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Tuesday
Feb272018

SEC v. Sayid: District Court Denied Securities Lawyer's Motion to Dismiss SEC Fraud Allegations 

In SEC v. Sayid, No. 17 Civ. 2630 (JFK), 2018 BL 9039 (S.D.N.Y. Jan. 10, 2018), the United States District Court for the Southern District of New York denied securities lawyer Norman T. Reynolds’ (“Reynolds”) motion to dismiss a Securities and Exchange Commission (“SEC”) complaint for failure to state a claim. The SEC alleged Reynolds wrote misleading opinion letters for Mustafa David Sayid (“Sayid”), the legal counsel for Nouveau Holdings Ltd. and Striper Energy, Inc. (collectively, the “Shells”), which opinion letters Sayid used to engage in market manipulation. The court found that the SEC adequately alleged facts that constitute strong circumstantial evidence of Reynolds’ conscious misbehavior.

According to the SEC’s complaint Sayid, who provided legal representation to the Shells, used his position to gain control of the Shells by installing employees whom he could control. The complaint alleges Sayid used these employees to unlawfully issue millions of shares of stock to third parties, without required restrictive legends, who could then sell the stock and kick back part of the profits. Sayid allegedly hired Reynolds to write false opinion letters that persuaded Nouveau’s transfer agent to allow free trade of the restricted shares. The letters contained inaccurate dates and falsely concluded that Sayid had held the securities for one year. In his motion to dismiss, Reynolds claimed he wrote the letters based off Sayid’s instructions and was not aware of Sayid’s scheme. The SEC argued Reynolds failed to investigate the truthfulness of the signed statements and ignored evidence that contradicted the opinion letters.

To successfully state a claim under Section 10(b) and Rule 10b-5, the complaint must allege the defendant made a material misrepresentation or omission as to which he had a duty, with scienter, in the connection with the purchase or sale of securities. To state a claim under Section 17(a)(2), 15 USC § 77(q)(a), there must be evidence that the defendant obtained money through the misstatements or omissions about material facts in the offer or sale of securities.

The court determined Reynolds’ opinion letters contained false statements and that Reynolds, as an attorney, could not “escape liability for fraud by closing his eyes to what he saw and could readily understand.” The court held that Reynolds could not escape liability by claiming reliance on Sayid. Further, the court determined that Reynolds’ allegations that he received payment for the opinion letters containing false statements, which he should have known were false, adequately alleged a claim under Section 17(a)(2).

For the reasons above, the court denied Reynolds’ motion to dismiss, concluding that the allegations against him were plausible on their face.

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

Monday
Feb262018

In re Hewlett-Packard Co. Shareholder Derivative Litigation: District Court did not Abuse its Discretion by Approving a Settlement Agreement Notwithstanding Plaintiff's Objections

In In re Hewlett-Packard Co. Shareholder Derivative Litigation, No. 15-16688, 2017 BL 425301 (9th Cir. Nov. 28, 2017), the United States Court of Appeals for the Ninth Circuit affirmed the district court’s approval of Hewlett-Packard Company’s (“Defendant”) settlement, despite objections from two shareholders, A.J. Copeland and Harriet Steinberg, (“Plaintiffs”). The Ninth Circuit held the district court did not abuse its discretion in approving the settlement.

 

After extensive due diligence, Defendant failed to acquire Autonomy Corporation which resulted in a derivative suit by shareholders. In response, the board created a demand review committee (“DRC”) to investigate the actions of Defendant’s officers. The DRC concluded the officers were not grossly negligent and recommended settling the suit. The board members voted to accept the DRC’s settlement recommendation, which only included votes by those members that did not participate in the decision to acquire Autonomy.

 

The settlement required Defendant to implement corporate governance reforms, in exchange for a waiver of claims related to the failed acquisition. Plaintiffs objected to the proposed settlement, and the district court held a hearing to address the objections. The district court found Plaintiffs’ case was unlikely to withstand a motion to dismiss, and the settlement agreement was fair, reasonable, and did not involve fraudulent negotiations. Accordingly, the district court approved the settlement. On appeal, Plaintiffs alleged the district court abused its discretion, and Defendant gave insufficient notice of the settlement by not sending it by direct mail.

