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Wednesday
Feb142018

In re SandRidge Energy, Inc., Shareholder Derivative Litigation: Denial of Attorneys' Fees and Appeal Dismissed as Moot

In In re SandRidge Energy, Inc., Shareholder Derivative Litigation, 875 F. 3d 1297 (10th Cir. 2017), the United States Court of Appeals for the Tenth District affirmed the district court's denial of Dale Hefner's (“Plaintiff”) request for additional discovery, challenge to the settlement agreement, and attorneys' fees resulting from a federal shareholder derivative suit filed on behalf of SandRidge Energy, Inc. (“SandRidge”) against its Board of Directors. The court affirmed the lower court’s ruling regarding attorneys’ fees and held Plaintiff's remaining claims were moot.  

SandRidge was involved in two derivative suits, the first in federal court and the second, filed by Plaintiff, in state court. The state case was stayed pending a decision in the federal case. After a settlement was reached in the federal case, Plaintiff filed a motion objecting to the settlement, requesting attorneys’ fees, and requesting discovery related to the settlement. The court denied Plaintiff’s motion, and Plaintiff appealed arguing the court abused its discretion. Before the appeal was heard, SandRidge filed for bankruptcy and had their plan of reorganization approved. SandRidge then moved for dismissal of the appeal as moot.  

When determining if a case is moot, the court looks for subsequent events that deny a claimant's standing. For a claim to be justiciable, the court must be able to provide effective relief. Additionally, an objector to a settlement can be compensated for attorneys’ fees only if he contributes to the "collective good" of the corporation.

The court held all but one of Plaintiff's claims were moot. The bankruptcy court’s approval of SandRidge’s reorganization released any claims against SandRidge's current or former officers and directors and eliminated all pre-organization shares. Even if Plaintiff was able to show the lower court abused its discretion in approving the settlement, the case would be dismissed on remand for lack of standing because the Plaintiff’s shares were eliminated in the reorganization. With regard to attorneys’ fees, the court held the district court properly decided that the actions taken by Plaintiff and his counsel did not provide substantial benefit to SandRidge or its shareholders. As such, the claim was properly denied.

For the above reasons, the court affirmed the district court's judgment denying attorneys’ fees and dismissed the rest of the appeal as moot.

The primary materials for this case may be found on the DU Corporate Governance website.

Tuesday
Feb132018

Federal Judge Dismissed Class Action Against Cemetery Company for Failure to State a Claim

In Anderson v. StoneMor Partners, LP, No. 16-6111, 2017 BL 390217 (E.D. Pa. Oct. 31, 2017), the United States District Court for the Eastern District of Pennsylvania granted the motion to dismiss filed by StoneMor, LP (“StoneMor”), its parent company American Cemeteries Infrastructure Investors, LLC, and the controlling shareholder executives (collectively, the “Defendants”). The court held the class action suit failed to state a claim because Plaintiffs could not show statements made by StoneMor between March 2012 and October 2016 misled or materially harmed investors.

According to the allegations, the Defendants issued materially false and misleading statements regarding the financial performance of StoneMor’s business to create the appearance that the company issued its regular quarterly distributions to investors with available cash. StoneMor’s main business plan, however, involved selling cemetery plots on a “pre-need” basis to living customers. State law required most of these pre-need sales proceeds to be kept in a trust until the actual burial services were performed, meaning StoneMor could not access this cash until after the customers died. The Plaintiffs asserted the Defendants misled investors to believe the sales of cemetery plots provided the cash distributed to investors. StoneMor, the complaint explained, wanted to avoid revealing its indirect reliance on debt and equity to make the quarterly distributions to investors and to conceal the risk that distributions could be cut significantly if StoneMor’s access to capital markets failed.

A party may move to dismiss a complaint for failure to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). For a claim to survive a motion to dismiss, the complaint’s factual allegations must contain a facially plausible claim and raise a non-speculative right to relief. Bell Atl. Corp v. Twombly, 550 U.S. 544, 555 (2007); Gelman v. State Farm Mut. Auto. Ins. Co., 583 F.3d 187, 190 (3d Cir. 2009). Claims for relief under section 10(b) of the Securities Exchange Act of 1934 must demonstrate (1) the defendant made a materially false or misleading statement or omitted to state a material fact; (2) the defendant acted with scienter; and (3) the plaintiff’s reliance on the defendant’s misstatement caused harm or injury. 17 C.F.R. § 240.10b–5; Cal. Pub. Emps.’ Ret. Sys. v. Chubb Corp., 394 F.3d 126, 143 (3d Cir. 2004).   

The court held the Plaintiffs failed to show they relied on materially false or misleading statements made with an intent to deceive. None of the statements made by the company materially misled investors because StoneMor provided accurate information, despite focusing the investor’s attention on financial figures created with non-generally accepted accounting principles (Non-GAAP). Additionally, the court determined the Plaintiffs failed to show StoneMor acted with intent to deceive or manipulate investors.

For the above reasons, the court granted StoneMor’s motion to dismiss based on a failure to state a claim.

The primary materials for this case may be found on the DU Corporate Governance website.

Sunday
Feb112018

SEC v. Cary: Accounting Consultant Charged with Insider Trading 

In SEC v. Cary, No. 8:17-cv-01649, 2017 (C.D. Cal. Sept. 21, 2017), the United States Securities and Exchange Commission (“SEC”) filed a complaint against Justin Samuel Cary (“Cary”) in the United States District Court for the Central District of California for alleged violations of the Securities Exchange Act Section 10(b) (“§ 10b”) and Rules 10b-5(a) and 10b-5(c) promulgated thereunder.

According to the complaint, Cary, a certified public accountant, worked as a consultant for NOW CFO, an accounting outsourcing firm.  NOW CFO placed Cary as a consultant with Adaptive Medias from March 2013 through March 2016.  Cary prepared financial statements for Adaptive Medias that were filed with the SEC, and acted as Adaptive Medias’ point of contact for its independent auditors.  SEC asserted that on January 27, 2016, AdSupply, Inc., a competitor of Adaptive Medias, made a confidential offer to purchase Adaptive Medias for $35 million, or $1.50 per share.  At the time, the offer was worth nearly ten times Adaptive Medias’ then current trading price.  Cary allegedly purchased 18,500 shares of Adaptive Medias’ stock upon receiving an email from Adaptive Medias’ controller about a press release regarding the purchase offer from AdSupply, Inc. When the news of the offer was made public on February 1, 2016, and Adaptive Medias’ stock price rose 428% in one day, Cary allegedly profited $8,140.25. 

Rules 10b-5(a) and 10b-5(c) prohibit the use of any device, scheme, or artifice to defraud and or engage in acts, practices or courses of business which operated or would operate as fraud or deceit upon any person in connection with the purchase or sale of any security.  Fraud is considered to be in connection with a securities transaction if it was material to the decision to buy or sell a security.

Through its allegations, the SEC asserted that Cary misappropriated confidential information he obtained through his position at NOW CFO and work with Adaptive Medias and used the confidential information for securities trading purposes. The SEC also argued Cary breached fiduciary and confidentiality duties to NOW CFO and Adaptive Medias by failing to maintain confidential information in trust and confidence. Due to this alleged misconduct and the evidence against Cary, the SEC requested the court enjoin Cary from violating §10b and Rules 10b-5(a) and 10b-5(c) thereunder.         

On January 5, 2018, Cary consented to the entry of a final judgment without admitting or denying the allegations of the complaint.  As part of the final judgment, Cary is permanently restrained and enjoined from violating §10b and Rules 10b-5(a) and 10b-5(c) thereunder.  Additionally, Cary is prohibited from acting as an officer or director of any issuer that has a class of securities registered pursuant to § 12 of the Exchange Act.  Finally, Cary is liable for disgorgement of $8,140.25, representing profits gained from his alleged conduct, and a civil penalty $8,140.25.

The primary materials for this case may be found on the DU Corporate Governance website.

Friday
Feb092018

No-Action Letter for Apple Inc. Permitted Exclusion of Policy to Keep Doors closed when Climate Control in Use.

In Apple Inc., 2017 BL 446883 (Dec. 12, 2017), Apple Inc. (“Apple”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by Sustainvest Asset Management, LLC (“Shareholder”) requesting Apple produce a report assessing the climate benefits and feasibility of adopting a store-wide policy to keep entrance doors closed when climate control is in use. The SEC issued the requested no action letter allowing for the exclusion of the proposal under Rule 14a-8(i)(10).

