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Monday
Oct102016

The Director Compensation Project: Caterpillar Inc. (CAT)

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 2015’s Fortune 500 and using information found in their 2015 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 Caterpillar Inc. (NYSE: CAT) 2016 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

Director

Fees Earned or Paid in Cash

Stock Awards

All Other Compensation

Total

David L. Calhoun

$150,000

$124,998

$ 5,000

$279,998

Daniel M. Dickinson

$150,000

$124,998

$35,441

$310,439

Juan Gallardo

$150,000

$124,998

$12,170

$287,168

Jesse J. Greene, Jr.

$150,000

$124,998

$  9,000

$283,998

Jon M. Huntsman, Jr.

$150,000

$124,998

$       ––

$274,998

Dennis A. Muilenburg

$150,000

$124,998

$       ––

$274,998

William A. Osborn

$170,000

$124,998

$17,170

$312,168

Debra L. Reed

$ 87,500

$ 72,996

$ 2,000

$162,496

Edward B. Rust, Jr.

$175,000

$124,998

$21,465

$321,463

Susan C. Schwab

$150,000

$124,998

$12,000

$286,998

Miles D. White

$170,000

$124,998

$10,000

$304,998

 

Director Compensation. During fiscal year 2015, the Board held seven meetings. The independent directors generally meet in executive session as part of each regularly scheduled Board meeting, with the Presiding Director serving as Chairman. Each director attended 100% of the total meetings of the Board and committee on which he or she served. Absent unavoidable conflict, directors are expected to attend the Annual Meeting. All directors attended the 2015 Annual Meeting. During 2015, the Board had three standing committees: Audit, Compensation, and Public Policy and Governance. In 2015, the Audit Committee met eleven times, the Compensation Committee met eight times, and the Public Policy and Governance Committee met six times. Compensation for non-employee directors for 2015 was comprised of the following components: cash retainer of $150,000; restricted stock grant (one year vesting) of $125,000; and committee chairman stipend of $25,000 for the Presiding Director, $20,000 for the Audit Committee Chairman, and $20,000 for the Compensation Committee Chairman. Other Compensation represents amounts paid in connection with the Caterpillar Foundation’s Directors’ Charitable Award Program and the Caterpillar Political Action Committee Charitable Matching Program (CATPAC’s PACMATCH program) and administrative fees and insurance premium associated with the Directors’ Charitable Award Program.

Director Tenure. Mr. Juan Gallardo has been a director of the Company since 1998 and is the longest serving director. He is currently Chairman and former Chief Executive Officer of Organización CULTIBA, S.A.B. de C.V. He is also currently a director of Grupo Aeroportuario del Pacifico, S.A.B. de C.V. and Lafarge SA and Grupo Financiero Santander Mexico, S.A.B. de C.V. Ms. Debra L. Reed is the shortest serving director having joined the board in June 2015. Ms. Reed serves as Chairman and Chief Executive Officer of Sempra Energy. She also serves as a director of Halliburton Company.

CEO Compensation. Mr. Douglas R. Oberhelman, Caterpillar’s Chairman and Chief Executive Officer, has held numerous leadership positions with the Company for over thirty-five years and has been a director of the Company since 2010. Mr. Oberhelman earned total compensation of $17,903,837 in 2015. He earned a base salary of $1,600,008; stock and stock option awards of $12,991,067; non-equity incentive plan compensation of $822,804; change in pension value and nonqualified deferred compensation earnings of $2,091,814; and other compensation of $398,144. Mr. Bradley M. Halverson, Group President and Chief Financial Officer, was the second highest compensated Caterpillar executive. In 2015, he earned a total of $8,248,494. He received a base salary of $786,312; stock and stock option awards of $4,833,636; non-equity incentive plan compensation of $244,440; change in pension value and nonqualified deferred compensation earnings of $2,293,173; and other compensation of $90,933. Other compensation for 2015 consists of matching contributions to the Company’s 401(k) plan, matching contributions to the Supplemental Deferred Compensation Plan, personal corporate aircraft usage, and home security.

Friday
Oct072016

The Director Compensation Project: J.P. Morgan Chase (JPM) (DRAFT)

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 J.P. Morgan Chase’s 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

($)

Option

Awards

($)

All Other

Compensation

($)

 

Total

($)

Linda B. Bammann

90,000

225,000

0

30,000

345,000

James A. Bell

90,000

225,000

0

25,000

340,000

Crandall C. Bowles

105,000

225,000

0

30,000

360,000

Stephen B. Burke

75,000

225,000

0

-

300,000

James S. Crown

115,000

225,000

0

42,500

382,500

Timothy P. Flynn

90,000

225,000

0

30,000

345,000

Laban P. Jackson, Jr.

115,000

225,000

0

222,500

562,500

Michael A. Neal

90,000

225,000

0

-

315,000

Lee R. Raymond

120,000

225,000

0

37,500

382,500

William C. Weldon

90,000

225,000

0

105,000

420,000

 

Director Compensation. In 2015, the board met eleven times. Each director attended 75% or more of the total meetings of the board and the committees on which he or she served. All 2015 nominees were present at the annual meeting of shareholders held on May 19, 2015. For 2015, each non-management director received an annual cash retainer of $75,000 and an annual grant, made when annual employee incentive compensation was paid, of deferred stock units valued at $225,000, on the date of the grant. Additional cash compensation was paid for certain committees and other services. Directors were reimbursed for their expenses in connection with their board service or paid such expenses directly. The firm also paid the premiums on directors’ and officers’ liability insurance policies and on travel accident insurance policies covering directors as well as employees of the firm.

 

Director Tenure. All but four of the directors hold directorships with other organizations. Mr. Raymond is the longest serving director, having served since 2001. Mr. Neal is the shortest serving director having joined the board in 2014. Mr. Bell serves as a director for Dow Chemical Company and Apple Inc. Ms. Bowles serves as a director for Deere & Company. Mr. Burke serves as a director for Berkshire Hathaway Inc. Mr. Crown serves as a director for General Dynamics Corporation and J.P. Morgan Chase Bank, N.A. Mr. Flynn serves as a director for Wal-Mart Stores, Inc. and International Integrated Reporting Council. Mr. Weldon serves as a director for CVS Health Corporation, Exxon Mobil Corporation, and J.P. Morgan Chase Bank, N.A.

 

CEO Compensation. James Dimon serves as Chairman, Chief Executive Officer, Director, and President and has been at J.P. Morgan Chase since 2004. Mr. Dimon also serves as a director for Harvard Business School and Catalyst but does not serve on the board of any publicly traded company other than J.P. Morgan Chase. Previously, he was President and Chief Operating Officer following J.P. Morgan Chase’s merger with Bank One Corporation in July 2004. At Bank One, he was Chairman and Chief Executive Officer from March 2000 to July 2004. In 2015, Mr. Dimon earned a total of $18,230,313. He received a base salary of $1,500,000, a cash bonus of $5,000,000, stock awards of $11,100,000, deferred compensation of $9,253, and other compensation totaling $621,060. Other compensation for Mr. Dimon included personal use of corporate aircraft ($123,873) and cars ($34,828), cost of residential and related security paid by the firm ($462,264), and cost of life insurance premiums paid by the firm ($95). Mr. Matthew Zames, Chief Operating Officer, was the second highest compensated J.P. Morgan Chase executive. In 2015, he earned a total of $17,600,842. He received a base salary of $750,000, a cash bonus of $7,100,000, stock awards of $9,750,000, and deferred compensation of $842.

Thursday
Oct062016

The Director Compensation Project: Federal Home Loan Mortgage Corporation (“Freddie Mac,” or “FMCC”)

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 Federal Home Loan Mortgage Corporation’s (OTCMKTS: FMCC) 2015 10-K. According to the 10-K, the company paid the directors the following amounts:

Name

Fees Earned or Paid in Cash ($)

Stock Awards ($)

Option Awards($)

All Other Compensation ($)

Total ($)

Christopher S. Lynch*

292,167

0

0

0

292,167

Raphael W. Bostic**

157,778

0

0

0

157,778

Carolyn H. Byrd

185,000

0

0

0

185,000

Lance F. Drummond**

79,375

0

0

0

79,375

Thomas M. Goldstein

170,000

0

0

0

170,000

Richard C. Hartnack

170,000

0

0

0

170,000

Steven W. Kohlhagen

175,000

0

0

0

175,000

Donald H. Layton

0

0

0

0

0

Sara Mathew

170,000

0

0

0

170,000

Saiyid T.  Naqvi

160,000

0

0

0

160,000

Nicolas P. Retsinas

160,000

0

0

0

160,000

Eugene B. Shanks, Jr.*

177,833

0

0

0

177,833

Anthony A. Williams*

172,167

0

0

0

172,167

* In March 2015, Mr. Lynch and Mr. Williams left, and Mr. Shanks joined, the Audit Committee.

