Tagged: Securities

That’s a Wrap! United States Supreme Court Closes 2023 Term

With the close of the U.S. Supreme Court’s October 2023 term, we offer this round-up, focusing on decisions of special interest from the business and commercial perspective. Administrative In a pair of cases, Relentless v. Department of Commerce and Loper Bright Enterprises v. Raimondo, the Supreme Court overruled the deference doctrine first articulated in Chevron v. Natural Resources Defense Council. That doctrine permitted federal courts to adopt an agency’s reasonable interpretation of its originating statute. Now, federal courts must interpret statutes anew and are free to adopt their own interpretations. Though the Supreme Court did not overrule any cases that relied on Chevron’s deference framework, it invited the bar to challenge those decisions in the future. The impact of this case will be dramatic, as courts across the country will be reinterpreting (what used to be) settled understandings of countless statutes, including the Clean Air Act, the Clean Water Act, the Civil Rights Act, the Securities Exchange Act, and many more. In another administrative case, the Court in Corner Post, Inc. v. Board of Governors of the Federal Reserve System held that the six-year statute of limitations for challenges under the Administrative Procedure Act accrues when a plaintiff suffers an injury from final agency action. That holding supplants the prior rule, which ended the statute of limitations six years after the...

Securities Plaintiffs Beware: Third Circuit Holds Initiating Suit to Force Settlement May Violate Rule 11 and Can Lead to Mandatory Sanctions Under the PSLRA

With the 30th anniversary of the Private Securities Litigation Reform Act (PSLRA) on the horizon, the Third Circuit’s recent precedential opinion in Scott v. Vantage Corp. provides timely guidance on an important aspect of the landmark statute that may not always be top of mind – its interplay with Rule 11. The PSLRA, in its effort to curb frivolous securities litigation, not only imposes heightened pleading requirements and an automatic stay of discovery pending motions to dismiss, but also requires Rule 11 compliance findings as to each party and attorney based on what they knew at the time suit was filed. In Scott, the Third Circuit reiterated these principles and held that district courts must impose some form of sanction for any Rule 11 violation, no matter how insubstantial the violation – a characteristic unique to the application of Rule 11 in PSLRA cases. The decision also reminds us that the PSLRA creates a presumption in favor of awarding attorneys’ fees in cases of “substantial failure” to comply with Rule 11, which is defined by the court in the opinion. Finally, the decision stands for the remarkable proposition that filing a complaint to force settlement may violate Rule 11 even when the claims asserted are sufficient to withstand a motion to dismiss. In Scott, a...

SEC Offers Disclosure Guidance and Extensions of Certain Reporting and Disclosure Deadlines

Recognizing the struggle businesses currently face and will continue to face in satisfying their disclosure obligations amid the uncertainty surrounding this unprecedented crisis, the SEC’s Division of Corporate Finance on March 25 issued disclosure guidance specific to the coronavirus pandemic. In its guidance, the Division acknowledges that it “may be difficult to assess or predict with precision, the broad effects of COVID-19 on industries or individual companies” and that “the actual impact will depend on many factors beyond a company’s control and knowledge.” That said, the Division goes on to encourage “timely reporting,” noting that SEC disclosure requirements apply to a “broad range of evolving business risks” that may not be specifically identified, including the “known or reasonably likely effects of and the types of risks presented by COVID-19.” The Division encourages “tailored” disclosure of “material information about the impact of COVID-19 to investors and market participants … that allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management,” and proactive revision and update of those disclosures as facts and circumstances change. The Division identifies in its guidance a non-exhaustive list of specific issues relevant to assessing and disclosing the evolving impact of COVID-19, including: The expected impact of COVID-19 “on future operating results and near-and-long-term financial condition.” Impact...

The Consequences of What We Say: Minimizing Potential Liability Under the Securities Laws

The business challenges posed by the coronavirus are unique and unprecedented. The pervasive uncertainty, market turmoil, and near constant stream of new information inevitably draws our focus to near-term concerns and demands, and action that must be taken quickly to address them. However, it is in these exact times of crisis and uncertainty that companies cannot afford to lose sight of the very real consequences hastily made statements and disclosures may have in terms of liability under the securities laws. Securities class actions and shareholder derivative actions follow negative market activity like night follows day. And the coronavirus pandemic has created, perhaps more than any crisis before it, a perceived need for companies to provide customers, clients, shareholders, and the general public immediate, real-time updates about plans for navigating the pandemic and its impact on operations. Every person reading this post likely has an inbox brimming with emails regarding coronavirus plans and impact from every company with which they have ever transacted any kind of business. When the dust settles, however, it is these very communications—along with any SEC filings, earnings guidance, investor calls, and other public-facing statements regarding business operations issued during this time period—that will be combed for material misstatements and omissions that might form the basis of a securities class or shareholder...

Coming Soon to an Opposition Brief Near You: U.S. Supreme Court Holds That Disseminators of False or Misleading Statements Face Liability for Securities Fraud Under Rules 10b-5(a) and (c) Even Where They Are Not Subject to Liability Under Rule 10b-5(b)

In a decision that is certain to receive a warm welcome from the securities class action plaintiffs’ bar, last week, in Lorenzo v. Securities and Exchange Commission, the U.S. Supreme Court held that a disseminator of a false or misleading statement, who cannot be liable for securities fraud under Rule 10b-5(b) because he or she was not the “maker” of that statement, nonetheless faces liability under Rules 10b-5(a) and (c) and related securities statutes. Under Rule 10b-5(b), it is unlawful to make any untrue statement of material fact in connection with the purchase or sale of a security. Nearly eight years ago, in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011), the Supreme Court held that only the maker of a false or misleading statement faces liability under Rule 10b-5(b) and that the maker of a statement is the person with ultimate authority over the statement including its contents and whether and how to communicate it. As a result, in that case, an investment adviser who had participated in drafting a false statement included in the prospectus of its mutual fund client avoided liability for securities fraud because the mutual fund, and not the investment adviser, was the maker of the false statement. The decision was of no small significance. In...

