausal connection between [the d]efendants\u2019 purported racketeering and [the p]laintiffs\u2019 injury [was] insufficiently \u2018direct\u2019 and \u2018straightforward\u2019 to satisfy the proximate cause requirement.\u201d<\/p>\n On the other hand, the court declined to dismiss claims under Sections 1 and 3 of the Sherman Act. Under Section 1, the plaintiffs must show (i) a combination or form of concerted action between at least two legally distinct economic entities that (ii) unreasonably restricts trade. Section 3 \u201cextends the reach of Section 1 to trade or commerce involving U.S. Territories and the District of Columbia.\u201d The court rejected the defendants\u2019 arguments that these claims were insufficiently pleaded under Federal Rule of Civil Procedure 9(b) because the plaintiffs pleaded sufficient circumstantial evidence, \u201cincluding charts, graphs, and specific examples illustrating how and when Defendants\u201d purchased a certain cryptocurrency \u201cto inflate cryptocurrency prices,\u201d to plausibly infer an agreement between the defendants sufficient to survive a motion to dismiss, and price fixing schemes are \u201cper se <\/em>unreasonable\u201d restrictions on trade.<\/p>\n SDNY Dismisses Investor Suit Alleging Cryptocurrency Scam on Jurisdictional Grounds<\/strong><\/p>\n Berdeaux v. OneCoin Ltd.<\/a><\/em>, No. 19-CV-4074 (S.D.N.Y. Sept. 20, 2021)<\/p>\n Judge Valerie Caproni dismissed a putative class action complaint alleging that an attorney, his business partner and their lawyer violated Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder by perpetrating a fraudulent cryptocurrency offering. The court also dismissed the plaintiffs\u2019 claims against the bank that allegedly aided and abetted the fraud. Specifically, the complaint alleged that the offering was actually \u201ca multi-level marketing scheme promoting and selling a fake cryptocurrency\u201d which was never traded on an actual cryptocurrency exchange or blockchain. The complaint alleged that the defendants laundered the proceeds of the fraudulent scheme. The individual defendants moved to dismiss for lack of personal jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(2), and all defendants moved to dismiss for failure to state a claim under Rule 12(b)(6).<\/p>\n The court determined that it lacked personal jurisdiction over the individual defendants because they resided in Florida during the course of the alleged fraud. The court rejected the plaintiffs\u2019 argument that because one of the three defendants was licensed to practice law in New York, had been arrested and tried in a criminal case in the Southern District of New York \u2014 and that wire transfers to the defendant\u2019s consulting company had been routed through a New York bank account \u2014 this was sufficient to find personal jurisdiction over all three individuals. The court determined that those facts did not show that any of the defendants actually transacted any business in New York sufficient to trigger specific jurisdiction under N.Y. C.P.L.R. \u00a7 302(a)(1). The court also noted that while the plaintiffs purported to represent a nationwide class, the complaint did not allege any injury in New York sufficient to exercise jurisdiction. Finally, the court dismissed the aiding and abetting claims against the bank that allegedly routed proceeds from the fraud to offshore accounts, finding that merely transferring funds was \u201cpatently insufficient to plead substantial assistance,\u201d and the plaintiffs failed to plead that the bank had any actual knowledge of the alleged fraud.<\/p>\n Southern District of Florida Grants Class Certification in Securities Fraud Action Concerning a Company\u2019s Initial Coin Offering<\/strong><\/p>\n Rensel v. Centra Tech, Inc.<\/a><\/em>, <\/em>No. 17-24500 (S.D. Fla. Sept. 10, 2021)<\/p>\n Judge Robert N. Scola Jr. granted class certification in a securities fraud case alleging that Centra Tech, Inc. violated securities laws through the unlawful sale of its cryptocurrency.<\/p>\n The plaintiffs were purported investors in Centra Tech\u2019s initial coin offering (ICO) that took place from July 23, 2017, to October 5, 2017. The plaintiffs alleged that Centra Tech made several misrepresentations to investors in its attempts to promote the ICO. Based on these alleged misrepresentations, the plaintiffs brought a putative class action against Centra Tech under Section 12(a)(1) of the Securities Act, Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5. Because the plaintiffs were pursuing monetary relief, they moved for class certification under Federal Rule of Civil Procedure 23(b)(3).<\/p>\n The district court initially denied the plaintiffs\u2019 motion for class certification for failure to satisfy the ascertainability requirement; however, on appeal, the Eleventh Circuit found that the plaintiffs had \u201ceasily\u201d shown that the proposed class was ascertainable. Thus, the panel vacated the district court\u2019s order and remanded for further proceedings.<\/p>\n On remand, the district court granted the plaintiffs\u2019 renewed motion, certifying a class that includes all persons and entities who purchased Centra Tech\u2019s cryptocurrency during its ICO. In reaching this decision, the court found that all of Rule 23\u2019s requirements for class certification had been satisfied. The court first adopted the Eleventh Circuit\u2019s holding that the plaintiffs had \u201ceasily\u201d satisfied the ascertainability requirement, which serves as an implied prerequisite of Rule 23.<\/p>\n The court then found that the plaintiffs had satisfied all four prerequisites set out in Rule 23(a) for class certification \u2014 numerosity, commonality, typicality and adequacy. First, numerosity was satisfied, as it was undisputed that thousands of individuals had invested in Centra Tech\u2019s ICO. Second, commonality was established insofar as the class members shared issues of law and fact relating to Centra Tech\u2019s alleged misrepresentations. Third, typicality was met because the claims of the class representatives and of the class arose from the same event and were premised on the same legal theory. Fourth, adequacy was satisfied because the class representatives possessed the same interests in litigating the case as the other class members, and did not have any conflicts that would preclude them from adequately representing the class.<\/p>\n Finally, the court found that the plaintiffs had satisfied the two additional requirements \u2014 predominance and superiority \u2014 under Rule 23(b)(3). With respect to predominance, the court found that individualized issues of reliance would not preclude certification because (i) Section 12(a)(1) claims do not require a showing of reliance; and (ii) with respect to the Section 10(b) claim, the plaintiffs could rely on the fraud-created-the-market presumption of reliance. As to superiority, the court reasoned that \u201c[c]lass treatment is often the best method for resolving securities fraud claims predicated on public misrepresentations.\u201d<\/p>\n Delaware Supreme Court Simplifies Standard for Analyzing Demand Futility<\/strong><\/p>\n United Food and Com. Workers Union and Participating Food Indus. Emp\u2019rs Tri-State Pension Fund v. Zuckerberg<\/a><\/em>, <\/em>No. 404, 2020 (Del. Sept. 23, 2021)<\/p>\n The Delaware Supreme Court adopted a new three-part test for evaluating demand futility, \u201cblending\u201d and replacing the tests formerly set out in the seminal cases Aronson v. Lewis <\/em>and Rales v. Blasband<\/em>. Going forward, this will be the \u201cuniversal test for assessing whether demand should be excused.