Shareholder submitted a proposal providing that:

RESOLVED: Shareholders request that Apple Inc. produce a report assessing the climate benefits and feasibility of adopting store-wide requirements for having all retail locations implement a policy on keeping entrance doors closed when climate control (especially air-conditioning during warm months) is in use. The report should be produced at reasonable cost, in a reasonable timeframe, and omitting proprietary and confidential information.

Apple sought exclusion of the proposal from its proxy materials under subsections (i)(7) and (i)(10) of Rule 14a-8.

Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. In addition, the Rule gives thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC and The Shareholder Proposal Rule and the SEC (Part II).

Rule 14a-8(i)(10) permits a company to exclude a shareholder proposal from its proxy materials “if the company has already substantially implemented the proposal.” In applying this standard, the SEC considers whether the company’s policies, practices, and procedures “compare favorably” with the guidelines of the proposal. The SEC also considers whether the company has satisfied the “essential objective” of the proposal. For additional discussion of the exclusion, see Aren Sharifi, Rule 14a-8(I)(10): How Substantial is “Substantially” Implemented in The Context of Social Policy Proposals?, 93 DU Law Rev. Online 301 (2016).

Additionally, Rule 14a-8(i)(7) permits a company to exclude a shareholder proposal from its proxy materials if it deals with a matter relating to the company’s “ordinary business operations.” The underlying policy of the ordinary business exclusion is "to confine the resolution of ordinary business problems to management and the board of directors, since it is impracticable for shareholders to decide how to solve such problems at an annual shareholder meeting.” For additional discussion of the exclusion, see Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7), 93 DU Online L. Rev. 183 (2016), and Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, 93 DU Online L. Rev. 263 (2016).

Apple argued the Shareholder’s proposal should be excluded under Rule 14a-8(i)(10) because the essential purpose of the proposal had been substantially implemented by Apple’s existing store environment policy.

Apple also argued the proposal should be excluded under Rule 14a-8(i)(7) because the proposal solely relates to how Apple operates the doors in its retail stores. Further, the opening and closing of doors in the Company’s retail stores would constitute inappropriate micro-management of Apple for shareholders to oversee and vote upon at an annual shareholder meeting. 

The SEC agreed with Apple and determined the company had substantially implemented the proposal pursuant to Rule 14a-8(i)(10). Meanwhile, the SEC declined to comment on further arguments for exclusion. As such, the SEC concluded it would not recommend enforcement action if Apple excluded the proposal from its proxy materials. 

The primary materials for this post may be found on the SEC website.

Tuesday
Feb062018

No-Action Letter for ExxonMobil Denied Exclusion of Proposal Concerning Increasing Shareholder Distributions to Prevent Losses from Climate Change Related Risks of Stranded Carbon Assets

In ExxonMobil Corporation, 2017 BL 76009 (March 7, 2017), ExxonMobil Corp. ("Exxon") asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a shareholder proposal submitted by Arjuna Capital/Baldwin Brothers Inc. on behalf of Susan B. Inches (collectively, "Shareholder") requesting Exxon increase the amount authorized for capital distributions in order to prevent the climate change related risk of losses stemming from unburnable carbon. The SEC denied the requested no-action letter under Rule 14a-8(i)(2).

The Shareholder submitted a proposal providing that:

RESOLVED: Shareholders hereby approve, on an advisory basis, that ExxonMobil commit to increasing the total amount authorized for capital distributions (summing dividends and share buybacks) to shareholders as a prudent use of investor capital in light of the climate change related risks of stranded carbon assets.

Exxon sought to exclude the proposal under subsection (i)(2) of Rule 14a-8.

Rule 14a-8 provides shareholders with the right to include a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholder, however, must meet certain procedural and ownership requirements. Moreover, the Rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirement of the Rule, see The Shareholder Proposal Rule and the SEC and The Shareholder Proposal Rule and the SEC (Part II).

Rule 14a-8(i)(2) allows the exclusion of a proposal that, if implemented, would force a company to violate any state, federal, or foreign law. For additional discussion of the exclusion, see Jason Haubenreiser, Rule 14a-8 and the Exclusion of Proposals that Violate the Law. 94 Denv. L. Rev. 231, (2016) (discussing Rule 14-a-8). At issue here, the New Jersey Business Corporation Act (the “Act”) gives companies’ boards of directors authority to manage business affairs and allows a restriction of this right if the company amends its certificate of incorporation. If the company's shares are traded on a national securities exchange, an amendment of this type is not permitted under the Act.

Exxon argued for omission of the proposal under Rule 14-a-8 (i)(2) because implementing the proposal would cause Exxon to violate the Act. Exxon argued the Shareholder was asking for a mandated, regular, and indefinite increase to capital distributions when the proposal requested a "commit[ment] to increasing" capital distributions. Exxon further argued an amendment to its certificate of incorporation to satisfy this proposal would restrict the board in its management of the business, thus violating the Act because its shares trade on the New York Stock Exchange.

The Shareholder claimed the proposal is neither asking, nor directing Exxon to violate New Jersey law because the proposal leaves leeway for the board's implementation. The proposal did not require a "specific quantity of capital distributions, nor an open-ended or time-bound commitment to increasing capital distributions regardless of other financial considerations, including debt repayment, leverage, and solvency." Last, the Shareholder asserted the proposal did not attempt to reduce the board's discretion or force it to amend its certificate of incorporation because the proposal could not be reasonably read as requiring Exxon to violate the Act.

The SEC disagreed with Exxon’s reasoning and concluded Exxon may not omit the proposal under Rule 14a-8(i)(2).

The primary materials for this case may be found on the SEC website.

Tuesday
Feb062018

No Action Letter for ITT Inc. Permitting Exclusion of Shareholder Proposal

In ITT Inc., 2017 BL 84441 (March 16, 2017), ITT Inc., (“ITT”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit ITT to omit a shareholder proposal submitted by John Chevedden (“Shareholder”) requesting that ITT place a proposal on ITT’s proxy statement permitting a group of up to 50 shareholders to aggregate their shares to equal 3% of ITT stock owned continuously for 3-years in order to make use of shareholder proxy access. The SEC issued the requested no-action letter permitting ITT to exclude the proposal under Rule 14a-8(i)(10).

Shareholder submitted a proposal providing that:

RESOLVED, Shareholders request that our board of directors take the steps necessary to enable up to 50 shareholders to aggregate their shares to equal 3% of our stock owned continuously for 3-years in order to make use of shareholder proxy access.

Rule 14a-8 provides shareholders with the right to insert a proposal in the company's proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. In addition, the Rule indicates thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC & The Shareholder Proposal Rule and the SEC (Part II).

Rule 14a-8(i)(10) allows a company to exclude a shareholder proposal from its proxy statement if the company has substantially implemented the proposal. The rule allows shareholders to avoid considering matters which have already been favorably acted upon by management of the company. Rule 14a-8(i)(10) does not require a company to implement every detail of a proposal in order for the proposal to be excluded so long as the company has already addressed the essential objective of the proposal.  For additional discussion of the exclusion, see Aren Sharifi, Rule 14a-8(I)(10); How Substantial is “Substantially” Implemented in The Context of Social Policy Proposals?, 93 DU L. Rev. Online 301 (2016).   

ITT argued the proposal should be excluded under 14a-8(i)(10) because its board approved amendments to its by-laws to implement a proxy access by-law consistent with the specifications in the Shareholder’s proposal.  Additionally, ITT argued that the SEC has permitted exclusions of proposals seeking implementation or modification of proxy access by-laws even when not every element of the shareholder proposal was adopted, including those relating to aggregation, as long as the essential elements were adopted.  Regarding the current Shareholder proposal, ITT asserted that it adopted two of the three requests (three-year holding period requirement and 3% ownership requirement) in the company’s by-law amendment.  The only difference in ITT’s amendment and Shareholder’s proposal was the Shareholder’s desired increase in the shareholder aggregation limit to 50 shareholders.  ITT believed the increase from 20 to 50 shareholders would not benefit shareholders in a way the current Shareholder’s proposal desired. 

Shareholder disagreed, arguing that ITT provided no evidence of past activism on the part of large individual shareholders included in its no-action request data.  Further, Shareholder claimed that ITT had failed to meet its burden of proof and requested an opportunity to give additional responses to combat the expedited request of ITT.