District of New Jersey’s Dismissal of Securities Class Action Reiterates Significant Hurdles to Sufficiently Pleading Scienter

A decision last week from the District of New Jersey is the latest of several recent decisions from the District and the Third Circuit making clear that securities fraud plaintiffs face a high bar in pleading an inference of scienter strong enough to withstand a motion to dismiss. In In re Electronics For Imaging, Inc. Securities Litigation, Plaintiffs brought a securities fraud class action alleging that Electronics For Imaging, Inc. (EFI), and two of its executives, violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. According to Plaintiffs, Defendants falsely assured investors in a Form 10-K and Form 10-Q (and accompanying Sarbanes Oxley certifications) that EFI’s internal controls over financial reporting were functional and effective—including by asserting that those controls had been reviewed, evaluated, and improved. A subsequent press release and amendments to the Form 10-K and Form 10-Q identified material weaknesses in EFI’s internal controls. Plaintiffs filed suit in the wake of a drop in EFI stock price that occurred after the press release was issued. Defendants moved to dismiss for failure to sufficiently plead scienter. In support of scienter, Plaintiffs alleged that Defendants’ record keeping practices so egregiously violated generally accepted accounting principles that Defendants either: (i) lied when they asserted they had previously reviewed and evaluated...

New Jersey Federal Court Holds that Cryptocurrency Allegations Sufficiently Alleged a “Security” Subject to ’33 Act Registration Requirements

In Solis v. Latium Network, Inc., Susan D. Wigenton, a United States District Judge in the District of New Jersey, held that a class action plaintiff adequately alleged that a particular cryptocurrency was a “security” subject to the registration requirements of the Securities Act of 1933 and, by extension, the regulatory strictures of the Securities Exchange Act of 1934. Solis alleged that Latium operates a blockchain-based, crowdsource tasking platform, which allows users to create tasks, find people to complete the tasks, and then verify completion of the tasks according to specified standards. Users of the platform pay for the completed tasks using Latium X tokens, Latium’s proprietary cryptocurrency, which can be used only on Latium’s platform. Solis also alleged that, to raise money for the platform, Latium offered its tokens for sale to the public in exchange for U.S. dollars or the cryptocurrency Ether. The sale was conducted in several stages, with the cost of a token increasing with each successive stage. When marketing the tokens, Latium stressed the limited quantity of tokens to be issued and characterized its tasking platform, particularly in tandem with the tokens, as a “unique investment opportunity.” Solis purchased $25,000 in Latium X tokens and later sued Latium in a class action, alleging that the Latium X tokens are “securities”—specifically...

In Affirming Dismissal of Putative Securities Class Action, Third Circuit Provides Important Guidance for Evaluating Sufficiency of Scienter Allegations

A recent precedential decision from the Third Circuit may make it more difficult for putative securities class actions to withstand motions to dismiss and provides useful guidance for district courts in making the often difficult determination whether a complaint adequately pleads the strong inference of scienter necessary to sustain a federal securities fraud claim. In In re Hertz Global Holdings, Inc., certain pension funds brought a securities fraud class action alleging that Hertz Global Holdings, Inc. and certain of its current and former executives violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. Plaintiffs’ complaint relied heavily on a financial restatement Hertz issued with its fiscal year 2014 Form 10-K, which corrected errors to Hertz’s 2011, 2012, and 2013 financial statements. According to the restatement, Hertz had overstated its pre-tax income by a total of $215 million and its net income by a total of $132 million during the three-year period. The restatement explained that “an inconsistent and sometimes inappropriate tone at the top was present under then existing senior management” which “resulted in an environment which in some instances may have led to inappropriate accounting decisions and the failure to disclose information critical to . . . effective review.”  Plaintiffs alleged that the restatement constituted an admission that...

Wrap-Up of United States Supreme Court’s 2017-2018 Term

With the close of the United States Supreme Court’s 2017-18 term, we offer this wrap-up, focusing on decisions of special interest from the business and commercial perspective (excluding patent cases): In a much talked-about decision in the antitrust field, the Court held in Ohio v. American Express Co. that American Express’s anti-steering provisions in its merchant contracts, which generally preclude merchants from encouraging customers to use credit cards other than American Express, are not anticompetitive and therefore do not violate Section 1 of the Sherman Act. In so holding, the Court found that credit card networks are two-sided transaction platforms, one side being the merchant and the other side being the merchant’s customer. Thus, when assessing whether the anti-steering agreements are anticompetitive, the effects on both sides of the platform must be considered. The plaintiffs’ proof that American Express had increased its merchant fees over a period of time was insufficient to show an anticompetitive effect because it neglected the customer side of the platform, where consumers have received the benefit of ever-increasing rewards from credit card companies and other improvements in services that those higher merchant fees enable. Bringing an end to a fight that New Jersey had been waging against the NCAA and professional sports leagues since 2012, the Court paved the way for...