** Mr. Bostic joined the Board in January 2015. Mr. Drummond joined the Board in July 2015. The amount of Mr. Drummond's compensation includes partial annual compensation for the period he served on the Audit Committee during 2015.

*** Because Freddie Mac does not have pension or retirement plans for their non-employee directors and all compensation is paid in cash, “Change in Pension Value and Non-qualified Deferred Compensation Earnings” and “All Other Compensation” columns have been omitted.

Director Compensation. Board members receive compensation in the form of cash retainers only, paid on a quarterly basis. Non-employee directors are reimbursed for reasonable out-of-pocket costs for attending meetings of the Board or a Board committee of which they are a member and for other reasonable expenses associated with carrying out their responsibilities as directors.

Director Tenure. Mr. Retsinas is the longest serving director, having served since June of 2007. Mr. Drummond began as a director in July of 2015 and is the newest member of the board. Only six of the thirteen directors hold directorships with other companies. Ms. Byrd serves as a director of Popeyes Louisiana Kitchen, Inc. and Regions Financial Corporation. Mr. Hartnack serves as a director of Synchrony Financial. Mr. Kohlhagen serves as a director for AMETEK, Inc. and GulfMark Offshore, Inc. Mr. Lynch serves as a director for American International Group Inc. Ms. Mathew serves as a director for Avon Products, Inc., Campbell Soup Company, and Shire plc. Mr. Shanks, Jr. serves as a director for ACE limited.

Executive Compensation. Mr. Layton has served as Chief Executive Officer and a member of the Board since May 2012. Mr. Layton received an annual base salary of $600,000, “a level established by FHFA.” Mr. Layton has a cumulative Target Total Direct Compensation (“TDC”) for 2015 of $5,200,000.  Mr. Layton is eligible to participate in all employee benefit plans offered to Freddie Mac’s other senior executives. Mr. Mackey has served as the Chief Financial Officer since November 2013. Mr. Mackey has an annual Target TDC opportunity of $3,000,000, consisting of a base salary of $500,000 and Deferred Salary of $2,500,000; and the opportunity to participate in all employee benefit plans offered to Freddie Mac’s executive officers. Mr. Mackey was also provided with a cash sign-on award of $960,000 in recognition of the forfeited compensation at his prior employer and commuting expenses during the first several months of his employment.

 

Wednesday
Oct052016

Director Compensation Project: Deere & Company (DE)

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 Deere & Company’s (NYSE: DE) 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

($)

Option Awards

($)

Nonqualified Deferred Compensation ($)

Total

 ($)

Crandall C. Bowles*

135,000

119,966

0

0

254,966

Vance D. Coffman*

140,000

119,966

0

0

259,966

Charles O. Holiday, Jr.**

160,000

119,966

0

0

279,966

Dipak C. Jain*

120,000

119,966

0

20,610

260,576

Michael O. Johanns*

100,000

135,637

0

0

235,637

Clayton M. Jones*

120,000

119,966

0

0

239,966

Joachim Milberg**

120,000

119,966

0

0

239,966

Richard B. Myers**

120,000

119,966

0

0

239,966

Gregory R. Page*

120,000

119,966

0

843

240,809

Thomas H. Patrick**

130,000

119,966

0

0

249,966

Sherry M. Smith*

120,000

119,966

0

2,122

242,088

Dmitri L. Stockton*

50,000

93,441

0

0

143,441

Sheila G. Talton*

50,000

93,441

0

0

143,441

 

*Up for reelection

**Retiring/Not standing for reelection

***Brian M. Krzanich is a 2016 nominee to the board and is therefore not listed in this chart 

Director Compensation. During fiscal year 2015, Deere held five Board of Directors meetings and fifteen committee meetings. Each current director attended at least 75% of the total number of Board and committee meetings on which he or she served, except Joachim Milberg, who attended less than 75% of the Board and committee meetings at which his attendance was required (four absences total due to illness). Overall attendance at such meetings was approximately 96%. Directors are reimbursed for expenses incurred from Board service, including cost of attending Board and committee meetings. Directors may elect to participate in the Nonemployee Director Deferred Compensation Plan, which allows participants to invest in  interest-bearing or equity alternatives. 

Director Tenure. In 2015, Ms. Bowles, who has held her position as a member of the Board from 1990 to 1994 and since 1999, held the longest tenure. Mr. Stockton and Ms. Talton hold the shortest tenures as they joined in 2015. All directors currently sit on other boards: Mr. Allen serves as a director for Whirlpool Corporation; Ms. Bowles serves as a director for JPMorgan Chase & Co.; Mr. Coffman serves as a director for 3M Company and Amgen Inc.; Mr. Jain serves as a director for Northern Trust Corporation, Reliance Industries Limited (India) and Global Logistics Properties Limited (Singapore); Mr. Johanns serves as a director for Burlington Capital Group, LLC; Mr. Jones serves as a director for Cardinal Health, Inc., and Motorola Solutions, Inc.; Mr. Page serves as a director for Eaton Corporation PLC; Ms. Smith serves as a director for Tuesday Morning Corporation and Realogy Holdings Corp.; Mr. Stockton serves as a director for GE Asset Management Inc. and General Electric RSP U.S. Equity Fund; and Ms. Talton serves as a director for OGE Energy Corporation and Wintrust Financial Corporation. 

CEO Compensation. Samuel R. Allen, Deere’s Chairman and Chief Executive Officer since 2010, earned total compensation of $18,701,330 in 2015. He earned a base salary of $1,500,000, stock awards of $5,612,187, option awards of $2,660,623, incentive compensation of $5,519,363, deferred earnings of $2,931,274, and other compensation totaling $477,883. Michael J. Mack, Deere’s President of Global HR and Public Affairs, earned total compensation of $5,724,129 in 2015. He earned a base salary of $675,839, stock awards of $1,285,151, option awards of $596,532, incentive compensation of $2,162,777, deferred earnings of $848,211, and other compensation totaling $182,619. “Other compensation” for officers includes miscellaneous items such as personal use of the company aircraft, financial planning, medical exams, and company contributions to defined contribution plans.

Monday
Oct032016

Director Compensation Project:  2016

The Race to the Bottom is foremost a corporate governance blog.  The Blog is, however, run by students. Students supervise the activities of the Blog and regularly write posts.  Topics for post can include cases, no action letters (particularly in the Rule 14a-8 space), and analysis of proxy statements.  

Today we start a series of posts that examines compensation paid to directors.  Until 2006, director compensation was mostly disclosed in narrative form.  Reforms in 2006 required a disclosure compensation table for directors. As a result, the "total compensation" provided to directors became easier to determine and easier to compare. Also, the table had to include more than cash and equity.  Other compensation picked up any other benefits provided to directors.

Students have examined a number of proxy statements, mostly of larger companies, and reviewed the compensation.  The posts generally include director compensation, CEO compensation, and other information from the proxy statements.   

Friday
Sep302016

Newman Opposes Petition for Certiorari, Relying on Merits of Second Circuit Opinion

The US Supreme Court has taken cert in a case raising issues first addressed in US v. Newman, 773 F.3d 438 (2d Cir. 2014).  See Salman v. United States, 15-628 (Jan. 19, 2016).  The Supreme Court accepted cert in Salman only after rejecting a petition filed by the US in Newman.  This post discusses one of the briefs filed in connection with the Newman cert petition. 

In Brief For Todd Newman In Opposition to the Petition for a Writ of Certiorari to the United States Court of Appeals for the Second Circuit, No. 15-137 (August 24, 2015) regarding United States v. Newman et al., Newman (“Defendant”) argued: (1) resolution of the question presented by the United States (“Plaintiff”) would not affect the outcome of the case as decided by the Second Circuit; (2) the Second Circuit’s decision did not conflict with the Supreme Court’s decision in Dirks v. SEC; (3) the Second Circuit’s decision did not create a circuit conflict; and (4) the Second Circuit’s decision would not undermine insider trader prosecution.