The SEC agreed with ITT’s reasoning and concluded ITT may omit the proposal from its proxy materials in reliance on Rule 14a-8(i)(10) because the Shareholder proposal compares favorably with ITT’s policies, practices, and procedures. Therefore, ITT had substantially implemented the Shareholder’s proposal.  Accordingly, the SEC indicated it would not recommend enforcement action if ITT omitted the proposal from its proxy materials.

The primary materials for this post can be found on the SEC website.

 

Tuesday
Feb062018

Dinnen v. Kneen: Defendants' Motion to Dismiss Claims in Amended Complaint Granted.

In Dinnen v. Kneen, No. 16-cv-00882-PAB-STV, 2017 BL 332704 (D. Colo. Sept. 19, 2017), the United States District Court for the District of Colorado granted PdC, LLC, Timothy Kneen, Michael Roberts, Timothy Flaherty, and Carl Vertuca’s (“Defendants”) Motion to Dismiss, finding that Michael W. Dinnen’s (“Plaintiff”) Amended Complaint failed to sufficiently allege scienter in the Section 10(b) claim under the heightened pleading requirements of the Private Securities Litigation Reform Act (“PSLRA”). 

According to the Amended Complaint, Plaintiff alleged Defendants made false and misleading statements between 2007 and 2014 regarding Plaintiff’s investment in a luxury real estate project in Mexico. Plaintiff alleged that he was “repeatedly assured” that his investments were safe and he would double his money. Plaintiff also alleged Defendants provided a “largely fictitious table” of financial projections. Plaintiff claimed Defendants sent an e-mail that contained numerous false representations in connection to the offer and sale of the luxury villas. Plaintiff further claimed Defendants failed to disclose ongoing litigation during Plaintiff’s investment. Plaintiff lastly alleged Defendants misrepresented the permits they had obtained to begin construction of the luxury villas. Plaintiff sought to enforce his rights under a letter of intent, in which he described plans to loan up to six million dollars to Defendants. In reliance on the letter of intent, Plaintiff wired $250,000 to Defendants.

Under section 10(b) of the Exchange Act, it is unlawful for any person to employ any manipulative or deceptive device in connection with the purchase of a security.15 U.S.C. § 78j (2012). Therefore, a plaintiff must allege that defendants in connection with the purchase or sale of a security, “made an untrue statement of material fact, or failed to state a material fact,” with scienter; and “that plaintiff relied on the misrepresentation, and sustained damages as a proximate result of the misrepresentation.” In order to state a claim under Section 10(b) and SEC Rule 10b-5, defendants must have made fraudulent statements “in connection with” the sale of a security. A security is characterized by “an investment of money in a common enterprise with profits to come solely from efforts of others.” The PSLRA amended the Securities Acts of 1933 and 1934 to impose specific and more stringent pleading requirements on complainants alleging securities fraud under Section 10(b). Those requirements are that plaintiff must “specify each statement alleged to have been misleading,” why the statement is misleading, and, regarding each act or omission, “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” In regard to state claims, according to 28 U.S.C. § 1367(c)(3), the district courts may decline to exercise supplemental jurisdiction over a claim, if the district court has dismissed all claims over which it has original jurisdiction.

The court found Plaintiff failed to meet the pleading requirements of the PSLRA and evaluated the facts the Plaintiff provided. The court held Defendants’ statement that Plaintiff would double his money was mere puffery and no reasonable investor would rely on such representations. The court also held the table of financial projections must be viewed only as “estimates” and not binding, which do not demonstrate fraudulent intent. In regard to the e-mail, it was not sent to Plaintiff, therefore irrelevant to Plaintiff’s claim. Further, Defendants could not have disclosed the ongoing litigation at the time Plaintiff made the investment, therefore Defendants did not violate the securities laws by failing to inform Plaintiff of litigation. The statements related to permits were not sent to Plaintiff before his decision to invest, having no effect on Plaintiff’s decision to invest. The statements related to permits are not actionable under the provisions of the Exchange Act relied upon by the Plaintiff.

Consequently, the court held Plaintiff did not have a claim under 10(b) for misrepresentations with respect to that investment. The letter of intent, additionally, did not contain any reference to the rights of individuals who provided funds. Therefore, the court held that Plaintiff’s $250,000 contribution to Defendants was not a security.

For the above reasons, the court granted Defendant’s motion to dismiss claims in the Amended Complaint. It further ordered to dismiss several of Plaintiff’s claims for relief with prejudice pursuant to Fed. R. Civ. P. 12(b)(6), and the state claims without prejudice pursuant to 28 U.S.C. § 1367(c)(3).

The primary materials may be found on the DU Corporate Governance Site.

Monday
Feb052018

In Re VEON Ltd. Securities Litigation: Plaintiffs Properly Alleged Claims Based on Violations of the FCPA

In In re VEON Ltd. Securities Litigation, No. 15-cv-08672 (ALC), 2017 BL 330225 (S.D.N.Y. Sept. 19, 2017), the United States District Court for the Southern District of New York denied in part and granted in part VEON Ltd.’s (“VEON”) and current and former executives’ (collectively, “Defendants”) motion to dismiss for failure to state a claim in putative class action brought by Westway Alliance Corp. on behalf of all of those who purchased VEON securities between December 2, 2010 and November 3, 2015 (collectively, “Plaintiffs”). Based on VEON’s admitted bribery in Uzbekistan, Plaintiffs allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.

Between 2005 and 2012, it is alleged that VEON made or attempted to make millions of dollars in improper payments to Uzbekistan’s President’s daughter to secure certain 3G frequencies, obtain telecommunication assets, and access the Uzbek market. Allegedly, VEON’s executives disguised these payments as legitimate transactions. On March 12, 2014, VEON filed a Form 6-K disclosing it was under investigation by the Securities Exchange Commission (“SEC”) for its operations in Uzbekistan. In 2016, VEON entered into a deferred prosecution agreement with the United States Department of Justice, and pleaded guilty to charges against the company for conspiracy to violate the anti-bribery, books and records, and the internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”). Furthermore, VEON admitted it failed to implement and enforce adequate internal accounting controls and did not have a proper anticorruption compliance program. Plaintiffs alleged that VEON’s conduct resulting in the FCPA violations led to material misstatements and omissions in its SEC filings in violation of Sections 10(b) and 20(a). Defendants argued Plaintiffs failed to allege any actionable misstatements, scienter, or loss causation pursuant to Section 10(b).

Under Section 10(b) and Rule 10b-5, a court may find a material misrepresentation or omission actionable in a financial statement when a company has failed to disclose an uncharged, unadjudicated wrongdoing where the failure would make other disclosures materially misleading. A court may find scienter when a plaintiff alleges facts sufficient to create a strong inference the statements would have been approved by corporate officials sufficiently knowledgeable about the company to know the statements were misleading. To establish loss causation, a plaintiff must provide a defendant with some indication of loss, and the causal connection between the misconduct alleged and the economic harm. Finally, under Section 20(a) control persons can be found liable for the fraud of the entities they control.

The court found the Defendants’ disclosure of reasons for VEON’s increased revenue in its SEC filings was actionable because it excluded the impact of the bribes. Additionally, VEON’s statement that all owners of telecommunications networks had equal rights and enjoy equal protection guaranteed by the law was misleading because VEON admitted to bribery. Finally, the court found that some of VEON’s statements about internal controls were actionable because Defendants were aware VEON’s internal controls were not effective when they made statements to the contrary. On the other hand, the court dismissed Plaintiff’s claims alleging inaccuracies in VEON’s revenue reporting, its disclosures regarding governmental authorities, and its failure to follow internal controls. In regard to the element of scienter, the court found the allegations that executives understood how bribery would impact VEON’s financial statements and took steps to obscure it allowed the court to reasonably infer scienter. The court also determined that only individuals who sold their shares after VEON’s Form 6-K disclosure on March 12, 2014 could show loss causation. Finally, the court denied dismissal of the Section 20(a) claims because some Section 10(b) claims remained.

Accordingly, the court denied in part and granted in part Defendants’ motion to dismiss.

The primary materials for this case may be found on DU Corporate Governance website.