 

The relevant factors for determining fairness, adequacy, and reasonableness of a proposed settlement include “strength of the plaintiff’s case, the risk, expense, complexity, likely duration of further settlement, stage of the proceedings, experiences and views of counsel, and the reaction of class members.” Courts will approve nonmonetary settlements when a causal connection exists between the corporate benefit and the derivative lawsuit. Additionally, the business judgment rule governs the strength of shareholder claims. Under the rule, shareholders can withstand dismissal by showing the directors were 1) not disinterested and independent, and 2) did not make a valid business judgment.

 

The court agreed that Plaintiffs’ claims lacked merit. First, Defendant’s board of directors consisted mostly of outside directors, who were exempted from the duty of care by Defendant’s corporate charter. Second, the directors’ actions were likely valid under the business judgment rule, and no evidence existed that any directors knowingly violated their duties. Specifically, Defendant hired outside advisors to review the proposed acquisition and no evidence indicated any director benefited from the transaction. Further, the DRC conducted an extensive investigation before making the settlement recommendation, and the directors did not participate in the vote to accept the DRC’s recommendation.

 

The court held the settlement agreement was reasonable and fair because it included detailed guidelines for Defendant to follow in future business acquisitions and gave shareholders the right to enforce the terms. Additionally, Defendants admitted the lawsuit influenced reform, which indicates a causal connection exists between the lawsuit and corporate benefit. The court determined no evidence of fraud existed. Finally, the court found that three months advance notice, publishing in relevant newspapers, filing an 8-K, and displaying notice on Defendant’s website, was sufficient to appraise Plaintiffs of their rights to object.

 

For the reasons above, the court affirmed the district court’s approval of the settlement.

 

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

Saturday
Feb242018

Jaroslawicz v. M&T Bank: Dismissing Class Action Complaint Under Section 14(a) of the Securities Exchange Act of 1934 

In Jaroslawicz v. M&T Bank Corp., No. 15-897-RGA, 2017 BL 385847 (D. Del. Oct. 27, 2017), the United States District Court for the District of Delaware granted M&T Bank Corp.’s (“M&T”) and Hudson City Bancorp, Inc.’s (“Hudson City”), along with the companies’ directors and officers at the time the companies merged, (collectively “Defendants”) motion to dismiss the second amended class action complaint by David Jaroslawicz, individually and on behalf of former Hudson City Bancorp stockholders (“Plaintiffs”).

 

In February 2013, M&T and Hudson City executed a merger agreement and issued a Joint Proxy statement, which included the text of the merger agreement. The merger was initially expected to close in the second quarter of 2013. On April 12, 2013, M&T and Hudson City issued a joint press release, and Proxy supplement, explaining that the merger would be delayed because the Federal Reserve Board raised concerns with M&T's anti-money-laundering compliance program and M&T needed time to demonstrate compliance and provide additional information. M&T also discussed the press release during an April 15, 2013 conference call discussing first quarter earnings. Hudson City stockholders approved the merger on April 18, 2013. On October 9, 2014, the Consumer Financial Protection Bureau ("CFPB") announced M&T had violated consumer disclosure laws, which prolonged the merger closing. On September 30, 2015, the Federal Reserve Board approved the merger. The merger finally closed on November 1, 2015.

 

Plaintiffs alleged that Defendants violated Section 14(a) of the Securities Exchange Act (“Exchange Act”) by: (1) failing to disclose significant risk factors required under Item 503 of Regulation S-K; (2) making misleading opinion statements; and (3) disclosing the Federal Reserve Board’s concerns on April 12, 2013, which was only few days prior to the stockholder vote on the merger on April 18, 2013.

 

Under Item 503(c) of Regulation S-K, a party must provide a "concise discussion" of "the most significant factors that make the offering speculative or risky.”

 

To succeed on a claim alleging a misleading opinion statement under Section 14(a) when the plaintiffs’ claim is an opinion, party must show: (1) the speaker did not believe the statement made at the time, (2) the opinion contained untrue facts, or (3) material facts were omitted in the speaker’s “inquiry into or knowledge concerning a statement of opinion” that “conflict with what a reasonable investor would take from the statement itself.”