First, Defendant asserted Plaintiff’s question would not affect the Second Circuit’s ruling, because the Second Circuit’s central holding required a tippee to know the tipper received a personal benefit in order to find the tippee liable for insider trading. Here, Defendant argued Plaintiff’s reframed question on whether corporate insiders received a personal benefit from disclosing information to Defendant would not overturn the Second Circuit. Defendant maintained because knowledge of a personal benefit (“gift theory”) was still required, and gift theory was an issue decided by the lower courts and not on appeal.

Second, Defendant argued the Second Circuit’s decision was consistent with the Supreme Court’s ruling in Dirks v. SEC. According to Defendant, Dirks imposed insider trading liability for the gifting of information to a relative or friend. This required a close personal relationship between the tipper and the tippee. Defendant stated the Second Circuit’s reference to an impersonal relationship endorsed the Dirks ruling.

Third, Defendant asserted there was no circuit conflict. Plaintiff contended the Ninth Circuit issued an opinion demonstrating a conflict that required resolution by the Supreme Court. Defendant, however, maintained the Ninth Circuit opinion included a hypothetical that was outside the scope of Newman and further noted that both circuits agreed that a gift of information could result in insider trading.

Finally, Defendant stated the Second Circuit’s decision would not undermine insider trader prosecution. Plaintiff argued personal benefit to a relative or close friend would be impossible to prove under Newman, but Defendant’s assertions illustrated this particular type of personal benefit.

As such, Defendant’s primary assertion was: the issues on appeal, and any subsequent outcome, were insignificant.

The primary materials for this post can be found on the DU Corporate Governance website.

Wednesday
Sep282016

Lubbers v. Flagstar Bancorp, Inc.: Failure to Prove a Material Omission

In Lubbers v. Flagstar Bancorp, Inc., No. 14-cv-13459, 2016 BL 36824 (E.D. Mich. Feb. 10, 2016), the United States District Court for the Eastern District of Michigan, Southern Division, granted Flagstar Bankcorp. Inc. (“Flagstar”), and two of its officers, Alessandro DiNello and Paul Borja’s (collectively, the “Defendants”) motion to dismiss. The court found that Plaintiff failed to meet his burden in pleading Flagstar’s public disclosures contained an actual, material omission.

According to the allegations, after the collapse of the mortgage industry, Flagstar, a holding company for non-party Flagstar Bank, experienced a backlog in processing loan modification and loss mitigation applications. In September 2011, Fannie Mae allegedly threatened to terminate Flagstar’s servicing rights on loans owned or guaranteed by Fannie Mae. In December of 2013, Flagstar purportedly sold a portion of its mortgage servicing rights (“MSRs”) portfolio to Matrix Financial Services Corporation (“Matrix Financial”). In August of 2014, Flagstar filed a Form 8-K with the Securities and Exchange Commission (“SEC”) disclosing its discussions with the Consumer Financial Protection Bureau (“CFPB”) regarding a potential settlement relating to alleged violations of various federal consumer financial laws. Flagstar’s rating was downgraded, and within two days, the stock price fell by $1.16.

The Plaintiff brought this class action against the Defendants on behalf of all purchasers of Flagstar common stock from October 22, 2013, to August 26, 2014 (the “Class Period”). The Plaintiff alleged Flagstaff omitted material information and made misleading statements in its public disclosures in August of 2014 in violation of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder. Further, the Plaintiff asserted the Defendants, as controlling persons of Flagstar, were liable for Flagstar's violations under Section 20(a) of the Securities Act.

For non-disclosure liability under the Exchange Act to attach, a defendant must violate an affirmative duty to disclose, which can arise from a prior false, inaccurate, incomplete, or misleading statement of material fact in light of the undisclosed information. Materiality depends on the significance a reasonable investor would place on the withheld or misrepresented information. Courts look to the context of the statements to determine whether an omission renders prior statements misleading. 

The court found “no reasonable investor could have read Flagstar’s disclosure as negating the possibility of a CFPB investigation or settlement.” The court further held the fact that such investigations were not disclosed during the class period combined with the language of Defendants’ disclosure was not misleading. Specifically, the court found Defendants' public disclosure statements “from time to time” and “we may face a greater number or wider scope of investigations,” to be nothing more than “semantic quibbling” such that the Plaintiff’s claims regarding misleading disclosures could not rest on these statements. In fact, the court concluded the Defendants’ phrases were broad enough to “encompass the possibility” of a CFPB investigation for not complying with consumer protection laws, even if the phrases somehow conveyed to investors that the Fannie Mae investigations were routine.

The court also held Flagstar was under no obligation to disclose Fannie Mae’s threats to terminate its right to loan servicing. In so holding, the court found no material relationship between the threats and either Flagstar’s disclosure regarding ongoing investigations or its generic statement informing investors that consumer protection laws and regulations were ever changing. In addition, the court held a “boilerplate statement” Flagstar made regarding fines and penalties was too generic to be misleading and, furthermore, had no relationship to the disclosure itself. Furthermore, the court held that to require disclosure of Fannie Mae’s alleged threats would impose a general duty, not required under law, of unlimited disclosure whenever any financial data is released.

The court held Defendant’s statements made to sell a portion of its MSRs portfolio to Matrix Financial was not misleading, therefore no more needed to be disclosed. Although the Plaintiff argued investors would read the statements as suggesting the sale absolved Flagstar of liability for the previous violations of the CFPB, the court held it was not misleading because no reasonable investor would conclude such. Therefore, and because the statement was not misleading, the court found no further disclosures were necessary, noting that omissions need only be disclosed when necessary to make a previous statement misleading.

Accordingly, the court granted the Defendants’ motion to dismiss Plaintiff’s amended complaint. 

The primary material for this case can be found on the DU Corporate Governance Website. 

Monday
Sep262016

In re Biglari Holdings, Inc. S'holder Derivative Litig. (Taylor v. Biglari): Court Affirms Dismissal of Shareholder Derivative Suit

In In re Biglari Holding, 813 F.3d 648  (7th Cir. 2016), the United States Court of Appeals for the Seventh Circuit affirmed the lower court’s dismissal of a shareholder derivative suit brought by shareholders Chad Taylor and Edward Donahue (the “Plaintiffs”) against Biglari Holdings, Inc. (“Biglari Holdings”) CEO and board chairman Sardar Biglari (“CEO”) and four other members of the Biglari Holdings board (collectively, the “Defendants”). 

According to the complaint, the board of Biglari Holdings approved three separate transactions in 2013, including the sale of Biglari Capital Corporation (“BCC”) back to the CEO at “a low price” and a stock offering valued at $75 million. In the case of the stock offering, the Plaintiff alleged that the company had not retained a “financial advisor.” In addition, the board approved a licensing agreement to use the CEO’s name and likeness for the purposes of promoting Biglari Holdings to consumers.  A term in the licensing agreement required the company 

to pay [the CEO] 2.5 percent of the company's gross revenues from products and services that bear [the CEO’s] name as royalties for the use of his name and likeness for five years if he's removed as CEO, resigns because of an involuntary termination event, or loses his sole authority over capital allocation, or a majority of the board is replaced, or someone other than [the CEO] or the company's existing shareholders obtains more than 50 percent of the shares and therefore acquires control of the company. 

The Plaintiffs alleged these transactions amounted to entrenchment, and were “intended to cement Biglari’s control” of Biglari Holdings and “enrich him at the expense of other shareholders.” The Plaintiffs contended that the board was not independent and its members were beholden to the CEO.  Specifically, the Plaintiffs alleged the independence of the Biglari Holdings board had been compromised by the personal and business connections of several individual directors to the CEO.  The Plaintiffs further argued such a costly royalty payment attached to the licensing agreement, triggered by replacement of the board or the CEO, amounted to entrenchment of the current board. Finally, the Plaintiffs alleged the board failed to adequately deliberate before the stock offering or consider the entrenching effects of such an offering. 

Traditionally in a shareholder derivative action, shareholders must demand that “the board either correct the improprieties alleged or initiate an action on behalf of the corporation against members of the board.” The Plaintiffs instead asserted “demand futility.” Under Indiana law – following guidance from Delaware in such cases –“demand futility” can be shown by facts that create a reasonable doubt that a majority of directors was disinterested, that the board was independent, or that the board had exercised reasonable business judgment. Additionally under Indiana law, there is a strong presumption a director is not liable for any action taken unless the alleged breach or failure to perform constitutes willful misconduct or recklessness. 

With respect to the entrenchment claim arising from the licensing agreement, the opinion pointed to the lower court’s conclusion that Plaintiffs had not “alleged that any of the directors were in peril of being removed from the board and, if they were not, it is unlikely that their motivation for approving the challenged transactions was entrenchment.”    