Sunday
Jan212018

Judge Tosses Fraud Suit Against Seattle Genetics for Lack of Scienter

In Patel v. Seattle Genetics, Inc., No. C17-41RSM, 2017 BL 373924 (W.D. Wash. Oct. 18, 2017), the court granted biopharma company Seattle Genetics’ and three of its executives’ (collectively “Defendants”) motion to dismiss Carl Johnson’s, the lead plaintiff of an investor group (collectively “Plaintiffs”), Consolidated Amended Complaint (“CAC”) for failure to state a claim. Although Plaintiffs satisfied the misrepresentation element of the 10b claim in their complaint, the court held they failed to demonstrate scienter or underlying securities fraud by Defendants, and therefore dismissed Plaintiffs’ claims under SEC Rule 10b-5 and Section 20(a) of the Securities Exchange Act.

Plaintiffs alleged in their complaint that Defendants’ outward expressions about the potential of its cancer drug, referred to as 33A, to avoid liver toxicity were inconsistent with its alleged knowledge of the drug’s safety risks. Plaintiffs also alleged Seattle Genetics knowingly omitted information about liver toxicity while simultaneously touting the drug’s benefits over a predecessor drug made by Pfizer, Inc., which was pulled from the market due to patient fatalities caused by toxicity. Plaintiffs asserted that a former Seattle Genetics safety engineer shared data about the drug’s level of toxicity on each organ in the body with his superiors, though not with the named Defendants directly. In relying on this confidential witness, Plaintiffs attributed knowledge of the drug’s toxicity on Defendants through the core operations doctrine, the theory that imputes specific knowledge on senior executives based only on their general awareness of company business.

Central to Plaintiffs’ CAC is the FDA’s decision to halt trials of the drug in certain sub-groups, including patients with stem cell transplants and those undergoing chemotherapy in combination with 33A, because of toxicity concerns and patient deaths. On the same day as the FDA’s announcement, Defendants issued a press release alerting investors to the FDA’s action, which prompted Seattle Genetics’ stock to decline by over 15% and a lowering of its price target by a Credit Suisse analyst. The company also instituted “risk mitigation measures” to address the liver toxicity issues in two of its trials, while halting the others altogether. Plaintiffs filed suit two weeks later.

To adequately state a claim under Section 10(b) of the Exchange Act and Rule 10b-5, a plaintiff must allege facts sufficient to show: (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.

To meet the first element above, a complaint must "specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading." The plaintiff must further show defendants made misleading statements as to a material fact. A statement is material when there is "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." 

To properly allege scienter, the second element of a claim under 10(b) and Rule 10b-5, a complaint must allege the defendant made false or misleading statements either intentionally or with deliberate recklessness. Mere opportunity and motive to commit fraud are not sufficient.

Additionally, according to Rule 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act (“PSLRA”), fraud assertions must meet a heightened pleading standard stating the “who, what, when, where, and how” the fraud occurred.

The court found Plaintiffs adequately pled misrepresentation in its complaint. The press release issued by Defendants on the day of the FDA’s halting of its trials critically omitted data about patients who had already experienced hepatotoxic events, while simultaneously touting 33A’s lack of hepatotoxicity in comparison to Pfizer’s previous drug pulled from the market. The court held Defendants had a duty to disclose these results given the company’s positive publicity about 33A.

As for scienter, the court held the link between knowledge of 33A’s hepatotoxicity and the individual Defendants was too tenuous. The confidential witness’ communication with others in the company, rather than the individually named Defendants, was insufficiently particular, according to the court. While the executives had access to the drug’s safety data sheets about environmental toxicity (as opposed to clinical studies), abandoned a portion of a clinical trial, and had knowledge of the drug’s toxicity from a third-party risk assessment, the court held these factors did not adequately show intent or deliberate recklessness. Additionally, Plaintiffs’ allegations did not assert “cogent possible motivations” for the alleged misrepresentations.

The court held Plaintiffs’ reliance on the core operations doctrine was misplaced because the CAC contained no facts regarding when and how Defendants became aware of the toxicity information. Without those facts, the inference that Defendants were unaware of the information was equally plausible.

For the above reasons, the court granted Defendant’s 12(b)6 motion to dismiss for failure to state a claim. The court allowed Plaintiffs a 30-day leave to amend their previously amended complaint to cure its deficient claim of scienter.

The primary materials for this case may be found on the DU Corporate Governance website. The full docket is available here

Tuesday
Jan092018

Dietz v. Cypress Semiconductor Corp.: Plaintiff Not Protected Under Sarbanes-Oxley

In Dietz v. Cypress Semiconductor Corp., No. 16-1209 & 16-1249, 2017 BL 370853 (10th Cir. Oct. 17, 2017), the United States Court of Appeals for the Tenth Circuit vacated the district court’s judgment in favor of Timothy Dietz (“Plaintiff”) under the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). The court found Plaintiff did not reasonably believe his former employer, Cypress Semiconductor Corporation (“Defendant”), committed mail fraud or wire fraud, therefore his whistleblower complaint was not protected activity under Sarbanes-Oxley. Accordingly, the court granted Defendant’s petitions for review, vacated the Administrative Review Board’s (the “Board”) awards for Plaintiff, and vacated as moot the district court’s order enforcing those awards.

Plaintiff was an employee for Ramtron International Corporation (“Ramtron”) until it was acquired by Cypress Semiconductor Corporation (“Defendant”) in November 2012. According to the allegations, Defendant offered some Ramtron employees, including Plaintiff, the opportunity to join the new company. The offer letters outlined terms and conditions of employment, including salary, but omitted that the former employees would be subject to a compensation plan called the Design Bonus Plan (“Bonus Plan”). Defendant explained it had no way of knowing at that time, which employees would be subject to the Bonus Plan. Plaintiff accepted the offer and became a program manager for Defendant. On April 12, 2013, after a training session about the Bonus Plan, Plaintiff expressed concerns to his supervisor about the legality of the plan. Plaintiff allegedly claimed the plan violated state wage laws and “took the Ramtron employees by surprise.” Soon after, Plaintiff began having trouble with his supervisor, and the supervisor required Plaintiff to acknowledge problems with his work performance in a memo. Plaintiff disputed that he had done anything wrong and responded with a letter stating he was “terminating his employment.” Plaintiff claimed he did not intend to definitively quit, but rather intended to trigger an employee-retention policy. However, because his employer’s reaction to his letter caused him to fear he would soon be terminated, Plaintiff made his resignation effective immediately on June 7, 2013. Plaintiff filed suit against Defendant, asserting: (1) Defendant’s concealment of details about the Bonus Plan constituted federal mail fraud and wire fraud; and (2) Plaintiff suffered retaliation for expressing concerns about the Bonus Plan. The Board affirmed an Administrative Law Judge’s grant of awards on the merits for Plaintiff. Plaintiff filed civil action in district court to enforce the Board’s orders and Defendant appealed.

Sarbanes-Oxley protects whistleblower employees who report corporate fraud from employer retaliation “only when the employee reasonably believes the company has engaged in certain enumerated federal offenses.” Federal mail fraud and wire fraud are among these offenses. The reasonable belief standard means an “employee must actually believe in the unlawfulness of the employer’s actions and that belief must be objectively reasonable.” Federal mail fraud and wire fraud statutes require existence of a “conscious objective to deprive the victim of property.”

The court held Plaintiff could not have reasonably believed Defendant was engaged in mail or wire fraud, finding there was not enough evidence Defendant intended to deprive the Ramtron employees of their property. The court considered Defendant had a “plausible, non-nefarious explanation” as to why the employees’ offer letters did not include details about the Bonus Plan.

The court also noted Defendant did not begin taking deductions for the Bonus Plan until nine months after the employees signed their offer letters, by which point it had made sure the employees were aware of the Bonus Plan. Accordingly, the court found no reasonable belief Defendant engaged in one of the enumerated offenses under Sarbanes-Oxley, and so Plaintiff’s whistleblower complaint was not protected.

For the above reasons, the United States Court of Appeals for the Tenth Circuit granted the Defendant’s petitions for review and vacated awards to the Plaintiff.

The primary materials for this case may be found on the DU Corporate Governance Website.

Monday
Jan082018

Putative Class Action Alleging False and Misleading Statements and Scienter Fails Under Section 10b-5 and Section 20(a) of the Securities Exchange Act

In Markette v. XOMA Corp., No. 15-cv-034250HSG, 2017 BL 345015 (N.D. Cal. Sept. 28, 2017), the United States District Court for the Northern District of California granted XOMA Corp.’s (“Defendant” or “XOMA”) motion to dismiss Joseph Markette’s (“Plaintiff”) class action complaint alleging violations for Sections 10(b) and 20(a) of the Securities Exchange Act (“Exchange Act”). The court held the Plaintiff failed to meet the heightened pleading standards under the Private Securities Litigation Reform Act (“PSLRA”).