\u201d<\/p>\n Plaintiff stockholders filed a derivative action seeking to recover nearly $90 million that Facebook had spent defending and settling an earlier consolidated class action challenging a reclassification that was ultimately abandoned. The Court of Chancery noted that under the facts of the case \u2014 which included board turnover and certain board member recusals \u2014 it was unclear whether the test articulated in Aronson<\/em> or Rales<\/em> applied for purposes of assessing demand futility. The court instead applied a three-prong standard derived from both Aronson<\/em> and Rales<\/em>, and dismissed the complaint for failure to plead that demand was futile.<\/p>\n The Delaware Supreme Court adopted the Court of Chancery\u2019s new three-part test for demand futility, explaining that although Aronson<\/em> \u201cmade sense\u201d at the time it was decided, \u201c[s]ubsequent changes in the law have eroded the ground upon which that framework rested. Those changes cannot be ignored, and it is both appropriate and necessary that the common law evolve in an orderly fashion to incorporate those developments.\u201d Going forward, in determining whether demand is futile, the court will consider whether the director (i) \u201creceived a material personal benefit from the alleged misconduct that is the subject of the litigation demand\u201d; (ii) faces \u201ca substantial likelihood of liability on any of the claims that are the subject of the litigation demand\u201d; and (iii) \u201clacks independence from someone who received a material personal benefit from the alleged misconduct that is the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.\u201d If the answer to one of these questions is \u201cyes\u201d for at least half of the members of the demand board, then demand is excused as futile.<\/p>\n As part of its ruling, the Delaware Supreme Court rejected Tri-State\u2019s argument that demand was \u201cautomatically excused under Aronson<\/em>\u2019s second prong\u201d because Mark Zuckerberg, Facebook\u2019s controlling stockholder, stood on both sides of the challenged transaction, implicating the entire fairness standard of review. The Delaware Supreme Court further explained that claims for breach of the duty of care that are exculpated by a charter provision adopted pursuant to 8 Del<\/em>. C. \u00a7 102(b)(7) do not expose directors to a substantial likelihood of liability and cannot satisfy this standard.<\/p>\n Delaware Supreme Court Overrules Gentile<\/em>, Holding Corporate Overpayment\/Dilution Claims Are Exclusively Derivative<\/strong><\/p>\n Brookfield Asset Management, Inc. v. Rosson<\/a><\/em>, No. 406, 2020 (Del. Sept. 20, 2021)<\/p>\n The Delaware Supreme Court overruled Gentile v. Rossette<\/em>, 906 A.2d 91 (Del. 2006), holding that corporation overpayment\/dilution claims \u2014 including those resulting from a transaction that transfers economic value and voting power from minority stockholders to a controlling stockholder \u2014 are \u201cexclusively derivative.\u201d<\/p>\n In 2004, the Delaware Supreme Court issued its decision in Tooley v. Donaldson, Lufkin & Jennette, Inc.<\/em>, in which it \u201cundertook to create a simple test of straightforward application to distinguish direct claims from derivative claims\u201d by asking \u201c(1) who suffered the alleged harm, the corporation or the stockholders, individually, and (2) who would receive the benefit of any recovery or other remedy, the corporation or the stockholders, individually.\u201d Two years later, in 2006, the Delaware Supreme Court decided Gentile<\/em>, holding that although claims for overpayment are typically derivative, claims involving \u201ca controlling stockholder and transactions that resulted in an improper transfer of both economic value and voting power from the minority stockholders to the controlling stockholder\u201d present an exception to the Tooley<\/em> test and are \u201cdual-natured,\u201d i.e<\/em>., both derivative and direct.<\/p>\n In Brookfield<\/em>, plaintiff stockholders challenged TerraForm Power, Inc.\u2019s private placement of stock to its controlling stockholder. The plaintiffs alleged that TerraForm undervalued the stock and the transaction diluted both the financial and voting interests of the minority stockholders. After the plaintiffs filed their complaint, the controlling stockholder acquired TerraForm\u2019s remaining shares in a merger. The defendants moved to dismiss the complaint for lack of standing, arguing that dilution claims are \u201cquintessential derivative claims\u201d under the Tooley<\/em> test and the derivative claims had been extinguished by the merger. The Court of Chancery agreed that the plaintiffs failed to state direct claims under Tooley<\/em>, but nevertheless denied the motion to dismiss because the plaintiffs stated a direct claim under Gentile<\/em>.<\/p>\n On interlocutory appeal, the defendants-below\/appellants argued that the plaintiffs\u2019 claims were derivative under Tooley<\/em>, and that Gentile<\/em> should be overruled because it \u201ccontradicts and undermines long-standing case law, complicates real-world commercial transactions, and is superfluous given existing legal remedies.\u201d Addressing the importance of stare decisis and emphasizing that \u201cprecedent should not be lightly cast aside,\u201d the Delaware Supreme Court nevertheless agreed with the defendants-below\/appellants. It recounted the detailed history of the court\u2019s decisions concerning direct and derivative claims and ultimately concluded that \u201cthe corporation overpayment\/dilution Gentile<\/em> claims \u2026 are exclusively derivative under Tooley<\/em> and that Gentile<\/em> \u2026 should be overruled.\u201d It therefore reversed the Court of Chancery\u2019s decision, \u201cnot because the Court of Chancery erred, but rather, because the Vice Chancellor correctly applied the law as it existed, recognizing that the claims were exclusively derivative under Tooley<\/em>, and that he was bound by Gentile<\/em>.\u201d<\/p>\n Court of Chancery Denies Motion To Dismiss Caremark<\/em> Claim<\/strong><\/p>\n In re Boeing Co. Derivative Litig.<\/a><\/em>, C.A. No. 2019-0907-MTZ (Del. Ch. Sept. 7, 2021)<\/p>\n The Court of Chancery sustained a Caremark<\/em> claim at the pleadings stage, holding that stockholder plaintiffs had adequately pled that a majority of the Boeing board of directors faced a substantial likelihood of liability for failing both prongs of Caremark<\/em>\u2019s two-part test. The Caremark<\/em> test imposes liability under two \u201cprongs,\u201d where (i) the directors either utterly failed to implement any reporting or information system or controls; or (ii) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.<\/p>\n According to the plaintiffs, in 2017, global aerospace company Boeing began to fulfill customer orders for its new Boeing 737 MAX airplanes, which Boeing had aggressively designed, developed, marketed and produced. In the development and marketing of the 737 MAX, Boeing \u201cprioritized (1) expediting regulatory approval and (2) limiting expensive pilot training required to fly the new model.\u201d Boeing\u2019s \u201cfrenetic\u201d pace for the 737 MAX program led, in part, to undisclosed safety issues with the airplanes. These safety issues ultimately led to two separate airline crashes, each killing between 150-200 passengers. By 2020, Boeing estimated that these airline disasters, the resulting grounding of the 737 MAX fleet and other fallout had already caused Boeing to incur $22.5 billion in total costs.<\/p>\n In describing the Caremark<\/em> standard, the court emphasized that a well-pled oversight claim \u201crequires not only proof that a director acted inconsistently with his fiduciary duties but also most importantly, that the director knew he was so acting.\u201d Because the test is rooted in concepts of bad faith, \u201ca showing of bad faith is a necessary condition<\/em> to director oversight liability.\u201d Notwithstanding the high bar for pleading bad faith, however, the Court of Chancery held that the plaintiffs adequately pled a claim for breach of the duty of loyalty predicated on lack of oversight under both prongs of the Caremark<\/em> test.