With regard to director independence, the court found the facts surrounding the connections between the CEO and other members of the board were insufficient to raise reasonable doubts regarding the independence of the board. The court conceded that the director who had been the CEO’s professor could “raise a question” about independence but that the allegations concerning the other four directors were insufficient.  The court, however, rejected claims of non-independence for a director who served on the board of a company that the CEO tried to take over and director who, because of the fees received, would “kowtow” to the CEO.  The same was true of a director who served on a board of a company that was 12.8% owned by Biglari Holdings and had allegedly developed business relationships with the CEO prior to becoming a director.       

The court also determined that the three transactions challenged by Plaintiffs did not adequately establish a claim for entrenchment.  With respect to the licensing agreement, the court questioned the allegations that the replacement of the board would “trigger costly royalty obligations.”  See Id. (“Thus the net earnings figure does not reveal the true financial health of the company, and so the required royalty need not have the grave impact that the plaintiffs allege.”).  

Concerning the sale of BCC, the court addressed the claim that the amount paid by the CEO was less than the value of the asset.  The court determined that the $1.7 million sales figure was reasonable in light of the benefits to Biglari Holdings, including “a reduction in regulatory burdens related to investments and by avoiding potential conflicts of interest”.  Finally, the court disagreed with the Plaintiffs’ claim regarding the stock offering, noting the offering contained an oversubscription feature, which allowed existing shareholders to purchase the shares not taken.  The court found the CEO had simply exercised his right to buy more shares under the subscription feature, while other shareholders declined to do so, resulting in the change in ownership interests. 

For the above reasons, court found none of the Plaintiffs’ allegations created a substantial doubt the transactions were a product of valid business judgment by an independent board. Accordingly, the court affirmed the lower court’s dismissal of the Plaintiffs’ complaint. 

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

Friday
Jul012016

SEC Adopts New Resource Extractive Industries Rule

Just in time, on June 27th the SEC adopted new resource extractive industry rules. The agency faced a June 27 adoption deadline after Oxfam America Inc. sued to speed up the rulemaking and a federal judge in September ordered the SEC to create an expedited rule schedule.  (see here).

The rules require resource extraction issuers to disclose payments made to governments for the commercial development of oil, natural gas or minerals.  The rules are the second attempt by the SEC to fulfill the mandate of Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. That section directs the Commission to issue final rules that require each resource extraction issuer to include, in an annual report, information relating to any payment made by the resource extraction issuer, a subsidiary of the resource extraction issuer, or an entity under the control of the resource extraction issuer to a foreign government or the federal government for the purpose of the commercial development of oil, natural gas, or minerals. 

An earlier rule adopted pursuant to the section was adopted by the Commission on August 22, 2012, but was vacated by the U.S. District Court for the District of Columbia.  (see here and here

The final rules require an issuer to disclose payments made to the U.S. federal government or a foreign government if the issuer engages in the commercial development of oil, natural gas, or minerals and is required to file annual reports with the Commission under the Securities Exchange Act.  The issuer must also disclose payments made by a subsidiary or entity controlled by the issuer. 

Under the final rules, resource extraction issuers must disclose payments that are:  made to further the commercial development of oil, natural gas, or minerals; “not de minimis”—defined as any payment, whether a single payment or a series of related payments, which equals or exceeds $100,000 during the same fiscal year; and within the types of payments specified in the rules.

The final rules include two exemptions to the reporting obligations.  One provides that a resource extraction issuer that has acquired a company not previously subject to the final rules will not be required to report payment information for the acquired company until the filing of a Form SD for the first fiscal year following the acquisition. Another exemption provides a one-year delay in reporting payments related to exploratory activities. The required disclosure will be filed publicly with the Commission annually on Form SD no later than 150 days after the end of its fiscal year. 

Perhaps the most interesting requirement of the new rules is that the required disclosure must be filed publicly with the Commission annually on Form SD no later than 150 days after the end of its fiscal year.    Given that the public filing requirement that caused the court to strike down the first attempt at the resource extractive industries rule we might have expected to see a different approach this time around.  Perhaps there has been some backstage negotiation over this point.  If not, it seems likely that another legal challenge will be brought.

Friday
May202016

SEC v. Battoo: Violations of the Exchange Act and the Advisers Act

In SEC v. Battoo, 1:12-CV-07125, 2016 BL 19839 (N.D. Ill. Jan. 25, 2016), the United States District Court for the Northern District of Illinois, Eastern Division, granted the Securities and Exchange Commission’s (“SEC”) motion for summary judgment against Tracy Sunderlage. The court found the SEC successfully demonstrated Sunderlage’s violation of Section 15 of the Securities Exchange Act (“Exchange Act”) and Section 203 of the Investment Advisers Act (“Advisers Act”).

As the SEC alleged, Sunderlage was barred in 1986 from associating with any broker, dealer, investment adviser, investment company, or municipal securities dealer, after discovering he sold unregistered securities and made material misstatements to clients. In 1989, Sunderlage created a “Multi-Employer Plan,” replaced in 2003 by a “Single-Employer Plan” (collectively, the “Employment Plans”), through which employers made tax-deductible contributions to a welfare benefit trust. PBT, Ltd. (“PBT”), owned and operated by Sunderlage, served as the trustee of the Employment Plans. PBT pooled contributions and invested them in insurance products, including a company Sunderlage founded and directed, Maven Assurance Limited (“Maven”). Participating employees paid premiums, and were required to become Maven shareholders by purchasing variable annuities issued to Maven Life International Limited (“Maven Life”), promoted and administered by Sunderlage. Sunderlage also owned Sunderlage Resource Group, Inc. (“SRG”), which managed SRG International and allegedly promoted the Employer Plans and Maven Life variable annuity at conferences in the United States.

The SEC brought this federal securities law action against Sunderlage, the one remaining defendant, after the other individual and corporate-entity defendants defaulted.

As a threshold requirement to impose liability under the Exchange Act and Advisor’s Act, it must be proven that the case involved a "security." Under 28 U.S.C. § 2462, there is a five-year statute of limitations for any "action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise." Section 15 of the Exchange Act bars unregistered brokers from using interstate commerce to conduct securities transactions, and requires any person who has been barred from associating with a broker to obtain SEC approval to willfully "associate with a broker.” 15 USC §78o.  In addition, the Advisers Act prohibits any person who has been barred from associating with an investment adviser to willfully "associate with an investment adviser" without SEC approval.

The court first addressed whether the Employer Plans and Maven Life annuity were securities under the Exchange Act and the Advisers Act, concluding no reasonable trier of fact could find they were anything but securities. The Exchange Act and the Advisers Act both define a security to include an investment contract. The court held the Employment Plans were investment contracts because, under the well-established Howey test, they were: (1) an investment of money, since employers “invested” money by “giving up some tangible and definable consideration in return for interests with substantially the same characteristics of a security;” (2) in a common enterprise, because PBT pooled employer contributions to purchase securities as well as the Employer Plans tying SRG International’s interests to the investments; and (3) with an expectation of profits flowing solely from the efforts of others, because the Employer Plans were portrayed as “having a dominant investment intent.” The court also held the Maven Life annuity was a security, as Sunderlage admitted such in his answer to the complaint.

Turning to the statute of limitations, the court quickly concluded that, unlike a claim for penalties, the claims seeking injunctive relief and disgorgement were not subject to a five-year statute of limitations. According to the court, Sunderlage forfeited any other statute-of limitations argument because he did not offer an alternative limitations period for equitable relief.

Next, the court determined that Sunderlage acted as or associated with a broker in violation of Section 15 of the Exchange Act’s bar on willful association with brokers, absent SEC approval. The court found it significant that Sunderlage and SRG International not only solicited investors and provided investment advice, but they also processed documents and handled funds to effectuate securities transactions, receiving transaction-based compensation for investments in the Employer Plans and the Maven Life annuity.

Finally, the court held Sunderlage and SRG International routinely provided investment advice by relaying information about the Maven securities and managing clients’ funds in exchange for compensation, thus acting as an investment adviser under the Adviser’s Act in violation of Section 203(f).

Accordingly, the court granted the SEC’s motion for summary judgment.

The primary material for this case can be found on the DU Corporate Governance Website.  