 

The court determined Plaintiffs’ claim under Item 503 failed because “there can be no omission where the allegedly omitted facts are disclosed.” The court concluded Defendants disclosed the relevant material facts in the Proxy, pointing to a portion of the Proxy entitled “risk factors,” which explained regulatory approvals might be delayed. Plaintiffs argued the court should infer that causes of the CFPB and Federal Reserve Board investigations existed at the time the Proxy was issued and should have been disclosed. The court disagreed and found Plaintiffs failed to sufficiently allege the risk of either investigation was present at the time the Proxy was issued. The court concluded, “liability cannot be imposed on the basis of subsequent events.”

 

Addressing Plaintiffs’ argument under the third prong of Section 14(a), the only prong the plaintiffs’ pled, the court found Defendants did not omit material facts contrary to the belief of a reasonable investor. The court explained Plaintiffs failed to show the Proxy was misleading based on an omission of the Defendants’ knowledge or process. Because Defendants were unaware of the Federal Reserve Board’s findings at the time the Proxy was issued, Defendants did not mislead investors by omitting “information in the speaker’s possession” at the time.

 

The court also found Plaintiffs failed to demonstrate an omission based on process. Plaintiffs did not plead material facts showing Defendants omitted information about how the opinion in the Proxy was formed or explaining how the formation of the opinion would conflict with “what a reasonable investor would expect” reading the Proxy "fairly and in context." Examining the alleged omission in the context of the timing of the Proxy, the court concluded no reasonable investor would have been misled based on Defendants’ actions.

 

Finally, the court examined Plaintiff’s claim that Defendants’ April disclosures (the April 12, 2013 press release and the April 15, 2013 conference call) were impermissibly untimely and misleading under Section 14(a) because Defendants’ disclosed the information in such close proximity to the Proxy vote on April 18, 2013. Plaintiffs first relied on several S.E.C. Releases requiring “ample time for voters to consider the information provided” before a Proxy vote. The court rejected Plaintiffs’ argument, explaining the Releases Plaintiffs cited were not relevant because the Release only required issuers to expeditiously distribute Proxy information to banks and brokers in order to allow enough time for the banks and brokers to distribute the information to beneficial owners.

 

Plaintiffs also pointed to case law in which courts granted injunctions to delay Proxy votes after supplemental disclosures. Plaintiffs argued that because the injunctions granted in cases were longer than the period between the disclosures and the vote in the instant case, Defendants violated Section 14(a). The court expressed discomfort with Plaintiffs’ reasoning because Plaintiffs sought damages, not injunctive relief. The court determined that in order to pursue a claim based on the timing of the disclosures and the Proxy vote, Plaintiffs needed to “present authorities showing that securities law offers a post-closing remedy for this claim.”

 

For the above reasons, the United States District Court for the District of Delaware granted Defendants’ motion to dismiss without prejudice.

 

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

 

Saturday
Feb242018

Pearlstein v. Blackberry Limited: Second Consolidated Amended Complaint Alleged Sufficient Facts to Infer Securities Fraud

In Pearlstein v. Blackberry Ltd, 13-CV-7060 (TPG), 2017 BL 321990 (S.D.N.Y. Sept. 13, 2017), the United States District Court for the Southern District of New York granted in part and denied in part Marvin Pearlstein’s (“Plaintiff”) motion to amend his complaint against Blackberry Limited (“Defendant”). The court found Plaintiff’s amended complaint alleged sufficient facts to show violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 violations but did not establish Defendant violated SEC Item 303 of Regulation S-K of the Securities Act of 1933. 

 

On June 2, 2014, Plaintiff filed a class action complaint alleging Defendant made false statements regarding the sales and returns of the Blackberry Z10 smartphone (“Z10”). The court granted Defendant’s motion to dismiss based on lack of sufficient claims of material misrepresentation and scienter. The Second Circuit affirmed but remanded the case for the court to reconsider Plaintiff’s motion to amend in light of new evidence and the Supreme Court’s decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015).