<\/p>\n Turning to the plaintiffs\u2019 allegations, on prong one, the court concluded that airplane safety was \u201cessential and mission critical\u201d to Boeing\u2019s business, yet the board (i) had no committee charged with direct responsibility to monitor airplane safety; (ii) did not monitor, discuss or address airplane safety on a regular basis; (iii) had no regular process or protocols requiring management to update the board of airplane safety and instead only received ad hoc <\/em>management reports that included only positive information; (iv) never received information on yellow and red flags that management saw; and (v) made statements that demonstrated they knew they should have had processes in place to receive safety information. On prong two, the court concluded that the board ignored the red flags of the first plane crash and consequent revelations about the unsafe 737 MAX. For these reasons, the court denied the defendants\u2019 motion to dismiss the Caremark<\/em> claim.<\/p>\n The Second Circuit Partially Reverses Dismissal of Proposed Class Action Claiming Manufacturing Company Misled Shareholders About Inventory<\/strong><\/p>\n IWA Forest Indus. Pension Plan v. Textron Inc.<\/a><\/em>, No. 20-2746-cv (2d Cir. Sept. 17, 2021)<\/p>\n A split Second Circuit panel partially reversed the dismissal of a proposed class action lawsuit brought by a putative class of investors against a manufacturer of aircraft and recreational vehicles and two of its executives. The complaint alleged that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 thereunder by making four material misstatements between January and December 2018 relating to the company\u2019s new acquisition of a manufacturer of snowmobiles and off-dirt vehicles. Those statements concerned (i) the acquired company\u2019s inventory levels; (ii) the integration of the acquired company\u2019s business; (iii) the acquired company\u2019s performance and prospects; and (iv) the possibility of a goodwill impairment charge. The district court dismissed the complaint in its entirety, finding that the complaint failed to adequately allege any actionable misstatements.<\/p>\n On appeal, the Second Circuit agreed with the district court\u2019s findings relating to the acquired company\u2019s integration, expected performance and goodwill, but determined that some of the CEO\u2019s statements about clearing out the acquired company\u2019s old inventory could have misled investors. Specifically, the Second Circuit focused on three statements made by the company\u2019s CEO in 2018: (i) the acquired company had seen \u201cimproved demand in the snow retail channel, allowing dealers to clear older inventory and drive 2018 model sales\u201d; (ii) that \u201cthrough the course of the year\u201d there had been \u201cpretty significant reductions in that aged inventory\u201d; and (iii) that the \u201colder inventory ha[d] been moved off [dealers\u2019] books,\u201d and that \u201clast year was great, in terms of burning down a lot of the inventory.\u201d The plaintiffs claimed that these statements were false because from early 2017 through the summer of 2018, the acquired company consistently had a substantial inventory backlog of vehicles from model years 2015 to 2017.<\/p>\n The Second Circuit held that the complaint had sufficiently alleged that the CEO\u2019s 2018 statements regarding inventory were materially misleading. The Second Circuit rejected the company\u2019s argument that the CEO\u2019s earlier statements in 2017 \u2014 which disclosed the significant challenges presented by the acquired company\u2019s backlog of aged inventory \u2014 were enough for a reasonable investor to recognize that the \u201colder inventory\u201d problem mentioned by him in his 2018 statements related to vehicles that were at least model year 2016 and older, and had nothing to do with model year 2017 vehicles. The Second Circuit noted that since the company generally launches new model year products in the fall of the prior calendar year, the 2017 models were not current as of August or September 2017. Thus, the inventory-related statements the CEO made in 2017 viewed \u201cin the light most favorable\u201d to the plaintiffs must be inferred to have referred to models from 2016 or earlier, not to models from 2017.<\/p>\n \u00a0<\/p>\n Maryland Federal District Court Dismisses Shareholder Suit Against Biopharmaceutical Company for Failure To Adequately Plead Falsity and Scienter<\/strong><\/p>\n Emps.\u2019 Ret. Sys. of City of Baton Rouge v. MacroGenics, Inc.<\/a><\/em>, No. GJH-19-2713 (D. Md. Sept. 29, 2021)<\/p>\n Judge George J. Hazel granted biopharmaceutical company MacroGenics\u2019s motion to dismiss a securities fraud class action. The case arose from defendant MacroGenics\u2019s statements about the clinical trials of its new cancer treatment product Margetuximab.<\/p>\n MacroGenics began developing Margetuximab and conducted a Phase III trial for the drug. This trial compared the performance of the new Margetuximab treatment to the performance of an existing treatment called Trastuzumab, which was considered the \u201cmarket-leading\u201d standard biologic treatment for breast cancer. The trial first attempted to establish a \u201cmeaningful benefit\u201d to patients taking Margetuximab as opposed to Trastuzumab in terms of \u201cprogression free survival\u201d (PFS). The trial further attempted to establish a \u201cmeaningful benefit\u201d to patients taking Margetuximab compared to Trastuzumab in terms of \u201coverall survival\u201d (OS). According to the complaint, OS is considered a \u201ccritically important endpoint\u201d in evaluating a new treatment for a disease with a high mortality rate and \u201ccritical to the commercial prospects of a drug like Margetuximab.\u201d<\/p>\n On February 6, 2019, MacroGenics released results from its initial review of the trial. MacroGenics announced that the data showed a statistically significant PFS benefit to Margetuximab treatment but stated only that the OS data was still \u201cmaturing.\u201d The stock price of the company increased by 130% that same day. MacroGenics then announced that it would be holding a secondary public offering on February 13, 2019, at an offering price of $20 per share. The company raised $126.5 million in gross proceeds from that secondary offering. Over the next few months, MacroGenics continued to publicize its positive PFS data while declining to comment on its OS data except to mention the data was still maturing. The plaintiff allegedly purchased common stock in MacroGenics after the February 6, 2019, release of initial results.<\/p>\n On May 15, 2019, MacroGenics disclosed initial interim OS data for the first time. On June 4, 2019, MacroGenics presented interim trial data at a conference and, for the first time, presented graphs of OS data showing that the clinical trial data was not<\/em> on track to demonstrate that Margetuximab would result in a meaningfully higher overall survival rate than Trastuzumab. Two days after the conference, the price of MacroGenics stock fell more than 21%, representing an overall 43% decline since its February 6, 2019, high.<\/p>\n The plaintiff brought suit, alleging the defendant made false and misleading representations and omissions in statements about Margetuximab during the class period, which caused them to buy MacroGenics stock at \u201cartificially inflated prices\u201d and suffer losses after the \u201cfull truth\u201d about the study emerged. The plaintiff brought their claims under Section 10(b) and 20(a) of the Exchange Act relating to various public statements during the class period, and under Sections 11, 12(a)(2) and 15 of the Securities Act relating to the defendant\u2019s February 2019 offering. The defendant moved to dismiss.