Plaintiff brought a putative class action on behalf of anyone who purchased XOMA common stock between November 6, 2014 and July 21, 2015. According to the allegations, XOMA partnered with a pharmaceutical company to conduct a double-blind experiment on an antibody for the treatment of inflammatory eye diseases. XOMA was required to provide investors, including Plaintiff, a critical documentation of the study’s effectiveness; however, XOMA was delayed by a few months in reporting the data. Ultimately, the unblinded trial data revealed no difference between the tested and placebo groups. The Plaintiff challenged seven of the Defendant’s statements regarding the double-blind study on the grounds that the statements made material omissions or misrepresentations.

Section 10b-5 of the Exchange Act makes unlawful, any omission of a material fact or untrue statement of a material fact necessary to make the statement not misleading. To succeed on a claim of a 10b-5 violation the burden is on the plaintiff to prove (1) material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation. An omission is material when there is a substantial likelihood that a reasonable investor would view the disclosure as significantly altering the total mix of information available. All private securities fraud complaints are subject to the heightened pleading requirements of the PSLRA, requiring both falsity and scienter. Under the PSLRA, to plead scienter the complaint must state specific facts giving rise to a strong inference that the defendant acted with deliberate recklessness. 15 U.S.C. § 78u-4(b)(2)(A). Finally, Section 20(a) holds persons liable for the Exchange Act violations of entities they control.

The court examined Defendant’s seven statements under the Dearborn pleading standards which create three different pleading standards depending on the nature of the statement. Claims of material misrepresentation, must allege the “speaker did not hold the belief she professed and the belief is objectively untrue.” Claims based on opinion statements, must allege “the supporting fact the speaker supplied is untrue.” Finally, claims alleging misrepresentation through omission must allege the omission “makes the opinion statement misleading to a reasonable person reading the statement fairly and in context.” City of Dearborn Heights Act 345 Police & Retirement Sys. v. Align Tech., Inc., 856 F.3d 605 (9th Cir. 2017).

The court held the challenged statements were mere opinion statements, and Plaintiff’s allegations were insufficient because the facts suggested the Defendants believed the statements to be true at the time. Additionally, the court held that the Plaintiff insufficiently alleged that the seven challenged statements were materially false or misleading based on alleged omissions. The court held that a reasonable investor would have understood the Defendant’s statements as future projections subject to uncertainty. For two of Defendant’s statements, the court held that a reasonable investor would not have viewed the information as significantly altering the information available. Finally, the court found that the Plaintiff inadequately pled scienter. The court held that the Defendants believed in good faith the statements were accurate; transparent regarding the data’s limitations; and included “cautionary language” to put investors on notice that the blind data was potentially uncertain. Because Plaintiff did not adequately allege any primary violations of Section 10(b), the court dismissed the Section 20(a) claims.

For the above reasons, the court granted Defendant’s motion to dismiss with Leave to Amend.

The primary materials for this case may be found on the DU Corporate Governance website.

Monday
Jan082018

Princeton Ophthalmic, LLC, v. Corinthian Ophthalmic, Inc.: Motions for Summary Judgment Denied Due to Conflicting Testimony of Material Facts

In Princeton Ophthalmic, LLC v. Corinthian Ophthalmic, Inc., No. 14-cv-05485 (PGS), 2017 BL 364534 (D.N.J. Oct. 10, 2017), the United States District Court for the District of New Jersey denied both Princeton Ophthalmic (“Plaintiff’s”) partial motion for summary judgment as to the first and third elements of section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10(b)(5) promulgated thereunder and Corinthian Ophthalmic, board members Drs. Ianchulev and Packer, and Corinthian CEO Mr. Ballou’s (“Defendant’s”) motion for summary judgment on Plaintiffs entire securities fraud complaint. The court denied the motions on the grounds there were genuine disputes of material facts concerning the Defendants’ misrepresentation of or lack of disclosure of the engineering capabilities of its ocular drug delivery device, the WHISPER.

According to the complaint, Defendants were developing the WHISPER, a proprietary fluid ejector that could dose ocular drugs in micron-sized droplets without discomfort. In an effort to obtain further funding, sold Plaintiff 19,900 shares for $1,990,000. Plaintiff claimed Defendants committed securities fraud by misrepresenting facts concerning the development of the WHISPER prior to purchasing stock in the company. Plaintiff argued offering documents and business plan statements regarding the device’s capabilities were misleading and invalid, implying the device was fully developed when Defendants were aware the WHISPER did not perform as stated. Defendants conceded some statements in the business plan, read alone, could infer the product was fully-developed, but not if read fully and in context. Defendants argued the Plaintiff should have been familiar with the language in the business plan and experienced in investing due to the members’ professions and educational backgrounds. Further, Defendant claimed the Plaintiff had the chance to research the device and see the facility but chose not to.

For a party to prove any violations under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, the party must prove materiality, scienter, and loss causation. To prove materiality, the misstatement must significantly alter how a reasonable investor views the information. Scienter can be established by either: (1) showing the defendant had both motive and opportunity to commit fraud, or (2) establishing facts constituting circumstantial evidence of recklessness or conscious behavior. Finally, to prove loss causation there must be evidence: (1) of a sufficient causal connection between the alleged loss and the alleged misrepresentation, and (2) that the stock price dropped in response to the disclosure of the alleged misrepresentation.

According to the court, Plaintiff failed to prove Defendants intentionally misrepresented or omitted material information in the offering documents and business plan that caused the Plaintiff an economic loss. The wording used in the offering documents could be interpreted in multiple ways and there was no proof that the Defendants did this in an attempt to mislead the Plaintiff’s judgment and portray that the device was at a more developed stage. Further, the Plaintiff could not establish an economic loss because the Defendants sold the company in an effort to save the value of the Plaintiff’s investment. The court found neither party presented strong enough evidence to show there was no issue as to the material facts of the case. Each party’s testimony differed concerning the Defendants’ statements during the offering period and no testimony presented clear intentions behind the misleading statements in question.

For the above reasons, the court denied the Plaintiff’s and Defendant’s motions for summary judgment.

The primary materials for this case may be found on the DU Corporate Governance website.

Sunday
Dec172017

SEC v. Faulkner: Faulkner Not Withdrawing Money from His Bank Account Anytime Soon After Court Grants SEC’s Motion for Preliminary Injunction, Asset Freeze, Appointment of a Receiver, and Other Relief 

In SEC v. Faulkner, No. 3:16-CV-1735-D, 2017 BL 337822 (N.D. Tex. Sept. 25, 2017), the District Court of the Northern District of Texas granted the Securities and Exchange Commission’s (“SEC”) request to enjoin Christopher Faulkner (“Faulkner”), Breitling Oil & Gas Corporation (“BOG”), and Breitling Energy Corporation (“BECC”) ( collectively, “Defendants”) from future violations of the antifraud provisions of the federal securities law, instituted an asset freeze upon Defendants, and appointed a receiver due to the alleged violations of Section 17(a) of the Securities Act of 1933 (“Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), and Rule 10b-5 promulgated thereunder.

The SEC alleged that Defendants had, for at least seven years, engaged in a scheme of over-selling the available units for oil and gas prospects. According to the SEC, Defendant Faulkner oversold “working investments” for oil and gas prospects, while also inflating the estimated costs incurred for each project. Additionally, Defendants allegedly misappropriated millions of dollars in cash disbursements, and reimbursements, for personal expenses incurred by Faulkner. In total, the SEC estimated Defendants defrauded investors of $80 million, with Faulkner having personally received at least $23.8 million. Faulkner responded by arguing that: (1) the scope of receivership should be limited to the assets of BOG and BECC, as the appointment of a receiver to control his assets was excessive since the assets of BOG and BECC would sufficiently secure any proceeds owed to investors; and (2) Faulkner and other insured parties should have access to the directors’ and officers’ insurance policy (“D&O Policy”) issued to BECC. The other Defendants did not respond to the SEC’s motion.

Section 17(a) of the Securities Act promotes honesty and fair dealing by requiring companies to provide full disclosure of material information concerning securities offered to the public. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit any act or omission that results in fraud or deceit, in connection with the purchase or sale of any security. Further, pursuant to Section 20(b) of the Securities Act and Section 21(d) of the Exchange Act the SEC can obtain injunctive relief upon showing a reasonable likelihood that the defendants are, or are about to, engage in practices that violate federal securities laws. The SEC can adequately show this likelihood with proof, by a preponderance of the evidence, of past substantive violations that indicate a reasonable likelihood of future violations.