 

In his original complaint, Plaintiff alleged Defendant made false statements in two press releases and in its 2013 and 2014 financial reports. One of the press releases challenged a report released by Detwiler Fenton (“Fenton”) regarding Z10 return rates. After the original complaint was filed, on June 4, 2015, James Dunham (“Dunham”), the COO of one of Defendant’s franchisors, stated in a criminal plea hearing that he sold confidential Z10 sales and return information to Fenton. Subsequently, Plaintiff filed a motion to amend, alleging Dunham’s statements supported Section 10(b) and Rule10b-5 violations.

 

Section 10(b) and Rule 10b-5 prohibit manipulative or deceptive securities sales practices. A plaintiff must allege facts that show a material misrepresentation; scienter; a connection between the misrepresentation and the purchase or sale of a security; reliance upon the misrepresentation; economic loss; and causation. Misrepresentation requires asking what a reasonable investor would find important in making an investment decision. Under Omnicare, a misrepresentation includes statements of opinion that omit conflicting facts a reasonable investor would find material. Scienter can be inferred from recklessness, which requires alleging a defendant knew or had access to facts contradicting his public statements. Causation requires showing the withheld information, upon disclosure, lowered the security’s value. SEC Item 303 of Regulation S-K requires a company to disclose any known trends that may have an unfavorable impact on its net sales or revenues.

 

The court found Dunham’s disclosed sales data made plausible the claims that Defendant had knowledge of facts contradictory to the press releases and financial reports, and overstated sales and return numbers. The court held that since non-disclosure of such information would likely mislead a reasonable investor, Plaintiff alleged sufficient facts to show material misrepresentation, scienter, and loss and causation. Finally, the court found Plaintiff did not establish a plausible claim for violations of SEC Item 303 because Defendant is a Canadian entity to which the rule is not applicable.

 

For the reasons above, the court granted Plaintiff’s motion to amend the Section 10(b) claims and denied the motion to amend the Item 303 claim.

 

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

Thursday
Feb222018

No-Action Letter for TD Ameritrade Holding Corporation Allowed Exclusion of Proposal to Create A Shareholder Right to be Clients of the Company.

In TD Ameritrade Holding Corp., 2017 BL 422375 (Nov. 20, 2017), TD Ameritrade Holding Corporation (“Ameritrade”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit omission of a proposal submitted by a group of shareholders (collectively, the “Shareholders”) requesting the board of directors to include a proposal in the proxy statement allowing shareholders of Ameritrade to be clients of the company or to have their business relationship with the company reinstated if it had been terminated. The SEC issued the requested no-action letter and concluded it would not recommend enforcement actions if Ameritrade excluded the proposal under Rule 14a-8(i)(7).

The Joint Shareholders submitted a proposal that stated:

We are proposing the following shareholder rights(s):

(1) Shareholder(s) of Ameritrade shall have the right to be client(s) of Ameritrade and/or any subdivisions thereof; and

(2) Any shareholder(s) of Ameritrade whom had their business relationship(s) terminated, shall have the right to have their business relationship(s) restored under this right.

Ameritrade sought to exclude the proposal from its proxy materials under subsections (i)(7), (i)(4), (i)(2), and (i)(3) 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 provides 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)(7) permits a company to exclude any shareholder proposal from its proxy materials that “deals with a matter relating to the company’s ordinary business operations.” In applying this standard, the SEC considers whether the proposal implicates “ordinary business” matters, as the management requires “flexibility in directing certain core matters involving the company’s business and operations” to run the company. 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)."

Rule 14a-8(i)(4) permits a company to exclude any shareholder proposal that “relates to the redress of a personal claim or grievance against the company” or is “designed to further a personal interest…not shared by the other shareholders at large.” This allows the omission of proposals seeking to “air or remedy” a personal grievance or advance a personal interest of the submitting party.

Rule 14a-8(i)(2) permits a company to exclude any shareholder proposal that “would cause the company to violate any state, federal, or foreign law” if implemented.

Lastly, Rule 14a-8(i)(3) permits a company to exclude a shareholder proposal when “the proposal or supporting statement is contrary to any of the Commission’s proxy rules, including [Rule 14a-9], which prohibits materially false or misleading statements in  proxy soliciting materials.”