<\/p>\n The court sided with the defendant and dismissed the action. In so holding, the court first found that heightened pleading standards applied to all the plaintiffs\u2019 allegations suit because the claims sounded in fraud. The court grouped the statements at issue into four categories: (i) statements about PFS results; (ii) statements of \u201csuperior outcome\u201d or \u201cpositive results\u201d; (iii) cautionary statements and risk factors; and (iv) statements about the interim OS data.<\/p>\n The court determined that the defendant\u2019s statements about the PFS results were not misleading, reasoning that disclosure is required only when necessary to make statements already made not misleading. The court determined that the plaintiff did not \u201cspeak\u201d on the OS data just by virtue of releasing results about PFS data, and further reasoned that no reasonable investor would have been left with a mistaken impression about the OS results. With respect to the defendant\u2019s statements about superior and positive outcomes, the court determined that they were inactionable puffery, particularly where the defendant stated that its clinical trial results provided \u201cclinical validation\u201d that the data is \u201cpromising\u201d and showed \u201cpositive results,\u201d as Margetuximab did in fact display positive PFS results. Moreover, the court found these statements were broad enough to be considered \u201cpuffing\u201d or were accompanied by caveats that the determination of OS data was ongoing. With respect to the third category, the court determined that the defendant\u2019s cautionary statements and risk factors were inactionable. The court determined that the warnings regarding the prospects for Margetuximab did not relate to risks that had already come to fruition since failure was not a certainty for Margetuximab.<\/p>\n Finally, the court disagreed with the plaintiff\u2019s assertion that the OS data was vitally important to investors and thus required to be disclosed. The court noted that disclosure of information was not required simply because it may be relevant to a reasonable investor. The court further reasoned that investors were not entitled to \u201cseveral forms of data or data in a preferred form,\u201d and that disagreement with the defendant\u2019s failure to release specific types of graphic data until June 2019 was not a material omission.<\/p>\n The court also determined that the plaintiff failed to prove the defendant acted with scienter. The court reasoned that scienter could not be inferred from financial motivations ultimately common to every company, such as the motivation to raise capital or increase compensation. The court also determined that corporate executives\u2019 access to information and internal affairs also did not demonstrate scienter in this instance, regardless of the fact that the defendant\u2019s corporate executives may have had access to the OS data prior to its release.<\/p>\n Northern District of Ohio Dismisses Putative Class Action With Prejudice<\/strong><\/p>\n Plymouth Cnty. Ret. Ass\u2019n v. ViewRay, Inc.<\/a><\/em>, No. 1:19-cv-2115 (N.D. Ohio Aug. 25, 2021)<\/p>\n Judge J. Philip Calabrese dismissed a putative securities class action against ViewRay, a medical device company. ViewRay\u2019s revenues are based on the sales of its Linac MRIdian, an MRI machine paired with a radiation beam to image and treat cancer at the same time. Once an order is placed, it takes nine to 15 months to be fulfilled. As such, the key metric in ViewRay\u2019s valuation is its backlog of unfulfilled orders. In March 2019, ViewRay projected that its revenue for the year would be between $111 million and $124 million, based on the backlog. These projections decreased as the year progressed. In January 2020, ViewRay disclosed that its 2019 revenue was below $17 million. As a result, ViewRay\u2019s stock price dropped about 23%.<\/p>\n The plaintiffs filed suit under Section 10(b) of the Securities Exchange Act and Rule 10b-5, arguing that ViewRay knowingly issued false statements about its backlog. ViewRay moved to dismiss the claim, arguing that the plaintiffs failed to allege materially false statements or omissions. The court agreed, granting ViewRay\u2019s motion to dismiss.<\/p>\n The plaintiffs claimed that the alleged misrepresentations and omissions fell into three categories: (i) statements about orders in the backlog; (ii) statements about the backlog\u2019s value; and (iii) ViewRay\u2019s 2019 revenue projections.<\/p>\n The plaintiffs argued that ViewRay did not follow its own publicly stated criteria for including orders in its backlog, which rendered its statements false or misleading. The plaintiffs further alleged that ViewRay maintained sham orders in the backlog that would not result in profit. Here, the plaintiffs relied on statements from a confidential witness that a customer decided not to proceed with the purchase of a machine but the order remained in the backlog. The court disagreed on both points. He noted that part of ViewRay\u2019s publicly stated criteria involves a subjective judgement about the likelihood of an order contract translating into revenue, thus the company\u2019s statements could not be false or misleading. The court added that the plaintiffs\u2019 complaint contained no allegations regarding the specific order discussed by the confidential witness, nor did it allege facts sufficient to support the witness\u2019 account.<\/p>\n Next, the plaintiffs argued that ViewRay\u2019s statements about the valuation of the backlog included orders that were unlikely to come to fruition. The court stated that neither the complaint nor the witness statements offered more than generalities about the backlog, and that they failed to allege facts about specific orders. Further, the plaintiffs did not allege facts showing that ViewRay\u2019s calculations underlying valuation of the backlog were incorrect.<\/p>\n The plaintiffs also argued that ViewRay\u2019s revenue projections for 2019 were misleading. The plaintiffs claimed that ViewRay\u2019s projections in March 2019 were not achievable or accompanied by necessary meaningful cautionary language. The court disagreed, holding that the projections were forward looking, meaning they could not be the basis of the claim. Additionally, the court pointed to appropriate cautionary language, noting that ViewRay stated that its total revenue figures were anticipatory and that actual results may differ. Having found that the plaintiffs\u2019 allegations were insufficient to support their claim, the court dismissed the case.<\/p>\n Seventh Circuit Affirms Dismissal of Merger Proxy Challenge<\/strong><\/p>\n Kuebler v. Vectren Corp.<\/a><\/em>, 13 F.4th 631 (7th Cir. Sept. 13, 2021)<\/p>\n In 2018, Vectren Corporation filed a preliminary proxy statement for an all-cash merger with CenterPoint Energy, Inc., in which CenterPoint would pay Vectren shareholders $72 per share. The plaintiff shareholders filed suit under Section 14(a) of the Securities Exchange Act to enjoin the shareholder vote based on alleged disclosure defects. After the district court denied a preliminary injunction and shareholders approved the merger, the plaintiffs amended their complaint to ask for damages based on the omission from the proxy statement of two metrics used by the financial adviser to assess the value of Vectren\u2019s shares: (i) unlevered cash flow projections, which forecast the gross after-tax annual cash flow for Vectren between 2018 and 2027; and (ii) business segment projections, which show separate financial projections for Vectren\u2019s three main lines of business. The District Court for the Southern District of Indiana dismissed the plaintiffs\u2019 claims, finding that they failed to adequately allege the materiality of the omissions and resulting economic loss. The plaintiffs appealed, and the Court of Appeals for the Seventh Circuit affirmed the decision on the same grounds.