The court determined the SEC made an adequate showing to support a reasonable likelihood that Defendants had, or were about to, violate federal securities law and granted the preliminary injunction requested by the SEC without addressing the uncontested merits of the request. The court also determined that a receivership covering Faulkner’s assets was appropriate, as Faulkner obtained at least $23.8 million of investors’ assets and Faulkner’s continual misappropriation of investor’s assets, even after the SEC filed suit, instilled little confidence the management of assets would improve in the absence of supervision.

The court also concluded the D&O Policy was subject to the freeze order by looking to who owned the proceeds of the policy. The court determined that while the policy insured BECC, and its directors and officers, from claims made against them alleging wrongful acts, it was within the scope of the Defendants assets, and subject to the freeze order, as proceeds from the policy would be used to pay damages, judgments, settlements, and pre-judgment and post-judgment interest. The court noted, however, that Faulkner could file for an advancement of defense costs from this policy, as without such funds he faced a real and immediate harm of not being able to mount a defense in the present suit.

For the reasons above, the court held that a preliminary injunction, asset freeze, receivership, and other ancillary relief was appropriate against the Defendants.

The primary materials for this case are available on the DU Corporate Governance website.

 

Tuesday
Nov212017

Asset Freeze Granted in SEC v. Bar Works Capital

In SEC v. Bar Works Capital, LLC, No. 17-cv-04396-EMC, 2017 BL 370327 (N.D. Cal. Oct. 16, 2017), the Securities and Exchange Commission (“SEC”) sought an asset freeze against Bar Works Capital (“Bar Works”) for allegedly purchasing 615 Sacramento Street, San Francisco, California (“Property”) with fraudulently-obtained funds. The court determined the SEC offered sufficient and proper evidence to support this claim and imposed an asset freeze on the Property.  

The SEC requested preliminary relief in the form of an asset freeze after an enforcement action arose against Capital alleging violations of federal securities laws in the Southern District of New York. The defendants in this security suit, Bar Works, Inc. and 7th Avenue Bar Works, allegedly solicited $4,666,647 from approximately eighty-six investors to convert former bar and restaurants in central city locations into full-service work spaces. The complaint asserted Richard Haddow, Capital’s manager and the owner of the defendants in the securities suit, transferred these funds to a separate account used to purchase the Property, instead of applying the money towards the proposed new venture. The court issued a default judgment against Capital on September 13, 2017, because it failed to timely answer the SEC’s complaint.

A party requesting an asset freeze must show that it may succeed on the merits, it will suffer irreparable harm in the absence of preliminary relief, the balance of equities tips in the party’s favor, and an injunction is in the public interest.

The court determined the SEC presented substantial and uncontroverted evidence establishing the investor funds were used to purchase the Property in Capital’s name because the defendants maintained complete control over the investor’s money from the initial deposit to the purchase of the Property. Second, the court found a potential for irreparable harm in the absence of preliminary relief because the defendants had previously dissipated assets or transferred them beyond the United States’ jurisdictions from accounts involved in this case prior to the commencement of the securities suit. The court determined irreparable harm may also stem from other third-party claimants, seeking to impose liens against the Property. Third, the court decided the equities weighed in favor of granting the asset freeze because investors may not be able to recover moneys wrongfully obtained from them otherwise and Capital failed to respond with reasons why a temporary asset freeze would cause them to suffer harm. Lastly, the court held the SEC’s role as a statutory guardian charged with protecting public interest in security law enforcement supported the imposition of an asset freeze because the purpose of such disgorgement remedies is to deter security law violations.

For the reasons above, the court ordered the asset freeze on the Property.

The primary materials for this case are available on the DU Corporate Governance website.

Sunday
Nov052017

In re Eaton Corporation Securities Litigation: Dismissed Consolidated Class Action Complaint Alleging Fraud

In In re Eaton Corp. Sec. Litig., No. 16-cv-5894 (JGK), 2017 BL 332475 (S.D.N.Y. Sept. 20, 2017), the United States District Court for the Southern District of New York granted Alexander M. Cutler, Richard H. Fearon (together the “Individual Defendants”), and Eaton Corporation’s (collectively, the “Defendants”) motion to dismiss the Consolidated Class Action Complaint (“CCAC”) by all purchasers of publicly traded common stock and/or exchange traded options on such common stock of Eaton Corporation between May 21, 2012, and July 28, 2014, (“Plaintiffs”) pursuant to Federal Rule of Civil Procedure 12(b)(6). The court held that the Plaintiffs failed to allege sufficient facts that the defendants made any material misstatements, were subject to a duty to disclose and failed to raise an inference of scienter.

According to the allegations, Eaton Corporation, an Ireland-based manufacturer of engineered products and historically a vehicle component manufacturer, announced plans to merge with Cooper Industries plc. Cutler was Eaton’s Chairman and Chief Executive Officer and Fearon was Eaton’s Vice Chairman and Chief Financial and Planning Officer. Cutler stated the company was not anticipating “any substantial additional change in the portfolio as a result of this transaction.” At various other shareholder meetings and calls Cutler and Freon continued to assure investors that there were no plans for divesture of company assets or any spin-offs planned. The CCAC alleged the merger was completed on November 30, 2012, and because of the acquired company’s electrical products business, there was concern that Eaton would sell off its automotive business. The CCAC alleges that the plaintiffs believed that failing to disclose the possible tax consequences of the spin-off of the automotive business adversely effected the company’s stock prices. The CCAC alleges inquiries regarding Eaton Corporation’s intent to change the business’s portfolio continued to surface, with Defendants claiming they “like[d] the portfolio we’re with” and releasing a press release entitled “Eaton Not in Discussions to Sell Its Automotive Business.” In its CCAC, Plaintiffs argued Defendants misrepresented or omitted the tax consequences of the merger between Eaton Corporation and Cooper plc. Plaintiffs claim this misrepresentation, that a company spin-off of its automotive business was economically prohibitive for the business for a period of 5 years because the spin-off would not be tax free, was materially misleading.

Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder make it “unlawful for any person . . .  [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. A claim under Section 10(b) of the Exchange Act is based in fraud and must meet the heightened pleading requirements of Rule 9(b) and the Private Securities Litigation Reform Act. To fulfill those standards a plaintiff must specify each statement alleged to have been misleading and the reasons or reasons why those statements are misleading. A plaintiff must also show the defendant acted with the required state of mind.

The court found that Defendants were under no duty to disclose the hypothetical tax consequences of a potential spin-off of the company’s automotive business because the Defendants themselves repeatedly made clear that the “indicated probability” of such spin-off was zero. Further, the court found no inference of scienter because the CCAC failed to allege sufficient facts that would support it and the Individual Defendants’ stock sales were not unusual or suspicious. The court then found that because the Plaintiffs failed to allege a plausible primary violation of Section 10(b) and Rule 10b-5, Plaintiffs did not satisfy the first element of a Section 20(a) claim.

The court granted Defendants’ motion to dismiss and ordered Plaintiff to file a formal motion including a copy of the proposed amended pleading to be filed within 21 days of the opinion, or all claims would be dismissed with prejudice. 

The primary materials for this case may be found on the DU Corporate Governance website.

Tuesday
Oct312017

Corporation’s Motion for Reargument Denied for Failure to Show Court Misapprehended Case

In Nguyen v. View Inc., No. 11138-VCS, 2017 BL 258186 (Del. Ch. July 26, 2017), the Court of Chancery of Delaware denied View, Inc.’s (“View”) motion for reargument.  In an earlier decision, the court  had concluded that Paul Nguyen (“Nguyen”) alleged sufficient facts to support a reasonable inference that Series B Financing (“Financing”) completed by View was void. 2017 WL 2439074 (Del. Ch. June 6, 2017.  The court denied the motion for reargument, finding that View had failed to identify any overlooked decision or principle that would have affected the outcome.   

According to the allegations, View pursued a round of Financing in 2009.  Nguyen, then the majority shareholder, initially consented to the Financing as consideration for settling various claims brought against View, but then timely exercised revocation option in the settlement agreement. View, however, closed the Financing prior to the expiration of the revocation option and contested Nguyen’s right to revoke his consent.  An arbitrator found the revocation valid and the closing of the Financing void and invalid. View then took steps to ratify the Financing and various charter amendments. Nguyen filed a complaint alleging View’s Financing was improper and sought a declaration of invalidity. View asserted that the actions had been ratified.  See DGCL 204. 