Wednesday
May182016

Varjabedian v. Emulex Corp.: Court Grants Motion to Dismiss in Securities Class Action

In Varjabedian v. Emulex Corp., No. SACV 15-00554-CJC(JCGx), 2016 BL 21999 (C.D. Cal. Jan 13, 2016), the United States District Court for the Central District of California granted a motion to dismiss filed by Emulex Corporation (“Emulex”), Emerald Merger Sub, Inc. (“Merger Sub”), Avago Technologies Wireless Manufacturing, Inc. (“Avago”), and ten members of Emulex’s board and management (the “Individual Defendants”) (collectively, “Defendants”) against Gary Varjabedian’s (“Plaintiff”) complaint.

According to the allegations, Avago acquired Emulex in 2015 after the two companies reached a merger agreement, under which Merger Sub was to initiate a tender offer for Emulex’s outstanding stock. Emulex solicited a fairness opinion from its financial advisor, which found the merger, which produced a 26.4% premium over Emulex’s current stock price, was fair. Accordingly, Emulex issued a Recommendation Statement summarizing the findings and recommending shareholders tender their shares and support the acquisition. The Recommendation Statement, however, did not include a one-page Premium Analysis from the financial advisor’s fairness opinion indicating the Emulex premium was below-average. Plaintiff filed suit alleging Defendants intended to mislead Emulex shareholders into believing the proposed merger was a better deal than it actually was. Among other claims, Plaintiff contended Emulex violated Sections 14(e) and 14(d)(4) of the Exchange Act.

Section 14(e) makes it unlawful to make any untrue statement of a material fact or omit any material fact necessary to make the statements made not misleading. 15 U.S.C. 78n(e). Plaintiff asserted that a claim under the Section did not require allegations of scienter. Assuming scienter was required, the Plaintiff attempted to meet the requirement in three ways: (1) the Defendants made misleading statements regarding Emulex premiums despite having access to contradictory information; (2) the Defendants knew of the Premium Analysis, and that withholding the information would mislead investors; and (3) the Individual Defendants had a motive to commit fraud because they feared for their jobs if Emulex did not sell quickly.

The court first addressed whether Section 14(e) even required allegations of scienter. Relying on case law, statutory interpretation, and analysis from other jurisdictions, the court concluded a plaintiff bringing a claim under Section 14(e) is required to allege scienter. To determine whether a plaintiff sufficiently pleaded a strong inference of scienter, the court utilizes a “dual inquiry.” The court must determine whether the following are sufficient to create a strong inference of scienter: (1) any of the plaintiff’s allegations, when standing alone; and (2) any insufficient individual allegations, when combined.

The court found the Plaintiff failed to allege a strong inference of scienter. First, the court found the Premium Analysis suggested the Emulex premium was below the industry average, but within a range of reasonable outcomes. Because the Defendants never represented the premium as above industry average, the court reasoned these statements were not contradictory. Second, the court held Defendants were under no obligation to include every piece of information regarding the merger in the Recommendation Analysis, so it was not unreasonable to omit the Premium Analysis. Finally, the court noted the Individual Defendants rejected multiple offers for Emulex, and as shareholders, the Individual Defendants had no motive to sell the company at an unacceptably low price.

Examining the complaint in its entirety, the court found the Plaintiff failed to allege scienter under the second prong of the “dual inquiry”. The court reasoned it was likely the Defendants legitimately believed the premium to be fair to shareholders, and the Premium Analysis did not explicitly indicate otherwise.

The Plaintiff also alleged violation of Section 14(d)(4) and Rule 14d-9. Section 14(d)(4), however, does not expressly create a private right of action. Thus, the Plaintiff argued the court should recognize an implied right of action. The court refused to do so, holding the statute did not create a federal right in favor of the plaintiff, and the legislative intent and underlying purpose of Section 14(d)(4) was not to create a private right of action, but to reserve enforcement for the Securities and Exchange Commission.

Accordingly, the court granted the Defendants’ motion to dismiss the Plaintiff’s complaint.

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

Monday
May162016

Bondali v. Yum! Brands, Inc.: Section 10(b) Claims Require More Than an Overall Impression

In Bondali v. Yum! Brands, Inc., No. 15–5064, 2015 WL 4940374 (6th Cir. 2015), the United States Court of Appeals for the Sixth Circuit affirmed the district court’s holding, dismissing Arun Bondali’s (collectively, “Plaintiffs”) class action complaint against Yum! Brands, Inc. (“Yum”) and three Yum senior officers, CEO David C. Novak, Richard T. Carucci, and Jing-Shyh Su (collectively, “Defendants”).  The court determined the district court correctly dismissed the complaint for failure to plead with particularity under Section 10(b) and Section 20(a) of the Securities Exchange of 1934 as well as Rule 10b-5.

According to the allegations, Yum owned Kentucky Fried Chicken (“KFC”) and had a significant presence in China. Between 2010 and 2011, Yum received test results from an independent laboratory showing batches of chicken from a supplier tested positive for drug and antibiotic residues.  Subsequently, Yum disqualified the relevant suppliers but did not disclose the results or the disqualifications nor that one other supplier had tested negatively.  Only after the media began raising issues with respect to drug or antibiotic residues in chickens did Yum “publicly acknowledged any issues”.  In Feb. 2013, Yum stated that, as a result of the “negative same-store sales” and the need to “recover consumer confidence,” the company no longer expected to “achieve” earnings per share growth in 2013.

Plaintiffs brought an action for securities fraud alleging that the Defendants made false or misleading statements and acted with scienter by failing to disclose adverse results and system failures to the public, eventually resulting in a 17% drop in stock prices.  Yum moved to dismiss all claims, and the district court granted the motion, finding Plaintiffs failed to allege both actionable misstatements and scienter.

Under Section 10(b) and Rule 10(b)(5), a plaintiff must prove: (1) material misrepresentation or omission by a defendant; (2) scienter; 3) in connection with the purchase or sale of security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.

Plaintiffs appealed, alleging that during the Class Period, Yum made ten materially false or misleading statements.  The court divided Yum’s statements into four categories: (1) cautionary statements or risk disclosures (statements on the investment risk that food safety issues posed; (2) statements touting standards and protocols; (3) responses to negative publicity; and (4) statements on softer sales (statements relating to “lowered same-store sales projections”).

First, statements regarding food standards and safety protocols, the court determined Yum’s were not misleading.  The court found that Yum’s statements regarding its “strict” standards and protocols were reasonably grounded in objective fact.  Thus, the court determined it was “not reasonable” to interpret Yum’s statements as a “guarantee” that its suppliers would always abide by these standards.  The court also agreed that statements providing assurance that unsafe products would be “immediately . . . pulled from distribution” because they appeared in a Code of Conduct and were “aspirational.” (“Nevertheless, Yum's statement is not actionable because it was a statement of aspiration made in Yum's corporate Code of Conduct rather than rather an assertion of objective fact made in a public filing or press release. As the district court properly explained, a code of conduct is not a guarantee that a corporation will adhere to everything set forth in its code of conduct. Instead, a code of conduct is a declaration of corporate aspirations.”). 

Second, the court found Plaintiffs failed to show how Yum’s responses to negative publicity were false and misleading.  Yum took the actions mentioned in the statements to manage suppliers by engaging in spot checks and eliminating “inferior” suppliers.  To the extent that Plaintiffs allegations went to the efficiency of the process, the court noted efficiency was an issue of corporate mismanagement, not investor deception.

With respect to allegations relating to food safety, Plaintiff asserted that Yum portrayed the issue as a food safety as a future rather than a materialized risk.  The court first reasoned that cautionary disclosures were inherently prospective and did not “infer anything regarding the current state of a corporation's compliance, safety, or other operations... ”  The court further reasoned that Plaintiffs did not allege facts to show the food safety issues “were so sever” that they would have “resulted in financial loss for Yum.”  As for the other allegations of falsity, the court stated that “the remaining statements can be cast aside with little fanfare.”  The court also declined to examine the “overall impression created by Yum’s statements” concluding that courts “do not forego a statement-by-statement analysis of objective falsity in favor of analyzing the overall impression made by a set of statements.”

Lastly, the court held Plaintiffs failed to sufficiently allege a “strong inference” of scienter.  The court determined that allegations of “motive” were not enough to establish scienter.  Nor did the allegations sufficiently tie the individual defendants to the test results “by alleging that senior officers were regularly notified of test results or that Yingtai and Liuhe supplied such a substantial proportion of KFC China's chickens that senior officers would have had to be aware of any issues with such major suppliers.”    

Accordingly, the court affirmed the lower court’s dismissal of the suit.