<\/p>\n The Seventh Circuit first addressed a \u201cprocedural wrinkle\u201d that arose in the district court. In that court, the plaintiffs attached an affidavit by a financial expert and relied upon it in their opposition to the defendants\u2019 motion to dismiss. The district court did not consider the affidavit when ruling on the motion, holding that it was evidence. The Seventh Circuit held that plaintiffs opposing a Rule 12(b)(6) motion to dismiss may submit evidence to illustrate their allegations \u2014 unlike defendants moving to dismiss a complaint under Rule 12(b)(6), who may not.<\/p>\n Assessing the materiality of the omitted information, the Seventh Circuit held as a matter of law that the information was not material. Specifically, the court held that disclosure of the business segment projections would not have substantially altered the total mix of available information because shareholders did not have the option of selling separate interests in separate lines of business. The court also held that the omission of the unlevered cash flow projections was not material because the proxy statement included a variety of other financial information sufficient to assess the value of the shares, such as projections of net income, depreciation and amortization, EBIDTA and capital expenditures. The court found that the plaintiffs failed to plausibly allege that the omission of the unlevered cash flow projections \u201ccould have kept hidden a value in Vectren shares that was not otherwise disclosed.\u201d The court emphasized that the materiality standard \u201crequires courts to assess the value of the omitted information in light of all the information made available to shareholders,\u201d and that shareholders are not entitled to the disclosure of all data used by financial advisers in order to apprais[e] the \u201cappraiser\u2019s appraisal after the fact.\u201d<\/p>\n The Seventh Circuit also held that the plaintiffs failed to allege loss causation because they failed to purport any economic harm at all, alleging rather that shareholders were unable to determine the extent of their economic harm because of the omitted information. The court noted that the plaintiffs\u2019 allegation that Vectren\u2019s financial adviser used an inflated discount rate \u2014 thereby deflating Vectren\u2019s valuation \u2014 was \u201ca debate about the merits of the merger terms, not whether the proxy statement was misleading,\u201d and that the plaintiffs did not allege the existence of a viable superior offer.<\/p>\n Having found that the plaintiffs failed to adequately allege materiality and loss causation, the Seventh Circuit affirmed the Southern District of Indiana\u2019s dismissal of the case.<\/p>\n Second Circuit Upholds Dismissal of Securities Fraud Claim for Failure To Plead Actionable Misstatements<\/strong><\/p>\n Plumber & Steamfitters Local 773 Pension Fund v. Danske Bank<\/a><\/em>, <\/em>No. 20-3231 (2d Cir. Aug. 25, 2021)<\/p>\n The Second Circuit affirmed the dismissal of claims brought by a putative class of investors against a bank and certain of its officers under Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 thereunder, alleging that the defendants materially misled investors about a money laundering scandal involving the bank\u2019s branch in Estonia.<\/p>\n Specifically, the plaintiffs \u2014 three pension funds \u2014 alleged that they had purchased the bank\u2019s American depositary receipts (ADRs) at artificially inflated prices between March and June of 2018 because the defendants misleadingly disclosed year-over-year net profit and revenue while concealing that possible money-laundering at the bank was \u201cbaked into the bank-wide numbers.\u201d The Second Circuit disagreed, holding that accurate financial statements \u201cdo not automatically become misleading\u201d if a company does not disclose suspected misconduct that may have contributed to the financial results. The plaintiffs also alleged that the defendant\u2019s 2013 and 2014 corporate responsibility reports (the Reports) which represented that the bank and its employees \u201cstrive to conduct [their] business in accordance with internationally recognised principles in the area of \u2026 anti-corruption\u201d were misleading in light of the bank\u2019s corrupt activity in Estonia. Observing that almost every bank makes such statements, the Second Circuit held that they are \u201cinactionable puffery,\u201d because no investor \u201cwould take such statements seriously in assessing a potential investment.\u201d The Second Circuit held that a reasonable investor \u2014 who purchased the bank\u2019s ADRs more than three years after the Reports were published and was well aware of the laundering scandal as it was brought to public light in 2016 \u2014 would not have considered the challenged statements from the Reports in its \u201cinvestment calculus.\u201d<\/p>\n The plaintiffs also alleged that the defendants made actionably misleading statements in their 2018 second quarter financial results because the defendants knew that the scope of the laundering scandal \u201cfar exceeded\u201d what was publicly reported at the time and was \u201clikely to materially undermine its financial position.\u201d The Second Circuit disagreed, holding that the timing of the plaintiffs\u2019 purchases undermined their claim. The Second Circuit noted that the plaintiffs purchased the defendants\u2019 ADRs three weeks before these challenged statements were made. The Second Circuit further noted that the plaintiffs alleging that they were damaged by \u201cpurchasing securities at an inflated price cannot maintain a securities fraud claim premised exclusively on statements made after<\/em> the plaintiff\u2019s final purchase of securities.\u201d<\/p>\n SDNY Grants Motion To Dismiss Complaint Filed Against Tobacco Company<\/strong><\/p>\n In re Philip Morris Int\u2019l Inc. Sec. Litig.<\/a><\/em>, No. 18-cv-08049 (RA) (S.D.N.Y. Sept. 10, 2021)<\/p>\n Judge Ronnie Abrams dismissed claims brought by a putative class of investors under Sections 10(b) and 20(a) of the Securities Exchange Act, and Rule 10b-5 promulgated thereunder against a tobacco company and certain of its officers alleging that the defendants failed to timely disclose material information from four undisclosed studies about known health risks associated with the company\u2019s smokeless cigarette-alternative device for which the company sought FDA approval. The plaintiffs further alleged that the defendants made misleading statements about the results of studies given to the FDA concerning the cigarette-alternative device. The defendants moved to dismiss the complaint, arguing that it failed to sufficiently plead an actionable misstatement or omission and failed to adequately plead scienter.<\/p>\n The court agreed and rejected the plaintiffs\u2019 argument that the defendants\u2019 positive interpretations of available data concerning the comparative risks between the cigarette-alternative device and conventional cigarettes were misleading because they failed to disclose four scientific studies showing larger amounts of some harmful chemicals in the cigarette-alternative device. Noting that the complaint pleaded that defendants had a reasonable basis for making their challenged statements of opinion about the relative risks of the cigarette-alternative device, the court held that none of the undisclosed studies substantially undermined the defendants\u2019 statements. The court further held that the plaintiffs failed to plausibly allege that the defendants\u2019 factually accurate statements about the company\u2019s clinical trials were rendered misleading by failing to disclose results from a different category of studies. The court found that no reasonable investor in the cigarette-alternative market \u201cwould have interpreted the reporting of clinical results as necessarily implying the release of all available, non-clinical, data on the subject.