DGCL permits the ratification of “defective corporate” acts.  DGCL 204. The phrase included transactions “within the power of a corporation”.  Id.  The court, however, rejected View’s argument that the close of Financing was a defective corporate act.  Instead, the court characterized the action as unauthorized since Nguyen had revoked his consent prior to the closing.  As a result, the company lacked the power to act.  Id. (“Section 204 makes clear that the defective corporate acts that a corporation purports to ratify must be within the corporation's power a’t the time such act was purportedly taken.’”). 

View moved for reargument on the grounds that the court misapplied applicable law.  The court will deny a motion for reargument “unless the Court has overlooked a decision or principle of law that would have a controlling effect or the Court has misapprehended the law or the facts so that the outcome of the decision would be affected.” Stein v. Orloff, 1985 WL 21136, at *2 (Del. Ch. Sept. 26,1985).

View argued the court misapprehended Section 204.  The “power to act” was not limited to a corporation’s ability to act “at the time of the defective corporate act.”  Instead, the right to ratify applied to any “type of act that corporations are authorized to take”.  The court, however, found the Chancery had previously considered, and rejected this argument.

View also argued the Chancery inappropriately carved out “rejected” acts from acts that were invalid due to a “failure of authorization.” The court found View repeatedly made this argument and it was explicitly addressed in the Chancery’s opinion, therefore it was not a proper ground for reargument.

Because View failed to identify any law or facts the court misapprehended or failed to consider, the court denied the motion for reargument.

The primary materials for this case may be found on the DU Corporate Governance website.

Tuesday
Oct312017

Motion to Dismiss Granted Because Former Monster Stockholder Did Not Have Standing 

In Weingarten v. Monster Worldwide, Inc., No. 12931-VCG, 2017 BL 59636 (Del. Ch. Feb. 27, 2017), the Court of Chancery of Delaware granted Monster Worldwide, Inc.’s (Monster) motion to dismiss Joe Weingarten’s (Plaintiff) complaint seeking to inspect the books and records of Monster Worldwide, Inc.  The court dismissed Plaintiff’s complaint, finding that Plaintiff lacked standing to bring an action under Section 220(c) of the Delaware General Corporation Law as a former stockholder subsequent to a merger.

On August 8, 2016, Monster, a company “providing job placement, career management, and recruitment and talent management services” entered into a Merger Agreement (“Merger”). On October 19, 2016, Plaintiff sent a letter to Monster’s board demanding to inspect books and records to determine whether he should pursue litigation against all or some directors for alleged wrongdoing in connection with the Merger.

Monster rejected the demand although not until after the deadline provided by Plaintiff. On November 4, 2016, Monster finalized the Merger and Plaintiff’s stock was cancelled. Plaintiff filed a complaint on November 22, 2016 (“Complaint”) seeking to inspect the books and records of Monster.  Plaintiff alleged as a basis for the inspection two types of wrongdoing and mismanagement:  1) process-related claims alleging a flawed sales process resulting in an inadequate merger consideration; and 2) disclosure-related claims alleging Monster’s failure to disclose potential conflict of interest of Monsters managers.

Monster sought dismissal alleging that because Plaintiff had ceased to be a shareholder as a result of the merger, Plaintiff lacked standing to inspect the documents. 

The court found that Monster was not estopped from raising the issue of standing.  To invoke equitable estoppel, the party must demonstrate 1) it lacked knowledge or the means of obtaining knowledge of the truth; 2) it reasonably relied on the conduct of the party against whom estoppel is sought; and 3) it detrimentally changed position based on that reliance. The court found that Monster had not engaged in the required “conduct.”  Plaintiff informed Monster that he “expected” the company to waive the standing defense due to the delayed response to his request.  Monster, however, never responded.  Reliance on silence was not, the court concluded, “reasonable.” 

In determining the standing issue, the court looked to Section 220(b).  The Section provided that “any stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose” records of the corporation.  In the event of a failure to respond within 5 days, Section 220(c) provided a right to bring an action in the Court of Chancery for relief. To be eligible to do so, however, the person had to, among other things, be a stockholder.

The court concluded that, as a result of the merger, the Plaintiff was not a shareholder.  Under the plain language of the statute, he lacked standing.

The language of Section 220(c) is plain and unambiguous. By requiring that a plaintiff under Section 220, to seek relief from this Court, demonstrate both that it “has”—past tense—complied with the demand requirement, and that it “is”—present tense—a stockholder, the legislature has made clear that only those who are stockholders at the time of filing have standing to invoke this Court's assistance under Section 220. 

Because Plaintiff could not establish he was a stockholder at the time this action was filed, he lacked standing, and therefore the Court dismissed the matter.

The primary materials for this case may be found on the DU Corporate Governance website

Tuesday
Oct312017

The Director Compensation Project: Walgreens Boots Alliance, Inc.

This post is part of an ongoing series that examines the way stock exchange independence rules relate to director compensation. We are for the most part including companies from 2016’s Fortune 500 and using information found in their 2016 proxy statements.

NASDAQ and the NYSE have similar rules with respect to director independence. NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors. A director does not qualify as “independent” if he or she has a “material relationship with the company.” NYSE Rule 303A.02(a). In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years. The NYSE imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with Rule 10A-3 (C.F.R. §240.10A-3) (see Rule 303A.06) and requires consideration by the board of directors of certain specified factors in designating directors for the Compensation Committee. See NYSE Rule 303A.02(a)(ii).

Finally, as the Commission has noted with respect to director independence:

All compensation committee members must meet the general independence standards under NYSE’s rules in addition to the two new criteria being adopted herein. The Commission therefore expects that boards, in fulfilling their obligations, will apply this standard to each such director’s individual responsibilities as a board member, including specific committee memberships such as the compensation committee. Although personal and business relationships, related party transactions, and other matters suggested by commenters are not specified either as bright-line disqualifications or explicit factors that must be considered in evaluating a director’s independence, the Commission believes that compliance with NYSE’s rules and the provision noted above would demand consideration of such factors with respect to compensation committee members, as well as to all Independent Directors on the board.

Exchange Act Release No. 68639 (Jan. 11, 2013); see also Exchange Act Release No. 68641 (Jan. 11, 2013).

Independent directors are compensated for their service on the board. The amount of “total compensation” can be seen from examining the director compensation table from the Walgreens and Boots Alliance 2016 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

 

Name

Fees Earned or Paid in Cash ($)*

Stock Awards ($)**

All Other Compensation ($)***

Total ($)

 

Janice M. Babiak

120,000

190,000

14,437

324,437

David J. Brailer

115,000

190,000

28,537

333,537

William C. Foote

155,000

190,000

62,644

407,644

Ginger L. Graham

95,000

190,000

29,342

314,324

John A. Lederer

95,000

95,000

2,418

192,416

Dominic P. Murphy

95,000

190,000

14,460

299,460

Barry Rosenstein****

71,250

189,937

10,000

271,187

Leonard D. Schaeffer

95,000

79,167

1,014

175,181

Nancy M. Schlichting

115,000

189,937

74,062

378,999

 

*Includes the annual retainer and other cash retainers outline above (in all cases including deferred amounts). Directors who join the board during a specific year receive a prorated amount for his or her service during that year

**Represents the grant date (11/1/2015) fair value determined in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Certification Topic 718 of the stock grant under the Omnibus Incentive Plan to each Non-Employee Director who received this stock award (including any deferred amounts).

***Represents dividends credited to DSUs. In addition to the amounts reported, directors also are eligible to receive the same discount on merchandise purchased from the Company as is made available to employees generally.

**** Mr. Rosenstein resigned from the Board effective May 16, 2016

 Director Compensation. During the fiscal year 2015, Walgreens and Boots Alliance held twelve (12) board meetings. Each current director participated in 75% or more of the aggregate of (i) the total number of meetings of the Board held during the period for which such person has been a director, and (ii) the total number of meetings held by each committee of the Board on which such person served during the periods that such person served. The independent directors meet in executive sessions in conjunction with each regular quarterly Board meeting. The company expects all of its directors to attend the Annual Meeting of Stockholders.