Ameritrade argued the proposal should be excluded under subsection (i)(7) because company policies and procedures for handling customer accounts are “ordinary” business. Specifically, Ameritrade argued company policies contain numerous restrictions on the types of accounts the company may open and maintain, including a policy to not conduct business with incarcerated persons. Ameritrade asserted the proposal interfered with the company’s policies and procedures related to handling customer accounts.

Ameritrade also argued the proposal should be excluded under subsection (i)(4) because the proposal related to the redress of a personal grievance against the company, specifically the closure of the Shareholders’ account because one of the shareholders was incarcerated.

Additionally, Ameritrade argued the proposal should be excluded under subsection (i)(2) because the proposal would require the company to maintain an account for any person, so long as they are a shareholder. This would require the company to violate federal laws prohibiting companies from conducting business with sanctioned countries and parties, as well as federal laws limiting who can be customers of a SEC registered broker-dealer or a state-regulated trust company.

Further, Ameritrade argued the proposal should be excluded under subsection (i)(3) because the proposal was inherently vague and indefinite and neither the shareholders voting on the matter, nor the company implementing the matter, would be able to determine exactly what actions the proposal would require.  Namely, Ameritrade argued it was impermissibly vague whether the proposal created a new “right” and, if so, how that right related to non-shareholders clients.

The SEC agreed with Ameritrade and concluded it would not recommend enforcement action if Ameritrade omitted the proposal from its proxy materials in reliance on Rule 14a-8(i)(7) as the proposal related to Ameritrade’s policies and procedures. The SEC did not comment on Ameritrade’s arguments to omit the proposal pursuant to subsections (i)(4), (i)(2), or (i)(3).

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

Friday
Feb162018

No-Action Letter Granted for Apple Allowing Exclusion of Proposal Connecting Sustainability and Diversity Metrics with Executive Compensation 

In Apple Inc., 2017 BL 452782 (Dec. 15, 2017), Apple Inc. (“Apple”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by Zevin Asset Management, LLC, on behalf of Eli Plenk (“Shareholders”) that would integrate sustainability and diversity metrics with the performance measures of Apple’s executive compensation plans. The SEC issued the requested no action letter allowing for the exclusion of the proposal from Apple’s proxy statement under Rule 14a-8(i)(12)(ii).

Shareholders submitted a proposal providing that:

RESOLVED, Shareholders request the Board Compensation Committee prepare a report assessing the  feasibility of integrating sustainability metrics, including metrics regarding diversity among senior  executives, into the performance measures of the CEO under the Company’s compensation incentive  plans. For the purposes of this proposal, “sustainability” is defined as how environmental and social  considerations, and related financial impacts, are integrated into long-term corporate strategy, and  “diversity” refers to gender, racial, and ethnic diversity. 

Apple argued the proposal may be excluded from the company’s proxy materials under subsections (i)(12)(ii) and (i)(7) 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 includes 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)(12)(ii) permits a company to omit a shareholder proposal from its proxy materials if it deals with "substantially the same subject matter as another proposal or proposals that has or have been previously included in the company's proxy materials within the preceding 5 calendar years" and the most recent proposal received "[l]ess than 6% of the vote on its last submission to shareholders if proposed twice within the preceding 5 calendar years."

Additionally, Rule 14a-8(i)(7) permits the exclusion of proposals that relate to the company’s ordinary business operations, which are interpreted to mean the issues that are fundamental to a company’s management abilities on a daily basis and would thus be impracticable for shareholder oversight. 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).

With regard to (i)(12)(ii), Apple argued the proposal’s characterization of diversity at the executive level as a “sustainability issue” was simply a repackaging of prior proposals by the same Shareholders that aimed to “influence [Apple’s] diversity policy.” Apple asserted the inclusion of a proposal substantially similar to a failed prior proposal would enable Shareholders to “skirt” the 8(i)(12) exclusion. Apple’s second basis for exclusion, (i)(7), was that the sustainability objectives at the center of Shareholders’ proposal “merely ask the company to do what it already does every day” and thus fit plainly in the definition of Apple’s ordinary business operations.

In response to Apple’s argument that the proposal violated the (i)(12) rule, Shareholders responded that Apple failed to demonstrate the proposal was anything other than an inquiry into the feasibility of linking sustainability metrics to executive compensation. Shareholders also disagreed that (i)(7) permitted exclusion, arguing that the Apple Board’s assessment of the Company’s sustainability objectives was inadequate. They added that Apple failed to prove the proposal was not a significant policy matter that would have warranted presentation to the company’s shareholders.