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

 

Friday
May132016

SEC v. Cook: Nearly $156 Million in Disgorgement and Prejudgment Interest Ordered Following Convictions 

In SEC v. Cook, No. 09-3333, 2016 BL 7948 (D. Minn. Jan. 12, 2016), the United States District Court for the District of Minnesota granted the United States Securities and Exchange Commission’s (“SEC”) Motions for Summary Judgment against Defendants Patrick Kiley and Jason Beckman (the “Defendants”) regarding alleged violations of Section 5(a) and (c) and 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 thereunder, and Section 206(1) and (2) of the Investment Advisers Act of 1940 (“Advisers Act”). The court permanently restrained and enjoined Defendants from further violating the securities laws and ordered disgorgement of Defendants’ ill-gotten gains in addition to prejudgment interest totaling nearly $156 million.

In July 2012, a jury found Defendants guilty of criminal charges including wire fraud, mail fraud, conspiracy to commit mail and wire fraud, and money laundering arising from a fraudulent scheme in which Defendants fraudulently sold investments in a purported foreign currency trading scheme from at least July 2006 through July 2009. The scheme was alleged to have resulted in approximately 1,000 investors losing at least $190 million. 

The SEC brought actions against Defendants, moved for summary judgment, and asserted that the criminal proceedings estopped Defendants from disputing the facts in the civil proceeding. Because the evidence introduced in the criminal trial was the same evidence underlying the SEC’s claims, the court determined Defendants were estopped from disputing the facts, which supported the SEC’s Motions for Summary Judgment. As such, the court considered whether the SEC was entitled to judgment as a matter of law in regard to each alleged violation.

First, to establish violations of the anti-fraud provisions of the Exchange Act, a plaintiff must show the defendant: (1) engaged in a fraudulent scheme; (2) in connection with an offer or sale of a security; (3) through the use of interstate commerce; (4) with scienter. In addition, to establish a violation of the Advisers Act, the plaintiff must prove that the defendant: (1) acted as an investment adviser; (2) perpetrated the fraud on existing or prospective clients; and (3) acted at least negligently in doing so.

The court found the criminal convictions satisfied all of the requirements for collateral estoppel and, thus, entitled the SEC to summary judgment regarding the securities fraud charges. Specifically, because the jury in the criminal matter found Defendants devised a scheme to defraud investors to obtain money through materially false pretenses, did so knowingly and with intent, and based its findings on the same factual basis as the SEC’s claims, the court concluded all of the elements for violations of the anti-fraud provisions were established. 

Second, to succeed on a claim for a violation of the Securities Act registration provision, a plaintiff must show: (1) did not file a registration statement for the offering of securities with the SEC; (2) sold or offered to sell securities, directly or indirectly; (3) through the use of interstate facilities or mails. An “investment contract” constitutes a security if: (1) a person invested money; (2) in a common enterprise; (3) with the expectation of profit; (4) derived solely from the efforts of the promoter or others. Defendants can escape liability, however, by proving a securities offering at issue qualified for a registration exemption.

Again, the court found the evidence in the criminal matter established the elements for an unregistered, non-exempt offering in violation of the Securities Act. The evidence introduced in the criminal trial demonstrated that investors gave Defendants money to invest in a foreign currency trading venture expecting a profit in return. Additionally, the evidence demonstrated that Defendants comingled the investors’ money in pooled accounts, never filed a registration statement, and failed to demonstrate that a registration exemption applied. The court, therefore, granted the SEC’s Motions for Summary Judgment.

Lastly, the court reasoned the SEC was entitled to permanent injunctive relief because it demonstrated Defendants violated the securities laws and there was a reasonable likelihood of future violations. Moreover, the court determined disgorgement and prejudgment interest were appropriate remedies to prevent Defendants’ unjust enrichment. Thus, the court ordered Defendants to disgorge their ill-gotten gains, with prejudgment interest, in the amount of $155,928,523.    

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

Wednesday
May112016

Tai Jan Bao v. SolarCity Corporation: Accounting Practices Lead to Securities Fraud Claim

In Tai Jan Bao v. SolarCity Corporation, No. 14-cv-01435-BLF, 2016 BL 2378 (N.D. Cal. Jan. 05, 2016), the United States District Court for the Northern District of California granted SolarCity, Chief Executive Officer Rive, Chief Financial Officer Robert Kelly, and Chairman of the Board of Directors Elon Musk’s (collectively, “Defendants”) motion to dismiss a complaint filed on behalf of purchasers of SolarCity common stock (“Plaintiffs”).

According to the allegations, SolarCity Corporation derived revenue in two ways: renewable twenty-year leases of solar energy products, and sales of solar energy systems. Between December 2012 and March 2014 (“Class Period”), SolarCity’s accounting formulas shifted overhead costs from sales to leases. This enabled SolarCity to amortize costs over a twenty-year period, allowing the corporation to post consistent sales profit during the Class Period. SolarCity filed restated financials in March 2014, showing SolarCity had a negative gross margin for six affected quarters. 

The Plaintiffs claimed Defendants committed securities fraud in violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 (“Act”) by shifting overhead costs from sales to leases. Specifically, Plaintiffs alleged the Defendants deliberately manipulated accounting formulas to portray profitability and secure financing. The Plaintiffs also sought to hold Chairman Musk jointly and severally liable under Section 20(a) of the Exchange Act.

A successful securities claim under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 requires the plaintiff show: (1) a material misrepresentation or omission by 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 successfully plead scienter, the plaintiff must show a defendant made false or misleading statements either intentionally or with deliberate recklessness.

In seeking to show a “strong inference” of scienter, Plaintiffs relied on statements by eight confidential witnesses (“CWs”). To satisfy pleading requirements, confidential witnesses must describe events with sufficient particularity to establish reliability and personal knowledge, and indicate scienter. While Plaintiffs provided confidential witnesses in an effort to show Defendants knew or deliberately ignored the accounting error, the court found the CW’s statements were too “conclusory, speculative, and/or vague to hold weight.” Specifically, the court noted “most glaringly, not a single “most glaringly, not a single confidential witness alleges that Defendants knew of accounting error central to this case.” Nor did the evidence give rise to “core-operations inferences.” 

The court then held Musk was not jointly and severally liable. To hold the individuals joint and severally liable, a plaintiff must prove a primary violation of federal securities laws where the “defendant exercised actual power or control over the primary violator” by providing specific facts showing specific control over a company’s “preparation and release of allegedly false and misleading statements.”

Plaintiffs claimed Chairman Musk should be held jointly and severally liable because he maintained the power to direct or cause the direction of management or policies of  SolarCity. Plaintiffs argued Musk exercised actual authority, where he signed financial documents, was related to SolarCity’s officers, owned outstanding shares, and because, as CEO Rive explained, Musk “instruct[ed] [Rive] to swerve into a pothole” to avoid invisible walls. Musk may have been a “visionary” but such status did not “suffice to show Musk’s control over SolarCity.” 

Accordingly, the court dismissed all claims under Section 10(b) and Rule 10b-5 with leave to amend, and dismissed the Section 20(a) claim against Musk without leave.    

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

 

Monday
May092016

In re Sanofi Sec. Litig.: Pharmaceutical Company’s Motion to Dismiss Granted In Federal Securities Fraud Claims

In In re Sanofi Sec. Litig., 2016 BL 3051 (S.D.N.Y. Jan. 06, 2016), the United States District Court for the Southern District of New York granted corporate defendant Sanofi and individual defendant Christopher Viehbacher’s (collectively, “Defendants”) motion to dismiss Meitav DS Provident Funds and Pension Ltd., and Joel Mofenson’s (collectively, “Plaintiffs”) putative class action asserting federal securities fraud claims. 

According to the complaint, Sanofi, a global pharmaceutical company, engaged in an illegal marketing scheme (“Scheme”) to artificially boost the sales of its diabetes product line (“Drug”). Plaintiffs alleged the Scheme consisted of funneling millions of dollars in payments disguised as contracts to Accenture and Deloitte, acting as middlemen, in an attempt to induce pharmaceutical retailers and hospitals to favor the Drug. Plaintiffs further alleged that Viehbacher, as CEO and a member of the board of directors, was in a position to have knowledge of the Scheme but failed to stop it. When two whistleblowers revealed the Scheme, an internal investigation ensued and the Scheme was abandoned, which caused the Drug’s sales to slow and the share value to decline significantly. Plaintiffs brought a putative class action on behalf of all persons who purchased shares of Sanofi between February 7, 2013 and October 29, 2014 (the “Class Period”), alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act.