\u201d<\/p>\n The court similarly rejected the plaintiffs\u2019 argument that the defendants made misleading statements concerning the chemical composition of the cigarette-alternative device. Acknowledging that the plaintiffs and defendants viewed data concerning the chemical composition of the cigarette-alternative device differently, the court held that because the FDA \u2014 \u201cafter months-long analysis of the data\u201d \u2014 reached an opinion about the chemical composition of the cigarette-alternative device that was \u201csubstantially similar\u201d to the defendants\u2019 view, the defendants\u2019 statements were not misleading.<\/p>\n Finally, the court held that the complaint failed to adequately plead scienter because it did not plead with particularity that any defendant was aware of the results of the four studies at the time of their challenged statements. The court rejected the complaint\u2019s confidential witness allegation of scienter because \u201c[a]lthough the unnamed former employee may have been familiar in broad strokes with the procedure concerning non-clinical studies, there is no allegation that he or she had any direct conduct with any individual defendant.\u201d<\/p>\n \u00a0<\/p>\n Ninth Circuit Affirms Dismissal of Securities Fraud Action for Failure To Plead Scienter<\/strong><\/p>\n Veal v. LendingClub Corp.<\/a><\/em>, No. 20-16603 (9th Cir. Sept. 21, 2021)<\/p>\n The Ninth Circuit affirmed the dismissal of securities fraud claims brought against a peer-to-peer lending company and certain of its officers based on an allegedly misleading disclosure regarding the subject matter of a regulatory investigation.<\/p>\n In May 2016, the Federal Trade Commission (FTC) began investigating the company over alleged deceptive practices regarding hidden loan origination fees. In the company\u2019s public filings, the defendants disclosed that the company had been contacted by and was cooperating with the FTC on an investigation, but did not disclose the precise subject matter of the investigation. After the FTC investigation came to light, the plaintiffs \u2014 purported investors \u2014 brought securities fraud claims under Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5 thereunder, alleging that the defendants made misleading statements to investors regarding the FTC investigation that improperly downplayed its risks to the company\u2019s revenues. The district court dismissed the complaint, concluding that the plaintiffs had failed to adequately allege scienter.<\/p>\n The Ninth Circuit affirmed, concluding that the plaintiffs\u2019 individual allegations failed to establish a strong inference of scienter. Specifically, the plaintiffs did not plausibly allege that the defendants knew the focus of the FTC\u2019s investigation at the time the challenged statements were made, or that the defendants sought to hide the focus of the investigation from investors. While the plaintiffs alleged in conclusory fashion that the defendants \u201cknew all along\u201d what the FTC was investigating, the panel explained that knowledge of an issue within a company does not necessarily imply awareness of a government agency\u2019s investigation of that particular issue.<\/p>\n Viewed holistically, the allegations still failed to give rise to a strong inference of scienter. The panel noted that none of the individual defendants sold any stock during the alleged class period, and that two of them actually purchased stock during the period. These facts undermined any inference of scienter and instead supported an \u201cinference of innocence.\u201d<\/p>\n Third Circuit Upholds Dismissal of Securities Fraud Claim for Failure To Plead Scienter<\/strong><\/p>\n Pamcah-UA Loc. 675 Pension Fund v. BT Grp. PLC<\/a><\/em>, No. 20-2106 (3d Cir. Aug. 5, 2021)<\/p>\n The Third Circuit affirmed the dismissal of securities fraud claims brought against multinational telecommunications company BT Group and several of its officers and directors regarding the fraudulent accounting that took place for several years at one of its subsidiaries.<\/p>\n In its prior financial statements, BT Group reported profits from its subsidiary \u2014 BT Italy \u2014 and indicated that it was examining the control environment there. However, in a 2016 press release, BT Group identified prior overstatements of profits due to \u201chistorical accounting errors\u201d stemming from inappropriate management behavior at BT Italy. BT Group later confirmed in a 2017 press release that the overstatement of profits exceeded \u00a3530 million. After these accounting irregularities were revealed, the plaintiffs \u2014 alleged investors \u2014 brought securities fraud claims under Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5, arguing that the defendants wrongfully concealed the accounting issues in BT Group\u2019s public filings. The district court dismissed the complaint, concluding that the plaintiffs\u2019 scienter allegations did not meet the heightened pleading standards imposed by the Private Securities Litigation Reform Act of 1995 (PSLRA).<\/p>\n On appeal, the Third Circuit affirmed, rejecting the two arguments the plaintiffs advanced to defend the sufficiency of their scienter allegations. First, the panel found that the allegations as to the chairman of BT Group\u2019s audit committee did not support a strong inference of scienter that could be imputed to BT Group. The panel noted that (i) BT Group\u2019s board of directors visited BT Italy at the audit committee\u2019s request to review operations; (ii) BT Group repeatedly disclosed concerns about BT Italy to the SEC and reported that it was monitoring the entity\u2019s control environment; and (iii) BT Group voluntarily disclosed its prior inaccurate reporting through its 2016 and 2017 press releases. While the panel acknowledged that these allegations provided modest support for the inference that BT Group intended to commit fraud, they provided stronger support for the inference that the company actually intended to detect and prevent fraud.<\/p>\n Second, the panel found that the allegations regarding executives at two subsidiaries of BT Group \u2014 BT Global Services and BT Italy \u2014 also failed to plead scienter. The plaintiffs sought to impute the alleged mental states of those executives to BT Group by urging the Third Circuit to adopt the \u201ccorporate scienter\u201d doctrine used in other circuits. However, the panel declined to apply that doctrine in this case. With regard to the executives at BT Global Services, the panel found that the plaintiffs\u2019 allegations \u2014 which relied on second- and third-hand accounts contained in news articles \u2014 did not create a compelling inference that the executives had an intent to commit financial statement fraud, as required by the PSLRA. With regard to the executives at BT Italy, the panel found corporate scienter did not exist because the plaintiffs made no allegations that BT Group participated in BT Italy\u2019s alleged accounting fraud. The panel explained that parent companies cannot be held liable for the acts of their subsidiaries merely by the fact of ownership.<\/p>\n District of Minnesota Dismisses Securities Claims for Failure To Meet PSLRA Pleading Standards<\/strong><\/p>\n In re 3M Co. Sec. Litig.<\/a><\/em>, No. 20-CV-2488 (D. Minn. Sept. 30, 2021)<\/p>\n Judge Nancy E. Brasel granted 3M\u2019s motion to dismiss securities claims against the company and certain executives because the plaintiffs failed to meet the heightened pleading standard under the Private Securities Litigation Reform Act (PSLRA).<\/p>\n The plaintiffs allege that 3M materially understated its legal and financial exposure related to PFAS, synthetic chemical compounds which have been linked to cancer. PFAS are used in a variety of products, including foam used in high-temperature firefighting. 3M developed and manufactured PFAS from the 1940s until 2008 after studies demonstrated the harmful effects of the chemicals. 