 Director Tenure. In 2015, Mr. Foote, who has held his position as a member of the Board of Directors since 1997, held the longest tenure. Mr. Schaeffer and Mr. Lederer hold the shortest term as they joined in 2015. All but three of the other directors sit on other boards: Ms. Schlichting serves as a director for the Kresge Foundation, Mr. Schaeffer serves as a director of scPharmaceuticals, Mr. Pessina serves as a director for Galenice AG (a publically traded Swiss-Healthcare group) and a number of private companies including Spring Acquisitions Holdings Limited, Mr. Murphy serves as a director for Amea Holding AB & Mehilanien Oy, Acteon Group Ltd. and The Hut Group Limited and OEG Offshore Group, Mr. Graham serves as a director for a number of private companies, Mr. Foote serves as a director for Kohler Co., and Mr. Brailer serves as a director for several private companies in the healthcare sector. Additionally, Mr. Foote is a trustee of Williams College and Mr. Skinner is a trustee of the Ronald McDonald House Charities.

 CEO Compensation. Stefano Pessina, Walgreens and Boots Alliance, Inc.’s Executive Vice Chairman and Chief Executive Officer since 2015, earned total compensation of $7,133,155 in 2015. He earned a base salary of $35,850, stock awards of $7,000,006 and other compensation of $97,299. George R. Fairweather, Executive Vice President and Global Chief Financial Officer, earned total compensation of $3,047,951 in 2015 consisting of a base salary of $687,268, incentive compensation of $2,051,657 and other compensation of $309,026. Alexander Gourlay, Co-Chief Operating Officer, earned $4,495,066 in 2015. James Skinner, Executive Chairman, earned $5,480,427 in 2015. 

Monday
Oct302017

In re Dynavax Security Litigation: Consolidated Class Action Dismissed with Leave to Amend

In In re Dynavax Sec. Litig., No. 4:16-cv-06690-YGR, 2017 BL 320563 (N.D. Cal. Sept. 12, 2017), the United States District Court for the Northern District of California granted Dynavax Technologies Corporation, Eddie Gray, Michael S. Ostrach, and Robert Janssen’s (collectively, “Defendants”) motion to dismiss lead plaintiff Kwok Pang’s (“Plaintiff”) consolidated class action complaint with leave to amend. The court found Plaintiff’s complaint failed to establish that Defendants failed to disclose facts, which would have been sufficient to demonstrate materially false and misleading statements under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder.

According to the complaint, in late 2013 or early 2014, Defendant Dynavax was engaged in a Phase III clinical trial (“the clinical trial”) for its HEPLISAV-B vaccine, in an effort to obtain FDA approval by providing a larger safety database specifically assessing the possibility of rare autoimmune side effects. On January 7, 2016, Defendants issued a press release announcing “top-line results” from the clinical trial that were consistent with expectations. According to Plaintiffs’ allegations, although Defendants discussed some Adverse Events of Special Interest (“AESIs”), Defendants failed to report “a numerical imbalance in a small number of cardiac events,” not seen in prior trials. Plaintiff filed a complaint alleging that Defendants made materially false and misleading statements by reporting certain positive aspects of the clinical trial but failing to report other AESIs. Specially, Plaintiff alleged the statements made in the January 7, 2016, press release were false. Plaintiff further alleged that Defendants’ failure to mention the occurrence of “cardiac AESIs” rendered the discussion of AESIs misleading.

Section 10(b) of the Exchange Act makes it unlawful to make any untrue statement of material fact or to omit a material fact necessary to make the statements made not misleading. Section 10(b) and Rule 10b-5 create a duty to include all facts necessary to render a statement accurate and not misleading. Absent a duty to disclose, silence is not misleading. Under the Private Securities Litigation Reform Act (“PSLRA”), a plaintiff has a heightened pleading standard; the complaint must specify each statement alleged to have been misleading, the reasons why the statement is misleading, and, if the allegation is made on information and belief, state with particularity the facts on which that belief is formed. The PSLRA also requires that, for each act or omission alleged, the complaint states with particularity the facts giving rise to a strong inference that the defendant acted with the required state of mind.

The court found that Plaintiffs failed to meet the heightened pleading standard and pled facts that, even if found true, would be insufficient to demonstrate materially false and misleading statements. The court determined the clinical trial was analyzing a specified list of AESIs, referred to as “other AESIs,” and the cardiac events were not among the defined AESIs of the study. Due to this specification, Defendants were not required to report the cardiac events with the “other AESIs” to ensure that the statements were not untrue or misleading. Following a hearing, Plaintiffs conceded the complaint misconstrued the term “AESIs”, but maintained that Defendants’ failure to disclose the cardiac events during the press releases was still misleading, even if not considered AESIs. The court, however, ruled that the complaint failed to plead these new allegations and was therefore inadequate under Section 10(b). The court encouraged the Plaintiffs to include in their amended complaint the specific facts of each statements they allege to be misleading, why they believe those statements to be misleading, and what that belief is based upon, as the heightened pleading burden requires.

For the above reasons, the United States District Court for the Northern District of California granted Defendant’s motion, dismissing Plaintiffs’ complaint with leave to amend.

The primary materials for this case may be found on the DU Corporate Governance website.

Tuesday
Oct242017

SEC v. Riel: Summary Judgment & Default Judgment Granted

In SEC v. Riel, No. 5:15-CV-1166 (MAD/DEP), 2017 BL 342140 (N.D.N.Y. Sept. 27, 2017), the United States District Court for the Northern District of New York granted in part and denied in part the Security Exchange Commission’s (“SEC”) motion for summary judgment against Charles Riel III (“Riel”), and granted the SEC’s motion for default judgment against REinvest, LLC (“REinvest”) (collectively “Defendants”), for Defendants’ violations of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933 (“Securities Act”), and Riel’s alleged violations of Sections 20(a) and 20(e) of the Exchange Act, and Section 15(b) of the Securities Act.

According to the allegations, Riel formed REinvest in 2008, and was the company’s sole member. Riel, through phone and email communications and two websites, claimed REinvest offered high yield returns through investment in commercial real estate. Between 2010 and 2014, five investors invested $285,000 with REinvest in exchange for promissory notes. According to the complaint, Riel used most of the funds for his own expenses, used a later investor’s funds to repay an earlier investor, and lost nearly $30,000 of an investor’s funds in undisclosed futures trading. Additionally, Riel provided several investors false account statements purporting to show high yields on their investments. In early 2014, after the SEC initiated its investigation into Riel and REinvest’s actions, Riel contacted his most recent investors to “clarify” that their arrangements with REinvest were private-loan arrangements rather than investments. In September 2015, the SEC filed its complaint against Riel and REinvest. At his deposition, Riel asserted his Fifth Amendment privilege in response to all substantive questions. REinvest did not appear in court to answer the claims against it.

Rule 10b-5 prohibits a person from making a material misrepresentation, with scienter, in connection with the purchase or sale of securities. Scienter can be established by showing false statements were made “with the intent to deceive, manipulate, or defraud.” Section 17(a) prohibits a person from using any means of interstate commerce to make material misrepresentations in the offer or sale of a security. Additionally, Section 15(b) prohibits aiding and abetting violations of the Securities Act, and Section 20(e) prohibits aiding and abetting violations of the Exchange Act. Finally, Section 20(a) holds control persons liable for the fraud of entities they control.

The court held Riel’s assertion of his Fifth Amendment privilege, and conclusory denials, failed to raise an issue of material fact and the SEC was entitled to summary judgment. The court found the SEC allegations established Riel made false and misleading statements to his investors through his websites and phone and email conversations, those statements were material because they were significant in the investors’ decisions to invest with REinvest, and they were made with the intent to defraud which demonstrated scienter. The court found Riel’s actions, as the owner and sole employee of REinvest, were imputed to REinvest, for the same violations. Based on these findings, the court held Defendants liable for violations of Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act. Furthermore, the court determined Riel knowingly and substantially assisted in REinvest’s violations, and was liable for both aiding and abetting claims. Finally, the court did not find Riel liable under the control person liability claim, under Section 20(a) of the Exchange Act, because it determined Riel could not be held liable under both Section 10(b) and 20(a) for the same underlying conduct.

For the above reasons, the court granted in part and denied in part the SEC’s motion for summary judgment against Riel, and granted the SEC’s motion for default judgment against REinvest. The court permanently restrained Defendants from further violations of Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act, ordered the Defendants to pay disgorgement of $197,500, plus prejudgment interest of $27,875.20, and ordered Riel to pay a civil penalty of $125,000.

The primary documents for this case may be found on the DU Corporate Governance website.