To state a Section 10(b) securities fraud claim, a plaintiff must plead the defendant: (1) made misstatements or omissions of material fact, (2) with scienter, (3) in connection with the purchase or sale of securities, (4) upon which plaintiffs relied, and (5) the reliance was a proximate cause of their injury. Defendants moved to dismiss the complaint pursuant to Rule 9(b) and 12(b)(6) on the grounds that the Plaintiffs failed to adequately allege: (1) any actionable false statements or omissions of material fact, (2) a strong inference of scienter, and (3) loss causation.

A complaint alleging securities fraud based on misstatements must, among other factors, explain why certain defendant misstatements were fraudulent. The court organized the alleged misstatements and omissions into three categories: (1) statements on compliance and corporate integrity; (2) Viehbacher’s Sarbanes-Oxley (“SOX”) certification; and (3) SEC filings, press releases, and conference calls stating the growth of the Drug.

The court found Defendants’ statements on compliance and corporate integrity were not actionable under the securities laws because they were examples of corporate “puffery” and could not mislead a reasonable investor. Similarly, the court determined Defendants’ statements made in SEC filings, press releases, and conference calls were not actionable because they did nothing more than characterize, “albeit it with more fanfare,” the accurate historical data: that the Drug’s sales were growing during the Class Period. Finally, the court held that, since Viehbacher’s SOX certification was a statement of opinion, Plaintiffs were required to plead facts demonstrating Viehbacher did not actually believe what he said. Here, the court found nothing alluding to Viehbacher’s subjective knowledge in the complaint.

Next, one way a plaintiff can establish scienter is through “strong circumstantial evidence of conscious misbehavior or recklessness.” Plaintiffs argued such evidence derived from Defendants’ access to the whistleblower reports and internal investigation. The court disagreed and found the Plaintiffs’ complaint relied on “unsubstantiated conclusions” and did not reference or identify specific facts, reports, or documents that could establish circumstantial evidence of scienter. Thus, the court held Plaintiffs failed to plead a strong inference of scienter.

Finally, to prove loss causation, a plaintiff may show: (1) cause-in-fact proof, or (2) the loss suffered was foreseeable and caused by the materialization of the risk concealed by the fraudulent statements. Plaintiffs theorized that after Defendants abandoned the Scheme, the Drug faced less advantageous pricing in the market, which caused the Drug to sell less, adversely affecting the value of shares. The court agreed Plaintiffs theory could establish loss causation, but found no evidence Defendants’ Scheme actually materially inflated the Drug sales. Here, the court concluded loss causation could not be proven without evidence of a casual relationship between the Scheme being abandoned and the share price declining.

Accordingly, the court dismissed Plaintiffs’ putative class action asserting federal securities fraud claims.

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

Friday
May062016

SEC Requests Injunction Against Participant in the Marijuana Business

On February 29, 2016 the Securities and Exchange Commission (“SEC”) filed a complaint in the U.S. District Court for the Western District of Pennsylvania against Fortitude Group, Inc. and CEO Thomas Parilla (“Defendants”), regarding alleged false and misleading public press releases regarding the company’s efforts and performance as a successful marijuana-related business. The SEC requested an injunction from further misrepresentation and the payment of penalties by the defendants, as well as a penny stock and officer and director bar against Parilla.

According to the allegations in the Complaint, Defendants between February 2014 and May 2014 circulated several press releases on www.otcmarkets.com portraying the company as active in the legalized marijuana business. Via press releases, Fortitude announced the formation of three new subsidiaries, described two separate plans to issue various pre-paid debit cards that could be used for marijuana transactions, and announced the distribution of a marijuana vaporizer. For the first quarter of 2014, Fortitude reported $412,162 in revenue.  The day Fortitude disclosed its plans for three new subsidiaries, the company’s stock price increased 4900% to $0.01 per share and the volume increased three-fold to over 132 million shares. The price of shares continued to increase, peaking at $0.08 per share on April 4, 2014, two days after the press release regarding Fortitude’s plan to distribute vaporizers.

The SEC alleged that Defendants violated Rule 10b-5 and aided and abetted violations of the rule.  The SEC contended that none of the business pursuits reported in the Defendants’ press releases were executed and Fortitude lacked the requisite licensure, funding, or infrastructure to realize them. Also, that the revenues reflected in Fortitude’s first quarter report were false.  Additionally, that Fortitude’s stock price and trading volume between February 2014 and May 2014 were materially impacted by the public dissemination of the aforementioned misrepresentations. 

To prevent continued violation by the defendants, the SEC requested the court issue an injunction from violation of the federal securities laws alleged and an order for the defendants to pay civil money penalties pursuant to Section 21(d)(3) of the Exchange Act, 15 U.S.C. § 78u(d)(3).  The SEC also requested Parilla be barred from future offering of a penny stock as well as from acting as an officer or director of any issuer of registered securities.

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

Thursday
May052016

In re Dole Food Co., Inc.: Merger Breaches Duty of Loyalty

In In re Dole Food Co. Stockholder Litig., No. 8703-VCL CONSOLIDATED C.A. No. 9079-VCL, 2015 BL 276794 (Del. Ch. Aug. 27, 2015), shareholders (the “Plaintiffs”) brought action against David H. Murdock, C. Michael Carter, and David A. DeLorenzo (collectively, “Defendants”) for breach of their duty of loyalty and against Deutsche Bank for aiding and abetting. The Court of Chancery found Murdock and Carter jointly and severally liable, without imposing liability on DeLorenzo and Deutsche Bank.

According to the allegations, Murdock, the CEO and controlling stockholder of Dole Food Company, Inc. (“Dole”), owned 40% of Dole’s common stock. In November 2013, Murdock bought all remaining shares of Dole’s common stock for $13.50 per share as a single-step merger (the “Merger”). A committee of disinterested and independent directors of Dole’s board of directors (the “Committee”) formed to negotiate the transaction.

Although a majority of unaffiliated shareholders approved the Merger, Defendants allegedly made false disclosures and withheld material information from the Committee and shareholders during the process. Specifically, Plaintiffs alleged that the Committee received erroneous information about Dole increasing its income through cutting costs and purchasing farms. Shareholders filed suit, alleging the Defendants breached the duty of loyalty through fraudulent self-dealing.

In transactions involving self-dealing by a controlling shareholder, the applicable standard is entire fairness. Entire fairness depends upon fair dealing and fair price. After examining these two aspects separately, the court considered the issue as a whole to determine entire fairness.

First, the court found the Merger did not involve fair dealing. In reaching this conclusion, the court considered the timing, initiation, negotiation, structure, and approval of the transaction. The court found Carter provided inaccurate information to the Committee. For example, the due diligence of DeLorenzo and Deutsche Bank revealed Dole’s “cost-cutting plan” could achieve $50 million cost savings per year. Although Carter knew this, he claimed in a press release that Dole could only achieve a $20 million cost savings, which caused stock prices to fall 13%.

The court also held that while the price may have been within the range of fairness, Plaintiffs were entitled to a “fairer” price. Id. (“This is because by engaging in fraud, Carter deprived the Committee of its ability to obtain a better result on behalf of the stockholders, prevented the Committee from having the knowledge it needed to potentially say “no,” and foreclosed the ability of the stockholders to protect themselves by voting down the deal.”).

Having found violations of fair price and fair dealing, and thus entire fairness, the court next examined each Defendant separately to determine who was liable. The court found Murdock liable for breaches of the duty of loyalty both as a director and a controlling shareholder. The court also determined DFC Holdings, LLC, an entity controlled by Murdock, was an “acquisition vehicle” for the Merger and aided and abetted the violation.

The court further found Carter liable for damages both as an officer and director. Lastly, the court found that, while a “close call,” DeLorenzo was entitled to rely on the Committee's recommendation of the Merger and was not liable. With regard to Plaintiffs’ suit for aiding and abetting against Deutsche Bank, the court found Plaintiffs failed to meet the third element of the claim, “knowing participation in the breach,” because Deutsche Bank did not knowingly assist in the Defendants’ breach of duty.

Accordingly, the court found Murdock, his entity DFC Holdings, LLC and Carter liable for breach of duty of loyalty in the amount of $148,190,590.18.

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

Wednesday
May042016

Conference on Corporate Compliance: The Rutgers Center for Corporate Law and Governance

I'm happy to pass along the following announcement:

The Rutgers Center for Corporate Law and Governance is presenting a conference on corporate compliance on Friday, May 20, 2016, from 8:30 AM to 3:30 PM, entitled New Directions in Corporate Compliance. The conference will take place at Rutgers Law School, 217 North Fifth Street, Camden, NJ 08102.
 