Ultimately, the SEC agreed with Apple, concluding it would not recommend enforcement action if Apple omitted the proposal from its proxy materials. The SEC justified this determination under Rule 14a-8(i)(12)(ii), and did not address Apple’s other arguments under Rule 14a-8(i)(7).

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

Friday
Feb162018

SEC v. Mapp: SEC's Motion for Summary Judgment Granted in Part and Denied in Part

In SEC v. Mapp, No. 4:16-CV-00246, 2017 BL 401498 (E.D. Tex. Nov. 8, 2017), the United States District Court for the Eastern District of Texas granted in part and denied in part the Securities and Exchange Commission’s (“SEC”) motion for summary judgment and denied William E. Mapp’s (“Defendant”) partial motion for summary judgment.

According to the allegations, Defendant raised approximately $26 million in private securities offerings as CEO for Servergy, Inc., (“Servergy”) from November 2009 to September 2013. Defendant received over $1.4 million in investments from Caleb White (“White”) through Dominion Joint Venture Group No. 1, 2, and 3 (collectively “Dominion JVs”). Servergy also secured $19.4 million from broker dealer WFG Investments, Inc. (“WFG”). Severgy did not file a registration statement for any of its securities offerings. Plaintiffs further alleged Servergy claimed to only accept investments from accredited investors however, this was not the case.  From 2012 to 2013, Defendant secured various non-binding pre-orders for units of Servergy’s new computer server. Defendant subsequently emailed investors a memorandum and conducted live presentations announcing the pre-order sales projections at over 2,000 units. In March 2013, a prospective client withdrew its pre-order for 1,000 units. Servergy, alledgedly, did not amend its projections on pre-orders in the memorandums sent out to targeted investors. The SEC claimed Defendant violated sections 5(a), 5(c), and 17(a) of the Securities Act, and sections 10(b) of the Exchange Act and Rule 10b-5 thereunder.

A prima facie case for violations of Section 5(a) and 5(c) of the Securities Act is established by showing a defendant (1) offered or sold a security; (2) there was no registrations statement on file with the SEC or in effect as to the security; and (3) the defendant used interstate transportation, or communication, or the mails in connection with the offer or sale. A defendant may be liable as a participant in a Section 5 violation if the defendant’s role in the transaction was significant, acting as both a necessary participant and a substantial factor in the sales transaction. Section 17(a)(2) of the Securities Act makes it unlawful to “obtain money or property by means of an untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. Rule 10b-5 prohibits the use of any device, scheme, or artifice to defraud and or engage in any act, practice or course of business that operates or would operate as a fraud or deceit upon any person in connection with the purchase or sale of any security.

Since the SEC sought relief in the form of civil money penalties, Defendant asserted the form of relief sought by the SEC against him was time-barred by 28 U.S.C. § 2462 five-year limitation period.  SEC argued that the five-year limitation would not apply because the majority of Defendant’s alleged conduct occurred after the date five-years preceding the SEC complaint.

Defendant further asserted he did not receive compensation that could be attributed to the alleged misrepresentations, in violation of Section 17(a)(2). SEC argued that Defendant’s salary was wholly dependent on the investor funds obtained through alleged misrepresentations.     

Responding to Section 5 violations, Defendant asserted he did not personally offer or sell the securities because he was neither a “necessary participant” nor a “substantial factor” in the Dominion JV investments.  Defendant maintained a substantial amount of the investment offerings were attributable to White, creating a factual dispute in establishing Mapp as a substantial participant in Servergy security distribution.

The court determined Defendant failed to demonstrate that the injunction sought by SEC constituted a penalty. Therefore, the court found Defendant failed to carry his initial burden of showing the absence of a genuine issue of material fact. Additionally, given Defendant admitted to receiving five million shares of Servergy stock in October of 2009, the court determined a material fact existed as to whether Defendant obtained money or property as a result of the alleged misrepresentation. The court determined SEC failed to establish a prima facie Section 5 violation against Defendant, because Defendant created a factual issue with regard to whether or not his involvement with Dominion JV rose to the level of participant liability. The court found SEC had not provided sufficient evidence to conclusively prove the amount of pre-orders listed in investor information was inaccurate.  Thus, the court concluded Defendant’s pre-order statements did not, as a matter of law, constitute material misrepresentations or omissions under Rule 10b-5 and Section 17(a).