3M has faced tort lawsuits and a suit from the Minnesota Attorney General related to its manufacture and disposal of PFAS. 3M disclosed this litigation in its public filings and accrued liability contingencies related to environmental litigation. 3M ultimately settled the litigation with the Minnesota attorney general for $850 million.<\/p>\n The putative class plaintiffs, who were purchasers of 3M\u2019s stock during the relevant period, brought claims for violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5, alleging that 3M and its executives made misleading and inadequate disclosures regarding the PFAS-related liability exposure. 3M moved to dismiss, asserting that the plaintiffs failed to meet the PSLRA pleading standards because the complaint (i) failed to plead an actionable misstatement; and (ii) failed to plead a strong inference of scienter.<\/p>\n With respect to actionable misstatements, the court noted that the plaintiffs took a kitchen sink approach to pleading, alleging that broad sections of 3M\u2019s disclosures were false. The critical issue was whether 3M\u2019s failure to accrue a greater amount for PFAS liabilities violated the generally accepted accounting principles (GAAP) requirement to disclose probable and reasonably estimable losses. The court found that the complaint failed to allege facts that would demonstrate that 3M knew of a reasonable estimable amount it should disclose for the PFAS litigation; therefore, the complaint failed to plead any actionable misstatements.<\/p>\n 3M also argued that the plaintiffs failed to plead any of the avenues to show scienter: (i) motive to defraud; (ii) intent to defraud; or (iii) severely reckless conduct. The plaintiffs alleged that 3M executives\u2019 trading activity suggested motive. The court rejected a finding of motive because the complaint failed to allege that the executives made an unusual amount of profit or sold an unusual portion of their holdings. The court likewise found no allegation of intent to defraud because the complaint failed to demonstrate that 3M knew a reasonably estimable amount it should have accrued for the PFAS liabilities. The plaintiffs argued that 3M\u2019s failure to accrue a greater amount for PFAS liabilities was at least reckless because 3M was aware of the GAAP requirement to disclose probable and reasonably estimable losses. However, because the court found that the plaintiffs had pled no underlying GAAP violation, it found that the complaint failed to plead the recklessness to support scienter.<\/p>\n Because the plaintiffs failed to meet the PSLRA\u2019s heightened pleading standards for actionable misstatements and scienter, the court dismissed the complaint.<\/p>\n SDNY Dismisses Securities Exchange Act and Securities Act Claims Brought Against Technology Company<\/strong><\/p>\n In re Farfetch Ltd. Sec. Litig.<\/a><\/em>, No. 19-08657 (AJN) (S.D.N.Y. Sept. 29, 2021)<\/p>\n Judge Alison Nathan dismissed putative class claims brought by investors pursuant to Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and Sections 11, 12(a)(2) and 15 of the Securities Act against a technology company that focuses on the sale of luxury goods and certain of its officers. The plaintiffs alleged that in offering materials filed with the SEC before the company\u2019s initial public offering (IPO), the company made material misstatements or omissions concerning its operating segments by falsely touting itself as a third-party sales entity with less risk than first-party sales entities. The plaintiffs further alleged that after the IPO, the defendants made material misstatements or omissions concerning the company\u2019s projected quarterly financial results and acquisition of a first-party sales entity for nearly $675 million.<\/p>\n The court dismissed the Securities Exchange Act claims because the complaint failed to adequately plead scienter. The court rejected the plaintiffs\u2019 argument that the defendants\u2019 \u201csuspicious\u201d trading activity \u2014 ahead of an alleged corrective disclosure concerning the company\u2019s poor quarterly financial results and new acquisition of a first-party sales entity \u2014 showed motive and opportunity to defraud investors. Noting that even after their sales of company stock, the defendants remained heavily invested in the company, the court reasoned that the \u201cstock sales \u2026 were not calculated to maximize the personal benefit from undisclosed inside information.\u201d The court also found that the timing of the defendants\u2019 stock sales was not suspicious because the trades were made pursuant to Rule 10b5-1 trading plans that were established several months in advance of the corrective disclosure and stock price drop. The court determined that the complaint lacked facts that the defendants knew when the plans were established that the company\u2019s subsequent purchase of a first-party sales entity would occur or that it would have a negative impact on the company\u2019s stock. Similarly, the court rejected the plaintiffs\u2019 argument that the defendants consciously or recklessly hid plans for the first-party sales acquisition from the public \u201cin order to further a false narrative about the nature of [the company\u2019s] business.\u201d The court determined that the complaint instead showed that the company, through its risk disclosures, \u201cintentionally put the public on notice of [the] risks related to their business model\u201d regarding first-party sales and other potential future acquisitions.<\/p>\n The court also dismissed the Securities Act claims, rejecting the plaintiffs\u2019 argument that the company\u2019s offering statements hid from the public the amount of revenue generated by a first-party retailer model of the kind to which the company allegedly claimed it was superior. The court instead found that the company\u2019s offering materials \u201cstated exactly how much of its revenue came from third-party sales, first-party sales, and in-store sales,\u201d and therefore \u201cexpressly disclosed precisely what [the plaintiffs\u2019] claim [the company] was trying to hide.\u201d<\/p>\n Ninth Circuit Affirms Partial Denial of Motion To Dismiss, Clarifies Shareholder Standing in Direct Listings<\/strong><\/p>\n Pirani v. Slack Techs., Inc.<\/a><\/em>, No. 20-16419 (9th Cir. Sept. 20, 2021)<\/p>\n The Ninth Circuit held that a shareholder who purchased shares in a direct listing had standing to bring claims under Sections 11 and 12(a)(2) of the Securities Act, despite his inability to prove that the shares he purchased were registered under the company\u2019s offering documents.<\/p>\n This case arose from Slack Technologies, Inc.\u2019s use of a direct listing on the New York Stock Exchange (NYSE). In a direct listing, a company does not issue any new shares but instead files a registration statement \u201csolely for the purpose of allowing existing shareholders to sell their shares on the exchange. \u201c However, unlike in a traditional IPO, a direct listing is not underwritten by a bank, meaning that existing shareholders are not subject to any \u201clock-up\u201d periods restricting the sale of unregistered shares to the public. Thus, from the first day of a direct listing, both unregistered and registered shares may be sold to the public.<\/p>\n In June 2019, Slack went public on the NYSE through a direct listing, releasing 118 million registered shares and 165 million unregistered shares to the public for purchase. During this time, the plaintiff purchased 250,000 Slack shares, but was unable to determine if he had purchased registered or unregistered shares in the direct listing. Subsequently, Slack allegedly experienced service disruptions and its share price dropped. The plaintiff filed a class action suit against Slack and its officers, directors and certain investors, alleging failures to make relevant disclosures in its registration statement and prospectus in violation of Sections 11, 12 and 15(a) of the Securities Act.