Corporate and regulatory compliance has exploded as an area of importance to a variety of business organizations in recent years. Corporate compliance programs must be well planned and rigorously implemented throughout a business organization. Notwithstanding the importance of corporate compliance, there is disagreement over the best way to implement and enforce a compliance program. 

This conference will bring together academics, practitioners, and government officials, who approach compliance from different perspectives. The conference will include sessions on litigating the adequacy of a compliance program, structural issues in the compliance department, and organizational culture and developing a culture of compliance. Andrew Donohue, Chief of Staff of the U.S. Securities and Exchange Commission, will present a keynote luncheon address. 

Other speakers include: Catherine Bromilow, Partner, PwC Center for Board Governance; Stephen L. Cohen, Associate Director, Securities and Exchange Commission; James Fanto, Gerald Baylin Professor of Law, Brooklyn Law School; Donald C. Langevoort, Thomas Aquinas Reynold Professor of Law, Georgetown Law; Joseph E. Murphy, Author of 501 Ideas for Your Compliance & Ethics Program; Donna Nagy, C. Ben Dutton Professor of Law, Indiana University Maurer School of Law; Charles V. Senatore, Executive Vice President, Fidelity Investments, Greg Urban, Arthur Hobson Quinn Professor of Anthropology, University of Pennsylvania; and John Walsh, Partner, Sutherland.   

The conference is free and open to the public. A reception will follow. To RSVP, please contact Deborah Leak at dl524@camden.rutgers.edu. CLE credit is available for NJ, NY, and PA. For additional information about CLE credit, contact Deborah Leak.

Tuesday
May032016

SEC v. Gibraltar Global Securities, Inc.: District Court Affirms Magistrate’s Report

In SEC v. Gibraltar Global Securities, Inc., No. 13 Civ. 2575, 2016 BL 7335 (S.D.N.Y. Jan. 11, 2016), the United States District Court for the Southern District of New York adopted its prior October 16, 2015 Report and Recommendation (“Report”), holding Gibraltar Global Securities, Inc., and its president and sole shareholder, Warren A. Davis (collectively, “Defendants”) liable for damages following violations of the Securities Exchange Act of 1934 (“Exchange Act”) as well as Securities Act of 1933 (“1933 Act”). 

The Securities and Exchange Commission (“SEC”) filed a claim against Defendants alleging violations under Section 15(a)(1) of the Exchange Act and Sections 5(a) and (c) of the 1933 Act. On July 2, 2015, the court granted the SEC’s motion for default judgment against Defendants and referred the case to a magistrate for an inquest on damages. When Defendants failed to appear at the damages hearing or to timely object, the Magistrate accepted all facts alleged in the SEC’s complaint as true. Those facts are as follows:

Defendants operated as an offshore, unregistered securities broker-dealer selling millions of shares of unregistered stock in the company Magnum d’Or. Defendants used the Gibraltar website, email, telephone, or mail to complete transactions for customer stock on the open market. Defendants sold unregistered Magnum shares through their U.S. brokers, placed the proceeds in US-based brokerage accounts, and wired any sales proceeds to Defendants’ Royal Bank of Canada account in the Bahamas, where a 2-3% commission was deducted. Defendants sent the remaining amounts back to their U.S. customer, Magnum via mail. Defendants bought and sold over 11 million Magnum d’Or shares between November 2008 and September 2009 to generate $11,384,589 in proceeds.

Under Section 15 of the Exchange Act, it is unlawful for an unregistered dealer to utilize an instrumentality of interstate commerce to effect transactions in, or to induce the purchase of, any security. 15 USC 78o.  Defendants utilized Gibraltar’s website, email, or telephone—instrumentalities of interstate commerce—to receive shares of stock from its customers and deposit the shares into Gibraltar’s U.S.-based brokerage accounts. As such, the court found no clear error in the Report, holding the Magistrate correctly determined Defendants violated the Exchange Act.

Under the 1933 Act, a defendant violates Section 5 (15 USC 77e) if: (1) he or she directly or indirectly sold or offered securities; (2) without registration in effect for the subject securities; and (3) interstate means were used in connection with the offer or sale.  Because Defendants sold unregistered Magnum shares through their U.S. brokers to generate commissions’ proceeds and sent the remainder back to Magnum via mail, the court determined the Report properly found Defendants liable under the 1933 Act.

Based on a magistrate’s finding of a defendant’s liability, the court can adopt a magistrate’s recommendation for damages. Here, the Magistrate recommended disgorgement, disgorgement for prejudgment interest, and second-tier civil monetary penalties. Disgorgement calculations need only be a reasonable approximation of the profits causally connected to the violation, ensuring that the defendant does not profit from his or her gains. The court held the Magistrate’s recommendation to award disgorgement and disgorgement for prejudgment interest was proper and reasonable based on Defendants’ liability. The court, however, determined the Magistrate’s prejudgment interest calculation contained a mathematical error and adjusted the final amount. The court also held each Defendant liable for a second-tier civil monetary penalty for their “abhorrent” conduct.

Accordingly, the court adopted the Magistrate’s report in its entirety notwithstanding the calculation error in prejudgment interest, awarding damages to the SEC.

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

Monday
May022016

Tongue v. Sanofi: Allegations of Misleading Statements Not Actionable Under Revised Omnicare Standard

In Tongue v. Sanofi, No. 15-588, 2016 BL 66168, (2d Cir., Mar. 4, 2016), the Court of Appeals for the Second Circuit affirmed the United States District Court for the Southern District of New York’s grant of Sanofi Pharmaceutical Inc.’s (“Sanofi”), Genzyme Corporation’s (“Gnzyme”), and Sanofi Executives’ (“Executives”, collectively “Defendants”) motion to dismiss the consolidated class action complaint by all persons (“Plaintiffs”) who purchased Contingent Value Rights (“CRVs”) between March 6, 2012 and November 7, 2013.

According to the allegations, Sanofi in February 2011 acquired Lemtrada , a multiple sclerosis treatment, developed by Genzyme, for $74 per share and one CVR per share. Each CVR entitled the holder to cash payouts upon achievements of milestones, such as receiving approval from the FDA by a specific date. In the years leading up to this deadline, Defendants released optimistic statements about Lemtrada’s clinical testing and the FDA approval process. In a call with investors in April 2012, Sanofi’s CEO claimed that, in regards to Lemtrada, “the data are nothing short of stunning.” Defendants, however, omitted the concerns expressed by the FDA about the use of single-blind, rather than double-blind clinical studies, in the testing for Lemtrada. Ultimately, Lemtrada was not approved by the FDA before the deadline and the value of each CVR dropped by more than 62% from $2.00 to $.077 a share.

On April 28, 2014 Plaintiffs filed a complaint alleging Defendants violated Section 10(b) and Section 20(a) of the Security Exchange Act (“Act”), as wells Rule 10b-5 promulgated thereunder, by making materially false and misleading statements that misled investors when Defendants failed to disclose the FDA had expressed concerns about the single-blind, rather than double-blind, testing.

In the period between dismissal by the district court and the decision in the appeal, the Supreme Court decided Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015). The Court, therefore, applied the analysis in that case. Under the revised standard set forth in Omnicare, an investor must “identify particular (and material facts) in the issuer’s opinion whose omission makes the statement misleading to a reasonable person reading the statement fairly and in context.” While opinions may be actionable if the omitted information makes the statement misleading to a reasonable investor, an issuer failing to disclose facts, which cut against its opinion is not necessarily misleading. A reasonable investor expects the issuer to believe the opinion and that it fairly aligns with the information in the issuer’s possession, but does not expect every fact known to the issuer to support its opinion.

The court determined Sanofi did not make material misleading statements of opinion. While the FDA had concerns with the testing methodology “it also stated that any deficiency could be overcome if the results showed an ‘extremely large effect.’” In effect, the concerns were part of a “dialogue” between the FDA and Sanofi. As the court reasoned, “These sophisticated investors, well accustomed to the ‘customs and practices of the relevant industry,” would fully expect that Defendants and the FDA were engaged in a dialogue, as they were here, about the sufficiency of various aspects of the clinical trials and that inherent in the nature of dialogue are differing views.” Moreover, the dialogue “did not prevent Defendants from expressing optimism, even exceptional optimism, about the likelihood of drug approval.”

Accordingly, the court determined there was an absence of serious conflict between the FDA’s concerns about the testing methodology and the Defendants’ optimism about the approval, affirming the district court’s dismissal.

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