For the foregoing reasons, the court denied Defendant’s partial motion for summary judgment, and denied SEC’s motion for summary judgment, except for the integration of the offerings. 

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

Wednesday
Feb142018

Norfolk Cty. Ret. Sys. v. Cmty Health Sys., Inc.: Plaintiffs Plausibly Alleged Securities Fraud

In Norfolk Cty. Ret. Sys. v. Cmty Health Sys., Inc., 877 F.3d 687 (6th Cir. 2017), the United States Court of Appeals for the Sixth Circuit reversed the district court’s judgment in favor of Community Health System shareholders (“Plaintiffs”). The Court of Appeals ruled that under §10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder, Plaintiffs plausibly alleged the value of Community Health Systems’s (“Defendant”) shares fell because of undisclosed practices. Defendant’s profits relied on Medicare fraud, which they failed to disclose. The Plaintiffs allege that the market reacted negatively once those fraudulent practices were revealed, resulting in a loss in the value of their shares.

Defendant runs the largest for-profit hospital system in the country. In 2011, Defendant reported $13.6 billion in revenue, which revenue significantly depended on reimbursements from treating Medicare patients. Defendant is reimbursed far more for inpatient services, and relies on an internal system called the Blue Book to determine if a person needs inpatient or outpatient care. According to the allegations, the Blue Book directed doctors to provide inpatient services for conditions that other hospitals would treat as outpatient cases. Allegedly, Defendant never disclosed the Blue Book practices and attributed its profits to “synergies” and “efficiencies” of its hospital network. In 2011, Defendant initiated a hostile takeover of Tenet Healthcare Corporation (“Tenet”). To win the votes of Tenet’s shareholders, Defendant attributed its success to its “reputation for superior operating performance” and did not mention the Blue Book practices. Defendant made this same statement, and others like it, to the SEC. Tenet sued Defendant, alleging those statements were false and misleading because the Blue Book practices were the real reason for Defendant’s success and further claimed that the Blue Book practices directed Defendant’s hospitals to defraud Medicare. After the Tenet suit was filed, Plaintiffs alleged that Defendant engaged in a series of misrepresentations designed to preserve the fraud’s effect, including assurances that the hospitals would stop using the Blue Book practices by the end of the year, that Defendant’s “business practices are appropriate,” that the Blue Book practices were “fairly close” to other systems used in the industry, and that switching from the Blue Book practices would not hurt revenues. According to the Plaintiff’s allegations, the date Tenet filed its complaint, Defendant’s shares lost more than half their value and Plaintiffs lost a total of $891 million. Plaintiffs claimed that Defendant’s misrepresentations convinced investors that Defendant’s revenues were sustainable when in fact they were not and argued the district court erred in dismissing the complaint for failure to state a plausible claim of securities fraud under Section 10(b) and Rule 10b-5.

To state a claim under Section 10(b) and Rule 10b-5, the plaintiffs must allege the defendants made material misrepresentations or omissions in connection with the sale of a security, that they did so with scienter, that the plaintiffs relied on the misrepresentations or omissions, and that they suffered an economic loss as a result. Plaintiffs must set forth allegations that, if proved, establish a “strong inference” of fraudulent intent. Plaintiff may satisfy the loss causation element through the defendant’s revelation of their own fraud with a “corrective disclosure,” which is a statement that reveals what the defendants themselves previously concealed.

The only element in dispute was whether Plaintiffs sufficiently alleged loss causation. The Court of Appeals concluded that Plaintiff plausibly alleged corrective disclosures in Defendant’s response to Tenet’s complaint. The court held Plaintiffs’ reliance on the subsequent drop in Defendant’s share prices satisfied the loss causation element, therefore Plaintiff plausibly stated a claim for securities fraud.

 Accordingly, the Sixth Circuit reversed the district court’s dismissal and remanded the case.

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

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.