<\/p>\n At the district court, Slack moved to dismiss on the grounds that the plaintiff lacked standing to sue under Sections 11 and 12(a)(2) of the Securities Act because he could not determine if he had purchased registered or unregistered shares in the directing listing, and therefore could not show that he had purchased \u201csuch securities\u201d issued under the registration statement and offering prospectus as required by Sections 11 and 12(a)(2). However, the district court rejected that argument, finding that the plaintiff had standing to pursue his claims.<\/p>\n On appeal, the Ninth Circuit affirmed. The court held that because no stock sales in a direct listing \u2014 whether the shares are registered or unregistered \u2014 can occur unless the issuer files a registration statement and offering prospectus, all sales in a direct listing are sufficiently traceable to the issuer\u2019s offering documents to satisfy the Securities Act\u2019s statutory standing requirements. The court expressed concern that if it were to rule otherwise, investors would be left without any private Securities Act remedies in the direct listing context.<\/p>\n Eleventh Circuit Affirms Dismissal of Securities Class Action, Holds Equitable Tolling Does Not Apply to Time-Barred Claims at Issue<\/strong><\/p>\n Woods v. Michael<\/a><\/em>, <\/em>No. 21-10818 (11th Cir. Aug. 3, 2021)<\/p>\n The Eleventh Circuit affirmed the dismissal of a securities fraud claim, concluding that the claim was untimely and the doctrine of equitable tolling did not apply to save it.<\/p>\n The case arose out of a series of transactions that occurred between April 2014 and June 2018. The plaintiff alleged that the defendants used misrepresentations to obtain millions of dollars from him as loans to be used in various commercial property developments. For each loan, the defendants promised to give the plaintiff 9% annual interest and an equity share in the entity that owned each property. In June 2018, after failing to fulfill their end of the loan agreements on time, the defendants promised to fully repay the plaintiff\u2019s loans by December 2018, as well as provide him with additional interest and equity to compensate for the delay. When this promise also went unfulfilled, the plaintiff initiated litigation in October 2020 and brought several claims against the defendants, including claims under the Securities Act. The district court dismissed the plaintiff\u2019s securities fraud claims as untimely.<\/p>\n The Eleventh Circuit affirmed on the basis that the plaintiff had been put on \u201cinquiry notice\u201d of the defendants alleged securities fraud. Under the Securities Act, the one-year limitations period begins to run when the victim of securities fraud is first placed on inquiry notice \u2014 when he obtains knowledge of facts that would lead a reasonable person to begin investigating the possibility of fraud. Here, the panel determined that the defendants\u2019 failure to repay the loans by December 2018 would have given the plaintiff reason to investigate potential fraud, especially given the defendants\u2019 failure to repay multiple times before. Because the plaintiff did not file his Securities Act claims until October 2020, more than one year after he was placed on inquiry notice, the panel concluded that his claims were time-barred.<\/p>\n The court also rejected the plaintiff\u2019s argument that the doctrine of equitable estoppel should have tolled the one-year limitations period in this case. Under this doctrine, tolling is appropriate where the parties recognize the basis for suit, but the wrongdoing party convinces the other to forego litigation until after the statute of limitations has expired. The panel concluded that the doctrine was unavailable because the defendants did not make any attempts to prevent litigation after December 2018, the date when the plaintiff was placed on inquiry notice of the potential fraud and when the one-year limitations period began to run.<\/p>\n Third Circuit Affirms District Court\u2019s Order Granting Leave To Amend Complaint, Holds That FRCP 15 Permits Relation Back Against Statutes of Repose in Securities Fraud Cases<\/strong><\/p>\n SEPTA v. Orrstown Fin. Servs. Inc.<\/a><\/em>, No. 20-2829 (3d Cir. Sept. 2, 2021)<\/p>\n The Third Circuit affirmed a district court\u2019s decision granting leave to amend a securities fraud complaint in a decision that provides new guidance on how the \u201crelation back\u201d doctrine interacts with the three-year statute of repose for Securities Act claims and the five-year statute of repose for Exchange Act claims.<\/p>\n In the underlying action, the plaintiff \u2014 a purported investor \u2014 alleged that the defendants made material misrepresentations in their financial disclosures. The plaintiff first brought suit in 2012 asserting both Securities Act and Exchange Act claims. After years of motion practice, the district court dismissed all Securities Act claims \u2014 leaving only a few Exchange Act claims \u2014 and the parties began discovery. In April 2019, the plaintiff moved for leave to file a new amended complaint on the basis that it found further evidence to support its claims through discovery. The plaintiff sought to reassert previously dismissed claims from its original complaint. The defendants argued that the amendment would be futile because the reasserted claims were filed outside the three-year repose period for Securities Act claims and the five-year repose period for Exchange Act claims. However, the district court concluded that the amendment would not be futile and granted the plaintiff\u2019s motion.<\/p>\n On appeal, the Third Circuit affirmed, holding that Federal Rule of Civil Procedure 15(c) \u2014 which allows plaintiffs to amend their complaint to assert new claims that might otherwise be time-barred if the new claims \u201crelate back\u201d to timely filed original claims \u2014 allows amendment of a pleading after the expiration of a repose period. The panel based its conclusion on three grounds.<\/p>\n First, the panel found that relation back complied with the text of the federal securities laws\u2019 repose statutes, which provide that an \u201caction\u201d may not be \u201cbrought\u201d outside the repose period. The panel emphasized that the plaintiff\u2019s previously dismissed claims were first \u201cbrought\u201d in the original \u201caction\u201d before the applicable repose periods expired. Under Rule 54(b), reinstatement of dismissed claims cannot constitute the filing of a new action until a court has decided all claims against all parties to the initial action. Thus, none of the plaintiff\u2019s claims in the action ended because the district court had not disposed of all claims and all parties when the repose period expired.<\/p>\n Second, the panel found that relation back was consistent with the purpose of repose statutes; namely, to insulate defendants from liability after the prescribed repose period. The panel concluded that this purpose would not be defeated by allowing the plaintiff to amend its pleadings since it had already brought its action before the applicable repose period expired.<\/p>\n Finally, the panel found that relation back complied with the Rules Enabling Act, which prohibits interpretations of federal rules of procedure that would \u201cmodify any substantive right.\u201d The panel explained that defendants do not have a \u201csubstantive\u201d right to repose against plaintiffs who sue before the statutory deadline and whose action remains pending. Because the plaintiff\u2019s action had not ended under Rule 54(b), none of the defendants had substantive rights to repose against the plaintiff when the deadline passed.<\/p>\nClass Certification<\/h2>\n
Cryptocurrency<\/h2>\n
Derivative Litigation<\/h2>\n
Securities Fraud Pleading Standards<\/h2>\n
Materiality<\/h3>\n
Misrepresentations<\/h3>\n
Omissions<\/h3>\n
Scienter<\/h3>\n
Standing<\/h2>\n
Statutes of Limitations<\/h2>\n
Statutes of Repose<\/h2>\n